Hard on the heels of its disappointing fiscal Q2 2006 earnings report, independent movie studio Lions Gate Entertainment
As of this writing, shares of the Canadian studio have already tumbled more than 10% in just an hour's worth of trading on the NYSE. The reason: The company slashed its forward guidance for this fiscal year's earnings by more than 50%. It now predicts that net profits will come in at just $15 million, down from its previous expectation of $35 million.
The reasons cited were legion:
- Weak reception to its recent film In the Mix among theatergoers.
- Disappointing sales of its recent direct-to-video offerings.
- Decreasing margins generated by its library of old films.
- And "softness of family home entertainment product" -- whatever that means. Is the firm selling movies or Nerf balls?
Of the above, only the "decreasing margins" excuse really rings true. At the same time that Lions Gate slashed its profit estimates, it maintained its predictions for the year's revenues ($850 million) and free cash flow ($100 million). Assuming the company has a better handle on its sales numbers now than it had on its profit numbers a month ago, Lions Gate's problem seems to stem less from finding an audience and more from making a profit from those viewers.
In this Fool's view, that brings us right back to where we were in November, when the company blamed higher marketing costs for its $14.1 million fiscal second-quarter loss. Last month, the firm lamented spending $98 million to distribute and market just two films, Lord of War and The Devil's Rejects, neither of which recouped those expenses theatrically. While Lions Gate expected those films to become profitable on DVD and in pay-per-view screenings, today's earnings warning suggests that expectation is nearing its expiration date -- if it hasn't vanished already.
As I said in November, if huge hits like DreamWorks'
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Fool contributor Rich Smith does not own shares of any company mentioned in this article.