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Lionsgate Entertainment Corp. (NYSE:LGF)

F4Q07 Earnings Call

May 31, 2007 9:00 am ET

Executives

Peter Wilkes - Senior Vice President, Investor Relations

Jon Feltheimer - Chief Executive Officer

Michael Burns - Vice Chairman

Steve Beeks - President

James Keegan - Chief Financial Officer

Analysts

Gordon Hodge - Thomas Weisel Partners

David Miller - SMH Capital

Thomas W. Eagan - Oppenheimer & Co.

Alan Gould - Natexis Bleichroeder

Barton Crockett - JP Morgan

Eric Handler - Lehman Brothers

David Bank - RBC Capital Markets

Michael Kelman - Susquehanna Financial Group

David Joyce - Miller Tabak

William Kidd - Wedbush Morgan

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the fiscal 2007 year end analyst call. (Operator Instructions) I would now like to turn the call over to our host, Senior Vice President of Investor Relations, Mr. Peter Wilkes. Please go ahead.

Peter Wilkes

Thank you. We’ll begin with remarks by our Chief Executive Officer, Jon Feltheimer; our Vice Chairman, Michael Burns; our President and new Chief Operating Officer, Steve Beeks. We are also joined on the call by CFO Jim Keegan and Chief Accounting Officer, Rick Prell. After these remarks, we’ll turn the call over to Q&A.

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. The company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. Jon.

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Jon Feltheimer

Thank you, Peter and thank you all for joining us on this morning’s call. We are very pleased with Lionsgate's performance in fiscal 2007. It was a great year, not only because we significantly exceeded our guidance in terms of free cash flow and adjusted pretax earnings but because we continued to develop our brand, broaden our audience and invest in our business.

Before Michael, Steve and I update you on our business operations, I would like to cover three areas. First, I want to talk about diversification. The multiple product line, multi-platform approach that we built into our business model and how it is serving as a catalyst for growth in our overall business while protecting our downside from cyclicality in any one of those businesses.

Second, I would like to discuss our current operating environment and the opportunities afforded by new digital revenue streams.

Finally, I would like to take a quick look at fiscal 2008.

The benefits of our diversification were particularly evident as we ended fiscal 2007. Even with the box office underperformance of Pride at the close of the year, on which we have a loss of $6 million in the period, we still had room to achieve our financial targets because of contributions from all of our other businesses -- television, home entertainment, international and our library.

The performance of home entertainment and our library was particularly significant. To briefly summarize the fiscal 2007 contributions from these other businesses, home entertainment generated nearly $530 million in North American revenues, actually exceeding last year’s total despite that fact that our box office was down a little. This is a testament to strong library management, new and higher margin digital revenue streams, and our ability to over index the box office performance of our theatrical releases in other media.

The library, our greatest asset, continues to be a growth story. Our library sales grew by more than 20% to revenues of $256 million in fiscal 2007, far and away our best year. Our library has already demonstrated its consistency by achieving three straight years of revenues in excess of $200 million. We view the dramatic growth in revenues and concurrent increase in margins this past year as a very important indicator of our ability to continue generating strong free cash flow and to continue building value for our shareholders.

As margins continue to grow, our library through off approximately $90 million in free cash flow during the year. Steve will fill you in on some of our most recent initiatives to continue this growth.

In addition, we have continued our diversification with our recent investments in the U.K., our Debmar-Mercury television syndication company, and the Dirty Dancing stage play -- businesses that didn’t make significant contributions in fiscal ’07 but will in fiscal ’08.

We are also beginning to see tangible contributions from Blu-ray titles, VOD, and other digital revenue streams, which Steve will also describe in more detail in a few minutes. This leads to my second point, which is that our environment is continuing to change in the direction we anticipated. We are seeing significant increase in demand for content of all types across myriad platforms. For example, on-demand generated revenues, VOD and pay-per-view, equaled nearly 10% of box office on better performing titles such as Crank and Employee of the Month. VOD revenues on Employee of the Month alone exceeded $3 million on a film that grossed about $27 million at the domestic box office.

Our VOD revenues grew by approximately 50% in fiscal 2007 from the previous year. Additionally, our Internet delivered digital revenue grew by a multiple of 7 in fiscal ’07 compared to the prior year, although obviously from a relatively small base.

By the end of this year, we will have released at least 50 titles on Blu-ray, and our Blu-ray market share of 11% significantly over-indexes our overall home entertainment market share, which has grown to over 6%. We have nearly a dozen active agreements in place for digital delivery of our content, with such major players as Apple, Amazon, Microsoft, Blockbuster, Best Buy and Wal-mart, with more to follow.

The first six months since the launch of our FEARnet branded VOD and Internet channel with partners Comcast and Sony has been an unqualified success and we are looking at other similar opportunities.

In short, these are just a few examples showing that significant digital revenue streams are no longer a promise but a reality and every indication is that they will be incremental. The niche audiences we serve in horror, teen comedy, and action are the early adopters and users of new technologies and formats and our targeted approach to our content business model will allow us to capitalize as the digital marketplace grows.

On the flipside, supply of content is also increasing and this is evident in competition at the domestic box office. In their efforts to achieve larger openings for films with production budgets of up to $250 million, the major studios are securing up to 10,000 screens -- more than one-third of the quality screens in North America -- for the launch of their big franchise movies. This has generated some pressure on our smaller releases this spring.

However, the strength of our fiscal 2008 theatrical release slate lies ahead. It is edgy, distinctive, and packs a bigger wallop than ever before but it remains cost-effectively acquired, produced and marketed within our business model. We are confident that we’ll cut through the clutter to generate our best theatrical box office year in history.

