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Edited Transcript of LGF earnings conference call or presentation 23-May-19 9:00pm GMT

Q4 2019 Lions Gate Entertainment Corp Earnings Call

SANTA MONICA Jun 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Lions Gate Entertainment Corp earnings conference call or presentation Thursday, May 23, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Milton Marsh

Lions Gate Entertainment Corp. - Senior VP & Head of IR

* James W. Barge

Lions Gate Entertainment Corp. - CFO

* Jeffrey A. Hirsch

Starz - COO

* Jon Feltheimer

Lions Gate Entertainment Corp. - CEO & Director

* Joseph Drake

Lions Gate Entertainment Corp. - Chairman of Motion Picture Group

* Kevin Beggs

Lions Gate Entertainment Corp. - Chairman of Lionsgate Television Group

* Superna Kalle

Starz - EVP of International Digital Networks

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Conference Call Participants

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* Alexia Skouras Quadrani

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Andrew M. Borst

Goldman Sachs Group Inc., Research Division - VP

* Benjamin Daniel Swinburne

Morgan Stanley, Research Division - MD

* David Carl Joyce

Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst

* David Walter Miller

Imperial Capital, LLC, Research Division - Research Analyst

* Douglas Lippl Creutz

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Matthew Corey Thornton

SunTrust Robinson Humphrey, Inc., Research Division - VP

* Richard Scott Greenfield

BTIG, LLC, Research Division - Co-Head of Research, MD and Media & Technology Analyst

* Vasily Karasyov

Cannonball Research, LLC - Founder

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Lionsgate Fiscal Fourth Quarter and Full Year 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, James Marsh. Please go ahead.

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James Milton Marsh, Lions Gate Entertainment Corp. - Senior VP & Head of IR [2]

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All right. Thanks, Eric, and good afternoon, everyone. Thank you for joining us for the Lionsgate Fiscal 2019 Fourth Quarter and Year-End Conference call. We'll begin with opening remarks from our CEO, Jon Feltheimer; followed by remarks from our CFO, Jimmy Barge. After their remarks, we'll open of the call up for your questions. Also joining us on the call today are Lionsgate COO, Brian Goldsmith; Chairman of the Motion Picture Group, Joe Drake; Chairman of the TV Group, Kevin Beggs. From Starz, we have COO, Jeff Hirsch; CFO, Scott MacDonald; and EVP of International Digital Networks, Superna Kalle.

The matters discussed on this call 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. This includes the risk factors set forth in Lionsgate's most recent annual report on Form 10-K as amended in Lionsgate's most recent quarterly report on Form 10-Q filed with the SEC. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.

With that, I'll turn it over to Jon. Jon?

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [3]

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Thank you, James, and thank you all for joining us this afternoon. We're pleased to report our results for a very active and productive fiscal '19 in which we reloaded our film and television content pipelines, reenergized every part of our film business and restructured our television group around our most prolific top-tier production partnerships.

It was a year in which we diligently refocused on extracting maximum value from all of our franchises. The results have been evident, and everything from last weekend's huge global opening of John Wick 3 to the upcoming launch of our Lionsgate Entertainment World theme park in China this summer and the adaptation of beloved properties like Nashville and Wonder to Broadway. I'll drill down on all of these initiatives in a few minutes.

But first, I'd like to talk to you about our biggest and newest initiative, bringing Starz around the world. Last year, we told you about the opportunity to launch STARZ PLAY, our Starz international streaming service, in 15 countries within 3 years. Today, I'm pleased to announce that STARZ PLAY, including STARZ PLAY Arabia, is live with active subscribers in 42 countries and by July 1, will be in 51 countries, making us one of the 3 leading pure-play subscription video-on-demand services in the world. Recognizing the uniqueness and scope of the incredible opportunity available to us, we leaned into it with all the resources of our company and with an investment at the high end of the range we had previously discussed.

Here's why. First, the market opportunity itself. With only 5% penetration of subscription video-on-demand services worldwide, we believe that the international market is a $45 billion opportunity for us that will result in between 15 million and 25 million new STARZ PLAY international subscribers by 2025.

Second, great global partners. The pace of our expansion has been accelerated by successful international launches on Apple and Amazon Prime. Our premium content offering, platform capabilities and speed to market make us a launch partner of choice to the other streaming giants as well.

Third, great local partners. We've already launched with top local distributors like Bell Media in Canada, Liberty Global's Virgin Media in the U.K., and Orange and Vodafone in Spain and have become a strong performer on each of those platforms.

