Lions Gate Entertainment Corporation (LGF)

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Lionsgate Entertainment Corp. (LGF)

F2Q08 Earnings Call

November 12, 2007 9:00 am ET


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


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



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 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.

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