Lionsgate F2Q08 (Qtr End 9/30/07) Earnings Call Transcript

Nov.12.07 | About: Lions Gate (LGF)

Lionsgate Entertainment Corp. (NYSE:LGF)

F2Q08 Earnings Call

November 12, 2007 9:00 am ET

Executives

Peter D. Wilkes - Senior Vice President, Investor Relations

Jon Feltheimer - Co-Chairman of the Board, Chief ExecutiveOfficer

Michael Burns - Vice Chairman of the Board

Joe Drake - CEO, Mandate Pictures, Co-Chief OperatingOfficer and President, Lionsgate Motion Picture Group

Steven Beeks - President, Chief Operating Officer; Presidentof Lions Gate Entertainment Inc.

James Keegan - Chief Financial Officer, Principal AccountingOfficer, Chief Administrative Officer

Analysts

Michael Savner - Banc of America

David Miller - SMH Capital Markets

Doug Creutz - Cowen & Company

Lloyd Walmsley - Thomas Weisel Partners

Alan Gould - Natexis Bleichroeder

Thomas Eagan - Oppenheimer

Barton Crockett - J.P. Morgan

Andy Nasr - Raymond James

Matthew Harrigan - Ferris, Baker Watts

David Joyce - Miller Tabak & Company

David Bank - RBC Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Lionsgatesecond quarter earnings and analyst conference call. (Operator Instructions) Iwould now like to turn the conference over to your host, Senior Vice Presidentof Investor Relations, Mr. Peter Wilkes. Please go ahead.

Peter D. Wilkes

Thank you for joining us. Jon Feltheimer, our CEO and therest of the management team will have opening remarks and then we’ll open thecall to your questions. The matters discussed on this call includeforward-looking statements. Such statements are subject to a number of risksand uncertainties. Actual results in the future could differ materially andadversely from those described in the forward-looking statements as a result ofvarious important factors, including the risk factors as set forth inLionsgate's quarterly report on Form 10-Q filed with the SEC on November 9,2007, and Lionsgate's annual report on Form 10-K filed with the SEC May 30,2007.

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

Jon Feltheimer

Good morning, everyone. I am joined here this morning by MichaelBurns, our Vice Chairman; Steve Beeks, our President and Co-Chief OperatingOfficer; Jim Keegan, our Chief Financial Officer; and Rick Prell, our ChiefAccounting Officer. I would also like to welcome Joe Drake, who has joinedLionsgate as President of our Motion Picture Group and Co-Chief OperatingOfficer, and who is joining our call from New York this morning. Good morning,Joe.

Joe Drake

Good morning, everyone.

Jon Feltheimer

Okay, Joe will have some comments later on in the call.Operationally, this was a very strong quarter for all of our businesses. We notonly had the strong theatrical run we forecast, but our DVD over-performance inthe quarter on films that under-performed in theaters earlier in the year hasmade up a lot of lost ground.

On our last analyst call, we projected that in order to stayon track for our financial targets, we would need our next five wide releasesto collectively gross $175 million at the box office.

With the strong performances of War, 3:10 to Yuma,Good Luck Chuck, Tyler Perry’s Why Did I Get Married?, and Saw IV, these filmswill gross about $230 million at the box office in aggregate. Over the past twomonths, Lionsgate has been the number one studio at the domestic box officewith an 18% market share and three of our last four films have debuted atnumber one.

But in terms of our financials, the price of success issometimes inverse. Our marketing spend on 3:10to Yuma, for example, will increasefrom $27.5 million to $38 million in success, including our Oscar campaign. Asa result, it will have a great negative impact in the current fiscal year butit will be more profitable for us on an ultimate basis.

Ultimate profitability is obviously a key benchmark ofsuccess for us. Here is how we look at the financial contribution from our filmbusiness. In order to achieve our target of more than $100 million in free cashflow every year, we expect our motion picture slate to contribute a minimum of$100 million in ultimate profit each year.

If our films for the rest of the year perform as anticipated,this year’s slate should contribute approximately $120 million in ultimateprofit, 10% to 20% more than last year’s slate.

Over the long term, this positions us well for our goals ofcontinued revenue growth, consistent free cash flow and increasing long-termshareholder value. Over the short term, it made for the strongest revenuequarter in Lionsgate's history. We reported more than $343 million at the topline in the second quarter, on our way to over $1.1 billion in overall revenue.And this growth was achieved according to the Lionsgate business model -- allsingles and doubles without swinging for the fences.

With the continued expansion of our slate, we also had andexpensed our largest quarterly theatrical P&A spend ever -- approximately$120 million, even though we had a partner, Pride Pictures, who shared $84million of that on a 50-50 basis.

Our P&A spend covered our four wide releases in thequarter, as well as some of the advanced P&A on Tyler Perry’s Why Did I GetMarried? and Saw IV.

Over the next two quarters, our marketing spend will evenout and our earnings performance will swing to positive, as is typically thecase with our back-loaded fiscal years. We expect to finish our fiscal year instrong fashion, over-performing our key metrics of free cash flow and revenuewith our balance sheet in its strongest position ever at fiscal year end.

Michael will now give you more color on our films in thelast quarter and into fiscal ’09.

Michael Burns

Thank you, Felt. Before I get into the strength of ourrecent and upcoming slate, I would like to update you on our investment andrecent results at break.com. Break has proven itself an invaluable platform forintegrating Lionsgate's content and advertising, attracting a record-breaking$18.4 million unique monthly visitors and attaching new advertisers to thesite, Break has achieved impressive third quarter growth of 90% over Q2. Wehave also recently enjoyed similar success with the investment we made inRoadside Attractions, which just had a solid success with the platform releaseof Bella, which had a stellar opening weekend, earning $1.3 million at the boxoffice in just 165 theaters.

As Jon noted, the five films that constituted the core ofour release scheduled, 3:10 to Yuma, War, Good Luck Chuck, and Why Did I GetMarried?, as well as Saw IV, performed well relative to our expectations. Evenas we ramp up our award campaign for the acclaimed 3:10 to Yuma, there is moreto come.

As we told you a few months ago, our theatrical slate financinghas helped allow us to spread our release schedule over the full 12-monthcalendar year, allowing us to capitalize on competitive opportunities andrelease dates that crop up throughout the year, including the January to Marchquarter. In fact, for the first time in our history, we have a minimum of threewide releases slate for our fiscal fourth quarter.