And finally, content. Lots of content. From Hunger Games to Power, John Wick to Spanish Princess, La La Land to Vida, the combination of Starz original programming, our 17,000 title library, Lionsgate premium TV series and films, and the ability to augment our offering with locally produced films and TV programming in the U.K. and elsewhere adds up to a compelling value proposition for partners and subscribers alike.

We're off to a great start scaling rapidly across multiple territories to give us an early mover advantage ahead of many other premium players. And to preserve that early mover advantage, we will continue to lean into the STARZ PLAY international expansion with additional investment. Jimmy will talk you in a few minutes about the size of that investment and how we'll report it to give you greater visibility into how much we're planning to invest and how much value we're creating. We view this as an investment in our future. The STARZ PLAY international expansion is an exciting next step in creating an asset with lasting and incremental long-term value.

Now let me show you why we're so excited about the year ahead in each of our businesses. For the past year, we've been restructuring the organization and streamlining the operations of our film group under its new leadership team, ramping up production and closing major talent deals with Point Grey Pictures, the Erwin Brothers and filmmaker Jonathan Levine, collaborations that touch every part of our company.

These initiatives are producing results. We closed fiscal '19 with Madea, Cold Pursuit and Five Feet Apart, films that were all profitable and outperformed expectations. Last weekend, John Wick 3 opened as the #1 movie in the world, nearly doubling the box office of the last installment. Its outsized performance not only cements John Wick's stature as one of the world's premiere action franchises. It reaffirms our ability to create content that drives value across all of our businesses from video games and location-based entertainment to the TV spin-off series, The Continental at Starz and the theatrical release of John Wick 4 on May 21, 2021. We're poised to keep this momentum going with a strong and balanced slate featuring a diverse mix of genres and budgets but deep in areas of proved strength. This slate features the final Rambo film, the latest installment of the popular action thriller series, Angel Has Fallen and CBS' Scary Stories to Tell in the Dark, films with built-in fan bases, all slated for release in late summer and early fall on dates on which we have capitalized in the past.

Then we build into the holiday season with Roland Emmerich's Midway, an epic action film with a huge ensemble cast. Star Wars director Rian Johnson's whodunit Knives Out, which generated raves from our exhibition partners at CinemaCon, and Jay Roach's bombshell starring Nicole Kidman, Charlize Theron, Margot Robbie and John Lithgow, which is already creating buzz ahead of its release in December.

At Easter, we're releasing the Erwin Brothers' I Still Believe, starring music superstar Shania Twain, the follow-up to their faith-based hit, I Can Only Imagine. And looking beyond fiscal '20, we're bringing back some of Lionsgate's biggest and most iconic properties, including The Hitman's Bodyguard, starring Ryan Reynolds, Salma Hayek and Morgan Freeman; and a great new twist for Jigsaw, starring Chris Rock on October 23, 2020.

Turning to our Television Group. We've spent the past year refilling our pipeline and entered fiscal '20 with one of the strongest development slates in recent years. Of the 54 projects set up at networks, 53 come from production PODs, like 3 Arts, Courtney Kemp, the Tannenbaum Company, BBC Studios and Universal Music Group that form the backbone of our television business. Our strategy is working, and our slate is filling with high-profile series that have all the earmarks of success like Zoey's Extraordinary Playlist, which was the centerpiece of NBC's recent upfronts.

Mythic Quest, Raven's Banquet set in the world of video game development is one of our first collaborations with 3 Arts. It's currently in production as part of the Apple programming slate unveiled in March. We also have 2 new series fast tracked at HBO, Courtney Kemp's Dirty Thirty and Silicon Valley creator Mike Judge's QualityLand. And today, I'm pleased to announce a new addition to our lineup, Love Life, a romantic comedy anthology that will be one of the first series for the WarnerMedia streaming platform from A Simple Favor director Paul Feig and starring Anna Kendrick.

The diversity of our network partners shows our ability to create bespoke business models for different platforms. With a universe of nearly 30 scripted series at Lionsgate Television, another 30 shows from Pilgrim and our in-house unscripted team, 6 game, talk and variety shows from Debmar-Mercury, 5 series from Lionsgate U.K. and 3 productions already underway with 3 Arts. Our television business is positioned for success in fiscal '20 and beyond.

Turning back to Starz. We had a strong year in fiscal '19, and we believe that the best is yet to come.

Let's start with the numbers. We grew overall domestic subscribers by 1.2 million during the year for a total of 24.7 million, including 4 million paid domestic over-the-top subscribers, a number that reflects in part our recent successful launches on Apple, Google, Roku and Hulu. In addition, we now have 3 million international subscribers, including more than 1 million at STARZ PLAY Arabia.

