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Lions Gate Entertainment (NYSE:LGF)

Q1 2014 Earnings Call

August 09, 2013 9:00 am ET

Executives

Peter D. Wilkes - Senior Vice President of Investor Relations and Executive Communications

Jon Feltheimer - Chief Executive Officer and Non-Independent Director

James Keegan - Chief Administrative Officer, Chief Financial Officer and Chief Accounting Officer

Michael R. Burns - Vice Chairman

Kevin Beggs - President of Television Programming & Production

Robert G. Friedman - Co-Chairman, Chief Executive Officer and Director

Steven Beeks - President

Analysts

Alan S. Gould - Evercore Partners Inc., Research Division

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

David W. Miller - B. Riley Caris, Research Division

James M. Marsh - Piper Jaffray Companies, Research Division

Douglas Creutz - Cowen and Company, LLC, Research Division

Caroline C. Anastasi - JP Morgan Chase & Co, Research Division

David Bank - RBC Capital Markets, LLC, Research Division

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

James C. Goss - Barrington Research Associates, Inc., Research Division

Tuna N. Amobi - S&P Capital IQ Equity Research

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Lionsgate Fiscal 2014 First Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Peter Wilkes. Please go ahead.

Peter D. Wilkes

Good morning. Thank you for joining us for our Q1 Analyst Call. We will begin with opening remarks from Jon Feltheimer, our CEO. Following his remarks, we'll open the call to questions. Joining us on the call today are Vice Chairman Michael Burns; Motion Picture Group co-Chairs Rob Friedman and Patrick Wachsberger; President of Lionsgate Television Group Kevin Beggs; Steve Beeks, co-COO and President of the Motion Picture Group; Brian Goldsmith, co-CFO; Jim Keegan, our CFO; and Rick Prout, our Chief Accounting Officer.

The matters discussed on this call include forward-looking statements, including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the risk factors set forth in Lionsgate's 10-K filed with the SEC on May 30.

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. Jon?

Jon Feltheimer

Good morning, everybody, and thanks for joining the call. We're very pleased with our first quarter results. They get us off to a good start for the year, which, as usual, will be backloaded. As we continue building new franchises, diversifying our TV business and strengthening our capital structure, the global environment for content owners is robust and continues to grow. The theatrical box office, though product sensitive, rebounded over the summer, and home entertainment spending continues to increase, driven by strong growth in electronic sell-through. At the same time, demand for content is increasing internationally across multiple platforms in major markets like Russia, Latin America, China and the U.K. Unencumbered by a large number of legacy deals and possessing a unique international infrastructure in a film and TV portfolio that is deeper than ever before, we're well positioned to meet this demand.

Looking inside this quarter's numbers provides a few examples. Lionsgate U.K. just completed its best year ever, with nearly $150 million in revenue and growing margins. With $32 million in revenue this quarter, it's off to another strong start, partially due to the emergence of strong digital buyers like Netflix and Amazon. If you'll recall, we formed an output deal with Netflix in the U.K. 2 years ago. Based on the strength of that deal and increasing demand from a broad spectrum of digital and traditional buyers in the territory, we've seen new opportunities across the entire portfolio of our film and TV content. To take advantage of that demand, in addition to distributing our own films, our U.K. business has created robust in-house production and third-party acquisition businesses. As a matter of fact, 11 of the its 18 theatrical releases last year and over 3/4 of its releases this year will be U.K. productions, coproductions or third party acquisitions as Lionsgate U.K. continues to increase its contribution to our business.

We expect similar dynamics in other territories as new digital buyers enter markets where little or no competition previously existed. We're positioned to capitalize on this growth, not only with a muscular film slate, but with a television business that has grown from 430 TV episodes distributed internationally in fiscal 2012 to more than 1,000 episodes this year.

These television episodes, plus the strength of films like Now You See Me, Breaking Dawn 2, Warm Bodies and The Impossible, have contributed to the 71% growth in international revenue you see this quarter. And with big openings in France and Mexico last weekend, Now You See Me, the sleeper hit of the summer at the North American box office, has already achieved international box office exceeding its domestic total of $115 million. With major territories like Australia, China and Japan still to open, it's poised to gross nearly $275 million at the worldwide box office. It's a perfect example of how we're benefiting from the unique international infrastructure of output deals, joint ventures and self-distribution that we've set in place to maximize value and minimize risk.

For example, the film has performed well in territories in which we licensed to our output partners such as Russia, where it grossed more than $20 million at the box office. Russia is now consistently one of our top 3 or 4 territories, reaping the advantages of steady market growth, as well as output deals for Lionsgate and Summit Product, with 2 of the top independent distributors in the territory.