Felt already noted that this year’s slate is expected tocontribute approximately $120 million in [EBITDA] profitability. Our box officeafter two quarters currently stands at slightly over $300 million, meaning thatwith an additional cumulative $100 million from our three upcoming widereleases, we will reach our goal of $400 million in North American box officefor the full year.

That said, we certainly anticipate doing better than a $33million average box office for the following three upcoming films: in January,Rambo is back with a vengeance. Starring and directed by Sylvester Stallone, weexpect Rambo to join our growing roster of recent hit action films. The initialreaction to the Rambo trailer playing in theaters in front of Saw and all overthe web, including break.com, has been terrific.

After starring for us in Good Luck Chuck, Jessica Albareturns as a lead in the thriller The Eye, slated for a February 1st release.We have a great marketing campaign for the film launching as we speak and weare delighted to have Jessica back again in the Lionsgate family.

Coming on the heels of his $55 million North American boxoffice hit, Why Did I Get Married?, we will release Tyler Perry’s Meet theBrowns on March 21st. Tyler continues to be incredibly prolific, generating twofeature films every year for us.

Fiscal ’09 is shaping up to be equally exciting. As anexample of our continuing commitment to deliver diverse product offerings, I amhappy to report that we were thrilled with our first look at the action-packedadventure movie Forbidden Kingdom, featuring the formidable pairing of Jet Liand Jackie Chan. On the comedy front, we will be releasing My Best Friend’sGirl in fiscal ’09 as well. The lovely Kate Hudson stars in this very edgycomedy with Dane Cook who, as you know, has a great history with our companywith a string of very profitable pictures.

We have already staked out a January 2009 release date forThe Spirit from director Frank Miller of Sin City fame. The Spirit has a trulystar-studded ensemble of players, including Samuel Jackson, Gabrielle Macht,Eva Mendes, and Scarlett Johansson.

We are pleased to announce that we have two more films fromTyler Perry in fiscal ’09 after Meet the Browns, including a film based on hismost popular Madea play of all, Madea Goes to Jail.

The next Publisher film from the Lionsgate/Marvelpartnership is currently shooting in Montrealand The Game, an intense action film that is a Lakeshore co-production with usstarring 300’s Gerry Butler is now shooting in New Mexicoand is being directed by the team that gave us the hit Crank last year. Boththe new Punisher and The Game should prove to be an important fiscal ’09release for us, while continuing our momentum in the action arena.

And finally, what late October would be complete withoutanother bloodletting from Lionsgate, so look forward to Saw V arriving again atHalloween.

For those of you concerned about the impact of the writers’strike, I hope you can see now, in the words of our head of motion picturesproduction, Mike Pasternak, we are locked and loaded with the vast majority ofour fiscal ’09 theatrical release slate already in place.

Besides the strong portfolio of films wrapped or currentlyin production, in the event of a prolonged strike we remain in a competitivelystrong position because of our nearly 12,000 title library throwing outsignificant evergreen income, our filmed entertainment backlog near itsall-time high at $340 million, and an extremely robust and un-levered balancesheet.

We are not changing our game plan and continue to stickclosely to our model of mitigating risk, efficient production, targetedmarketing, repeat talent relationships, and teaming with strong creative andfinancial partners. Jon.

Jon Feltheimer

Thank you, Michael. We not only see substantial growth inour North American motion picture business, but in all of our other businessesas well, including international. We’ve just opened an office in Australiawhere we have established motion picture, television and home entertainmentbusinesses operating under the Lionsgate brand in conjunction with three verystrong strategic partners: Hoyts, Sony, and the Movie Network.

We kicked off our new distribution alliance there with therelease of Saw IV a few weeks ago, marking the second-highest opening for ourpartner Hoyts, which has been serving the Australian market for more than 30years. We are also distributing video product under the Lionsgate brand withSony as our partner, and we have just formed a pay television deal with TheMovie Network for our films and several of our television series.

Our entry into Australia, coupled with our successfullygrowing Lionsgate U.K. operations and our alliance with Maple Pictures inCanada gives us a strong presence in the world’s our largest English-speakingterritories.

The films that we self-distribute through Lionsgate U.K.continue to over-index their North American box office performance by nearlytwo-to-one on a per capita basis, just like Good Luck Chuck, which was numberone at the U.K. box office this weekend. We have focused our self-distributioninitiative there on our strength in action, teen comedy and genre movies andthe films that we have been releasing have been significantly more profitablethan when we sold our films to third party competitors.

In addition to our strength and presence in English speakingterritories worldwide, we are also building on our momentum in the English andSpanish language marketplace, with our new strategic relationship withTelevisa, the largest Spanish language media company in the world.

We will co-produce feature films and television programmingwith Televisa, both here and Mexico, always taking into account Televisa’sprior contractual commitments. We are delighted that they have chosen Lionsgateto help them access the English language U.S. market, just as they are helpingto open the Latin American market to us. You’ll be hearing more about thispartnership from us in the months to come.

Mandate is yet another example of our international growthstrategy. We acquired Mandate in part because they operate one of the strongestthird-party feature film businesses in the international marketplace. But likeLionsgate, they also operate with an entrepreneurial business model that has madethem a profitable and consistent supplier of films to all the studios. Webelieve that their addition to the Lionsgate family brings a whole newdimension of growth potential to our motion picture business and a new profitcenter to our company.

I’d like to ask Joe, who’s returned to Lionsgate asPresident of our Motion Picture Group and Co-Chief Operating Officer, tobriefly describe the strategic potential of the Lionsgate/Mandate combination.Joe.

Joe Drake

Thank you, Jon. It’s a pleasure to be part of the Lionsgatefamily again. My decision to join Lionsgate was made with a specific viewtowards the potential synergies that could be achieved and the value that couldbe unlocked through an alignment of Mandate Pictures and Lionsgate.

Now that I’ve been aboard for eight weeks and had theopportunity to see Lionsgate in action, I am even more excited about the growthwe can create together. I would like to touch briefly this morning on theMandate business model, how we operate and fit into Lionsgate, as well as toshare a few thoughts on some of the areas of focus and growth going forward.

Mandate does two things; it acquires, develops, packages,and licenses broad appeal commercial films for worldwide consumption and it isone of the premier international sales organizations in the business today.

