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Final Transcript

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

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



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.



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



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



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



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



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



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



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?



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.



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



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



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.



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



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



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.



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.



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



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.



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?



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



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



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?



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



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



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



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



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



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.



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



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?



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.



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



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?



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



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



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.



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



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.



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



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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