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Lionsgate Entertainment Corp. (NYSE:LGF)

F1Q08 Earnings Call

August 10, 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

Rick Prell - Chief Accounting Officer

Analysts

Gordon Hodge - Thomas Weisel Partners

Michael Savner - Banc of America

David Miller - Sanders Morris Harris Capital

Jeff Logsdon - BMO Capital Markets

Tom Eagan - Oppenheimer

Alan Gould - Natexis Bleichroeder

Barton Crockett – JP Morgan

Eric Handler - Lehman Brothers

Andy Nasr - Raymond James

David Bank - RBC Capital Markets

Michael Kelman - Susquehanna Financial Group

David Joyce - Miller Tabak

William Kidd - Wedbush Morgan

Presentation

Operator

Welcome to the fiscal 2008 first quarter analyst conference call. (Operator Instructions) I would now like to turn the conference over to our host, Senior Vice President of Investor Relations, Mr. Peter Wilkes. Please go ahead.

Peter Wilkes

Good morning. We will open with remarks from Jon Feltheimer, our Chief Executive Officer; Michael Burns, our Vice Chairman; and Steve Beeks, our President and Chief Operating Officer. Jim Keegan, our CFO, and Rick Prell, our Chief Accounting Officer, are also on the call.

The matters discussed on this call include forward-looking statements, including those regarding the timing of our upcoming film slate, the expansion of our television business and the success of our fiscal 2008. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the risk factors as set forth in Lions Gate's Form 10-K. 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 Feltheimer

Good morning and thank you all for joining us on today's call. As we have seen for the last three or four years, our first quarter is typically a soft, expense-laden quarter with our positive results from seasonal home video and television deliveries back loaded in the year. This Q1 is no exception. The numbers we released yesterday were exactly on track with our budget and expectations. Our negative earnings of $53 million in the quarter were primarily attributable to a $47 million increase in theatrical marketing expenses from last year's first quarter, and our negative cash flow is largely attributable to $80 million invested in television product that will come back to us as revenue during the balance of the year.

While revenue's negative cash and earnings were as expected, we're still disappointed in the performance of our first six films of the fiscal '08 slate. This performance alone would leave us about $22 million off plan. That would be the case if we didn't have a nimble and diversified business. Due to adjustments we have made to overhead as well as overperformance and projections from home entertainment, international, and corporate development activities, we are now basically on plan. We therefore are reiterating our guidance of revenue growth to over $1.1 billion, free cash flow over $100 million, and EBITDA and pre-tax net income over negative $40 million and $50 million respectively. As usual, this assumes our ongoing businesses, including our future theatrical releases perform on plan.

To give a good sense of why we're confident of that performance, I would like to turn the call over to Michael to talk about the upcoming slate, as well as our recent slate financings, and Steve will then take you through recent developments in home entertainment, our library, the international arena, and our continuing digital initiatives.

Michael Burns

Thank you. I would like to first take a moment to address what I believe to be a misperception about the financial impact of our last six under-performing films at the box office, Slow Burn, The Condemned, Delta Farce, Bug, Hostel 2, and Bratz. Because we stick to our discipline about budgets, financial structuring and P&A spends these six films will cost us an approximate cumulative ultimate loss of around $15 million. Even though that number is likely less than most on this call suspected, it is still a loss. Our plan is to reverse that trend and we have much higher return expectations for our next five wide releases, which represent the core of this year's theatrical slate.

We continue to expect that our full fiscal 2008 slate will be our strongest ever with a $400 million domestic box office target. Between now and the end of October, we will release an important picture every few weeks, and you will see what we have been striving to achieve with a bigger, broader, more diversified slate all acquired, produced and distributed within the parameters of the Lions Gate model.

Our next five films include War, which we are releasing in two weeks on August 24th starring Jet Li and Jason Statham. We expect them to deliver for us, just the way Jason delivered last year at this time in Crank. War is tracking well. On September 7th, we release 3:10 to Yuma, directed by Walk The Line's James Mangold. It is a powerful and brilliantly acted film with great performances from Russell Crowe and Christian Bale and a breakthrough performance from Ben Foster. We have high expectations for the film both at the box office and during awards season.

Two weeks later, we release Good Luck Chuck" The chemistry between Jessica Alba and Dane Cook is terrific. We believe this is Lions Gate's strongest comedy to date and the movie that defines Jessica Alba as a major motion picture comedy star. Dane is already shooting his third film for us, Bachelor 2 with Kate Hudson for next year. You will see Jessica Alba again in our thriller, The Eye which just wrapped principal photography.

