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Edited Transcript of LGF earnings conference call or presentation 9-Aug-18 9:00pm GMT

Q1 2019 Lions Gate Entertainment Corp Earnings Call

SANTA MONICA Aug 24, 2018 (Thomson StreetEvents) -- Edited Transcript of Lions Gate Entertainment Corp earnings conference call or presentation Thursday, August 9, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher P. Albrecht

Starz, LLC - CEO

* James Milton Marsh

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

* James W. Barge

Lions Gate Entertainment Corp. - CFO

* Jon Feltheimer

Lions Gate Entertainment Corp. - CEO & Director

* Kevin Beggs

Lions Gate Entertainment Corp. - Chairman of Lionsgate Television Group

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Conference Call Participants

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* Alexia Skouras Quadrani

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

* Amy Yong

Macquarie Research - Analyst

* Aravinda Suranimala Galappatthige

Canaccord Genuity Limited, Research Division - MD

* Barton Evans Crockett

B. Riley FBR, Inc., Research Division - Analyst

* 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

* James Charles Goss

Barrington Research Associates, Inc., Research Division - MD

* 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

* Steven Lee Cahall

RBC Capital Markets, LLC, Research Division - 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, and welcome to the Lionsgate Fiscal 2019 First Quarter Earnings call. (Operator Instructions) And as a reminder, today's call is being recorded.

I would now like to turn the call over to our host, Head of Investor Relations James Marsh. Please go ahead, sir.

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

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Thanks, Gary, and good afternoon, everyone. Thanks for joining us today for the Lionsgate Fiscal 2019 First Quarter 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 the call up for questions. Also joining us on the call today are: Vice Chairman, Michael Burns; Starz President and CEO, Chris Albrecht; Starz Chief Operating Officer, Jeff Hirsch; Starz Chief Financial Officer, Scott Macdonald; Lionsgate COO, Brian Goldsmith; Chairman of the Motion Picture Group, Joe Drake; Chairman of the TV Group, Kevin Beggs; Chief Operating Officer of the TV Group, Laura Kennedy; and Chief Accounting Officer, Rick Prell.

The matters we'll discuss 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, including the risk factors set forth in the Lionsgate annual report on Form 10-K filed with the SEC on May 24 as amended in Lionsgate's quarterly report on Form 10-Q filed with the SEC on August 8, 2018. 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 the call 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 today. We got our fiscal year off to a great start with a strong quarter that reflected contributions from all of our businesses. I'd like to begin with a few quick headlines.

With gains in over-the-top and traditional subscribers, Starz had growth of 300,000 domestic subs in the quarter. Momentum continued after the quarter with the launch of Power, the highest-rated premium cable series of the year. We added a major new content partnership with the announcement of a global music publishing agreement and a first-look television deal with the world's largest music company, Universal Music Group.

I'm also pleased to report that, on the heels of the breakout hit I Can Only Imagine, our Motion Picture and Television Groups have closed an overall deal with the Erwin Brothers, leading producers of faith-based film and television content. Together with our partners at Liberty Global, we began shooting our first Lionsgate television series for Starz, The Rook. This will be followed by our next series for Starz, the John Wick TV spin-off, The Continental. I'd like to add that the footage from John Wick 3 feature film looks terrific.

During the quarter, our Television Group was in production on nearly 50 series in 12 locations. And I'm pleased to announce this afternoon that our partnership with 3 Arts Entertainment has hit the ground running with our collaboration with Ubisoft on a scripted series for Apple, a comedy created and executive produced by Rob McElhenney and Charlie Day, the creative masterminds behind It's Always Sunny in Philadelphia.

To sum it up, the quarter reflected the strong and integrated growth of our businesses. I'm going to focus on Starz this afternoon because we're investing in a programming and international rollout strategy that's working.

In the quarter, new series Vida and Sweetbitter delivered on our commitment to be the platform of choice for diverse and underserved audiences. Both have been renewed for their second seasons. The return of Power after the quarter has accelerated the already strong growth trajectory of Starz OTT subscribers. Power has become a global brand with broad commercial appeal across most demos. And it's driving a Starz Sunday night programming block that has become dominant in the premium television space.

We're also encouraged to see positive signs in the broader environment. The recent data that we've all seen seems to suggest that cord cutting is decelerating industry-wide, and the growth of virtual MVPD subscribers is beginning to offset the loss of traditional MVPD subs. As a platform with a flexible, lower-cost product, Starz is well positioned to capitalize on this growth and to benefit from the higher margins generated by virtual MVPD subscribers. Starz is already on DIRECTV Now, YouTube TV and Sling, and we will launch on Hulu in October. With this anticipated uptick in virtual MVPD subs and the heart of our programming slate still to come, including Outlander, American Gods and The Spanish Princess, we're bullish about overall subscriber growth for the rest of the year.

Internationally, all the indicators from our rollout to date show that the global arena presents an incredible growth opportunity for Starz. Our launches on Amazon Prime Video in the U.K. and Germany are off to a strong start as a combination of Starz original programming, Lionsgate films and television series and our deep content library is resounding with consumers. Our Starz Play Arabia venture continues to grow rapidly in the Middle East and North Africa, where we've become the leading subscription video-on-demand platform revenue and subscribers. And we're pleased to announce today that we've entered into agreements to launch the Starz Play brand in France, Italy and Spain, with more international territories and partners to be announced soon.