Our domestic growth in the face of a challenging MVPD environment reflects the unique positioning of our offering and the strength of our programming lineup. American Gods returned with its loyal and passionate fan base in March and has been renewed for a third season. The Spanish Princess is continuing the footsteps of The White Queen and The White Princess, delivering a premium female audience that continues to grow week over week.

Looking ahead, the full second season of the critically acclaimed award-winning series Vida drops today worldwide. The series also recently launched on our premium Spanish language streaming service, Pantaya, as we continue to expand our content across our Latin mix vertical. And Starz continues to build a slate designed to drive subscriber acquisition and retention year-round.

Next month, we will debut the supernatural spy thriller, The Rook, from Lionsgate and our partners at Liberty Global, the first of over a dozen Lionsgate properties in development at Starz, followed by Sweetbitter in July. August will bring the return of Power with a supersized 15-episode season. Together with our incredible creator and showrunner, Courtney Kemp, and with several spin-offs in the works, we have a lot more story to tell as we explore and expand the Power universe for years to come.

We're continuing to invest in a programming slate that is driving the growth of Starz over-the-top business domestically and its expansion around the world. We're also widening the creative aperture to ensure that we supply the Starz platform with programming that is right for its global footprint. In the past 2 months alone, we've green lit or fast track the production of 5 new STARZ Original Series, many of which we'll be telling you about on our next call. As Starz continues to offer its partners a unique and compelling value proposition, we look forward to telling you in the near future about a number of interesting packaging, bundling and symmetrical marketing agreements on which we've been working and for which Starz is the perfect fit.

In closing, our industry is changing at the speed of light, and we're changing with it. Over the past year, we've reimagined the role of our content businesses and undertaken the exciting process of expanding Starz into one of the world's leading pure-play streaming platforms. We're well positioned to continue to grow and create value for our shareholders in the year ahead.

Now I'll turn things over to Jimmy.

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James W. Barge, Lions Gate Entertainment Corp. - CFO [4]

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Thanks, Jon, and good afternoon, everyone. I'll briefly discuss our fiscal fourth quarter financial results and update you on our balance sheet. Then I'd like to take a moment to provide more color on the STARZ PLAY international opportunity Jon mentioned in his remarks.

Fiscal fourth quarter adjusted OIBDA was $103 million, while revenue was $914 million. Reported fully diluted earnings per share was a loss of $0.72 a share, and fully diluted adjusted earnings per share came in at $0.11 per share. Adjusted free cash flow for the quarter came in at $151 million as cash flow from operations benefited from working capital improvement and monetization of certain assets. For the full fiscal year, adjusted free cash flow was $638 million.

Now let me briefly discuss the fiscal fourth quarter performance of the underlying segments compared to the prior year. Media Networks quarterly revenues increased 2% versus the prior year to $362 million. Segment profits declined 21% year-over-year to $91 million largely attributed to preparing for a more aggressive rollout of STARZ PLAY. Starz ended the quarter with 24.7 million total domestic subscribers, which was up 1.2 million from the prior year and down 400,000 sequentially from last quarter. Over-the-top subs were up 400,000 sequentially driven by the premieres of American Gods and Now Apocalypse.

Motion Picture revenue declined 16% in the quarter to $358 million. Segment profits slipped 28% to $21 million, reflecting the timing of pre-released P&A spend on Q1 titles that we highlighted for you on our previous earnings call.

Television Production revenues of $273 million were down 7% in the quarter. TV segment profits slipped 11% to $20 million on the timing of episodic deliveries and production schedules.

Now for a quick update on the balance sheet and our plan to delever while still investing in our core business. During the fourth quarter, we reduced net corporate debt by $181 million and ended the quarter with leverage at 4.9x, and we will continue to prioritize deleveraging going forward.

Turning to STARZ PLAY. We are enthusiastic about the international opportunity and believe it will drive long-term value for shareholders. As you all on this call know, creating long-term value requires investment in the short term, and we believe we have the opportunity to create a first-class international over-the-top business over a relatively short period of time. We recognize there is currently a substantial valuation disconnect between our enthusiasm for the international business and the current investor perception. In fact, we estimate we have roughly $500 million of negative value weighing on our market value today. To narrow that valuation disconnect, we will begin providing substantially more transparency around our international effort, helping to unlock that value over time.

This effort will consist of 3 elements of disclosure. First, financial. We will provide more financial disclosure by separately breaking out our STARZ PLAY business within Media Networks, so you can be more carefully tracking our execution. Second, nonfinancial. We will also provide nonfinancial KPI, including disclosure of our international subs. And lastly, expectations. We will provide some increased disclosure around our expectations for STARZ PLAY.

