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Evaluating Lions Gate Entertainment's 2Q 2014 Results



November 09, 2013 – Comments (0) | RELATED TICKERS: LGF-A , NFLX , IMAX

Yesterday Lions Gate Entertainment (LGF) reported results for the second quarter ended September 30, 2013, of its 2014 fiscal year. Below are brief highlights of the report along with some of my thoughts. 

2Q FY2014 Highlights (year-over-year, unless otherwise noted):

** Revenue decreased 29% to $498.7 million from $707 million 
** International Motion Picture revenue (excluding Lionsgate U.K.) decreased to $88.7 million from $108 million
** Home entertainment revenue (motion pictures and television) decreased to $209.9 million from $277.8 million
** Filmed entertainment backlog (contracted revenue, generally for projects spanning the next 18 months, not yet recorded) totaled $1.1 billion as of September 30, 2013

** Free cash flow increased to $84.9 million from $18.9 million
** Operating cash flow increased to $139.86 million from -$8.88 million
** Cash and cash equivalents increased to $67.21 million from $54.4 million 
** Over the past 12 months total debt has decreased $277.8 million to $801.44 million 

** Net income decreased to $0.5 million ($0.00 EPS) from $75.5 million ($0.56 EPS)
** Adjusted net income decreased to $25.4 million ($0.19 EPS) from $75.5 million ($0.62 EPS)

Conference Call Transcript: 

Lions Gate is an interesting business to follow, because quarterly revenues and earnings can be quite volatile depending on what movies and TV shows are being released and when. Lions Gate is obviously hinging quite a bit on the continued success of the Hunger Games franchise, which will release a Hunger Games sequel each November into 2015. (The first Hunger Games film was released in March in 2012.) There are even discussions for a Hunger Games theme park, which gives an idea of the vast potential involved with this franchise. In the meantime, Lions Gate continues to work with Netflix, Amazon, and Hulu, which allows the company to expand through the growing online market as well as internationally through those providers. 

While it is disheartening to see substantial declines in revenue and income, even with the understanding that it is the nature of the business (which depends extensively on timing for film and TV releases), it is encouraging to see the company's ability to generate cash flow and reduce overall debt. Michael Burns, Vice Chairman of Lions Gate, states that management is targeting a total debt figure in the range of $300 -$500 million, which is well attainable considering the business's ability to produce cash flow and management's focus on reducing overall debt. 

In many ways, Lions Gate is adjusting to a new reality of releasing very popular content, particularly with the Hunger Games, in contrast to its smaller budget projects from the past decade (such as Saw). I anticipate Hunger Games to be a rock solid and expanding franchise over the next three years, which will significantly boost annual revenue and earnings. The excitement for the franchise on my college campus alone has convinced me of the "staying power" of the franchise. Quarterly financial reports often paint incomplete pictures of businesses, especially those such as Lions Gate, because the next two quarters will be most important in terms of gauging the success of Hunger Games compared to last year, when Lions Gate's revenue rocketed to $2.71 billion and secured a profit margin of 8.57%. Thus far this fiscal year, Lions Gate's profit margin stands at 1.32%. 

Lions Gate is in a volatile field facing much larger competitors. However, I am impressed with the ability of this independent studio, backed by involved, experienced, and innovative managers, to boost its market presence over time with internet, international, and traditional markets as well. Jon Feltheimer, who has been CEO of Lions Gate since 2000, explained in the earnings conference call that management expects Catching Fire (the second Hunger Games film) to garner significantly more international revenue than the first Hunger Games film. The first Hunger Games earned approximately $290 million in revenue internationally, and with revenue totaling over $691 million worldwide. 

As Lions Gate improves its balance sheet, continues to invest in new markets online and internationally, and reaps what I expect to be a very successful next several years with the Hunger Games, I am content as a long-term shareholder despite these volatile quarterly results. With its new EPS of $1.47, the stock is still trading at a reasonable P/E ratio of approximately 22. Should the stock drop below a P/E of 20, I will consider adding to my position. 

On another note, I am glad to see Hunger Games once again being released in Imax, another business in which I happen to be invested. Between Netflix, Imax, and Lions Gate, I seem to have exposure to just about all the primary areas of movie/TV production, release, and distribution. Thankfully I never added Blockbuster to those ranks! 

David K

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