Starz Entertainment Corp (STRZ) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Lionsgate FY17 second-quarter earnings call.

(Operator Instructions)

Also as a reminder, today's teleconference is being recorded. And at this time, I'll turn the conference over to your host, SVP of Investor Relations Mr. James Marsh. Please go ahead, sir.

Thanks, Tony, and good afternoon. Thank you for joining us today for our FY17 second-quarter conference call.

We'll begin the call with remarks from our CEO, Jon Feltheimer, followed by Jimmy Barge, our CFO. After the remarks, we will open your call to questions. Also joining us on the call today are Vice Chairman Michael Burns; Co-COO and President of Motion Picture Group Steve Beeks; Co-President of our Motion Picture Group Erik Feig; Chairman of our Lionsgate Television Group, Kevin Beggs; Co-COO Brian Goldsmith; and Chief Accounting Officer Rick Prell.

The matters discussed on this call today include forward-looking statements, including those regarding the performance of our 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 a variety of factors, including the risk factors set forth in Lionsgate's 10-K filed with the SEC on August 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. With that, I'll turn it over to Jon. Jon?

Thank you, James. Thank you all for joining us this afternoon. I'd like to begin by noting that we expect this to be the last quarter that we report stand-alone numbers for Lionsgate. We anticipate that next quarter we'll report combined numbers from Lionsgate and Starz for the first time, numbers that we believe will begin to reflect the scope of our vertically integrated content platform, our strong free cash flow generation, and a more diversified income stream, with more than 70% of our contribution expected to come from our stable network and television businesses.

Obviously we're not the only ones thinking about the relationship between content and distribution in today's ecosystem. The AT&T/Time Warner deal is the latest example of a great brand-driven content company combining with a distribution platform that has incredible reach, in order to create more value. The AT&T/Time Warner, Comcast/DreamWorks, and Lionsgate/Starz deals all illustrate the value of great content and its potential to differentiate platforms looking to engage the consumer.

During the quarter, we made great progress in planning the integration of our two Companies so that we'll be ready to hit the ground running on day one. On the operational front, we've already finalized the Lionsgate and Starz senior executive reporting relationships that will take effect at the close, and have communicated them to both sets of employees.

As part of our commitment to maximize the integration of our Companies, we expect to co-locate Starz and the Lionsgate offices, have begun exclusive negotiations for 60,000 square feet of office space next door to our Santa Monica headquarters. We've announced plans for integrating Starz distribution operations into our own, creating a world-class packaged media, digital, and television distribution business under Jim Packer and Ron Schwartz, with a number of key executives coming from the Starz Anchor Bay operations.

To create even greater efficiencies and strengthen our direct interface with the consumer, we're also exploring the migration of the technology backbone for our streaming services to the Starz Over the Top platform, beginning with our new Spanish-language premium movie service. In that regard, I'm very pleased to announce this afternoon that Hemisphere Media, which operates seven top US and Latin American, Hispanic pay television networks and the number-one broadcast network in Puerto Rico, has just joined Lionsgate in our service. They will be contributing a library of several hundred movie titles, increasing the content offering of what we believe will be the premium Spanish-language streaming music service in the US.

Turning back to the Starz integration, I'd like to note that we are on track to achieve over $50 million in anticipated cost synergies, which doesn't include benefits from tax efficiencies and revenue enhancements. In addition, Michael, Jimmy, and Jeff Hirsch, the COO of Starz, just completed a roadshow for our debt financing, which we closed with significantly better pricing than was anticipated in our S4 filing. Jimmy will give you the details on the annual lift to our numbers during his comments.

Starz performance during their latest quarter reflects their growing momentum, and reaffirms our belief that we're bringing our two Companies together at exactly the right time. The Starz network continued to achieve steady subscriber gross, up 1.2 million year over year and 300,000 in the latest quarter. The Starz Over The Top offerings also continued to build their subscriber base, reaching nearly 1 million subscribers in 10 months across an increasingly diverse array of platforms, including the rollout last quarter on Xbox One.

This growth has been complemented by unprecedented demand for the network's original programming associated with the launch of their Sunday night block, including a record-breaking third season for Power, the second most-watched premium pay television series in 2016, behind only Game of Thrones. Upcoming Starz series include the eagerly anticipated adaptation of Neil Gaiman's contemporary fantasy novel, American Gods, staring Gillian Anderson and Ian McShane; The White Princess sequel to the Emmy- and Golden Globe-nominated, The White Queen, miniseries; and the return of the Starz BBC Golden Globe-nominated family thriller, The Missing.

Starz is increasingly becoming a must-have network, and we look forward to collaborating with them to create platform-defining hit series that will take them to that next level of performance. When you consider the value that Mad Men and Walking Dead have created for AMC, Game of Thrones for HBO, and The Americans for FX, you can see the importance of bringing our creative teams together to develop a fully owned premium quality hit series for Starz.

Turning to our film business, we continue to operate in an environment in which three or four wide releases are opening each weekend, streaming platforms continue to bid aggressively for talent, and competition from other sources of entertainment continues to increase. While the quarter included two films that we hoped would do better, we're very pleased with the break-out performance of Tyler Perry's A Medea Halloween, which has been number one at the box office for two weeks in a row. Not only does it continue to build our leadership with one of our core demos, but its crossover performance reflects the strong and still growing appeal of the Tyler brand. And I'm pleased to note that we have two more Tyler films on the way, including another Medea picture.

