Starz Entertainment Corp (STRZ) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Lions Gate FY16 third-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Peter Wilkes. Please go ahead.

Good morning. Thank you for joining us for our FY16 third-quarter call. We will begin with opening remarks from our CEO, Jon Feltheimer. Following his remarks, we will open the call for your questions. Joining us on the call today are Vice Chairman, Michael Burns; Motion Picture Group Co-Chairs, Rob Friedman and Patrick Wachsberger; Lions Gate Television Group Chairman, Kevin Beggs; Steve Beeks, Co-COO and President of the Motion Picture Group; Brian Goldsmith, Co-COO; Jimmy Barge, our CFO; Rick Prell, our Chief Accounting Officer; and Laura Kennedy, EVP of Corporate Development.

The matters discussed on this call include forward-looking statements, including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties.

Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various factors, including the risk factors set forth in Lions Gate's 10-Q filed with the SEC on February 4. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. Jon?

Thank you, Peter, and thank you all for joining us this morning.

We have a lot of great things to talk about on this call, but I need to begin by noting that the quarter was softer than anticipated largely due to the performance of our film slate. Although Mockingjay 2 grossed $650 million at the worldwide box office, its domestic performance fell short of our expectations.

Internationally, while it equaled MJ1 on an apples-to-apples local currency basis, its box office was affected by the terrorist attack in Europe and a disappointing performance in China. However, our other businesses continue to perform very strongly and our Television Group continued its robust growth and diversification in the quarter. I'm pleased to announce this morning that Netflix has renewed our hit series Orange is the New Black for seasons five, six, and seven.

Orange's creator, the remarkably talented Jenji Kohan has also committed to continue as show runner for three more years. I would like to congratulate Kevin Beggs, Sandra Stern, and the rest of our Television Group for successfully concluding a long and complex negotiation that positions Orange to be a major driver of our television slate for years to come.

Nashville wrapped its fourth season in April and its loyal fan base continues to make it one of the most DVR-ed shows on television. The Royals has emerged as a break-out series that has become one of E Network's highest-rated shows. It has already been renewed for its third season.

Hulu's Golden Globe-nominated, Casual, has been hailed by critics as one of the best new shows of the year. Already renewed for a second season, it leads a growing roster of Lions Gate shows on the network that includes Deadbeat, which just wrapped shooting its third season, and RocketJump: The Show. We continue to generate other great new properties that build on our stature as a leading supplier of platform-defining premium scripted content.

American Lion, ordered by HBO, starting Academy Award winner Sean Penn and written by Narcos creative team, Doug Miro and Carlo Bernard, begins production in June. We've reunited with our long-term Mad Men partner AMC on Clyde Phillips' Feed the Beast, based on the hit Danish series. The series began production this week with an A-list ensemble cast headed by David Schwimmer and Jim Sturgess and we believe that this prestige property will be one of our biggest new shows of the year.

We are also proud to partner with Oprah Winfrey for her return to scripted television in Greenleaf. The drama about secrets and scandals in a family-run mega-church premieres on OWN in May. We just wrapped production on, Graves, featuring an ensemble cast headed by Oscar winner Nick Nolte and Sela Ward. The show will air in the fall, anchoring the first line-up of original scripted series for our Epix platform. It looks terrific and we believe that Epix is assembling a debut slate that will catapult it to the next level of performance.

I would also like to note that, with record 54% year-over-year subscriber growth, Epix was the fastest-growing premium network last year. We also partnering with Pop, our joint venture channel with CBS, on the production of Nightcap, an original comedy starring Ali Wentworth that takes place behind the scenes of a fictitious late night talk show. The new series deepens a Pop lineup that already includes nearly 400 hours of original program.

Giving new meaning to the line, nobody puts baby in a corner, even after 30 years, ABC recently ordered a three-hour remake of our classic property Dirty Dancing, underscoring the tremendous lifespan of great IP. It stars Oscar-nominated Abigail Breslin as Baby and Debra Messing as her mother. We've also continue to scale and diversify our television portfolio by building a robust unscripted content business alongside our premium scripted programming.

Two weeks ago, Fox Broadcasting ordered our new survival competition series, Kicking & Screaming, from Fear Factor and Wipeout executive producer, Matt Kunitz. We've retained all international distribution rights to this series, including format rights, and we envision it becoming a major global brand in the reality space. You can expect to see an announcement next week for another global unscripted franchise on another broadcast network.

During the quarter, we complemented these growth initiatives in the unscripted space by acquiring a majority stake in Pilgrim Studios in a deal that increases our television slate to 80 shows spanning 40 different networks. A premier producer and supplier of unscripted programming, Pilgrim has major brands including the Ultimate Fighter, for FOX Sports; Ghost Hunters, for the SyFy channel; and Fast N' Loud, for Discovery Channel; as well as new shows such as Kocktails with Khloe, whose season premiere a few weeks ago achieved the highest ratings in FYI's history.

