Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Lions Gate Entertainment Corp. (LGF)

Q1 2007 Earnings Conference Call

August 9, 2006 4:30 pm ET

Executives

Jon Feltheimer - Chief Executive Officer

Michael Burns - Vice Chairman

Steve Beeks - President

Jim Keegan - Chief Financial Officer

Rick Prell - Chief Accounting Officer

Peter D. Wilkes - Investor Relations

Analysts

Lowell Singer - SG Cowen

Yolanda Masalan - Credit Suisse

Michael Savner - Banc of America Securities

David Miller - Sanders Morris Harris

Jaqueline Spring - Thomas Weisel Partners

Barton Crockett - JP Morgan

Eric Handler - Lehman Brothers

Matthew Harrigan - Janco Partners

David Bank - RBC Capital Markets

Michael Kelman - Susquehanna Financial Group

Berna Barshay - Ingleside Investors

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter fiscal 2007 analyst conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time.

(Operator Instructions)

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

Peter D. Wilkes

Thank you for joining us today. Jon Feltheimer, our CEO will begin with remarks, then we will open the call to questions from our analysts. The matters discussed on this call include forward-looking statements. 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 important factors, including the risk factors as set forth in Lions Gate’s Form 10-K filed with the Securities and Exchange Commission on June 14, 2006. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.

Now, I will turn the call over to Jon.

Jon Feltheimer

Thank you, Peter. Good afternoon. Thank you for joining us at a different time than usual for our Q1 call. Joining me on this call are Michael Burns, our Vice Chairman, Steve Beeks, our President, Jim Keegan, our Chief Financial Officer, and Rick Prell, our Chief Accounting Officer.

We generally prefer to wait until the morning after our earnings release to discuss our results to give you more time to read our announcement, but we know that many of you will be following Marvel’s webcast tomorrow. Fortunately, our Q1 financial results are pretty straightforward.

Our pre-tax income improved by $16.7 million from the prior year quarter, and overall our business plan is financially on track. We remain well-positioned for a very successful year with significant cash on hand, our highest backlog ever and a great slate of films, television and video product going forward.

Our backlog has in fact grown to $240 million, more than 60% higher than at the end of any previous quarter. We continue to maintain a significant cash balance, as well as $215 million in our unused credit facility.

Our revenue variance compared to the prior year quarter primarily reflects the timing of television deliveries, and we expect that revenue will be made up by the end of the year because our television business is more robust than ever.

We now have 11 primetime series scheduled to air in fiscal 2007. These include two new additions since our last call in June: White Boyz N The Hood for Showtime, which actually started out as a video project with one of our in-house executives and turned into a backdoor pilot and subsequent series commitment from Showtime; and from Matt Weiner, executive producer of the Sopranos, Mad Men, a new series set in the world of advertising for AMC, which recently achieved record ratings with their movie broken trail.

Ten of our 11 television series are for cable rather than broadcast networks, and our television operation reflects the changes in our overall business. Revenue diversification, the emergence of large niche audiences, not only in film but television as well, new buyers, particularly the cable channels, and a strong TV to DVD market.

It also underscores the strategic fit between our business model and the fundamental changes transitioning our industry from a marketplace dominated by [old line] media companies to a digital marketplace with tremendous opportunities for content companies like Lions Gate that we build not only to generate hits but to succeed in a niche-oriented business.

Just looking at the television side of our business, when Michael and I started here in 2000, the main buyers for television series were the major broadcast networks, ABC, CBS, NBC, Fox, the WB, and UPN. Now, there are literally scores of buyers -- Lifetime, Showtime, HBO, A&E, USA, ABC Family, Discovery, TV Land, Spike!, Oxygen, TNT, TBS, WE, Comedy Central, MTV, VH1 -- just to name some, with new players like AMC emerging all the time.

For those of you who wonder where the growth will come from in Lions Gate’s business, consider this: when we started six years ago, our television revenues were $8.3 million. Last year, they were $133 million and we are on track for more growth this year, all in a business with low overhead and positive free cash flow.

We are seeing a similar landscape in packaged media. When we started six years ago, the major buyers for DVD’s were the established retailers -- Wal-Mart, Blockbuster, Best Buy, K-Mart, and Target. Now, in addition to those major retailers, Steve and his team are selling to new players, such as NetFlixx, Starbucks, PlayStation III, Blockbuster Online, X-Box 360, Amazon and many others.

