Lionsgate

Fiscal 2018 Third Quarter Earnings Conference Call

Thursday, February 08, 2018, 5:00 PM Eastern

CORPORATE PARTICIPANTS

James Marsh - Head of Investor Relations

Jon Feltheimer - Chief Executive Officer

Jimmy Barge - Chief Financial Officer

Chris Albrecht – President & Chief Executive Officer, Starz

Michael Burns - Vice Chairman

Kevin Beggs – Chairman Lionsgate Television Group

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PRESENTATION

Operator Ladies and gentlemen, thank you very much for standing by and welcome to the Lionsgate Fiscal 2018 Third Quarter Earnings Conference Call. At this time, all participants are in a listen- only mode. Later, we will conduct a question and answer session and instructions will be given to you at that time. If you should require assistance during today’s call, please press “*” then “0” and an operator will assist you offline. And also as a reminder, today’s call is being recorded.

I would now like to turn the conference over to Head of Investor Relations at Lionsgate, Mr. James Marsh. Please go ahead.

James Marsh Alright. Thanks, Perki [ph]. Good afternoon, everyone. Thank you for joining us today for the Lionsgate’s fiscal 2018 third quarter earnings conference call. We will begin with opening remarks from our CEO, Jon Feltheimer, followed by remarks from our CFO, Jimmy Barge. After their remarks, we will open the call for your questions.

Also, joining us on the call today are, Vice Chairman, Michael Burns, Starz’ President and Chief Executive, Chris Albrecht, Starz’ Chief Operating Officer, Jeff Hirsch, Starz’ Chief Financial Officer Scott MacDonald, Lionsgate’s Chief Operating Officer, Brian Goldsmith, Motion Picture Group Co-Chairman, Joe Drake, Motion Picture Group Co-Chairman, Patrick Wachsberger, President of Motion Picture Group, Erik Feig, Chairman of the TV Group, Kevin Beggs, Chief Operating Officer of the TV Group, Laura Kennedy and Chief Accounting Officer, Rick Prell.

The matters discussed on this call today 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 could differ materially and adversely from those described in the forward-looking statements as a result of various factors, including the risk factors set forth in Lionsgate’s annual report on Form 10-K filed with the SEC on May 25th, 2017, as amended in the Lionsgate’s quarterly report on Form 10-Q filed with the SEC on February 8, 2018. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements, and may be made to reflect any future events and circumstances.

With that, I’ll turn it over…the call to Jon. Jon.

Jon Feltheimer Thank you, James, and thanks everyone for joining us today.

Our strong performance in the quarter keeps us on track for our fiscal year expectations, with robust free cash flow generation that has enabled us to de-lever ahead of schedule.

I’m pleased to report that our continued financial strength has allowed us to resume paying a quarterly cash dividend of nine cents per common share, returning value to our shareholders as we continue to grow our Company.

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I’d like to touch on a few highlights in the quarter, going a little deeper than usual into initiatives in our emerging businesses. Then I’ll drill down on each of our segments to tell you how we’re responding to the pace of disruption in our operating environment.

In the quarter, the worldwide box office success of Wonder, which is nearing the $300 million mark, again shows our ability to achieve outsized performance from a lower budget, lower risk film. The movie capped a slate that was up 30% at the domestic box office from the previous year.

At Starz, the drama series Vida, already generating buzz among Latinx audiences, the half-hour millennial drama Sweetbitter, based on the New York Times bestseller, and the prestige limited drama series Howards End, have all been added to a strong, diverse, and growing slate. I’m also pleased to report today that Starz is on track to air the 2nd season of the critically- acclaimed hit series American Gods early next year.

All of these series are consistent with our Starz strategy of super-serving women, African- American, Latinx, and millennial audiences, and we’ll continue to invest in new premium programming that builds on our strength in reaching these demos.

Also, during the quarter we announced a new Lionsgate Television premium series for Starz, The Continental, continuing the steady growth of our John Wick film, television, and game franchise.

We continued to supply high-end content to our other network partners, launching the critically- acclaimed dance series Step Up: High Water for YouTube Red. Step Up is another adaptation of one of our successful film franchises, part of our Lionsgate 360 strategy exploiting our intellectual properties across multiple platforms.

We had one of our most productive quarters in creating premium properties for our emerging businesses.

Kevin Hart’s Lyft Legend, the 1st series for Laugh Out Loud, has already drawn over 50 million views. Since launch we’ve added six more series, including Cold As Balls, a sports interview show starring Kevin and a group of celebrities and star athletes that debuts today. Next week we’ll launch the Laugh Out Loud radio platform in partnership with Sirius, with Kevin’s “Straight from the Hart” weekly talk show leading a line-up of “laugh out loud” programming.