On October 12, we release the next film from our crown jewel, Tyler Perry, Why Did I Get Married? starring Tyler and Janet Jackson. When Halloween comes around just two weeks later, we will continue one of the most successful horror franchises of all time, by releasing the fourth installment in our Saw series. The film is, in a word, terrifying. We are also very excited to have Tyler Perry in Meet the Browns, which will likely be released in its usual February slot.

Additionally, we're producing or finishing a number of films for fiscal '09, and we expect the momentum generated from this year's drivers to carry into next year. These films include Rambo 4, starring and directed by Sylvester Stallone. Go to Break.com in a few days and see an incredibly compelling clip.

The action packed Forbidden Kingdom, starring Jet Li and Jackie Chan, which is currently wrapping, is a solid indication of how action is being incorporated into our diverse slate. The romantic comedy, Bachelor 2, as I mentioned, soon shooting in Boston with Kate Hudson and Dane Cook, Frank Miller's The Spirit, fresh off his blockbuster hits 300 and Sin City, starring Gabriel Macht, Samuel Jackson, and what is shaping up to be an incredible all star cast of actresses for the four major female roles. Tyler Perry's Medea Goes To Jail and the next Punisher film, which begins shooting in Montreal in October as part of our SGF slate financing recently announced.

Our growth will be facilitated by three recently completed slate financings. We closed these deals just ahead of tightening credit markets. In addition to the $400 million theatrical slate financing arranged through Goldman Sachs and Jefferies for 23 of our next pictures, we announced last week the completion of our SGF financing transaction that will provide up to $140 million in financing for television and motion picture production in Quebec. The sixth broadcast season of The Dead Zone is already shooting in Montreal under this deal, and as I mentioned a few moments ago, we begin production on the next Punisher film in Montreal later this fall.

We're also in the process of negotiating a compelling financing deal for production in the Commonwealth of Pennsylvania. This innovative arrangement is consistent with our strategy of aligning ourselves with film-friendly local governments such as those in New Mexico, Quebec, Edmonton and now Pennsylvania. Although it has been a brutal stock market of late, we are still very disappointed with our share price. We remain quite bullish however on the soundness of our core businesses and the upcoming theatrical slate. Although to date we have not bought back shares in the market, we continue to have a significant buyback in place with board authorization to do so when deemed appropriate.

I would like to now turn the call over to Steve Beeks who will discuss how we are maintaining robust performances in our home entertainment businesses while we're beginning to see significant growth in the high margin digital revenue streams that we have been anticipating.

Steve Beeks

Thanks, Michael. This is a good time for the packaged media business, and the Company's home entertainment businesses are hitting on all cylinders. Our DVD share this calendar year is currently 6%, up from 5.2% last year. That doesn't include the growth we expect to see in Blu-ray DVD during the second half of the year, especially with cheaper hardware being announced and Target's announcement they will be exclusively carrying Blu-ray players in their stores and Blockbuster's decision to only support Blu-ray. We currently have 26 Blu-ray titles in release with many more planned in the coming months.

Our titles continue to significantly over index in terms of DVD revenue to box office. For example, Pride, which had a box office of $7 million is expected to generate net revenue to us of around $13 million from DVD sales in the first six-month cycle alone.

Library revenue, which includes international sales and domestic television licensing revenue as well as home entertainment, is again on track for over 200 million collars this fiscal year with DVD margins and the average wholesale prices on deep catalog holding steady. Give our focus and expertise in handling library, we not only recently extended the distribution term for the Studio Canal library but added 400 new titles as part of that agreement.

Our strategy of focusing on brands and franchises in the family home entertainment business is working. During the quarter, we released another DVD of The Doodlebops, a series that continues to do well in DVD as well as a new animated Bratz DVD, which is also selling through well.

In the television to DVD market we just released season two of Weeds, and the first two weeks of sales are 250% what we experienced with the same period for season 1. During Q1 we also released season 6 of Will & Grace, another season of The Dead Zone as well as The Lost Room. We continue to grow our market share in fitness, and recently signed a deal with Kathy Smith, one of the most prominent names in fitness, to bring her into the Lions Gate family and we'll start releasing her first productions later this year. Kathy will join our strong brand-based lineup of Denise Austin, The Biggest Loser and Dancing With the Stars. We'll further expand our home entertainment business with third party programming suppliers and are working on a few deals now we hope to announce soon.

Digital delivery continues to become a very meaningful part of our business. We're approaching 2 million downloads of our movie and television products and continue to upload more and more films from our library to the various digital retailers. Yesterday's announcement that Blockbuster is buying MovieLink is indicative of not only the growing importance of digital delivery but also the aggressive moves brick and mortar retailers are taking to evolve in this new digital marketplace.