Here is what we're expecting from STARZ PLAY. Within 5 years, our target is to have 15 million to 25 million total international subscribers within the 51 countries Jon mentioned earlier. We expect international losses to peak at $125 million to $150 million in fiscal '20. Excluding these losses, we expect fiscal '20 adjusted OIBDA will be $650 million to $700 million, following within our previous guidance range of a mid- to high single-digit 3-year CAGR. We expect STARZ PLAY to reach profitability in fiscal '23. Most importantly, we think the returns are compelling. We plan to raise equity against STARZ PLAY to help finance this international rollout and manage our overall leverage to a target of 4x by the end of fiscal '20, which includes the start-up losses I just mentioned.

And with that, I would like to turn the call over to James for Q&A.

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James Milton Marsh, Lions Gate Entertainment Corp. - Senior VP & Head of IR [5]

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Great. Thanks, Jimmy. Eric, we can open it up to Q&A at this stage.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Matthew Thornton with SunTrust.

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Matthew Corey Thornton, SunTrust Robinson Humphrey, Inc., Research Division - VP [2]

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Maybe just to start, Jimmy, you talked about potentially raising equity against STARZ PLAY. Is that a -- an open market offering that you're talking about or bringing a third-party private equity or strategic sidecar to help expand STARZ PLAY? That would be question number one. Secondly, just coming back to Starz U.S., the ARPU was down again kind of second quarter in a row. Just want to get some color about the dynamics kind of driving that. And then finally just third, I'm wondering if you can maybe just update us or give us any color on how to think about just kind of core library and what that's driving from a free cash flow standpoint per annum. Any color there would be helpful.

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James W. Barge, Lions Gate Entertainment Corp. - CFO [3]

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Sure. I'll -- Matt, I'll take the equity and then the core library component of this. The -- on the equity side, absolutely. This is an equity raise against STARZ PLAY and that opportunity in particular. The timing of that and the forms to be determined. Obviously, it'll be dependent on valuation as well. That's going to help delever our overall business. Same time, it's going to provide a very important valuation marker for everyone and help unlock that substantial value that we mentioned earlier.

With regards to the core library, we have over $500 million of revenues in the library across the board on any given year and pretty substantial margin on that, generating around 50% on the cash side. Don't confuse that because that's both TV and film, and it flows into the results of both Motion Picture and TV segments and are incorporated into the guidance that I mentioned earlier.

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Jeffrey A. Hirsch, Starz - COO [4]

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And in terms of the of ARPU question, ARPU was slightly off for the quarter primarily due to timing of show premieres. Just remember American Gods was late in the quarter.

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Matthew Corey Thornton, SunTrust Robinson Humphrey, Inc., Research Division - VP [5]

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And if I can just add one follow-up really quickly. Jimmy, on the library, the $500 million in revenues across film and in TV, call it a 50% margin and then apply a tax to that and that would kind of give us a rough guess on free cash flow. Is that fair?

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James W. Barge, Lions Gate Entertainment Corp. - CFO [6]

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Yes, that's a cash flow margin, correct.

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Operator [7]

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And our next question will come from the line of Alexia Quadrani with JP Morgan.

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Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [8]

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Just 2 questions, staying on Starz here. I guess the first one is can you give us more color in terms of which markets are more of a target on the earlier part of the rollout on STARZ PLAY in terms of which international markets. And then the second question more just on traditional on Starz here in the U.S. With your second run film output window sort of potentially changing in a couple years in terms of your partnerships maybe shifting, I guess how important or -- I know your original contents is the big driver for subs. But I'd love to hear sort of some color from you on just how important having that sort of theatrical library on Starz is. And should we assume a sort of disruption based on potential changes ahead because of that?

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [9]

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Superna Kalle will answer the first question, Alexia.

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Superna Kalle, Starz - EVP of International Digital Networks [10]

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So our initial rollout will be throughout Western Europe, including the U.K. and all of Latin America.

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Jeffrey A. Hirsch, Starz - COO [11]

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Okay. In terms of library, library, as we've talked about, a lot on the call, our big originals drive subscription to the over-the-top into the -- our linear partners, but library provides a tremendous retention value to our subscriber base. We've got a lot of data around the age of library content and how important it is to viewership and it is to churn and extending lifetime value. And we will eventually go -- and Joe will talk about this in a minute, we'll eventually take the Lionsgate Pay1 onto the platform to help continue to bolster our over-the-top business.