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We’re also very pleased with the rapid growth of our over-the-top platform PANTAYA, backed by the first-run movies and library titles of Lionsgate, Pantelion, and Hemisphere Media, three of the leading content players in the Spanish-language and bilingual space. The service is well on its way to becoming a premier destination for Hispanic consumers.

Our interactive games business is reaching critical mass with a fast-growing slate of premium properties.

Following in the footsteps of John Wick Chronicles and Power Rangers Legacy Wars, our Saw downloadable content for the Dead by Daylight game reached number one last week on the Steam platform. On February 22nd we’ll launch Deploy and Destroy, a mobile game that will integrate multiple properties, beginning with Ash vs. Evil Dead, to coincide with the premiere of the show’s third season on Starz. And we’re developing three games in three different genres for the video game component of The Kingkiller Chronicle franchise.

Our location-based entertainment business is reaching critical mass as well, with eight branded theme parks and entertainment offerings in operation or slated to open by the end of 2020.

Buoyed by the recent opening of our Lionsgate Zone, the Motiongate theme park in Dubai is setting new attendance highs. The first Saw Escape Experience debuted in Las Vegas last month to rave reviews. And last week we announced our second Lionsgate Entertainment City indoor theme park with our partner Parques Reunidos in Madrid, incorporating multiple Lionsgate branded properties.

As you can see, we continue to cross-promote great intellectual property created in our core businesses across our emerging platforms. As a result, both our location-based entertainment and interactive games divisions are positioned to make meaningful contributions to our bottom line in fiscal 2020.

While our global IP platform is operating at full throttle, we’re operating in an increasingly disruptive environment that touches every part of our business – content spend, talent relationships, and how we look at and reach our audiences.

In response, we’ll continue to rely on our strengths by competing in areas where we can win. We’ll build upon our leadership in reaching under-served audiences with exciting and relatable content. And we’ll leverage our status as a platform-agnostic supplier of high-end content to create relationships with new partners as we continue to grow existing ones.

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As I touch on each of our businesses, let’s take a look at how we continue to incorporate these responses into our strategies.

Looking first at motion pictures, our slate continues to reflect our core strengths – tentpole properties like Chaos Walking and The Kingkiller Chronicle… star-driven films like Good Universe’s Flarsky, teaming Charlize Theron and Seth Rogen, and Robin Hood, starring Jamie Foxx and Taron Egerton… strong commercial genre pictures like Hellboy, Borderlands, Naruto and, of course, John Wick 3… and movies targeted to large affinity audiences such as Pantelion and MGM’s Overboard, Uncle Drew, the Sundance favorite Blindspotting, and the next two Tyler Perry films.

We’re also very excited about the Susanna Fogel-directed action comedy The Spy Who Dumped Me, starring Mila Kunis and Kate McKinnon from producers Ron Howard and Brian Grazer, and Paul Feig’s noir thriller A Simple Favor, teaming Blake Lively and Anna Kendrick. Both films continue our legacy of big commercial female star-driven properties.

This is a diverse slate in areas of proved strength targeted to audience segments we know. Like last year, it has films with breakout potential in every category.

Turning to Starz, the network continues to add exciting new series to a strong lineup that is performing well. The J.K. Simmons spy thriller Counterpart debuted impressively last month, earning a rare 100% score on Rotten Tomatoes.

Ratings for Starz originals have grown for three years in a row and position the network as a strong #2 among the premium pay platforms with four of the top 10 dramas in premium television. Power is the top-rated premium series for African-American audiences, and Outlander ranks 2nd among women, reflecting our ability to deliver programming that resonates with our core demos.

Starz has more than doubled the number of subscribers for its direct-to-consumer offering in the past 12 months, and we grew the number of over-the-top subscribers again in the December quarter.

Last month Starz renewed its multiyear carriage deal with Verizon on market terms and forged a new partnership with Bell Media in Canada, part of Starz’s planned rollout across 15 territories over the next three years. The agreement calls for Starz and Bell Media to rebrand Bell’s TME

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Encore entertainment channel in Canada as well as to collaborate on bringing Starz programming directly to consumers on new platforms.

On the distribution front, I’m pleased to report that we’ve just signed a multiyear renewal of our Amazon partnership that expands the distribution and marketing of our Starz digital product. The Amazon distribution has been very important to the growth of our over-the-top product, and we believe that this agreement incentivizes both partners to continue growing that distribution significantly.

These gains are all being driven by the success of our Starz programming. And, as part of our commitment to put on “more shows that matter more often,” we’re planning to ramp up the number of Starz original series episodes by almost 100% by the end of fiscal 2020.

As Starz continues to transition into a consumer analytics-driven digital world, its business becomes more measurable, repeatable and investable. And as our ability to monetize Starz programming through retention of rights worldwide continues to grow, so does our confidence that we can achieve a strong return on our investment in very short order.

Turning to Lionsgate Television, we had another strong quarter as a leading supplier of premium programming to a diverse group of buyers.