Even though we just closed the transaction in November, we're already working closely with Pilgrim's world-class CEO, Craig Piligian, and his talented staff on several new series, including series based on several of our big feature film formats. We're also generating tremendous momentum in our television distribution and syndication business. Last month, we announced a new long-term deal with Debmar-Mercury's co-founders Mort Marcus and Ira Bernstein.

Their trifecta of hit game and talk shows continues its winning ways with The Wendy Williams Show recently extended through 2020, Celebrity Name Game renewed for a third season, and Family Feud from our production partner at FremantleMedia, setting an all-time ratings record and ranking in a virtual dead heat with Big Bang Theory as the number one show in syndication in its target demo.

The combination of strong organic growth and accretive acquisitions continues to turbo-charge the momentum of our television operation. We are on track to deliver a top-line run rate of more than $1 billion in FY18, with contribution margins increasing to between 15% and 20%. I should note that all of this is without factoring in any additional acquisitions.

Turning to the film side, we are pleased with the play-off of Dirty Grandpa, as it continues to perform in spite of an opening weekend affected by the East Coast blizzard. Like Norm of the North, a few weeks ago, it is a film with limited financial exposure that we expect to deliver solid bottom-line results. We opened, The Choice, this weekend to counter-program the Super Bowl and to capitalize on Valentine's Day the following weekend.

Then we close FY16 with Gods of Egypt and Allegiant. You'll see the trailer of Gods of Egypt airing this Sunday on the Super Bowl pre-game show. As you know, we have a great financial model on this film and we are expecting a solid performance. Allegiant has resonated with audiences in all of its early screenings and we believe that it is positioned to follow in the footsteps of the franchise's first two films, which each grossed nearly $300 million at the global box office.

Looking ahead to FY17, we have assembled a great slate with more movies, increasing number of wide releases from 13 to 17; lower overall film cost as we continue to focus on disciplined production spend; and a diverse portfolio of franchise properties, branded event film, and importantly, movies that return to the core strengths on which our Company was built. In that regard, we are proud to return to the Tyler Perry franchise business with a Madea Halloween, a film that brings together two great Lions Gate traditions, Madea, and a big movie at Halloween.

John Wick 2 stars Keanu Reeves, in Lions Gates newest action franchise. A follow-up to the very successful film from our FY15 slate, John Wick 2 wraps production in Rome next Friday. We've also partnered with Starbreeze, Weaver, and Grab on a John Wick virtual reality game, as we continue to grow our presence in the VR space. Stay tuned for an announcement about how we're mining our traditional strength in the horror genre with two major new additions to our slate.

Turning to the tent poles of our FY17 roster, early screenings have been terrific on, Now You See Me 2, which will be released on June 10 in the same early summer play period that catapulted the first film to $350 million at the global box office. Deepwater Horizon from Lone Survivor filmmaker, Pete Berg, features an amazing cast led by: Mark Wahlberg, Kurt Russell, Kate Hudson, John Malkovich, Maze Runner star Dylan O'Brien, and Golden Globe winner Gina Rodriguez. A story of heroism and heart based on the biggest man-made disaster in history. Deepwater Horizon opens in September.

We also continue to add exciting new brands to our slate. We just announced that we're developing the Magic Tree House franchise, based on Mary Pope Osborne's award-winning series of books that has sold 130 million copies worldwide and has been translated into 35 languages. Magic Tree House joins a line-up for FY18 and beyond that includes Francis Lawrence's The Odyssey; Hood, a retelling of the Robin Hood legend starting The Kingsman's, Taron Egerton, as well as Jamie Foxx; The Kingkiller Chronicle, based on a best-selling trilogy, with sales ranked second only to Game of Thrones among modern fantasy book series; Monopoly, the first brand from our Hasbro relationship; our film adaptation of the video game franchise, Borderlands; and the fourth and final movie in our Divergent series, Ascendant.

I'm also pleased to announce this morning that we've joined with our friends at CBS on a developing deal to re-envision the MacGyver franchise in film and television, with CBS taking the lead on the television show, and Lions Gate taking the lead on the film. The film will be produced by Fast and Furious and 21 Jump Street producer, Neal Moritz and original MacGyver creator Lee Zlotoff.

Finally, as Saban's, Power Rangers prepares to start production, we believe that it is shaping up to become a very special franchise. In addition to the five Power Rangers already announced, we announced this week that Elizabeth Banks will play the arch villain Rita Repulsa. Power Rangers is a massive global brand and we believe that filmmaker Dean Israelite's singular vision will not only thrill generations of existing fans, but will bring the magic to a whole new global audience. Production begins at the end of this month for a March 24, 2017 release.