In Latin America, we are -- instead of licensing our films, we operate a 50-50 joint venture called IDC. The film will gross nearly $25 million at the box office and will generate a profit more than 3x greater than had we sold it for a minimum guarantee. By eliminating the customary all right sale to Latin America and instead monetizing the individual media and territories that comprise the Latin American market, we are enhancing our revenue and increasing our profit margins in one of the fastest-growing markets in the world.

Our infrastructure also increases our flexibility to customize release strategies for individual films. Regardless of whether we license Now You See Me to third parties or distribute it through a joint venture, in every case, we have worked with our distribution partners to carefully select the right release dates in one of the most competitive summers ever, resulting in a disciplined and extended rollout that enabled the film to maximize its potential and outperform some of the big summer tentpoles.

For Catching Fire, our international sales and distribution organization has both the reach and clout to ensure that we're going day and date with our domestic release in virtually every territory in the world, and I'd like to emphasize that we're doing so with no significant new competition on that date.

Turning back to the financials. It's also interesting to note that our first quarter compared favorably to the first quarter of last year that included all but the first 9 days of the theatrical release of The Hunger Games. So with less than 1% of our revenue this quarter generated by Hunger Games, we still achieved strong quarter-over-quarter growth, highlighting the diversity of our business.

Looking at the numbers, you can see that the growth came instead from areas like television production where revenues more than doubled. TV contributions came not only from a roster of cable shows but from Anger Management, the broadcast series Nashville, the new Netflix series Orange Is The New Black, and strong international TV sales.

A big quarter -- a big contributor to the quarter was home entertainment with package media increasing due to strong theatrical titles and digital revenue growing more than 20%. Growth of digital revenue is reflected throughout our numbers. As a matter of a fact, strong contributor to the $0.18 of adjusted EPS in the quarter was an increase in the ultimate of a number of our TV shows, including Mad Men, partially due to increased international digital revenues. And with the domestic electronic sell-through industry-wide in the first half of the year at almost $0.5 billion, we are now seeing digital home entertainment revenue becoming incremental margin as opposed to replacement margin, as we've been predicting for a long time.

The underlying point of all these examples is that the story for content keeps getting better and better. Next week, we start the official 100-day countdown for the November 22 worldwide opening of The Hunger Games: Catching Fire. The film is amazing and brings to the screen tremendous scope and visual effects that elevate the franchise to a new level.

And next month, we start production on the next 2 Hunger Games installments, Mockingjay 1 and 2. Divergent, which recently wrapped production in Chicago, is well positioned to become our next young adult franchise. It has already garnered the first of what we hope will be many Entertainment Weekly covers. Book sales for the series are approaching $4 million, and both Divergent and Insurgent are in The New York Times' Bestseller List. Advance orders for the third book, Allegiant, which will be published in October, are the strongest yet. As you know, we'll release Divergent in the original Hunger Games slot on March 21, 2014, and we're already working on the script for Insurgent, the second book in the franchise.

Another of our young adult properties, Ender's Game, was particularly well received at Comic-Con last month where more than 30,000 fans flocked to the interactive Ender's experience, and its large following is mobilizing for the film's November 1 release.

As I mentioned a moment ago, Now You See Me is headed for $275 million of the worldwide box office, and we have a sequel in the planning stages that we expect to begin shooting next year. We also counter-programmed the big summer tentpoles by debuting Kevin Hart: Let Me Explain, on the 4th of July weekend. The first film from our partnership with CodeBlack Films, Let Me Explain, continues the growth of Kevin Hart's remarkable career. It grossed 4x more than his last concert film and it's become one of the highest grossing standup comedy films of all time. With a combined following of 15 million fans on Facebook and Twitter, Kevin is one of the hottest entertainers in the business, and we're pleased to be developing a second film with him.

While Red 2 underperformed our expectations at the domestic box office, it will make a solid profit and is off to a fast start internationally. And while not every film on our slate will be a hit, 22 of our last 24 films have been profitable, highlighting the value of a portfolio approach. We're generating profits from a broad spectrum of our film portfolio. For example, we partnered with our sister company, Roadside Attractions, to release 6 to 8 specialty films a year, in addition to the 14 to 16 commercial films we released under the Lionsgate and Summit labels. One of these films, Mud, generated more than $20 million of the domestic box office in the quarter and is the highest grossing independent film of the year. Both Mud and Robert Redford's upcoming tour de force, All is Lost, are also shaping up as contenders for year-end awards.