Both broadband and conventional VOD continue to grow. We experienced our biggest quarter ever in VOD with nearly $13 million in revenue, which is nearly three times the VOD revenue in Q1 of last year.

On the international front, we continue to develop and expand Lions Gate UK. We recently closed a deal to jointly acquire with our partner Studio Canal the independent home entertainment sales and distribution entity, Elevation Sales. Through this joint venture, we'll have more direct control of sales and distribution of home entertainment, and we'll also recapture some additional operating margins. As of September, we will be selling our product directly to retail through Elevation.

The UK business continues to deliver as we anticipated. During the quarter, we theatrically released The Lives of Others which won the Academy Award for Best Foreign Language Film, and has performed better than anticipated. We also released Employee of the Month on DVD during the quarter which is also performing over plan. The management team at Lions Gate UK has proven to be the best asset we acquired in that transaction.

We're finalizing our plans on Australia and plan to announce a new partnership we have formed there before the next call. The Dirty Dancing stage play, which continues to play to full houses in London after successful runs in Australia and Germany is beginning to deliver a nice return on our investment. The plan is to open the play in Toronto in November with an anticipated rollout across North America.

We continue to be very bullish on the packaged media business, which is showing strength and resilience even in advance of the Blu-ray format really ramping up. Digital delivery grows every quarter. VOD is becoming more important as a source of revenue. Our international business is strong, and we anticipate growing in all those areas over the coming quarters.

Thank you all. Now back to Jon.

Jon Feltheimer

Thank you, Michael and Steve. I would like to touch a bit on television before I go to Q&A. Television continues to be an important growth area for us with our television revenues projected to be around $200 million this year. If you read the New York Times yesterday and a number of other recent articles, the big story is the growing popularity and performance of cable television's original programming. That's where we live.

Steve mentioned the second season of Weeds on DVD. This also portends a growing audience for the show and its value in syndication. Madmen AMC's first scripted drama series, has debuted to good ratings and extremely good reviews, SpikeTV's Kill Point, another solid ratings performer, is also a good indicator of our ability to access provincial, state and municipal funding, in this case from Pittsburgh and Pennsylvania. And Tyler Perry's House of Payne has stabilized its ratings as a place that should make it a major success for us as we move into the double run of TBS and FOX station group led syndication.

Debmar-Mercury is a big reason we're so confident of our television growth. In addition to the distribution rights to House of Payne, Family Feud, South Park, Revolution Studios Film Packages and Surreal Life, Debmar-Mercury is working on a number of new deals which we hope to announce shortly. Debmar gives us the syndication capability that no other independent studio really has, and led by two terrific entrepreneurs, will be a big driver for us.

Steve mentioned the growth in digital distribution of our product, but I would also like to mention FEAR.net and Break.com. FEAR.net had the best month ever in terms of VOD, about 7 million total views, average time for the views was 45 minutes, which is extremely high. We're the number eight VOD service for Comcast and the number one horror site in terms of registered users. As I said on the last call, we're poised to announce new cable system to pick up the service and expand our distribution.

In Break.com, we've made another deal with a smart entrepreneur, Keith Richmond, who will not only build the site as a standalone exciting business already with an owned content library and 17 million unique, mostly young male users, but will also work together with us on all of our property to cross promote Break and Lions Gate. We have already put Break together with FEAR.net for a new movie site and sponsorship package to cross promote Sony's 30 days of night and to drive traffic between FEAR.net and Break, sharing the advertising revenue. The idea at the end of the day for FEAR.net, Break, and our other digital initiatives is to accumulate eyeballs in nontraditional ways and then monetize them. These initiatives have just started, and are just the tip of the iceberg for us, but like the other businesses, our focus and diligence will bring results in the not too distant future.

To close, I want to reiterate that our business plan called for the loss we reported yesterday. We don't guide to quarters because the film and television business is cyclical and lumpy. Our focus is growing top line and free cash flow while we invest in and diversify our core business operations.

As we look at the marketplace, our capital structure, and the value created in our film and TV library, product pipeline, proprietary repeatable properties, our filmed entertainment backlog and new digital initiatives puts us in a position to capitalize on strategic opportunities that are now available. Given the GAAP accounting for a pure content business, we can not allow short term reporting speed bumps to slow down what we know is a solidly built growth plan for our business.

I'd now like to open the floor to your questions.

Question-and-Answer Session

Operator

Your first question comes from Gordon Hodge - Thomas Weisel Partners.

