Archive for category: Lionsgate

Lionsgate reported another confusing quarter. Revenues blew away expectations but so did expenses. EBITDA was a big negative number but the company reported over $21 million in free cash flow. The press release was vague and the simultaneously issued 10-Q did not directly address the absolute figures but instead focused on percentages. All that said the numbers and their implication for the rest of LGF’s fiscal year ending March 2008 are positive. Guidance was not formally raised but management said the company is on track to exceed its revenue and free cash flow guidance by 10%. This forecast assumes that three films to be released in the March quarter perform to expectations, a not unreasonable view given the box office targets articulated on the call. Finally, management was able to provide an acceptable explanation for why free cash flow and operating cash flow will converge next year. This is an ongoing point of contention for LGF and will be a comfort to investors….

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Lionsgate (LGF) reported a good quarter. EPs of 19 cents matched estimates, while revenues of $255 million did not fall materially short of the $258 million consensus. Free cash flow of $50 million was very strong. Management opened the conference call by stating it was raising guidance to revenues of $950 million and free cash flow of $100 million. LGF left its pretax income guidance of $30-35 million unchanged but said that non-cash stock compensation charges were the only thing keeping it form going higher.
I think the shares will be well supported by the quarter and could move marginally higher on the basis of the guidance increase and confident talk of the FY08 outlook, which begins on April 1st. However, it still bugs me that such a huge gap exists between operating income and free cash flow. This means that free cash flow is being driven by working capital items. My analysis, which may be wrong, is that the gap exists because LGF consistently ups the portion of its film investment that represents residuals and participations. Eventually, this line item will stabilize year over year thus requiring operating income to drive free cash flow….

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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….

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On Thursday, LionsGate Entertainment (LGF) reported mixed 4Q06 results and announced 2007 guidance which was inline with expectations. The shares are responded well initially, rising more than 3%. After almost a year of disappointing financial results, I think the rally in the shares is more a function of relief than the result of any important new positive fundamental trends.
Revenues Far Ahead of Estimates
For 4Q06, revenues came in at $313 million, far ahead of analyst estimates that ranged from $250 million to $300 million. Strength came from higher than expected home video revenues, which were due to good sales of DVD titles from recently released films. Theater revenue and TV revenue came in as expected. The revenue upside did not flow through to operating income as EBITDA only met guidance of $20 million. Expenses were too high once again, which is a problem that recurred throughout FY06 and raises questions about the long-term profitability of LGF’s business model. Despite the lack of operating leverage, free cash flow (FCF) easily beat estimates, coming in at $48 million as working capital items again contributed greatly. The shares are probably responding to the better than expected free cash flow but the continued disconnect between EBITDA and FCF leaves earnings quality issues front and center.
Revenue Guidance for 2007 Tops $900 Million
For FY2007, LGF provided revenue guidance of “greater than $900 million” and free cash flow guidance of around $85 million. Management based the revenue guidance on what it called conservative assumptions for box office receipts along with general commentary for TV, library and home video revenue. FCF guidance of $85 million is less than the $103 million the company reported in 2006. But management noted that 4Q06 included a $20 million working capital benefit, so in reality they are forecasting flat comparisons.
Closing the Gap Between EBITDA and FCF
On the call, management noted that it plans to close the gap between EBITDA and FCF by increasing its operating profits. This will have to be the case as almost all of 2006 FCF came from balance sheet items. Balance sheet items can play an unusually large role for TV and film production companies, but ultimately operating income has to support FCF. Unfortunately, management provided no EBITDA guidance for FY07. Repeated questions by analysts did help to flush out the composition of 2007 FCF but there is still much looseness in the cash flow model for me.
Guidance of Flat Results for 2007 Reflects Mediocre Earnings Quality
I don’t mean to be overly negative in my assessment of the quarter and guidance. I sold the stock partially because I was concerned about earnings quality. But the main reason I soured on LGF was that I did not see growth potential in FCF over the next couple of years that would support what I see as a full valuation for anything short of a takeover. I think guidance for flat results in 2007 supports my thesis.
There are reasons to be optimistic. Investors will respond if 2007 FCF and EBITDA converge. The company continues to build library value in both films and TV. TV especially looks strong with the number of series and pilots the company is producing growing nicely in 2007. Carl Icahn has taken a stake in LGF, complementing a stake built over the past year by a former associate.
LGF Remains a Suitable Takeover Candidate
LGF is a unique asset as the only sizable independent movie and TV studio. The company fits well with many public companies that could easily swallow the financial commitment to acquire LGF. There are significant shareholders with a history of agitation. Stabilizing financial performance, asset value, and takeover speculation will support the shares unless there is another significant setback related to earnings quality. Management has heard the earnings quality complaints and seems to be responding. We’ll probably wake up one day to news that LGF is being taken over. I’ll regret not owning its shares that day but until then I just don’t have the confidence in the company’s growth profile or cash generation consistency to be long.

There could be some excitement around Lionsgate (LGF) this week ahead of Friday’s opening of Akeelah and the Bee. LGF shares received a boost last year when Starbucks (SBUX) announced it had selected the film as its first entry into the movie business via in-store promotion.
I think it is possible that LGF could trade up this week in anticipation of a solid opening for the film. SBUX has been promoting the film in its stores since early April and LGF is supposed to be spending a good-sized advertising budget of around $15 million. The film received sneak previews on over 900 theatres this past Saturday as LGF tries to build buzz. The cast will appear on Oprah this week and so far reviews are excellent.
After moving up from a tax loss selling depressed year end close of $7.68 to $10.29 at the end of March, LGF shares have pulled back steadily this month to $9.40, down almost 9% from the high. I still have serious reservations about LGF that led me to sell the stock well below current prices, but I think the recent pullback leaves room for a nice run this week as the anticipation of Akeelah’s opening builds….

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