Starz Entertainment Corp (STRZ) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Lionsgate Fiscal 2017 Fourth Quarter and Full-Year Earnings call. (Operator Instructions) As a reminder, the conference is being recorded.

I'll now turn the meeting over to our host, the head of Investor Relations, James Marsh. Please go ahead, sir.

Great. Thanks, Laurie, and good afternoon, everyone. Thanks for joining us today for the Lionsgate Fiscal 2017 Fourth Quarter and Full-Year Conference Call.

We'll begin with opening remarks from our CEO, Jon Feltheimer; followed by remarks from our CFO, Jimmy Barge. After their remarks, we'll open the call to your questions.

Also joining us on the call today are Vice Chairman, Michael Burns; Starz' President and CEO, Chris Albrecht; Starz' Chief Operating Officer, Jeff Hirsch; Starz' Chief Financial Officer, Scott Macdonald; Co-Chief Operating Officer, Brian Goldsmith; Co-Chief Operating Officer and President of Motion Picture Group, Steve Beeks; Co-President of Motion Picture Group, Erik Feig; Chairman of the Television Group, Kevin Beggs; Chief Operating Officer of the Television Group, Laura Kennedy; and Chief Accounting Officer, Rick Prell.

The matters discussed today on this call 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 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 Lionsgate's Annual Report on Form 10-K filed with the SEC on May 25, 2017.

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. Jon?

Thank you, James. Thank you all for joining us this afternoon. I'm pleased to report our first full quarter of results since we brought Starz into the Lionsgate family. Not only do our numbers reflect a great quarter and a strong year, but our accomplishments reflect the continued transformation of Lionsgate from a film and television studio into a diversified global content machine developing, producing and owning the rights to great intellectual property that we monetize across multiple platforms and windows, many of which we own.

As I go through my remarks you'll see not only the growth of our Starz film and television core businesses, but how our content is starting to drive our interactive games, virtual reality, location-based entertainment and over-the-top channels as they become important platforms in their own right, all poised to begin making meaningful contributions to our bottom line.

Let me begin with an update on Starz. They're coming off a great year and off to another fast start in fiscal '18. And we couldn't be more excited about how successfully they're being integrated into our operations. Together, we are unlocking fresh opportunities on a regular basis. During the quarter, our teams worked together to monetize the rights to Starz' flagship series to attract top talent and produce new shows.

Let me give you a few examples. This morning, we announced that our combined Lionsgate and Starz distribution team has sold the second window streaming rights to our hit series Power to Hulu, the second syndication sale of a high-profile Starz series since the close a few short months ago.

Combined sales of Starz programming and streaming in other syndication markets since the merger is already accounting for well over $100 million in anticipated revenue over the next few years, none of which was projected before the transaction and now will hit our bottom line with substantial gains.

These deals, again, reinforce the benefits I've previously mentioned in bringing our distribution groups together, the appeal of Starz' programming, the value of retaining worldwide rights to our shows and our ability to successfully monetize them when we do.

A few weeks ago, we signed Power showrunner, Courtney Kemp, to a new long-term deal that includes a development agreement with Lionsgate. Under the new deal, she continues as showrunner of Power and our expanded reach offered her the opportunity to explore new projects on other platforms. This is a perfect example of our combined enhanced ability to attract and nurture the best talent in the business.

We've discussed many times the benefits of bringing Lionsgate's content-creation capabilities to the Starz platform, so I'm pleased to report that we've already got 7 Lionsgate scripted series in the Starz development pipeline.

And on the financial front, the speed and efficiency with which we're integrating Starz has put us ahead of our originally projected $200 million in combined annual operating and tax synergies. Jimmy will update you on how we're also ahead of schedule in deleveraging due to a number of factors, including our strong free cash flow generation.

Operationally, Starz continues to ramp-up its slate of original programming, with last month's launch of 2 critically acclaimed new series, American Gods and The White Princess. American Gods has earned some of the best reviews of the year and has already been renewed for a second season. It leads a programming block that is consistently winning Sunday nights over our competitors, and it's already driving new subscribers to the Starz over-the-top offering. As a matter of fact, the weekend of American Gods' premier resulted in a record number of over-the-top subscriber adds.

Even in a tough MVPD environment, last year was a growth year for Starz subscriptions. The Starz over-the-top offering increased to well over 1 million subs in its first full year. Excluding the loss of the ATT, the U-verse subscribers due to DirecTV conversion, Starz even increased its subs in the traditional MSO world. In fact, backing out AT&T, we achieved robust 5% overall year-over-year subscriber growth.

With Starz' strongest programming slate ever in a world of new buyers and fresh opportunities, we expect this trend to continue in fiscal '18 as we believe that Starz is a must-have channel for every platform.

