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August 07, 2006

Lionsgate 1Q07 Earnings Preview

Lionsgate (LGF) reports its 1Q07 on Wednesday after the close. With the key theatrical releases coming this fall and winter, LGF is looking at a backend loaded year so investors shouldn’t expect much out the quarter. The company had no box office success in the quarter but results weren’t bad enough to warrant any write-offs. DVD sales should be a strength in the quarter thanks to the successful release of the latest Tyler Perry film Madea’s Family Reunion as well as several stage plays from Perry’s catalog.

LGF’s results are notoriously volatile and the company has provided full year guidance so rather than offer consensus estimates, here are ranges based on my review of several different analysts. Revenues should come in between $195 million and $215 million producing an EBITDA loss of $1 million to $19 million. EPS estimates range from a loss of 4 cents to a loss of 11 cents. Free cash flow, which is management’s preferred metric is expected at around $3 million but there aren’t many estimates....

Assuming no surprises in the quarter and the back end loaded nature of the year, management will likely reiterate FY07 guidance which calls for revenues of $900 million, free cash flow of $85 million, and pretax income of $32 million. Analysts view the company’s guidance as conservative but acceptable given the company has regularly missed estimates and reduced guidance over the past year. Key to the guidance is box office of $250-300 million for the company’s FY07 releases, library revenue of over $200 million, and the production of 9 TV shows vs. just 5 a year ago. The key movies for fall and winter are Saw 3, Hostel 2, and Tyler Perry 3. Also, analysts have high hopes that Employee of the Month could do $25 million. SO far this year, Akeelah and the Bee, See No Evil, and The Descent have all had mediocre box office runs.

Investors will be hoping for an update on the much anticipated but long overdue Horror Channel. LGF is one of the most successful studios for horror and has a large library of movies and TV shows it could exploit. This seems like one of the few niche cable channels that is not presently launched.

I gave up my long on LGF because the company was unable to produce consistent financial results and could not explain inconsistencies I found between my understanding of film accounting and the operating results. I am not saying that the accounting is bad, just that I couldn’t reconcile my own understanding of it with the company’s performance and long-term growth.

Key for LGF shares is meeting free cash flow estimates. I think that the company seems able to do so for FY07. However, I don’t understand how the company can grow its free cash flow off the 2007 base without the added risks of a significant ramp in film and TV production. LGF has a premium valuation, partly attributable to takeover speculation. Given my growth concerns, I am not willing to pay the premium.

Posted by Steve Birenberg at August 7, 2006 01:02 PM in LGF