In spite of the maturation of the North American DVD market, the truth is that Lions Gate’s packaged media business grew 13% year over year in fiscal 2006, and it grew 18% quarter over quarter. This growth in our fore-packaged media business does not reflect the emergence of mobile downloaded broadband businesses that did not exist six years ago.

We have new video-on-demand deals with In Demand, TVN, Cablevision, and Echo Star, and instead of distributing through Warner Brothers and paying a distribution fee, we now have new direct distribution deals in place to deliver content to 20 million VOD enabled households.

We also have digital delivery deals in place with Cinema Now, MovieLink, and iTunes, with upcoming announcements with at least two more major industry players.

While we will not be sharing the $900 million that Rupert is getting from Google for MySpace, we welcome the vibrancy of sites like MySpace and YouTube for giving us the ability to market effectively and efficiently directly to the consumer as we are currently doing with our film release, The Descent.

In addition, in the ongoing discussion of our new channel brands, especially the Horror Channel, on which we expect an announcement shortly, it is amazing to see all the potential carriers and partners that currently exist.

Let me talk about just one digital company. I am a little biased because we own a 21% stake on an undiluted basis. In the month of July alone, after Cinema Now announced download-to-burn, it achieved nearly as many buys as in the previous three months combined.

Although these digital revenues are only a drop in the bucket for us at this stage, they reflect a critical area of future growth for our business. It is important to note that this is growth in addition to our core businesses, not at the expense of them.

As Forrester pointed out in its latest media technology forecast, there is no evidence that VOD revenues are cannibalizing revenue streams from our traditional DVD or other core businesses. In fact, we continue to believe that these will be higher margin incremental revenues.

When we talk about growing our business not only at the top-line but on the margin as well, we are eliminating the middle man in digital distribution, increasing margin through self-distribution of theatrical titles by Lions Gate U.K. with last year’s Redbus acquisition, and with the acquisition last month of Debmar-Mercury, we are improving margin from The Dead Zone and our movie packages, as well as third-party products.

On the box office front, our year is off to a solid start with the heart of our film slate still to come. Early orders for the Akeelah DVD are strong and we have already sold the pre-television window to two big cable buyers.

The Descent, which had an almost $9 million opening weekend, is a perfect example of our film business model. When we bought this film for $1 million, we did not look to open at number one at the box office, especially with the four pictures that ranked ahead of us last weekend, adding a combined production budget of nearly $500 million.

For an acquisition price of $1 million, and a spend of about $18 million in P&A to release The Descent nationwide in 2,000 theaters, we expect to only generate about $50 million in North American revenues, from which we will take our distribution fee and a portion of the back-end. This will be a very profitable movie for us.

Looking ahead at the next couple of months, we see our slate continuing to gain momentum, with:

  • Crank releasing nationwide on Labor Day weekend;
  • The U.S. Versus John Lennon is shaping up as our strongest entry yet from our documentary division, on September 15th, and expanding September 29th;
  • Employee of the Month generating terrific buzz in advance of its October 6th release; and
  • Saw III at Halloween.

The thought we heard anecdotally about the reaction of this past weekend’s moviegoers who watched the premier of Saw III trailer is correct: we are very well-positioned for the next installment of the Saw franchise.

One interesting footnote to our current film business is not only the creation of franchises, but is the repeat relationships we are generating and without a lot of high-priced overall deals.

Dane Cook goes from a starring role in Employee of the Month in October to a starring role in Good Luck, Chuck, to be released in ’08; Academy Award Nominee Terence Howard goes from Crash to Pride; Jason Statham stars in Crank next month, and then segues to Rogue with Jet Li next year; Jessica Alba also in Good Luck, Chuck, is now slated to do a remake of The Eye with the Cruise Wagner Company coming back to produce another film for us.

We are releasing Larry the Cable Guy’s second movie for us at the end of this fiscal year.

We are planning a new project with Monster’s Ball Academy Award Winner Halle Berry.

We have and will be getting from our a partners at Marvel, who produced The Punisher for us, the successful DVD release Ultimate Avengers and this month’s Ultimate Avengers 2, with at least six more direct-to-video titles to come.