We enter awards season with a deep slate of contenders, including Hacksaw Ridge, opening this weekend; La La Land, which has earned rave reviews on the festival circuit; and Patriots Day and Hell or High Water from our partnership with CBS films. Patriots Day, the dramatic thriller about the five-day manhunt for the Boston Marathon bomber, opens in limited release for the holidays, goes wide in January, and just earned the coveted closing night slot at the AFI Film Festival. Hell or High Water has become the top indie hit of the year.

In February, we launched the second film in our John Wick action franchise, along with the John Wick virtual-reality mobile game, which generated a great response from fans at New York Comic-Con last month. In March, we'll release The Shack, based on the runaway faith-based global bestseller, and featuring an A-list cast of Sam Worthington, Octavia Spencer, and Tim McGraw.

We end the fiscal year with Saban's Power Rangers, bringing one of the most popular brands in the world to the big screen. The first teaser trailer that we released generated over 100 million Internet views, ranking near the top of our superhero comps.

Taking a look ahead, our lineup for FY18 and beyond runs the gamut from best-selling book adaptations, Wonder and The Glass Castle, to franchise opportunities such as Chaos Walking and Robin Hood; the star-driven event film, Line of Fire; and follow-ups to proved winners including Soldado, the sequel to Sicario; Eugenio Derbez's next film for Pantelion, How To Be a Latin Lover; the next two Tyler Perry films; and the return of Jigsaw. Our slate is also rich in product from our partners, including the thrillers, American Assassin, from CBS, and The Commuter, from StudioCanal, along with our first film from Hasbro, My Little Pony, as we continue to expand our relationship with the owner of one of the world's greatest portfolios of intellectual property, including Monopoly, which we have in fast track development.

Turning to television, our efforts to build a high-end premium unscripted business continue to gain momentum as we announced a massive property, Candy Crush, in partnership with CBS, Activision, and King. Based on one of the world's most successful mobile gaming franchises, Candy Crush becomes our second major network reality series, alongside Kicking and Screaming, which debuts on Fox in the spring. We retain all international format and distribution rights for both series, and launched their global sales and marketing campaigns at MIPCOM last month. I'm pleased to say that we're already fielding tremendous in-bound interest from buyers all over the world, well in advance of the show's network premieres. The rollout of two network brands, combined with last year's majority investment in Pilgrim Media Group, demonstrates our commitment to building a significant reality business in a very short period of time with a modest capital investment.

Our scripted business is also firing on all cylinders. This quarter, four of our current series, Orange is the New Black, Nashville, the Golden Globe-nominated Casual, and The Royals were all renewed for additional seasons. In addition, two new series, Greenleaf and Nightcap, have already been picked up for a second season, reflecting our ability to keep key series on the air. Greenleaf was a break-out success in its first season on OWN, achieving record ratings, and its second season renewal is a super sized 16-episode order. During the quarter, we added a new high-end series to our slate with Dear White People currently shooting for Netflix.

We also delivered the pilot, White Famous, executive produced by Jamie Foxx, to Showtime. We believe that it has all the ingredients to become another premium series for us and our network partner. In addition, we continue to ramp up our supply of premium content to our own platforms and those of our partners, reflecting the level of vertical integration that we've already achieved. These include Teresa, a fast-track development series for Starz with our partner Televisa; Manifesto, the Unabomber series for Discovery; and Kevin Hart's Lyft Legends, his first original series for our own LOL platform.

Finally, we're continuing to build our television business in the UK to stand alongside the premier film brand Lionsgate UK CEO Zygi Kamasa and his team have built. Our first steps have included investment in the production companies, Primal Media and Kindle Entertainment, which are already beginning to show real growth. And one of the first television series with which we've become involved, channel 4's comedy, Damned, is a ratings success poised for renewal.

As part of our vision, I am pleased to announce today that respected ITV Senior Executive, Steve November, is being brought aboard to manage our production relationships in the UK, and develop original programming for Zygi, Kevin, and the respective teams. We believe that our UK television business is at the beginning of a major long-term build, and that initiative is getting a big shot in the arm with Steve's addition to the team.

In closing, despite the velocity of change in the film and television landscape, we remain excited about what we continue to build, a vertically integrated, diversified platform that encompasses a non-replicable portfolio of assets. We believe that the combination of Lionsgate and Starz has the potential to supercharge our respective businesses, amplifying existing strengths, opening the door to a broad array of new ones, and ultimately, creating a massive global content engine. And now, I'd like to turn things over to Jimmy.

Thanks, Jon, and good afternoon, everyone. I'll briefly discuss our quarterly results, give you an update on our previous FY17 guidance, as well as discuss some of the elements of the Starz deal.

For the second quarter, we reported fiscal net revenues of $640 million, which were up 34% from the prior year, as both motion picture and TV posted year-over-year growth. Gross contribution was also up at both motion picture and TV, despite motion picture being negatively impacted by higher marketing costs associated with seven wide releases in the current quarter, compared to only three last year.

