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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 Executive Officer

Michael Burns - Vice Chairman of the Board

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

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

James Keegan - Chief Financial Officer, Principal Accounting Officer, 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 Lionsgate second quarter earnings and analyst conference call. (Operator Instructions) I would now like to turn the conference over to your host, Senior Vice President of Investor Relations, Mr. Peter Wilkes. Please go ahead.

Peter D. Wilkes

Thank you for joining us. Jon Feltheimer, our CEO and the rest of the management team will have opening remarks and then we’ll open the call to your questions. The matters discussed on this call include forward-looking statements. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the risk factors as set forth in Lionsgate'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 the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. Jon.

Jon Feltheimer

Good morning, everyone. I am joined here this morning by Michael Burns, our Vice Chairman; Steve Beeks, our President and Co-Chief Operating Officer; Jim Keegan, our Chief Financial Officer; and Rick Prell, our Chief Accounting Officer. I would also like to welcome Joe Drake, who has joined Lionsgate as President of our Motion Picture Group and Co-Chief Operating Officer, 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 not only had the strong theatrical run we forecast, but our DVD over-performance in the quarter on films that under-performed in theaters earlier in the year has made up a lot of lost ground.

On our last analyst call, we projected that in order to stay on track for our financial targets, we would need our next five wide releases to 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 films will gross about $230 million at the box office in aggregate. Over the past two months, Lionsgate has been the number one studio at the domestic box office with an 18% market share and three of our last four films have debuted at number one.

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

Ultimate profitability is obviously a key benchmark of success for us. Here is how we look at the financial contribution from our film business. In order to achieve our target of more than $100 million in free cash flow 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 ultimate profit, 10% to 20% more than last year’s slate.

Over the long term, this positions us well for our goals of continued revenue growth, consistent free cash flow and increasing long-term shareholder value. Over the short term, it made for the strongest revenue quarter in Lionsgate's history. We reported more than $343 million at the top line 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 -- all singles and doubles without swinging for the fences.

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

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

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

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

Michael Burns

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

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

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

Felt already noted that this year’s slate is expected to contribute approximately $120 million in [EBITDA] profitability. Our box office after two quarters currently stands at slightly over $300 million, meaning that with an additional cumulative $100 million from our three upcoming wide releases, we will reach our goal of $400 million in North American box office for the full year.

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

After starring for us in Good Luck Chuck, Jessica Alba returns 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 we are delighted to have Jessica back again in the Lionsgate family.

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

Fiscal ’09 is shaping up to be equally exciting. As an example of our continuing commitment to deliver diverse product offerings, I am happy to report that we were thrilled with our first look at the action-packed adventure movie Forbidden Kingdom, featuring the formidable pairing of Jet Li and Jackie Chan. On the comedy front, we will be releasing My Best Friend’s Girl in fiscal ’09 as well. The lovely Kate Hudson stars in this very edgy comedy with Dane Cook who, as you know, has a great history with our company with a string of very profitable pictures.

We have already staked out a January 2009 release date for The Spirit from director Frank Miller of Sin City fame. The Spirit has a truly star-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 from Tyler Perry in fiscal ’09 after Meet the Browns, including a film based on his most popular Madea play of all, Madea Goes to Jail.

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

And finally, what late October would be complete without another bloodletting from Lionsgate, so look forward to Saw V arriving again at Halloween.

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 pictures production, Mike Pasternak, we are locked and loaded with the vast majority of our fiscal ’09 theatrical release slate already in place.

Besides the strong portfolio of films wrapped or currently in production, in the event of a prolonged strike we remain in a competitively strong position because of our nearly 12,000 title library throwing out significant evergreen income, our filmed entertainment backlog near its all-time high at $340 million, and an extremely robust and un-levered balance sheet.

We are not changing our game plan and continue to stick closely to our model of mitigating risk, efficient production, targeted marketing, repeat talent relationships, and teaming with strong creative and financial partners. Jon.

Jon Feltheimer

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

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

Our entry into Australia, coupled with our successfully growing Lionsgate U.K. operations and our alliance with Maple Pictures in Canada gives us a strong presence in the world’s our largest English-speaking territories.

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

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

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

Mandate is yet another example of our international growth strategy. We acquired Mandate in part because they operate one of the strongest third-party feature film businesses in the international marketplace. But like Lionsgate, they also operate with an entrepreneurial business model that has made them a profitable and consistent supplier of films to all the studios. We believe that their addition to the Lionsgate family brings a whole new dimension of growth potential to our motion picture business and a new profit center to our company.

