Starz Entertainment Corp (STRZ) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Lionsgate FY17 third-quarter earnings call. (Operator Instructions)

As a reminder, this conference is being recorded.

I'll now turn the conference over to Senior Vice President of Investor Relations James Marsh. Please go ahead, sir.

Thank you, Cathy. Good afternoon, everyone. Thanks for joining us today for our FY17 Third-Quarter conference call.

We're going to begin with remarks from our CEO Jon Feltheimer followed by remarks from our CFO, Jimmy Barge. After the remarks we will open it up for your questions.

Also joining us on the call today are Vice Chairman Michael Burns; Starz Chief Executive Officer Chris Albrecht; Starz Chief Operating Officer Jeff Hirsch; Starz CFO Scott Macdonald; Chief Operating Officer and President of Motion Picture Group Steve Beeks; Co-President of Motion Picture Group Erik Feig; Chairman of the Lionsgate TV Group Kevin Beggs; EVP of TV Operations and Corporate Development Laura Kennedy; Co-Chief Operating Officer Brian Goldsmith; and chief accounting officer Rick Prell.

Just a safe harbor here. The matters discussed on this call today include forward-looking statements, including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various factors including the risk factors set forth in our 10-Q filed with FCC on November 8, 2016. The company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.

With that, I'll turn it over to Jon. John?

Thank you, James, and thank you all for joining us this afternoon.

I'm really pleased to welcome the Starz team here today: Chris, Jeff, and Scott. They've played a key role in helping us to integrate Starz quickly and efficiently and their leadership is one of the reasons we're ahead of scheduled in combining our two companies and achieving our target synergies. Even though we saw many of you just last month at Investor Day, we have a lot more to talk about this afternoon because this has been one of our busiest and most productive quarters ever.

During the quarter we released La La Land, one of the most celebrated and successful product properties in Lionsgate history. We continue to enjoy a great awards season with 26 Academy Award nominations spanning four different films; launched Nashville to record ratings in its new home on CMT; received a pickup of the Jamie Foxx-produced series, White Famous from Showtime, giving us premium series on the air, in production, or fast-track development with every major subscription platform; ramped up our global television business with a series of strategic partnerships in the UK; continued to attract leading third-party content suppliers signing a new multi-year home entertainment distribution deal with EuropaCorp that includes a sci-fi action film Valerian, written directed, and produced by Luc Besson; and accomplished all of this while integrating Starz, the biggest acquisition in our history.

These initiatives all reflect the continued scaling of our global content platform, growth that we are achieving through the development of major new film and television properties as well as by continuing to form partnerships with other leading content companies around the world.

Looking first at our film slate, La La Land has become a global box office phenomenon. It is over-performing expectations in nearly every territory and we are looking forward to its Valentine's Day release in China.

In addition to enhancing our corporate brand and serving as a magnet for top-tier talent, La La Land is creating opportunities across all of our divisions as we explore various ancillary plans for the property. The recent box office success of Hacksaw Ridge, Tyler Perry's Madea Halloween, and La La Land underscored the sustainability of a film model that allows us to create breakout hits without swinging for the fences.

I'm pleased to report that our upcoming slate is also loaded with films in our sweet spot, beginning with this weekend's John Wick Chapter 2. Tracking a solid for the second installment of the Keanu Reeves action franchise, and the John Wick Chronicles VR game also launch tomorrow Two years ago we used a similar strategy, debuting the John Wick video game content ahead of the film's release, fanning excitement among the millions of gamers who comprise the movie's core demographic. This time our games division has spearheaded a unique cross-platform Humble Bundle offering that incorporates the VR game, John Wick downloadable content, movie tickets to John Wick 2 through ADAM Tickets, and gaming content from our partners at Starbreeze.

Looking ahead, The Shack, Wonder, and The Glass Castle are all star-driven films, based on best-selling books, that highlight the diversity of our portfolio.

In June we will release Tupac Shakur biopic, All Eyes on Me, for our partners at Morgan Creek, continuing a summer counterprogramming strategy that has worked well for us in the past. And we continue our relationship with the incomparable Tyler Perry on not one but two films, including a new Madea movie.

Our slate also encompasses a number of higher-profile properties. Power Rangers debuts on March 24 and film-related content has already generated over a quarter billion social media views. We'll launch the Power Rangers Legacy Wars mobile game at the same time. I should note that our new e-sports franchise team, Immortals, will be checking it out and streaming the action on their social channels.

We're currently in production on Robin Hood with Otto Bathurst directing a fresh, hip, and contemporary story starring Jamie Foxx and The Kingsmen's Taron Egerton.

We've also assembled a very exciting creative team for the film adaptation of the best-selling young adult book trilogy, Chaos Walking. The Bourne franchise's Doug Liman will direct an all-star cast led by Star Wars' Daisy Ridley and Spider-man's Tom Holland.

And finally, our slate features the film adaptations of two globally renowned brands from our Hasbro relationship: My Little Pony, due out in October, and Monopoly.

Turning to television, we are continuing to scale what is already one of the largest independent television businesses in the world. As I mentioned earlier, White Famous, executive produced by Jamie Foxx and starring Saturday Night Live's, Jay Pharaoh, became the third series one which we've partnered with Showtime.

Dear White People, an adaptation of one of our film properties and our second original series for Netflix, debuts at South by Southwest next month and begins streaming April 28.

