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LIONSGATE ENTERTAINMENT: 2013 2nd Quarter Earnings Call November 9, 2012/6:00 a.m. PST
SPEAKERS Jon Feltheimer – Chief Executive Officer Jim Keegan – Chief Financial Officer Rick Prell – Chief Accounting Officer Michael Burns – Vice Chairman Rob Friedman – Co-Chair, Motion Picture Group Patrick Wachsberger – Co-Chair, Motion Picture Group Steve Beeks – Co-Chief Operating Officer, President Motion Picture Group Kevin Beggs – President, Television Group Peter Wilkes – Senior Vice President, Investor Relations ANALYSTS Alan Gould – Evercore Partners David Miller – Caris & Company Ben Mogil – Stifel, Nicolaus & Company Doug Creutz – Cowen & Co. James Marsh – Piper Jaffray Jim Goss – Barrington Research David Bank – RBC Capital Matt Harrington – Wunderlich Securities Alexia Quadrani – JP Morgan Tuna Amobi – S&P Capital David Joyce – ISI Group
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 2
PRESENTATION Moderator Ladies and gentlemen, good morning. Thank you for standing by, and
welcome to the Lionsgate Fiscal 2013 Second Quarter Earnings call. At
this time, all lines are in a listen-only mode. Later there will be an
opportunity for your questions, and instructions will be given at that time.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to our host, Senior Vice
President, Investor Relations, Mr. Peter Wilkes.
P. Wilkes Good morning. Thank you for joining us today. Jon Feltheimer, our
CEO, will begin with remarks and then we will open the call to questions.
Joining the call are Michael Burns, our Vice Chairman; Rob Friedman and
Patrick Wachsberger, co-Chairs of the Motion Picture Group; Steve
Beeks, co-COO and President of the Motion Picture Group; Kevin Beggs,
President of our Television Group; Jim Keegan, our CFO; and Rick Prell,
our Chief Accounting Officer.
The matters discussed on this call include forward-looking statements,
including those regarding the performance of future fiscal years. Such
statements are subject to a number of risks and uncertainties. Actual
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 3
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
annual report on Form 10-K filed with the SEC on May 30, 2012, which
risk factors are incorporated by reference. The company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.
Jon?
J. Feltheimer Good morning everyone and thank you all for joining us. As I mentioned
in our earnings release, this quarter’s solid performance was driven by the
core values on which we’ve been building our company over the past 12
years, remaining agnostic while delivering content to the growing
spectrum of digital and traditional buyers, innovating new models in our
television business designed for a multi-platform environment, growing
our library organically and through third party acquisitions, producing film
and TV content differentiated for passionate targeted audiences and
continuing to aggregate a business where the sum is greater than its parts.
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 4
Here are some of the quarter’s highlights. We’ve continued building out
our international film distribution network as part of our ongoing
commitment to lower our risk and extend our visibility and predictability
while maintaining our upside. With the recent announcements of deals in
Germany, France, Spain, Australia, Latin America and Russia, among
others, we’ve established partnerships in major territories representing
approximately 80% of the world outside of China and India. These output
arrangements and partnerships will cover more than the majority of the
costs of our Lionsgate and Summit feature film production slates,
significantly reducing our capital at risk on each film we produce.
To give you a significant and recent example, while the scope and
therefore the budget of Hunger Games: Catching Fire is substantially
larger than the first Hunger Games film, thanks to these output deals and
the tremendous sales achieved by our international team led by Patrick
Wachsberger, we actually have the same domestic exposure on Catching
Fire that we had on the first movie.
Turning to our television business, we’re deep into production on the
second order of Anger Management, and the show looks great. In addition
to its 90 episode pick-up by FX, Anger Management had an excellent start
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 5
to its syndication rollout. Debmar-Mercury’s deal with the Fox TV
stations gives us great time slots on great stations across the country. As
we’ve mentioned before, we’ll be in syndication at least three years earlier
than a traditional television rollout.
We’re also pleased with the ratings for the first five episodes of Nashville.
In today’s time shifted environment, it’s particularly encouraging that
Nashville’s live-plus-three numbers continue to average more than 50%
higher than the ratings for its live-plus-same-day airing, making it one of
the most time shifted shows on television. With eight songs debuting high
on iTunes’ charts this month and generating over half a million downloads
already, Nashville is that rare show that has the opportunity to expand its
marketing reach and revenue base through touring, soundtracks, and
merchandising. We believe that the show will continue to grow and
become an important asset for both Lionsgate and ABC.
On the feature side, we continue to be pleased with the performance of our
film slate this year with Sinister and The Possession doing particularly
well recently. Even more important is the continued development of our
young adult franchises. I just got back from the set of Catching Fire and
I’m very excited about what I saw. As you’ve read in the press, we just
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 6
signed Francis Lawrence to the next two installments, and we’re obviously
impressed with what he’s doing with the franchise.
Divergent is a new brand designed to continue building on our leadership
in the young adult space. We’ve signed a terrific filmmaker in Neil
Burger, the director of Limitless and The Illusionist, and a great up-and-
coming talent in Shailene Woodley from The Descendants to star. We’ve
already scheduled Divergent for a March 21, 2014 release, the same slot
we used to launch The Hunger Games. To remind everyone, the books
have already sold more than two million copies and are tracking ahead of
both the Twilight and Hunger Games books at a comparable stage in their
growth trajectory.