These Lionsgate-Roadside titles have been significant contributors to our managed brand business that may operate under the radar, but generated almost $300 million in revenue in fiscal 2013 with anticipated growth of almost 20% this year.

Our television slate is equally diverse, and this year, we will produce and distribute between 28 and 33 television series for more than 20 different networks, including an array of cable series, a number of shows in national syndication and several series for digital platform. We will nearly double our in-house production this year as we move to capitalize on the increased value we're seeing for our content, both domestically and internationally. We have new shows in the pipeline for NBC, the History Channel, E!, the Cartoon Network, FX, Amazon and Hulu, among others.

As part of this growth, we continue to expand our roster of profitable 10+90 comedies. We've already completed nearly half of the 100-episode order of Anger Management in less than a year, and our partnership with FX has resulted in orders for 2 additional high-profile comedies: Saint George, which begins production later this month, features comedy superstar George Lopez heading an all-star cast that includes Sons of Anarchy's Danny Trejo and the Academy Award nominee Adriana Barraza. The second new show brings together the huge talents of Kelsey Grammer and Martin Lawrence. FX has ordered 10 episodes of both series, which will begin airing in early 2014. With these exciting new packages already assembled, we hope to have 3 10+90 series on the air by later next year.

Our initial foray into creating content for digital platforms is also out to a fast start as Orange Is The New Black debuted on Netflix to rave reviews, and the second season has already begun filming in New York. Orange is also off to a strong start internationally. Outside of the Netflix footprint, we have already sold the show in Russia, Israel and India, with Australia and a number of major European territories to follow. And in an exciting new development for our television business, our Celestial Tiger Entertainment partners in Asia licensed Orange to stream on YouTube in China the day after its Netflix premiere, the earliest that any U.S. show has premiered on an international digital platform and it has already generated nearly 7 million views in its first 3 weeks.

Continuing our leadership in creating and delivering content for digital platforms, we also just completed a deal for a pilot script with Amazon, and we are very close to an order for a series from Hulu as well.

Our nonfiction business also continues to grow, with over 10 different series now ordered or airing in prime time, including TBS' new hidden camera reality hit, Deal With It, starting Howie Mandel, which attracted more than 3 million viewers last week.

In its fourth season, the Wendy Williams syndicated talk show has become a long-term annuity for our company. With ratings up 30% over the last year and an expanded production schedule, it has been renewed by the FOX Station Group for 3 more years through the 2016-2017 season.

Turning to our Channel business. TVGN continues to gain momentum on the heels of our recently announced partnership with CBS. Primetime ratings in July are up 33% over the prior year, and late-night ratings are up nearly 200% as the network continues to add fresh programming. Two new unscripted series, the Tequila Sisters, from veteran reality producer Eli Frankel, and Mother of All Talent, featuring a mother-daughter duo running a kids talent agency, will premiere this fall, with new projects from Wendy Williams and singer-songwriter John Rich in development. It's interesting to note that while our CBS partnership -- with our CBS partnership in place and execution of a little blocking and tackling, TVGN was the fastest-growing cable network in the country in July.

Even as we continue to grow our content businesses, our commitment to keeping costs down, reducing our debt and lowering our cost of capital remain 3 of our highest priorities. We recently completed 2 offerings that allowed us to significantly reduce the cost of our debt, as well as extend our maturities.

As a matter of fact, the refinancing of our debt, coupled with paying down our $500 million Summit term loan more than 2 years early, will enable the company to reduce its cash interest payments from $75 million last year to an anticipated $37.5 million next year. These initiatives have significantly strengthened our balance sheet and led to recent credit upgrades from both Standard & Poor's and Moody's.

In closing, if you look at recent developments in our industry, 3 words dominate nearly every conversation: scale, brand and innovation. These themes play to our strengths as we continue to build a critical mass of content to grow our current and emerging film brands, increase the scale of our diversified television business, expand the growth and scope of our international operations and bring more of our resources to bear on emerging opportunities in the digital world every day.

Our ultimate goal when overriding responsibility is returning value to our shareholders. So as we continue to operate with the content pipelines of a major studio, we also retain the innovative spirit and financial discipline of our independent roots, and we will continue to focus on translating this unique blend of strengths into long-term profitable growth.

I will now open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of Alan Gould with Evercore.

Alan S. Gould - Evercore Partners Inc., Research Division

Jon, when you mentioned scale, brand and innovation, and I look at the financial position the company is in, which is the best it's ever been in or the best it's been in a long time, how do you plan on growing that scale, brand and innovation? Are you looking more to buy or to build in that area? That would be my first question.