The Step Up drama series, adapted from the film franchise that has grossed over $600 million worldwide, goes into production for YouTube Red later this year. With the recent completion of a Step Up sequel for Chinese audiences and the launch of our Step Up Live stage event at the Motiongate theme part in Dubai, we're continuing to expand a significant multiplatform franchise. Turning to another Lionsgate franchise, the three-hour musical event Dirty Dancing, based on the original film, airs on ABC, May 24 as part of the property's 30th anniversary celebration.

I'm also pleased to report that we continue to grow our strategic relationship with David Zaslav and his team at Discovery as they build their presence in long-form scripted programming.

We're already producing a series about the search for the Unabomber starring Sam Worthington and Paul Bettany, the first installment of what we anticipate to be a long-running manhunt anthology series for Discovery.

And this afternoon we're announcing that Discovery has also just committed to a second original scripted project, a drama set against the backdrop of the Vietnam War, to be helmed by the creators of thirtysomething and Nashville showrunners, Ed Zwick and Marshall Herskovitz.

I would also note that we're exploring a number of exciting projects with another major strategic partner, Mike Fries and his team at Liberty Global, including the development of a series about Formula E racecar drivers to be produced by Pilgrim Media.

This was also a great quarter for our current television series. Ed Zwick and Marshall Herskovitz are doing a great job reinvigorating Nashville. As I noted it's achieving record ratings for CMC.

Orange is the New Black recently completed production of season five, which premieres June 9 on Netflix. The show won the SAG Award for Outstanding Performance by an Ensemble in a Comedy Series last weekend, reaffirming its stature as one of the most acclaimed series on television.

Our breakout series Greenleaf is poised to become a hit on multiple platforms. We are in the midst of shooting an expanded sixteen episode second season for OWN and just licensed the S1 syndication window to Netflix.

It's also been a productive quarter for the growth of our international businesses. We continue to ramp up our UK television operations under the creative leadership of former ITV executive Steve November, adding a distribution agreement with production company Bonafide and a strategic investment in Potboiler Television alongside earlier investments in Kindle Entertainment and Primal Media.

With a respected film brand, continued diversification into scripted and unscripted television, and a world class distribution business, Lions Gate UK continues to scale our presence across the Atlantic under the leadership of CEO Zygi Kamasa.

China also continues to be an area of focus. Our box office performance increased 62% from last year and China now accounts for over 20% of our total international box office. With the state-of-the-art content licensing deal with online giant iQyi, investments in coproductions and local theatrical product, our cofinancing deal with Hunan TV and broadcast intermediary TIK Films, the previously mentioned Chinese language version of Step Up, and next year's opening of a Lionsgate indoor entertainment center in Hengqin, our opportunities in China are greater than ever.

Finally, I'm pleased to report that Starz had a strong quarter marked by robust ratings for its top shows, continued expansion of its OTT services, and the Starz app across multiple platforms and rapid integration into the Lionsgate family. I should also note that in terms of year-over-year subscriber growth, the Starz flagship network has added 700,000 subscribers, bringing its total to 24.3 million.

On the programming front, Black Sails launched its fourth season premiere with a 15% ratings uptick from its third season finale, and the show achieved 53% ratings versus last season's average in its 18 to 34 core demographic. The series has already sold or airs in nearly 200 territories around the world.

During the quarter our collaboration with our Starz colleagues on the creation of original new series shifted into high gear. We have already added three premium properties to the Starz development pipeline with more on the way.

Most importantly, Chris and his team continue to accelerate the initiative they launched five years ago to transform Starz into a modern consumer-facing entertainment company for the digital age. Since launching its app last April, Starz has made great progress in the over-the-top expansion of its services, reaching approximately 1 million subscribers. The Starz app has recently rolled out across virtually every device and recently integrated Spotify into its platform, merging the music and video entertainment experience into a unique offering.

And in December, the Starz app was named one of Apple TV's 10 best apps of the year. Yesterday Starz and Starz Encore launched on the new direct mail platform, creating an opportunity for new subscribers who had previously been priced out of accessing the service in the traditional cable package. Based on the strength and proved demand for Starz programming the services are either offered or about to launch on every new package offering from traditional MVPDs and digital platform distributors.

The integration of Starz and Lionsgate is progressing even faster than we anticipated. With the consolidation of the worldwide home entertainment and television distribution group, not only have we brought together the best and the brightest from both companies, but we have created one of the five largest home entertainment operations in the industry, with a 12% market share. In fact, this year we are distributing six of the nine best picture Oscar nominees in home entertainment.

We have also begun the process of bringing together with the rest of our prospective teams to the new office in New York and plans to co-locate all Lionsgate and Starz West Coast employees by the end of the year.

In closing, we're pleased with the strong momentum of our film, television, and media network segments during the quarter. And we're committed to continue scaling our global operations to take advantage of opportunities in an international marketplace. Not only is the integration of Lionsgate and Starz progressing rapidly, but while we only had 23 days of their financial results in the quarter, the combination of our two companies is already beginning to turbocharge our respective businesses as we anticipated.

I will now turn things over to Jimmy to take you through the numbers.

Thanks, Jon, and good afternoon.

I will briefly discuss our quarterly financial results, highlight where we stand on leverage, and update you with some other financial metrics.

We reported solid results for the quarter reflecting the acquisition of Starz as of December 8. Revenues grew 12% to $752 million while adjusted EBITDA, our new operating metric, increased $84 million. Earnings per share was a loss of $0.19 a share and as expected was impacted by a number of nonrecurring items related to the Starz acquisition and the related refinancing.