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Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [12]

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Okay. And if I can just sneak in one more. Looking just at your film business, you have obviously huge success recently with John Wick and you obviously had some great success in the past. Do you think in general you have the scale you need to be competitive given just how consolidated some of the other -- your peers are becoming?

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Joseph Drake, Lions Gate Entertainment Corp. - Chairman of Motion Picture Group [13]

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We do. I think that we -- this is Joe. We've built a strategy that really focuses both on where the consumer appetite is. And I think when you look at that box office, outside of the top 10 movies, the rest of the marketplace is about -- it's over $7 billion available. And it's the place that we play best. So whether it's Wonder in the live action family business or John Wick or some of the core initiatives that we're in, in Saw and the like, there's plenty of real estate for us to play in. I think that another advantage that we're really seeing play out is that talent, writers, directors, actors, still have a huge appetite, and frankly, some are making a condition of their deal that they're with -- that they're at a place that can get them up on screen for that theatrical release for that immediate customer feedback. So we're having more success on how we're attracting the kind of talent we want for this content and where talent goes, we'll get the content that we need.

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [14]

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Yes. And I would add as well, you get scale in a couple ways. You get scale by spending a huge amount of money. You also get scale by you doing what we do here, and you've heard me talk about before Lionsgate 360. If you watch what happened on John Wick, we had every part of our company operating together, Atom Films fantastic promotion with T-Mobile and a separate one. We have the video game promotions with EPIX films and 2 video games that are coming out soon. So we add 1 plus 1 plus 1 at our company and generally, come up with 5. So again, I think we just show that, and we'll continue to show that.

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Operator [15]

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And our next question will come from the line of Ben Swinburne with Morgan Stanley.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [16]

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A couple questions. Jimmy, just to go back to the balance sheet, I don't know if you want to give us some free cash flow look for 2020 or at least talk about whether there's an equity raise baked into that 4x number you gave us for your expectation for the end of this year.

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James W. Barge, Lions Gate Entertainment Corp. - CFO [17]

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Yes, certainly. There is an equity expectation baked into that for the 4x. And obviously, the leverage throughout the year is going to -- and end of the year as well is going to depend obviously on the -- I mean, ultimately, on the timing and -- of free cash flows as well as the equity raise itself. But that is factored in. Throughout the year, keep in mind that I would expect that to be relatively level, in fact, declining as I -- our trailing 12 months is going to be -- the OIBDA is going to be more back-end loaded in fiscal '20. And so trailing 12 months will be slightly declining in that context. So we'll have leverage, will be higher during the earlier part of the year and then reducing throughout the year as we focus on deleveraging. And to be clear, the equity raise is against the international opportunity also.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [18]

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Right. And then on that international opportunity, what do the 15 million to 25 million subscribers look like from a kind of unit economics perspective? And I ask the question because in the quarter you just reported, I think you ended the year with 2 million international subs but very little revenue, so I wasn't -- I couldn't really make sense of the implied ARPU. Maybe just talk about what was going on in Q4. But more interestingly, longer term, do these 15 million to 25 million look like your U.S. Starz subs financially in your view?

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Jeffrey A. Hirsch, Starz - COO [19]

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So in the numbers, STARZ PLAY Arabia is not consolidated in the numbers even though we did talk about it in the call because those are Starz subs in our mind. What you see in the current numbers in the schedules is our Canadian deal, which is late at the end of the quarter. And so there's a little funkiness in the ARPU.

In terms of international, our retail rate is EUR 4.99, so it's a little -- it will be a little different than our domestic numbers. But we do think somewhere -- our ARPU will be somewhere around $3 to $4 long term in terms of that business.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [20]

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Okay. And then if you don't mind, just one last one. I think -- I guess I have to ask it. There's obviously been, Jon, a lot of M&A in the press. I know that's not new for you guys, and I'm sure you don't want to talk about specifics. But what's interesting here is the idea of splitting apart Starz and Lionsgate again, which obviously is a lot different than the story you're telling today about the continued integration of the assets. What are you telling shareholders about this release concept of potentially moving in a different strategic direction if that creates value? How should we think about that as an option for you guys?

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [21]

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Yes. Obviously, we don't comment on M&A. And I would say simply what you heard on the call today is that we have a plan. That plan is we're super confident about it. We are executing on the plan. We felt that the window of opportunity was now. You can see the results already. We are in 51 markets. Our STARZ PLAY Arabia is really successful. We are positioning our programming to be more global. We are getting some of the best third-party content, amazing shows like The Act, a huge show on Hulu right now by moving quickly. We're getting great content. It's going to play in a number of our international markets. So we have a plan. We believe in it. We think it's going to create value. We are obviously -- always our responsibility is to our shareholders. We always have to listen to opportunities to create whatever way that would be shareholder value. But again, we outlined today the plan, and that's what we're going to execute on.