The bottom line is that we continue to successfully execute on our thesis: investing in premium programming that differentiates us from our competitors domestically, while our platform of Lionsgate and Starz content has positioned us to be the launch partner of choice for major global distributors, something that will become evident as we continue to roll out new territories.

Instead of our usual rundown of upcoming films and television series orders, I thought it might be interesting to talk today instead about the overall talent strategy that will drive these slates. We've created a unique value proposition for artists with our entrepreneurial culture, our commitment to bold original and diverse creative voices and the opportunity to play across all of our platforms in what we call a no-silos environment. We bring to this initiative an enormous stockpile of content, expertise in production, marketing and distribution and executives with great talent relationships across our businesses.

The talent community is responding. In addition to our partnership with 3 Arts, our new collaboration with Universal Music Group and the Erwin Brothers deal announced today, we've recently signed agreements with Eugenio Derbez, Salma Hayek, Paul Feig and Dear White People's Justin Simien and Yvette Lee Bowser. And you can expect to see a number of new talent deals in the coming weeks.

In closing, success in today's environment is about who best understands the changing composition of our audiences, the different ways in which content is being discovered and enjoyed, the places where demand is growing and the places where it isn't and how the needs of our media and technology partners are shifting in response to recent developments. The value we bring to our partners and consumers is not only the breadth of our content but our agility, our freedom from legacy constraints, our willingness to be a game changer and our ability to quickly deploy our content in innovative and exciting ways.

Now I'm going to 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. As we discuss the quarterly financial results, I'll also update you on our outlook and balance sheet.

For the fiscal first quarter, adjusted OIBDA came in at $117 million on revenue of $933 million. This reflects the ongoing strength of our businesses with notable success in subscriber growth and ancillary revenues. As expected, the year-over-year comparisons reflect the postmerger licensing of Power in the prior year quarter and difficult comparisons in the Motion Picture segment.

Reported fully diluted earnings per share was a loss of $0.04 in the quarter, while fully diluted adjusted earnings per share was a profit of $0.18. Free cash flow came in at $114 million.

And before I walk you through the results of our various businesses, I'll point out that the realignment of reporting segments that you probably have already noticed in our press release. The purpose of this realignment is to report the results attributed to all of our TV Production business in a single segment and [distill] the Media Network segment to more clearly reflect the results of our network distribution business. We think this better aligns our segments to how we run the business and should be more intuitive for investors.

I want to emphasize that the realignment of reported [ing] segments has no impact on consolidated results. You'll find more detail in our 10-Q disclosure and the trending schedules, where we have recast all periods in a consistent manner to facilitate comparison. And of course, James will be available to work with you if you have questions.

With that in mind, I'll cover some of the performance highlights across our businesses. It is helpful if you could follow along in the updated trending schedules we posted to our website.

In Media Networks, segment revenue was $355 million for the quarter. This reflects an increase of 3% that was primarily driven by over-the-top subscriber growth. Segment profits were essentially flat from the prior year quarter due to costs associated with our international rollout and modest increase in domestic spending -- marketing spend.

As Jon mentioned, Starz ended the quarter with 23 million -- 23.8 million subs, which was up 300,000 sequentially and reflected an increase in both MVPD and over-the-top subscribers. Also, it's important to note that these sub numbers only include our domestic business at this stage. And as we mentioned on our year-end call, we are poised to deliver full year-over-year growth on Starz domestic subs in fiscal '19.

For the Motion Picture segment, revenue of $365 million and segment profits of $51 million including -- included strong ancillary performance on titles like Wonder and I Can Only Imagine. As you were expecting, there was a decline relative to the prior year quarter due to comparisons against titles like John Wick Chapter 2 as well as the continued carryover effect of La La Land.

In our TV Production segment, revenue of $279 million was up 7% in the quarter with a decline in segment profit attributable to the postmerger licensing of Power for multiple seasons in the prior year quarter. Remember that, under the realignment, the ancillary sales of Starz originals have now been included in the TV segment. Of course, Power continues to drive ancillary revenues. But excluding the year-over-year quarterly impact of Power, the TV segment would have been essentially flat.

Now looking ahead, we continue to feel comfortable with our guidance for a 3-year adjusted OIBDA CAGR of mid- to high single digits.

Now taking a look at our balance sheet, we continue to maintain leverage in the 3.5 to 4x range. Also, since our last quarter's call, we hedged another $500 million of 7-year LIBOR, effectively increasing our overall hedged position to $1.5 billion of notional value at just under 2.9%. I would also like to note that we continue to have substantial liquidity with over $300 million in cash and $1.5 billion of undrawn revolver.

Now I'd 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. Gary, can we open it up for 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 comes from Alexia Quadrani from JPMorgan.

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Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [2]

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Just a couple of questions. First, can you talk about the economics of the Starz expansion, whether it's to Hulu or just virtual MVPDs in general that you're adding or also the international expansion you highlighted in your opening remarks? And then my second question is just really sort of a broader question on the TV side. Has your production focused, or does it -- is the content sort of strategy focused a bit more now to really aim toward licensing your content to the streaming video players? Or are you still looking for kind of a broader -- obviously, Starz included -- but a broader kind of audience of potential buyers of your content including still broadcast and cable?