Nonrecurring items including restructuring other expenses of $52 million as well as $28 million related to the early retirement of debt partially offset by a $20 million gain. Adjusted earnings per share came in at $0.21 a share. Recall on our Investors Day we announced the new configuration of our segments and posted those schedules to our IR website reconciling our old and new metrics.

The remainder of my comments will be based on the pro forma combined results reflecting the integration of the Starz and landscape legacy businesses as shown in the updated trending schedules that it been posted to our website.

This is just a reminder, the pro forma combined numbers will vary from the reported numbers you may see in the press release and SEC filing since reporting numbers only include the integration of Starz from December 8.

In the motion picture group, as expected, motion picture group quarterly revenues slipped a bit due to a tough comp with Mockingjay 2 last year.

But segment profits increased 67% as we have favorable comps on direct operating expenses as well as distribution and marketing. And recall the La La Land impact on fiscal third quarter was muted by its initial limited release and will ramp up more meaningfully in the fiscal fourth quarter. However, as we highlighted it on Investor Day, we're spending additional chase P&A in the fourth quarter, which will benefit our overall take in future periods.

In TV production they posted 38% revenue growth in the quarter driven by new Orange is the New Black, episodic delivery among other factors.

Distribution and marketing costs were managed efficiently. Segment profit almost doubled to $27 million. Recall we have a tough comp with Orange is the New Black delivery in our fiscal fourth quarter coming up. The media networks revenues for the quarter were up 3%. Direct operating expenses were down 21% related to the timing of original programming, so segment profits were up 94%.

In the fiscal fourth quarter we would expect a sequential increase in the programming and marketing costs as Starz premieres season four of Black Sails and the next chapter of the Missing

Now to talk about leverage, our net leverage at 12/31/[16] was 4.4 times using our legacy adjusted EBITDA metric. That was well below the 5 to 5.5 times range we previously communicated. Cash balances came in above projections due to retaining $450 million in cash related to the center shares. Excluding the $450 million, we came in at the low end of the range at 5.1 times.

We continue to expect we can deliver one-and-a-half terms off of our original projections in the next 12 to 18 months. In terms of guidance, as we stated at our Investor Day underlying operating trends remain strong at the company.

Given the closing of the Starz transaction along with our reorganized segment and revise KPI's we are not updating our standalone legacy adjusted EBITDA guidance for the final quarter of fiscal 2017.

As we ramp up our budget process in the next few weeks we will be in a better position to provide the information and metrics you will need to analyze the combined company's future performance.

Now I would like to turn the call over to James for Q&A.

Great. Thanks, Kathy. Can we open up the line now for Q&A please?

Certainly.

(Operator Instructions)

Our first question will come from Amy Yong with Macquarie. Go ahead, please.

Good morning. Good afternoon. Two questions, one on motion pictures and one on Starz. Looks like for motion picture there's clearly a lot of positive momentum with La La and the early reviews of John Wick. Can you give us a sense of growth for the full year and then also some magnitude of the P&A spend related to La La Land.

And then quickly on Starz. It looks like it dipped in the quarter sequentially, but obviously up year-over-year. Should we assume that reverses next quarter, as some of the programming comes back?

And then, Chris, if you could talk about some of the consumer behavior around the over-the-top usage. That would be great.

Okay Amy. In terms of La La land, as I noted, the overall rollout of La La Land was a limited release in December and didn't really pass 1,500 locations until we rolled into January. As I noted, we've got some P&A spend in the fourth quarter proving more just chasing the success of the film. So this is really more of a FY18 as opposed to a Q4 from a financial perspective.

The tracking for John Wick seems great and we're really excited about it opening this weekend. The advance ticket sales have been incredibly strong and the reception to the first movie in home entertainment to John Wick One really built into the launch of this movie, which we hope will be a pretty strong franchise for us.

Hello Amy. It's Chris. With regard to Starz subs, we really saw a lot of headwind coming from the AT&T direct integration. They're basically shutting down U-verse and trying to migrate all their subs over to Direct.

Obviously, that is not a Starz-only situation as we heard this morning on Time Warner calls. So that is -- that has an end to it but it has had an impact for us.

With regard to OTT we're seeing great tick of the app.

As Jon mentioned it's really well regarded. The consumers seem to be really liking it. What we did find is that we do better when we have a real regular new show in the field as an acquisition vehicle. The originals tend to be tools that we used to acquire subs.

The original programming library, and particularly our great film library and from offering, helps reduce churn. So as we're rolling out and we're going to be learning more about this business, we're very bullish on the OTT and we think the MVPD world has some upside for us as well. Because we don't think that Starz is as appreciated or as valued by them.

You know [700] year-over-year is nothing to sneeze at, and the last few years, given our original programming investment, we've really grown a lot. You know, we certainly think there's more to come especially as they innovate in their packaging. Starz is a must-have, must carry for any kind of bundle that the MVPD's are going to put out. So we feel good about these long-term relationships going forward and about new opportunities.

For those of you that saw the recent Bernstein report, they were literally blown away, I think, with the term by how overwhelming the evidence was that Starz subscribers seem to really know about service, use the service, care about the service, be willing to pay for the service, and keep the service. We think that's just great news especially as we enter the OTT world through wholesome and through direct to consumer offerings.