Speaking of Twilight, if you’re in downtown L.A. this weekend and you
want to have some fun, visit the Twilight Fan Camp at Nokia Plaza for
movie screenings, a fan concert presented by Time Warner Cable, or a fan
breakfast as thousands of fans begin the preparation for next week’s
opening of Breaking Dawn - Part 2. Advanced ticket sales for this
fantastic installment are running ahead of Breaking Dawn - Part 1 and
prerelease tracking is strong. We’re looking to a big opening weekend
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 7
that will take our slate past a billion dollars at the domestic box office this
year.
On the channel front, Epic signed a new carriage deal with Amazon during
the quarter as its advanced technology and young subscriber base
continues to be a magnet for digital platforms. Digital consumption of our
content has become one of the fastest growing segments of our business.
We entered the digital space early and we’ve assembled a dedicated
working group with the institutional knowledge to negotiate complex
deals involving our films, TV shows and library of content on digital
platforms in dozens of territories around the world.
With 600 million smartphones and 100 million tablets sold this year alone,
demand for content continues to grow and the spectrum of digital buyers is
expanding worldwide. We’re aggressively selling our content on iTunes
platforms in Europe, Asia and Latin America; on Xbox in Europe, Mexico
and Australia; through Netflix in Latin America and the U.K.; and Vivendi
in Germany, just to name a few.
This digital growth is reflected in our numbers today as well as in the
composition of our library sales. Just five years ago, 70% of library
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 8
revenues were generated by packaged media. This year, our library
revenue should be up approximately 20% with only 38% being generated
by packaged media as digital becomes an increasingly important and high
margin component. Lionsgate already has tens of millions of digital
customers worldwide; however, as we continue to convert digital rental
customers to sell through, our focus on online digital initiatives will
generate even greater rewards in the future.
The last topic I want to discuss is our capital structure. We recently closed
a new five-year, $800 million revolving credit facility. Additionally, we
paid down the remaining balance on our Summit term loan more than two
years ahead of schedule. These are the first of a number of moves that
will save us millions of dollars of interest every year. With an $800
million facility, a record $1.2 billion backlog that represents a sizeable
portion of our future revenue stream, a 15,000 title library, significant box
office market share, and a successful and diversified TV slate, we have
now achieved critical mass and leveled the competitive playing field.
As a result, we’re in a stronger position than ever to secure competitive
terms with our distribution partners, create new output agreements around
the world, attract A-list creative talent, and support the continued growth
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 9
of all of our businesses. As this quarter’s results demonstrate, we’re
beginning to see the financial benefits of 12 years of patient and
disciplined growth.
Now I’d like to open the call to your questions.
Moderator Our first question today comes from the line of Alan Gould representing
Evercore Partners.
A. Gould I have three questions. First Jon, on the last call you told us that this year
was going to be back end loaded and the profitability would grow each
quarter. I assume that’s no longer the progression. What was the major
cause of the positive surprise over the last three months?
J. Feltheimer Sure. Jim, why don’t you take that one?
J. Keegan Sure. In the first three months, we had some internal over-performance.
Hunger Games continued to over-perform and the ultimate of that has
continued to grow. The Possession has been exceedingly strong,
outperformed our estimates, and our television division, shows like Nurse
Jackie have continued to over-perform and actually increased our
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 10
syndication ultimates on that. So we’ve had significant over-performance
throughout the feature film business and our television business.
J. Feltheimer I would add to that, obviously we still think the next six months is going to
be very strong.
A. Gould Following on that, I thought The Hunger Games sold close to 10 million
units, but I see the fiscal ’12 slate contributed 151 million of home
entertainment revenue in the quarter, so it couldn’t have been that big. Is
there still more Hunger Games video profits to come in the current
quarter?
S. Beeks Yes, Alan, the majority of them have been recorded. There will be
continuing sales, especially as we go through the holiday season. We have
high expectations through the holiday season, and obviously in a couple of
weeks we’ll start a Black Friday promotion going all the way through the
rest of the year.
A. Gould My last one is for Jim or Rick, an accounting question—particularly in
light of how strong the current quarter was and what looks like a pretty
clear path to predictability, will you reverse your tax valuation allowance?
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 11
And could you remind me of the mechanics—it looks like you could
recognize almost $1 a share of non-cash earnings, but then would begin
recording taxes at a more normal rate for book purposes.
J. Keegan Well you’re right, Alan. We have to follow the accounting rules for the
reserve. We do have a significant reserve there, and what we’re going to
do is as we go along, we’re going to review and look how our current
performance is and to future performance. But if we continue to perform
as we’re performing, we will reverse the reserve, and what that will do,
that’s going to result in a one-time significant positive non-cash
contribution to net income at that time.
A. Gould And Jim, in the 10-K you had a 133 million of U.S. valuation allowance
and 15 million in Canada. Could you be reversing that whole 150 million
in one shot?
J. Keegan The 133, yes, but that number, it varies as we go along and with our
current income in the quarter we have six months to lower that, but yes.
Moderator Our next question today comes from the line of David Miller with Caris &
Company.