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

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Thanks, Alexia. On the international rollout, the first I would just note that while it's ultimately going to depend on the timing and the structure, the investment related to the recently announced launches has been included in our updated guidance. We're certainly excited about the international opportunity. And we'll keep you updated as we refine our plans and launch new territories. But at this time, we're not going to break out the specific amounts.

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Kevin Beggs, Lions Gate Entertainment Corp. - Chairman of Lionsgate Television Group [4]

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It's Kevin speaking. With regard to the various platforms, we obviously sell everywhere. There is a high degree of focus on Starz, but we are in business with all the premium players, all the basic players, the broadcast players, the other streamers. And it's a mix. And the market moves and shifts, and we move with it. And wherever the product is best served and we feel creatively it will be the most robust and we can drive the best business model is where our product is going to land.

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Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [5]

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And Kevin, is there one that -- is there a buyer that is maybe more attractive from an economic perspective? Or does it really depend on the individual content -- show and the content?

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Kevin Beggs, Lions Gate Entertainment Corp. - Chairman of Lionsgate Television Group [6]

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It really depends on the show because every show is different. Some have stronger international potential. If you have a really strong international show, you want to hold onto as many rights as you can. Something that may be more domestically focused, you might lean more toward a streamer. But generally, we wind up with 3 or 4 bidders on most of the projects that we take to the market, and then we do a very exhaustive kind of contemplative process to drill down to where we think it will really succeed and where the show will last. And it's not always about the short money, it's really about where can a show go multiple, multiple seasons and bring long-term value to the company. And the wider company obviously includes our platform partners.

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Operator [7]

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And now to the line of Ben Swinburne from Morgan Stanley.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [8]

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I think Chris is there. I just want to get a little more color on the Starz strength this quarter, particularly around the traditional distributors. I don't know if we know, but it feels like it's has been a while since traditionally distributed Starz has grown. Do you chalk that up to Power, to the new Altice deal, to other stuff? Any color on that improvement? And then how are you thinking about programming the international OTT products versus the U.S.? Is it -- are you thinking about doing things differently overseas in terms of content mix or positioning of the brand or anything like that? Any color there would be great.

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Christopher P. Albrecht, Starz, LLC - CEO [9]

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Sure, Ben. Look, I think as Jon mentioned in his remarks, the recent data that we've all seen is suggesting that there's been some deceleration in cord cutting. So that certainly helps. I think the strength of our programming helps. The consistency of our programming helps. And the increased focus on the virtual MVPD products from our partners, I think, is starting to gain traction. So those are all good things, and we're -- we've already baked in a ramp-up of our originals, so we think that we're going to continue to field an even stronger product. With regard to the international products, the early returns show us that the Starz originals and the Lionsgate library stuff is among the top performers. I mean, what we are gratefully seeing is that the combination of Starz and the Lionsgate library, both television and film, are allowing us to become the partner of choice because we can so quickly put together a robust content offering and be in market like literally within weeks. So this is a terrific advantage that we have. Partners are seeing that, and we're looking forward to more announcements as we roll out this international expansion. But I guess, also, I would say that we're sort of curating it differently for different territories depending on what rights we retain and also what we think might work in that territory. And it's early days, so we're going to continue to learn just like we learned on Starz Play, just like we're learning on Starz here, domestically.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [10]

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Any timing, guys, on the Arabia consolidation? I think you hinted at that last call, which I think would bring in a decent sized international sub number to the business.

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James W. Barge, Lions Gate Entertainment Corp. - CFO [11]

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Yes, Ben. Certainly, Starz Play, as you point out, is not currently consolidated. Nor do we include the subscriber count in the numbers that we disclose. And this is certainly one of those hidden assets. While STARZ Play Arabia is currently not included in the subtotals, it will be likely to be included in the future as we start to roll out global -- our global footprint.

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Operator [12]

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And now to the line of Matthew Thornton from SunTrust.

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Matthew Corey Thornton, SunTrust Robinson Humphrey, Inc., Research Division - VP [13]

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Just following up on Ben's question there on the MVPD channel. I guess, anything kind of going on there on the Altice side that's kind of behind us? I know you've got a new agreement that's a little more favorable going forward. Was that a contributor in the quarter, or do you expect that to kind of contribute to [sub limism] in the back half? Some of the recent headwinds with U-verse, with the Charter-Time Warner cutover, some of those headwinds, are they kind of continuing to fade, or are they predominantly behind us? Just any update there. And then just on the comment this year, you expect sub growth, domestically, I thought was actually new, which is interesting. So I guess that doesn't include any increments from Amazon and the new launches you have coming here, France, Spain and Italy. I just want to confirm that. Any color there would be helpful.