Reported earnings per share came in at a loss of $0.12 per share, which was an improvement over last year's loss of $0.28 a share. Adjusted EBITDA for the quarter was $2.6 million, up from a loss of $8 million last year.

For FY17, we continue to estimate adjusted EBITDA in the range of $200 million to $300 million. While we are currently below the mid-point of our guidance, as you might expect from the underperformance of a few film releases, we like our second-half lineup. We have six wide releases remaining, including Hacksaw Ridge, La La Land, Patriots Day, and John Wick 2. And Tyler Perry's, Boo! A Medea Halloween, is continuing to play strong, capturing the number-one box office position two weeks in a row.

As we have stated earlier, the fiscal year is back-end loaded with preponderance of adjusted EBITDA occurring over Q3 and Q4. Accordingly, we think it's premature to revise our guidance at this time.

I also want to update you on the Starz acquisition. As you know, we recently announced a conclusion and pricing of our merger-related financing. We are very pleased with the lender community reception.

Overall, the weighted average pricing was approximately 70 basis points better than the projections included in the S4, representing over $20 million a year in annual savings. I would also add that we continue to project our going-in leverage to be 5 to 5.5 times, assuming year-end close, and we expect to delever roughly 1.5 turns in the first 12 to 18 months.

With regards to integration, as Jon mentioned, we are very pleased with our progress towards delivering the $50 million plus in operating cost synergies. We are equally excited about the annual cash tax savings of $150 million, which will start immediately upon close. On that note, we expect to close the Starz acquisition in the calendar fourth quarter. We have received all the required regulatory clearances, and will schedule our shareholder vote as soon as our proxy statement is declared effective by the SEC. Now I'd like to turn the call over to James for Q&A.

Great, thanks. Tony, we'll open it now for questions, please.

(Operator Instructions)

Ryan Fiftal, Morgan Stanley.

Thank you very much.

Two questions if I may, so first on the TV studio side, I think it was may be a couple of quarters ago you talked about 15 new scripted series this year. That's a pretty big number, but I'd imagine that networks and platforms have quite a bit of discretion on when they launch those shows. So I don't know, at this point in the year, do you have a sense for how many of those you expect to actually hit or deliver in this year versus how many could slip into next year?

Thank you. Good question.

So from the 15 we talked about since then, two have aired and aren't returning, so we're kind of at a steady state of about 13 in the new category, which are spread across multiple months and over the next year or so, because just based on network schedules and when they want them.

So a number of shows are in production, some are in the writing phase, some are in post. Which is why we focus ultimately on the aggregate revenue and EBITDA of a fiscal year, which continues year-on-year to keep growing. So it's all pointing in the right direction, but too hard to break out each one and where it hits for a call like this, but obviously we can talk in more detail at another time.

Okay sure. And in my second one was on the new business initiatives that you had. It looks like in the quarter, there was another about $10 million in startup losses on those. And the proxy that you guys had filed or the management forecast, implied that those losses were going to accelerate in the back half and I don't know if that's still your expectation or not, but can you maybe give us an update or some color on how you expect those to trend, what initiatives really are even driving those and your confidence in moving those toward profitability. Thanks.

Sure. Jimmy will handle that one.

Thanks Ryan, I appreciate it. Look, our new business initiatives include primarily our SVOD services, but also Atom, our dynamic ticket pricing services as well that we have an interest in. Look, we're very excited about the investments here and the value being created.

I would say that to your point, we have two SVOD services that already launched, Tribeca Shortlist and Comic-Con, we've announced two others that we'll be moving forward with, Including Laugh Out Loud with Kevin Hart as well as the Spanglish Spanish-language service. So I would expect us to see some modest increase in the second half in the context of run rate spin there.

I would just also note though in particular, that as John noted in his remarks, and as we press release, we have just announced a new strategic partner with a minority stake in our Spanish-language service, and I think you can see more of this in the future. Particularly as the value of these services increase. We could go in that direction with strategic partners to mitigate some of our cash investments.

Thanks Ryan. Operator next question please.

Stan Meyers, Piper Jaffray.

Thank you. I have one for Jon and one for Jimmy, if I may. Jon, you mentioned earlier the recently announced AT&T Time Warner deal. I just wanted to hear your perspective on the deal both as a [comp] studio and also as a future competitor with HBO. And then one for Jimmy. I want to briefly discuss the debt raise, you clearly -- guys got a much better than expected rate and I believe it was oversubscribed. But it feels there's a bit of a disconnect between the equity invest there, that see a number of uncertainties in your business and debt investors. Any color there on the debt raise and demand would be helpful, thank you.

Well, as I noted, I think this is a great potential transaction for AT&T because at the end of the day, global demand for content just keeps growing. There are more users, there are more buyers. As the supplier, obviously, that's great.

There's a better ability to get it to the home, to the consumer and to do it in a customized way and I think for a company like ours that's entrepreneurial and moves quickly to take advantage of new technology and new business concepts, I think that's really good. I think we've spent 16 years now building an incredible library. We have a deep, deep pipeline of film and television. So I think the validation of content and the vertical integration of that content is, I think, exactly the right message.