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Operator [22]

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And the next question comes from the line of Vasily Karasyov.

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Vasily Karasyov, Cannonball Research, LLC - Founder [23]

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Wanted to ask about TV production. So if you look at the past several years, sort of the margin and the EBITDA is all over the place. You can't actually assess out a trend here. So I was wondering, given that the environment, one would think, is really conducive for TV production here, what's going on under the surface here? Why can't we see more years of $100 million plus in EBITDA? Or will we see them? And if we will, how will we get there? So would appreciate thoughts on that.

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Kevin Beggs, Lions Gate Entertainment Corp. - Chairman of Lionsgate Television Group [24]

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It's Kevin speaking. Let me just speak about the environment. So the last couple of years, as you all know, have been a little down in the entire market because of the big merger activity. A lot of places were shoring up, not buying as much. All that seems to now be unlocked. I think you saw that at the upfronts the last week, a splurge of buying and declarations of victory by the big conglomerates. That's great for us as an arms dealer of content across the board. We have our biggest development in production slate historically now. As Jon mentioned, 54 projects sold and set up across 17 networks and most -- the biggest priority, of course, is Starz. We've really opened a great deal of collaboration in the last few months, several shows green lit, 10 more in development. So I think you're going to have more visibility, and the volume, both revenue and EBITDA, is going to trend upward.

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Operator [25]

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(Operator Instructions) The next question comes from the line of David Joyce from Evercore.

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David Carl Joyce, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [26]

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Got some more questions on Starz. If you could talk about the programming seasonality and churn lately just to help address the subscriber totals both on the traditional and the over-the-top. And also wanted to think about how that is impacting the margin. And then if you could help to kind of separate that from the margin impact from the international expansion.

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Jeffrey A. Hirsch, Starz - COO [27]

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So on the domestic front, what we've seen in terms of the traditional linear business is a lot of our large operators have lifted their subscriber base and reconciled their very highly discounted customers, and we saw some impact of that in the quarter. We continue to see great growth on the OTT business as we've talked sequentially. We did have some timing related to American Gods being premiered late in the quarter. But churn continues to be at an all-time low. We continue to use the data capabilities that we built off the domestic -- the direct-to-consumer product to look at how we schedule the content, what shows you want to put behind other shows, what library we go out and buy to really minimize churn and extend lifetime value. So we continue to see churn at low levels, and we'll continue to improve as we get more and more data from our products.

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David Carl Joyce, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [28]

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And your release mentioned some content impairment charges related to Starz programming. If you could highlight which properties those were. And was there anything from the Motion Picture side in those impairments?

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James W. Barge, Lions Gate Entertainment Corp. - CFO [29]

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There was nothing there relative to Motion Picture. And while I'm not going to comment specifically on programming, hence you'll see in our 10-K, there's some programming that is not going to be running on Starz network. And we took this opportunity to go ahead and write that down. And that's included in the programming charge.

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Operator [30]

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And the next question comes from the line of Doug Creutz from Cowen.

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Douglas Lippl Creutz, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [31]

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If you just talk a little about it looks like you're going to be spending about another incremental $100 million in fiscal '20 in international relative to last year. Is that marketing spend? Are you spending on other things? If you can just kind of give a little bit of color where those dollars are going, that'd be helpful.

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [32]

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Yes, great question. About 85% of that spend is going to content and marketing.

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Douglas Lippl Creutz, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [33]

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In terms of the content piece of that, is that -- are you buying other people's content? Are you creating content specifically for local markets? What's going on there?

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Jeffrey A. Hirsch, Starz - COO [34]

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There's really a three-pronged approach there. We are obviously taking from the Lionsgate library, the Lionsgate original series as well as the Starz originals, and as those come off licensing from other properties, we'll pull it onto the service. And so that's around 30% in the short term. We think that growth is still about 70% by 2025. And in terms of the Starz domestic slate and some of the shows we don't have, Outlander, for example, is a license. We don't have that around the world, so we've been augmenting that by purchasing third-party content. So it's a combination of those 2 pieces. And then in U.K. where we have a local production group, we're looking at putting locally produced local talent shows that the office there is producing onto the service, so the combination of all 3 of those things.

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Operator [35]

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(Operator Instructions) And the next question comes from the line of David Miller from Imperial Capital.