Gordon Hodge - Thomas Weisel Partners

Jon, you mentioned that on the theatrical slate side so far, obviously with the bigger releases probably coming in the near future, but you're $22 million off plan. Is that revenue or was that profit? Obviously you made it up elsewhere, but if you could clarify that. Also on the TV investment this quarter of $80 million and total investment in film of about $136 million, how should we think about that for the rest of the year in terms of the total amount and also how it stages over not necessarily the quarters but just throughout the year? Thanks.

Jon Feltheimer

The $22 million is a net number.

Jim Keegan

The television investment is for the series airing primarily in future quarters. It is Kill Point, The Dead Zone, Weeds and Wild Fire, so we'll see the benefit; we've invested now and we'll get the benefit later. Something else that we spent money on this quarter, if you look at my film production obligation line item, I actually paid for War this quarter which is one of our largest pictures ever, and that cash went out this quarter and we'll get the benefit from the revenue in future quarters. On the full year, I anticipate that the full year actual cash payments will be net approximately $274 million cash out by the end of the year.

Jon Feltheimer

I would also add, Gordon, on the War cash out was about $36 million. In addition to the revenue from the release, we've not yet collected the revenue from our partner Pride Pictures, so that benefit hasn't come back to us in terms of cash.

Gordon Hodge - Thomas Weisel Partners

Really front end loaded obviously?

Jon Feltheimer

Exactly.

Operator

Your next question comes from Michael Savner - Banc of America Securities.

Michael Savner - Banc of America

Good morning, guys. I have a few questions as well. First, real quick, on G&A, as a percentage of revenue it definitely spiked up in the quarter. I believe at least since I have been covering the company it is the highest percentage it has been, even if I do a quick back of the envelope to adjust for the under performance of the past couple films, it would still track near the higher end. How do we think about the G&A line?

Jim Keegan

We ran about 13% for Q1. Actually, my estimations are for the rest of the year it is going to track probably about 8.5% rolling to cumulative end at about 9.4%.

Michael Savner - Banc of America

So it was front end loaded?

Jim Keegan

Primarily because we had some unusual stock depreciation charges that were somewhat large, Debmar-Mercury was in there. We had a one-time slate bonus, so it was slightly front end loaded. Also, the revenues, I want to interject that. As a percentage of revenue you will see that we're still keeping it under 10%. The revenue in the first quarter is only a couple hundred million basically. So as we go to the back end, we may see a similar level of G&A. You may see the same level but it will track to 9.4%.

Michael Savner - Banc of America

On the VOD, which seems to be getting more and more meaningful, how should we think about the margin implications it is having, if any yet? I am assuming it is in library, and if it is not, please correct me on that if it is. Where are library margins right now? Are you seeing a benefit from the VOD impact and are you finding it to be accretive to what you're selling out of the library or somewhat replacement for what you would have otherwise done in DVD?

Jon Feltheimer

First of all, especially with conventional VOD, it is not library. That is primarily the new titles that are going into their pay-per-view and VOD window. In terms of digital delivery for product with library, obviously the margin will is dramatically higher for us, and I think what we are not seeing at this point is any degradation in the packaged media business, I think what we're seeing is simply making the pie larger as we've spoken before.

Steve Beeks

Michael, if you look at iTunes recently, many of the titles that were great performers on iTunes weren't even out on DVD at the moment.

Michael Savner - Banc of America

Some of the iTunes stuff, though, is that in library? Some of those are much older. Are those in library?

Steve Beeks

Yes. All of our business with iTunes is purely with library product. We have not yet started uploading newly released films.

Michael Savner - Banc of America

I appreciate the clarification. On the reaffirmation of full year guidance of $100 million or more of free cash flow you acknowledge you're tracking $15 million or $20 million below as of now. Is your ability to get to that or confidence to get to that number at year end, is that a function of new cash flow that you now see and have more confidence it is coming or is it a function of cushion that you just believed you had built into your original guidance?

Jon Feltheimer

Well, I mean, it is really basically unchanged guidance based on the fact that I said in my comments we had over performance in some ways, maybe some cushion built in, and looked at the schedule and obviously a lot of the difference between EBITDA and net and free cash flow is timing. Fourth quarter is always, you know, a big swing factor. As we looked at our schedule and made adjustments in bonus accrual frankly, you know, based upon performance as well as over performance as Steve said particularly in the home entertainment area, we made adjustments. FEAR.net in terms of lowering over head a little while we're waiting for additional distribution. So again we were nimble in a number of ways, and perhaps had a little bit of and maybe still do have a little bit of extra capacity in our original budget.

Steve Beeks

Michael, I think you know this, but we certainly do not over budget performance as far as hits. Our plan for example for our next five worldwide releases is a cumulative box office of $175 million or $35 million a piece, and those are big releases coming down the pipe.