Thanks. Can we have the next question, please?

That will come from Alexia Quadrani with JPMorgan. Please go ahead.

Thank you. Just two quick questions. The first one is also on La La Land.

If you could give us some color of how, when you have movie like that which gets so much critical acclaim and also achieves box office success, how does it have indirect benefit to the studio?

Does it open further doors? Do you get more interest? I guess, just the indirect benefit there. Are there any opportunities?

I think you touched upon that in your opening remarks for that IP. If you provide any color on that. My second question really is just on any update on dissenters' rights issue and how you think about it from a modeling standpoint

I will let Eric answer the first question.

Hello, Alexia. We're thrilled with La La Land. It's a great success. We love the movie, and we are beyond thrilled with its reception both domestically and around the world. It has worked basically in every single territory where it has opened. We have seen overages in every single territory which has opened and we're really, really optimistic about its launch in China on the very fitting Valentine's Day of February 14.

This week it's poised to cross the $300 million mark worldwide box office, and in fact, what's been great -- Jimmy talked a little about its rollout. But even at its widest expansion that's the first time that it crossed $100 million that we expanded on its wide.

In terms of the indirect benefits, the movie is great, the movie -- it's great for us, and it's great for the box office to show that an original movie and a genre that has been a little bit kind of rediscovered is actually working so well. But it also really shows the strength of the Lionsgate brand, the fact that we were willing to take a bet on a unique filmmaker vision and really back his vision along the way has been actually emboldening to us and has brought us a lot of movies and a lot of different kinds of filmmakers that want to go with the home that can embrace their vision and bring it to a wide audience, to critical attention and to box office and commercial success as well.

For La La Land, it's up. We are really right in the midst of its theatrical life, and we are fully committed to it. It still has a lot of runway left into it, and what we do beyond that with just the property of La La Land, I think there are many, many opportunities and we will continue to talk about and let you know about.

But terms of what it's done to the creative community, it again shows that Lionsgate is a company that has a pretty broad and diverse labor approach and is willing to take a bet on an unconventional approach and ride it along to the marketplace.

Thank you, and then just on the dissenters' right issue.

Yes, Alexia. As we disclosed and as you know, 25 million of the Starz A shareholder -- or rather shares, did not exercise or tender and exercise appraisal rights.

In effect, they did not receive the consideration that was offered in the merger. As a result of that we retain $450 million in cash on our balance sheet and we did not issue 17 million shares of Lionsgate B shares At December 31, as you'll see in our filings, we established an $866 million liability to cover the value of that consideration.

Subsequently, as you will see in our disclosures, we were notified by shareholders representing 2.5 million of the shares or approximately 10% that they were withdrawing their demand for appraisal rights and accepting the merger consideration. We think the remaining dissenters are expected to pursue their appraisal rights through the Delaware courts. These cases generally take a couple years to run their course.

By that time I expect we will have significantly de-levered. In the meantime, I would expect our internal Lionsgate shares will exceed the after-tax interest accrual associated with the exposure.

Alexia, it's Michael It's sort of a poor savings plan for us. We'll plan on paying this out with cash. We will accumulate a lot of cash because of the free cash flow if that's the way it turns out. We'll never go into the share cap.

Thank you very much.

Our next question is from Ryan Fiftal with Morgan Stanley. Go ahead, please.

Thank you. So first I just wanted to say a quick thank you for the more detailed reporting and metrics. It's all a significant improvement, so thanks there.

Then I have two questions if I may. One on Starz and one on the TV studio. So first on Starz.

The pro forma network -- Starz network revenue came in ahead of our expectations so I wanted to confirm a couple of things. One is to check that the full impact of the new AT&T rate card was impacting the quarter.

And then second I think there was also a separate $17 million in annual payments that was, I believe, going to be reported as a contra revenue. So I wanted to see if that was included in the pro forma number.

Scott?

Yes, that's correct. The impact of the deal and the impact of the additional contribution of the equity was reflected.

Okay, thank you.

[Fully baked] in the quarter.

And then on the TV segment. You guys previously talked about of $1 billion or over $1 billion revenue run rate in FY18. I was just wondering for an update on how you're tracking against that goal and then also on margins in that segment in 2018.

Is that still the right way to think about it that we should expect some margin improvement off the 2017 levels which I think are being temporarily reduced by the unusual volume and new show launches. Just want to make sure that logic makes sense. Thanks.

Sure, Ryan. We said were expecting low double-digit contribution margins in FY17 and that is certainly the case. We're very comfortable with our overall trends in the TV business. Things really look good.

In terms of FY18 revenues we're just a few weeks away from going into our FY18 budget process. Again we're going to be in a much better position to update people then, so we are refraining from updating metrics if you will before we go into the budget process and communicate more fully after that for the combined companies.

Okay. Thank you.

Thank you. We now have a question from John Janedis with Jefferies. Go ahead, please.

Thank you. Jon, you talked about the UK, and with TV becoming more global, I wanted to ask about the international opportunity within TV, meaning the segment. I think it's for 20% of revenue. I was wondering how you think about the revenue split maybe two to four years out and as that gets bigger how does it impact segment margins

This is Laura. We're excited about the opportunity to expand our TV business outside the US. You will have seen us obviously making a few investments and building our presence in the UK market, which is a great market for television.