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Christopher P. Albrecht, Starz, LLC - CEO [14]

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Okay, let me try and remember from the beginning. So with regard to the domestic MVPD subs, Altice has not really been a factor yet. There are still some provisions of that deal that will get enacted as we move forward, and we're hoping that, that will be -- that, that will have positive impact, although we're not here announcing anything. We'll stand by our statement of we look forward to growth. Certainly, as Jon mentioned or as -- and as Jimmy mentioned, the strength of this last quarter doesn't include the July 1 launch of Power, where we've seen unprecedented growth on our OTT business both on the wholesale and the retail side. As a matter of fact, if you took those 2 businesses together and looked at them collectively, they would represent our third largest distributor. So we think that's a pretty good showing, and we hope that we'll be able to continue that. We're not counting international subs. There's no announcement as to when we will be doing that, and the Starz businesses are strong. We're working with our MVPD partners. We want to continue to field a great, robust product for them. And as there are new partners, the Hulu launch, and the strength of the virtual MVPDs, hopefully, other partners for our OTT business wholesale, as well as learning more and just getting better at our retail business as the strength and the consistency of our lineup rolls out quarter -- month-over-month, quarter-over-quarter.

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James W. Barge, Lions Gate Entertainment Corp. - CFO [15]

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Matt, just to clarify for you, as you know, the domestic subs, we're just reiterating that we expect that growth year-over-year. That's something we said earlier, and it includes both the MVPD and the over-the-top subs.

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Matthew Corey Thornton, SunTrust Robinson Humphrey, Inc., Research Division - VP [16]

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Right, right. Yes, I didn't remember the domestic component of that, so that's encouraging. Let me just slip in one other, if I could. The announcement in France, Italy and Spain, is that going it alone? Is there a partner there? Is there a partner that you haven't announced kind of behind that? And then just as you think out just to fiscal '20, I think you guys have talked about being in 15 markets by the time we exit. Is that still a reasonable bogey?

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Christopher P. Albrecht, Starz, LLC - CEO [17]

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We've announced that the territories at this time, we're not going to announce a partner. That will come later. And I think as Jimmy said before, the territories that we've announced so far are included in the numbers that we've put out there. And if anything needs to be updated, you'll be the first to know.

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Operator [18]

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And that comes from the line of Steven Cahall from Royal Bank of Canada.

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Steven Lee Cahall, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Maybe just, first, as a follow-up on Starz network, the -- it looks like the ARPU growth has been pretty positive, running around mid-single digits. Just a question if you would expect that to continue as you give your guidance for the sub growth for the year. I would think, if it's coming from OTT, it would, but just to confirm that. And then secondly, with the alignment you've got between the Starz studio and the Television segment, do you get any strategic or operational benefits from that? Do you get synergies or cost savings from like a single distribution sales force? So anything that's kind of going on there beyond just the way you're reporting it would be helpful.

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James W. Barge, Lions Gate Entertainment Corp. - CFO [20]

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Could you rephrase that first ARPU question?

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Steven Lee Cahall, RBC Capital Markets, LLC, Research Division - Analyst [21]

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Yes. So ARPU looks to me like, at Starz network, has been sort of growing mid-single digits. So I was wondering if you could comment, as you expect the subs to grow, do you expect the ARPU to continue at this nice sort of mid-single-digit rate as we think about the overall network revenue growth?

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James W. Barge, Lions Gate Entertainment Corp. - CFO [22]

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Look, Steven, we're not going to lean into the projections specifically on ARPU, but we like where we're positioned. And we've obviously factored that into our guidance.

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [23]

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So yes, and you can you rephrase the second question as well?

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Steven Lee Cahall, RBC Capital Markets, LLC, Research Division - Analyst [24]

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Yes. So just in the release, you talk about the alignment of Television Production and Media Networks, and I just wanted to understand if that's actually starting to put teams together. And if so, do you get any strategic or operational benefits from that alignment?

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [25]

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Yes. I think that's the magic of our company. I think our teams speak not once a day but 10 times a day. I think the television team is totally focused on a premium product for Starz. And I think the Starz team is reaching out talking about what their needs are. I think there is cross-platform marketing across our -- we have a huge spend in terms of marketing. And our feature film group is keen always on delivering our hundreds of millions of social site followers to promote new Starz launches and vice versa. There's a huge amount of efficiency in the retention of rights and our ability to look across the globe at the right way to monetize those and the right way to use them across all of the Stars platforms. I could go on and on, but as I say, that's, I think, our secret sauce. It's the way all of our divisions, if you add them up, punch way above their weight when we put them all together. We saw all the synergies that we said are initial synergies, both below the line and above the line, the tax benefits, we accomplished all of those and actually exceeded all of our estimates at first. But I can tell you that, as we continue to operate, we continue to see even larger synergies both above and below the line, which we are going to be taking advantage of.

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Operator [26]

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And it comes from the line of Amy Yong from Macquarie Securities.

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Amy Yong, Macquarie Research - Analyst [27]

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Maybe a couple of questions for me. First, on the acquisition of 3 Arts, Jimmy, can you confirm that it was roughly $170 million in the quarter? And then any comments to contribution to revenue or the bottom line? And I guess, for Kevin, what are you hoping that this acquisition will drive to the TV segment? And then free cash flow obviously grew nicely in the quarter. Any other commitments that we should be aware of, whether or not it's if it's dissenters' liability or the buying of Arabia? And then lastly, any broad comments on the recent board movement with Chairman Malone leaving.

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [28]

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And you have a follow-up?

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

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I can take the -- I can take a swing at...

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [30]

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Hold on. Let me cover that. It's Dr. Malone, not Chairman Malone.

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Amy Yong, Macquarie Research - Analyst [31]

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Apologies.