The fundamental difference between Lionsgate and Mandate isthat Mandate does not self-distribute the films it makes. Its primary customersin North America are the major studios and internationally, it licenses itsfilms on a territory-by-territory basis to the major studios and majorindependent distributors.

Although at first glance it may appear counter-intuitive,post acquisition Mandate is continuing to develop and product is movies, notfor Lionsgate but for its studio partners such as Sony, Fox, New Line andothers.

The idea is simple. In addition to Lionsgate's 18 to 20films a year, we are adding four to six Mandate pictures per year to thecombined business. By distributing these through third-party major studiosinstead of Lionsgate, we are effectively expanding Lionsgate's distributionreach to as many as 24 films annually without adding infrastructure, overhead,or P&A exposure.

This innovative approach is a win-win for everybody. We arealso, of course, adding four to six pictures each year to the Mandate library,which already holds more than 20 titles -- I’m sorry, 200 titles. Mandate hastwo branded production operations -- Mandate Pictures and Ghost House Pictures.

Ghost House is a 50-50 joint venture between Mandate and SamRaimi, the highly acclaimed director of the Spider-man movies, and his partner,Rob Tapert. This company was formed solely for the creation and distribution ofhorror content and to date has achieved five consecutive number one box officereleases with The Grudge franchise, Boogeyman, Messengers, and most recently,30 Days of Night, which opened October 19th of this year.

Then there is the Mandate brand, which has been responsiblefor Mark Forrester’s Stranger Than Fiction, starring Will Ferrell; Harold andKumar Go To White Castle; and an exciting upcoming slate, which includes Mr.Magorum’s Wonder Emporium, starring Natalie Portman and Dustin Hoffman, whichwill be release by Fox Walden this coming Friday; Juno, starring Michael Ceraof Superbad and acclaimed young actress Ellen Paige which is slated for aDecember 15th release through Fox Searchlight; Passenger, starring the DevilWears Prada’s Anne Hathaway, to be released by Columbia Pictures in 2008; andthe eagerly anticipated sequel to Harold and Kumar, which will be released onFebruary 8th of next year.

To date, the combined Mandate/Ghost House slate has achieveda worldwide box office of more than $0.5 billion with a lot more to come.

In addition to its production operations, Mandate is one ofthe top international sales organizations in the business. The internationalsales business, and in particular the third party representation business, isone of a number of areas where we felt we could unlock significant value bycombining operations with Lionsgate, and in this area specifically we’vealready seen results.

Upon closing the acquisition, we immediately consolidatedthe Lionsgate and Mandate international sales businesses under the Mandate nameand appointed an exceptional executive, [Helen Lee Kim], to run the operation.In just six weeks of working together, this new team was able to attract threenew high profile properties for third-party representation: a broad romanticcomedy starring Renée Zellweger; a supernatural thriller starring KevinCostner; and a big budget adventure fantasy starring Heath Ledger.

One week ago, we took these three new films to the Americanfilm market, along with two films from Lionsgate's slate, Brothers, starringJake Gyllenhaal, Tobey Maguire, and Natalie Portman; and a romantic comedy, MyBest Friend’s Girl, starring Kate Hudson and Dane Cook. The results werefantastic.

Our newly combined effort resulted in the single biggestmarket that either Lionsgate or Mandate has ever achieved, with gross sales ofjust under $60 million.

With time and focus, we believe that there is stillsignificant growth to be had from this third-party representation business.

Another area where we believe there will be value creationis through the sharing of our broad but largely distinct set of creative andbusiness relationships. We are already working to monetize the expanded paletteof relationships available to both our companies. As an example, LionsgateTelevision, run by Kevin Beggs, is currently recognized by the creativecommunity as one of the most interesting and innovative places to createtelevision content, largely due to such cutting edge series as Weeds andMadmen.

The ability to offer a Lionsgate Television opportunity toour Mandate talent relationships is a blue chip calling card for the Mandateteam and should result in opportunity for Lionsgate Television as well. Webelieve the same opportunity exists to drive value through Mandaterelationships at the Lionsgate Home Entertainment business, and althoughLionsgate and Mandate are running their respective feature businesses asseparate entities with separate business models, we suspect that we’ll be ableto pool our talent relationships in this area as well.

Finally, I would like to touch on Lionsgate's theatricalacquisition production and distribution operations. At Mandate, we had theopportunity to work very closely with all of the major studios and to gain anin-depth view of how each of them operates.

In the short time that I’ve been at Lionsgate, I’ve beenable to watch the domestic theatrical operation release three number one boxoffice hits, stand as the market leader for two months in a row, and at anygiven time occupy as many as 20% of the quality screens in the country.Frankly, I’ve been amazed at the real capability this company has to competehead-to-head with the major studios on any given weekend with a fraction of theoverhead.

The company’s domestic theatrical business was alreadyperforming well before I arrived, so I see my primary job in this area asenhancing rather than changing our operations. What we need to do now is focusrigorously on the product mix and the deal mix.

With this theatrical team, I am sure that we will find waysto unlock even more value for each theatrical slot without taking on undue riskor increasing our P&A exposure.

Now that we’ve completed our heavy fall release schedule,we’re planning an offsite strategy session for early December so that we canhave the opportunity to get more granular about the fiscal 2009 slate. I lookforward to updating you on our thinking on the next call. Jon.

Jon Feltheimer

Thank you, Joe. As usual, our home entertainment group hascontinued to perform extremely well with its full array of products, includingnew releases, catalog exploitation, and direct to video. Steve Beeks will takeyou through the quarter and provide a view of the current video and digitalmarketplace. Steve.

Steven Beeks

Thanks, Jon. This was a strong quarter for the homeentertainment division for both packaged media and digital delivery, driven bynew releases that continue to over-index on DVD and our ability to generaterevenue and margin from our library better than any company in the business.

We are again on track to generate approximately $250 millionof library revenue, translating into $90 million in free cash flow with steadywholesale prices and strong, stable margins.

In our new release business, the Q2 results are a goodexample of what we consider to be our core strength, which is extractingmaximum value from our products. All of the theatrical releases we released onDVD during the quarter over-indexed their box office performance and threepictures, Pride, Delta Farce, and The Condemned, had extraordinary results.