An important part of our theatrical strategy is the theatrical financing agreement, which as you know, we announced on Tuesday. The fund will cover 23 of our films over the next three years, beginning with the release of Bug last weekend. The fund will cover up to $400 million in financing and marketing costs on these films, with up to $200 million coming from a senior facility in mezzanine and equity financing, which will be matched by us on a pro-rata basis. The fund does not include the Saw and Tyler Perry franchises, on which we have preserved our full equity, but it does include other sequels.

The strategy is very simple. We made a decision to have significant continued investment and growth in our theatrical business and we have created a partnership that will share the financing of this growth on a 50-50 basis. While this year’s slate has a number of considerably larger budget pictures and significant marketing expenses in releasing them, we continue to acquire and produce them with the same creative, disciplined and risk-averse approach we have always used.

One nuance in the theatrical slate financing deal that may not be as apparent as the other benefits is that by using a fund to help grow the business, we are giving ourselves the opportunity to own more rights, more of the back end and more content and perpetuity on our films than if we were just doing negative pick-ups and acquisitions. When Michael takes you through our upcoming theatrical slate, you will see that we not only have more films and more wide releases, but also more pictures produced in-house relative to acquisitions compared to previous year. This will inure to the benefit of Lionsgate and our financing partners.

Finally, I would like to take a look at fiscal 2008. We have entered this fiscal year in our strongest cash position, with new financing arrangements structured for growing the business. We will be investing significantly in our pipeline of theatrical product, both in production and marketing, and we will also maximize this investment by spreading the theatrical releases more evenly this year, particularly in our fiscal fourth quarter, a less competitive time.

In fiscal ’08, our marketing expenses for our expanded slate of feature films will grow from approximately $150 million to almost $290 million, with an additional marketing spend of $60 million for our home entertainment product.

As I stated earlier, we have partners who will share the financing of this growth. In other words, approximately $150 million of the more than $350 million in marketing expense will be co-invested by third parties. However, reporting rules require us to expense the entire $350 million plus ourselves. Given this, although we are targeting free cash flow again exceeding $100 million, the use of the film fund will actually increase and we therefore anticipate reporting negative earnings of over $40 million of EBITDA and $50 million of net income in fiscal ’08.

Our growth momentum will be reflected at top line in fiscal ’08 and we anticipate increased revenues of at least 10% to 15%, to well over $1 billion.

As we have said for years, revenue and cash are the primary metrics to measure a pure content business in full growth mode. What’s important to remember is that every single one of the past three years, we’ve invested significantly in building our product pipelines, acquiring new businesses, such as Lionsgate U.K., Debmar-Mercury, and our FEARnet branded horror channel, as well as steadily growing our filmed entertainment backlog, yet we have just as consistently thrown off on average more than $100 million in free cash flow and further strengthened our balance sheet during this period.

As you look at the backlog that is currently over $320 million, the library cash flow of approximately $90 million, and the investment we are making in content in fiscal 2008, you can see that we are creating significant long-term value for our shareholders.

Now I would like to turn the floor over to Michael to take you through our upcoming release schedule and then Steve and I will update you on growth in our other businesses. Michael.

Michael Burns

Thank you, Felt. We view our fiscal 2008 theatrical slate as the boldest and most diverse in the history of the company and believe it is capable of generating North American box office of more than $400 million. As you know, our rule of thumb is that we generate roughly twice our box office numbers and overall revenues by exploiting all portions of the motion picture food chain, although obviously not in a single 12-month period. Those windows include theatrical DVD, pay television, free television, and increasingly VOD.

As a result, if we can generate box office of $400 million in fiscal ’08 compared to our $250 million box office this past year, that should translate into growing our revenues from all sources over the ultimate of these pictures from $550 million to $900 million, including international.

This is a delta of approximately $350 million and even conservatively assuming margins at the 15% plus range, we would anticipate significant free cash growth in the years to follow. We therefore view our fiscal ’08 slate as an important step towards the next level of performance that you have been anticipating.

We began the fiscal year with several modestly sized films in which we had relatively limited exposure in terms both negative and P&A costs. We will recoup our money on at least two of these films and we anticipate sustaining a cumulative $10 million negative cash flow impact on the full year from these under-performers.

The core of our ’08 slate obviously begins with Hostel 2 next weekend. Hostel 2 is a more psychologically shocking film than its predecessor, and as we have shown with the Saw franchise, we work very carefully on our sequels to do well at the box office.

Three weeks later, we have Sicko, the powerful and compelling documentary from Michael Moore, for whom we distribute Fahrenheit 9-11. In a summer of popcorn movies, it is a thoughtful, compelling and provocative look at one of America’s most important national issues, healthcare.

We have two wide releases later this summer. We believe the live action film Bratz capitalizes on one of the hottest franchises for young girls today. With more than 150 million Bratz dolls sold, this new franchise will strike a resonant chord with its audience.

Good Luck Chuck is one of the funniest comedy offerings and has tremendous upside potential for us. This will be the movie that defines Jessica Alba as a major motion picture star, thanks to a terrific physical comedy performance that is sexy, funny and appealing. Her pairing with comic star Dane Cook produces great chemistry and humor. We refer to the movie in-house as There’s Something About Jessica.

The Ladron -- I won’t attempt the full Spanish title, but it means the thief who stole from the thief, is the second film in our Spanish language initiative where we continue to build leadership in a large niche that is a good fit for us. As Felt has noted before, we are not in the business of doing one-offs so expect more films and other content initiatives in the Latino market that is 42 million strong and the fastest growing in the country.

