Lions Gate (NYSE: LGF) recently reported a second quarter net loss of $44.2 million compared with a gain of $10.3 million the year prior. Revenue increased 81% fueled by the release of "The Hunger Games." This revenue was not enough to offset the higher marketing costs to release the movie. Lions Gate released 5 movies in theaters in the second quarter, an increase from just one the year prior. The company has yet to see the benefits from home video sales of these releases, which is set for the third quarter. Lions Gate also cited the expense of integrating Summit Entertainment as a cause of profit loss. Lions Gate acquired Summit Entertainment, which made such films as "Twilight," for $412.5 million in January.
While movie revenue increased, revenue from production of TV shows such as "Mad Men" and "Weeds" fell 5% in the second quarter. The company delivered fewer shows into syndication that it did the year prior. Lions Gate had to compete against high grossing releases such as Walt Disney's (NYSE: DIS) "The Avengers" in the second quarter. That movie along with theme park expansions led Walt Disney to a 24% profit increase in the same quarter. The studio's operating income jumped significantly from the year prior. "The Avengers" brought in over $1.5 billion at the global box office and Disney has announced the director would be returning for a sequel. The movie was made by Marvel Entertainment, which Disney acquired in 2009 for $4 billion.
The third quarter will be no easier for Lions Gate as it competes against heavy hitters such as Comcast's (NASDAQ: CMCSA) Universal Studios, which produced "The Bourne Legacy," and Time Warner's (NYSE: TWX) Warner Brothers Studios, which produced "The Dark Knight Rises." However, what separates all of these companies from Lions Gate is the level of diversification. Lions Gate is largely a production company that counts on syndication of its TV shows and box office sales to bring revenue. Walt Disney, Comcast, and Time Warner are all heavily dependent on other revenue sources along with box office revenues. Walt Disney has its theme parks and television networks and shows. Comcast is actually more widely known as a cable company than a movie producer. Time Warner was once well known for AOL and Time Warner Cable before getting into the production business. These companies all have what Lions Gate lacks, diversification.
Lions Gate is striving to grow. The acquisition of Summit Entertainment serves as an example of that. As its box office numbers grow, Lions Gate is struggling with high costs of marketing and production. If the company truly wants to succeed then it needs to expand its business.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.