We will be looking at building our local production pipeline with our investments in producers, both in unscripted and scripted, as well as under the creative leadership of [Dean --]. I think you'll see us looking to build our TV business for the next couple of years outside of the US.

I think which are also see us doing, Jon, is having a lot more contact with some of the best producers internationally, companies that we're already in business with like StudioCanal and [all three], particularly all three given the partnership with two of our directors and parent companies.

So I think you will see a lot more - some version of international co-production that should build our revenues fairly substantially in the next two or three years.

Maybe on the cost side. It seems like one common theme across the segments for the quarter was expense controls. Understanding a lot of that may have been timing.

Can you talk about to what extent some permanent costs may have been taken out that are unrelated to the Starz transaction and are there more areas to speak to as you wrap up the year?

Sure, John.

I mean, we're just starting to phase in the cost synergies, if you will, with $50 million-plus. As John noted the integration plans are going better than expected. So feel good about being able to put in $50 million of those savings over the next 12 to 18 months, and I would say the short end of that.

Those will start to phase in -- the way the segments are laid out those will occur in mostly as you would expect in the media network segment, but also some in the motion picture segment as the -- what is formally known as Anchor Bay third-party distribution, as you know from Investor Day that has moved into the motion picture segment. We did have a little headwind in G&A day across corporate as well as the segments of TV and motion picture, because you will recall a year ago in the third quarter we did not -- we were not accruing for bonuses in that third quarter because the expectation was we had already fully accrued.

So it is a tough comp in that context. So you maybe seeing that in the context of G&A if that's what you are looking at.

Jimmy, just a follow-up, are there other areas away from that $50 million within what I'd call legacy Lionsgate that you're looking at?

We're always controlling G&A, and so we certainly made changes so the cost controls certainly were not limited by any means to the Starz acquisition.

In fact, we are executing our procurement plans where we are looking at every common vendor across both Starz and Lionsgate. I'll tell you, we're getting some really good results back and the teams are working extremely close together. Scott and Brian leaning those things and everybody in the organization is pulling together to control costs.

Thank you.

We now have a question from Ben Mogil with Stifel Nicolaus.

Good afternoon. Thanks for taking my question. One for Chris, one for Jon. As I was Chris, sort of following up on Ryan's comments about revenue trends at Starz.

Pretty good sequential revenue trends even though sub numbers were actually down. Is there a mix issue that's worth calling out? Were there some standard toward the end of the year? Sort of curious anything around that front.

Hey, Ben. It's really what I said. The AT&T Direct is a big event that's affected us. That's going to pass through and end.

There was another large distributor that ended some long-time promotional programs that had some sub affect, not necessarily revenue effect because we've been able to actually accelerate revenue growth. But on the -- sort of going forward the idea that we're going have more shows premiering and talent in 2017 than we have ever had is really going to give us a leg up in messaging that we can do to the subs that we think are amply available, given the demographics that we've been chasing in the OTT space both through the skinny bundles the wholesale OTT business and our direct-to-consumer business, all of which are expanding in terms of partners and avenues that we can get to the consumers.

We're certainly not giving any guidance here but we feel very good about what our opportunities are, and we're very focused on making sure we take advantage of them.

Is your sense that now that all three of the premium channels have gone OTT and the traditional MVPD market has been able to support that, that the carriers -- particularly because you're working with them, are going to start being more supportive once again of the premium services from a marketing perspective?

It's clear that the MVPDs are not willing to advocate the video business to new providers. That's good news because for a long time that's been a real obstacle in terms of higher penetration of premium channels. The two seem to be able to coexist and as a matter of fact, one seems to be spurring the other.

So there's no shortage of people who are interested in distributing Starz and Starz Encore. And we're interested in doing business with all the available ones that are qualified and ready to support what we think is a terrific but still under appreciated product.

Thanks Chris. And then, Jon, one for you. Talking about -- descent amount of chatter at the beginning -- about China and your market share there. China's sort of going, or should be going through this coming year, some more WTO liberalizations, there's obviously larger issues in terms of whether that it gets done or not from a political perspective.

So maybe talk about how easy or how hard it is to get film slots in China, given they're limited. Maybe talk about how you're hedged if in fact they don't liberalize to the degree people hoped they were in terms of local productions, et cetera.

First of all, it's a great market for us. It's a growing market. It's going to keep growing.

I would actually let Brian Goldsmith, who has spent a lot of time there recently, talk about it. But our business there -- the main thing I would stress is that we have a very diverse set of businesses there and a very diverse set of relationships, and I think that's really the key to what we're doing there. We're investing with them. We're being financed by them.

We're creating an indigenous project with them, co-productions with them, output deals with them. At the end of the day, every economy -- there are definitely ebbs and flows, but at the end of the day we think it's going to be a great market. Brian, why don't you fill in some detail.

Yes, Ben, just to expand upon that. Our key approach to China has been in many respects the same approach other markets in which is to work with really strong local partners. To great extent, that's been one of the reason why we have been able to have a pretty good track record to date in terms of the number of pictures we get released in China every year which continuously keeps us ranked amongst the top two or three studios in the business today.

So we're obviously very pleased that, and very pleased with the performance there. You know, Jon mentioned earlier on the call that we were making number of investments in local productions.

We're particularly excited about a new installment of a local language version of Step Up, which we're calling Step Up China. Which for us is not just an extension of greater business in China, but also shows how valuable our intellectual property can be as we extend it not just across multiple installments of a franchise but into location-based local language production and scripted television. We're pretty excited overall about the opportunities and think -- and we're helpful that we will continue to see great growth in the territory.