ABC ordered Courtney Kemp’s Get Christie Love, an action-packed spy drama pilot based on the 70’s television show about an African-American female CIA agent. This is the first show picked up under Courtney’s expanded development and production deal with Lionsgate.

CBS ordered the pilot of L.A. Confidential, based on James Ellroy’s noir classic and the first series from our television joint venture with New Regency.

And earlier this week, Fox picked up the animated pilot presentation of Li’l Kev, a loosely autobiographical show based on the standup comedy of Kevin Hart, produced by Lionsgate and Fox Television and extending our 360 degree relationship with Kevin.

Our new series are positioned to join a slate that already includes, as I mentioned, Step Up, along with Nashville, still CMT’s most watched series in its 6th and final season, Greenleaf, whose 2nd season generated strong ratings on OWN, The Royals, whose 4th season debuts next month, and Orange is The New Black and Dear White People, returning to Netflix later this year.

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We also had a strong quarter on the unscripted side. Kevin Hart: What the Fit?, debuts on YouTube next month, and the recently-announced Joel McHale Show, the first of three new unscripted series for Netflix, head a slate of eight unscripted Lionsgate Television series for the streaming platforms alone.

In addition, Craig Piligian and the team at Pilgrim have assembled a prolific slate with 50 shows expected to be in active production by this summer, including a talk show, a syndicated legal show, and two broadcast network game shows.

Proving that the syndication business is alive and well, Debmar-Mercury had one of its most active quarters, producing and syndicating the court show Caught in Providence, based on a viral Internet sensation, to the Fox television stations. Debmar-Mercury is also syndicating the animated comedy BoJack Horseman, one of the first Netflix original series to hit the syndication market.

In closing, we’re on track to meet expectations for the current fiscal year. As we continue to add scale to our platform by investing in talent and content, continue to expand Starz internationally, and ramp up our emerging businesses, the growth we had originally anticipated in fiscal ’19 will likely be pushed back a year to fiscal ’20.

We expect this increased investment in content to lead to greater returns for our shareholders as well as enabling us to resume our strong growth trajectory. Jimmy will provide more color in a moment.

We continue to believe that it’s a great time to be content creators, owners and distributors. We remain uniquely positioned for above industry average growth with below average risk and significant optionality in the M&A space. Our content platform remains strong, and we’re committed to investments that will make it even stronger.

Now I’ll turn things over to Jimmy…

Jimmy Barge Thanks, Jon, and good afternoon. I’ll briefly discuss our quarterly financial results and update you on our outlook, as well as provide an update on our capital profile and strengthening balance sheet.

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We reported solid results for the quarter; revenues increased 8% over the prior year on a pro forma combined basis to over $1.1 billion, largely driven by the solid performance of Wonder and SVOD licensing fees on Ash versus Evil Dead.

Adjusted OIBDA was flat with last year at $178 million after absorbing an impairment charge. Excluding the impairment charge, adjusted OIBDA would have been up 13%. Reported fully diluted earnings per share was $0.87 in the quarter, while fully diluted adjusted earnings per share came in at $0.48. Free cash flow came in at $140 million.

Now let me briefly discuss the performance at the underlined segments compared to the prior year on a pro forma combined basis. You can follow along in the updated trending schedules that have been posted to our website.

Media Networks quarterly revenues increased 6% versus prior year to $383 million, while segment profit also increased 6% year-over-year, driven by higher over-the-top revenues and licensing fees.

Starz ended the quarter with 24 million subscribers with over-the-top subs growing sequentially and year-over-year. As Jon said, we will continue to invest in programming and marketing to grow this business.

Our Motion Picture segment grew revenues at 14% in the quarter, driven by Wonder. Segment profit slipped 3%, as we booked a $23 million non-cash impairment on films, as our new Motion Picture Group management team integrated the Good Universe acquisition and evaluated upcoming slates. Excluding the impairment, segment profit would have been up 38%.

TV Production segment revenues were 2% lower than last year, or $227 million. TV segment profit came in at $23 million, representing a $5 million decline related to the timing of episodic deliveries and difficult comparisons from Orange Is the New Black and Dear White People.

Looking ahead, we mentioned last quarter the changes in our film slate, and opportunistic incremental spending on Starz original programming could result in flatter growth for fiscal 2019. We have now repositioned our film business and increased investment in Starz programming and expect fiscal 2019 will be largely in line with fiscal 2018, before returning to growth in fiscal 2020.

We are confident we will garner solid returns on this investment. However, the timing of those returns will likely fall outside the range of guidance we previously discussed. Accordingly, we think the CAGR for the three years ended fiscal 2020 will more likely be in the mid to high single-digit range, still exceeding industry average growth rates.

