Lions Gate's Q3 reflects risky movie business

Lions Gate Entertainment (NYSE: LGF), whose media colleagues include Disney (NYSE: DIS), Time Warner (NYSE: TWX), Viacom (NYSE: VIA), and Sony (NYSE: SNE), had one bomb of a quarter. Earnings were terrible. Actually, did I say earnings? No, there were none of those, just a big fat loss! For Q3, the studio saw revenues increase by over 8%. Great, but that does nothing to erase the fact that there was a loss of $0.81 per share. And talk about a miss. According to this source, Wall Street was expecting a loss of $0.20 per share. In last year's Q3 report, Lions Gate saw a profit of $0.06 per share.

So what happened? Well, Lions Gate's movie slate just didn't perform. The television-production operations did very well, increasing revenues by over 80%, but it wasn't enough. Total expenses increased significantly, driven by severe rises in direct operating and distribution/marketing expenses. Plus, there were a lot of unsold DVDs that were returned.

In terms of cash flow, which Lions Gate management has always highlighted, well, none was generated. Cash was used for operations for the nine-month period, and free cash flow was, roughly, negative $140 million. For the quarter, free cash was negative $105 million, and this compared so unfavorably to positive free cash flow of $5 million in last year's Q3. Management believes that the full-year cash-flow results will not be so hot. I'd say that was a pretty obvious observation.

Well, what should one do about Lions Gate's stock? I've been watching it a lot, but have always been reticent about pulling the trigger, given market conditions. I'd say that one should hold off on buying to allow for study of the price action following this earnings report. Lions Gate obviously needs to get serious about cutting costs. Apparently, management didn't get the memo on that one yet. When I reported on Lions Gate's Q2, I found that costs were also a problem at that time, too. I guess it's going to take a while to fully turn that part of the ship around. For now, I perceive a lot of risk to owning the stock.

Disclosure: I own Disney; positions can change without notice.

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Tags: DIS, Disney, LGF, lions gate entertainment, LionsGateEntertainment, SNE, Sony, time warner, TimeWarner, TWX, VIA, Viacom