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Tickers in this Article: LGF
Independent movie and television producer Lionsgate (NYSE:LGF) recently took a bit of an earnings hit, reporting third-quarter earnings that were significantly lower than last year's numbers.

But don't bench this up-and-coming company just yet. With an ever-growing arsenal of top-tier films, this lion is bound to roar once again.

The Earnings Situation
On February 11, Lionsgate reported third-quarter earnings of 2 cents per share, missing analyst estimates of 5 cents. Net income fell roughly 88% to $2 million, compared to $20.5 million earned in Q3 last year. This sounds pretty bad, but there is a diamond in the rough here - third quarter revenue did spike 14% year-over-year to $290.9 million. So, what's with the bad earnings?

Lionsgate has steadily expanded its film bank, going from just one theatrical release in 2000 to a planned 20 feature films for 2008 with 12-15 in wide release.

Direct operating and distribution/marketing costs associated with these new film ventures rose 23.8% and 25.7% respectively. This subtracted about $51 million from the bottom line and, as we can see, it affected the company's bottom line greatly.

However, let's not forget that Lionsgate has put out seven hit movie releases in a row: "The Eye", "Rambo", "Saw IV", "Why Did I Get Married?", "3:10 to Yuma", "Good Luck, Chuck" and "War".

The company did take a hit with the production expansion, but if Lionsgate keeps picking winners, there is no telling how much profits will pop within the next few quarters.

Business is Booming
Aside from the increased operating and marketing costs, just about every avenue of income for Lionsgate increased in revenue last quarter. Let's take a look at the different segments and how each performed:

  • Movie Division - $254 million this quarter compared to $221.6 million last year.
  • International Division - $53.8 million this quarter compared to $27.6 million a year ago.
  • Entertainment Backlog Division - $416.6 million this quarter compared to $347.4 last year.
  • Television Production - $36.8 million compared to $32.9 million last year.
  • Home Entertainment - $105 million compared to $113.6 million last year.

Four out of five Lionsgate divisions increased revenues from the same quarter last year. The only division that lost money was home entertainment, and this was still considered to be strong. You can't argue with the numbers; Lionsgate is raking in the dough.

The Bottom Line
Lionsgate is doing what any growing company does when it sees the true potential of its business - it expands. During the expansion phase business is bound to struggle a little, especially in the movie business when marketing and inflated movie star salaries are factored into the mix.

The company's true success is buried in each division's performance, and there is significant revenue growth coming in from almost every direction. The recent decision to expand its number of films in production will, without a doubt, spike profits during the upcoming quarters. Lionsgate has now put out seven hit releases in a row, and hopefully it can keep this run going. The stock has been beaten down during the last six months and looks extremely undervalued.

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