Now turning to our balance sheet, during the quarter, we paid down over $100 million in debt and refinanced our term loan B at LIBOR plus 2.25, reflecting a 75 basis point reduction in rate and $7 million of annual interest savings. Net leverage came in at 3.3 times for the quarter, which continues to be below our initial target of 3.5 to 4 times.

Free cash flow in the quarter was a robust $140 million. This represents $566 million in trailing 12 months free cash flow for the first full-year of post-merger results. Now that we have achieved our initial leverage range well ahead of schedule and we have good free cash flow visibility, we will start to return some of that cash to shareholders in the form of a dividend. As

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Jon mentioned, our Board recently approved $0.09 a share quarterly dividend. We expect to continue to fully fund our core businesses and maintain a strong balance sheet.

Now I’d like to turn the call over to James for Q&A.

James Marsh Great. Thanks, Perki. Can we open the question and answer period now?

QUESTION AND ANSWER

Operator Certainly. Ladies and gentlemen, if you wish to ask a question, please press “*” then “1.” And our first question comes from the line of Alexia Quadrani with JPMorgan. Please go ahead.

Alexia Quadrani Hi, thank you. With the Bell Media deal in Canada, could you talk a little bit more about how you decided to structure the deal, why decide to rebrand an existing network? And if this is something you’re looking to replicate in the market? I think you mentioned there probably 15 opportunities...15 other markets...15 other opportunities, so I wasn’t quite sure you said there. And then any sense on in terms of like how meaningful, how big those opportunities could be?

Jon Feltheimer Sure. I’ll let Chris answer that.

Chris Albrecht Yes, so we’re very excited about the Bell deal. There are a couple of structures that we look like…that we look at as we expand internationally. One of them is to partner with an incumbent player in the telecom and the telecom and media space, and Bell fits that bill, we are rebranding, so that we can get some instant distributions. But the plan is to expand that relationship and look to sell Starz channels on top of that existing channel business. So there’s a lot of opportunity here and as we look at the expansion into other territories, this is a model that could be replicated in other places when the opportunity exists.

Alexia Quadrani And just a follow-up on the content side, I guess, what are your current thoughts in terms of acquisition opportunities, if you were to expand in the segment, I guess, are you more interested in maybe TV versus Film? And how should we think about incremental scale, how important is incremental scale on the content side, in your opinion?

Jon Feltheimer Yes, I think the lines are blurring a lot, frankly between film and television anyway. And I think actually, you can look for us to try to figure out a way to get closer to talent. I think, you will see evidence of that in the upcoming months. And I think, talent right now crosses between TV and film and game. And so, I think that’s where we will focus and I think then the content will follow.

Alexia Quadrani Alright. Thank you very much.

James Marsh Thanks a lot, Alexia.

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Operator Thank you. And our next question comes from the line of Stan Meyers with Piper Jaffray. Please go ahead.

Stan Meyers Thank you, guys. So I have one for Chris, one for Jimmy, if I may. So Chris, I wanted to hear, if you have any updates for us on the progress with Altice, I think, we noticed that Starz is coming back in some regions on Optimum. Was the deal renewed? How should we read into that? And then Jimmy, maybe you can provide a bit more color on your updated guidance and how those…how individual segments will contribute, I guess, in fiscal 2019? Thanks.

Chris Albrecht Yes, thank you. So for the record, we’ve never taken the signal away from Altice. And we are not really sure what or why…they’re doing, what they’re doing now, but our teams are engaged and we hope that the deal is imminent.

Jimmy Barge Thanks. And Stan, with regards to fiscal 2019, we don’t break out the numbers specifically, but of course, to give you some color on the segments with regards to what we are expecting. You should continue to expect, as do we…that we will continue to exhibit strong growth in both TV and media networks. What you will see is, this being offset by the Motion Picture Group where just from a timing of our film releases, as well as, smaller slate, all under recent review by the new management team, you know, we would expect to end fiscal 2019 that the revenues and the segment profits in Motion Picture will be down before returning to growth in fiscal 2020.

Stan Meyers Thank you.

Operator Thank you. And our next question comes from the line of Matthew Thornton with SunTrust. Please go ahead.

Matthew Thornton Hi, guys. Thanks for taking the question. A couple of kind of housekeeping questions, if I could. I guess, and I jumped on a little bit late. So I apologize if I missed this. But any update on the Hulu TV distribution kind of partnership with Starz, I guess, first? Second, I know CBS has their call option on POP, coming up here in March. Just kind of curious, how you think that will all kind of play out, any color there? Third, any impact from tax reform and how we should think about tax going forward here? And then I will slip in a fourth one, if I could, the dissenter liability, should we expect that to kind of go to court late this year or is there any chance, I guess, resolved earlier, I guess. Just any color there would be helpful as well? Thanks, guys.