War is our second Jason Statham film, with a third on the way, teaming him with international action star Jet Li in a movie that we have already presold internationally for nearly $25 million, and look to continue Jason’s run of hot September action films for Lionsgate, a la Crank.

We think that 3:10 to Yuma, coming in October, is one of those rare aware contenders with great commercial appeal. Russell Crowe and Christian Bale both turn in brilliant performances, directed by Walk the Line’s James Mangold.

Saw 4 at Halloween may not be contending for awards, but it will deliver big time for its core audience. The Saw franchise from Twisted Pictures and Lionsgate has quickly turned into one of the most successful franchises in the history of horror.

On the topic of franchises, Saw 4 will be followed in the fall by the next Tyler Perry film, Why Did I Get Married? We actually have four Tyler Perry films in the pipeline. Why Did I Get Married? will be followed by Meet the Browns, bringing back the popular Madea character, most likely arriving in theaters February or early spring. We will have two additional Tyler Perry films next year, including Madea Goes to Jail, Tyler’s most popular and successful stage play.

Later in the fiscal year, we bring back Jessica Alba for The Eye, a terrifying thriller based on the Japanese horror film. In December, we will also release Thomas Kinkade’s the Christmas Cottage, a heartwarming film for the holiday season, featuring a brilliant performance by Peter O’Toole.

Rambo 4 may not be quite as heartwarming, but Sylvester Stallone looks terrific in a great action film that has come home to Lionsgate. As most of you know, we have the first three Rambo movies in our library. Stallone gives a performance as John Rambo that is every bit as compelling as his return as Rock Balboa a few months ago.

We are continuing to put our money where our mouth is this year, investing in our core businesses and sticking to our disciplines. While we are increasing the P&A spend for our fiscal ’08 slate with our expanded schedule, we want to make it clear that every film on our release schedule fits squarely within the classic Lionsgate risk profile. We are already filling the pipeline for fiscal ’09 with films such as Atlas Shrugs, staring Angelina Jolie; The Forbidden Kingdom, teaming Jet Li with Jackie Lee; The Spirit, which will be the next film from legendary Frank Miller, fresh on the heels of his blockbuster 300 and the acclaimed Sin City; Tulia, for which we are bringing back our Academy Award winner Halle Berry; Punisher 2, two more Tyler Perry films on the way and of course, stay tuned for future installments of our Saw and Hostel franchises.

It’s a great time to be a pure content player and we now have a portfolio that is equal in size and scope to that of a major studio but generated according to our own disciplined model.

On that note, I will turn to Felt to discuss our other content businesses. Jon.

Jon Feltheimer

Thanks, Michael. On the television front, our business is growing just as rapidly and successfully. We’ve combined our creation of original programming for cable networks with one of the most powerful line-ups of independent syndicated product in the television industry today to generate steadily increasing momentum for our business.

In fiscal 2008, with some of our growth coming from Debmar-Mercury’s portfolio of syndicated content, such as Tyler Perry’s House of Pain, Family Feud, South Park, two film packages from Evolution and our own drama series, The Dead Zone, we expect our television revenue to climb towards $200 million.

Our television approach is again focused, edgy and different from our competitors. To give you some examples, our upcoming television slate includes the fun, scary and sometimes disturbing Hidden Palms, which premiered on the CW Network last night; Mad Men, a darkly subversive and scathing look at 1960s Madison Avenue from Sopranos executive producer Matt Weiner, which will become AMC's first premium scripted drama series when it debuts in August; The Kill Point, a powerful hostage drama for Spike TV in the tradition of Dog Day Afternoon, starring Jon Leguizamo and Donnie Wahlberg; The Bernie Mac Comedy Roast from David Letterman producer Robert Morton for Comedy Central; and of course, we’re going into the third season of our acclaimed comedy, Weeds, another quintessentially Lionsgate franchise that highlights the fact that digital revenues can sit comfortably side-by-side with success in home entertainment and primetime programming. Weeds is already positioned to generate significant incremental revenues in syndication.

We have now formed long-term relationships with the state governments of Louisiana, New Mexico and Pennsylvania in our ongoing efforts to capitalize on filmed entertainment friendly production subsidies and tax incentives as part of the growth of our television business.

Another factor in the success of our television business is the major contribution from Debmar-Mercury. As you know, Tyler Perry’s House of Pain begins airing the first of its 100 episode order from Turner this coming month and will enter first-run syndication next year.

Our syndication arm has amassed one of the strongest portfolios of product in the industry and it is continually building its supply of content. Mort Marcus and Ira Bernstein operate very entrepreneurially within our culture and we continue to look for other entrepreneurs with whom we can partner and help build their businesses as we continue to build our own.

Now, Steve will give you some more color on our home entertainment, digital and international businesses. Steve.

Steve Beeks

Thanks. As Jon said, our home entertainment business continues to show strength, vibrancy and growth. I would like to focus particularly on the extraordinary performance we achieved from our library this past year and the steps we are taking to maintain this performance, as well as to leverage the success into the digital environment.

Our library revenue grew to $256 million in fiscal ’07, up 21% from last year, outperforming all expectations and again bucking industry trends in a mature DVD market. Our growth came from all areas of the library, with home entertainment alone exceeding $200 million in revenue and we had significant growth in international sales and domestic television from our library as well. The library performance continued to gain momentum throughout the year, with $143 million in revenues generated during the last six months of the fiscal year.

It is particularly noteworthy that our strong performance did not come at the expense of pricing. The average wholesale price on our deep catalog remained constant from fiscal ’06 to ’07. As Jon mentioned, our library generated approximately $90 million in free cash flow, which continues to pay for our entire overhead cost year after year.