This quarter was also noteworthy for the global partnerships that we continue to develop across the our film and television businesses. In addition to our alliance with Pilgrim and the continued expansion of our relationship with CBS, I cannot say enough about how pleased with our recently announced partnership with New Regency. This partnership includes a global distribution patent, deepening our international library, as well as the creation of a television joint venture.

There is no company with better access to A-list talent or a deeper recent pipeline of world-class intellectual property, and we expect titles including: The Revenant, The Big Short, Gone Girl, and Birdman to help drive the continued growth of our international television distribution business. We believe that our access to this great content, coupled with their access to our global infrastructure and television programming expertise, will make this an extremely productive relationship.

We've had a great start to our new strategic relationship with Discovery Communications and Liberty Global. In two weeks, we begin our home entertainment distribution of Discovery programing, kicking off with the critically acclaimed, Racing Extinction. We've also partnered with Discovery to create a documentary business for which we have already acquired our first movie, the Slamdance award-winning documentary, Million Dollar Duck.

Three days ago, we had our first Board meeting that included Discovery's CEO David Zaslav and Liberty Global's CEO Mike Fries. As we continue to expand our contacts with these two companies, we believe there are tremendous additional opportunities to unlock the value of our content. In closing, with three wide releases coming out in the next six weeks, including two tent-pole pictures, we aren't going to update guidance until our fiscal year-end call in May.

However, I would note that with Mockingjay 2 underperforming our ultimate profit margins by over $100 million, much of which hits in our guidance period, as well as the movement of pictures out of the same period, we are currently tracking below our guidance range of $1.1 billion to $1.2 billion in adjusted EBITDA. Giving the moving pieces I mentioned, we intend to wait for the next call to provide more visibility.

At the same time, I would also note that, given the continued strong growth of our television and ancillary businesses, and the mix and timing of our film releases in FY17, we have a clear path back to the adjusted EBITDA run rate of at least $350 million to $400 million you have seen in recent years, even absent transformative M&A or outsized performance from our films.

I will now open the call to your questions.

(Operator Instructions)

Alexia Quadrani, JPMorgan.

Just circling back on the color you gave on the TV side of the business, looking more near-term. Can you elaborate on what type of ramp or pick-up in deliveries we should expect for the fourth quarter? And then a follow-on to that question, given the changing dynamics in the media landscape, I would assume that there is a tremendous widening or pick-up in the number of buyers that have come to the table for the TV side or pick-up in demand. Would that be a fair statement? Any color on that would be great, too?

It is Kevin Beggs.

Starting with the second piece, yes, more and more buyers in the market, and we have a number of new series with new platforms. It is always a great experience for us to go into the market and have multiple bidders on our projects. It makes the deals better. It gives us more leverage. So we're very bullish on the amount of buyers in the market and our abilities to transact.

On the first point, the most recent quarter, or the upcoming quarter, we will have more deliveries, particularly on Orange is the New Black, and TV, all the sectors, had some timing relevance based on delivery dates and air dates. So it is a strong one and Jimmy can elaborate on the specifics of that.

A very strong fourth-quarter line-up coming. TV is hitting on all cylinders, and we also just announced the renewal of Orange, as you know, for seasons five through seven that starts in FY17, so we are poised for really good growth over the long term and leading into FY17, and Pilgrim only strengthens that.

Going into FY17, we would be expecting to exceed $125 million in contributions in FY17 and revenue should be approaching $1 billion. This is based almost entirely on shows that are already in the pipeline. This ramps us into, as Jon mentioned, over $1 billion of revenue run rate in FY18 with contribution margins between 15% to 20%.

Okay, thank you. If I could squeeze in one on housekeeping on the film side. Given so many what seems like very big titles coming out in the film over the next 18 to 24 months, how should we think about the P&A spend in general? Should it be the normal run rate we have seen? Or any color on that front would be great?

We have five releases in the fourth quarter. We will have the P&A associated with that. Going in FY17, we have got a lot more at bat at a much lower price point, so we will have P&A associated with the ramp-up from 13 wide releases this year to 17 in FY17.

Thank you very much.

Todd Juenger, Sanford Bernstein.

If I could maybe just step it a little back from the forest and look away from the trees and into the forest itself on the film side. I'm just trying to think through -- if you think of FY16, a year when you had a film for the Hunger Games franchise, and you think about where that will end up in terms of the EBITDA run rate for the film segment, and then trying to reconcile how we get confidence that next year and in years beyond, that segment delivers a much higher run rate EBITDA number.

Rather than -- the title by title stuff that stuff, let's step away from that. How can you help us think about why the film business should be much bigger it is in future years than it was in this year?

Remember our guidance has always been back-end loaded, and in fact, FY16 was always the smallest contributor to the three-year plan, really based on the slate and the cost of Mockingjay 2. When we look ahead, there are a number of contributing factors to the FY16 performances, as Jon mentioned, and we don't expect those to repeat in FY17.