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 12
D. Miller Following up on Alan’s question, was there any pull forward of economics
on Hunger Games that you guys thought were going to land in the
December quarter that landed in the quarter that you just reported? I
would reckon that if the ultimate on the title continues to grow, then at
least theoretically you should still have kind of a sequential bump in
EBITDA and adjusted EBITDA as you get into Q3 and Q4, and you
would have a continuous back end loaded year, but it sounds like you guys
are sort of rhetorically backing off of that. Then I have a follow-up.
J. Feltheimer Yes, I’m not sure what you mean on the backing up. I would say an easy
way for everyone to understand the numbers and to add to what Jim was
saying, is I would say most of the value or the upside here on these
numbers in terms of at least our yearly expectations is that most of the
upside here is value, not timing, if that’s what you’re referring to. Some
value upside here, and so again in terms of our expectation for the year,
this is a really great and positive start.
Obviously when you’re talking about three-year guidance, which is the
only guidance we have given, we’re not going to change that only two
quarters into three years. But obviously again, this was kind of a value
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 13
bump. We’re very pleased with the performance and again expect this
year to continue to be very strong, and again we’re on our way in terms of
the three year.
D. Miller Then Jim, on net cash from operating activities, that came in as a net cash
use, so obviously free cash flow trailed net income. I would assume that
reverses itself as we get into Q3 and Q4. Was the dynamic just simply
that investment in film and TV just eclipsed amortization, or were there
other sort of components there that you want to share with us?
J. Keegan The big component would be the fact that we shipped Hunger Games in
this quarter, in our second quarter, and the cash is going to come in our
third quarter. You’ll see that’s the movement.
Moderator The next question today comes from the line of Ben Mogil with Stifel
Nicolaus.
B. Mogil So maybe you could talk a little bit about some of the feedback that you’re
getting from your new output deals on sort of how Catching Fire is being
viewed abroad, how The Hunger Games franchise is being viewed abroad,
book sales, those kind of trends. Then as sort of a side note to that, are all
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 14
these output deals existing Summit relationships that you’re sort of re-
upping with, or were you able to sort of politely, if you will, upgrade some
of your output partners post-Hunger Game franchise?
J. Feltheimer That’s a great question, Ben, and I’ll have Patrick answer it.
P. Wachsberger First of all regarding the Hunger Games, I have to report that the pace of
readership internationally is now pretty high compared to where it was
when the movie was released; the original movie was released
internationally. Second of all, Jennifer Lawrence has also become
extremely popular internationally and we are basically looking for an
enormous growth in terms of the results of Catching Fire, which is
Hunger Games - Part 2.
In terms of the output deals that we’ve done, we’ve done now—we have
roughly about ten output deals internationally. Some of them are with the
same distributors for both labels Lionsgate and Summit; in some other
cases, we have different output deals for the Summit and Lionsgate. I
have to say that in general, we have improved the output yield, especially
when it comes to the back end of the most recent output deal that we’ve
done.
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 15
B. Mogil Then shifting gears a little bit, because we wouldn’t have a question from
me if there wasn’t one about TV Guide; you had no transactions in the
quarter with them at all. Is that a change in strategy?
J. Feltheimer When you say a transaction, I’m not sure, Ben, what you mean. I will say
that there are a number of both operational and strategic moves that we are
working on at TV Guide, and I think we’ll probably be able to talk a little
bit more about that in the very near future.
B. Mogil Then lastly just for Steve, when you look at the DVD market and look at
the packaged media market in general, are you seeing the retailers go very
deep on The Hunger Games, the Twilights, that kind of product, but really
still winnowing out the library stuff? If you could talk just sort of
generally what you’re seeing on the retailer front.
S. Beeks Especially with some of the larger retailers, we’ve seen the retailers re-
embrace the packaged media business. We’re seeing growth in certain
retailers. We’ve talked about our library growth, which is kind of across
all media, but it’s fairly strong. Yes, they’ve embraced films like The
Hunger Games. The Hunger Games did so well that actually our
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 16
conversion rate is going to be about that of Breaking Dawn 1, even though
it did over $100 million at the box office, so this shows the strength of that
franchise, strength in the packaged media marketplace.
Moderator We’ll go to the line of Doug Creutz with Cowen & Company.
D. Creutz A couple questions—first one is when I look at your theatrical revenue in
the quarter, it looks like it outperformed a bit versus what your actual box
office was you printed. I think when you had talked about the Summit
deal, you had talked about the potential to get better exhibitor splits
domestically, and I just wondered if that’s something we’re already seeing
in the numbers.
Second question is you had just an absolutely enormous international
revenue number in the quarter. I just wondered if you might kind of go
through where that was coming from.
J. Keegan Well, the enormous revenue growth that you’re …, the second part that is
in the quarter, it is the release of The Hunger Games on—the video is
huge. But we also had, as you indicated, the significant revenues coming
from our theatrical releases, but then we also had quite a bit of revenue in
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 17
my international line item. It’s jumped significantly, and that’s
international revenue for a lot of the other titles that are now hitting the
international window. So international has gone strong, home
entertainment has gone strong, and with five theatrical releases in the
quarter, that grew the theatrical revenue line. We’re really firing on all
cylinders with revenue coming from all sources.