Jon Feltheimer

Well, I think we have got a pretty good record, Alan, of starting with our core businesses and building organically. But obviously, we've had some very good opportunities through the years to make some very accretive acquisitions. I think, obviously, our balance sheet is in very good shape right now. And so obviously, we are always looking at those opportunities, particularly given that we built such a strong platform right now. But we're going to concentrate as always on building organically our business, and we think there's a tremendous amount of opportunity there.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. And the second one, I'm sure any S5 player is talking to you, what do you think is the likelihood that we see more S5 or digital players coming into the U.S. marketplace?

Jon Feltheimer

I think there's a very good possibility of that. Obviously, we've got some very, very deep-pocketed digital players. I've mentioned before, we're continuing to have a number of conversations with them. And I think, again, particularly internationally, I think we see very, very strong growth for our business and the other studio's business internationally because I think you're going to see really significant competition created by some of the digital distribution players going forward internationally.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. And one question for Jim. Jim, the 10-Q this quarter didn't give the same disclosure you've given in the past with respect to the number of TV episodes delivered. It mentioned the shows but not the number of episodes. Could you either online or offline...

James Keegan

Sure. No, I'll give it to you now, Alan. So we delivered 11 episodes of Mad Men, 11 episodes of Anger Management, 6 episodes of Nashville and 5 episodes of Orange Is The New Black.

Operator

Our next question comes from the line of Ben Mogil with Stifel.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

So I want to focus on sort of TV Guide and Epix. So on TV Guide, you actually put some money back in the channel. I saw during the quarter, you took some out by virtue of the dot-com sale. Was the putting money back in a capital a call? Or is there sort of something else on that front?

Jon Feltheimer

Yes, I think it was very normal capital call, just on the timing.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then on that front, on TV Guide, are there any material affiliate deals up this year or next when you talked about improving ratings? So beyond the app side, any way to monetize that in the near term, say, this next year or next on the calendar basis on the affiliate side?

Jon Feltheimer

There are some affiliate conversations going on. I think there is nothing particularly imminent. But obviously, we are hoping that both with our partnership with CBS, as well as the improved ratings, we will be able to improve on those distribution deals.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Like, are they not -- I'm presuming that they are not the sort of standard 5-year deals and 20% come up every year for you, is that correct?

Jon Feltheimer

I don't think it's a straight line as that. These deals have gone on pre our ownership and, obviously, pre the CBS ownership. So they're kind of all over the place. We can perhaps fill you in more over the next couple of quarters.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then on Epix, so first time, you've got some capital back, which is great obviously. From an Epix capital perspective, do you expect capital returns to be sort of an annual thing, semiannual? Or is it sort of still up for debate, if you will?

Jon Feltheimer

I think Epix is going to have another strong year, and I think you certainly could see continued, ongoing return of capital.

Operator

Our next question comes from the line of David Miller from B. Riley & Co.

David W. Miller - B. Riley Caris, Research Division

This is just kind of a stupid question, but I just want to make sure I have it right. So the senior secured second priority notes of $428.5 million, I would assume that's completely wiped out, right? Because you guys did that after June 30.

James Keegan

The answer is yes. They're completely -- there's no more high-yield notes outstanding really.

David W. Miller - B. Riley Caris, Research Division

Yes, I just want to make sure I have it right. And then the -- on these other levels of debt here, the production loans, the sub notes, I mean, the balance sheet is just looking fantastic but, I mean, Jim or even Michael, if you want to chime in, are you guys happy with the pricing there? Or is there any room for improvement? Or should we expect that, that pricing just stays constant over the next 2 or 3 years?

Jon Feltheimer

Michael?

Michael R. Burns

I would say, David, that pricing is very competitive. And it's -- we're in a good place there. Our single picture loans are priced very aggressively. We've got a group of banks that we work with over time that have priced those down well for us as our client. On top of that, our -- obviously, our credit facility, I think we have over $0.5 billion of availability on that today and that's why we're plus 2.5%. So all of our rates have come down fairly dramatically, especially, as you mentioned, we saved up 500 basis points on taking out the 10 1/4%.

David W. Miller - B. Riley Caris, Research Division

Okay, great. And then Jon, on Orange Is The New Black, obviously, it debuted on Netflix. I think it was July 11. Any other data you're willing to share in terms of audience response to the episodes that have aired, well, I guess they haven't really aired, but run so far on Netflix? And how confident are you that Netflix is going to renew the series?