Chris Albrecht Sure, on Hulu, as we announced previously we have an agreement with them, the integration into their platform so that they can sell Starz, does take time. It’s taken…to close the deal, took a little more time than we thought. The integration is taken little more time than we hoped, but we are on track to launch there in the next couple of months, and it has impacted the rate of growth that we were projecting on our OTT platform. So we will be very excited to get in the fields with them.

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Jon Feltheimer Pop, I would say we continue to enjoy great relationship with Les Moonves and his team at CBS. You may have noticed they seem to be pretty busy on something a little bit bigger, but…and we’ve had some interest expressed from some outside folks in terms of getting involved, but I think we are going to wait to have this discussion when CBS is ready.

Jimmy Barge And thanks, Matt. Regarding your question on taxes and the dissenter claims. First on taxes, it’s still early stages actually with regards to interpretations and tax planning for sure, but without a doubt, we benefit from the lower rates. You saw, we recorded $165 million gain in the period, that’s a reduction of deferred tax liability that was on our books, reflect the lower rates. And basically, this represents future cash savings that ultimately would be incurred after we utilize our NOLs, so we certainly benefit from that as do others.

With regards to cash taxes, as you know, we have a significant number of NOLs and foreign tax credits that would take us well into 2021. You can see those as previously disclosed in our prior 10-K. With regards to certain provisions of the tax reform, certain provisions do limit the use of NOLs. So we could pay some relatively modest US federal cash taxes beginning in fiscal 2019.

From a P&L standpoint, I would expect to continue to recognize near term tax benefits although at smaller rates. And on our effective tax rate on a longer-term basis, I would expect to be…and continue to be our previous forecast of mid-teens, so which is a great rate of course.

And then lastly, on your question about the dissenter claim, we’ve accrued a balance sheet amount of $850 million, you will see that in the 10-Q…also disclosed in the 10-Q. The trial is expected to commence in the second half of our fiscal 2019. So basically, by that time, as you know, we’ve already substantially de-levered. And upon ultimately any decision, we will have a lot of flexibility with which to fund that claim.

James Marsh Great. Thanks, Matt. Perki, do you have any other question?

Operator Certainly, the next question comes from the line of Bryan Kraft with Deutsche Bank.

Bryan Kraft Good afternoon.

James Marsh Hi, Bryan.

Bryan Kraft I had three questions, if I may. First, I think Jon said that Starz original episodes will double by 2020. I just wanted to clarify what the base number of episodes; it is that will double, so that we can try to model that correctly? Secondly, I know you expected some OTT churn in the December quarter, since it followed a heavy third quarter release schedule? You also said that OTT subs grew in the December quarter. I think, just wanted to understand what the driver behind the half million sub decline was, was it a change in the MVPD trend this quarter combined with maybe lower OTT net ads because of the churn or something like that, just trying to understand that better? And then lastly, Jimmy, on the updated guidance, what does that

Lionsgate Thursday, February 08, 2018, 4:30 PM Eastern 11 assume with respect to their current outage with Altice? Do you assume business as usual, or do you assume that that’s not included? Thanks.

Chris Albrecht Thanks, Bryan. On the sub numbers, which is not…I am not trying to diminish it…it’s not a key metric that we use to forecast our business. We have talked about the AT&T shutdown of the U-Verse platform. I think, we’ve seen publicly that both satellite platforms are experiencing some significant headwinds. So on top of that, that impacts us. And there is also some hurricane impact in that. But I think in the medium and long-term, we certainly are confident in our ability to keep our MVPD business stabilized. The OTT growth, we are excited about our new business, it is a new business, as we said it continues to grow. We continue to learn, the data is phenomenal that we are starting to get, we are seeing where we need to make adjustments, we are making those adjustments. We are bullish and confident in investing in it because we know that we can continue that growth and we are hopeful that we can accelerate it.

In terms of the base of episodes, we are looking at 80 something episodes around now, so a number that we are kind of working off. We are going to start to see other genres, docuseries and things like that. So we are in the…especially since we see the big impact going forward in the OTT space. We are looking at acquisition programs and retention programs. So getting new subscribers in the door and then keeping them satisfied and we think we have a pretty good plan to do that and we are looking forward to executing on it.

Jimmy Barge Bryan, when I refer to your question on Altice outage with regards to guidance. First, we would expect some short-term margin pressure in the fourth quarter short-term. Longer-term, I’m not going to really get into the specifics other than to say, we’re confident with regard to our guidance and we’ve taken everything into consideration. Longer-term, we also can reach subscribers over-the-top and direct-to-consumer.

Bryan Kraft Okay, great. Thanks. And then just a follow-up for you, Chris, if you don’t mind. You talked about looking at docuseries and how you’re looking at acquisition and retention content? As we think about the doubling, should we think about the average cost of that as being kind of in line with Starz current average cost of content, or will it skew lower or higher, just trying to think about what that incremental contents is going to look like on average?