In particular the FY16 slate was back-end loaded. So that will only serve to benefit FY17 as those films roll over with contributions. And we estimate an increase to $40 million year-over-year of improved rollover. So that moves into FY17. Of course, also, with FY17, we move some of our release dates to diversify our slate and to give us more at-bats. As I mentioned earlier, we have 17 films, compared to 13 in FY16.

If you look at that, more importantly, the overall film cost for those 17 films is lower by $100 million. So basically, on the film side of the business, we have more movies at lower cost, and as Jon mentioned earlier, we have got a very strong line-up of films going into FY17. And don't forget that we have got $1.3 billion of backlog and probably 70% or more than 70% of that will turn between now and the end of FY17.

And we have obviously got a very strong and continually replenishing our library, as well. So we have, we think, significant growth and increased visibility going into FY17, and we have already spoken to the strength and visibility we have on our TV business overall. So we feel very confident as we move into FY17.

Todd, by the way, the even simpler answer to that question is just that the contribution, the ultimate contribution, from Mockingjay 2, based on the cost, the performance, is not that tough of a comp really. That is the bottom line. It is a contribution comp that a normally large but not crazy outsized franchise can do and certainly any two of our bigger movies can easily accomplish. That is a simpler answer.

Thanks so much. If I can, like Alexia did, maybe squeeze in another quick one. On the TV side, a long list of projects coming up with all sorts of different distribution network partners. Curious on the original productions for the SVOD space, obviously you have a lot of stuff going on with Hulu, you have one huge product with Netflix. Didn't hear Amazon named and might have expected to think that some time you do more stuff with Netflix. Is there more opportunity, do you think, to do an original production with your SVOD partners? And would we be surprised if we saw some more of that in the coming months and years?

Many, many opportunities. We are in development with Netflix on additional properties, and Amazon. Those haven't gone to production yet, which is what -- we really only talk about things that are ordered. We're still quite positive about both. Hulu, we have the bulk of current production, but we look at all of those.

We are in discussion with YouTube Red and Susanne Daniels, who has come online as a new service, and Crackle as well, and other business. So we think there is going to be many of these all headed toward meaningful premium auteur-driven scripted programming, which is really our sweet spot, and we want to be there to help define and curate those networks as we have done with our cable and our streaming partners to date.

[Kudos]. Thanks.

Ben Mogil, Stifel.

Two parts on this FY17 film slate. The first question is when you look at the slate, what do you think has got real potential -- or maybe into FY18 -- got real potential for sequels, franchises, that is already either in development or already in production? And then when you look at the FY17 slate and I get that you have got 17 films against 13, but they are lower cost films. We're really seeing the audiences and the box office pretty material. Clearly stuff is really working, or stuff is really not working, and so curious how you think the more shots in a pretty crowded market is necessarily the right place to go, if you will?

Ben, it is Rob. Clearly we feel very, very excited about Power Rangers, The Odyssey, and Hood, among others, not to mention Now You See Me 2 is coming and we're already starting for Now You See Me 3. So we have a lot of IP in the franchise that we feel has very, very strong break-out possibility. Just on a side note, we have a great new film called La La Land, which we have just recently seen from the Academy-nominated filmmaker Damien Chazelle from Whiplash. We think that's going to be a great break-out film for us this year, as well.

On the other question, there were over 150 films released last year, and many of them, even though they were not the Giants that everybody is talking about, performed very, very well. So when you take a slate of 17 to 18 movies with good modest performance that we have built-in, we are not over-thinking the performance on these. If you get one break-out title, it really does a lot for your numbers.

Okay. Then as a side segment, there was an article earlier this week on Atom; highlighted you as being the driver of that. Any thoughts and comments that you wanted to have on that?

Hi Ben, it is Michael.

We incubated Atom here, actually in the building. We are very excited and encouraged by the initial test results. Obviously, it was very important that Disney and Fox came into the Series B. Lions Gate is the largest shareholder of Atom, and again, we don't put that in our future numbers, but we feel very good about the initial results.

Great. Thanks a lot.

David Miller, Topeka Capital Markets.

Couple questions. Kevin, what was the break-out -- broken out, what was the Pilgrim revenue and EBITDA number, if you have that in front of you?

We don't break out the specific numbers, but there was modest contribution in the quarter from Pilgrim, because obviously it was a 1.5 month. But we are very excited about that. Pilgrim is a great acquisition merger. Transition is going great as was mentioned earlier and very excited about it. It is accretive to our margins and you will see that growth factored in as we go into the remainder of the year.

It's Kevin. It is going to be a significant contributor to both revenue and EBITDA going forward and that was one of the main reasons, along with Craig's talent and his amazing hunger to succeed, and their roster of 40 shows, that we got into the deal.

