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August 09, 2006

Amazing! Lionsgate Reports A Routine Quarter

By recent standards, Lionsgate (LGF) reported a very routine quarter. There was little excitement in the numbers, full year guidance for March 07 was affirmed, and analyst questions on the conference call were not hostile. The lack of excitement was not just due to a generally inline quarter. LGF also made progress by releasing its earnings promptly after the close and hosting a conference call following the release instead of the next morning. Additionally, the structure of the call improved with short comments by management followed by Q&A. Previously, management talked way too much before taking questions. All of this is progress for LGF and regardless of action in the stock over the next few days if the company has turned a leaf in terms of its consistency and communications with investors, it is good news for investors.

The quarter, 1Q07 for LGF, was largely in line with expectations with one exception. EBITDA and free cash flow each were a low single digit loss and EPS were negative 3 cents. Each of these figures were within an acceptable range form analyst estimates. Revenues were well short of expectations at $173 million vs. expectations for around $200 million. The entire shortfall was attributed to timing of revenue recognition on TV production and management affirmed prior full year guidance for this segment’s revenue for the full year. LGF has 11 series in production vs. just 5 a year ago. It is not clear to me why the payments appear to be later this year but analysts didn’t seem too concerned. The reason why EBITDA closely matched expectations despite the significant revenue shortfall is that TV production revenue is offset by direct operating expenses at a 90% clip.

LGF’s FY07 is heavily back end loaded due to the timing of major theatrical releases and now the timing of TV production revenue....

This means that the calmer environment surrounding the report this quarter may not last. Management reaffirmed full year guidance targets including the key free cash flow call of $85 million.

I have no real beef with LGF meeting this year’s numbers as the assumptions on theatrical revenue for sequels to proven hits like Hostel, Saw, and the Tyler Perry look conservative. The reason I am no longer bullish is because I have little confidence that the company can grow its free cash flow without the substantial risk of significantly upping its movie production. When this happened in 2005, there was great volatility and confusion in the financial results. This tells me that growth based on more movies is not worth paying for.

So despite a better quarter relative to expectations and much better investor communications, I remain on the sidelines. I still expect to one day wake up to a buyout of LGF when I will regret not being long.

Posted by Steve Birenberg at August 9, 2006 04:46 PM in LGF