Lions Gate delivered disappointing sales figures for the first
quarter in 2014.
However, its main launch, Divergent, was released only 10 days
before the end of the quarter. This means the period included
most of the expenses, but only a small fraction of revenues,
related to Divergent.
On a forward-looking basis, the company’s smart business
model and healthy growth prospects look quite encouraging.
Is short-term weakness in Lions Gate creating a buying
opportunity for investors?
A smart business model
“We continue to grow and diversify our portfolio of film, television and digital
content to capitalize on demand from emerging and traditional platforms
throughout the world marketplace. We maintain a disciplined approach to
acquisition, production and distribution of film and television product, by
balancing our financial risks against the probability of commercial success for
each project. We pursue the same disciplined approach to investments in, and
acquisition of, libraries and other assets complementary to our business.
We believe that our strategic focus on content and creation of innovative
content distribution strategies will enhance our competitive position in the
industry, ensure optimal use of our capital, build a diversified foundation for
future growth and generate significant long-term value for our shareholders.”
Source: Lions Gate 10-K
Capital allocation discipline
Unlike many competitors, Lions Gate is focused on keeping its
production costs under control and carefully examining the
economic viability of new projects.
The company relies on franchises as a strategy to generate
more reliable and predictable revenues.
This smart business model means that Lions Gate does not
need every new movie to be a big hit for it to be financially
successful. Still, blockbusters such as The Hunger Games can be
enormously profitable for the company and its shareholders.
Lions Gate usually films in locations offering tax subsidies,
low-interest-rate loans, and cash rebates, among other
Lions Gate implements co-production agreements with
other production companies and it pre-sells international
distribution rights to reduce financial risk.
The company often signs agreements with actors that offer
them participation in a movie's financial success in
exchange for reducing up-front payments.
Betting on franchises
The Hunger Games is a major success that should continue
generating big results for Lions Gate over years to come. The
company will be launching a new Hunger Games movie in November,
and it's also working on a Hunger Games video game as well as
exploring the possibility of a theme park attraction.
Divergent is off to a strong start, with nearly $275 million in global
box office receipts as of May 30 and promising possibilities in the
Lions Gate has recently signed an agreement to produce a new film
based on the globally popular Power Rangers franchise, opening a
new door to exciting growth opportunities.
Growth opportunities in television
Highly successful television series such as Mad Men,
Orange Is the New Black, and Nashville have positioned
Lions Gate as a leading player in that segment.
Revenues in the television segment increased by a big 18%
to a record $447.4 million during fiscal 2014.
Management believes revenues in the television division
could increase 50% by 2017, while profit margins in that
segment could double, from 7% to 14%, over that time
“The trajectory of our business, the depth of our
content pipelines and the ongoing generation of
predictable income from our film franchises,
television properties and filmed entertainment library
continue to give us excellent long-term visibility.”
--CEO Jon Feltheimer
Lions Gate delivered disappointing financial performance
for the first quarter. But that was mostly because of the
timing of the Divergent launch.
The company has a smart and financially efficient business
Lions Gate offers a promising pipeline of new launches and
exciting growth opportunities in the years ahead.
Short-term weakness in Lions Gate looks like a buying
opportunity for long-term investors.
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