J. Feltheimer Rob, do you want to talk about exhibitions?
R. Friedman Our relationships with exhibition couldn’t be stronger and we are starting
to enjoy the benefit of change in rental structures.
D. Creutz And actually, could I just follow up for what Jim answered? I was
specifically asking about the international revenue line, kind of what drove
the big number there. Where there a few films that came through that had
big contributions?
J. Keegan The answer is yes. Hunger Games actually as it hits the different windows
on the revenue cycle recognition, that hit fairly significantly in the quarter.
I know the—I’ll give you the breakdown of the other items.
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 18
J. Feltheimer While Jim looks, I’d like to make an interesting point, though, about
particularly the U.K., which is the way we’re structured there—again, it’s
a very full-service business in terms of feature film business, and because
on the Lionsgate side we actually aren’t delivering that many pictures for
the U.K., three or four a year at this point, Zygi Kamasa and his team have
actually built a really significant business there. I would say they’ll have
probably this coming year about 20 releases, of which only three or four
are going to be supplied by Lionsgate.
The Summit side actually has an output deal there with E1. And so
they’re kind of knocking the cover off the ball, and I think you can expect
for the next two or three years, based upon what they already have in their
pipeline, which is movies like Magic Mike, for example this year that
performed very well, which is a totally independent buy by the U.K. team.
So I think you’re going to continue to see over the next two or three years
some significant, frankly, revenue and we believe a margin contribution
from the U.K. I don’t know, Jim, if you want to add a couple titles, but
that’s kind of the overview, Ben, of what’s going on there—or Doug, I’m
sorry.
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 19
J. Keegan Back on the international, back up to the question we just had, in the
international general revenues we had about what you’d expect when
you’re expecting a significant international revenue—Step Up Revolution,
Step Up 4 Revolution, significant international revenues, and Breaking
Dawn 1 had fairly strong international revenues.
Moderator We have a question from James Marsh representing Piper Jaffray.
J. Marsh First of all, I just wanted to discuss marketing for your theatrical releases.
It seems like it’s been a common theme on a lot of the media
conglomerates’ earnings calls so far about moving out from a live-plus-
three to maybe a week or longer because there’s some DVR measurement
issues. Obviously that sets some challenges for timing your marketing
messages, so I was hoping you could just broadly discuss how you kind of
navigate this changing landscape to get your marketing messages to your
targeted audience.
J. Feltheimer Yes, Rob may want to jump in as well on it because you’ve asked kind of
a couple questions there. I would say number one, I saw what Les did
yesterday. It’s pretty obvious really, and we’re seeing it on national as
well— I mean, everyone jumps up and down, looks at the ratings the next
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 20
day, and then we look at the ratings a week later and it’s 50%, 60%-plus
up in the key demos. Obviously that’s what’s relevant as you’re trying to
build a hit show.
I think there certainly will be, particularly in the media business, I think
there will particularly be—if they were to go to a live-plus-seven, given
the timeliness of our marketing spend, I think we’ll have to sort of look at
those numbers and actually get some kind of an adjustment based upon the
fact that obviously if it’s seven days and our movie’s coming out in three
days, we’re not going to get the benefit of those additional viewers. But I
think clearly we have to start with metrics that make the most sense and
then we’ll all make the adjustments accordingly. So I think we need to
move in that direction and, again, specifically in our television business
we think that’s the only smart way to look at it.
Rob, I don’t know if you want to add more on the feature side?
R. Friedman No, I think you answered it absolutely correctly. Since our message is
very timely, we’re going to be very aware of what our costs are as it
relates to any other metrics that are being used for the ratings.
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 21
J. Feltheimer Yes, the only other thing, again, that I would add is—I’ve mentioned this
publicly a couple of times recently, there’s no question that we are seeing
significant amounts of awareness, particularly on our frankly more
targeted movies from social media, from the Internet, and I think that’s
going to give us a tremendous opportunity, again, with the more targeted
movies for sure to potentially reduce our overall marketing spend. I think
you’re even seeing some of that in this quarter where we had five releases,
but the P&A didn’t significantly impact negatively our EBITDA. I think
that we’re going to be able to—certainly with the horror movies, some
other movies that we see, to continue to lower our—and be very creative
about lowering our P&A costs. I think that trend will continue.
J. Marsh Then I had a follow-up on the success of the Nashville show. Obviously
the buzz has been great and you’ve had some success at the broadcast
network level here. Could you talk just a little bit about the
monetization—are there potential challenges, you think, with the drama
genre, and maybe even with the country theme as you think about moving
this abroad? Is that, number one, a fair characterization and then, two, can
the music sales and the touring and the other things that you mentioned in
your prepared remarks, can that make up for any potential shortfall
abroad?
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 22
J. Feltheimer Okay, good. I’ll have Kevin answer that question.
K. Beggs We’re really bullish on our international prospects, and we’re not
presenting it or marketing it as a country show. Country, in essence, has
been eclipsed by pop, so if you think about Taylor Swift and who she is,
she started as a country artist and is now a crossover mainstream artist. So
really, it’s in the 10:00 ABC kind of genre of prime time serials like
Revenge, Once Upon a Time, Grey’s Anatomy, Private Practice. That’s
how we’re marketing it internationally and the response has been really
terrific, even early on.