Yes. It just seems like -- I just want to make sure there was no accounting issue or the way you booked revenue there with Pilgrim. I know the acquisition closed around, what, Thanksgiving or something like, so I thought you would have had maybe five or six weeks of contribution from Pilgrim. Do I have that wrong?

That is right, but there's nothing in particular there. There certainly were some transactional costs and things like that associated with the merger and some front-ended purchase accounting, so from a contribution standpoint, you really don't have that. It is washed by some of that, but you will see we adjust out the purchase price adjustments in the financials, so you will see that in our filings.

Okay. Fair enough. Then a question for the Summit guys, and Michael, if you want to chime in. You will recall in my preview piece that I wrote earlier in the week that I said, in writing, that one of the concerns that shareholders have near term with Lions Gate is this overall negative cost exposure with Gods of Egypt. What I said in the note, if you read the note was, The Street is under the impression that Gods of Egypt is this massive $140 million negative cost film and that Lions Gate might take a bath.

What we said in the note, again, was that you neatly defrayed that cost way down with tax credits from Australia and also a pre-selling of theatrical rights worldwide. I have your overall negative cost exposure with Gods of Egypt to $17 million. Do I have that correct?

Thank you, David. I will let Patrick--

It's Patrick Wachsberger. The movie looks great. The last screenings went very, very well. We just came on tracking nicely. We believe in the movie. We are in the Super Bowl in the pre-game show, with the 60-second spot, which for Lions Gate is a smart place to be. We're expecting a very solid performance. Do not forget, you mentioned it earlier, we have a great financial model and our risk capital is minimal.

To be specific, David, you are a little high actually. We are probably closer to under $10 million in risk capital.

Excellent. Thank you very much.

Amy Yong, Macquarie.

This is Rachel for Amy. Could you please walk us through some of the financial and strategic benefits of combining with a premium channel?

Yes, we have seen some notes on that this week, Amy. As Kevin has made it clear, we are -- pretty much every pitch of a great new idea that we have, Kevin is out there and has got four or five or six potential buyers and that is great. As we said, we have got 80 shows on over 40 different networks. But it is also important to note, as I said in my remarks, that we have Nightcap on Pop. We have got a second show before with Pop. We are doing Graves for Epix.

Owning or partly owning a platform gives you a tremendous amount of opportunity and leverage and optionality in the marketplace. That is fairly obvious. The other thing I would note is, as we start launching our over-the-top channels is we love the subscription space. We love the possibilities, as you start seeing all of the pay channels starting to be a little more direct to the consumer, having new distribution platforms, like Apple and Amazon.

The world is changing very quickly and I think the subscription space is a great place to play. Again, we noted the growth of Epix. Right from the beginning, Epix was a multi-platform offering that was on more devices through more distribution than any of the other channels. So the premium space for a company that really is an expert at creating premium programming is a good place to play.

Okay, thank you. Then now that you have increased your buyback authorization, can you talk about any restrictions that might exist while in discussions?

It is Michael. Obviously, we can't buy back stock when we are in a blacked-out window, but we -- the Board thought it was the prudent think to do to increase the authorization to up to $250 million. And we're looking at being opportunistic as we always have been in the past.

Okay, great. Thank you.

James Marsh, Piper Jaffray.

Two quick questions here. First, on the TV business, and you I think like to think about that as being platform agnostic, but I was wondering if you have any evidence that one platform has better returns than another. I obviously recognize popular shows would likely be more profitable on any of the platforms, but adjusting for that, is there one platform, whether it is cable, broadcast, or SVOD that has inherently better risk and return characteristics?

Then the second question follows up on an earlier question that talked about bidding for TV shows benefiting Lions Gate. There also been some reports out of Sundance and some of the other film festivals that these new SVOD platforms have been bidding up prices for film. Was just wondering if you see any impact on your business from that change in the model?

I'm going to let Rob and Patrick handle that first and -- that question.

On the Sundance front, obviously having new buyers in the market with different platform opportunities for release makes it more interesting, but we have, as you know, we released Amazon title as their theatrical distributor when they pick up product. And we are hopeful that some of the other guys in that space are going to look to us for their theatrical distribution. But we are always very, very mindful of films that we're looking at and there are opportunities there and we are not going to overbid.

The thing that -- the first question is really a good question and it really speaks to the strength of our Company in the sense that right now we are supplying to broadcast. We are supplying to basic cable. We are supplying to the new over-the-top SVOD players. We are supplying to syndication. What is interesting about it is it creates a tremendous risk diversification for us, not just a content diversification. It is important to have the worldwide distribution that we have, so we can take advantage of the various deals and each one of them is really a custom created deal. But where do you want to be? We have a ton of now reality shows, particularly with Pilgrim. But really, when you start talking about Kicking & Screaming, the new Fox show, and the next one that we are going to announce early next week on broadcast, that is a sign of where you want to be if you can be there in terms of a non-fiction show.