There is our relationship with Mark Burg in Oren Koules, the principals of Twisted Pictures, who brought us the Saw franchise, and we can never forget our relationship with Tyler Perry, himself a franchise with whom we are now in business through Debmar-Mercury on his new, first-run syndicated comedy series House of Payne, in addition to his remarkable feature films and DVD catalog.

This again speaks to our ability to attract entrepreneurial partners who remain in business for Lions Gate for repeat product over the long term.

In addition to investing in talent, we continue to grow our content leadership by investing in product and accretive acquisitions that help us accelerate our organic growth. Debmar-Mercury, the leading independent television syndicator, gives our growing television business the ability to self-distribute, and establish as a strong Lions Gate presence in television syndication with the South Park franchise, two major film packages from Revolution, and Tyler Perry’s House of Payne.

Our new deal for the distribution of more than 2,000 library titles from Studio Canal deepens our library and our relationship with an important supplier, as does the extension of our deal to distribute 1,600 Republic titles.

We are looking at a number of other deals, consistent with our acquisition strategy, internationally and domestically, to continue expanding strong growth areas such as television, our library and music publishing.

We grew Lions Gate by investing in content and staying agnostic to platform, and we will continue that way. While cable companies, telcos, and broadband players all compete for spectrum, broader pipes and bundled offerings, they are only expanding our customer base because those customers will need content, and we will be there to provide it.

Now, I know that some of you have several analyst calls today, so without further ado, I will open the call to questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from the line of Lowell Singer from Cohen & Company. Please go ahead.

Lowell Singer - SG Cowen

Thank you, good afternoon. Just want to ask you a couple of questions about the film side of the business, really from an industry perspective. Your thoughts, as we sit here today, on compression of DVD windows relative to theatrical releases. There does appear to be a move towards really squeezing those windows closer together. I am wondering what the pros and cons of that are.

Second, there continues to be discussion about long-term rates that pay, cable networks are going to pay for films. I am wondering if you think from an industry perspective, that should cause us some concern, and more specifically for Lions Gate what you think the potential longer-term impact of that could be.

Jon Feltheimer

I think we are still pretty sensitive, Lowell, to the needs of both the cinema owners, theater owners, as well as the players in the video business. We think 16 weeks is still about the right amount between windows. I do not think we see really compressing them much more than that.

There are times, particularly as a public company, where you are trying to get certain revenues within your fiscal year, and you move a movie a couple of weeks, so maybe the window changes a little. I think in general, we think that is the right window.

We have got, in terms of pay television, we have about two-and-a-half years left on a Showtime deal. I still believe at the end of the day that the core product for the pay channels really, when you think about it, what they really have to sell is our product. We are really a major studio right now in terms of being able to supply that product. I think competitively against the other studios, we are frankly a better bargain because we are doing the same size film slate and I think our movies are very attractive to some very large, desirable audiences for them.

I think as well, as we go down the road, again we will be looking at our film products in 2009, which would probably not even be release to pay until the end of that year, so call it almost 2010. I think you are going to be looking at lots of new incremental players and revenue streams at that point, and perhaps we will all be rationalizing how to put together that window. I still think again, our product is still critical to the pay television networks and I think it will remain a strong component of our revenue stream.

Lowell Singer - SG Cowen

Thank you.

Operator

Thank you. Our next question comes from the line of [Yolanda Masalan] from Credit Suisse. Go ahead, please.

Yolanda Masalan - Credit Suisse

Thank you. Two questions. Would you please walk through your cash flow statements and just talk through the major changes in the free cash flow generation and how those are likely to turn or not turn in upcoming quarters.

Secondly, just with regard to digital, the music industry is currently getting up to 10% of revenue from digital. How long do you think it is going to take for you to get to that same sort of level?

Jon Feltheimer

Jim, would you answer that first question, please?

Jim Keegan

Sure. If you look at our cash flow statements, you will notice that basically our receivables decreased significantly. That is about a $90 million decrease, and that caused an influx of cash. Then, on the other side, you will see the accounts payable line item also decreased by about $68 million. Net net, when you look at first quarter last, first year last year to the first quarter of this year, the real change in what occurred was that we paid payables down significantly. Our payable number is at $121 million, compared to about $136 million in the prior quarter.