The music—it’s twofold. It’s an added ancillary benefit, and as Jon
mentioned, we’re at half a million downloads in only 4.5 weeks of airing,
which is fantastic. We have the whole season in front of us if we get
additional episodes. That will become meaningful money. It’s not
making up against shortfall; it’s just added to the pot, but it really works as
a marketing tool as much as anything. The music is infectious, people
listen to that, they want to go back to the show, and it has those same kind
of circular and viral marketing hook of something like Glee, which is why
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 23
ABC was so excited about it when we brought it in. They are doing an
amazing job on the marketing side.
We have a soundtrack deal which was announced with Big Machine
Records, which is part of the Universal family, and will be in stores as
early as December 11 on the first soundtrack to complement the digital
strategy.
J. Feltheimer I think I would add to what Kevin just said. This year alone in the first
year of the show, we expect to make our share from this, about $1 million
from the music. So it’s not insignificant money, and frankly if you know
about the touring of some of these big shows, actually the money is
extremely significant. So I think you kind of hit the nail on the head that
there is significant money to be made from the ancillary sales of this on
the music side, but going in actually we have a pretty good economic
model to start with.
Moderator We have a question from the line of Jim Goss with Barrington Research.
J. Goss Actually just wanted to follow up on what you were just talking about
with Nashville—does that also provide a platform for high profile guest
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 24
stars, so that will be part of the issue? I suppose it would raise costs, but it
would raise the potential ratings and that sort of thing.
K. Beggs High profile guest stars usually on an ongoing series aren’t really a cost
issue because it’s a bit of a stunt and you have an allowance in every
budget for guest stars, but for sure, this is a great platform. We were all in
Nashville last week to watch the CMAs, which broadcast on ABC, and
spent a lot of time with a bunch of huge music artists, all of whom love
this show, are addicted to it, and have offered to be in it. So we’re going
to expand our guest star roster, especially now that we’ve established our
regulars, so you’ll see bigger names coming in and out of it, and that is a
priority for both us and ABC.
J. Goss A couple of questions I had—first, given the targeted demographic with
Hunger Games and your general targeted demographic, I was wondering
if you could talk a little bit more about what Ben started to get into, about
home video and that growth in packaged media. Is there a streaming
element, and as we move toward not just DVD Blu-ray but into
UltraViolet and the other options, how is that playing in? Is this one of
those titles that might push the mix a little more toward that direction?
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 25
S. Beeks I think you’re absolutely right. I think there are certain titles that come
along almost every year that can be a catalyst for certain media. I
mentioned the film did great in packaged media. In VOD, it’s currently
tracking to be higher in revenue than any other competitive release this
year, and it will be one of the top three or four VOD of all of time. You
mentioned UV, and we’ve long been a supporter of UV, and Hunger
Games was our first release in that format. So far, we’ve had over
600,000 total digital copies redeemed by purchasers of the DVD or the
Blu-ray, and over 150,000 of those are UV redemptions, which is second
only to the final Harry Potter, which didn’t offer an iTunes redemption
option.
So we can see that the UV model is working and we expect additional
retailers beyond Voodoo and Flixster to announce support of UV soon.
And when that happens, we foresee a fast-growing awareness of the UV
locker model, which is going to translate into overall increase in electronic
ownership, which we think is important to our industry and it’s started to
be a significant contributor to the home entertainment marketplace.
Actually when you look at sell-through overall, including electronic sell-
through, basically consumer purchases of filmed entertainment actually
are down less than 2% for the year and we think have a chance of being
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 26
flat for the year, and obviously when you consider that the electronic
copies come at extraordinarily high margin, I guess all good news for the
business, and The Hunger Games is a big part of that.
J. Goss It seemed like there was getting to be a little bit of a gridlock with physical
copies stalling a little bit and the other not picking up yet, so that’s good to
hear. The other question is philosophically as the company evolves, and
recognizing that risk mitigation is a hallmark of Lionsgate, are there any
places you feel you should now step up your risk profile to achieve higher
returns in areas where consistency, footprint, and where your confidence is
building?
J. Feltheimer Actually I would say no because I think the track that we’ve already put
ourselves on, and you can see it in the margins in this quarter, I think
we’re already there. I think the amazing thing that I keep scratching my
head about is the fact that when you see this Hunger Games: Catching
Fire, the scope of it, the size of it, it’s a huge leap. We think it’s going to
be amazing; we think it’s going to expand, certainly, looking at the two
installments after, really continue to expand on a worldwide basis the
audience. And the fact that we were able to go out with our output deals
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November 9, 2012/6:00 a.m. PST Page 27
and with the additional sales that we’ve made and end up with a domestic
exposure that’s the same as the first movie was pretty incredible.
So I think that given the franchise, the young adult franchises that we’ve
got, that we’re on a track already. If you look at money into building a
library already, the kinds of things that Steve was talking about,
particularly in the digital space in terms of our ability to continue to
exploit that library with higher margin digital revenue pushing, as I said in
my remarks, pushing our digital on demand, if you will, customers into the
sell-through space, I think we have an opportunity, frankly without taking
a particularly more risk. I think we have the opportunity based on what
we’ve built already to continue to push into a higher margin space with a
lot of efficiency, so I kind of think that’s where we are right now.