In terms of premium scripted content, we've figured out smart ways to make a lot of money in the over-the-top space and the basic cable space, and ultimately, in the broadcast space with Nashville. But at the end of the day, every one of those models is different. Every one, as I say, is created in a custom fashion. Again, you have got to have great distribution, great production capabilities, great access to tax incentives in order to do that. But as I say, there is great risk diversification in being able to play with all of them.

Okay. That's very helpful. Thank you.

John Janedis, Jefferies.

I wanted to try again to bring together the release on the buyback, and then the 13D filing. Meaning does the filing effectively put you in a black-out period until it is decided that a deal will or won't happen? Or would you be free to buy back stock, say some time next week?

The short answer, John, is that at this moment, we are not in a black-out period except for the earnings release. Until a deal, again, you have to get clarification from, obviously, the lawyers, until you are in a deal mode, then you are free to buy back stock.

Okay. Thanks. One follow-up, as well, on the comments related to liking the subscription space. Clearly we're all not sure about the various rights you hold, but is there a longer-term opportunity to maybe marry your TV and film content on a direct-to-consumer app that you own?

Sure. That is exactly what we're doing with Tribeca Shortlist. That is exactly what we're doing with, Comic-Con. Again, on this, you're going to see a big new announcement, very unique talent in the over-the-top space next week. But that is definitely how we see it. We think it is a great opportunity to, again, have the optionality of going direct to the consumer.

Thank you.

Barton Crockett, FBR Capital Markets.

I wanted to attempt to probe a little bit more about the interest in Starz that you have now has been publicly acknowledged with the SEC Schedule13D filing. My question is really, I know people have already speculated about this, really ever since you got the stake and John Malone on the Board. But at this point, is there anything you can tell us about why now would represent a good time to talk to Starz? And is there any way to talk about a combination in terms that are quantifiable of synergies? Or is the potential benefit here really not quantifiable and more thematic?

This is Michael. We obviously filed a 13D, so we cannot talk specifically about Starz. But the question is -- you have to look at the history of Lions Gate. We have a history of doing very accretive transactions and being very disciplined, so unless we thought something made a great deal of sense to us from an accretive standpoint, and also from a standpoint of we thought there were synergies, I would not expect us to do any deal.

I would add, I noticed one analyst -- I hope it wasn't you -- this week called us cheap. I was not sure if that was a compliment or not, but I would say that any transaction that goes forward and looks anything like a merger, if there is any stock component with it, we think that, that transaction has to recognize not only the value of the company that is the target, if you will, but also the value that we bring to the party, the value of our synergies. Whether you think that means we're cheap or that means that we are smart, that has been part of our strategy in M&A from the very beginning.

Okay. All right. That's helpful and I understand the constraints. If I could switch gears a little bit, you have started excluding losses from start-up ventures in your calculation of EBITDA, which got up north of $6 million of exclusion this quarter.

How should we think about that going forward? Is this a number -- are you excluding it because we should think that it becomes a more material number over time?

Not necessarily. This is something -- we look at this as an investment really more like if you were buying equity or otherwise investing into a business. That is what we're doing. It just so happens to be that this is start-up costs, so it is being expensed periodically, and we thought it was more appropriate to provide visibility into that.

It is included in the reported metrics and it is excluded, as you know, from the adjusted metrics. We obviously are investing because we think there is great returns. And so as we go out into the future we expect big returns on that. So I don't necessarily expect that to be continuing start-up cost long-term.

Okay. All right. Then one final thing on the Magic Tree House, could you give us some visibility on when you think you would have content -- I think you're looking at movies and maybe TV shows. What is a time frame for that stuff to actually see life?

FY18 probably. We are very excited about it, and we are all getting a lot of emails from our friends and family about their excitement. So it will definitely be there within FY18. Monopoly will be there, as well, soon, coming in too, as well.

Okay. That's great. Thank you.

David Joyce, Evercore ISI.

I just wanted to ask about a different topic. Jimmy, if you can talk about the tax rates, the benefit you saw here in the quarter. Could you walk us through how to think about that effective tax rate change and what that might mean for free cash flow going forward?

The tax benefit within the quarter reflects the benefit of our global structure relative to year-to-date pre-tax losses. So there is a larger share attributable to Q3, because year-to-date Q3 was in a pre-tax loss position relative to effectively a break-even year-to-date position in the preceding quarter.

Overall, going forward, for modeling purposes, I would look at this benefit as a year-to-date run rate and project that out into the remainder of 2016, where we expect to continue to have benefit. Then going forward longer term, I would expect that -- we've had a temporarily decline in pre-tax income, and as we move forward and that moves up, I would expect the overall effective tax rate to return to high single or low to mid-teen rates as we move forward and pre-tax income level rise in the future.