Chris Albrecht Yes, I mean, look, Bryan, as always, we’re going to have a very pragmatic portfolio approach to this, the partner-friendly docuseries are a fraction of the cost of the big script series. There are multiple docuseries factored into that ramp up. It’s going to vary as we kind of sort of settle on the lineup, it will grow. But it doesn’t mean that it will grow in proportion to the increase in the number of episodes.

Bryan Kraft Okay. Thanks very much.

Chris Albrecht Thank you.

Operator

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Thank you. And our next question comes from the line of Alan Gould with Rosenblatt Securities. Please go ahead.

Alan Gould Yes. Thank you. I’ve got two questions, please. First, for Kevin or Jon, I noticed that you had three pilots with the broadcast networks. I know you had sort of pushed away from the broadcast networks a little bit in the past. Had the economics changed? I was just wondering why you’re...what’s happening there? And secondly, with respect to the new investments, I think, you’ve been spending about $1.5 billion a year on investment in content. How much do you think that goes up with these additional investments?

Jon Feltheimer Great questions. I’ll turn the broadcast question over to Kevin Beggs.

Kevin Beggs So with regard to the three pilots, two of which are one hour standalone procedurals, of late over the last few years, a lot of the broadcast networks that were not doing many procedurals have waded into those waters and those are a really great economic model. They do great internationally. They have great repeat value, SVOD value. And traditionally, CBS has been the primary home of procedurals. So there’s a need in the market. Our job is to create Network Solutions. And we’re in business with some terrific writer producers, both of those come out of really strong talent relationships. Courtney Kemp, who as you know is the creator show runner of Power and in the deal that we made the Lionsgate Starz Courtney Kemp deal, she was interested in also providing other shows around town and jumped onto that and we had a nice bidding war and ABC landed get Christie Love, we’re prepping now. L.A. Confidential comes out of our partnership joint venture with New Regency, fantastic book, amazing movie, and we’re really excited about the CBS. And the pilot presentation for Kevin Hart’s Lil Kev, which is in partnership with 20th and Fox, hoping to create the kind of magic that The Simpsons and The Family Guy have had in the past. Also comes out of the OTT relationship that Jon created with Kevin with Laugh Out Loud, which already is earning great marks. So all those kind of fit in the model and the economics are quite strong. And when others are leaning a little out of there, we lean it.

Jon Feltheimer And in terms of your question, I would say that, we’re looking at a run rate of probably $2 billion by the end of the guidance period. And I would say, that’s weighted towards television and Media Networks.

James Marsh Okay. Thanks, Alan. Perki...

Operator Yes. Our next question comes from the line of Todd Juenger of Sanford Bernstein. Please go ahead.

Todd Juenger Hi. Thanks. Lot of the detailed questions have been asked. Let me, I guess, take the chance to ask a bigger picture one...somebody’s got to ask this. The combinations in M&A environment among your peers and customers has never quite been like this. And I guess, I’ll phrase the question this way, I wonder what that means for the end markets for your original output in syndication licensing opportunities, you’ve got lots of your customers announcing their own

Lionsgate Thursday, February 08, 2018, 4:30 PM Eastern 13 services, they described those as having a lot of their own exclusive content. On the other hand, you’ve got lots of services being launched that desperately need content. I have to check in and just how do...how should we think about the pluses and minuses for an entity like Lionsgate in the midst of all of that going on around you? Thank you.

Jon Feltheimer Yes, I thought you were going to even ask a bigger question, but I’m glad you did. So, as I said to a previous question, I think the key to what we’re doing and increasing our spend, but the key is getting closer to talent, obviously, we already are, but we have a unique proposition to offer talent. And that is that we are robust in television, that we are an agnostic supplier to virtually every single platform, I think, we’re probably supplying to over 40 platforms right now. We’ve been very aggressive through the last 17 years of being the first to market with any of the new players. So I would say that really all of these new big platforms by deeply pocketed players are actually going to be very good for our content creation and distribution business.

Operator Thank you. And our next question comes from the line of David Miller with Loop Capital Markets.

David Miller Yes. Hi, guys, congratulations on the stellar results. Jimmy, a quick question for you, or whoever wants to chime in. Just curious about the...what led to the decision to time the resumption of being a dividend payer now versus in the future? And the only reason I ask is, because selfishly, I mean, I had you guys sort of timed to get your net debt to EBITDA down into the low- 2s within the next 12 to 18 months, and you can still do that just with the free cash flow generation that you’ve obviously demonstrated in the quarter. But just curious why you decided to resume dividends now versus de-levering even further and then resuming the dividends? Thanks very much.

Jimmy Barge Thanks for your question, David. Look, we have...as you know, we’ve significantly de-levered well ahead of our pace. We’re below our going-in target of 3.5 to 4 times. We’ve got good visibility into free cash flow, and we felt like it was appropriate to resume our dividend return and move that cash to shareholders.