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

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And the only thing that I would say is he's going to be involved with us in a lot of ways. He remains one of our largest shareholders. He's going to be well represented by Dan Sanchez, who was already an observer, knows the company extremely well. And I would only add that we are going to continue to count on Dr. Malone's continuing wisdom, which is very, very deep, and his interest in our company. Why don't we, Jimmy, go onto the -- that first question.

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James W. Barge, Lions Gate Entertainment Corp. - CFO [33]

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Sure. Relative to -- Amy, relative to 3 Arts, beyond what we've laid out in the 10-Q, we're not really disclosing more there. But what I would tell you is the impact during the quarter was immaterial. And this is certainly an important asset. We'd expect it to contribute to our future growth, but all of that is factored into our guidance. And I think it's important to remember that 3 Arts is more important as a strategic long-term asset rather than a near-term contributor to growth.

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Christopher P. Albrecht, Starz, LLC - CEO [34]

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And then, Amy, can you just rephrase your question about acquisitions? There was something else embedded in there. I've missed it.

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Amy Yong, Macquarie Research - Analyst [35]

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Yes, sure. I was actually wondering if you could talk about sort of the free cash flow commitments that you might have going forward, obviously [it's free cashed nicely]. So you have the dissenters' liability. You have the buying of Arabia. Anything else that we should be thinking of?

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James W. Barge, Lions Gate Entertainment Corp. - CFO [36]

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Sure, Amy. From a balance sheet perspective, look, and particularly the dissenter liability is, as you mentioned, the court date is set for October. You'll see that in the Q. You'll also see that we've accrued a liability of roughly $885 million in the Q as well. Other than that, I'm not going to comment further on the litigation. But to your question, you'll be able to discern from the 10-Q that our financial flexibility and the unused revolver meaningfully exceed the amount of the accrued liability. And then with regards to Starz Play Arabia, we're not going to comment specifically on any provisions there to buy up additional interest.

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Christopher P. Albrecht, Starz, LLC - CEO [37]

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And Amy, on the expectations of 3 Arts, creatively. They're one of the best production management companies in the business, with 700 of the most important clients in town. And we've quickly collaborated and partnered. Jon touched on the announcement about Apple that just broke, with Rob McElhenney and Charlie Day. That's a really great one right out of the gate. It turned to a scripted series commitment. There's another show with Pop, our co-owned network with CBS, and something else brewing at a major streamer. And that's just been the last month. We're meeting with them regularly, collaborating with them on making kind of pioneering studio production management deals that they have been unable to do without a studio partner in some instances, and in some instances, we're bringing other things to the party, including deficit financing and our distribution infrastructure. So we expect many more things to come out of it. It's already been a fantastic collaboration.

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

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I would add one thing, which is there are a lot of people -- lots of talent that might want to go to one company, one streaming platform and, basically, say that's -- they're going to take all of their business there. Again, part of our secret sauce is that talent can do absolutely anything with us. Movies still matter. It matters across the platform. And we're noticing, by the way, that consumers are watching as many movies on premium as they are watching a series. They're actually turning off their subscription when they don't have enough movies. But talent with us can make movies. They can make television shows. They can make them for any network, including Starz. They can be involved with coproductions on a global basis. They can really do absolutely anything at our company. And I think a lot of talent are going to take that particular path as opposed to being tied up at one particular venue, if you will.

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Operator [39]

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And now to the line of David Miller from Imperial Capital.

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David Walter Miller, Imperial Capital, LLC, Research Division - Research Analyst [40]

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Jon, a couple of questions for you. The Now You See Me Live tour show, correct me if I'm wrong, I believe you guys have tour dates all set up in China. And Brian, if you want to chime in on this too, I believe you spend a lot of time in China, so you've probably worked hard on this. But I believe you guys have dates all set up in China but no North American tour dates yet. So I'm sensing kind of pent-up demand here. I'm wondering when the North American tour, that would be, and how would we model that out if there's any guidance there. And then on the 3 Arts deal, I mean, besides the access to talent and the access to the writing, which really speaks for itself, and sort of the first-look component, what are some of the other reasons you did the deal? And more importantly, what does The Street not understand about 3 Arts that you'd like to share this afternoon?

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [41]

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Again, I think Kevin spoke with it. We're already reaping the results of what I said, which is we believe the fourth leg of our stool is talent. And we believe that there, a, is so much competition for talent. But I believe, in addition to reaching out to talent with dollars, we want to reach out to talent with all of the opportunities that we can give to them. We found that the -- frankly, the best-operated company -- we looked at everybody, the best-operated company, in terms of not just management but the ability to be really be called a studio, and a real production partner with, for us was 3 Arts. We feel that it was the one -- the largest one at scale, number one, and the one that, actually based upon the way they operate the company, could actually fold in potentially some other choice companies as well. And then, as I said, we are already -- we've got 2 projects already sold and one I mentioned today. And I will tell you, they're every bit as excited about it as we are. And we're both incentivized to partner with them to give their clients an opportunity they might not get otherwise. And so again, super excited about that aspect of our business. On location-based entertainment in general, I wouldn't talk just about Now You See Me. I think we're going to go a couple of quarters down the road. But we have probably right now 10 or 12 very active, already being built location-based entertainment attractions, including in South Korea, including China, really, all over. And I think we'll start -- down the road, we'll start trying to give everybody a sense of what the future contributions of all of those are. When you add them all together, I think they're going to be quite substantial.