As we have said previously, as our newer titles drop into the library at higher prices than deep catalog, average wholesale prices have gone up and created higher gross margins for us. The ability of these new titles to serve as an important catalyst for revenue and margin growth is another factor confirming our strategy of investing in future growth of our theatrical slate. We continue to seek to increase our library and we expect to announce in the next several weeks some additions and extensions.

We cannot over-emphasize how important our growing library is to maximizing our performance in the digital marketplace, a market that has emerged in a financially meaningful way for Lionsgate this past year and is beginning to deliver accretive results that are a reality, not a promise.

As Jon mentioned a few minutes ago, both conventional and broadband VOD are an important part of the future and are beginning to contribute significantly. We are now achieving VOD revenues equaling 10% or more of box office results on our better performing theatrical titles, such as Employee of the Month and Crank. Conventional VOD revenue grew almost 50% to $24 million in fiscal ’07. We believe that these results will continue to be accretive going forward rather than cannibalizing our packaged media business, because we are entering an environment where any consumer with broadband can have instantaneous access to our content.

We can foresee a day when every consumer with broadband will have instant access to virtually every film ever made. No matter how much space is available at major retailers, virtual shelf space in the digital environment is unlimited.

As an example of the incremental revenue potential from these new consumers, during the most recent week of results from iTunes, six of our top 10 revenue-generating films are not currently on Wal-mart shelves, demonstrating that virtual shelf space allows for very accretive revenue generation.

More titles from our library generating more revenue -- that is the promise of digital delivery. The digital delivery is showing extremely rapid growth. We have already generated approximately 1.4 million downloads with our digital partners, and this nascent technology is just establishing itself. Our momentum is going to grow. We got off to a fast start with Weeds on iTunes, which generated over 1 million downloads itself, and in just the last three months that we’ve been selling library titles, we have seen their surprising power.

To give just one illustrative example of the strength of our digital delivery of library films, a few weeks ago we uploaded Van Wilder. In the first week it was offered on iTunes, it was the number one downloaded movie out of their entire selection and it only dropped 10% in its second week. That’s not bad for a five-year old film that generated less than $20 million at the box office -- more validation for the long tail theory.

Since our electronic delivery deal with X-Box Live became active in February, we have had 150,000 VOD downloads from just 15 films. This is an extremely promising sign for our entire library and the power of the virtual shelf space of digital delivery.

As we mentioned during our last call, our day-and-date VOD test with Comcast has shown promising results with little evidence of cannibalization of traditional rental and sell-through markets. We are expanding this test to include an addition market in the fall and will continue to monitor the results, but it does initially appear that this will prove to be a substantial accretive source of revenue.

Our traditional packaged media business continues to perform strongly, an essential prerequisite to the incremental nature of the digital revenue streams we are anticipating. As Jon noted, our home entertainment revenues grew year over year to nearly $530 million, although our domestic box office was down slightly over the same period.

The average wholesale price for new releases increased by $0.70 per unit last year, reflecting the strength of our most recent titles, both in sell-through and rental. We have achieved DVD market share of more than 6% during the current calendar year. January was the best month in Lionsgate's history in terms of DVD sales and the January to March period was also the second-best home entertainment quarter we have ever achieved from a revenue perspective, benefiting from a mix of very successful theatrical titles, such as Saw 3, Crank and Employee of the Month, as well as several strong family entertainment franchises, including the third in our series of 10 Marvel direct-to-video releases, The Invincible Iron Man, and the launch of our first animated Bratz home video title.

Our return rate is down, demonstrating both continued strong sell-through as well as an excellent logistical supply chain.

One of the catalysts of our home entertainment growth is our leadership as one of the premier content innovators in the business. We’ll have released approximately 50 titles on Blu-ray DVD by the end of this year at much higher gross margins than our traditional DVD titles. With 11% Blu-ray market share year-to-date significantly over-indexing our broader home video market share, we are currently well-positioned to capitalize on the acceleration of the high-definition market when a single format is established. Blu-ray currently has almost a two-to-one software advantage and we still believe that it will ultimately emerge as the dominant format.

Until then, however, Blu-ray will be a relatively small but growing source of higher margin revenue.

International is also a significant and continuing area of growth. Last week, Lionsgate U.K. entered into an agreement with our strategic partner, Studio Canal, with whom we have a steadily expanding relationship, and their U.K. subsidiary, Optimum Releasing, to buy Elevation Sales, which is an independent home entertainment sales and distribution company.

By virtue of this transaction, we will now have our own video sales marketing and distribution operation in the U.K. This complements our successful theatrical and library distribution there, which is consistent with our U.K. strategy of capturing additional margin.

Our Lionsgate U.K./Optimum venture will also explore opportunities to distribute third-party video product in the U.K.

Our current theatrical and library operations in the U.K. are achieving the results we anticipated when we bought Red Bus a year-and-a-half ago. Employee of the Month, for example, generated approximately $7 million in the U.K. box office this past quarter, and is illustrative of our strategy for capturing more margin.

Our library also performed strongly in the U.K. For example, Dirty Dancing has already sold through 400,000 DVDs in the U.K. since we released it under the Lionsgate U.K. label last August.

We are planning to establish a similar beach-head in Australia, part of our worldwide strategy of identifying strategic markets that offer the greatest opportunities for growing our margins through self-distribution. We currently have an active offer in the marketplace there to acquire an independent distributor, much in the same way we acquired Red Bus in the U.K.