We told you on our last analyst call that theunder-performing films in the first quarter would ultimately lose approximately$15 million in aggregate. But the DVD results of those pictures are so goodthat we now expect that our under-performing Q1 films will lose in aggregateless than $5 million, and may even reach profitability on an ultimate basis.

Not only is our business strong, but we are operating in amore stable market environment than expected as recently as a year or two ago.Even though consumer spend for packaged media in the first half of the calendaryear was down about 4%, that was mostly a function of the product coming tomarket, not broader industry trends, and we remain confident that the full yearfor the industry will end up essentially even with last year.

We’ve already seen significant improvement in calendar Q3,which was flat compared to last year, and the total box office of releasescoming to the DVD market in calendar Q4 is 17% greater than in Q4 last year,which we expect to translate into Q4 growth in DVD revenue.

This performance reflects only the first revenues fromhigh-definition DVD, which is a market that will be large, will operate athigher margins, and will serve as a big growth driver in the future.

While we still don’t have one unified format for theindustry, all the available trends seem to confirm that we made the rightchoice in selecting Blu-Ray. In addition to offering superior content capacityand copy protection, a major benefit in an environment where digital piracy hasbecome such a concern, it is still outselling HD DVD two-to-one, despite thedefection of one of the other studios.

We expect to see Blu-Ray hardware prices coming down soon,which should further boost growth in the market and substantially highermargins than standard DVD.

Strength and stability in our packaged media business iscomplemented by the long anticipated spike upwards in accretive digitalrevenues. Digital delivery is becoming a much more important and profitablepart of our business. To give you an example of how much the conventional VODand pay-per-view business is changing for us, we would have budgeted 3% to 4%of box office for our anticipated VOD and pay-per-view revenue for a particulartitle in the recent past. Today, releases such as Employee of the Month, Larrythe Cable Guy, An American Haunting, and Crank are generating between 12% and16% of box office in their VOD and pay-per-view windows.

Overall VOD revenues climbed from $12 million in fiscal ’06to $24 million last year and we have already achieved $20 million in VODrevenue in the first six months of fiscal ’08.

Our broadband electronic sell-through revenue also continuesto grow. We’ve had over 2.5 million downloads of our films and television showsto date, with that business expanding in virtually every corner and generatingsignificant revenue from our library. It is worth noting that all of ourdigital delivery business is done with no supply chain and very little overheadsupport.

The new high-definition DVD format coupled with digitaldelivery will stimulate continued growth for our home entertainment business atleast as far out as 2011, the longest timeframe from which we can project witha reasonably high level of confidence.

Every aspect of our business is solid -- catalogexploitation, new theatrical titles on DVD, direct to video product, anddigital delivery. As we leverage our content into new entertainmenttechnologies, distribution platforms, and market niches, we expect our homeentertainment revenues and cash flow to continue to grow and blended marginsfrom our mix of packaged media and exciting new digital applications toincrease over time.

Now back to Jon.

Jon Feltheimer

Thank you, Steve. Our television business also performedvery well in the second quarter, generating revenues of $109 million andkeeping us on track for our anticipated television production revenue ofapproximately $200 million for the year.

Weeds has been renewed for a fourth season, bringing ourtotal to 52 episodes and keeping it well-positioned for syndication next yearor the year after. AMC has picked up a second season of Madmen, which we willrelease on video May 2008. Just like Weeds, we expect it to do very well on DVDand bring fresh eyeballs to this critical favorite.

We recently sold 13 episodes of our new horror anthologyseries, Fear Itself, to NBC. Concurrent with its network airing, the show willalso be available as fresh programming for Fear Net, strengthening both theLionsgate and Fear Net brands.

Fear Itself is a prime example of our ability to crosspromote new content on our recently launched digital media distributionplatforms.

We are also launching 26 episodes of our Speed Racertelevision series on Nickelodeon’s Nicktoons Networks, with movies culled fromthe television episodes showing on Nickelodeon itself.

Our series will debut one week before the major WarnerBrothers motion picture produced by Joel Silver, and Speed Racer is alreadyturning out to be a licensing bonanza. We have over 25 licenses covering allcategories of merchandise, with the latest being a deal with Toys R Us with aretail exclusive to launch the brand.

We are seeing increasing contributions from ourDebmar-Mercury syndication business. Ira Bernstein and Mort Marcus haveassembled a powerful and diverse portfolio of product for syndication,including House of Payne, Family Feud, South Park, The Surreal Life, and sixseasons of our own paranormal thriller, The Dead Zone.

Debmar also recently announced the syndication launch of twoseries off Discovery Channel: American Chopper and Deadliest Catch, as well asacquiring worldwide rights to Trivial Pursuit: America Plays, for syndication,cable, and perhaps network distribution. We believe that this is anotherimportant property and Debmar will distribute it worldwide through their newlycreated international arm.

Another of our recent investments, Fear Net Channel, hasjust completed a very successful first year. It has emerged as the number onehorror website in America for both uniques and registered users, and itstreamed over 100 million videos on web and VOD since its Halloween 2006 launch,including 10 million views on VOD this past month.

With the addition of original programming such as the FearItself television series, we expect that both its viewership andcross-promotional opportunities will continue to grow.

We are pleased especially to announce that as of Today, CoxBroadcasting has become the latest major cable operator to carry Fear Net. Witha growing roster of carriage agreements with Cox, Comcast, [Bresnen] andVerizon, Fear Net is now available in over 16 million VOD-enabled homes, and webelieve that it is well on its way to becoming a fully distributed digitalnetwork.

We’ve already told you about recent initiatives on theBreak, Debmar, Mandate, Lionsgate U.K., and Lionsgate Australia fronts. Viewedtogether, these initiatives show that we are doing exactly what we should bedoing as a growth company -- significantly growing our top line, reinvestingour generated cash into new businesses, maintaining a healthy balance sheet,emphasizing long-term value creation, and capitalizing on all of theopportunities provided by new technologies, new platforms, and new audiences.

I’ll now open up for questions.

Question-and-AnswerSession

Operator

(Operator Instructions) Your first question comes from theline of Michael Savner of Banc of America. Please go ahead.

