Spy guys lead MGM to solid 1st qtr

Studio concentrates on profitable franchise spin-offs

NEW YORK — James Bond continues to pay dividends for MGM, which cut its first quarter loss by 35% and pumped up free cash flow on the back of library DVD sales, a strong late-quarter box office run by “Agent Cody Banks” and record-breaking “Die Another Day” overseas B.O.

The improvement came despite poor theatrical showing for other Q1 releases “A Guy Thing” and “Dark Blue.”

Though the bottom line at the Lion remains solidly in the red with a net loss for the quarter of $55.8 million, MGM is directing investor focus to its fast-improving cash generating abilities. This is driven largely by DVD sales of library titles and lower production investment, but can vary considerably quarter to quarter depending on the timing of theatrical releases, with their associated heavy expenses, especially marketing.

Management touted a significant improvement in cash flow in the last quarter from a cash loss of $45.1 million in the first quarter of 2002, to a positive $108 million coming out of operations for the first three months of this year. Nevertheless, the company warned that second quarter cash flow will turn negative as it revs up marketing efforts for the July 4 weekend release of “Legally Blonde II” and the domestic video/DVD release of “Die Another Day” June 3.

Sales jump

Sales overall for the quarter jumped 25% over the same period last year to $395.2 million, thanks to more and wider film releases this year compared to last, powered by “Agent Cody Banks,” which opened late in the quarter but managed big opening numbers and $45 million to date. Last year MGM was saddled with box office bombs “Rollerball” and “Hart’s War.”

Speaking to analysts on a Thursday earnings conference call, vice chair and chief operating officer Chris McGurk described the junior spy flick, as “precisely the type of film that now defines the majority of films in MGM’s portfolio” and with the potential to spawn profitable franchise spin-offs. McGurk also noted that “Barbershop II” will be shooting this summer in Chicago, featuring Queen Latifah, who will use the sequel as a stage setter for her own MGM vehicle, “Beauty Shop,” for 2004.

MGM stood by its full year 2003 goal of expanding sales by 3-5% this year to reach $1.7 billion, with free cash flow of $100 to $150 million, according to CFO Dan Taylor.

O’seas expansion

Among other notable Q1 milestones, McGurk cited the launch of new branded MGM channels in Germany and the Netherlands, a successful first season outing for syndicated drama “She Spies,” a 25% increase in worldwide DVD unit shipments and $21 million box office tally for United Artists docu “Bowling For Columbine,” the latter representing a healthy return on its $3 million acquisition cost.

Noting Viacom’s acquisition of Comedy Central this week, MGM Chairman and CEO Alex Yemenidjian commented on the clear value of niche channels and his hope that in future, the market might value MGM’s international branded network more fully. “The most valuable (properties) are niche channels with dual revenue streams. Viacom’s transaction is confirmation that that is where the best broadcasting dollars are,” Yemenidjian said.

In MGM’s ongoing pursuit of a cable network acquisition, Yemenidjian indicated that discussions with Cablevision centered around possibly swapping MGM’s 20% stakes in IFC and WE for a controlling stake in AMC. MGM’s 20% stake in these Rainbow Media Networks is believed to be worth in the neighborhood of $450 million.

Private sector?

Yemenidjian says the company is prepared to consider further stock buy-backs at current prices or even taking the company private in order to ensure shareholder value.

“We still think our stock is extremely cheap and will continue to buy back stock,” he said, adding that the company in the meantime remains focused on growth and creating a more diversified revenue stream.

The home entertainment group, which has recently assumed direct control of sales and marketing in key territories like Germany and France, will have released 900 library titles onto DVD by the end of 2003. The company is hoping that at less than 50% hardware penetration in the U.S. (and half that level internationally), there still will be ample growth in that sector through repackaging and re-releasing of titles. MGM said it is currently exploring further expansion of self-distribution, and will be revisiting the long term status of its distribution deal with Fox this summer.

The 20th Bond title has so far grossed $430 million worldwide and is expected to spike sales this summer when the DVD makes its U.S. debut. MGM says it expects to ship more than 14.5 million units worldwide

On MGM’s far smaller television front, series spin-offs of theatrical franchises “Legally Blonde,” “Thomas Crown” and “Barbershop” are all in development. The studio will kick off a 10 episode order of new reality skein “Fame” on NBC in late May.

Total negative production costs will decline slightly from last year’s total of $280 million to roughly $250 million in 2003. However, print and ad costs are due to rise at least 20% to between $480 to $500 million due to wider releases of more of its titles this year.

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