Marketing costs hit revved-up MGM

Lion's DVD operations continue to grow

HOLLYWOOD — MGM posted a $32.6 million loss in its third quarter despite a 20% revenue boost, as bottom-line fortunes of the movie-minded Lion continue to rise and fall with the ebb and flow of theatrical marketing costs.

The Century City, Calif.-based studio reported $11.7 million in net income in the same period last year.

Revenue in the latest quarter climbed to $457.1 million as DVD operations continued to grow impressively. Execs also touted an improvement in free cash flow to $21 million, compared with a negative $98.6 million a year earlier.

“Our better-than-expected free cash flow this year and our outlook for the next few years give us extraordinary flexibility in reviewing our capital allocation opportunities and priorities,” chairman-CEO Alex Yemenidjian said.

Debt disposal was a big priority in the quarter, with the elimination of $1.5 billion in liabilities reducing future interest costs by $34 million annually. Execs also reiterated an intent to disburse some surplus cash to shareholders and said that a decision will be made at a Nov. 12 board meeting on whether to use a stock tender offer or some other device to do so.

Lion’s quarterly bottom line reflected recent changes in accounting rules, which stipulate that marketing costs be posted as accrued. As a result, MGM had to acknowledge substantial marketing costs on October releases “Good Boy!” and “Out of Time,” even though box office from the movies won’t be enjoyed until the final quarter of the year.

MGM projects a profitable fourth quarter and touts a solid 12-month performance by its theatrical releases, though slate amortization is expected to shape a year-end loss of $70 million-$90 million.

“This year’s film slate will be the most profitable in MGM’s seven-year history as a public company,” vice chairman Chris McGurk said.

July release “Legally Blonde 2: Red, White & Blonde,” which grossed roughly $90 million domestically, “will be one of our most profitable films ever,” McGurk said. Subsequent titles including “Uptown Girls” and “Jeepers Creepers 2” will post solid profits, he added.

The studio’s theatrical philosophy stresses mostly modestly budgeted films aimed at clearly defined audiences, alongside a healthy mix of sequels and remakes such as April-slotted “Walking Tall,” McGurk said. A trailer for February release “Barbershop 2” is already drawing good response from moviegoers, he added.

“What we’ve been doing pretty consistently is hitting singles and doubles with films that make like $20 million to $40 million in profit,” McGurk said. “We’re very happy that our strategy is working, and it sets us up nicely for 2004 as well.”

Meanwhile, the Lion’s big movie library continues to generate robust revenue from DVD sales. Worldwide DVD shipments rose 52% in the quarter, and homevid revenue climbed 57%. Top-selling titles included James Bond actioner “Die Another Day” and kid spy pic “Agent Cody Banks.”

Revenue from television programming dipped almost 1% to $62.4 million. But execs noted Showtime has already renewed highly rated “Dead Like Me,” which the cable web preemed in June.

Elsewhere among TV ops, MGM Networks recently announced an agreement with CNBC Asia Pacific to launch a Chinese-subtitled MGM Channel in China and Southeast Asia. Branded channels bowing in Switzerland, Liechtenstein and Iceland will bring MGM Networks’ reach to more than 100 countries.

Chief operating officer Dan Taylor said costs of participating in due diligence during the recent auction for Vivendi Universal Entertainment added $5.1 million to the Lion’s quarterly red ink. MGM was ultimately unsuccessful in its VUE quest, but execs stressed the Lion is on the right path for continued growth.

“We expect our four core businesses to finish the year ahead of our business plan,” Taylor said.

Wall Street reacted positively to the financial results, with shares rising 17¢ to $15.50 in midday trading. MGM stock has risen 19% on the year so far.

“I thought it was a solid quarter,” said Sanders Morris Harris’ David Miller. Revenue growth was particularly impressive, outpacing even the most bullish analyst projections for the quarter, he added.

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