Great. Thank you.

Matthew Harrigan, Wunderlich Securities.

First of all, I don't go BronyCon, I wanted to assure you, but I was curious if you could give us an update on My Little Pony. That is a pretty popular, committed fan base, to say the least. Then John Wick that was marketed as the first VR shooter, you've done a lot of interesting things now, opportunistic investments, Telltale Games and all that.

A lot of noise out at CES this year on virtual reality, some of it positive, some of it still pretty cynical. I'm sure a lot of your guys were there. If you could just give us an update on those two points, that would be great?

Hi, Matthew. My Little Pony, obviously -- I thought I saw you at that convention the last time but maybe not (laughter).

I was in the gorilla suit.

(Laughter.) We are very excited with our partners at Hasbro on this. We're in the midst of buckling down some of the more interesting creative elements and we're looking forward to bringing that to market in the very near future.

It is in production.

I know. That's physically in production, but there are other creative elements that we're very excited about that we have not announced yet, but looking forward to it.

On the game space, we have all been looking at this virtual reality game, it is really pretty amazing. We brought in Peter Levin about 1.5 years ago. He's got probably 15 projects working right now, including some of with other studios -- Telltale, obviously, Next Games, two great investments that we have made.

We love the space. We're not putting really anything from the game business in our numbers at this point in time, but you're going to start seeing, I believe, a significant contributional start in 2017. But really 2018, 2019, you're going to start seeing significant contribution from our game and from our location-based entertainment business. So we agree the game space is really interesting right now.

Now just get Jennifer Lawrence to play Penelope in The Odyssey and your stock will be back at $40.

That would be nice (laughter). Thank you.

Doug Creutz, Cowen.

When I read through your press release, not too much reading between the lines, but it looks like you had some TV deliveries that maybe you expected to come in fiscal Q3 that are going to come in fiscal Q4. Can you size the revenue shift there?

Look, we don't break out specifically, but it is timing, and like we said, we have a very big fourth quarter coming up. Based off of the numbers I have given you already relative to the FY17 run rate, we should be able to get pretty good growth trajectory into a strong fourth quarter in TV, as well as improving margins.

Okay, thanks.

Jim Goss, Barrington Research.

I was wondering, if you did wind up successfully getting either Starz or some other pay channel, given that you already have a position in Epix. Would there be any benefits or complications of owning both, or in terms of your own programming, I wonder if you would be looking at more non-exclusives so that you could redirect some of your content in multiple outlets?

That is way more specificity that I'm prepared to get into at this point, but I would say, if you recall, we have one-half of our output with HBO in terms of our films and we're producing a show for HBO right now, the one I mentioned with Sean Penn. We have got our other theatrical app with Epix, and we have done series and are doing business with Starz. Again, we like the space; we like the optionality of having ownership in these platforms. Going forward, there is all kinds of combination. Interesting things can happen when you're playing in this arena. That is about all I can say right now.

Okay. One other thing related to the television side, do I sense that you have an interest in growing your global TV share? How does that work itself out? Are there relationships you're developing right now to become a bigger global player?

It is Kevin. You're referring to maybe original production outside of the US, and outside of our normal distribution infrastructure. We're always open. We have expanded our footprint corporately in the UK, particularly with our distribution business there. Our General Manager of Europe, Zygi Kamasa is working quite closely with Sandra and myself and our team, at looking at local companies and potential investments in that space.

As the world shrinks, you look at hits like Downton Abbey, which is a massive global asset, and even four, five years ago might be hard to imagine a show from the UK working so well in the US. We want to be part of that. We are in development on a couple of high-profile projects with UK and US broadcasters.

We're shooting two series in the UK right now for US broadcasters: The Royals for E and Guilt for Freeform, which was announced not too long ago. It is definitely a focus and we have spent a lot of time there, and we will continue to do so, and of course, according to Michael and Jon's dictate, we will do it in a disciplined fashion. Some may call us cheap, but I think we're entrepreneurial.

I would add that it is really a feather in the cap our worldwide television distribution group that we got this New Regency deal. It adds some really great titles to our distribution pipeline internationally and there is no question that those are the kind of deals we want to continue to leverage our infrastructure.

Okay. One final question. Are there any other global markets where you might employ the UK model as self-distributing rather than selling off rights?

It's a really good question. As you know, we were in Canada before. There were some complications in terms of one's ability to distribute in Canada, funny enough, in spite of the fact that we are a Canadian Company on a corporate basis. And we've looked at a couple of other territories. The only way that we would do -- we love our model. We love the risk avoidance.