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

Joe Drake

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

Now that I’ve been aboard for eight weeks and had the opportunity to see Lionsgate in action, I am even more excited about the growth we can create together. I would like to touch briefly this morning on the Mandate business model, how we operate and fit into Lionsgate, as well as to share 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 is one of the premier international sales organizations in the business today.

The fundamental difference between Lionsgate and Mandate is that Mandate does not self-distribute the films it makes. Its primary customers in North America are the major studios and internationally, it licenses its films on a territory-by-territory basis to the major studios and major independent distributors.

Although at first glance it may appear counter-intuitive, post acquisition Mandate is continuing to develop and product is movies, not for Lionsgate but for its studio partners such as Sony, Fox, New Line and others.

The idea is simple. In addition to Lionsgate's 18 to 20 films a year, we are adding four to six Mandate pictures per year to the combined business. By distributing these through third-party major studios instead of Lionsgate, we are effectively expanding Lionsgate's distribution reach 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 are also, 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 has two branded production operations -- Mandate Pictures and Ghost House Pictures.

Ghost House is a 50-50 joint venture between Mandate and Sam Raimi, the highly acclaimed director of the Spider-man movies, and his partner, Rob Tapert. This company was formed solely for the creation and distribution of horror content and to date has achieved five consecutive number one box office releases 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 responsible for Mark Forrester’s Stranger Than Fiction, starring Will Ferrell; Harold and Kumar Go To White Castle; and an exciting upcoming slate, which includes Mr. Magorum’s Wonder Emporium, starring Natalie Portman and Dustin Hoffman, which will be release by Fox Walden this coming Friday; Juno, starring Michael Cera of Superbad and acclaimed young actress Ellen Paige which is slated for a December 15th release through Fox Searchlight; Passenger, starring the Devil Wears Prada’s Anne Hathaway, to be released by Columbia Pictures in 2008; and the eagerly anticipated sequel to Harold and Kumar, which will be released on February 8th of next year.

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

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

Upon closing the acquisition, we immediately consolidated the Lionsgate and Mandate international sales businesses under the Mandate name and 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 three new high profile properties for third-party representation: a broad romantic comedy starring Renée Zellweger; a supernatural thriller starring Kevin Costner; and a big budget adventure fantasy starring Heath Ledger.

One week ago, we took these three new films to the American film market, along with two films from Lionsgate's slate, Brothers, starring Jake Gyllenhaal, Tobey Maguire, and Natalie Portman; and a romantic comedy, My Best Friend’s Girl, starring Kate Hudson and Dane Cook. The results were fantastic.

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

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

Another area where we believe there will be value creation is through the sharing of our broad but largely distinct set of creative and business relationships. We are already working to monetize the expanded palette of relationships available to both our companies. As an example, Lionsgate Television, run by Kevin Beggs, is currently recognized by the creative community as one of the most interesting and innovative places to create television content, largely due to such cutting edge series as Weeds and Madmen.

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

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

In the short time that I’ve been at Lionsgate, I’ve been able to watch the domestic theatrical operation release three number one box office hits, stand as the market leader for two months in a row, and at any given 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 compete head-to-head with the major studios on any given weekend with a fraction of the overhead.

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

With this theatrical team, I am sure that we will find ways to unlock even more value for each theatrical slot without taking on undue risk or 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 can have the opportunity to get more granular about the fiscal 2009 slate. I look forward to updating you on our thinking on the next call. Jon.

Jon Feltheimer

Thank you, Joe. As usual, our home entertainment group has continued to perform extremely well with its full array of products, including new releases, catalog exploitation, and direct to video. Steve Beeks will take you through the quarter and provide a view of the current video and digital marketplace. Steve.

Steven Beeks

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

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

In our new release business, the Q2 results are a good example of what we consider to be our core strength, which is extracting maximum value from our products. All of the theatrical releases we released on DVD during the quarter over-indexed their box office performance and three pictures, Pride, Delta Farce, and The Condemned, had extraordinary results.

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

Not only is our business strong, but we are operating in a more 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 calendar year was down about 4%, that was mostly a function of the product coming to market, not broader industry trends, and we remain confident that the full year for 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 releases coming 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 from high-definition DVD, which is a market that will be large, will operate at higher margins, and will serve as a big growth driver in the future.