The other movements within the cash flow statement, you will see deferred revenue moving a little and you will see other assets moving a little, but the real movement is within receivables and accounts payable.

Steve Beeks

I will try to answer your question with regard to digital and how fast that is going to move. You are right. The music industry now receives approximately 20% of its revenue on singles from electronic download, but only 5% of their revenue from album sales, so obviously that has been growing a little more slowly.

This is a new market. As Jon mentioned, it is growing dramatically. It has grown dramatically just in the last three or four months of electronic sell-through and downloads -- it is hard to estimate how long it is going to take us to get to that 10% or 20% level, but I would estimate definitely inside of five years.

Jon Feltheimer

I think the other thing that I would add it is a much simpler calculation in the music business. When you think about digital delivery, for us it is everything from a digital set-top box delivering video-on-demand to broadband space delivering download-to-own or download-to-burn.

I think probably you would be surprised, even at this point, at how much revenue is coming in from digitally-enabled, if you will, devices that going down the road, obviously we see significant growth.

Operator

Thank you. Our next question comes from the line of Mike Savner of Banc of America Securities.

Michael Savner - Banc of America Securities

Thank you. Good afternoon. If you could just comment a little bit on direct operating expenses, seem to be really light in the quarter, lighter than we have seen in the last couple of years, even given the revenue. Just wondering what was going on there.

Second, I think this time last year, you gave us some kind of broad outlook for the home video business, you library business for the duration of the year in terms of $200 million in revenue, and obviously there were some margin issues that seem to be getting a little bit better, so maybe just a quick update on where you see the library product, given some changes you have made.

Lastly, I was very pleased to see finally some closer matching between your EBITDA and free cash flow, even if it is negative at this point. It is nice to see it is close together. Mr. Keegan, maybe if you could just tell us how to think about that over the next couple of quarters, what would cause that to separate dramatically if it will, or maybe it will not. That would be helpful as well. Thank you.

Jim Keegan

First, on the direct operating expenses, it is due to the mix of the revenues. You saw only $7 million of television revenue. That revenue tends to have DOE of about 90%, and the other revenues from video tend to have DOE of probably 39%, 40%, so it is just due to the mix of the revenues is what caused that.

Steve Beeks

I will answer your question. With home entertainment in general, and library margins specifically, as I have indicated before, library margins fluctuate quarter to quarter depending on the product mix. We have put a lot of focus on that mix over the last several months, as we have indicated, with positive results. So library margin is up quarter to quarter in both of the last two quarters, and the margin for fiscal Q1 is very close to what it has been historically for library.

I want to reiterate that while we have been talking about library P&L margin, library is expected to generate in excess of $70 million free cash flow this fiscal year on revenues of approximately $200 million, so we are definitely still no track to hit that bogey.

Jim Keegan

In terms of the EBITDA and free cash flow going forward, if you look at our prior financial statements, you will see that our accounts payable line item tends to track up every quarter from now on through the year. I would anticipate that happening. We can make some obligation -- the other line item that people always focus on.

It is adjusted slightly right now, it has come down -- in concert with the year-end. I do not see that much more there, but I do see payables coming up. In fact, the two, I do absolutely see the EBITDA number and the free cash flow coming together, but they are going to be kept apart always due to the aggregation of film cost, the film cost associated with the acquisition of Lions Gate U.K., the film costs that are now going to be associated with Debmar.

Once again, whenever we buy a company, just as with Artisan, we [inaudible] value of the film cost and that amortization creates a spread between cash and free cash flow.

Operator

Thank you. Our next question comes from the line of David Miller from Sanders Morris Harris. Please go ahead.

David Miller - Sanders Morris Harris

Good afternoon, a couple of questions. On the timing of television series deliveries compared to the prior year quarter, what was the difference between the delivery system last year at this time versus now, and going forward, is that going to be a smooth process where you make up that delta over the next three quarters, or do you make it up immediately in the current quarter? How does that work? If you could flush that out, that would be great.

Also, Steve, you guys obviously knocked the cover off the ball pretty much in tandem with Madea’s Family Reunion on the DVD sell-through frame. Can you talk about how many units of the stage play you cleared in tying in the revenue synergies there? Thank you.