Michael Burns And David, obviously, we believe that we want to broaden the potential shareholder base that we have…there is a tremendous amount of money out there looking for dividends and yields, it’s certainly in the trillions. And so we want to pay attention to the entire market base.

David Miller Okay. Thank you very much.

Operator Thank you. And our next question comes from the line of Barton Crockett with FBR. Please go ahead.

Barton Crockett Okay. Yes, now B. Riley FBR and thanks for taking the question. So I wanted to follow-up on Todd’s big picture and maybe get a little bit bigger. But the pending merger of Disney and FOX, they’re going to be a much bigger studio. What is the read for Lionsgate? Does someone like

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Lionsgate need to get bigger to compete; do you believe, in this environment? On the flip side of that, you’ve got a lot of cost-cutting coming from the Disney FOX merger, they say. You’ve got a telephone company buying another big studio, Warner Bros. Does that create disruption that could allow you to peel off maybe some talents and projects? So how do you kind of see the impact in your movie business from all of that stuff and TV production?

Jon Feltheimer Yes, I think, that’s a great question, and part of it’s a great answer, which is disruption has always been our friend. I think, we’ve been fortunate. The Starz integration here has been a seamless. We have a great Starz management and that was easy to put together. But generally, especially with these integrations are pretty difficult. We also think there is probably assets amongst any of these big mergers right now, where forget peel off. But they just may not be as important to the new emerging company, as it might be to another potential player.

So I think, you’re very apt to mention those possibilities. When you use the word compete, I’d like to say, we don’t really look at it that way. I mean, we compete every weekend for movies. I think, we’ve done pretty well. We’ve been over the last six, seven, eight years doing it our own way. We’ve sort of been in the number five area, almost every one of those years in terms of all of the studios, but we’d like to do it our way. We’re not trying to be anybody else in television. I don’t look at it as competing, I look at it partnering. We’re a great supplier to so many of these, virtually every single...well, the companies you’ve named already for sure, and we’re in business with all of them.

So I would like to think that the original formula and culture that Michael and I created January 1st, 2000, is one that keeps working really, really well. Are there going to be opportunities smaller or larger going forward based upon our balance sheet, based upon the sort of robust business that we have. I think there probably will be, I mean, everyone’s using the term prey or predator, I think that’s probably appropriate. But at the end of the day, we love our business. We are excited by our business, we are excited by continuing to invest in our business. And I think really, this disruption is going to create amazing opportunities for us.

Barton Crockett Okay, and if I could follow-up with one other question, on...you know, on the antitrust suit AT&T, DOJ antitrust suit, they’ve cited Starz as one of the justifications for seeking to block the merger. And they have said that they don’t believe in structural remedies. But I am wondering what your view is, I mean, do you think structural remedies would answer your concerns from the merger or is that your belief that DOJ is right that it should be blocked?

Chris Albrecht Well, I mean, I think the government is saying, they do…they are advocating structural remedies because that’s what divesting one of those assets would be. Look we have made it known that we are interested in maintaining a level playing field. We think it’s really important for the competition that fosters great opportunities for the consumer and we would advocate anything that continues that. Obviously, once the government allowed the first merger between AT&T and DIRECTV, the second merger became even more problematic. So we certainly support they are taking this close look at what’s going on here.

Barton Crockett Okay. I will leave it there. Thank you.

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Operator Thank you. And our next question comes from the line of Steven Cahall with Royal Bank of Canada. Please go ahead.

Steven Cahall Yes, thank you. So one on media and then a bigger picture question maybe just on media, if you kind of take the medium term view maybe sort of like FY'19 to FY'20. How should we think about just the combination of sub growth, the rotation to maybe more OTT? So how do we think about ARPU growth? And how do we think about content growth over that time line? And you’ve had a little bit of benefit on the cost side, I think, from the Disney output deal. And so, as you ramp up originals, how should we also think about cost growth as we try to roll all this through? And then on the bigger picture side, you know, Michael, I think, you’ve been on TV talking a little bit about M&A. Are we to assume that you are currently at a heightened level in conversations from this or would you characterize it that you are more at sort of the normal level of conversations that are going on? Thanks.

Chris Albrecht So with sub growth…look in the MVPD world, you can figure about half or so of our deals called for flat deals with yearly increases. So there is not a direct correlation between sub growth and revenue, in the OTT space which includes our wholesale and our direct to consumer business. They are higher margin subs. As I said, we are learning a lot about that. Jon just announced the Amazon extension which is a terrific opportunity for both companies, obviously they thought so, and we thought so as well. Hulu coming on as another wholesale relationship with a lot of potential, all of those are higher-margins subs than we have, I think, in virtually any relationship with MVPD partner. So not all growth is equal; we think we can continue to grow our entire business. And like I said before, subs are not a key metric necessarily total subs and how we look at that, although more subs can’t be bad.