While we still don’t have one unified format for the industry, all the available trends seem to confirm that we made the right choice in selecting Blu-Ray. In addition to offering superior content capacity and copy protection, a major benefit in an environment where digital piracy has become such a concern, it is still outselling HD DVD two-to-one, despite the defection 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 higher margins than standard DVD.

Strength and stability in our packaged media business is complemented by the long anticipated spike upwards in accretive digital revenues. Digital delivery is becoming a much more important and profitable part of our business. To give you an example of how much the conventional VOD and 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 particular title in the recent past. Today, releases such as Employee of the Month, Larry the Cable Guy, An American Haunting, and Crank are generating between 12% and 16% of box office in their VOD and pay-per-view windows.

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

Our broadband electronic sell-through revenue also continues to grow. We’ve had over 2.5 million downloads of our films and television shows to date, with that business expanding in virtually every corner and generating significant revenue from our library. It is worth noting that all of our digital delivery business is done with no supply chain and very little overhead support.

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

Every aspect of our business is solid -- catalog exploitation, new theatrical titles on DVD, direct to video product, and digital delivery. As we leverage our content into new entertainment technologies, distribution platforms, and market niches, we expect our home entertainment revenues and cash flow to continue to grow and blended margins from our mix of packaged media and exciting new digital applications to increase over time.

Now back to Jon.

Jon Feltheimer

Thank you, Steve. Our television business also performed very well in the second quarter, generating revenues of $109 million and keeping us on track for our anticipated television production revenue of approximately $200 million for the year.

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

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

Fear Itself is a prime example of our ability to cross promote new content on our recently launched digital media distribution platforms.

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

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

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

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

Another of our recent investments, Fear Net Channel, has just completed a very successful first year. It has emerged as the number one horror website in America for both uniques and registered users, and it streamed 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 Fear Itself television series, we expect that both its viewership and cross-promotional opportunities will continue to grow.

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

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

I’ll now open up for questions.

Question-and-Answer Session

Operator

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

Michael Savner - Banc of America

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

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

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

Jon Feltheimer

Well, that’s a pretty broad question. I’ll try to be helpful. We certainly, as you know, we always point everybody to revenue, free cash flow and I would say for the year, we are probably looking at 10% plus overachievement on both those metrics. That’s with very little contribution from any of those businesses -- a little bit from Mandate, probably about $30 million on the revenue side, very small contribution, operating cash flow and obviously 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 some positive contributions almost immediately I think from Australia, given again that the way we’ve set up, we definitely believe that we’ll be doing better off in that area, in terms of contribution from our titles. And the way we’ve got it set up, we don’t have to expense our P&A spend there, so that’s a pretty unique setup.

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

I would say overall, this was a growth year for us and the reason it was is we planned it based around our Pride Pictures partnership, so this year we’ll probably expense close to $375 million, $380 million of marketing 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 free cash flow and operating cash flow would diverge. Next year it should swing back fairly heavily in the other direction, if that’s helpful.

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

Michael Savner - Banc of America

Okay, thanks. Maybe just one follow-up and I’ll save the rest for offline, but you had hinted I think on the last earnings call that you were expecting a nice pop in television revenue this quarter and it still far exceeded 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 on how I think about the next two quarters?

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

Jon Feltheimer

Jim.

James Keegan

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

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 contributing more higher margin revenue in fiscal ’09.

Michael Savner - Banc of America

Okay. Thanks, guys.

Operator

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

David Miller - SMH Capital Markets

Good morning, guys. Congratulations on the stellar results. Just a couple of housekeeping items; Felt, investment in film was huge at $247 million. If you could just quickly detail what portion of that was within TV spending, 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 some exposure to adjustable rate preferreds, and within that body, is there any exposure to the sub-prime CDO imbroglio? I have a feeling the answer is no, but I just want to make sure. I just wanted to hear it from you guys. Thanks very much.

James Keegan

Last quarter, we had about $80 million spend on TV. This quarter, 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 from 80 Q1 to 30 Q2.

Michael Burns

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

David Miller - SMH Capital Markets

Outstanding. Thank you.

Operator

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

Doug Creutz - Cowen & Company

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

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

James Keegan

Last year, the mix of product was -- I’ll be candor, it was primarily revenue from the Weeds series. Because it’s doing so well, it’s a high margin, so it’s kind of disproportionately higher. Last year I think I was running 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 television business and typically what happens, because we can’t up ultimates on the back end of TV shows until they are well into their third, fourth, fifth year, for an early company, a young company, those margins will stay low. Debmar is actually a little bit different. Being mostly a syndication or distribution business, those margins are higher immediately.