Jon Feltheimer

David, I do not have a clever answer for TV deliveries. It really depends on when the networks are going to air the series. We have a bunch of new series. It is really just a question of timing. It will definitely vary from year to year, although obviously when you have TV series and expect a number of them to be ongoing, that is the kind of consistency we are looking for, but it is not consistency quarter to quarter. It is consistency over the fiscal year. Steve.

Steve Beeks

Specifically with regard to the Tyler Perry plays, obviously as you mentioned we had a great campaign with Madea’s Family Reunion, and the two plays that were released at the same time, Madea Goes to Jail and Why Did I Get Married?, were both plays that had not been previously released, so this is the first time we have had plays that had not been in the market before.

Those sold incredibly well. We have shipped to date up, after six weeks, we have shipped in excess of 2 million units on those, and the sell-through rate is very healthy. It is over 80%.

David Miller - Sanders Morris Harris

Two million of the stage plays alone?

Steve Beeks

Just the stage plays.

David Miller - Sanders Morris Harris

Thank you.

Operator

Thank you. Our next question comes from the line of Gordon Hodge from Thomas Weisel Partners. Please go ahead.

Jaqueline Spring - Thomas Weisel Partners

Hi, this is Jaqueline in for Gordon. I was wondering, on the VOD revenue, if you could tell us how much those amount to now, if any. Also, what percent of your library do you have VOD rights to?

Jon Feltheimer

I cannot answer your first question. We just have not broken that number out.

In terms of percentage video on demand, I think we have said before we are well over 50% of our library. My guess is in terms of what is a more typical VOD, meaning not broadband delivered, Internet-delivered, virtually all of our library, so a significant portion of it.

Operator

Thank you. Our next question comes from the line of Bart Crockett from JP Morgan. Please go ahead.

Barton Crockett - JP Morgan

Thank you very much. First, just a housekeeping question here. I assume that your statement that you are on track with your business plan means that the guidance is basically unchanged that you guys have for this year. Is that correct?

Jon Feltheimer

That is correct. We are not changing our guidance right now. Obviously, as always, our numbers tend to track very much the success of our film business, also the scheduling of our films. At this point, we are comfortable with guidance.

Barton Crockett - JP Morgan

Great. Second thing, also on the housekeeping, I know there was some color on library, but will you give us a library revenue figure for the quarter?

Steve Beeks

Library revenue for the quarter was $112 million, and compares with $94 million in the year-ago quarter…

[Multiple Speakers]

Jim Keegan

$52.9 million for the first quarter of this year, actually, Steve.

Barton Crockett - JP Morgan

That other number was what, trailing six months or something?

Jon Feltheimer

He was giving you home entertainment numbers.

Barton Crockett - JP Morgan

I just wanted you to give us an update on where you are with your syndication efforts for your TV series, what your current outlook is in terms of what is coming out and what is likely to move into syndication and the timing of that. I will leave it there. Thank you.

Jon Feltheimer

We are currently syndicating, going out with The Dead Zone, both in terms of a broadcast syndication as well as to cable networks, while we discuss whether we are going to do new seasons of it as well. That is the main show.

I think we have alluded to the fact that through Debmar-Mercury, we are looking at first-run show House of Payne, whose tests have been fantastic. I hope it will be something to announce on that very shortly.

Then, of course, we are always open to people who want to buy the back-end of shows early. A show like Weeds, for example, or anything that is significantly. We will be looking at selling right now, also, the back-end of Missing.

Those are the main priorities right now.

Barton Crockett - JP Morgan

In terms of The Dead Zone, any color on how that is working, what the contribution is from the syndication at this point, or what it could be as you work through this?

Jon Feltheimer

I am not prepared to give color. We have a number in our financials. I am not prepared to comment on it right now.

Barton Crockett - JP Morgan

Just one final thing, on a housekeeping item, in the statement of cash flows, you guys had what would appear to be $25 million more investments, sale of investments, option rate securities than you had at spending, on that 165 spend, 190 gain. Could you just give us color what was going on there? It seemed to be a $25 million contributor of cash, so I am just wondering what happened there.