I would say -- I'd also note since you bring up HBO, I think the allocation, if you will, for HBO and that deal about 14 times forward EBITDA, I think if you look at our Starz transaction, it's closer to eight times. And clearly HBO's a fantastic brand, but I think there's no question that the thesis around this is that if we put our content creation machine together with Starz and the really talented executives over there, Chris Albrecht and Carmen and their team, we can put together a couple of premium hit series. Again, that we own retention of rights, really important for us in this global environment and we can get that value a lot closer to how HBO is valued there.

And again, if you look at the map, just a couple of multiple points, if you get it from 8 to 10 times, let's just say, you're talking about probably about $1 billion alone in incremental market value for Lions Gate. So again, we like that transaction, like it for them and like what it says for our business.

And Stan, to your second question, look, we continue to be very excited about the combination of these two companies. I was on the road show with Michael and Jeff Hersh from Starz and we thought it went very well. We met with all of our key investors there on the debt side. The reception was very positive. As you surmise, the deal was significantly oversubscribed and of course as we announced the rates were much better than we had initially forecast. So we couldn't be happier.

What seemed to resonate most with the fixed income investors was not just the strategic logic of the deal, but also the financial elements of the combination. In particular, I'd say the amount and growth of free cash flow, the predictability of that cash flow, and the ability to quickly de-lever. So I think that that helps explain the bondholder enthusiasm and of course, we're excited that these same metrics were going to help drive shareholder value, as well.

Alright. Thank you guys.

John Janedis, Jefferies.

Hi. So as you guys know, ratings weakness has been a topic for the networks and I don't think the expectation is how to change it. So as you expand your TV production and it seems like per-hour costs are rising above reality and scripted, do you think production process or demand changes, does the industry have to accept lower margins? Since I assume the suppliers are all going to have a similar strategy of trying to align themselves with the perceived long-term winners, thanks.

This is Kevin.

Really good question. We feel that we're in a great position to take advantage of the content needs as Jon alluded to globally, so when networks are under pressure ratings wise, they're looking for hits and to distinguish themselves from their competitors. And we really try to have the entire lifecycle of TV available to them, from primetime, to daytime, scripted, non-scripted.

The sticky, high budget premium, critically acclaimed, scripted programs that we're known for, we continue to generate and find as programming solutions for our partners. Moving aggressively into unscripted, which John alluded to as well, Kicking and Screaming and Candy Crush; Debmar Mercury, with it's daytime lineup and successes with Celebrity Name Game and Wendy Williams; Pilgrim Media in the UK as well, all of those are aimed at one thing, having the answer forgo the questions and the ratings pressure that you're talking about.

The scripted fare, the budgets continue to go up; the unscripted is a solution to offset the increases in scripted. So we kind of get them coming and going, which is good for us. So we like to say internally network needs our studio assets and we feel we're in good position.

Thanks that helpful, Kevin. And maybe switching to film. I think as you guys know, there's been some challenges over the past few quarters on the box office front and there's that perception in the market that the industry has gone from an oligopoly to an oligopoly of franchises, as the audience is describing. And so Michael, you talked about the steady state of film cash flow and with Madea performing well and a few others in the pipeline with good early reviews, do you think you're nearing the point where the narratives on the industry or yourself changes?

Hi, it's Michael. Erik, why don't you kick that off.

Hi, this is Erik. So, original movies are still breaking out all the time. Audiences are going to movies that they know and movies that they don't know. In the past year alone, there were three original moderately budgeted movies that made over $100 million. Near a half-dozen horror movies that made between $50 million and $100 million, and all of those are exactly the kinds of movies that we have made before and will continue to make. Also, I'd like to say, franchises, they really come in all shapes and sizes. I think when you see the success of Madea, number one at the box office for two weekends in a row, it proves you don't need a big budget to make a big presence and those are exactly the kinds of factors that make a big difference for us, as well.

The only thing I'll add is that even if you look at the wake of a little movie, like the second weekend of a movie like Madea, I think yes, the Greek term you suffer your way to wisdom, we're paying very close attention as is the industry. And when you have these mega-movies that open at crazy numbers, you want to pay attention to what it's going to do the second weekend as well.

So we've done -- we're really planning that with our theatrical distribution team and marketing team trying to figure out the right dates. And I think we're, as evidenced, as we talked about last weekend, we did well there and we're paying very close attention to that.

Great. Thanks guys.

David Joyce, Evercore ISI

Thank you. If we could talk about the international theatrical side of the business. Obviously one of your films, the Now You See Me franchise over indexes internationally. If we can understand the economics that are evolving, do you get any better overages for franchises or for films that typically do better overseas, or can you help us understand how we should think about the second half of this fiscal year with the upcoming releases in terms of how you think they'll do internationally.

So this is Jon. We have the potential for overages on any movie that's released with any of our partners. Obviously we've released ourselves, our movies in the UK with a terrific distribution, a group led by Zygi Kamasa, we have a hybrid organization in Latin America, we can totally benefit from the upside. And even in a number of the large Western European countries where we have strong third-party alright deals with, again, typically the best distributor in that territory, there's an opportunity for overages.