Moderator We’ll go to the line of David Bank with RBC Capital.
D. Bank Three questions. The first is can you give us a—I’m sure it’s a pretty high
number, but sort of a ballpark percentage of the $151 million of fiscal
2012 home video, what percent of it was Hunger Games? And within
Hunger Games, can you give us a breakdown of Blu-ray versus standard
def, revenues in units if possible? Related to that, by the way, you had
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November 9, 2012/6:00 a.m. PST Page 28
said that you thought Hunger Games was likely to sort of index similarly
to Twilight 1, despite the higher box office. Was that on a units basis or a
revenue basis?
The second question is on the balance sheet, part of our thesis and a lot of
others, I think, is the discipline you talked about with respect to taking the
cash flow generation from the success and paying down the debt. So can
you just review for us the debt balances as of the close of the Summit
transaction, and then kind of post-the Q where debt balances are today and
how much of your free cash flow was used to pay off the debt.
And then the last question is no one really—I mean, it would be incredible
for you to replicate the kind of success you had with Hunger Games. It
seems like the franchise you’re incubating at this moment is Divergent,
and how are you building that franchise? How are you incubating it?
What can we watch for? How do you recreate the success you had in
Hunger Games with Divergent, I guess is the question?
S. Beeks I’ll take the first one regarding Hunger Games. So of the things I can
share with you, of the sales of the Hunger Games, more than 40% of the
sales in Hunger Games were Blu-ray, which I think is not only an
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November 9, 2012/6:00 a.m. PST Page 29
indicator of the strength of that growing format, but it also shows the kind
of growing acceptance of the film. We found that in the theatrical box
office, over 60% of the ticket sales were to females, and our research
shows that in the DVD sales only 50% were female, so 50% were male,
which kind of shows that that format is growing.
We haven’t broken out specifically the revenue of The Hunger Games for
the quarter, but when I mentioned the conversion being equal to that of
Breaking Dawn 1, I was talking revenue. We generally always talk
revenue because in the end, that’s what’s important, but it’s even more
interesting to show that not only did we convert at the same level of
Breaking Dawn 1 in every media, and in some cases better when you talk
about VOD, but the title also converted—the sales in packaged media for
Hunger Games was essentially equal to one of the biggest films of all time
and the biggest film of the year, The Avengers, which shows the strength
of that franchise.
J. Keegan What’s going on currently as we stand as of literally today, I’m into the
$800 million facility about 490 million. We currently have no longer
anything outstanding on the term loan, so that’s paid; and the other items
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 30
on the balance sheet, the 436 high yield is still there and there’s still about
a face value of about $111 million of converts.
M. Burns I’m going to mention—Jon talked about critical mass, and we truly have
achieved critical mass, so our focus is on what we have, not in the world
of acquisition. So we believe we have critical mass here, and that is
incredibly important for us in all of our businesses.
And as far as, David, your question specifically about the interest—
D. Bank Yes, can you specifically remind us of how much debt you’ve paid down,
and have you done anything else with the free cash flow?
M. Burns Well, our plan is to do exactly that, is to quickly de-lever. There were two
separate transactions, but obviously the money on our credit facility was
cheaper than the money on the Summit side, so we ended up drawing our
own facility later on to pay off the Summit facility. So that $300 million
that was remaining on our Summit term loan is now paid off, and we
have—as Jim just mentioned, with the balance on our current credit
facility on the Lionsgate side, obviously cheaper money—LIBOR+ 2.5.
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 31
I think as Jon mentioned, he talked about significant interest-saving moves
in the future. You’ll see us, as you know from the public filings, our high
yield bonds, call it 10% money, we’ll be able to call those for the first time
in about 11.5 months at 105¼, and if interest rates stay approximately the
same, that will be about a 700 basis point savings. When you’re talking
about, call it $300 million to $400 million, that adds up to a lot of money.
D. Bank And on Divergent?
R. Friedman Like on Twilight, Hunger Games—and by the way, our very exciting
franchise Ender’s Game, as well, we constantly are focused on working
with our book sales around the world. Fan engagement is always a critical
part of the way we market these franchises. We’re constantly in
communication with our fan base and we do that on a worldwide basis on
an ongoing basis. We take a very long view in the way we market these
franchises.
J. Feltheimer Yeah, I would say what we’re indicating to our Twilight and Hunger
Games fans, by putting Divergent, by talking about it early and putting it,
frankly, in the original Hunger Games time slot is we are indicating the
amount of support that we have for it. We’ve mentioned the book sales
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 32
are ahead on the trajectory in terms of both Hunger Games and Twilight.
We are sort of putting out to our fans right now; we think this is the next
big franchise.
Moderator We’ll go to the line of Matt Harrington with Wunderlich Securities.
M. Harrington I’ve got three questions. One, one of the singularly nice aspects of
Lionsgate is you don’t have too much angst over the economy. I guess
there are a few things at the periphery in terms of TV Guide and
technology diffusion, a little bit of packaged media. But is there anything
we need to worry about with reference to a wide recession and how it
could affect Lionsgate?