Michael Savner - Bancof America

Good morning. Thanks very much. I have a few, if that’s allright. One kind of just broad, strategic, and then a couple quick ones on thequarter. First, can you complete the bridge to what you talked about for themajority of this call, which is highlighting the deals you’ve done over thelast couple of years back from Red Bus to Debmar and now Mandate, all of whichseem strategically right in your wheelhouse and seem to be delivering, but youare still a little bit vague on your longer term financial implications, sayingthat you’ll be above the plan you gave for this year but you didn’t give muchmore granularity.

Can you just take us through the bridge of where you thinkthe financial upside is going to be, both in fiscal ’08 and then probably moreimportantly over the next one or two years to really move you far away fromthis run-rate you’ve been in at around $100 of free cash flow to somethingmeaningfully more?

It seems to be from your commentary you feel comfortablethat’s where you’re going, but if you could just give us a little moregranularity, that would be helpful.

Jon Feltheimer

Well, that’s a pretty broad question. I’ll try to behelpful. We certainly, as you know, we always point everybody to revenue, freecash flow and I would say for the year, we are probably looking at 10% plusoverachievement on both those metrics. That’s with very little contributionfrom any of those businesses -- a little bit from Mandate, probably about $30million on the revenue side, very small contribution, operating cash flow andobviously Fear Net, definitely negative, at least for another year-and-a-half,something like that, I would say.

In terms of Red Bus, Australia, we’ll start to see somepositive contributions almost immediately I think from Australia, given againthat the way we’ve set up, we definitely believe that we’ll be doing better offin that area, in terms of contribution from our titles. And the way we’ve gotit set up, we don’t have to expense our P&A spend there, so that’s a prettyunique setup.

And the U.K., of course, I think we’re going to startdefinitely seeing positive revenue and free cash flow but again, there we areexpensing the P&A and so when you look at titles like Saw IV, Saw III, GoodLuck Chuck, very significantly more ultimate contribution than when we wereselling to third parties. But as we grow that business, you’ll definitely seesome expensing from the P&A side.

I would say overall, this was a growth year for us and thereason it was is we planned it based around our Pride Pictures partnership, sothis year we’ll probably expense close to $375 million, $380 million ofmarketing expense in film and video. And we had a partner for probably close to$100 million of that, and clearly that’s a year where the lines between freecash flow and operating cash flow would diverge. Next year it should swing backfairly heavily in the other direction, if that’s helpful.

Overall, we definitely feel that even with the linescrossing a little bit more, we are definitely heading yet again to another yearover $100 in free cash flow, but it’s still too early to tell you what kind ofgrowth we might expect for next year.

Michael Savner - Bancof America

Okay, thanks. Maybe just one follow-up and I’ll save therest for offline, but you had hinted I think on the last earnings call that youwere expecting a nice pop in television revenue this quarter and it still farexceeded what we were looking for. Can you give us a sense of did any of that-- was any of the timing unexpected to you? If not, maybe more granularity onhow I think about the next two quarters?

Because I would assume you are just giving very conservativeguidance because for the next two quarters, your revenue in television wouldhave to be down about 25% to be at that $200 million level, so -- so I guessthat’s two-part question.

Jon Feltheimer

Jim.

James Keegan

I’ll take that one. It was actually on track and I think Ihad indicated that that would be a large quarter, Q2, and I would anticipateyou’ll see a ramp-down, you can do the math, but Q4 will probably be smallerthan Q3, so it was definitely ramping down but all within plan andanticipation.

Jon Feltheimer

I do think that what you’ll start seeing again next year,and I’ve said this before, is Debmar-Mercury will definitely start contributingmore higher margin revenue in fiscal ’09.

Michael Savner - Bancof America

Okay. Thanks, guys.

Operator

Your next question comes from the line of David Miller fromSMH Capital Markets. Please go ahead.

David Miller - SMHCapital Markets

Good morning, guys. Congratulations on the stellar results.Just a couple of housekeeping items; Felt, investment in film was huge at $247million. If you could just quickly detail what portion of that was within TVspending, that would be helpful.

And then Michael, just another housekeeping item here;correct me if I’m wrong, but I think in your corporate cash, you do have someexposure to adjustable rate preferreds, and within that body, is there anyexposure to the sub-prime CDO imbroglio? I have a feeling the answer is no, butI just want to make sure. I just wanted to hear it from you guys. Thanks verymuch.

James Keegan

Last quarter, we had about $80 million spend on TV. Thisquarter, it’s about $30 million. I kind of indicated that there was a big --going to be a ramp-down on how much we would spend on the TV product, so from80 Q1 to 30 Q2.

Michael Burns

And the answer is no, David, to your second question. Wedon’t have exposure. We moved out over the adjustable rate preferreds over thelast eight months, so I’m happy to report that all of our money, all of ourcash and cash equivalents is sitting in money market funds.

David Miller - SMHCapital Markets

Outstanding. Thank you.

Operator

Your next question comes from the line of Doug Creutz fromCowen & Company. Please go ahead.

Doug Creutz - Cowen& Company

Thanks. Could you talk about maybe -- and this got alludedto a little bit earlier, you had about a single-digit television gross marginin the first half of the year versus I think around 10% last year. Could youtalk about where you think it would wind up for the full year?

And then, over the longer term, where do you see thatramping to and over what sort of time period? Thanks.

James Keegan

Last year, the mix of product was -- I’ll be candor, it wasprimarily revenue from the Weeds series. Because it’s doing so well, it’s ahigh margin, so it’s kind of disproportionately higher. Last year I think I wasrunning like 79% DOE last year. This year, I am running close to 10% margin.Ten-percent margin is more in line as to where the television business is.However, as Debmar-Mercury ramps up, we expect that margin to grow.

Jon Feltheimer

Typically, we are still a reasonably young televisionbusiness and typically what happens, because we can’t up ultimates on the backend of TV shows until they are well into their third, fourth, fifth year, foran early company, a young company, those margins will stay low. Debmar isactually a little bit different. Being mostly a syndication or distributionbusiness, those margins are higher immediately.

So both as the mix changes and as the series mature, you’llsee those margins definitely head up.

Doug Creutz - Cowen& Company

All right, thanks.

Operator

Your next question comes from the line of Lloyd Walmsleyfrom Thomas Weisel Partners. Please go ahead.

Lloyd Walmsley -Thomas Weisel Partners

I was wondering if you could just talk a little bit moreabout the licensing opportunity on Speed Racer and how that might flow throughyour financials.