Our structure is definitely oriented towards reducing some of the risk, and one might say at a certain point in time, it does reduce some of the upside as well. But I believe we have a potential on every one of our movies and obviously the bigger movies typically have more potential, but as Eric said, you never know where your next hit is going to come from.

I mean we're certainly looking at a movie like Power Rangers. I think we've got a reasonably modest expectation for that, but certainly we believe that's a potential franchise. As I've said before and again, we would see hopefully the possibility of significant overages if the movie does what we hope or obviously does even better.

I'd make another point to sort of that last question that Eric talked about, which is, again, franchises do come in different sizes and for a company of ours with overhead of probably a third of what the other major studios have in the film's entertainment side, obviously a franchise for us doesn't have to be a huge monster Marvel property. It is the beta for us, it does not need to be a Hunger Games and it doesn't need to be obviously as I say, a Marvel property.

We can move the needle a lot with a modest franchise hit. And again, we do tend to look to reduce some of our risk in the international market, but to get back to your question, we definitely have the possibility of overages and actually spend a lot of our time making sure we get overages on our movies.

Thank you.

Amy Yong, with Macquarie Securities.

Thanks, I have two questions, one for Jon and one for Jimmy. Jon, you mentioned some revenue enhancing opportunities that are not contemplated in the proxy and I was wondering if you could actually talk about with these could be and how big they could be. And then just following up on the international opportunity, just overall thoughts on your relationship with Televisa, Discovery and Liberty Global. How might those relationships evolve over time?

And the my question for Jimmy is on your deleveraging target, you've identified a basket of assets that you'd like to divest. Any progress on those and just thoughts around deleveraging and those specific assets, thank you.

Yes. I think certainly the revenue enhancements encompass a whole lot of different pieces of the business. It comes from scale, it comes from leverage with vendors, it comes from perhaps more efficient distribution, putting the best and the brightest together in our worldwide distribution business.

Again, there's a tremendous -- when you look at the amount of content in terms of both library and pipeline that sits there between our two companies, we've mentioned before, $1.8 billion a year of investment in original programming. And I think that as we do that, you're going to talk about definitely some margin improvement across the board. We'll perhaps be able to give you a better sense of that as we go down the road.

In terms of Liberty Global and Discovery an Liberty Interactive with John Malone, I can tell you bringing those entities and those three new board members into our companies has been a huge incremental benefit to the company. Funny enough, we just spent a lot of time in our board meeting yesterday, I spent a lot of time with Mike Freeze. These guys are just tremendous executives.

We're talking about all kinds of business ventures together, we are already doing with Discovery, for example, we are producing a big show for them right now, we are doing their home entertainment, we are supplying a number of reality shows. So we're -- we speak not quite daily, but almost. Somebody at our company is talking to each of those companies virtually every single day.

Liberty Global with their international reach, we're talking about some very, very exciting possibilities, doing things with them both in Over the Top space and just premium content programming for their platform. So I'm virtually certain you'll continue to see a lot more of those collaborations as we go down the road.

And Amy, to the investments we have, as you know we've got a lot of value that we've created there, we like these investments, we continue to drive value there. And we will move toward the monetization or otherwise improving contributions to adjusted EBITDA, I think you could see some of that towards the end of this year, on the select asset or so. We continue to make good progress on that.

Thank you.

Ben Mogil, Stifel.

Hi, good afternoon. Thanks for taking my question. So I've got a couple.

First of all, sort of following up on John Janedis question on the ratings erosion of TV and how some of the networks are looking at programming differently and spending differently. When you look at AMC, which you did say The Beast, but they took a big write-off today as part of that, so a two-part question.

Do you have any more exposure on that show? And then, they were obviously one of the ones you are talking a lot about that went straight to full season or full season order. Given some of the ratings issues that a lot of networks have had, are you seeing any networks pull back on big 13-episode or 10-episode full season orders and instead do more limited series and seeing if that works to extend beyond that?

Well, just starting on the overall environment. The basic cable players are a little more impacted. As you know, we've [we've never tried] our business including cable and broadcast and streaming. AMC is a fantastic network partner. Obviously they have a full slew of hits, they've struggled on Tuesday night launching things apart from their Walking Dead franchise, not just with this but with other things. So we were disappointed it didn't do better, but in general our hit rate of shows that get on and stay on is pretty impressive.

But no there -- our downside is limited, it was a co-production, that works both ways. And that's a bit of a blip, but most of our other new shows are proceeding and moving on to successful first season and second seasons.

Okay, thanks Kevin, I appreciate that. And then sort of on the film side, and I mean I get that there's a lot inherent fixed cost in film and you can't be the distributor and do three films a year. But given the crowding out we've seen in the box office and the concentration, any thoughts to maybe 12 or 15 movies is too many and that if you can shrink the size of the slate, you don't have to chase three or four fillers, if you will.

Yes. That's not the way we're going, because again, we don't want to be in that huge big swing business. We'd rather hit singles and doubles and we think 15 to 20, actually we're fully capable of doing. Particularly because we've got great partners supplying content, as I mentioned. We've got CBS delivering two or three films a year either as co-productions with us or as distribution deals, we've got studio Canal, we've got Black Label, we've got a bunch of suppliers that are coming to us - Hasbro, I mentioned on the call as well, Millennium.