Operator

Your next question comes from David Miller - Sanders Morris Harris Capital.

David Miller - Sanders Morris Harris

Jim Keegan and Felt, I know you're close to this, could you describe your relationship with the State of New Mexico or your arrangement there in terms of what you're doing with the state, and any tax breaks from the state that might be coming around the pike in future quarters? If you can help us below the line there, that would be great.

Michael, obviously your stock is an incredible bargain now trading around eight times free cash flow. When does the window open up for you to acquire shares in the open market?

Michael Burns

We're eligible to do that 48 hours after earnings are released we're able to go into the marketplace. Let me take a pass at New Mexico if I could. We shoot a television series there, we have done that the last four years, which is Wild Fire, so there is a great program in place which is basically money lent on the production from the State of New Mexico, so they're not tax breaks, but there are very cheap financing available to us, and we shot several movies there including Employee of the Month. We'll continue to shoot movies in places like New Mexico if we think that's the best place for us to utilize some of these financings.

David Miller - Sanders Morris Harris

Of the $47 million in P&A that you guys spent in the June quarter beyond what you spent in last year's June quarter, what portion of that gets reimbursed by the film fund and what's the timing of that and also what were the FEAR.net losses in the quarter? Thanks.

Jon Feltheimer

FEAR.net lost about $800,000 in the quarter. You can see that in the notes. In terms of the participation from the fund of approximately $20 million of Hostel, there would be half that and Bug was 16, it would be about half of that.

Operator

Your next question comes from Jeff Logsdon - Bank of Montreal.

Jeff Logsdon - BMO Capital Markets

Thank you. Can you give us some color on the video download business, which service consumers are using the most relative to your films, timing versus home video release, and again what would be the point of having sold MovieLink down at $20 million? Do the studios just absolutely want to be out of that kind of the business?

Steve Beeks

In terms of the digital download of the product, the two big services right now are iTunes and Xbox, and that reflects in our results. With Xbox at this point is a VOD service, and so they do get our films when the VOD window opens, which is 30 to 45 days after the DVD release. With iTunes so far, we have only been uploading library films, which is after they've been repriced, after the initial rental window, which is generally several months after the initial DVD release.

In terms of MovieLink, I think that the reason Blockbuster bought that, I can't speak for them, but they've always been a forward-looking company, and they're looking to evolve in the digital marketplace. They're defining their business as movie delivery to consumers as opposed to brick and mortar, and so I think that they've long said that they've got to evolve in the digital marketplace. They've done a great job with Blockbuster Online and Total Access. This is a pretty logical step for them.

Jon Feltheimer

In terms of the studios, Jeff, I think what's really start to go happen is all of the studios including us, we basically are trying to create a situation where our product is distributed in all kinds of formats, by all kinds of sites, by all kinds of distributors, and I think that's what's happening with MovieLink. Studios felt they didn't need to own a digital download service in order to exploit the content. We're starting to see so many potential digital distributors of our content, I think that's really what the studios acknowledge.

Jeff Logsdon - BMO Capital Markets

Is that really why spend the capital to be in the server farm business?

Jon Feltheimer

I think as we built this company we've often said we didn't bid on any one platform, and I think really that's what's going on. There are so many different ways to distribute. There was no reason to own and particularly it is difficult for that many studios to get along and really create a growth strategy, so I just think this was, just get the product out with everybody.

Operator

Your next question comes from Tom Eagan - Oppenheimer.

Tom Eagan - Oppenheimer

On P&A for the year, I roughly remember $290 million being the guidance for the year. Is that still a valid number? Secondly, what is the impact financially if at all on the Canadian fund? I know there was an impact EBITDA and free cash flow from the other fund. What about the Canadian fund? Lastly, regarding changes to day and date video-on-demand release, and you guys decide to go sell directly into international markets, how much of that is trying to avoid the piracy, so as you decide to distribute again VOD day and date directly, how much will you gain from offsetting piracy? Thanks.

Michael Burns

P&A is on track exactly where we forecast. Again, this was a year we decided to increase the slate because we knew we had slate financing and a partner in the risk of that P&A investment.

In terms of Quebec, what's interesting about that facility, it is for things we shoot in Quebec that slate financing can actually sit on top of our Goldman financing giving us kind of a double benefit and reducing the risk further than that.

In terms of day and date in general, I think probably is somewhat of a defense against piracy but clearly not the only one. That's not our game plan in international expansion is not in order to avoid piracy, it is in order to increase our margin from our product which is exactly what our experience in the UK is providing for us.

Operator

Your next question comes from Gould - Natexis Bleichroeder.

