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May 31, 2007

Lionsgate: Good Results and Outlook But As Usual Confusion

Lionsgate (LGF) shares are trading down about 4% following the release of the company's 4Q07 results and 2008 guidance. As usual, the accounting is complicated but overall I think the results and guidance are fine and expect the shares to bounce back.

For 4Q07, LGF reported EPS of 19 cents on revenues of $332 million. EPS were a little shot of the 22 cents consensus while revenues were $10 million higher than expected. Given the volatility in LGF's quarterly numbers due to timing issues regarding revenue and expense recognition in film and TV production, I see these results as essentially in line with expectations.

For 2008, LGF expects to produce free cash flow "in excess of $100 million" on revenue growth of 10-15%. However, EBITDA and Net Income will be significantly negative as the company absorbs an incremental $200 million in marketing expenses for an expanded slate of theatrical releases and the associated expenses related to DVD releases on the films. The discrepancy is the result of the new film financing deal LGF announced on Tuesday that will provide $400 million in off balance sheet financing for the company's film slate to be released this fiscal year. LGF has to recognize 100% of the expenses related to these films even though the financing vehicle will pick up 50% of the costs. On the call management explained that the cash flow statement will pull back the difference between free cash flow and EBITDA. The addition of even more complex accounting is not good news of LGF but the explanation makes sense and the numbers seem to balance in the end at close to the levels the street was expecting....

Management used the call to make three other key points. First, the company has diversified itself enough to reduce the impact of current year theatrical releases. International distribution, television production, and a larger library all help to provide a more stable core business. Second, the 2008 movie release slate was outlined and a target for $400 million in domestic box revenue was cited. Third, new distribution channels for content such as VOD and iTunes download are growing rapidly and beginning to contribute materially to corporate growth. On several occasions, it was noted that so far these revenue streams are incremental and not cannibalizing traditional distribution channels.

Overall, I see LGF's results as validating the current price of the stock. The increased theatrical slate and new financing vehicle increase risk if the movies bomb but assuming decent box office performance, the company is building the potential for high margin library revenue beginning next fiscal year. I think investors will be generally satisfied with the results, the guidance, and management commentary. I expect the shares to stabilize and bounce back assuming the market holds together.

Posted by Steve Birenberg at May 31, 2007 10:03 AM in LGF