Jon Feltheimer

Well, all of the information that we've had is extremely promising. In terms of renewal, we've already started shooting a second season, so it's really early for a third season. But I think Netflix and the audience really perceive this as a hit show. And I think we're certainly looking at it that way.

Operator

Our next question comes from the line of James Marsh with Piper Jaffray.

James M. Marsh - Piper Jaffray Companies, Research Division

Just wanted to talk about these 2 new 10+90 deals and maybe you could just compare and contrast those to the Anger Management structure. Do you get a sense for what the ratings threshold might be relative to Anger Management? Is it lower or higher? Is the deal structured in a similar way with talent taking more in the back? And -- but just -- can you just kind of compare and contrast those deals to Anger Management, not getting to all the specifics, but just broadly?

Jon Feltheimer

Sure, I'll let Kevin Beggs jump in here.

Kevin Beggs

Generally, they're all very similar, particularly because we're at FX for all 3 of them. The 2 new shows have been lower and above the line. Fewer elements involved in the producing side, so they'll be a little more affordable than Anger Management. And the thresholds are similar each show on the ratings, but each show is kind of calibrated specifically to the talent that's in it and their expectations. So we feel very comfortable and confident in the benchmarks that FX has laid out. They're very confident about the shows. And in Broadway, they are looking to kind of program these together and create a block. Eventually, I think they want to have as many as 4 of these, and right now, we have 3 of the -- out of 3 and maybe we'll get a fourth as well. But nothing out of the ordinary with the 2 new deals compared to Anger Management.

James M. Marsh - Piper Jaffray Companies, Research Division

Okay. And then just kind of a quick follow-up and this is kind of a big picture discussion. But I guess there's a lot of talk these days about studios taking more risk with their release dates and obviously highlighted with some write-downs recently. Could you guys talk a little bit about your view on risk and how that's emerged over time as you become more successful in the film entertainment space?

Jon Feltheimer

I'll let Rob take that.

Robert G. Friedman

I'm not sure I quite understand the question. I mean, our risk strategy is -- continues to be very robust. We operate all the time that way. As it relates to release dates, they are very, very important decision-making process that we go through very rigorously, and we're constantly reviewing our release dates and being very flexible in making sure that we're maximizing opportunity of all of our films.

Jon Feltheimer

Yes, I would answer it -- I would add to it. I think that you'll continue to find a Lionsgate that sort of operated just a little bit against the grain, be perhaps a little bit more opportunistic. I think it's pretty clear that the big holiday seasons are extending longer. You're starting to see summer be the very beginning of May, you're starting to see the Christmas holiday starts virtually November 1, which is where we have Ender's Game. But I think that you're going to still continue to find us be very judicious, partly because we intend to continue to spend less money to release every picture than a traditional major studio.

Operator

Our next question comes from the line of Doug Creutz with Cowen and Company.

Douglas Creutz - Cowen and Company, LLC, Research Division

Yes, obviously, you guys have done really well and pretty continued content and selling it to other people. And we're now seeing opportunities begin to arise where content can actually go direct to consumers with their offerings via either apps, the potential to set up OTT networks as we get more Internet-connected televisions. Where do you see opportunities in that for you to potentially start to directly own the relationship with the consumers of your content?

Jon Feltheimer

Well, we've certainly been experimenting in that area. Break in our networks is certainly a good way. We've done a BeFiT, which is our fitness channel, on YouTube is another one of those places. Obviously, when you look at electronic sell-through and any kind of on-demand rentals or sales, you're really talking about an ability to go through a wide array of traditional, as well as new distributors. So I think that's exciting. Again, as I mentioned earlier, I'm seeing really great opportunity internationally. Again, if you recall in the U.K., there was one pay television provider, Sky. And ever since Netflix and Amazon got really significantly involved in the business, 2 things happened. One is we were able to convert that opportunity into a pay television deal where we didn't have one before. We were just selling our product on a package basis to Sky. But not only that, what's happened is that Amazon and Netflix emerged as a buyer for the second and third windows of the studio product off of Sky, opening opportunities for us with the broadcasters and other cable buyers. So I see that opportunity happening all over the world, whether it's on-demand sales, which would be perhaps, as you're suggesting and recognizing, might be more kind of direct sales to the consumer, as well as an expansion of the array of buyers that we will have at our disposal in virtually every country in the world. So I'm pretty bullish on those opportunities, both -- in both ways.

Operator

Our next question comes from the line of Alexia Quadrani with JPMorgan.