Alan Gould - Natexis Bleichroeder

I was wondering if you can tell us the impact of what the new financings will be on your production plans, and how many films you plan on doing this year and how big the slate may be next year because of these financings?

Jon Feltheimer

I think that you can assume that in terms of our P&A marketing which kind of gives you a pretty good sense what the slate will look like, I would say next year's slate will probably either be steady state in terms of our P&A or actually be a reduction. I think you're probably talking about if we release 20 pictures this year, you're probably talking about 17 or 18 next year. So I don't think you will see growth in that respect.

I couldn't tell you right now. There is too many moving pieces, exactly what our investment in film would be, but I would say maybe the same as this year would make a certain amount of sense.

Alan Gould - Natexis Bleichroeder

Next, the stock is cheap today, it was cheap a month ago. Wondering why you decide to use stock rather than cash given the amount of cash when you made your investment in Break.com?

Jim Keegan

It was a decision we went back and forth on. We wanted the Break people to have a little vested interest in Lions Gate, but also it is important to note it was less than 1.3% of the fully diluted shares. The stock pricing on that deal was $11.11, certainly not in the $9 range.

Alan Gould - Natexis Bleichroeder

Steve, can you just give us your experience on day and date VOD? I think you're participating in the Comcast trials. What impact you've seen it have on both the rental and sell through of your product?

Steve Beeks

We are participating in that. As we mentioned before, any discernable cannibalization on rental and sell through has been de minimus. We are participating in further test in the fall in Atlanta which is a much bigger market and I think it will give us a lot more data. Until we see the results of that I think its too early to really make a determination, but the initial results were very positive in that it looks like that does actually increase, by increasing availability it is increasing the size of the home entertainment pipe.

Alan Gould - Natexis Bleichroeder

Some of the big said it has helped the sell through because of the marketing. Are you seeing that as well?

Steve Beeks

I can see that. I can see that as an argument. That's why we're waiting for Atlanta because that's a really big sell through market, and I think the tale would be told in the next test.

Alan Gould - Natexis Bleichroeder

My last question, Felt, I think you said you talked about House of Payne stabilizing its ratings. Can you tell us where the ratings are for House of Payne and what the status is for Tyler Perry's Meet the Browns TV show as opposed to the movie which he has been talking about on his website?

Jon Feltheimer

The Meet the Browns television show I can't talk about right now. There is no deal done for it, but obviously the experience we're having right now with Turner in terms of House of Payne is very positive. I think in the demo if you will, you're talking about somewhere between 1.3, 1.5, in that ballpark which is very significant. I think it was reported overall kind of 3 million viewers: it was the highest rated debut of any original show on cable. I believe it still holds that crown.

I can tell you the ratings right now have stabilized. The ratings right now are considerably higher than where our base case was, and you're talking about well over $100 million, could be $200 million of overall revenues back to us, and Debmar as we go down the road, it could even be more than that. We're quite pleased with he show. Tyler has done an amazing job as he does for everything, obviously between his talk show on the web as well as his plays as well as his films and television show, he continually is cross-promoting himself and his audience. So we're very pleased with it, and I think if we continue down this road, I think the idea of Meet the Browns will definitely be a strong possibility.

Operator

Your next question comes from Barton Crockett - JPMorgan.

Barton Crockett - JP Morgan

I wanted to ask a question about Saw 4 and if you can give us a sense if you have any data that would suggest how it is tracking, what the level of interest in, particularly in light of all the concerns in the press and also in the performance of the some of the more violent horror movies so far.

Jon Feltheimer

I have read a couple articles about the horror business being over, and that certainly is not really the case. There are certainly some examples of films that have performed very well, including, for example, "1408" which was approaching over $70 million of box office. The early indications we put out there, various things we put on the web, bits and pieces of Saw lead us to believe the franchise is still very robust.

Barton Crockett - JP Morgan

Switching gears here a little bit, I was wondering if you can comment about the competitive environment in terms of getting space and exposure in the theaters. It seems for the past two quarters Q2, Q3, have had a big surge of very big budget movies, and I am just wondering if there is any potential concern you guys would have over time that that may make it more difficult for the smaller movies that have historically been your specialty to really get enough exposure in the theaters?

Jon Feltheimer

We probably would have liked to book a few more screens on Bratz. Bourne was even bigger than anybody anticipated. We were competing in certain theaters to get one print in when they were looking at the third print of Bourne. I would say your question is much bigger concern to some of the other new entrants and people who can't afford the kind of P&A commitment we can nor have the track record with the theaters. I can guarantee you we're having no trouble booking screens for War. We'll have no trouble booking screens for really all of the releases we have through the rest of the year, so I would say that it is a crowded marketplace, and of course that's a concern for us and all of the major studios to be perfectly honest, but I think that we're as well positioned as anybody to deal with that.