And so we are built to do that many and I think that again, because we limit our downside, I think that's actually the right number. And by the way, don't forget we actually do another 20 or 25 through our segment two, I think right now 90% of those this year were profitable. They are not huge profits, $1 million to $3 million a picture typically, but again, those are day and date releases, things that we are built for.

We like the diversification, we like the singles and doubles approach, and as I said earlier, the good news is when you've got a Power Rangers or when you've got a Chaos Walking or you've got King Killer Chronicles, which I think you'll be very excited to hear about the developments of it next week with some announcements were going to make, when we develop a franchise property, we can really move the needle. So we think that's the right approach for Lions Gate.

Okay that's great, Jon, thanks for that.

Alexia Quadrani, JPMorgan.

Thank you, just two quick questions. First I guess for Kevin, just following up in your earlier comments on the number of TV series out there, sort of the give-and-take in trying to figure out the right amount. I mean there seems to be definitely a huge supply of content out there.

But at the same time there is definitely a huge increase in the amount of demand in terms of the number of distributors looking for this content. How do you balance that? Do you think net-net you're seeing more demand, less demand, kind of the same, given the production we're seeing.

And then the second question, a general question for whoever, on the film side we've gotten a lot of positive buzz and good reviews on a few of your upcoming fills, Hacksaw Ridge, and La-La Land. Any more color you can provide on terms or expectations for the film slate in the coming quarter.

Thanks Alexia, it's Kevin. On the TV side, there are a lot of shows.

There are not a lot of amazing shows and great shows, and we really aspire to create those, and those are the ones that are breakout, which is why it's still a very hit-driven business. An environment in which there's dozens and dozens, if not hundreds of more scripted shows than there were before.

People looking for new voices, big ideas, offices that are interesting, stories that you haven't heard before, and we are positioned perfectly to be the studio that delivers them. Both to our [owned and operated or partially owned networks, Starz in the future and all of our 40 or 50 clients that are out there that are in this game increasingly, in scripted and non-scripted.

On the film slate, this is Eric. I'm really excited again about sticking to the diversity of product and all the different movies the different movies that are in different shapes and sizes that Jon mentioned. We have six movies left for release in our fiscal year, starting with Hacksaw Ridge, which is opening this weekend.

We couldn't be prouder of that movie, it's been critically well-received. It's been loved by audience as well, 90% fresh on Rotten Tomatoes so far, the critic aggregator. We have Patriots' Day, we have La La Land, both opening platform release at the end of this year and then expanding in January. Both really different movies, but also united by one thing, excellent quality. Patriot's Day, again from Pete Berg, starring Mark Wahlberg and a great cast of fantastic actors and telling a story which is a heart racing thriller, but also at the same time, an inspiring story for our time.

La La Land from visionary film maker Damien Chazelle, really is just -- it's an audience fan favorite, critical fan favorite, and movies that I think are to get a lot of special attention and breakout: The Shack, John Wick, Power Rangers. Each one of these movies really speaks to the diversity and breadth product that we're offering audiences and also our international distributors. So very excited about all those movies lined up and think each one of them has shot at breaking out into the audience.

I was just going to add one thing Alexia, which is -- to Jon's point earlier about Power Rangers, we don't put Marvel type numbers in when we're doing our budgeting and our forecasting.

So we don't do that, we put in what we think is a reasonable number. But we think we have a tremendous amount of potential breakout movies lined up going forward and yes, obviously we're thrilled at the idea that some of the movies that are coming out relatively soon have terrific reviews.

Jimmy maybe you could speak to the financial impact.

Yes and Alexia, as we've noted, the fiscal year is backend loaded. So let's just say obviously second-half performance ultimately determines -- would be determined by a number of things including episodic deliveries and obviously, the film performance.

And while we're excited, very excited about the second half of our film slate, just to give you a little bit of color on the cadence of adjusted EBITDA, you should expect sequential growth throughout the remainder of the year. So by far, the fourth quarter would be the largest contributor for the full year.

Thank you.

David Miller, Loop Capital Markets

Hi guys. Jon question for you, I think it was two quarters ago on this call that I asked you about once the Stars deal closes and you had to look out a year, how would you gauge the difference in branding and the difference in programming between Starz and EPIX. And I think your answer was that Starz would definitely be branded around original programming, original episodic television programming, obviously, and then EPIX would retain this kind of rebellious tone around concerts, and movies and edgier stuff. Do you still feel that way, now that things are a little bit more integrated, now that the deal is close to closing? Any difference in answering that question versus six months ago. Thanks a lot.

I don't remember characterizing it quite like that David, although your memory is probably better than mine. (laughter) I think that, I think that what you'd have to say is of course that having been around a lot longer, having built up 24 million subscribers plus and growing and now a robust, over the top presence which is very exciting. I mean I think this app surprised a lot of people, and being close to 1 million or plus 1 million subscribers. So obviously, with that level of subscription ongoing revenue I think there's an ability to have a larger budget for original programming. As you can see though, in our development of EPIX, which is having a fantastic year by the way, and continuing to be a great asset, we're returning cash to all of the partners, strong EBITDA. As you noticed, we have moved from doing mostly a nonfiction programming in addition to the movies, towards scripted. Which each of the studios now has a scripted series, I believe all of them will be renewed, I think all of them are going to be successful and I think that it will continue that way.