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Operator [42]

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And now to the line of Aravinda Galappatthige from Canaccord Genuity.

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Aravinda Suranimala Galappatthige, Canaccord Genuity Limited, Research Division - MD [43]

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Just a quick question on Starz. I mean, obviously, you've been talking about ramping up the programming spend on the original side, on the original content. And I know you're looking to double the volume of shows there. Can you talk about the extent to which you are able to sort of pull back on the film component of your programming cost as you look to kind of make room in your programming budget, recognizing, of course, that there's going to be inflation in the budget regardless? But I was just trying to get a sense of that mix, whether that's the right way to characterize it, sort of less on film down the road and pulling back on that to kind of finance the original side. And then connected to that, if that is in fact the case, are you comfortable that, with less film content, like the current subscriber profile, it would still not see sort of additional churn or anything like that, that today's subscribers of your platform is predominantly looking at original content?

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Christopher P. Albrecht, Starz, LLC - CEO [44]

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So the Disney roll-off helped fund the ramp-up so far. And we're -- we have a multiyear deal left with Sony, which they have a lot of films that they release. So we are -- we have a very robust supply coming to us. We still get the Disney films in the second and third window, so those will continue to cycle through our service. We have library deals across the industry with very strong titles that perform very well and a great critical mass of films. Films are really important, as Jon likes to say, the secret sauce. The other opportunity here is there's going to be a time when we're going to get to sit and talk about the Lionsgate and Summit output, which not only gives us an in-house leg up to really strategize across the whole company but even as we talk about how we look at audiences and how we look at opportunities to grow revenue with specific audience groups, maybe we even have that kind of conversation with our motion picture partners and really do something that, in my mind, is unprecedented in the entertainment industry as you look towards creating and monetizing content. So films are important. They're important outside the U.S. And as I said before, the Starz originals coupled with the Lionsgate television and, as or even more importantly, film library are giving us this very quick to market with a robust content offering capability. And I think that's just going to continue to be enhanced as we get better at it and as more rights start to come back and cycle through the company for us to deploy in meaningful ways.

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [45]

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I think what Chris is partly saying is that, having a very large robust theatrical division, we have a lot of optionality, a lot of flexibility, and we can actually start honing some of our film output, actually, to the need on a global basis of Starz.

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Operator [46]

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And now to the line of Barton Crockett from B. Riley.

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Barton Evans Crockett, B. Riley FBR, Inc., Research Division - Analyst [47]

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I guess, a couple of things about the numbers. One is on the free cash flow, which was stronger than I was expecting this quarter. I'm just wondering if there's kind of a near-term benefit from rolling back film production, the pare-back in the film slate, that might reverse and go the other way as we kind of move ahead into next year? So if there's kind of a gyration there that we should be thinking about. I was also wondering if you could give us some sense of the quarterly cadence of these things that are hard for us to predict in terms of the cadence of spending at Starz, some thoughts about how to think about the TV Production pipeline and the movie pipeline as it flows through.

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James W. Barge, Lions Gate Entertainment Corp. - CFO [48]

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Certainly, Barton. If you look at the free cash flow, it certainly was a very good quarter and strong free cash flow. Of course, as you'd expect, we benefited from some timing of cash flows and changes in working capital that you alluded to. The $114 million of free cash flow, really, almost matched our adjusted OIBDA. So the conversion was substantially above the historical run rate. We don't provide specific guidance on free cash flow, as you know. But to give you a reference point, last year, we converted 55% of our adjusted OIBDA to free cash flow. I think, if you're looking forward, clearly, we're increasing our investment in original content and spending into our international rollout at Starz. So you should expect to see some moderation in that conversion. Nevertheless, even with this increased investment, we still expect to generate substantial free cash flow in fiscal '19. In terms of quarterly cadence with regards to our '19 -- year '19, the last quarter, I mentioned that the year would be back-end loaded and that the fiscal first quarter would likely be our smallest, and then you'd see adjusted OIBDA building sequentially throughout the year. Well now, we still expect it to be back-end loaded but not necessarily sequential. Now that the first quarter has benefited somewhat from timing at the expense of the second quarter, and we've also moved up, as you probably have seen the release date of Hell Fest, end of the second quarter, and its associated P&A, I would now expect the second quarter to be the smallest in the year.

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Barton Evans Crockett, B. Riley FBR, Inc., Research Division - Analyst [49]

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Okay, and if I could ask one other question just on a separate topic here. The -- you guys are kind of at the smaller end of the story here, but there's -- you haven't been immune to a lot of the reporting about the #MeToo stuff kind of sweeping Hollywood. When you guys are doing a lot of acquisitions, there's a lot of culture, I think, risk. And I was just wondering if you could talk a little bit about how you see the need to address this. What does one do, how does one address it, how does one deal with the reputational and, ultimately, investment risk as this kind of process unfolds?

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [50]

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I would say -- interesting question. I would say that -- and it has come up. I would say that, as we look at any investment and, really, any company, anybody that we are going to be in business with, I think we have an expectation that the way they operate is the way that we operate. I don't want to go any deeper than this other than saying we would expect they too to follow sort of our commitment to a safe, respectful, tolerant working environment for everybody, whether they're an employee, whether they're a production partner or in any respect. That would be our expectation. And I think that if we knew that it wasn't going to be that way, that would not be an arrangement we would enter into.