Barton Crockett - JP Morgan

There has been a lot of talk, some of the big budget movies going after the 3D effect, and I am assuming that's something you would not really see fitting into your slate, but I was just wondering if you can comment on that?

Jon Feltheimer

Well, it does seem to be providing for certain very large budget pictures, incremental revenue. I don't think we have many if any currently slated that we would be dealing with that 3D issue.

Barton Crockett - JP Morgan

One of the video rental companies, Movie Gallery, the way their equity and bonds are trading, there is clearly some liquidity questions there. Can you give us a sense of your exposure and how you're protecting yourself there, and what your view is on that?

Jim Keegan

Our exposures from the accounting standpoint I am now treating them on a cash basis. When I receive revenue, it is very, very small. It is small from a financial exposure, I am going to say almost none. I am not letting anything flow through that could have a negative impact.

Operator

Your next question comes from Eric Handler - Lehman Brothers.

Eric Handler - Lehman Brothers

First, with the rising number of studios that are starting to pop up now, how are you seeing that affect the M&A market for library product? Secondly, looking at the overall release schedule for the industry, some of the films that have been on your release schedule previously such as Trade and Right At Your Door, also Skinwalkers and First People are now with films that are going to be put out by Roadside Attractions and After Dark. What is the P&L impact by selling those films to other studios?

Michael Burns

When you talk about new entrants in the library pricing, are you talking about other people including private equity firms buying library?

Eric Handler - Lehman Brothers

Yes, correct.

Michael Burns

Certainly there is not a lot of library product out there to buy is the first answer because that was a consolidation play that we put into place about seven years ago, but there are, as Steve mentioned in his comment, we've had a great success renewing our distribution agreements and actually adding to library. As far as After Dark, and also you mentioned Roadside Attractions, we do believe that in some instances they're better equipped to release pictures, certain types of pictures, and so I will have Jim talk about the financial impact of what we do there.

Jim Keegan

Sure. With Roadside, if they're releasing a picture, I may be supplying the P&A for it, and therefore I will be fully flowing through my P&L. The After Dark situation is a little different as they are incurring the P&A and we'll have to analyze to see if any portion of it flows through to me. A big portion may not flow through but we're analyze each film on a case by case basis.

Michael Burns

Primarily the After Dark Deal, They're making an investment in the films as well as incurring most of the P&A risk. In terms of Roadside, the strategy for that was a little bit different. The strategy there was that we would let a company better equipped to handle smaller pictures and not take our focus away from our larger releases. But in terms of the overall economics, all of their pictures, not just ours, but all of their pictures we will handle their video, so we will essentially be getting a distribution fee that obviously will mitigate the P&A costs of our own pictures distributed through them.

Eric Handler - Lehman Brothers

When the 48 hour restrictions is lifted, at $9 should we assume that you guys would consider being active buying back stock?

Jon Feltheimer

We think it is at $9 is obviously a level we're interested in, but obviously we don't talk about when we're in the marketplace.

Operator

Your next question comes from Andy Nasr - Raymond James.

Andy Nasr - Raymond James

When you mentioned the six films you've released so far in fiscal '08 will approximate a cumulative loss of $50 million, I was wonder if that was your first cycle distribution? My next question was just pertaining to the timing of television deliveries. Wondering if revenues are going to be smoothed out during the balance of the year? Lastly I was hoping you could elaborate on the economics of the next five pictures you're releasing through October, curious about the P&A spend and if there are any arrangements that limit your upside or downside?

Jon Feltheimer

The numbers that is Michael referred to was the ultimate loss on those pictures, we generally have a seven-year period. That's the ultimate life. Television revenue actually, we have spent so much money in our Q1 you will see a lot of that revenue disproportionate amount, coming in Q2. You will see a huge spike in my television revenue in Q2.

Jim Keegan

I am not really sure how to answer that last question. We've got profit participants in all of our movies. I would say the movies that have significant upside potential, the ones that we actually own and own most of the back end would be Good Luck Chuck, Saw and War. Those would be the pictures that have significant upside potential to us. In each case, wide release pictures for us usually range in terms of our P&A exposure. They usually range from around $20 million to call it $27.5 million, and I think you could assume sort of that range for all of those pictures.

Operator

Your next question comes from David Bank - RBC Capital Markets.