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David Walter Miller, Imperial Capital, LLC, Research Division - Research Analyst [36]

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Jon, question for you. It's actually a question I wanted ask you 90 days ago, and I just didn't get the chance. You had mentioned 90 days ago on your fiscal Q3 call that you were looking to take Starz to the next level in integration. I'm wondering exactly what you mean by that. What specifically, in your view, got integrated further over the last 90 days that otherwise might not have been integrated if Chris Albrecht had stayed on? I guess that's the more blunt way of asking it.

And then, Joe Drake, the film that stands out to me, if I look at the slate over the next year, the film that really stands out to me in terms of commerciality is Midway and Roland Emmerich films, I'm sure I don't have to tell you, are super expensive. So I was wondering if you could just talk about the risk profile for that film. And does that fit into your kind of Tier 3 risk bucket as you guys outlined at your Analyst Day a couple years ago? Or should we consider other inputs?

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Joseph Drake, Lions Gate Entertainment Corp. - Chairman of Motion Picture Group [37]

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Sure, David. I'll answer first. This is Joe. In terms of on the slate, Midway is a very big budget film. It was an acquisition for us. And so we acquired North America and the U.K. We don't comment specifically on the numbers, but I can tell you that they're very favorable terms and that the -- it is uniquely situated as a big broad heartland action movie. So you're focusing on a title that does have a lot of attention, but our economics on it are very low risk and strong on the upside. And there's a couple other titles you have to pay attention to. I think that there's a movie that is coming out over the Thanksgiving holiday called Knives Out, big broadcast. We showed its audiences -- haven't seen audiences to like a movie like this in a long, long time, and it's the kind of thing that could turn out to be a nice brand for us.

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [38]

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So yes, physically, organizationally, we have actually already integrated in the last 30 days, we integrated the Starz production unit together with the Lionsgate production unit. But I would say the integration that I've been talking about is much deeper than that, and that it's sort of cultural and it's working. As we said, we've green lit like 5 new shows. We are aggressively mining Power.

One thing that happened a couple of years ago, honestly, is Courtney Kemp, who is one of the best showrunners I've ever worked with in 35 years, the creator of Power, was going to leave. She didn't like that she didn't have any other opportunities outside of Starz and frankly, felt she was being a little pigeonholed. And honestly, at that time, we also wouldn't have any spin-offs that were planned. And so what we ended up doing is we wrapped our arms around her on a studio level. And right now she's got like 6 shows in development, 2 at other networks, but frankly, 4 at Starz, including 3 that are spin-offs of Power.

And so I think that I would characterize this a little bit as there's typically for buyers the kind of lean out kind of way. You wait for programming to come, but the studio, it's a little bit of a lean in, aggressively going after talent so that you can sell it. So what we've done from a cultural perspective is put them together, and Kevin and Jeff have gone out to the community, and it's working. And they're actively seeking the kind of talent and the kind of shows that will propel us forward.

And so with that kind of a -- that kind of teamwork that is working for us right now I think the agencies, management companies like -- including 3 Arts, everybody sort of sees it, and we're actually starting to see everything. We won't get everything. We were super aggressive about a show recently from the creators of Downton Abbey, ended up going to HBO. But I will tell you right now, we are seeing everything because of this combined integrated effort.

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Operator [39]

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And the next question comes from the line of David (sic) [Drew] Borst from Goldman Sachs.

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Andrew M. Borst, Goldman Sachs Group Inc., Research Division - VP [40]

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It's Drew Borst. I wanted ask about the Starz international subs you mentioned because it jumped up pretty dramatically. You added 1.9 million subs. You said I think it's related to the Bell Canada deal. Is there something different about the distribution of the service in Canada versus what you're doing in U.K. and Germany given that it scaled so fast?

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Jeffrey A. Hirsch, Starz - COO [41]

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Yes. As we spoke about on the last call, there's 3 models that we really like for the international. There's this global partner that Jon detailed significantly in the first part of his remarks where we're on the backs of the Amazons and the Apples. There is the local partners where we're with Vodafone and Orange, Bell Canada and Superna's going to talk about the details in a minute. And then there's the ventures like STARZ PLAY Arabia. So we have those 3 models. Bell sits into that middle one, and I'll let Superna take you through some of the detail.

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Superna Kalle, Starz - EVP of International Digital Networks [42]

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There's a linear component where there's linear service in Canada that we participate on a revenue share basis with, and then there's an OTT service called Starz that's on top of Crave and digitally on other platforms as well.

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [43]

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Yes. And what you probably haven't heard before is the fact that as we looked at what's the most accurate picture of our international business, we realize that STARZ PLAY Arabia really is a part of that business. It's our brand with the largest shareholder. We're integrating the tech platform elsewhere. We have a path to control it. It's part of our plan. And so we realize that's the way we're going to start talking about our subs. As I think Jimmy may have mentioned, we don't consolidate -- or maybe Jeff mentioned, we don't consolidate that. Therefore, we don't get the benefit of the ARPU when we're looking at that. But at the end of the day, that's a critical part of our ongoing plan.

