Lions Gate reports highest quarterly revenue ever

Marketing, advertising pull down results to $56.2 million loss

By Ned Randolph -- Video Business, 11/13/2007

NOV. 13 | Lions Gate Entertainment Corp. reported its highest revenue ever in the last quarter, but it was more than offset by marketing and advertising expenses for its movies.

The studio's net loss was $56.2 million or 47¢ per share for the three months ended Sept. 30, compared to a net loss of $14.4 million or 14¢ per share in the same period last year. That included $122.5 million in marketing expenses for its slate of films.

However, revenue rose 57.4% to $343.5 million from the year-ago period, attributed to strong theatrical releases as well as DVDs that out-performed their theatrical runs.

"Operationally, this was a very strong quarter for all of our businesses," said Jon Feltheimer, co-chairman and CEO. "We not only had the strong theatrical run we forecast, but our DVD over-performance in the quarter on films that underperformed in theaters earlier in the year has made up a lot of lost ground."

"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," Feltheimer told analysts on Monday.

He said the theatrical slate going forward should contribute $120 million in cash flow, which is 10% to 20% more than last year's slate.

"Over the short term, it made for the strongest revenue quarter in Lions Gate'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," Feltheimer said.

Lions Gate's theatrical division generated $42.4 million compared with $20.5 million in last year's second quarter.

Its home entertainment business brought in $122.3 million, spurred by DVD releases of The Condemned and Delta Farce. That compared with $115.1 million a year earlier.

Head of DVD acquisitions and co-chief operating officer Steven Beeks said the company is again on track to generate approximately $250 million of library revenue.

"In our new release business, the [second quarter] results are a good example of what we consider to be our core strength, which is extracting maximum value from our products," Beeks said. "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."

Beeks also said that high-definition discs will offer higher margins and be a growth driver—especially Blu-ray, which Lionsgate supports.

"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," Beeks said. "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 out-selling 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."

Video-on-demand and pay-per-view window releases also were substantial revenue drivers, he said.

"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 PPV windows," Beeks told analysts. "Overall VOD revenue climbed from $12 million in fiscal 2006 to $24 million last year, and we have already achieved $20 million in VOD revenue in the first six months of fiscal 2008."

Broadband electronic sell-through revenue also is up, although Beeks did not give quarterly figures.

"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," he said. "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 revenue 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."

TV production revenue jumped 245.3% to $109.1 million, the company reported.

Lions Gate said it did not expect the strike by Hollywood screenwriters to have a significant impact on its operating results for the rest of fiscal 2008, which ends in March.

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