But I would say the biggest difference is certainly that Starz has a much bigger budget so far for original premium programming, I think we're very focused on developing, as I said in my remarks, a premium, fully owned or more than one series that we can exploit around the world, that we can put on Starz Play Arabia, that we can maximize the distribution benefits globally, but also that will build real premium value for the Starz platform.

Just as a follow-up with that or as a follow-up for that. Would you ever consider selling your stake in EPIX if there were a buyer out there to give you the terminal value that you think you deserve just to defray the cost of the Starz transaction. And Michael, I'd be interested in hearing your thoughts on that as well, thanks.

Yes, I think as we said before, I think we have tremendous optionality with EPIX. It is positioned a little differently, including in distribution, then Starz so I think there's a lot of options for it. But I do believe it's a very valuable platform and I think, as I said previously, we'll be having those conversations with Viacom. Obviously things are going on over there, we'll have to see how that works out and with our partner at MGM. We have a great partnership, we're certainly going to maximize the value of EPIX and we'll have to see how that goes.

Yes, I think that -- we own 100% of Starz, and we have a shade under 32% of EPIX. That's what I'll say about that.

Okay, thank you.

Alan Gould, Brean Capital.

Thank you, I've got two questions. First for either Jon or Kevin, at the recent Wall Street Journal conference, Reed Hastings was talking about the cost of top TV shows like The Crown costing $10 million an hour and comparing to the cost of top movies which are produced for $100 million an hour and started speculating, what if a TV show cost $20 million an hour? My question for you is, with Netflix and Amazon producing more and more of their own content, are they still as aggressive buying your content, and how does that impact the cost? Obviously Lions Gate's always been a pretty efficient producer of content.

And then the second question is for Jimmy, in the S4 you showed a very big increase in the FY19 revenue and EBITDA for Lions Gate. Is that due to a major film opening either late 2018 or early 2019?

So Kevin will handle the first one.

Just to the first one about Netflix and Amazon and streaming partners, I mean they're buying a lot of programming at various budgets (technical difficulties) one of their most successful shows on Netflix. And we're in the middle of shooting, actually winding up the first season of filming Dear White People, which is at a different budget level. And we're sitting on a couple offers right now in other projects from them, so it feels to us there's no signs of slowing for demand from third parties.

This is nothing new. We've seen with all networks, broadcast, cable and streaming services a desire to produce for themselves and control a little more of the economics. That you know that cuts both ways as we were referencing a little before, when things don't work out you're taking 100% of the losses. So the studio who comes in as a deficit partner, a creative curator, talent engine and distribution machine is always going to be a valuable part of the TV lifestyle.

Okay.

And Alan look I can appreciate your interest in your question, I really do. But as you know, the S4 was really represented a snapshot in time that we provided to our board in support of the merger.

You know they're not internal projections that were meant to be guidance. So there's really no plans to update those. I don't want to really comment further on the out years. The only thing I would say, there's no updates other than what we've -- the comments we've reiterated today regarding our FY17 guidance.

Okay thank you Jimmy.

Barton Crockett, FBR Capital Markets.

Thanks for taking the question. I wanted to ask about the contract that came out of Starz and AT&T and DirecTV. Two things about that, one is Starz was talking about $40 million less in revenue and that contract had been a place last year.

You know you guys had spoken to kind of a range of outcomes within the Starz, AT&T, DirecTV negotiation. With this outcome within the range or was it at the lower end of the range, could you give us some color on that?

Sure. We're not going to get specifically into those details.

What I would say is when we were doing our due diligence we'd stress things at all levels. So this is not a surprise and certainly not something that wasn't contemplated to various aspects here in our due diligence. I would just add that we did file the 8K, so that gives you all the information really that we would put out there.

I would note, as noted in the 8K, that we thought that part of that would be mitigated particularly over time with regards to the improving assumptions and experiences around Over the Top and I think what Starz released just this last quarter, we'll just reiterate that so I'll leave it at that.

Okay that's helpful.

And then as part of that deal, you guys are also issuing a little bit of stock and or cash at your option to them in return, I think, for some content you guys will produce. I was wondering if you could talk a little bit about what it is that you're doing for them and strategically how interesting it is.

Well, high, it's Michael, Barton. As you can see from the disclosures, it's a cash or stock at our options at the end of every year for three years. And obviously you know we announced that we did an electronic sell through deal with them, we re-upped our VOD deal, there were some library sales, as well. There's some programming that you'll see on their specific channels. So it was really a wide-ranging deal. And we love the idea of enhancing the partnership with AT&T/direct

Okay so that is going to be more money coming to you from them then you were getting before. That's a step up in revenues, is that correct?

We certainly hope - - well obviously they're not in the electronic sell through business and now they are, so that can only be an uptick.

Okay. Great thank you.

Steven Cahall, Royal Bank of Canada.

Thank you, just a quick question about cash. I think after the debt deal, your cost of capital as I calculated now is below 7%. So I was wondering if you just remind us the value of the cash tax assets and if we put all this together it sure seems like after Starz, you're going to have a heck of a lot of free cash flow.