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Andrew M. Borst, Goldman Sachs Group Inc., Research Division - VP [44]

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Is -- this may be difficult to do, but you mentioned you're now in 42 countries. You'll be in 51 in a month or so. Which model -- is there any way to generalize what -- which of the 2 models you're using? Is it more a hybrid or linear and digital? Or is it more just sort of a pure digital model like you've been doing in the -- in U.K. and Germany?

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Superna Kalle, Starz - EVP of International Digital Networks [45]

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Currently, we're linear in Canada only. Everywhere else is digital purely and...

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Jeffrey A. Hirsch, Starz - COO [46]

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Going forward, it'll be more digital.

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Andrew M. Borst, Goldman Sachs Group Inc., Research Division - VP [47]

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Okay. And if I could try to sneak one other one on a different -- completely different topic. But I believe the Lionsgate output deal with EPIX will expire at the end of this calendar year. Should we expect that, that -- you pivot that output to Starz? Or do you think you'll look for a third-party license deal?

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [48]

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I think that you can expect down the road that, particularly when you sort of look at the sunsetting of the Sony deal, I think you can expect that we will make all of the Lionsgate films available for Starz.

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Operator [49]

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And the next question comes from the line of Rich Greenfield from BTIG.

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Richard Scott Greenfield, BTIG, LLC, Research Division - Co-Head of Research, MD and Media & Technology Analyst [50]

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I got a couple sort of related. At Disney streaming Analyst Day a couple months ago, they put up a whole bunch of catalog titles on the screen. Many of them -- or a whole bunch of them were actually in windows that would have kept them exclusively on Starz. Wondering how much you were paid. I assume you were paid. If you were paid, did hit this quarter? Will it hit when Disney+ launches later in the year?

And then as kind of related to that, kind of a conceptual question, wondering -- you all have been in the business, the direct-to-consumer business but also in the SVOD business if you look at the Starz team for many years. Curious like how important is catalog, especially Disney catalog to driving Starz? Does Disney catalog titles drive a lot of viewership? Same thing with Sony. You talked about potentially losing Sony. How important are Pay1 8-, 9-month-old movies to driving gross adds, especially now that you're in the D2C business? Just any way you could kind of give us a sense of how to think about titles like Power and new release, your original programming versus of the catalog's impact on that business?

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Jeffrey A. Hirsch, Starz - COO [51]

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Great question, Rich. First, we're not going to comment on the details of our Disney deal. I would just say that we have a very multipronged relationship with Disney. I would say the content will continue to stay on Starz. But if we are going to get great value, we're going to get great value back, and there'll more to come on that down the road.

In terms of your -- the second half of your question, we've been mining the data produced significantly across both our Sony Pay1, our Disney in the second window and library that we buy coupled with our large originals. First and foremost, big originals drive acquisition like nothing else. Secondarily, big box office movies at Pay1 drives acquisition more than anything else, but they also come with higher churn because people can come in during the 7-day or the 30-day free window, watch it and then disconnect. And so we see lower conversion rate and a higher churn rate against those services.

The real value of what we're seeing in the library in the Pay2 is that value proposition against the $8.99 where people come in on large scale for the originals and they see all the other valuable movies that we have in the service. We've got more movies than HBO and Showtime combined, and we think that plus our price point gives us a really great value proposition. And one way that we've been able to really reduce churn long term.

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Richard Scott Greenfield, BTIG, LLC, Research Division - Co-Head of Research, MD and Media & Technology Analyst [52]

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And I assume we shouldn't expect the movies that you're licensing back to Disney -- they'll stay on Starz?

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Jeffrey A. Hirsch, Starz - COO [53]

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Like I said, we will continue to have the Disney product on Starz for the foreseeable future.

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James Milton Marsh, Lions Gate Entertainment Corp. - Senior VP & Head of IR [54]

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Any further questions there, Eric?

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Operator [55]

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There's no questions in the queue at this time.

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James Milton Marsh, Lions Gate Entertainment Corp. - Senior VP & Head of IR [56]

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Great. Just let me quickly provide a closing statement here. Please refer to the Press Releases and Events tab under the Investor Relations section of the company's website for a discussion of certain non-GAAP forward-looking measures discussed on this call. Thanks very much.

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Operator [57]

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Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation and for using AT&T Executive TeleConference service. You may now disconnect.