Jon Feltheimer

Well, licensing will flow through the financials the sameway any revenue stream would. It’s still really early to tell but this doeslook like one of those kinds of properties that should succeed and stay on theair, that it will be -- the margins will be considerably higher because that’san alternative revenue source that typically, we haven’t had on most of ourseries.

Lloyd Walmsley -Thomas Weisel Partners

Okay. Thank you.

Operator

Your next question comes from the line of Alan Gould fromNatexis Bleichroeder. Please go ahead.

Alan Gould - NatexisBleichroeder

Thank you. I have a couple of questions; first, with respectto the timing of your film releases, you seem to be very successful when youare -- during sort of the off-season for the majors and I notice there is nobig Christmas type releases. Is that what we should look at going forward,expect that you are going to avoid the Thanksgiving to Christmas and theMemorial Day to Fourth of July type periods?

Jon Feltheimer

Well, I think that is definitely typically our game plan,but that doesn’t mean that it will always be that way. I think the key thing isto be -- for company, to be opportunistic and almost every one of the titlesthat we just were successful with, the last releases, we actually moved therelease date on each one of those at least one time. A lot of people, forexample, on 3:10 to Yuma felt that that September 7th date was really going tobe a soft weekend, and I don’t think there are soft weekends anymore, actually.I think there is an audience out there that is always available to see movies,if they are movies that look interesting to them, that are well-marketed andcertainly that’s what we found we got -- we got 310 out of a difficult areawhere there were a tremendous amount of releases later in October and moved itup really significantly, almost four weeks.

I think you can’t say never, but I will say again it’s theold Ty Cobb’s philosophy of hitting them where they ain’t. So more or less, Iwould agree with you.

Alan Gould - NatexisBleichroeder

And Felt, your unreleased -- your completed but not releasedfilm cluster up to $81 million, up from $19 million six months ago. I assumethis is just preparing for the strike?

James Keegan

No, no, those are the films that we have coming out in thecurrent quarter. We have some large releases coming out so that’s just the bigreleases, the 310s, or the Saw IVs, things like that that were occurring. Thoseare somewhat high budget films.

Alan Gould - NatexisBleichroeder

Jim, I would have thought all those would have beenreleased. I’m talking about completed but not released films. The only one thatwould have been completed and not released at September 30th I would havethought would have been Saw IV, which is not the most expensive film in theworld.

Michael Burns

While Jim looks that up, Alan, what I was going to say isthat to your point, however, as I mentioned, we certainly have either inproduction or in the can the vast majority of our 2009 release slate.

James Keegan

And just to answer the question, Why Did I Get Married?,fairly significant, a large amount, and we had a lot of Mandate product thatwas gearing up, getting ready to release. Those two items, I don’t want to betoo specific, totaled $65 million. And a big chunk, I’ll be a little morespecific, if you look at the Mandate, you can see that Mandate product, when webought them, was $62 million of film costs coming in, a lot of that completed,not released.

Jon Feltheimer

I would say most of it is the Mandate product, actually.

Alan Gould - NatexisBleichroeder

Okay, and a last thing, Felt; who’s playing the [inaudible]for Hollywood this time?

Jon Feltheimer

Maybe it’s Arnold. No, I think it’s a team effort. We arenot really that involved. We’re not a signatory. It’s probably good news andbad news. You know, we’re not in the room is the bad news. The good news is wehave a little more flexibility than all the other major studios. But I can’teven predict what’s going to happen at this point, other than as Michael said,we’re pretty much locked and loaded, particularly in our film business, toprepare for a long strike.

Alan Gould - Natexis Bleichroeder

Okay. Thank you very much.

Operator

Your next question comes from the line of Tom Eagan fromOppenheimer. Please go ahead.

Thomas Eagan -Oppenheimer

Great. Thank you very much. Fiscal ’08 certainly has been agrowth year with a lot of acquisitions. Should we expect more of the same infiscal ’09, or should we expect more focus on other part of the business?

And I guess as part of that question, what are your thoughtson what you may do with your increasing cash balance? And then I have afollow-up. Thanks.

Jon Feltheimer

In terms of the second part of your question, which refersback to the first part of acquisitions, we expect to finish this year with wellover $300 million. Absent what Michael may choose to do in terms of stockbuy-back, we certainly know that there’s some pressure from our shareholders interms of not carrying too much cash, and so we are going to continue to look atacquisitions on an opportunistic basis. So I certainly can’t push those out ofthe picture.

In terms of the overall economics, again next year we shoulddefinitely narrow the lines between free cash flow and operating cash flow and --for example, this year’s slate, I think we will take a loss for the fiscal yearof about $80 million, should swing well into a positive over $100 million fornext year.

I don’t expect, and Joe, you can jump in, if you’d like, Idon’t expect an increase in investment and film, nor in marketing. I actuallywouldn’t be surprised if we pushed it down a little bit next year.

I think you are definitely looking for, even though it’s nota key metric, my guess is you are looking at a positive net and operating cashflow for next year.

Joe, do you want to comment on that at all?

Joe Drake

No, I think you covered it off pretty well. I don’t reallysee, based again I’ve been here eight weeks, but looking at the slate for nextyear, I don’t really see a need to increase investment in film and in fact, asyou had indicated, our goal is to actually bring P&A down a little bit.

Michael Burns

I am going to add one thing about the cash; as you can seefrom our Q, we bought back just a little over $10 million worth of stock. Thereis an advantage in turbulent markets like we’ve certainly seen that have anunlevered balance sheet as, for example, private equity firms recycle out ofinvestments that they’ve made, multiples come down in some of thosetransactions and it’s nice to have kept [inaudible], particularly in times likethis.

Thomas Eagan -Oppenheimer

And just a quick follow-up; in fiscal ’09, should we expectthe same number of wide releases not in [applied fund] -- you know, a Saw,Tyler Perry, and then maybe one other?

Jon Feltheimer

I’m sorry, say that again, Tom?

Thomas Eagan -Oppenheimer

Should we expect the same number of wide releases not partof the Pride film fund?

Steven Beeks

Well, the only thing exempted from that fund are some of ourfranchise pictures, and the way that fund was structured was 23 releases comingthrough, so outside of the franchises, we’ll just go according to thatschedule.