On a present value basis, we have yet to see that for the kind of movies that we do, that the present value base, on a regular basis, works better in a self-distribution model. We do extremely well in the UK, partly because Zygi accesses a lot of features that we do not actually supply to him, co-productions, local acquisitions. It is very much actually a local business. If there were another market like that, it is possible we would do it.

The other thing that I would mention in a sense is our Lat Am business with IDC is essentially a hybrid business, where really we are separating the rights. That is really the critical thing for self-distribution, is to be able to separate the rights. So in Lat Am, we actually distribute all of the television and digital rights, so we have access as if we were self-distributing.

All right. Thanks very much.

Tuna Amobi, S&P Capital.

I have a few, as well. The first one is with regard to the performance of Mockingjay 2. I have to assume that you were surprised, as well, in terms of the domestic performance relative to the prior title, as many of us were. Is there anything that you can point to that perhaps might explain that?

I am sure this is a question you have gotten before. We have certainly gotten it from quite a few, so I'm wondering if going forward there is any lessons to be learned in terms of the way that you release the film: the timing, the marketing, et cetera, things of that nature? Any comments would be helpful.

Tuna, it is Rob. As Jon mentioned earlier, the combination of circumstances that occurred were unique, between the terrorist attack that occurred in Europe and then ultimately Star Wars, which not only performed extremely well, but it over performed basically the industry estimates. At one point, if you think of Avatar, it over performed by $200 million in the period than Avatar did. That over performance we believe definitely hit our numbers by somewhere between $50 million and $100 million.

So a unique set of circumstances. Obviously we're paying attention to the marketplace all the time. The Mockingjay IP, we think, is clearly a very, very robust piece of material. It's performed -- we have done almost $3 billion worldwide on the franchise. Our fan base is totally invested, so we always look at the market and try to learn from it. But we think there were a very unique set of circumstances in this particular case.

Okay. That's helpful. Then two more questions really quick. First, with regard to China, Jon, I would love to get your updated thoughts on China. I know you have previously alluded to the stakes that you have in that market. Given all of the noise around China of late, I am wondering how you would assess the current opportunities or lack of it?

Are there any milestones that you have this year regarding some of your partnerships? And I am sure the deal with Legendary, that probably got your attention, as well. If you can comment around how you view Hollywood's relationship opportunities in China, particularly for Lions Gate, given that has been a market that you have been focused on of late?

Then separately, I don't know if this is for Michael, on Pilgrim Studio's valuation. You have made it pretty clear that you see great opportunities for that acquisition and you alluded to being accretive. But I am wondering, in terms of the actual valuation of the deal. Granted it is a relatively small deal as studio deals go, but I'm wondering what metrics that you might have looked at to the price that you paid? Any color around that? Because I would just like to get some context around some of the other studio deals that we have seen? Those are my questions.

We have been spending a lot of time in China. I will turn this over for detail to Brian Goldsmith, although I would say, we definitely see China as being, in terms of theatrical, within a year or two, maybe the largest sale market in the world. We were disappointed in Mockingjay's performance there, especially since we did our first China premier there.

As a matter of fact, Last Witch Hunter actually did better in China than Mockingjay 2, very much because of the date and the competition. There were actually six big movies in the last six weeks there in China, all sandwiched together. We were between a Spectre and The Martian, and really just couldn't get the screens. So the China theatrical performance going forward will really be a big swing factor, and we are all trying to figure out how to do that best.

In terms of partnerships and other things we're doing, I will turn it over to Brian.

It's Brian. Our business there continues to be robust. We have spent a lot of time focused on this marketplace and have done nicely there. We see that growing in the future. We have actually, in addition to the theatrical growth that Jon alluded to, it is interesting to note that the market was up nearly 50% at the box office year-on-year, and we see that rapid pace and growth in the theatrical market continuing.

But in addition to just the theatrical box office, the digital players are still experiencing significant growth. We see that continuing. In fact, we've actually expanded the number of digital players with whom we do business and have closed a number of significant deals licensing our product in that space.

So as a content supply, we think we're positioned really well to benefit from that continued growth in China.

Tuna, it is Michael. In regards to Pilgrim, we have been concerned over the last year or two at some of the multiples being paid out there. So we really stayed disciplined to the point where we knew that we were hopeful that we would be able to get some of these deals done at multiples that made more sense to us.

We also, from a financial strength standpoint, we've talked a little bit about our backlog: 70% of our $1.3 billion will be coming in in Q4 of FY16 and 51% of it about in FY17. So that is certainly the lion's share of that. So from a dry powder standpoint, we think we are in a pretty good position, and we will make strategic acquisitions and we will make them at multiple levels that we think make sense.

All right. That's very helpful. Any more specifics in terms of the multiple assessment?

It was -- even on a bad stock day like today, it is still an accretive transaction to us.

Thank you.

Thank you, everybody. We will speak to you on our next call.

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