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Lions Gate 2006 Guidance Not 'In The Mix'

5 Dec, 2005 By: Erik Gruenwedel

In the Mix

Lions Gate Entertainment today slashed its profit guidance more than 50 percent for fiscal 2006 (ending March 31, 2006).

The Santa Monica, Calif.-based mini-major blamed the revised profit estimate of $15 million (from more than $35 million) on disappointing box office returns from Usher's feature film debut, In the Mix ($6 million in ticket sales), coupled with soft catalog margins and family home entertainment product, among other concerns.

The studio also projected downward to $35 million in EBITDA (earnings before interest expense, interest income, taxes, depreciation and asset sales), compared to $63 million previously. In a conference call with investors, executives associated a $15 million negative swing in EBITDA directly to In the Mix. The film is expected to lose upwards of $5 million.

“[Money losing] pictures always hurt you more in the current year than the benefits you get from successes,” said Lions Gate CEO Jon Feltheimer, in a call with investors. “Clearly we have been hurt in EBITDA and free cash flow. We will be getting a EBITDA benefit next year from the pictures we have written off this year.”

Lions Gate president Steve Beeks said the operating margin on catalog sales dropped from 25 percent to 21 percent this year, which he said cost the studio about $8 million in EBITDA.

Beeks said the studio was able to increase by 1 percent the contribution margin (revenue less manufacturing, distribution and marketing costs) on catalog despite the fact it held a smaller stake in its most successful catalog title sales.

As a result, Lions Gate plans to increase the number of special edition catalog releases it has a higher stake in next year.

“They tend to do really well and bring our margins up,” said Beeks.

He said the studio managed to increase its wholesale price on new DVD releases while limiting increases of unit returns to 24 percent from 21 percent last year.

“This is significantly less than industry norms,” Beeks said.

He said the home entertainment division is on schedule to increase revenue 10 percent, including increasing its retail shelf skews at Wal-Mart 10 percent.

“We haven't changed our guidance for approximately $200 million in catalog sales,” Beeks said.

Lions Gate executives said the studio remains on course to generate $850 million in revenues, including $103 million in free cash flow as originally stated Nov. 10 in an investor call.

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