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Operator [51]

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And that comes from the line of David Joyce from Evercore ISI.

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David Carl Joyce, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [52]

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Two questions please. First, on Starz. You had some headwinds in the past from AT&T U-verse customer migration. I was wondering if that's still a factor, or is that waning at this point? And then secondly, if you could map out the TV Production deliveries - delivery schedule for this year, generally, and then a little more specifically, how you are planning to replace and increase the number of episodes over time for series that might be maturing?

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Christopher P. Albrecht, Starz, LLC - CEO [53]

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So with the AT&T direct, we do see it slowing. We don't have real visibility into what they are doing. They are putting more emphasis on DIRECTV Now. And I think that will, hopefully, be a positive factor going forward. We -- they seem to be committed to their video business, and we hope to continue to be a strong part of that.

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James W. Barge, Lions Gate Entertainment Corp. - CFO [54]

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David, in terms of your question regarding Television Production, look, what I can tell you is, as you move into the second half of the year, there's more episodic deliveries. I think you'll see the margins are somewhat lower in the current period. We will start to see accelerated margins in the second half of the year along with the programming deliveries in the back half.

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Kevin Beggs, Lions Gate Entertainment Corp. - Chairman of Lionsgate Television Group [55]

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And just adding to that, this is Kevin speaking. Yes, a robust slate of new shows coming. We touched on The Rook, which is shooting now in London, which is for Starz, as our first original together and Liberty Global as our coproduction partner. The Continental is kind of teed up behind that, which is in kind of the early pre-preproduction stage. Third season renewal on Dear White People, critically acclaimed show for us at Netflix. We've got an unprecedented 2-season order on -- in Manhunt for Charter, a new player in the original programming game. We're always thrilled to have new partners and clients in the space. We're doing another series for Pop called Florida Girls, which is a 3 Arts collaboration as well, and that's 10 new episodes. And a fair amount in the pipeline behind it, Kingkiller Chronicle perhaps being the most high profile at Showtime, and others. And then as just announced here, the Rob McElhenney - Charlie Day collaboration for Apple. So we -- more to come, but a good crop of new shows. And obviously, the goal is to keep them on for multiple, multiple seasons and create library value for Jim Packer and his team of distribution executives.

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Operator [56]

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And now to the line of Vasily Karasyov from Cannonball Research.

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Vasily Karasyov, Cannonball Research, LLC - Founder [57]

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I wanted to ask you about this. So since our last call, the previous quarter call, the Disney-FOX deal is getting closer to the completion. And Disney did clarify or provided some additional information what they're going to do with their direct-to-consumer services. So I was wondering if you could tell me what -- how you would change what you're doing on the Motion Picture and Television Production side if the deal does go through and then Disney eventually retains all the global rights to all the theatrical products, which is a possibility, right, and then they don't license to third parties their TV product at all? So do you think, a, it's an opportunity for you? How would that require for you to change what you are doing now domestically and internationally? Because I think we all understand that, that event would be unprecedented in terms of 2 major studios merging, and I would love your thoughts on this.

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [58]

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You've covered a lot of territory. I'll try to make a couple of remarks that at least address some of that, which is, one, I would say disruption has always been our friend, and I don't think we could have built this company if it wasn't for the benefit of disruption. So I think as -- in a transaction that big, the integration will take a long time. I think there will be disruption in terms of executives, there'll be disruption in terms of processes and there'll be disruption in terms of talent. And I hope we would be able to take advantage of that. In terms of FOX, the part of FOX that will remain, I think FOX, the FOX that will remain, have already reached out to us and talked about being a very viable buyer for the largest independent television company in the world. And so I think that's a positive. I'm not sure what you're saying about the movie business. I think, in a funny way, typically, that should provide an opportunity for us to fill in some of the blanks. Clearly, they will be, my guess is, taking some of their still expensive but not hugely expensive franchise properties and putting them direct to video. So if your question was does that create an opportunity for sort of the mid-price pictures to fill the gap in the theatrical marketplace, I would say the answer is yes.

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Vasily Karasyov, Cannonball Research, LLC - Founder [59]

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Yes, it was.

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [60]

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Yes. So I think the answer there is definitely yes. So again, I think this presents an opportunity for us. I'm not sure, competitively, in terms of the Starz platform what it means. But I'm pretty certain that the path that Chris and Jeff and their team have taken is one that we'll continue. I think it's particularly unique in the space and so I think it will stand out in spite of incremental competition.

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Operator [61]

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And now to the line of Jim Goss from Barrington Research.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [62]

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A couple of questions. One, I was wondering when the EPIX and HBO contracts come up for renegotiation and if, given the change in ownership involving both of them and your new direction with Starz, there might be some different orientation you might take after that. And I was also wondering if you might discuss in somewhat greater detail the deal with UMG. It sounds like you are merging to make content, so would it be based on their music? And I'm wondering how that would work, what -- how you would do a sharing of that, whether the creative content would flow in both directions. Any color you might add on that I think would be interesting.

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Kevin Beggs, Lions Gate Entertainment Corp. - Chairman of Lionsgate Television Group [63]

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Want me to start with Universal?