Some of you may not be familiar with another of our significant international initiatives, our investment in the smash success stage play, Dirty Dancing. Dirty Dancing was very successful during its run in Australia, went on to break box office records in Hamburg, Germany, achieved record ticket sales in London and recently set a new single day record for advanced ticket sales in Toronto in anticipation of its November opening there.

Our library, home entertainment, digital and international businesses are all showing the kind of strength we envisioned in our business plan and we are eager to continue our investment in fresh content that will continue fueling this momentum.

Now I will turn the floor back to Jon for a summary of our performance this past year and what it portends for the future.

Jon Feltheimer

Thank you, Steve. Lionsgate has completed the kind of successful year our business plan envisioned, exceeding our financial growth metrics and even more significantly, in terms of the larger picture, demonstrating continued innovation in leveraging our content into emerging platforms and markets that will sustain our future growth. Our balance sheet shows nearly $300 million in cash, no corporate debt, and sufficient capacities that continue making substantial investments in our business internally and through acquisitions that build on our content leadership and a diverse portfolio of businesses. It was particularly important in a period of significant growth for us to construct a portfolio of financing arrangements that will hopefully allow us to not only invest significantly but at the same time also deliver increasing financial metrics, and we will continue to add more of these arrangements as our ongoing growth warrants.

It is always our aim to complement the innovation of our strategies with the quality of our implementation. As Thomas Edison once said, vision without execution is hallucination, and we believe that we not only have the vision to continue identifying innovative ways to grow our business but we have the execution to get there.

We will now open the floor to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from the line of Gordon Hodge representing Thomas Weisel Partners. Please go ahead.

Gordon Hodge - Thomas Weisel Partners

Good morning. Just a couple of questions; one on the film front, just to understand how that works. Will you be, from an accounting standpoint, will you -- you’ll absorb the P&A, obviously the full P&A and you’ll absorb presumably the full ultimate margin, I guess, running through the income statement. And then, will you see reimbursements in the cash flow statement? Is that where that will show up, from a free cash flow perspective?

James Keegan

The answer is yes. The way the accounting will work for that is we’ll expense the P&A as incurred and we will record the funds we receive as an increase in cash and an increase in participations payable, therefore increasing the cash flow.

Gordon Hodge - Thomas Weisel Partners

Got it. Okay, and then it sounds like just directionally, you are focusing maybe a little less on pick-ups and a little more on your own productions, now that you have the fund available. Is that a correct interpretation? Would a lot of the investment that you are making this year, both in terms of P&A and in terms of investing in the slate, is that for releases that we might expect to see the revenues in ’09?

Jon Feltheimer

Yes, exactly, particularly as I said earlier, we are going to be releasing more pictures in fourth quarter than we had previously done and almost all the benefit of that will take, as usual, will take the marketing expense all in the fiscal ’08 year and we’ll see most of the benefits in ’09 and ’10.

In terms of those additional movies, they are both produced and co-financed, but there were a number of great opportunities for us to get into some bigger budget pictures, pictures that are $50 million to $70 million for very minimal up-front, if any, investment and so that’s why the slate looks considerably bigger this year.

Gordon Hodge - Thomas Weisel Partners

Last question, just an update if you can on any negotiations in terms of re-upping with Showtime, on the output deal.

Jon Feltheimer

We are definitely having ongoing conversations about our pay television window, either with just one service or a combination, and remain very confident that we will extend or replace that window.

Gordon Hodge - Thomas Weisel Partners

Thank you.

Operator

Next we’ll go to the line of David Miller, representing SMH Capital. Please go ahead.

David Miller - SMH Capital

Michael, your balance sheet just continues to look better and better every quarter, sequentially close to $3 per share in cash. I don’t get the sense from you guys rhetorically that you are willing to acquire anything using your stock. I get the sense that you think that that’s sacred, so given the stellar way the balance sheet looks, you only have converts on the balance sheet. With regard to debt, there is no bank debt. What is your overall taste for some sort of return on capital to shareholders in the form of some sort of one-time divi on the cash or some sort of traditional buy-back? Thanks very much and I have a follow-up.

Michael Burns

The first part of your question, David, is that there are some deals that we would consider doing a stock deal with because -- and on occasion, there are some transactions that they are looking to have our stocks, so I would never count that out. But I will tell you that yesterday, our Board authorized our first stock buy-back program.

David Miller - SMH Capital

Wow, there you go. Outstanding. Also, just a follow-up; Jon, maybe this is more appropriate for you, the FEARnet channel I think debuted as a VOD option on Comcast digital tier during Halloween weekend ’06, but you guys at the time stated that there was sort of a loose promise from the consortium that a linear component would debut within six months. It’s been six months. What’s the update on that? Thanks.

Jon Feltheimer

I would have to go back and look at those notes. We are continuing to talk, particularly to those folks who can’t do VOD, about linear but we have been much more focused actually on expanding the VOD offering to a number of other cable operators, and I think that we are very close to being able to announce a couple of other major carriers.

If you remember, the way the VOD works, it really -- in terms of financial benefits to us, it works very much like a linear channel in the sense that after an up-front free period, we will be getting paid on a per subscriber basis. This is really the way television is going to be in the future, an on-demand kind of business. So we are less focused on whatever you might call a linear service as opposed to just universal carriage.

David Miller - SMH Capital

Thanks very much.

Operator

Next we’ll go to the line of Tom Eagan with Oppenheimer. Please go ahead.

Thomas W. Eagan - Oppenheimer & Co.

Obviously your strategy of gaining more TV windows via theatricals was also working. Could you talk a little bit more about how you got more and better TV windows in fiscal ’07? I guess the second-half of ’07, and how you plan to continue that into fiscal ’08?