Jon Feltheimer

Most of the pictures will be under the Pride picturepartnership.

Thomas Eagan -Oppenheimer

Okay. Thank you.

Operator

Your next question comes from the line of Barton Crockettfrom J.P. Morgan. Please go ahead.

Barton Crockett -J.P. Morgan

Okay, great. Thanks for taking the question. I just wantedto be clear on one thing, really a nit-picking thing but just with the strike,you indicated that you are locked and loaded on the film side, and I was wonderingif you could update us on where you are on the TV production side for this yearand for fiscal ’09?

Jon Feltheimer

Yeah, I thought I left that hole pretty wide open, Barton.The answer is in a short strike, we’re not affected at all. In a longer strike,some of the renewals, particularly Weeds, Madmen, and Crash, our new order fromStars, could be affected.

Of course, in television, again, given the fact that we arebudgeting for other shows, new shows, and pilots, which could be potentiallydeficit shows, I mean a negative cash flow, it’s very possible in televisionthat even a long-term, our overall financials might not be significantlyaffected, and probably even the short-term, it could go positive for us.

But certainly in the long run, it could hurt the economicsfrom -- the short-term economics from Weeds and Madmen.

Barton Crockett -J.P. Morgan

Okay, and just to understand on Weeds and Madmen, are youbasically done for -- have you delivered all you need to for this televisionseason or is it the next television season we’d be thinking about, or is it --

Jon Feltheimer

That’s exactly right.

Barton Crockett -J.P. Morgan

Okay, great. And then when you talk about the narrowing ofthe free cash flow and operating cash flow, again, just to make sure what I’mhearing there, when you say operating cash flow, are you talking about theincome statement and not the statement of cash flows -- basically like anoperating income or EBITDA type proxy? Is that correct?

James Keegan

It is -- basically it’s EBITDA. Obviously as we say that,this year where we are guidance wise, coming to positive free cash flow of $100million, as we swing to profitability next year, we’ve said free cash flowbasically similar, $100 million, obviously the two lines are coming together.

Barton Crockett -J.P. Morgan

Okay. And then, on library, are you prepared to give us sometype of disclosure of what it was this quarter and what the year-to-year changein that was on library revenues?

Steven Beeks

We are basically on track with last year, essentially flatand we anticipate the same performance we had -- essentially the same range ofperformance we had last year.

Jon Feltheimer

And that was $0.25 billion dollars in revenue, approximately$90 million of free cash flow.

Barton Crockett -J.P. Morgan

Okay, and then the final thing here is could you just walkus through -- I noticed Pride is hitting the statement of cash flows and theP&L, just give us a big sense of exactly how that affected accounting forthings like P&A, both in the income statement and in the statement of cashflows.

James Keegan

Sure. As we talked about on the call, we’re basically at $84million worth of expense pouring through on the P&L, yet they gave me $42million in cash, so my P&L got hit by $84 million but really cash flow, mynet impact was only about 42 of money that I spent.

Barton Crockett -J.P. Morgan

So that cash flow came in what, the film obligations line or--

James Keegan

It shows up on the participation in liability line item.

Barton Crockett -J.P. Morgan

Okay, and then is that money that will be paid back out ofearnings from the film over the life of the film?

James Keegan

It will be paid back out of cash receipts over the life ofthe film. We talk about this year, our slate being negative 80 again, it’s morethan just Pride will be over 100 next year, so as cash comes in, we’ll pay themback.

Michael Burns

And Barton, you know this but obviously [the way it works]on a film fund, we would take our distribution fee off the top of grossrevenues.

Barton Crockett -J.P. Morgan

Okay, that’s great. Thanks a lot.

Operator

Your next question comes from the line of Andy Nasr fromRaymond James. Please go ahead.

Andy Nasr - RaymondJames

I’m wondering if Mandate film library encompasses domesticand international rights, and I’ll just ask all the questions now, but when youlook internationally, are there any other areas that you are looking to expandin by acquiring distribution assets?

And on the home entertainment side, distribution andmarketing costs, it looks like they were up 19% year over year. So I’m justwondering how to think of that in the context of the library emergence, which Ithink you said would still be robust.

And the last question is do you anticipate that the outcomeof the strike would have a significant impact on your margin by potentiallyhaving to carve out some additional profit participations?

Jon Feltheimer

Can you clarify that last, the third question?

Andy Nasr - RaymondJames

Just the last one?

Jon Feltheimer

Yes.

Andy Nasr - RaymondJames

The outcome of the strike, if you guys have to carve outsome profit participations to -- well, just related to the emergingdistribution channels, I’m wondering how that might affect the first cycleprofits going forward.

Jon Feltheimer

I’d answer that one. It’s very de minimis. Obviously I can’tanticipate the result but just would be very, very de minimis, if anything atall.

Video marketing, do you want to address that, Steve?

Steven Beeks

Primarily video, the increase in video marketing has a lotmore to do with timing of releases. Obviously the new releases carry with themmore significant marketing campaigns, consumer marketing campaigns, and as tolibrary margins in general, they are pretty much in the same range as they werelast year. And as a matter of fact, I would also point out our averagewholesale prices on our new product, while the library’s remaining constant,new product actually has improved margins and improved average wholesale pricesversus last year.

Jon Feltheimer

Joe, do you want to take the question about Mandate?

Joe Drake

Yeah, the Mandate library, all of the first release films,the bigger titles in the library that were created over the last short termhere, last three to four years, are all worldwide rights, so the library isboth domestic. Those rights tend to come back from the major studios inanywhere from 12 to 15 years from first release, and internationally, they comeback to library anywhere from seven to 15 years. And then there’s a group oftitles, a little over 200 titles, that are largely domestic, with some -- asmattering of international rights in them that we acquired.

Andy Nasr - RaymondJames

Great. Sorry, the last question, just internationalexpansion opportunities after Australia?

Jon Feltheimer

I think, as I’ve described before, the fact is that where wesaw the biggest opportunity for sales distribution was English-speaking. Itmakes a lot more sense for us. We create typically one set of materials, notthat they’re not customized by our various other distribution outlets, but atthe end of the day, that’s where we really saw the opportunity toself-distribute and be willing to take on, although I said in Australia, wedon’t take on the P&A risk at the end of the day, where we were willing totake on the P&A expensing as in Lionsgate U.K.