Secondly, you talked about the delta in the ultimate on the first Hunger
Games. I’m sure some of that is digital and such, but when you look at the
franchise value of the whole series with some of the just ridiculous
international box office, and Skyfall, Ice Age, etc., do you feel already like
the ultimate profitability on that series and maybe an Ender’s Game or
Divergent or whatever is already higher, just since you did the Summit
deal?
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 33
I guess thirdly, with the amount of profile that you’re getting, do you think
you’re going to have a breakout on the merchandise licensing side in terms
of how that could kind of gain the economics out longer term?
J. Feltheimer Look, on the economy, Matthew, obviously we believe, like I think most
people do, that entertainment media has been somewhat recession-proof. I
do think actually the way that we do our business with less exposure in
most of our businesses, and particularly sort of what Patrick’s gone off
and done, I think he can speak a little bit more about this. But I would say
that given some of the shakiness around the world, the fact that we went
out early and with major strong obligors, went and made output deals so
that we actually have tremendous visibility and predictability in terms of
the majority of the costs on each of our productions, the fact that we have
businesses like Arbitrage, Margin Call, Friends with Kids were actually
very significant contributions coming from movies that we can put out on
a platform basis where we only put $2 million, $3 million, $4 million into
marketing it at first instead of $30 million, $40 million, $50 million going
into a wide release. I think all of it gives us some flexibility that frankly
some of the major conglomerates don’t have if the economy were to
worsen.
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 34
So I guess I would say the long answer to a short question is we’re not
particularly concerned about it. Patrick, I don’t know if you want to
expand a little bit more on the international front.
P. Wachsberger Well as Jon noticed, our output deals definitely—first of all, they are made
in dollar currency so we don’t take any risk in terms of currency. They are
here to lower our risk capital, but also we have some very, very strong
back end for movies that will perform in individual territories. We are not
crossed, so if one movie works in one country and doesn’t work in the
other one, we’re going to get the benefit of the … on the country where
the movie works. So I think we are in very, very good shape, and to add
to what Rob said earlier, to give you an example—Divergent was—which
we started selling at the American … markets, we did extremely well, and
I think we’re probably going to cover about 80% of our projected budgets.
J. Feltheimer I’m not sure if your next question was if we see all the upside already built
into the international market, and I think the answer there would be no. I
think we’re starting just to hit the tip of the iceberg in terms of China, and
we haven’t really even scratched the surface in India. We have seen on a
couple of our pictures Japan starting to come back, but we actually believe
obviously absent some huge worldwide recession, Latin America
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 35
obviously with our partnership with IDC, if you start comparing—I’ve
said this before, the numbers we got from the first Hunger Games to what
the numbers that Summit has been getting from the partnership on all the
Twilights, we see some tremendous upside there. I think Brazil and Latin
America are going to be very, very robust growth territories going
forward. So again, I would say we’re not even halfway there in terms of
my expectations of where the international market is going.
R. Friedman On the licensing and merchandising front, obviously with our experiences
on the Twilight series and The Hunger Games series moving into
Divergent and our other franchises, we’re very, very active in that
landscape not only from a licensing and merchandising perspective, but
also bringing them in as promotional partners to help lower our marketing
costs as well.
Moderator We’ll go the line of Alexia Quadrani with JP Morgan.
A. Quadrani Just a couple of questions. First, do you have any sense of how big your
film slate is going to be for fiscal ’14? I assume it probably can’t match
quite this year following Summit, but I’m counting about 11 films. Is that
about right?
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 36
J. Feltheimer We’ll probably be very close to what we are looking as a normalized 14 to
15 films on an annual basis.
A. Quadrani Then when you look into the December quarter, any color you can give us
on what we should expect for P&A spend in the quarter?
J. Keegan Well, in our third quarter you’re going to see approximately $130 million
in theatrical marketing.
A. Quadrani Just a quick follow-up on something you discussed a bit on the call
already. The home video release of The Hunger Games moving also into
the December quarter, since revenue’s obviously recognized on delivery, I
would assume that the majority of the revenue fell into the September
quarter. Is it just re-ups of further deliveries you’re going to see benefiting
this current quarter, or are there other delivery mechanisms? I guess any
more color you can give us on that to get a sense of how much more we
still have to come.
Steve Beggs With regard to home entertainment, it’s primarily packaged media and
digital sales. Obviously the majority of it, as I mentioned before in the
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 37
previous question, fell into the quarter and we’re just going to see follow-
on revenue for the fourth quarter through the holiday season. I don’t know
if that answers your question.
A. Quadrani No, that’s helpful. Thank you.
Moderator Our next question comes from the line of Tuna Amobi with S&P Capital.
T. Amobi So I wanted to understand better your digital philosophy. You talk about
your bias for sell-through, given the understandable high margins there;
but perhaps you can help us understand better how you view your digital
window win strategy in the context of the … providers, also given your
joint venture in Netflix since I’m sure there’s a lot of moving parts that
you can probably help us understand better.
Separately with regard to Tyler Perry’s television deal with OWN, I
wanted to ask if perhaps that kind of limits your options on TV Guide, and
I would imagine that was also somewhat of a disappointment to you, if
that’s my take. And then lastly—India, you mentioned that you’ve barely
scratched the surface, and I’m wondering if that is purely to do with
timing or any kind of structural issues or hurdles that you’re facing in that
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 38
market. That would be helpful. China, by the way, I assume that you are
also interested in pushing further there.