And then, if you could maybe give a little more detail on fiscal ’08 EBITDA over and above what you already said, and how much of that is driven by the fund? Thanks.

Steve Beeks

Tom, I think you are probably referring to -- when you are referring to the television window, I assume you are referring to pay-per-view and conventional VOD, and I really think that the growth is a factor of two things -- not only the strength of our schedule but also the growth of VOD offerings by the cable operators around the country.

Jon Feltheimer

I think as well, it continues to be the kind of product, as I said in my remarks, it’s the kind of product that we’re doing. In other words, things like Crank and Employee of the Month, the kind of product that typically before over-indexed in home entertainment is going to and is already over-indexing in the other ancillary media, and I think that’s the great news for us because that’s the product that we focus on.

In terms of EBITDA, I’m not really sure what your question is. As usual, in spite of the fact that we have significantly high marketing expense, we have not budgeted for any hit movies. I’ve given you a range in terms of EBITDA. It’s pretty obvious again why this happens. We’re not at risk for over $150 million of the P&A that’s being invested in our slate but given, and I’ll use the word anomaly, given the anomaly of the reporting requirements, we are forced to expense all of that because we are the operating company.

So given that, you see a huge delta between free cash flow and EBITDA. So I think I’ve gotten you pretty close to where we are on that.

Thomas W. Eagan - Oppenheimer & Co.

I guess as a follow-up, Steve, what I meant on TV was the $109 million for the TV revenue from theatrical, was that -- that’s a pretty strong number. How much of that was driven -- was that driven by the VOD revenue?

And then Felt, what I meant was if you could just repeat what you were saying about EBITDA and how much of it being negative was driven by the fund. I know it is kind of hard to say what it would be without it, but if you did not have at some point increased participation of what that number might be. Thanks.

Steve Beeks

I’ll take the first part, of the $109 million in television revenue you mentioned. $24 million of that was VOD, which is as we mentioned, a huge increase, a 50% increase over the prior year.

Thomas W. Eagan - Oppenheimer & Co.

Okay.

Jon Feltheimer

Again, I’m still having trouble with the second question. We constructed our slate this year and actually some movies will still be moving around, but we constructed the release schedule based upon having the fund. If we did not have the fund, I would not have the same release schedule. Again, we focus entirely on revenue and free cash flow, so when we constructed our schedule and looked at our business this year, that was the basis that we did it on.

I actually only discuss and give you guidance, rough guidance, on EBITDA net because we are forced to report it but again, we’re focused on revenue and free cash flow.

Thomas W. Eagan - Oppenheimer & Co.

Okay. Thank you.

Operator

Our next question comes from the line of Alan Gould with Bleichroeder. Please go ahead.

Alan Gould - Natexis Bleichroeder

Thank you. I have three questions. First, Michael, could you tell us the size of the buy-back? Jim, could you tell us the interest expense on the film fund? Is that going to be consolidated, so is the interest expense going to flow through your P&L on that fund?

And then a follow-up on Gordon’s question for Jon regarding fiscal ’09; this big increase in P&A and follow-through in box office and ancillary revenue, it seems like 85% or so of the profits of the film come in the first 12 months, so shouldn’t we see -- just as we see this negative swing in ’08, shouldn’t most of that all come back to us in ’09?

Jon Feltheimer

I’ll take the last part -- the answer is yes. That’s exactly right. In the period of, I would say -- if we don’t grow substantially our slate in ’09, I think you will see a big, big net benefit that I would imagine would drive all of our metrics up well beyond this current year. Do you guys want to answer the other questions?

Michael Burns

The answer to the stock buy-back, the first stock buy-back authorization was $50 million.

James Keegan

And the answer to your other question, the way the fund is constructed, it won’t appear as an interest charge in my books. We’ll do a calculation that will do a, determine a participation back to the fund itself and it will flow through my participation expense line in my financials.

Alan Gould - Natexis Bleichroeder

Flows through the participation expense -- okay, but the fund is going to have what, about $175 million or so of debt attached to it?

James Keegan

Yes, but the fund is not -- I do not bring -- the fund is not consolidated into my financials. It is outside me.

Alan Gould - Natexis Bleichroeder

Okay, so where does the cost or the capital of the fund come in when you calculate the profits of the pictures?

James Keegan

It comes through as I calculate the back-end participation that goes back to the fund until all those, I determine how much money of the profit we will share in.

Jon Feltheimer

Let us be clear -- there is no cost of capital. The deal is very simple. We take our distribution fee which, as has been reported, is kind of a state-of-the-art fee and we report back to them as a 50-50 participant essentially on all the pictures. There is no cost of capital.

Alan Gould - Natexis Bleichroeder

So it’s irrelevant to what they are paying on their interest.

Jon Feltheimer

Exactly correct.

Alan Gould - Natexis Bleichroeder

Thank you.

Operator

Next we’ll go to the line of Barton Crockett with JP Morgan. Your line is open.

Barton Crockett - JP Morgan

Thank you very much. You just answered one of my questions there in terms of this is a profit participation as opposed to interest flowing through there.

I guess switching gears here a little bit, could you give us a sense of what you are looking for in terms of the profit impact of Sicko and just refresh us again of what we saw out of Fahrenheit 9-11? Give us a sense of the economics there.

Secondly, in terms of this discussion about the impact on the metrics in ’09 after the negative swing in ’08, does that also apply to free cash flow in ’09? Or since you are building up this participation and they are funding part of the marketing spend that you are expensing, isn’t there some pay-back than in ’09? Could that maybe deflate the growth in free cash flow relative to the other metrics? Thank you.