So could you quantify maybe what you expect per share? And over the long term once you've de-levered a little bit like you talked about, what are the plans of what you're going to do with all this cash that this entity is going to generate.

Thanks Stephen, appreciate that question and glad you've noticed, so absolutely. Our cost to capital is pretty low. We're very happy with how we executed on the debt side of things. And our focus at the moment in the near term after this acquisition is going to be on delivering, delivering and delevering.

We've stated we're going in -- it was leveraged somewhere between 5 and 5.5 times and we expected de-lever over say, 12 to 18 months, at least a turn and a half. That would get you to a range of call it, 3.5 to 4 times, I expect that we will de-lever down towards the bottom of that range for sure. And we're always going to be opportunistic in terms of how we invest capital and deploy capital for the growth of our business.

But I would just add that this deleveraging and significant free cash flow generation is after we fully invested in our core business. So our core businesses are going to get the cash they need to grow the way we would. So it will be business as usual. But you're absolutely right, there is still significant free cash flow left over, significant tax synergies that will start day one. And we're looking forward to that day.

And just a quick follow-up, could you mention how much Madea maybe outperformed your expectations, if in fact it has. Just like it's been a very strong movie, so could we get a sense of maybe how far ahead it is.

Yes we don't give specifics on absolutely how it outperformed, but yes it was a nice performance for us and we're very happy with that. And again, our film business is a portfolio, so we have some that underperform and we have some that over perform. I'd certainly characterize Boo, Medea's Halloween as an over performer.

Matthew Harrigan, Wunderlich.

I was curious -- it's easy to lapse into the levity on Brony-Con, but do you have any sense for what sort of fan base there is for my Little Pony? I mean that's clearly repeatable and you've got some pretty ardent supporters there. I know it's not as easy a metric as the book sales for Hunger Games or something like that.

And then secondly, you've done a lot of things with VR and AR, particularly gaming. There's lots of equipment coming to market now, like the Nokia camera with the eight lenses and eight microphones, it's even pretty affordable. It feels like there's like a bit of an inflection point in the consumer technology and the production technology there, and you've always been a bit of a technophile. So, I guess addressing Jon, I'd love to get your thoughts on that as well if you could, thank you.

Michael's on the board of Hasbro, so I'll let him be conflicted and answer that.

Hey Matthew, what I would say is that it's a very loyal fan base. The show does extremely well on Discovery Kids, it does very, very well on Netflix. We think this is a fantastic brand. I can tell you that Hasbro is going all in as far as the promotion tied in with our marketing campaign. So do I think it's a four quadrant movie? Hasbro will get mad at me if I said probably not, but we think it could branch out beyond the core young girl demo.

And in terms of our game business, and I'll segue into VR, I think at this point in time, we're working with some really great AAA developers and publishers: Starbreeze, nWay, TinyCo, Zynga, IGT, I think we've announced or have released or are releasing about 15 games right now and they run the gamut from first player shooters to social slots: really every kind of the game. But we're really spending a lot of time on VR and I, of course, I mentioned the John Wick VR game.

I played it, I can tell you it's amazing. It for me shows the future of where these gamers -- what can be an amazing production value VR game. As you noted, the equipment is coming down very substantially. So I think really the upside for this and again you know we're doing games, Orange Is the New Black, Power Rangers, Reservoir Dogs, just across the lot of our IP. And so I think there's a lot of upside there and to get particularly excited about VR.

We may have a worse problem than the election if My Little Pony is a four-quadrant movie, but thanks for your answers. (laughter)

Jim Goss, Barrington Research.

I was wondering as you move to 15 to 20 film slate per year and you have that with some consistency, I'm wondering a couple things. First, if you think you'll have more at bat and have a greater ability to appeal to international markets and in that context, to the extent that Great Britain, I think, has been your only direct international distribution vehicle, might it become more important to you to consider distribution outside the US and Great Britain on your own and how would Hemisphere relationship possibly tie into that?

Well there's a lot of questions in that question.

I would say, again, I noted earlier, Latin America, we really have a hybrid model we retain all of our digital and television distribution rights there, putting out the theatrical with typically best in class third party film distributors that retain all the rest of the right. And so we think that works really well for us, and we think we get equal upside frankly from what any of the studios do there. And as you noted the UK, we've looked at some other markets. We've been in Canada as you know before, it's something we certainly keep an eye on given its proximity to us and the English language.

We do China exactly the same way as everybody else and frankly we're incredibly active in China in terms of co-producing now movies, as well as on the distribution side. So I would say we remain, we keep our eye on what those businesses could be. But I think it would be tied into, and you make an interesting point -- I think to expand into another territory in a major way, it would probably involve having other businesses there that we would need to feed.

As I have mentioned before, I believe, the first run pay channel for all of our Pantelion movies of which we're doing around 20 a year is going to be our new Spanish-language movie service. So again, vertically integrating in a territory I think would be key to us taking the additional investment in terms of distribution.

Thank you.

Thank you and that does conclude the Q&A portion of our conference. And ladies and gentlemen this call would be available for replay after 4 PM Pacific time tomorrow November 4 through November 11 at midnight.

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