Thanks very much.

Thank you our next question is from Todd Juenger with Sanford Bernstein. Go ahead please.

Hi, thanks. A couple on Starz for whoever feels like it. First, maybe just to put a final, I hope, punctuation mark on the thread started by Ryan and Ben.

Could you remind us or inform us of, now with DirectTV in the rearview mirror, the cadence or pacing of other major distribution renewal timing with the conventional MVPD partners? That would be helpful.

Second, maybe more philosophical question. Just thinking about the margin investment profile, especially the content spend at Starz. With the sun setting on the Disney output deal, just wondering with the new company in growth aspirations. What are your current thoughts on reinvesting the money you used to spend on the Disney output in terms of originals and other acquired content in the upcoming -- I think the new Sony deal kicks in?

Are you imagining that it will end up in sort of a flat margin profile from were you were, or a lot more money on the bottom line, or somewhere in between, or wherever you think? It would be very helpful. Thanks.

First, Todd, thanks for all the work on the recent survey. Believe me, I've quoted it to everybody including my wife. We don't disclose the specifics of our MVPD deals.

As you know, we have many that come up continually. This year is no different. The performance by Starz with their MVPD partners is strong.

We don't expect there to be any easy conversations, but we don't expect there to be any overly difficult conversations. These are long-term partners. You see them innovating in the space.

Premiums in these new packages will have the same role that they have had traditionally, which is they sell a lot of other stuff behind it, and in this case we think they're going to drive penetration in the uptake of these new packages. So in 2017 we are going to continue to work with our MVPD partners to find win-wins and move forward. That's what I can tell you about that.

With regard to our original programming spend, we've always been very conservative. We've used the portfolio approach. We've been very disciplined.

We will continue on that path. We got four movies from Disney last year. So it's not exactly like there is a giant Disney column that pops up in every Starz P&L.

I don't think Lionsgate made this deal to make less programming for Starz. We have a great partner, not only in sourcing project but in potentially producing projects in Lionsgate television. We have more titles than ever before.

We're going to continue to spend money on originals. That's what's driving the business and this traditional space. That's what's driving the business in the new spaces.

But were are going to maintain that disciplined approach. It's a hallmark of what Starz has done and is the hallmark of what Lionsgate does.

Okay. Thanks a lot.

Thank you.

We will go next to Stan Meyers with Piper Jaffray. Go ahead, please.

Thank you, guys. I have one for Chris and one for Jimmy. Chris, I wanted to continue the discussion on Starz OTT.

It sounds like churn remains a risk for those new subs. And I wanted to hear how you guys are reshaping the release schedule maybe near-term or even longer term.

And then for Jimmy I just want to clarify your comments on the margin across the TV production segment. We're reaching a new run rate here, or the quarter was more or less mix shift. Thanks.

So with the Starz OTT as I said originals are an acquisition tool, library both originals and film are a retention tool. In premiering more titles in calendar 2017 than we even had before I think we're adding to both of us took both in acquisition and retention.

We've got a lot of conversations going with interested parties to distribute our services both in the wholesale model and people who are willing to take the directed consumer split on. And I think there's just upside for us ahead.

It was an interesting quarter in the world. You know, Starz exists in that world but I think there's a lot of stuff behind us. We're feeling very good about the plans we have in place in the programming we have to support it.

Basically 2017 we have virtually a new show premiering every four weeks. So that's the big change for so we think that will give us a really good leg up in the OTT business.

And Stan, just to answer your margin question.

You know, quarter to quarter you're going to see variations in the margin depending upon the episodes delivered and in particular even year to year. It's about the mix of programming, right? Your more established programs are higher margin and your newer programs are lower margin. It's a mix of the two.

So certainly the quarter is fairly reflective of a full FY17, which is you know in the context of a margin and kind of low double-digit. So I think that the takeaway is that I'd evaluate on a full-year not a quarter-to-quarter run rate. We have tough comps against orange relative to our fourth-quarter coming up versus a year ago.

In the future it's really matter of mix. I actually look at it very positively when the margin's kind of low to mid-teens space because the reality means you're putting out a lot of --for the right reasons, obviously, putting out a lot of -- for the right reasons obviously, putting out new series at the lower margins, nice mix. We build on it for the future.

Thank you.

Next question please, Cathy.

Thank you. That will come from Vasily Karasyov from CLSA. Please go ahead.

Yes, thank you. First of all, I wanted to join Ryan in thanking Jimmy, your organization, and James for the updated trending schedule. That made our lives much easier.

Then can I just clarify quickly on the guidance. Did you say you're not changing, meaning that it stays in place on legacy EBITDA streams? Or you're just not talking about it at all and it's no longer applicable and we shouldn't even think about it.

Then I have a quick one, a follow-up on film.

Sure. We're just not updating or commenting on the FY18 until we get through the budget process. So our focus at this point is on, you know, the combined company new metrics.

Of course, I did lean forward in giving you in my prepared remarks so I would just point you to the things I've said about the cadence in the fourth quarter across our combined businesses including media networks and not only motion picture and TV but across the entire Company. So that's our focus now.

You know, I would remind you that, as you know, the legacy metric had asset sales gains associated with that. You know, whether some of those occur in the fourth quarter and how large or not, is open at this point. I would also point you to the fact that our new metric of course doesn't include such gains.