Jim Keegan

When you take all of our available cash, as much as possible and purchase the option rate securities, so it is not a source of cash. It is just how it is distinguished accordingly to show every purchase and every sale as a separate line item. It is more a housekeeping internally.

Barton Crockett - JP Morgan

Thank you.

Operator

Thank you. Our next question comes from the line of Eric Handler from Lehman Brothers. Please go ahead.

Eric Handler - Lehman Brothers

Thank you very much. As a follow-up to an earlier question, do you have any idea at this point how some of your TV deliverables will play out for the rest of this year, when we would expect to see strength? Normally, most of your revenue is in the first and the second quarters of the year. Obviously this year will be the first quarter. I wonder if it would be somewhat back-end weighted.

Then also, can you give us a sense of what your, if you look at the revenue that you got from iTunes and downloads such as Cinema Now, what that might have been and then how that compared to the fourth quarter? Thank you.

Steve Beeks

I can answer your first question. I do not think we have enough color on the second. We have talked before about the kind of money we were getting just from Weeds, I think gross of, at this point I am prepared to say about $700,000 come in on downloads for Weeds. It might be a little bit more right now. I think it is a pretty substantial number, given it is only airing in 14 million households.

The TV I would say, if you look at it for the rest of the year, as pretty even for the next three quarters, and you know what kind of number we are looking at. I think you can extrapolate, but I think that is pretty much how it is going to come in.

Operator

Thank you. We have time for one more question, and that will come from the line of Matthew Harrigan from Janco Partners. Please go ahead.

Matthew Harrigan - Janco Partners

This is probably more of an industry note, but can you comment on how Blu-Ray is faring? You have had a number of announcements on that.

Also, it looks like we have not had quite the…[Technical Difficulties]…as we once had, given what has gone on in the DVD market. Is there some change in sentiment on the efficacy of that on the part of certain of your partners, or do you think we are just going through a bit of a lull, or am I just misperceiving the situation?

Steve Beeks

With regard to Blu-Ray, I would say, as we have indicated before, this is really all about Q4, when there will be more machines out. So far, there is only the Samsung machine. There will be several other manufacturers brining out machines in October and November. We have at least one more Blu-Ray release planned for the remainder of the year, so I think that it is too early to tell.

Sales have been about what we anticipated. Until we get an installed base of players out there, we do not anticipate this taking off. I would say that this fourth quarter and first quarter next year, it is going to be the consumer electronics gift of the time, or purchase of the time.

In terms of direct-to-video, we have announced at least -- for us, in the past, or at least this year, we are focusing more on the direct-to-video pictures supplied throughout the deals, for which we pay no minimum guarantee. We have done that. We have changed the mix, so we are taking less risk, but we still have just as many releases, or approximately just as many releases on a monthly basis. We release anywhere within five and six direct-to-video pictures per month.

I think that actually the direct-to-video business has seen some help and growth, particularly with Warner Brothers announcing that they just started a new unit, with Universal really going heavily into it, with the American Pie sequel, with Carlito’s Way, and now they are just next week releasing Bring It On 3. We are actually seeing more activity in direct-to-video movies, particularly in higher budget direct-to-video movies, so that market actually shows some help.

Jon Feltheimer

Thank you all for joining us.

[Multiple Speakers]

Okay. We have room for two more questions.

Operator

Yes, Sir. Our next question comes from the line of David Bank from RBC Capital Markets. Please go ahead.

David Bank - RBC Capital Markets

Thank you. Two questions. The first is, could you talk about what kind of contributions, if they are material, you are expecting from Studio Canal and Debmar financially?

The second question is movie downloads on iTunes, when do you think we are going to see it?

Steve Beeks

We cannot break out a contribution specifically from Studio Canal.

David Bank - RBC Capital Markets

What about Studio Canal and Debmar combined?

Jon Feltheimer

Well, I would not look at it that way. I think you might look at it a little differently. I could maybe guide you a wee bit in the sense that we paid, including debt, as we announced, 27 and we picked up some cash, but if you sort of ball park it, $23 million, $24 million, and we said it is an accretive transaction. I think you can do the math yourself, but we are not prepared to break out those numbers at this time.

In terms of movie downloads, Steve.