Caroline C. Anastasi - JP Morgan Chase & Co, Research Division

This is Caroline Anastasi for Alexia. Just a follow-up on the 10+90 series. You said before that international sales in Anger Management were very strong, in part due to the popularity of Charlie Sheen. So how do international sales on your 2 newer series compare? And are they also profitable in the first 10 episodes alone?

Kevin Beggs

Yes, they'll be profitable in the first 10. We haven't taken these out to the market yet. We think they will be somewhat lower than Anger Management, which is a little bit of an outlier based on Charlie's success on Two and A Half Men. But the budgets are also lower as well. So the model will hold up very nicely. These are going to be profitable in the 10 and they'll be very profitable, should they go to 100.

Caroline C. Anastasi - JP Morgan Chase & Co, Research Division

Okay. And then, can you just give us a bit more color on Ender's Game and how much capital you have at risk there? And what kind of box office performance we should look for to make that film profitable for you guys?

James Keegan

We -- as we've said in the past, we're 25% of the equity investment in the film and a very low threshold as it relates to domestic performance in order for our breakeven.

Unknown Executive

And we don't control volume.

Jon Feltheimer

Right.

Operator

Our next question comes from the line of David Bank with RBC Capital Markets.

David Bank - RBC Capital Markets, LLC, Research Division

If I go back to the summer of 2011, this is about the time you could see Hunger Games -- you really had something special. It was like almost every week there was more and more enthusiasm. And while on Wall Street, we can't really tell the progress of those sorts of things in the entertainment market. But could you parallel how you're feeling this summer on Divergent versus kind of what you're seeing in The Hunger Games franchise? And the kinds of things you're doing from a marketing perspective, be it the social media side and working with the book publishers, what are the parallels? And how do you feel relative to where you were in the summer of '11?

Robert G. Friedman

The parallels are very, very strong and very, very similar. We just came off the advanced cover of Entertainment Weekly declaring it the sort of next future franchise. Our book sales are well over $4 million at this date and continuing to grow. We came off a very, very exciting and enthusiastic Comic-Con appearance with our cast in Hall H. We showed some footage from the film, which had just completed photography 2 days earlier. We're feeling very, very good about the trajectory.

David Bank - RBC Capital Markets, LLC, Research Division

Do you think -- I know it's really difficult to project these things, but do you think we're in a place where we could kind of safely say that Divergent should be a franchise that's something in the range of Hunger Games in terms of box office expectations?

Robert G. Friedman

Well, I don't know that we'd ever want to put that burden on any film going in. It's obviously an extraordinary level of performance from Hunger Games. But we feel very, very confident that the audience base is building very, very significantly on Divergent. And we're excited about it -- on a worldwide basis. We're very excited about its possibilities.

Jon Feltheimer

I would add one more thing, which is internally, we budgeted this film like a traditional commercial release, not like a blockbuster or franchise film. We'll be everywhere in the world.

Operator

Our next question comes from the line of Matthew Harrigan with Wunderlich Securities.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

First, you talked about getting 2.5x better economics on IDC. I know you've gotten better turnouts in some of the domestic distributors. But as you're now -- I mean, the fact that you're a major with a better cost standpoint, is there any low-hanging fruit in terms of just getting even better performance on a given film at a given level of performance? And then secondly, I know most of you on the management team are technophiles and it's a little tangential, but can you talk about Xbox One and PS4 in any applications for your business for the overall ecosystem on the entertainment side?

Jon Feltheimer

I'll let Steve answer the second question.

Steven Beeks

Matt, this is Steve. So the most -- the biggest element of the Xbox One launch is the fact that it has a Blu-ray drive. So I think that bodes well for the future of that format, as well as they're becoming a viable marketplace in electronic sell-through in VOD, which, as Jon mentioned, is really becoming a business. I think we've hit the tipping point in that and I think that the launch of this device is going to help that along even further.

Jon Feltheimer

To answer your first question, Matthew. In a number of the synergies that we've pointed out before that have come from scale, the integration of our companies and the success that we're having in our portfolios, we are actually, at this point, just starting to recognize some of those synergies, for example, the savings from our new deal with our advertising agency. Those deals really will start to take much more stemming from the upfront and going forward. We are in the international front, continue to take advantage in terms of output deals, as well as changing some of our distribution. If you recall, in our IDC partnership, we actually took back the distribution of our television product, both paid television, on-demand and free television sales. And those numbers are starting to go up fairly dramatically. So I believe that we will continue to benefit from the scale and success of our business.

Operator

Next, we'll go to the line of Jim Goss with Barrington Research.