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

Doug Creutz - Cowen & Company

All right, thanks.

Operator

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

Lloyd Walmsley - Thomas Weisel Partners

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

Jon Feltheimer

Well, licensing will flow through the financials the same way any revenue stream would. It’s still really early to tell but this does look like one of those kinds of properties that should succeed and stay on the air, that it will be -- the margins will be considerably higher because that’s an alternative revenue source that typically, we haven’t had on most of our series.

Lloyd Walmsley - Thomas Weisel Partners

Okay. Thank you.

Operator

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

Alan Gould - Natexis Bleichroeder

Thank you. I have a couple of questions; first, with respect to the timing of your film releases, you seem to be very successful when you are -- during sort of the off-season for the majors and I notice there is no big Christmas type releases. Is that what we should look at going forward, expect that you are going to avoid the Thanksgiving to Christmas and the Memorial 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 is to be -- for company, to be opportunistic and almost every one of the titles that we just were successful with, the last releases, we actually moved the release date on each one of those at least one time. A lot of people, for example, on 3:10 to Yuma felt that that September 7th date was really going to be 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 and certainly that’s what we found we got -- we got 310 out of a difficult area where there were a tremendous amount of releases later in October and moved it up really significantly, almost four weeks.

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

Alan Gould - Natexis Bleichroeder

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

James Keegan

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

Alan Gould - Natexis Bleichroeder

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

Michael Burns

While Jim looks that up, Alan, what I was going to say is that to your point, however, as I mentioned, we certainly have either in production 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 that was gearing up, getting ready to release. Those two items, I don’t want to be too specific, totaled $65 million. And a big chunk, I’ll be a little more specific, if you look at the Mandate, you can see that Mandate product, when we bought 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 - Natexis Bleichroeder

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 are not really that involved. We’re not a signatory. It’s probably good news and bad news. You know, we’re not in the room is the bad news. The good news is we have a little more flexibility than all the other major studios. But I can’t even 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, to prepare for a long strike.

Alan Gould - Natexis Bleichroeder

Okay. Thank you very much.

Operator

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

Thomas Eagan - Oppenheimer

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

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

Jon Feltheimer

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

In terms of the overall economics, again next year we should definitely 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 year of about $80 million, should swing well into a positive over $100 million for next year.

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

I think you are definitely looking for, even though it’s not a key metric, my guess is you are looking at a positive net and operating cash flow 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 really see, based again I’ve been here eight weeks, but looking at the slate for next year, I don’t really see a need to increase investment in film and in fact, as you 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 see from our Q, we bought back just a little over $10 million worth of stock. There is an advantage in turbulent markets like we’ve certainly seen that have an unlevered balance sheet as, for example, private equity firms recycle out of investments that they’ve made, multiples come down in some of those transactions and it’s nice to have kept [inaudible], particularly in times like this.

Thomas Eagan - Oppenheimer

And just a quick follow-up; in fiscal ’09, should we expect the 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 part of the Pride film fund?

Steven Beeks

Well, the only thing exempted from that fund are some of our franchise pictures, and the way that fund was structured was 23 releases coming through, so outside of the franchises, we’ll just go according to that schedule.

Jon Feltheimer

Most of the pictures will be under the Pride picture partnership.

Thomas Eagan - Oppenheimer

Okay. Thank you.

Operator

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

Barton Crockett - J.P. Morgan

Okay, great. Thanks for taking the question. I just wanted to 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 wondering if you could update us on where you are on the TV production side for this year and 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 from Stars, could be affected.

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

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

Barton Crockett - J.P. Morgan

Okay, and just to understand on Weeds and Madmen, are you basically done for -- have you delivered all you need to for this television season 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 of the free cash flow and operating cash flow, again, just to make sure what I’m hearing there, when you say operating cash flow, are you talking about the income statement and not the statement of cash flows -- basically like an operating 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 $100 million, as we swing to profitability next year, we’ve said free cash flow basically 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 some type of disclosure of what it was this quarter and what the year-to-year change in that was on library revenues?

Steven Beeks

We are basically on track with last year, essentially flat and we anticipate the same performance we had -- essentially the same range of performance 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 walk us through -- I noticed Pride is hitting the statement of cash flows and the P&L, just give us a big sense of exactly how that affected accounting for things like P&A, both in the income statement and in the statement of cash flows.

