Lions Gate Entertainment (NYSE:LGF) reported earnings for its second fiscal quarter last week. Its performance was, for the most part, on par with its first fiscal quarter, as the company remains in a holding pattern, waiting for growth.

Revenues increased 3% for the quarter to $218.2 million -- while the growth in the top line was modest, it beat the decline seen in the previous quarter. The operating loss widened 15% to $12.2 million. Net loss from continuing operations dropped slightly to $14.4 million ($0.14 per diluted share), compared to a net loss of $15 million ($0.15 per diluted share) in last year's quarter. A tax benefit helped to lighten the red ink.

International operations continue to do well, booking a 73% increase in revenues. Product contributors for this segment include Saw II and Hard Candy. Television distribution blew the roof of its top line, growing revenues by 82%, again with some help from the second Saw movie. Revenue for television production declined 26% due to issues of timing; deliveries of new product are backloaded and will see placement on platforms such as the new CW network -- a joint venture of Time Warner (NYSE:TWX) and CBS (NYSE:CBS) -- and the Showtime premium cable channel sometime in the future. The DVD operation was soft this time around, posting a 4% decline in sales.

Moving on to the cash flow situation, we see that net cash from continued operations plunged 71% for the last six months. Free cash flow (as defined by the company) for that same period took a dive as well, declining 38%. However, free cash flow for the quarter increased almost 300% to $24.1 million. That's a lot better than the first quarter's use of cash for operations.

Honestly, I think Lions Gate is holding up reasonably well here. Foolish investors should keep a few things at the forefront of their minds when considering this business. First, there's still deferred revenue on the books reflecting a backlog of filmed entertainment -- $248.7 million, a slight increase over last quarter. This is money that the company cannot book yet due to accounting principles, but eventually will, thus adding to the top line.

Second, the company is investing for the future, as evident by the line on the cash flow statement indicating an increase in funds allocated for film and television production. Considering the skill the company wields in generating franchises, that could very well turn out to be a good thing.

Third, the company's horror franchises should continue to be revenue drivers in future quarters. Lions Gate will distribute Hostel: Part II next year. Plus, for the Jigsaw fans out there, there will be a Saw IV. A big hit can aid Lions Gate's top line; as noted in the latest 10-K, the top four theatrical products represented, in aggregate, about 73% of total revenues for the theatrical segment. Hit movies will also enhance other revenue streams, including home entertainment and television distribution.

Lions Gate is wise to continue its infatuation with horror, since the genre seems to be eternally popular. In fact, the studio is investing in FEARNet, an online and on-demand channel devoted to horror, which is also backed by Comcast (NASDAQ:CMCSA) and Sony (NYSE:SNE).

I think Lions Gate will do well over the long haul, but it will be volatile -- any studio can find itself in a dry spell at any time. There are also the risks of costs with a company like this -- every franchise has the potential to get more expensive to produce and promote over time, and the risk increases with each successive entry. (I mentioned this in a Take on Saw III's performance.) The movie business in general is seeing rising marketing expenses and other costs. It's increasingly difficult to determine how capital should be allocated with entertainment products, considering that the public at large's receptiveness to a concept is nearly impossible to predict with certainty.

Nevertheless, I remain confident in Lions Gate's potential, even with the current operating and net losses. It has a great library of filmed assets, new disc formats are on the horizon, and the company will eventually recognize those aforementioned backlog revenues. As long as the studio keeps generating decent amounts of cash, it will continue to invest in multiple entertainment concepts -- many will sputter out, but some will hit big. Keep an eye on the Lion, and remember to do some due diligence before investing.

More Takes on Lions Gate Entertainment:

Time Warner is a Motley Fool Stock Advisor recommendation. Discover David and Tom Gardner's entire slate of star-studded stock selections with a free 30-day trial.

Fool contributor Steven Mallas does not own shares of any company mentioned above. As of this writing, he was ranked 1,859 out of 12,920 investors in the CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.