S. Beeks I think part of your question regarding windows can maybe be addressed
with how we look at—how we sequence in the ancillary markets, and
we’ve had a tremendous amount of success playing with those windows,
experimenting, trying to find the right model for different movies. The
one thing we have found is that there is a different model for different
movies. We’ve been a pioneer in that regard. You’ve seen us with day-
and-date releases, obviously the most successful ones being Margin Call
and Arbitrage, which ended up being extraordinarily profitable on a
relative basis.
You’ve seen us with early electronic sell-through going 30 to 40 days
prior to DVD with films like What to Expect When You’re Expecting and
Cabin Fever, and you are going to see us do more and more of that in the
future. We just feel that you don’t try to make one size fit all. You’ve
seen us do some VOD prior to DVD with films like Abduction, so it’s
really about finding the right model for the right film, recognizing that
we’re in partnership with exhibition partners, our retail partners, our VOD
partners, trying to keep that all in balance.
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 39
J. Feltheimer I’m not sure what you were referring to with our Netflix partnership. We
have a number of different pieces of business we’re doing with Netflix.
They were early on a distribution partner for Epix. As I think all of you
know, we’ve come out of our exclusivity period and immediately got
Amazon to come on board.
We think Netflix is a fantastic company, and again we are doing one of
their first original series, Orange is the New Black. I’ve seen two episodes
already. It’s really a fantastic show. Jenji Kohan, the creator of Weeds is
doing it; but again, as we’ve said, we are aggressively looking at various
models that take advantage of the way people are watching content these
days. Every single piece of business—as Steve has mentioned, every
business has a new deal attached to it. We like to be flexible, we like to be
able to be entrepreneurial and move quickly to take advantage of these
new models, and we’re going to continue doing that as we move into,
frankly, higher margin replacement revenue.
In terms of Tyler, we have a tremendous business. We just actually green-
lit two new movies, including a Medea Christmas movie we think is going
to really be extremely strong and profitable for us. He can’t do every
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November 9, 2012/6:00 a.m. PST Page 40
single piece of business. I believe his deal at OWN is to do two series for
them, and that was one of the possibilities that we had been talking about
in terms of TV Guide and this, in the short run, probably prevents it. But
again as I mentioned earlier, we have a number of different things we’re
working on with TV Guide.
To move on to the India question, I think the way we’re looking at India,
not dissimilar from China, is you’ve got 1.1 billion, 1.2 billion people of
which probably half of them—in a sense, it might be the largest English-
speaking country in the world right now. They love entertainment. I did
help years ago to build Sony Entertainment Television in India and
recognized the incredible value that we can get there, and I’m sure there’s
a lot of different reasons why it hasn’t been as open to U.S. content as it
could be, but I can tell you we’re concentrating on them significantly right
now. Jim Packer just came back from a trip there and I think you can see
in the next year some significant revenue benefits from our concentration
that territory.
T. Amobi Just a quick housekeeping clarification on the backlog—is it fair to
assume that the international component of that number has been growing,
or—? Any color on that would be helpful, thank you.
LIONSGATE ENTERTAINMENT Host: Peter Wilkes
November 9, 2012/6:00 a.m. PST Page 41
J. Keegan Yes, the international absolutely—with our theatrical releases, absolutely
international has … release; so yes, you’re seeing that grow significantly.
Moderator We have time for one final question today, and that will come from the
line of David Joyce with ISI Group.
D. Joyce If you could just provide a little bit more color on a few items such as
P&A—was there any Twilight P&A in the second quarter? Also, DVD
release schedule from the film releases over the summer, are they all going
to be in the third quarter with cash flowing in January? That all would be
helpful.
R. Friedman Breaking Dawn 2 had about $2 million worth of … P&A in our second
quarter.
S. Beeks To answer your question, David, on the DVD releases, the biggest release
we have in the fourth quarter really is The Expendables 2, which we have
in a really strong date just prior to Thanksgiving, which really worked
well for us two years ago with the first Expendables. As you might
expect, we’ve got Witness Protection that we just released, which is the
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November 9, 2012/6:00 a.m. PST Page 42
Tyler Perry picture; and that’s really about it. We didn’t really have many
more summer releases that are coming out in the fourth quarter.
D. Joyce If you could clarify—Jon had mentioned 38% of the library revenue was
packaged media, but in the quarter it seemed like it was about 20%, at
least from the film side. What am I missing in that calculation?
J. Feltheimer Yes, I was talking about the library, David. And again, guys, I’ve
mentioned we’ve been building the company for 12 years and it doesn’t go
beyond us that most of you have been supportive along the way, and we
certainly appreciate that support and look forward to the next quarter.
Moderator We’ll turn the conference back over to Mr. Wilkes for closing remarks.
P. Wilkes No closing remarks. Thank you all for joining us. Talk to you next
quarter.
Moderator Ladies and gentlemen, that does conclude our conference for today.
Thank you for your participation and using the AT&T Executive
TeleConference. You may now disconnect.
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