Steve Beeks

In terms of iTunes movie downloads, I think most likely some time before the end of the year. We know when they are planning on launching, but since they have not announced it publicly, I do not think it is our place to say anything more about that. Calendar year.

Operator

Thank you. Our next question comes from the line of Michael Kelman from Susquehanna Financial Group. Please go ahead.

Michael Kelman - Susquehanna Financial Group

Good afternoon, guys. Just considering the acquisitions you made over the course of the past year, the Debmar-Mercury, Redbus -- can you speak a little bit about your strategy behind these deals, whether you purchased them more from a desire to add on a particular market, such as TV syndication, or whether they are driven just by the opportunity presenting itself at that particular time? Thank you.

Jon Feltheimer

I think we are always going to be opportunistic. I think each deal has been a little bit different, but they usually have similar characteristics. Number one, when we buy a business, we tend to buy management. That is really important, I think I said at the time when we made the deal with the Redbus people that we were buying a company very much like the Lions Gate of U.K.

As well, we tend to look at proprietary rights, and in that particular case, we got a pretty significant library in the territory, and three, we look at distribution, about extending our footprint, and particularly extending it in a way where we recapture margin. I think that is what we did in that case. I think it is the same exact thing that we did Redbus. We have got a great management team. I know both of these guys very well for 20-some odd years. They come in with rights, as I mentioned before.

Not only had we previously hired them to distribute syndication of Dead Zone, but also of our movie packages. They have these revolution move packages, which sure are significant movies. South Park, which is doing really well in syndication. They have Tyler Perry. I believe they announced today a new series that they have, Strip Lights, about 175 episodes.

You know, again, very much the same. It is margin recapture or improvement. It is additional proprietary rights. It is a distribution footprint, which is in this case, now we are I would say the largest independent syndicator of content and its management.

Those tend to be the criteria upon which we base our decisions.

Operator

Thank you. Our last question comes from the line of Berna Barshay from Ingleside Investors. Please go ahead.

Berna Barshay - Ingleside Investors

A couple of questions. First, on the TV business, I wanted to know what kind of cost increases are going to be associated with the increased number of TV shows you are doing for the Fall.

Also, you mentioned briefly in passing that the TV business is free cash flow positive, so I just wanted to understand what the margins looked like in that business prior to syndication.

Finally, just in the film obligations line, there has been a lot of stuff in the press about the Crash payments that are being held up by the producer, the dispute that is going on. I was wondering if any of that is sitting in your film obligations line, and if that is something that could come out in one fell swoop at some point in the near future? Thank you.

Jim Keegan

We are completely up to current with any participation payments associated with Crash, so any controversy around that is not attributable to us.

Michael Burns

I want to add to that. When we make a deal to acquire a film, we typically make that deal with the producer of the film, and we pay according to our contract and participations. As Jim has said, we are fully paid up to the producers of Crash.

Steve Beeks

The question I am not quite sure I understand, Berna, if you could repeat -- when you say additional costs reflected in having more shows, what do you mean by that?

Berna Barshay - Ingleside Investors

In terms of development people and just general overhead, as well as I think you said you would, you said in the past you want cash deficit from TV shows, so I assume that they are still EBITDA positive, but just on a general overhead basis. You go from having three shows on TV to 11. You would think there would be some kind of incremental cost on that.

Steve Beeks

We have added almost no overhead in our television business at all. We argue amongst ourselves as to, because of allocation, what number it is, but somewhere between $2.5 billion and $3.5 billion for our entire television production unit. I would say it is on the lower side, but in any case, we really have not added overhead there. They are doing a terrific job.

In terms of use of cash, yes, it is true that typically after we look at tax credits, loans, interest free loans, and with various kinds of financing, international revenue, video revenue, pretty much on an up-front basis. Certainly after the first year of a series gets going, we tend to be cash flow positive. Overall, my reference was to the fact that overall, and I think I mentioned this earlier in the year when I did our guidance, is that overall, not only is our television business cash flow positive, but actually there is more free cash this year. The free cash flow number is considerably higher than the EBITDA or net income number.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 5:00 p.m. today, Pacific time, through August 17th. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 837968. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, with the access code of 837968.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Lions Gate Entertainment Q1 2007 Earnings Conference Call Transcript (LGF)
This Transcript
All Transcripts