James Keegan

Sure. As we talked about on the call, we’re basically at $84 million worth of expense pouring through on the P&L, yet they gave me $42 million in cash, so my P&L got hit by $84 million but really cash flow, my net 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 of earnings from the film over the life of the film?

James Keegan

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

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 gross revenues.

Barton Crockett - J.P. Morgan

Okay, that’s great. Thanks a lot.

Operator

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

Andy Nasr - Raymond James

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

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

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

Jon Feltheimer

Can you clarify that last, the third question?

Andy Nasr - Raymond James

Just the last one?

Jon Feltheimer

Yes.

Andy Nasr - Raymond James

The outcome of the strike, if you guys have to carve out some profit participations to -- well, just related to the emerging distribution channels, I’m wondering how that might affect the first cycle profits going forward.

Jon Feltheimer

I’d answer that one. It’s very de minimis. Obviously I can’t anticipate the result but just would be very, very de minimis, if anything at all.

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

Steven Beeks

Primarily video, the increase in video marketing has a lot more to do with timing of releases. Obviously the new releases carry with them more significant marketing campaigns, consumer marketing campaigns, and as to library margins in general, they are pretty much in the same range as they were last year. And as a matter of fact, I would also point out our average wholesale prices on our new product, while the library’s remaining constant, new product actually has improved margins and improved average wholesale prices versus 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 term here, last three to four years, are all worldwide rights, so the library is both domestic. Those rights tend to come back from the major studios in anywhere from 12 to 15 years from first release, and internationally, they come back to library anywhere from seven to 15 years. And then there’s a group of titles, a little over 200 titles, that are largely domestic, with some -- a smattering of international rights in them that we acquired.

Andy Nasr - Raymond James

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

Jon Feltheimer

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

So we are not abandoning the model that we have on our film business of preselling the international marketplace to reduce our risk. I could 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 mostly fulfilled what we set out to do, which is the opportunity in the English-speaking marketplace.

I will say, however, in terms of expanding Fear Net as a channel, looking at other channel opportunities internationally, looking at perhaps India and China in terms of perhaps some funds that we believe we could raise and grow some interesting indigenous opportunities in those places, we are definitely looking at those opportunities and working on a couple of plans right now.

Andy Nasr - Raymond James

Great. Thanks.

Operator

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

Matthew Harrigan - Ferris, Baker Watts

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

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

Jon Feltheimer

Michael.

Michael Burns

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

In terms of Televisa, I can’t speak to them, in terms of what 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 lots of different areas -- video, distribution of some of their library, TV format exploitation, co-production of television shows, English-speaking and Spanish language, and co-producing feature films together with them. So we are really excited about the relationship and as we develop it, we’ll certainly let everyone know what we’re doing.

Matthew Harrigan - Ferris, Baker Watts

Great. Thank you.

Operator

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

David Joyce - Miller Tabak & Company

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

Jon Feltheimer

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

David Joyce - Miller Tabak & Company

Okay. Everything else was answered. Thanks.

Operator

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

David Bank - RBC Capital Markets

Thanks very much. I’ve got a handful, sort of last but not least, hopefully.

Jon Feltheimer

We’ll answer at least one of them.

David Bank - RBC Capital Markets

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

The second one was just in terms of the stock buy-back, good to see you coming in for the $10 million buy-back, but the stock touched below 9 at one point in September, and I’m just kind of curious why you didn’t get more aggressive on the buy-back.

And then last question on the home video side, a lot of really interesting color on how the VOD revenues are growing and I was wondering, given that there are only so many hours in a day and so much content we can consume, when do you think the shift occurs to the dominant media consumption moving from people going out and buying DVDs versus the primary consumption method being watching video on demand, the VOD side?

Steven Beeks

I’ll answer the home entertainment question first. Obviously digital delivery is growing dramatically and our view is that overall, it’s going to increase the size of the pie, as more than being a replacement for DVD purchases.

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

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 saw my younger kids watching something on the DVD. They watched a bunch of television, and my 15-year old actually watched a move on her computer with her friend, so what’s exciting for us about our business is the array of platforms that 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 guys to know that we are subject to blackouts and we are subject to trading our stock, be restricted in trading our stock in certain scenarios like, for example, when an acquisition, i.e. Mandate, is in the works.

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

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

Jon Feltheimer

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

Operator

Ladies and gentlemen, this conference will be available for replay after 12:30 Eastern Time today through November 19th. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering 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 access code 891844.

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

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