And in terms of ARPU, the place that we can impact that the most is in our direct to consumer business, lowering ARPU, lowering churn, those are two key metrics for us. And we think we are gathering the information, the tools of implementing that knowledge and those tools to impact both of those metrics in a positive way.

Michael Burns It’s Michael, as far as, your second question, obviously, we are paying attention as the world recognize [multiple speakers]…we are paying attention as the world recognize that scale matters and companies have the same issue which is how they are going to grow? Are they going to grow organically or are they going to go through acquisitions? So everything we are doing is getting as closer to the consumer. Jon mentioned earlier, we are getting as closer to the key talent. We think we are going to continue just to run our business and as the world convergence happens, we are going to pay attention.

Steven Cahall So is it fair to say that as we think about media network revenue growth, it’s much more of an ARPU story than a sub story for the next few years?

Chris Albrecht Look, it’s not an either or I mean, we are continuing to try to grow our business with our existing MVPD partners and we are absolutely in the business of strengthening the growth…continuing

Lionsgate Thursday, February 08, 2018, 4:30 PM Eastern 16 the growth and strengthening the growth in our over-the-top business, but they…not all subs are created equally here and growing our revenue is our key goal here.

Steven Cahall Right, thank you.

James Marsh Thanks, Steven.

Operator Thank you. And our next question comes from the line of Jim Goss with Barrington Research. Please go ahead.

Jim Goss Thank you. I was wondering with the Starz product right now. Can you talk about the mix of content that is Lionsgate produced versus others and what strategy you have here and the pros and cons you are thinking of in terms of controlling downstream versus stabilizing costs?

Chris Albrecht So we look at it as a bucket of retaining rights, I mean our strategy now is to retain more rights…as many rights as possible in almost every situation. And the reason that we are doing that is because we have a much greater opportunity to monetize those rights, not just through Jim Packer and the Lionsgate distribution machine, but also in the opportunities that we just talked about an international expansion, where we can take, the retaining of those rights and use them to help build new businesses on top of continuing to sell to third parties, sometimes within the same territories. We are creating our own windowing opportunities in some of these territories just as we have in Starz Play Arabia footprint.

Lionsgate Television itself as a production arm is a great resource. Kevin and his team are our A-list [ph] in terms of being suppliers and being producers. We have The Rook, they just announced Continental, and they are our closest partners in terms of sourcing the material. But as I said it’s…we are kind of agnostic, as long as, we are retaining those rights and being able to monetize that which will reduce the net cost of this investment in programming which will allow us continue to invest more in programming.

Jim Goss Okay. And the current share of their programming that is Lionsgate versus others right now?

Chris Albrecht I said, we look at it as retaining rights. The Rook is in production…is in pre-production, we are casting right now, that will our first big series from Lionsgate since Boss which was even before the merger. But we have multiple shows in development, In Fashion is one of the docuseries that we are slating for the upcoming year and a half or so, and that will become as Lionsgate Television and Continental is one of the top fast track development projects that we have.

Jim Goss Okay and one other thing related to Starz. I know as the merger was developing, there seem to be an interest in developing a certain theme, and it seems that the theme that is coming to the surface is women, whether a various races, cultures et cetera, but it seems that the…that is a theme for Starz. Is that the case, and is there something you can make of that in terms of branding that might be helpful to you?

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Chris Albrecht Look, I think historically women have been underserved in the premium space. We certainly look to the female cohort we simply call it has a great opportunity for us across a wide age range. The Outlander fans and The Outlander franchise has been a great success for us to piggyback on top of White Queen, White Princess, other shows that we have Howards End we think was going to be a great show to service that audience. But also as we look at millennial show like Sweetbitter…shows like Sweetbitter and Vida, although a Latinx core target certainly has strong female characters and we think that there are lots of women to fit under the tent, that umbrella that can come in and piggyback on things we already have, we brought in by new acquisition franchises and be satisfied and retained by the robust library that we have of our originals and the most movies in the premium category.

Jim Goss Alright, thank you very much.

James Marsh Thanks Jim.

Operator And there are no further questions at this time.

CONCLUSION

Jon Feltheimer Perki, I just have one final closing statement. I just want to remind everyone listening to the call to refer to our reports and presentation tab under the investor relations section of the company’s website for discussions of certain non-GAAP forward-looking measures discussed on the call. Thank you very much.

Operator Thank you. Ladies and gentlemen, this conference call will be available for replay starting today at 4 PM and will run until February 15th at midnight. You may access the replay service by dialing 1800-475-6701 and entering the access code of 442686. That number again, 1800-475- 6701 and entering the access code of 442686. That does conclude your conference for today. Thank you very much for your participation and for using the AT&T executive teleconference. You may now disconnect.

Lionsgate Thursday, February 08, 2018, 4:30 PM Eastern