Jon Feltheimer

It’s a good point but I would say probably not. I think that we will see, as I said earlier, all of the -- overall, all of the metrics -- don’t forget this fund will run almost three years, so the benefit will be rolling, and as I say I would think if we look forward, which I hate to do, look forward into ’09, I think you will have significant positive results and growth in ’09, even compared to this fiscal year.

Barton Crockett - JP Morgan

Okay, and then for Sicko, the margin impact there?

Jon Feltheimer

Sicko, the margins will be very strong because we have no risk really attached to it but the overall number is not that significant.

Barton Crockett - JP Morgan

Okay, and also, did you give us a number in terms of the size of the share repurchase you guys authorized?

Michael Burns

We said up to $50 million.

Barton Crockett - JP Morgan

Okay, great. Thanks a lot.

Operator

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

Eric Handler - Lehman Brothers

Thank you. Can you give us a sense what your television production margins might be for the year and how you think your profit will look like, the film business versus television?

Secondly, can you give us a sense of what your syndication backlog is for your TV programs?

Jon Feltheimer

Margins, as I say, we see revenues approaching $200 million, margins 10% to 15%. I don’t know if Jim has broken out for this call the specific elements of that. Can you pull that out?

James Keegan

Backlog as of the end of March 31 is about $152 million from TV and $167 million from motion pictures.

Jon Feltheimer

Have you broken out syndications specifically?

James Keegan

Not broken out, just combined with TV.

Jon Feltheimer

Okay. We can drill down on that with you, Eric, later.

Eric Handler - Lehman Brothers

Specifically, what titles do you have going into the off-network syndication market in the next couple of years?

James Keegan

I’ll tell you the big piece. If you look at the Debmar portion of that backlog, it is about $64 million, which is more the TV syndication number you are looking for. That has the South Parks and the Tyler Perry franchise.

Jon Feltheimer

But Eric, as you know, if I get your question, we don’t put -- backlog doesn’t refer to anything that is a potential syndication sale. We don’t have, for example, any number in there for Weeds or any of our television series. We’re not allowed to put that down until we’ve actually completed a sale.

Backlog really means these are sales that have been made already, contracts that have been completed but the window hasn’t opened, so we don’t have any of that television, those potential television revenues in our backlog.

Eric Handler - Lehman Brothers

Right, actually what I’m trying to -- the question I’m trying to get at is when will shows like Weeds, when you begin pre-selling those for the syndication market?

Jon Feltheimer

I’ll have to look very specifically at what the availability of Weeds is but probably we’ll start selling it now. We’re already talking to people but when the window will open up is probably 2009 or 2010.

Eric Handler - Lehman Brothers

Thank you.

Operator

Our next question today comes from the line of David Bank representing RBC Capital Markets. Please go ahead.

David Bank - RBC Capital Markets

Thanks very much. Good morning. First one, I’m going to start with reconciliation for the fiscal year that just passed, on cash flow and EBITDA. It actually looks like there wasn’t a particularly big swing between investment and amortization of film, nor in terms of participations but the big swings were in deferred revenue and payables versus receivables with the big, big contribution coming from receivables. So could you give a little bit of color in terms of those swings and how they may or may not reverse in the following quarter?

The second is, I’m sorry to do this to you, can you clarify that -- can you literally actually just repeat what you said on the revenue, P&A and EBITDA numbers? I’m sorry to give you this basic question but what I don’t quite understand is given that it’s a 50-50 split, why you are increasing the P&A spend. Wouldn’t your loss just be pro-rata versus what it would have been if you did not have a partner? It sounds like maybe you are spending more money because you can make bigger movies or make more movies because you have a partner, but the inherent profitability of them, how do they change because you are doing it with a co-production partner? Thanks. Sorry for the long questions.

James Keegan

I guess I’ll take your first. AR end of last year, this year we actually released some of Saw franchises and things that we had those earlier in the quarter, so basically we received and collected those funds from our Saw 3 this year, which really is driving the decrease from AR last year to this year. AR will continue to grow as films come out, I guess I’ll say that.

Deferred revenue, big pick-ups this year. We received some advances from some people from the motion picture division -- it’s actually coming more out of the motion picture division than the television division this year, with about $49 million in motion pictures compared to about $30 million last year. And that’s coming from just pre-sales also on some of our films that are coming up, some of the big ones, the Rogues and things of that nature.

David Bank - RBC Capital Markets

Any big reversals expected in terms of first or second quarter?

James Keegan

We will see things, like we had some Weeds deferred revenue will roll in. Yes, you’ll see that reverse and come in but hopefully that will be then increased by something else, so to answer your question, I really don’t know if I see deferred revenue coming down significantly this year from its current standpoint. Maybe a little, but not significantly.

Jon Feltheimer

In terms of your second question, David, I’m not quite sure I understand. If you are asking does it make sense that we should have to expense all of our partner share of P&A, the answer is it doesn’t. In terms of the ultimate benefit, actually, we constructed the slate with a pretty conservative model and actually did not assume performance significantly higher, even with the additional P&A expense and the higher budgets. Again, the risk that we have in terms of the up-front equity on almost all of these pictures is really not at all dissimilar to the current movies that we have out.

But I would assume actually going forward that we will get the benefit of those movies and that the performance will probably outperform what we’ve got in our targets.

David Bank - RBC Capital Markets

I think I understand. So basically the issue is that you just have a dramatic acceleration in terms of negative costs and P&A moving into a larger slate next year, rather than those movies being bigger bets and potentially less profitable?