James C. Goss - Barrington Research Associates, Inc., Research Division

I've got a couple of questions. Maybe I'll start with international syndication. One of the comments you made was continuing to intend to spend less to release each picture and part of that has been accomplished by selling off some of these syndication rights internationally. And I know you are also talking a little more about treatment, different treatments, in different markets, the U.K., for example, where you might take a more active role in syndication. I'm wondering how -- I mean, what direction you intend to take in terms of using those rates as a cost mitigation factor versus attacking it as a new profit center? And how does that sort of evolve?

Jon Feltheimer

If I understand what you're saying, to start with, I assume you're talking about our film slate, Jim?

James C. Goss - Barrington Research Associates, Inc., Research Division

Yes, yes, on the film slate, sorry.

Jon Feltheimer

So I'd use a different terminology, if I understand the question. First of all, we never sell off our rights. Typically, what we say is we license our rights and we license them for a particular term. And I think the big difference between our company and any other company that actually licenses rights is we are far more aggressive about our churn and far more aggressive about pursuing overages and far more aggressive about working together with our distributors in terms of release dates, P&A spend. And again, approach it very differently as kind of a hybrid -- almost a hybrid self-distribution business. So as we expand our business, clearly in the U.K., the point I was making was that they are able to almost create with the infrastructure that they have got and starting with the basis of the films that we supply to may have actually turned into a full service organization, cofinancing a business, improving our margins in terms of the distribution of our product and also as a freestanding business. It is possible, as we go forward, that we will mitigate risk less in 1 or 2 territories in order to increase our margins in that territory. But we would do that very carefully and only if we were sure that there would be a supply of product in that territory, in addition to what we could supply and, frankly, ancillary sources of sales to free television and paid television that we could support that so we would mitigate at least a large portion of that expansion risk. I hope that answers your question.

James C. Goss - Barrington Research Associates, Inc., Research Division

Yes, I think that gets to where I was headed. And it sounds like there could be occasion -- some other markets besides the U.K. where you might take a similar approach at some time. Is that possible?

Jon Feltheimer

Yes, we would absolutely look at those territories. But again, we are in no rush to do that. We like our model a whole lot.

James C. Goss - Barrington Research Associates, Inc., Research Division

Okay. And on the television side, I'm wondering if you can talk a little bit about the profit margin potential there, which is still, I think, just under development and the balance you might seek between television relative to theatrical as time evolves.

Jon Feltheimer

Are you talking about TV margins?

James C. Goss - Barrington Research Associates, Inc., Research Division

Yes, TV margins and how big that business can be relative to the film business.

Jon Feltheimer

Well, I said in the last call, we'll be approaching about $500 million of revenue this year, so you're looking at about 20% to 25% of the business. And I'd like to see that be up closer to about 1/3 of the business. I think we have some tremendous opportunities for growth. Again, we're hoping we can be a dominant supplier to the new digital networks, as well as having been obviously a very serious player in terms of cable and paid television. We've got some partnerships with Televisa and with Frank Giustra's company in Canada and feel like, with their contribution or investment in growth together with ours, we're going to continue to mitigate risk but look at a lot of upside in that business. And so we're very bullish from a revenue perspective on the growth from television business. And I would say that, as I mentioned before, obviously, margins in television are very dependent upon the success of the shows, meaning at the beginning of the show we recognize no margin, and as they go forward, we increase it. So as we get to a position where, hopefully, we'll have 2 or 3 10+90 shows going into syndication as Wendy Williams starts to contribute more margin given her success and ratings have been pretty significant lately, I think our margins should go up considerably as well.

James C. Goss - Barrington Research Associates, Inc., Research Division

All right. And last question. FX has been taking your 10+90 model programs. Are they almost getting their right of first refusal? Or are there other networks who are interested in that model as well?

Jon Feltheimer

We actually have had significant attention being paid by like another, I would say, 8 other networks. And of course, FX has been a great partner. We like doing business with them. And we particularly like that they're expanding from just FX to FXX as well, so they're going to need good commercial content. But I think that this is a model that can work for a lot of other networks. Kevin, do you want to add to that?

Kevin Beggs

Well, we've had a lot of interest when we take these shows to the market from broadcasters and cable networks. You may have noticed that NBC has announced doing something on their own in this -- with this model. And 3 or 4 networks have come to us, specifically saying they prefer that we don't take anything into the open market. They want to simply have us tailor something specifically for them. So the market feels very robust for us.

Operator

And we have time for one final question. That will come from the line of Tuna Amobi.