So trying to help you with the cadence in the context and some forward-looking information by segment for the fourth quarter but beyond that we are not really addressing the FY18 or our legacy metric.

Thank you. I have a follow-up for a separate question, actually for Jon and Michael probably. So in the past before the merger with Starz -- acquisition of Starz your film slate was a source of upside more than downside risk to you. Now that you are merging with Starz, you're more of a deleveraging story right now.

So if you just play with the numbers and assume certain EBITDA to free cash flow conversation, your deleveraging within 12 or 18 months happens even if your EBITDA next year from film doesn't grow that much. So can you talk about how your philosophy and how you approach the risk and the slate change after the acquisition, if it did? I would appreciate that. Thank you.

Yes, I appreciate that. It's a great question. I think that in a sense we are approaching it the same way we always have, which is -- I think, interestingly enough, La La Land is an absolutely perfect example of the philosophy, which is we took a protected approach to the economics, taking on some financial partners and the risk on the downside.

We put it through our very efficient international distribution business. And look what happened. We've had explosive beta returns that I think will be very important for growing our company going forward.

So we of course love the strong free cash flow from our Starz investment. I can promise you that one plus one is going to continue to equal a lot more than two. I think you'll see some evidence of it tomorrow, of the way we're concentrating together on our huge content portfolio together and putting our distribution together.

As I said, pay attention to tomorrow, the very beginning of us starting to pick off some low hanging fruit. But the feature film business still remains as far as we're concerned, the beta. And what I love about our model is that we can protect our downside, not threaten too much of that free cash flow and paydown of debt. But when it works, we can build franchises whether it's La La Land, whether it's a Hunger Games.

We can have still explosive growth and great returns that will definitely tweak our model.

I would add one thing. It's still a [bridge mitigation] our film model has that changed. It's business as usual for us. Obviously the idea that we now have this free cash flow generation coming out of the Starz asset to deleverage is terrific. But again we're sticking to our plan.

Very helpful. Thank you.

Thank you. We now have a question from Barton Crockett with FBR Capital Markets. Please go ahead.

I wanted to make sure that I understand what you're saying about the Starz OTT trend in the quarter. Because I think the last time you reported, Chris, you were talking about having nearly 1 million OTT subs.

I think I heard on this call that you have over 1 million which is, you know, you could drive a truck through that terminology in terms of whether you added subs or not in the quarter. So can you clarify? Was there actual growth in Starz OTT subs in the quarter?

So we're not going to break out the OTT subs from positional MVPD subs. We're going to report one number. I think the word Jon or Jimmy used was approximately.

We definitely see growth in this business. As I outlined before, we learned a lot from the few months we were in it. And the way that we have scheduled our original programming lineup, we think it really leans in toward the lessons that we've learned and the opportunities that we see.

We are going to report one number of total subs. We're a subscription television business and that's the metric that we use for how successful we are in terms of sales -- number of sales to subscribers.

Okay. And then I also wanted to push a little bit more on the question of the cost, which in the context of Starz network revenue is not a lot of change, costs, can drive some EBITDA growth. Pre-merger, the pro forma table would've had a step up in EBITDA to the $600 million range over a couple years which would seem to be driven by a lot of the Disney savings dropping to the bottom line.

Are you now at a place where you guys won't really speak to that as a goal at this point? If you could clarify.

We never really -- I mean I think that model that has a Disney -- that had a certain number for Disney dropping to the bottom line, that's not a model we put out. That's not how we build our budget. That's not how we look at our business.

We are going to be doing more original programming. We are going to be looking to manage the cost on the movie side because it's originals that are driving the business, and as I said before, movie's still an important part of the foundation but not the reason people are subscribing. It may be a very important reason about why they keep their subscription.

We believe we can grow our business. I think our new owners believe that we can grow our business. So that is how we're proceeding. There was never a statement from Starz about here's what the quote-unquote Disney savings are and here's the impact is going to have on [zMail].

Again, by the way, just to clarify. We definitely see growth in Starz. We see from the distribution perspective.

We see it from a cost-saving perspective. I think Chris and Jeff and their team have been doing a great job totally changing the personnel of that business. They're going from ultimately something like 780 people to 550 people.

We are working together on putting all of our costs together. And on the flipside, the way Chris has grown this business over the last five years is by investing in original programming. You can see every year as he invested more it went up.

We think frankly together we can be a more effective at producing more efficiently, bringing revenue in from numerous sources as we've done. And so, actually, we think we can put on programming in a more efficient way together by owning more of that programming by distributing it in a more effective way by looking at windows again. Look tomorrow, you can get a sense of what we're talking about.

So, we see growth of Starz across all of those -- for all those reasons.

Okay. I'll leave it there. Thank you guys very much.

Thank you. Our next which is from David Joyce from quarter ISI. Please go ahead.

Thank you. Just a couple of housekeeping questions at this point. Thanks for calling out that Hacksaw Ridge was recorded on a net fee basis. How should we think about the films for the upcoming few quarters that will be accounted for on a net fee basis or consolidated?

And then secondly, how should we think about the free cash flow attributes of the Starz acquisition in terms of how the benefits will be cadenced throughout the year? Thank you.

The film slate coming up is going to be a gross basis. We're producing and co-producing. That answers that question.

Second question again?

Yes. The cadence on free cash flow of Starz?