Jon Feltheimer

That’s the right way to say it. Again, you are not seeing -- the impact is not really because of the negative cost. The impact is solely because of the P&A impact, and that P&A impact is also in our home video. So in other words, even in -- most of the -- for all of these pictures that the video comes out in this fiscal year, our partner, the fund is actually paying for half of the P&A expense as well. Again, we are expensing the entire 100% of it, so the positive benefit of that obviously will roll into ’09 and then obviously into the library piece of it, which again I can’t over-emphasize enough -- all of these films that we are getting are essentially 25 years to perpetuity, so we are extending certainly significantly the value of our library.

Michael Burns

The only thing that I want to make sure that we are clear on is that you used the term bigger bets. We are in fact doing more wide releases but we are obviously sharing the risk with the fund.

David Bank - RBC Capital Markets

Thanks.

Operator

We will go to the line of Michael Kelman with Susquehanna Financial Group. Please go ahead.

Michael Kelman - Susquehanna Financial Group

First, could you talk about the accounting for the production costs under the film fund, particularly for films that you will share the negative costs for, I understand how the P&A, I think you’ve talked about that a few times, on how that will work but will you be amortizing the net amount or the gross amount of the negative cost of the film?

The second question is with regard to the TV production revenue next year obviously expecting significant growth. Could you maybe talk a little bit about your expectations for timing on the revenue recognition of that on a quarterly basis?

James Keegan

I’ll answer your first. We will be amortizing the negative costs for the film on the gross method. The way -- I’ll do a quick accounting on it. The way the rules are going to work, quickly, we’ll take revenue, the fee Jon discussed, and then we will do a calculation of the participation back to the film co, and that will be amortized. When I get the cash from the film co, as I mentioned earlier, I am just going to debit cash, credit our participation liability. As I make payments to the film co, all I do is debit the liability, credit cash. In a nutshell, that’s the accounting.

Jon Feltheimer

And as you know, we don’t guide quarter to quarter, but Jim, can you give them any visibility on how that $200 million breaks down?

James Keegan

Sure. I would anticipate that the -- actually, it’s not as even. Q2 looks to spike a little, then actually slows down in Q4. Starting about approximately $200 million revenue but you should see a spike in Q2.

Michael Kelman - Susquehanna Financial Group

Thanks very much.

Operator

Next we’ll go to the line of David Joyce with Miller Tabak. Please go ahead.

David Joyce - Miller Tabak

Thanks. It’s sort of a conceptual question, but as you are getting more and more into TV production, can you generally talk about the economics that you are getting on those programs?

Jon Feltheimer

Again, a lot of the growth in television is coming from Debmar-Mercury, which is really more of a syndication business. The TV business, the way it works and the way again we are forced to account, is we can’t really put any back-end on our television product until we are well down the road, so typically the TV production business is a low margin business. Obviously when we start looking at some revenues from Dead Zone and then Weeds and some of the other shows, we are going to up those margins. But the syndication margin is considerably higher, closer to 20%, which is why we are talking about blended average 10% to 15%. We are very excited about the growth of our syndication business. We really think it is a tremendous driver. We are really the only true independent syndication company of any size right now. We are the only alternative for talent out there when they are looking at deals to the major studios and I think that this is going to be a real tremendous growth opportunity for us, because Mort and Ira are just doing a tremendous job.

So the syndication area is what is going to drive the margins.

David Joyce - Miller Tabak

That’s helpful. That’s on the 20% range. And then just a housekeeping issue on the share count for the fourth quarter -- is that related to the converts?

James Keegan

Yes.

David Joyce - Miller Tabak

Thanks.

Operator

We have time for two final questions today. Our first one comes from the line of William Kidd with Wedbush Morgan.

William Kidd - Wedbush Morgan

Good morning. I had a question really about the library reform, just as it relates to Blu-ray. You are obviously doing really well at present. Other studios are not as aggressive with Blu-ray as you have been. Do you think as other studios step up their Blu-ray performance and start to bring more titles more quickly into the marketplace, that that’s going to affect your ability to over-index? If that is the case, when would you expect that to be visible?

Steve Beeks

I think that logically, if every studio were releasing in Blu-ray our market share in Blu-ray would reflect our overall broader -- not our margin but our market share, would reflect our overall market share. I think that’s still a ways off. We’ve still got other -- one studio that’s exclusively HD-DVD, but I think that through the course of the year you are going to see, hopefully you are going to see Blu-ray build its advantage and become a bigger part of our revenue base.

William Kidd - Wedbush Morgan

On the VOD side, I think you gave a metric that your VOD revenues were up 50%. Could you give that together, consolidated with your pay-per-view numbers and just kind of give us what a total pay-per-view gain was, including the VOD?

Steve Beeks

That’s the number. That includes pay-per-view, VOD are really in a way -- we view that as the same kind of business.

William Kidd - Wedbush Morgan

Likewise. Thank you so much.

Operator

Our final question today comes from the line of David Miller with SMH Capital. Please go ahead.

David Miller - SMH Capital

Just a quick follow-up; Jim Keegan, I forgot to ask you, what were FEARnet losses in the quarter? I know you guys report that on a three-month lag, so I guess you would be reporting your December quarter losses on FEARnet.

James Keegan

About $1.5 million.

David Miller - SMH Capital

Okay, thanks.

Operator

Please continue.

Jon Feltheimer

Thank you all. We appreciate you being on the call and we will talk to you next quarter.

Operator

Ladies and gentlemen, this conference will be available for replay after 9:30 this morning until June 7th at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 871581. International participants may dial 1-320-365-3844. Those numbers again are 1-800-475-6701. International participants dial 1-320-365-3844. Please enter the access code of 871581.

That does conclude our conference for today. We thank you for your participation and for using the AT&T executive teleconference. You may now disconnect.

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