Tuna N. Amobi - S&P Capital IQ Equity Research

I also have a few questions. So I think -- so along the lines of your comments, Jon, in terms of your release strategy, I think you provided a lot of color there. But are you also -- you said something about being opportunistic and going against the grain. So I'm just trying to ascertain if that explains why you pretty much choose to steer clear of the summer for some of your biggest releases? Is that something that we should expect going forward? And what do you think about the whole issue about this summer being crowded, et cetera? But it seems to me that you guys can be a much more formidable player there given your emergence in the last couple of years to compete with the major studios. So any kind of color around your summer thinking would be helpful.

Jon Feltheimer

Yes, I'll let Rob speak to the specific. But the one thing that I would emphasize about this company that just hasn't changed, and I hope never will, is we don't wake up in the morning on Saturday and think, "Oh, isn't that great? We're #1 in terms of box office gross." We're focused on the profitability of our pictures. We're not focused on getting the -- grabbing the attention of we're #1 at the box office. And so there's no great excitement for being in a slot just in order to be #1 or to break the record for that date. We're very focused on maximizing the value proposition for each and every film, whether it's a wide release or whether it's a specialty release. And that's going to drive our strategy no matter what. I don't know if Rob has got a few...

Robert G. Friedman

I mean, as you see by our summer so far with Now You See Me and Kevin Hart: Let Me Explain and Red 2 all performing very, very well, Red 2 a little less than we would like but still very profitable for us, we do look at all year as an opportunity. And we weigh every single decision as to where we put our films. We look at the summer and we look at the Christmas as very, very competitive, obviously, with the major studios and their tentpole strategies. But we always try to counter program and look to the opportunity as demonstrated by our Madea's Christmas title coming in this coming Christmas as well. So we're always looking at opportunity and looking at the most effective and efficient way to market and distribute our films.

Tuna N. Amobi - S&P Capital IQ Equity Research

Okay. And next, I think, Jon, towards the end of your prepared remarks, you actually did use the word returning capital to shareholders. I don't know if you meant creating value for shareholders. What I thought you were referring to, I'm not trying to split hairs here, but I was getting some ideas from that comment. Am I just getting ahead of myself or. . .

Jon Feltheimer

Well, you'll never know. Michael, do you want to jump in here?

Michael R. Burns

Yes, I mean, look, we're all about -- we believe it actually and appreciate -- stock is appreciating is actually returning money to shareholders. But at the same time, as we've said before, we're going to be looking at what we think is an accretive transaction if those make sense. We take our time. We don't rush into anything. We're not going to do anything stupid. And then at the same time, we talked about what are we going to do going forward. A couple of analysts have asked us over time, are you going to pay a dividend? Are you going to buy back stock? Again, we are going to be opportunistic when we think that's the best use of our shareholders' money.

Tuna N. Amobi - S&P Capital IQ Equity Research

Okay. Wasn't trying to get ahead of myself. Just last question then, can you address the recent issue that came up with Expendables 3, the casting change? And how do you -- how does that incident kind of affect your kind of philosophy about your whole thinking in terms of talent management, costs, et cetera? And does that change at all your ultimate view and plans for that particular franchise?

Jon Feltheimer

Okay. We're -- these movies, especially a movie like that with significant array of star power, these deals are usually being negotiated right until the very last day. And I think the cast is not yet set for Expendables 3, but I think everyone is going to be very excited about the new stars that are in the movie. And I think I know what you're referring to and you just never know, even on that particular piece of talent. But the bottom line is that, that franchise is going to have a lot of new and very exciting blood in it. And it's managing talent, whether it's on camera or off camera. These are really talented, creative people, and part of our job is to manage. That particular movie, by the way, is controlled by the producer and so, obviously, we're involved in the casting but really not as directly as some of our other in-house productions. But obviously, that's our job, is to manage the talent. I think we do a pretty good job of it.

Operator

And with that, speakers, I'd like to turn it back over to you for any closing comments.

Peter D. Wilkes

Thank you. For a discussion of certain non-GAAP forward-looking statements mentioned on this call, please refer to the Presentations tab under the Corporate Reports section of the company's website at www.lionsgate.com. Thanks, everyone. We look forward to speaking with you on the next call.

Operator

Thank you. And ladies and gentlemen, today's conference call will be available for replay after 8 a.m. today until midnight August 16. You may access the AT&T Teleconference replay system by dialing (800) 475-6701 and entering the access code of 298340. International participants, dial (320) 365-3844. That does conclude your conference call for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.

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