The cadence on free cash flow of Starz is fairly predictable, right? A subscriber base. That's strong, predictable, it's factored into our deleverage owning obviously.

I would also add, just from a free cash flow perspective, because of our risk-mitigated model and motion picture and television which, as you have heard, is not changing. Our free cash flow while they may be lumpy, given release schedules and timing of episodic deliveries and payments, they are more predictable than a lot of people would think.

Thank you.

Those cash flows from Starz -- Jimmy talked about predictability. It comes in monthly.

Next question please?

Thank you. That will come from David Miller from Loop Capital. Please go ahead.

Yes, Hello. Two questions, one for Jimmy and one for Kevin Beggs. Jimmy, it was reported by Bloomberg on January 26 that you guys were looking to unload your 32.1% stake in EPIX. I don't believe you have actually formalized that announcement.

I guess Bloomberg is just reporting on it. But there is no announcement on the tape from you guys about that. But assuming that is true, what are your thoughts about supercharging your deleveraging program beyond what you stated at the analyst day? And would you consider -- assuming the promise of my question is correct, would you consider re-instituting the dividend or maybe a small dividend? And then I have a follow-up for Kevin Beggs.

Without commenting specifically on EPIX, other than the fact that we think it's great asset. We love our partners. Along with our partners we created a lot of value there.

And it gives us a lot of optionality. As you know, we talk about supercharging, deleveraging. We're certainly focused on deleveraging.

But to be clear, the 1.5 times off of this original metric that we set which would get to the 3.5 to 4 zone within 12 to 18 months. That is not contemplating any large sales. So we're obviously going to look at the opportunities to extract value and monetize non-core assets in EPIX and the right opportunity and then deleverage accordingly.

In terms of reinstating a dividend or share repurchase or anything of that nature, it is far too early. We have to delever before we re-lever.

Fair enough. Kevin, I'm trying to get a sense of how large of a customer EPIX currently is and will be for your pure Lionsgate stand-alone television product. I've got Graves, I've got American Gods.

I hope you don't mind the question, it's just a housekeeping question. What are some of the other series that are on there that you are currently producing and/or have yet to produce that will air on EPIX. I'm trying to get a sense of how large of a customer EPIX is for you guys at this time. Thanks.

Just to clarify, they have three original series. One is Graves, Berlin Station is from Paramount, and later this year Get Shorty will come from MGM. Berlin Station and Graves have been renewed.

We're excited about it. Nobody could predict the timeliness of a populist president reflecting on his tarnished legacy, but we really did. And Berlin Station was pretty timely as well.

My view is, our goal is to keep those shows on the air, keep them going. They have a very robust development slate. We have a couple projects in the pipeline, as they have with other studios, owners, and outside studios alike.

But it really is more to be determined how much more they're going to do the original space. It's important to them that their movie business is a foundation of their business as Chris alluded to on the Starz side, too. As a seller, I want everyone to buy a ton. How much they'll buy, I'm not sure. But right now, keeping Graves renewed and on the air for years to come is our priority.

Okay. Thank you very much.

Our final question will come from Steven K. Hall with the Royal Bank of Canada. Go ahead please.

Yes, thanks. First one on Starz. It's been asked a few ways around ARPU and sub-growth and cost growth.

Maybe I'll try to come at it from a slightly different angle. We think about Starz or the media network's new segment over the medium-term. Should we expect the margin profile there to expand, should we expect it to be about flat, or any other trajectory that we should think about for the margin profile?

Chris can fill in as well. What's exciting for us about Starz, and it's part of why we want to do this transaction, is that we sell again, as Chris said, an undervalued asset. The good news about that undervalued asset is that there's a value proposition there that no matter what the platform is, whether it is the mobile-only customer whether it's a skinny bundle customer whether it's a traditional customer direct-to-consumer wholesale as Chris calls it.

It's a great value proposition. Obviously, as more subs take it up, in the new platforms there is frankly a better margin. We're not going to project right now the mix that you're talking about but I can say where the world is going right now it certainly looks to us like the aggressive push to more direct-to-consumer, more skinny bundles, et cetera.

When you've got a value proposition like Starz, we think there's a strong possibility of improving margins going forward.

Okay. And then maybe just one for Jimmy. You mentioned that the leverage came in at the low end of your expected range at [5.1]. Is that driven more by just cash that you generated that's sitting on the balance sheet, or is that driven more by the dominator, the earnings?

As we think about your ability to deleverage going forward, is it aggressive for us to think that you will also do so at the high-end of the range? Or would that be premature at this point? Thanks.

Well I think it's a bit of good performance in the quarter as well as conserving cash going into year-end. Obviously the [5.1] is excluding the $450 million of cash and as you saw, we closed the books with almost $600 million of cash and it actually paid down some production loans fairly aggressively. We finished a very strong and in a good position, so I think that [5.1], that puts us in a nice zone pretty quickly.

A good starting point de-levered from there. Again getting into that 3.5 to 4 times, and we're comfortable in that range. We'll continue to evaluate our use of capital at that point in time in that range.

Great.

Thanks Stephen.

Thank you. Please go ahead with any closing remarks.

Great. I have one last closing statement. I just want to refer everybody to our reports and presentation tab under our corporate section of our website lionsgate.com for discussion of all our non-GAAP and forward-looking measures discussed on this call. With that, we'll wrap it up, and thanks for your time tonight. Thank you.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and choosing AT&T executive teleconference. You may now disconnect.