David Bank - RBC Capital Markets

A quick follow-up on what Felt was talking about before in terms of original cable series and that's where you guys play and where you've seen so much success. How do you think about moving into providing TV series for the network side of the business? Is there a market outside their own studios, and do you think that's a place you could ever play given your record of success with the cable stuff?

Jon Feltheimer

The answer is yes and no. I do think what's interesting for all of these vertically integrated studios is that clearly they look at when they have a successful series they love that they own it, but when they have a failure, and obviously the failure rate is a lot higher than the success rate, it is a double hit to them in terms of earnings, and I do think they're looking at ways to mitigate that. I think obviously we have proved that we are a good lower cost provider, that we're really great at accessing provincial/state benefits, and again the Quebec facility that we put in place is being used right now for a television series, it could be used for others. We are working on frankly another fund right now that would be most specifically for television. So I do think we could be potentially a strong partner.

In truth we have been offered quite a few co-productions with vertically integrated studios over the last year, and we basically have passed on all of them because we don't want to be considered a bank for a studio, and frankly, we were not impressed with the things that we were being offered. I do think going down the road, it is very possible that we could do some co-productions with vertically integrated studios.

We still believe, however, that where our bread and butter is, where we can get longer series orders where the series will stay on the air longer, where they will be more open to us filming in the places where we want to film as opposed to where they tell us to film that our greatest opportunity is to be the number one supplier for cable as opposed to being the number eight or number nine supplier for broadcast.

Operator

Your next question comes from Michael Kelman - Susquehanna Financial Group.

Michael Kelman - Susquehanna Financial Group

Thanks. I just wanted to dig in a little more on the VOD revenue because clearly growth in this quarter was significant. What's driving the growth? Is it better and greater distribution? Is it better marketing, both either from you or the distributor, or is it you playing around with some of the windows a little bit like you're doing with Comcast. What is the principal driver for the significant growth?

Steve Beeks

It is not really related to windows but it is a combination of all the other factors. It is of course a certain extent the factor of the films available during that particular quarter, but more so really has to do with growing acceptance of that market among consumers, and the increased focus on the cable operators are putting on it on VOD, so I think you're going to see continued growth in that medium throughout the next several years.

Jon Feltheimer

If you look at Comcast VOD platform, I think they would tell you they have tremendous growth overall in their platform, and as I said earlier, the results we're seeing on FEAR.net very much say that the viewers are wanting to watch on demand, and that says to us as we look down the road at pay television, VOD, all of those windows, that on demand viewing is going to be very significant.

Michael Kelman - Susquehanna Financial Group

Does this encourage to you look to put together other types of packages like FEAR.net for other genres?

Jon Feltheimer

Yes, indeed, we're already having that conversation.

Operator

Thank you. Ladies and gentlemen, we have time for three more questions. We'll go to the line of David Joyce - Miller Tabak.

David Joyce - Miller Tabak

Thank you. As far as the TV production is concerned, how many series are you producing this year and how far into the year do you expect the costs on the production to hit free cash flow? I know the bulk of it is in the first quarter, into the second and spill into the third. Finally, how has the DVD conversion ratio been trending? Thanks.

Michael Burns

First on the costs on the last question, very front-loaded in costs. A big portion of our television revenue is going to be coming in to the first, actually next quarter will be large, so the production costs will be front loaded for TV in Q1 and Q2, very much leveling out to close to very low as we go throughout the rest of the year.

The different revenue, how many series, are you aware of the names of all the series?

Jon Feltheimer

I think the total is eight or nine throughout the year, something like that depending when a couple launch, and in terms of DVD conversions, Steve?

Steve Beeks

Our DVD conversion ratio is still over 1.1 measured over the last year or so. Obviously titled like Pride now coming into the mix and some of the other titles to the conversion rate will probably maintain at that level, if not go up. So news is still good in that front.

Operator

Your next question comes from William Kidd - Wedbush Morgan.

William Kidd - Wedbush Morgan

A question about the quarterly dispersion of your loss guidance. Last quarter when you announced the fiscal loss for 2008 I walked away with the impression some of that loss was due to increased spending on your fiscal 2009 film slate following in fiscal 2008. Obviously, we started with a large Q1 loss and you're talking about the next five films being profitable.

Am I correct in understanding that we start with a loss, we see profitability, and then the tail of the year we give back some of these Q2 gains? Or is my understanding not correct, so in other words I am looking for a little bit more clarity on the distribution of future quarterly earnings?

Jon Feltheimer

No. You're a little off on that. There will be significant P&A expense in second quarter as well, so you would expect a negative quarter, and you will see significantly positive quarters in Q3 and Q4 as usual.

Operator

We have no further questions.

Jon Feltheimer

Thank you all. We'll speak with you on the next call.

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