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [64]

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Sure.

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Kevin Beggs, Lions Gate Entertainment Corp. - Chairman of Lionsgate Television Group [65]

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This is Kevin speaking. On the Universal Music Group, that's specifically built for original television content, both scripted and nonscripted, and with an idea of collaborating with them and taking advantage of their deep catalog, their cutting-edge artists, both legacy and newer artists, which is an incredible roster. So many of the artists that they are involved with are interested in bringing their story to television in this new PTV environment. We had a great run doing a music-based show in Nashville. That led the way. Obviously, shows like Empire continue to thrive. And those are the kind of things we'd want to do in addition to nonscripted docs built around artists and catalogs. So it's a mix. We've already had 2 big meetings. We're working on finding the right executive to work between the 2 groups. But it's mostly about bringing their IP and getting it to television in the original space. That's the thrust of the deal.

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [66]

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And I think it would be inappropriate for me to talk about the contractual pieces of our contracts with our 2 platforms. I would say what I said earlier, which is having a very robust feature film division will allow us flexibility and optionality as we go forward. And I would say that, while I won't give you specific dates, I would say those deals are not that far down the road.

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James Charles Goss, Barrington Research Associates, Inc., Research Division - MD [67]

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Okay. And just one final follow-up. With the UMG deal, how -- could you scale it? Or do you have any sort of -- like how that relationship would work and how big it might be? Or is this sort of a smaller piece of the business?

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [68]

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I would say this is -- it's a very exciting new opportunity for us. Again, we think they have a tremendous amount of talent over there. And when you look at what Chris and the team are doing in terms of documentaries and limited series and all of the new forms of television right now, I think it's a fantastic area to be in. And again, we're with a fantastic partner, a huge partner, so we think this is a real piece of business.

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Operator [69]

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And our final question today comes from Rich Greenfield from BTIG.

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Richard Scott Greenfield, BTIG, LLC, Research Division - Co-Head of Research, MD and Media & Technology Analyst [70]

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A couple of parts to it. So I think HBO is now up to somewhere around 8 million over-the-top subs. Most of that's through Amazon and Hulu, their kind of wholesale relationships that they've struck on the digital side. A fraction is actually direct, I believe. But I'm wondering how close is Starz tracking to those numbers? It seems like when I look at the App Store, that you're doing a lot better than Showtime OTT. And I guess, kind of attached to that, John Stankey, as he's taken over WarnerMedia, has talked pretty openly about the fact that these premium networks have pretty large opportunity and they've been underinvested in by legacy media and that they're going to start ramping the investment in HBO. And I wonder like, as you think about -- Lionsgate, I know you sell to everyone, but how do you think about funneling even more content so that there's even more of a regular cadence of programming, original new programming on Starz to grow those subscribers even faster?

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Christopher P. Albrecht, Starz, LLC - CEO [71]

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Rich, it's Chris. So we'll take your numbers on HBO. We have had a long, delayed launch on Hulu. And I guess what I could say is, if you sort of factored in -- if you kind of took our Amazon business and added in a potentially like-Hulu business, we'd be right up there. We have a strong wholesale relationship, and we think it's a really good product. Our direct business is doing very well. And as Jon mentioned, we've seen a great response to Power. And I think the -- framing it as, combined, it would be our third largest distributor, puts it in perspective. We think we're priced really well. We think our product is good both from a user experience, from a content experience. What we are doing is we're focusing on grabbing people, bringing them into the tent and then keeping them. And as we do that, we create kind of a Venn diagram of people being able to watch library stuff, watch other originals. We're getting some really important feedback that's going to help us to direct our spend on the content side. Certainly, the Lionsgate content machine is going to be a big factor in our ability to do that successfully. We feel good about where we are, and we look forward to putting our foot on the accelerator.

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Jon Feltheimer, Lions Gate Entertainment Corp. - CEO & Director [72]

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But if the question you're asking is will our enthusiasm in the Starz, both domestic and global rollout, translate into more spend, smarter spend perhaps, based on, again, putting these companies together, but more spend, more hours of original programming, the answer is yes. And what we're seeing is we're doing that because the plan is working. As we spend more, as we market more effectively, we are getting really excellent subscriber trajectory.

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Christopher P. Albrecht, Starz, LLC - CEO [73]

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And also, Rich, we're -- as we move forward, we're going to be really looking at this as a global subscriber business and not just a domestic and an emerging international business. This is really a worldwide plan that we have in place that we're just at the early stages of executing on.

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Operator [74]

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Thank you. We have no one else in queue. Please continue.

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James Milton Marsh, Lions Gate Entertainment Corp. - Senior VP & Head of IR [75]

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Great. Thanks, Gary. I'd just like to make a closing statement here. Please refer to our Press Releases & Events tab under our Investor Relations website of the company's website at investors.com -- at investors.lionsgate.com for a discussion of certain non-GAAP and forward-looking measures discussed on this call. With that, I'll wrap it up. Thank you.

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Operator [76]

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Thank you. And ladies and gentlemen, this call will be available for replay after 4 p.m. Pacific Time today through midnight, August 16, 2018. You may access the AT&T replay system at any time by dialing 1 (800) 475-6701 and entering the access code of 450776. International participants may dial (320) 365-3844.

And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.