So we are not abandoning the model that we have on our filmbusiness of preselling the international marketplace to reduce our risk. Icould see maybe one or two other territories over the next two or three years,if we had the right partner in that territory. But again, we’ve mostlyfulfilled what we set out to do, which is the opportunity in theEnglish-speaking marketplace.

I will say, however, in terms of expanding Fear Net as achannel, looking at other channel opportunities internationally, looking atperhaps India and China in terms of perhaps some funds that we believe we couldraise and grow some interesting indigenous opportunities in those places, weare definitely looking at those opportunities and working on a couple of plans rightnow.

Andy Nasr - RaymondJames

Great. Thanks.

Operator

Your next question comes from the line of Matthew Harriganfrom Ferris, Baker Watts. Please go ahead.

Matthew Harrigan -Ferris, Baker Watts

Congratulations on the results, firstly. Two questions; Ithink Televisa has been in the movie business for a while and it’s been afairly peripheral business. Can you say if they are expanding fairlyaggressively? And is that going to be a significant business for youdomestically, as well as down in Latin America?

And then secondly, could you just update us on where you areon the Atlas Shrugged situation?

Jon Feltheimer

Michael.

Michael Burns

I’ll take the second one first, Matthew. We have justreceived, on October 31st, right before the strike, we were served a draft fromVadim Perlman that we’ve read and loved but we are in the process of again, itwas 161 pages and we want that script to be down to about 135 pages. So all Ican say is that so far, so good and we keep trying to make a step forwardthere.

In terms of Televisa, I can’t speak to them, in terms ofwhat their interest and how they are going to expand their various businesses.I can tell you that the partnership that we contemplate with them involves lotsof different areas -- video, distribution of some of their library, TV formatexploitation, co-production of television shows, English-speaking and Spanishlanguage, and co-producing feature films together with them. So we are reallyexcited about the relationship and as we develop it, we’ll certainly leteveryone know what we’re doing.

Matthew Harrigan -Ferris, Baker Watts

Great. Thank you.

Operator

We have time for two more questions. The next question comesfrom David Joyce from Miller Tabak & Company. Please go ahead.

David Joyce - MillerTabak & Company

Thank you. I just wanted to see if the big volume in TV, ifthat was more an acceleration ahead of a writers’ strike or was that scheduledthat way? Are the financials there going to be decelerated from here for thesecond half?

Jon Feltheimer

Yes, I think as Jim said, TV deliveries were exactly as weforecast and budgeted. It will slow down a little bit and again, we are ontrack for about $200 million.

David Joyce - MillerTabak & Company

Okay. Everything else was answered. Thanks.

Operator

And your final question today comes from the line of DavidBank from RBC Capital Markets. Please go ahead.

David Bank - RBCCapital Markets

Thanks very much. I’ve got a handful, sort of last but notleast, hopefully.

Jon Feltheimer

We’ll answer at least one of them.

David Bank - RBCCapital Markets

Felt, just first to clarify something you said, I think yousaid that the current year slate would lose something like $100 million, andyou expected that to swing to a positive next year. Could you clarify -- didyou mean on the net operating, in the income statement line versus the freecash flow line? And was that just the Pride slate or was that your overallrelease slate? Is there going to be a $100 million swing in net incomecontribution next year, I guess is the first to clarify.

The second one was just in terms of the stock buy-back, goodto see you coming in for the $10 million buy-back, but the stock touched below9 at one point in September, and I’m just kind of curious why you didn’t getmore aggressive on the buy-back.

And then last question on the home video side, a lot ofreally interesting color on how the VOD revenues are growing and I waswondering, given that there are only so many hours in a day and so much contentwe can consume, when do you think the shift occurs to the dominant mediaconsumption moving from people going out and buying DVDs versus the primaryconsumption method being watching video on demand, the VOD side?

Steven Beeks

I’ll answer the home entertainment question first. Obviouslydigital delivery is growing dramatically and our view is that overall, it’sgoing to increase the size of the pie, as more than being a replacement for DVDpurchases.

But as to the impact on the DVD purchase, it’s reallydifficult to project when certain consumers start -- because some consumerswill make the shift, it’s difficult to predict when some consumers will makethe shift. The packaged media business, our view is packaged media is going tobe extremely healthy at least for the next four or five years, so not beforethen.

Jon Feltheimer

I’ll probably be considered a bad parent for saying this,but over the weekend, I noticed that -- I took my kids to a movie. Then I sawmy younger kids watching something on the DVD. They watched a bunch oftelevision, and my 15-year old actually watched a move on her computer with herfriend, so what’s exciting for us about our business is the array of platformsthat the consumer is starting to watch content on.

Michael, do you want to talk about the stock buy-back?

Michael Burns

Sure. A couple of things, one is it’s important for you guysto know that we are subject to blackouts and we are subject to trading ourstock, be restricted in trading our stock in certain scenarios like, forexample, when an acquisition, i.e. Mandate, is in the works.

And then lastly, we are subject to our average daily tradingvolume, the percentage of stock that we can buy. For example, this week, theaverage daily trading volume this week is 130,795 shares. That means that wecan buy a percentage of that on a daily basis or buy one block.

So we were in the market looking for blocks at certaintimes, couldn’t find a lot of them, but it is important to note that, as youcan see from the Q, the average price paid, we try to be opportunistic, theaverage price paid was about $9.14 for the shares that we bought.

Jon Feltheimer

And on your first question, David, what I was talking aboutwas our entire slate, whether it included Pride Pictures partnership or not,would lose from an operating cash flow or EBITDA contribution about $80 millionthis year, would swing to a positive, probably looks like over $100 million nextyear, which means a swing not of 100 but a swing actually of about $180million. And therein, if indeed we do as Joe suggested, keep our marketingexpense and our investment in film staid, if you will, it certainly does looklike we can’t avoid being profitable for next year.

Does that help?

Operator

There are no further questions.

Jon Feltheimer

Thank you all. We look forward to seeing you on the nextcall.

Operator

Ladies and gentlemen, this conference will be available forreplay after 12:30 Eastern Time today through November 19th. You may access theAT&T teleconference replay system at any time by dialing 1-800-475-6701 andentering the access code 891844. International participants dial 320-365-3844.Those numbers once again are 1-800-475-6701 or 320-365-3844, with the accesscode 891844.

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

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