On that note, we're pleased to announce today that Starz has struck a deal with Sprint to bring our app to its wireless platforms and devices, making our great Starz content easily accessible to Sprint customers with their tremendous 60 million connections.

Turning to our film business. Our fiscal '17 slate increased its profitability from the prior year and produced a strong return on invested capital of 14%, earning 26 Oscar nominations and 8 wins across 4 films and closing the fiscal year with one of our best box office quarters ever. We did all of this in our first year in 5 without a Hunger Games title.

Our success came from a portfolio of properties: La La Land; the faith-based hits, Hacksaw Ridge and The Shack; Tyler Perry's Boo! A Madea Halloween and Pantelion's How To Be A Latin Lover for underserved audiences, and the second installment of our John Wick franchise.

John Wick started out as an opportunistic low-budget acquisition that we've grown into a Lionsgate success story. After the first film became a hit, we cross-promoted John Wick Chapter 2 with the John Wick Chronicles VR game. John Wick 2 doubled the box office of the first film, and John Wick Chronicles planted our flag in the game world. Now we have John Wick 3 in fast-track development, and we've begun working on a spin-off television series called the Continental.

While Power Rangers had a great opening and earned an A+ cinema score with its core demo, it didn't hold as well as we hoped in a tough box office environment. However, the film helped launch our biggest game title to date, Power Rangers: Legacy Wars. And we're also discussing location-based entertainment initiatives with our Saban Brands partner as we explore potential next steps for a great property.

Our fiscal '17 slate is indicative of our film strategy, a diverse mix that includes titles targeted at 1 or 2 quadrants that have the potential to break out, category killers in areas of proved strength and a select group of larger properties that will really move the needle in success.

We believe that our upcoming slate also fits this profile. All Eyez on Me, the biopic of Tupac Shakur, will be released on his birthday on June 16, and early buzz is very strong. The Hitman's Bodyguard starring Ryan Reynolds, Samuel L. Jackson and Salma Hayek is a terrific action-comedy featuring great chemistry between its leads. It scored a big hit with exhibitors at CinemaCon last month, and we believe that we also have the perfect release date on August 18.

Wonder, starring Academy Award winner Julia Roberts and Oscar nominees Jacob Tremblay and Owen Wilson, is based on the inspirational New York Times bestseller about a 10-year-old boy who can't blend in because he was born to stand out. A film in the tradition of The Blind Side, it has tested through the roof, with 100% of preview audiences checking off the top 2 boxes. We're confident that we have a very special film on our hands, and we've moved it to November 17 to take advantage of the holiday play period.

Our slate also includes the sequel to Tyler Perry's Halloween hit Boo!; the first film from our Hasbro relationship, My Little Pony; the return of Saw at Halloween; and the action thrillers American Assassin and The Commuter from our CBS and StudioCanal partnerships. In that regard, I'm also pleased to announce that we are again partnering with StudioCanal and European production house, Aardman, on the film Early Man, reuniting the team that collaborated on the Oscar-nominated Shaun the Sheep Movie.

We closed our fiscal year slate with Otto Bathurst's fresh and contemporary take on Robin Hood that teams Taron Egerton, one of the Hollywood's hottest young stars, with Jamie Foxx and Fifty Shades of Grey's Jamie Dornan. Our Robin Hood display took the Cannes Film Festival by storm and the early materials we've seen look great.

We're also beginning or readying production on several major properties that we expect to become drivers of our fiscal '19 slate, including Bourne Identity director Doug Liman's Chaos Walking, starring Daisy Ridley and Tom Holland; The Kingkiller Chronicle produced by Lin-Manuel Miranda; the third installment of John Wick; the Spy Who Dumped Me, teaming Mila Kunis and SNL's breakout sensation Kate McKinnon; and Flarsky, an outrageous comedy starring Seth Rogen and Charlize Theron.

Turning to television. We continue to build our stature as a diversified supplier of high-end scripted content with our top-rated series on 7 different networks. Fiscal '17 was another year of growth, marked by continued high demand for our premium scripted programming, renewal of key series, increased traction for our unscripted content and the ramp-up of our television business in U.K.

Renewals included The Royals, picked up for a fourth season; Greenleaf, renewed for an expanded season 2; and Nightcap and Graves, both picked up for their second seasons.

When ABC didn't renew fan favorite Nashville, we pivoted quickly and moved the series to CMT and Hulu, where it has achieved record ratings, has been picked up for a sixth season and is growing into a brand capable of driving significant ancillary benefits, including a potential Broadway musical.

Justin Simien's Dear White People, adapted from our 2014 film with sister company Roadside Attractions, led our strong slate of new series when it debuted on Netflix last month, one of our most critically acclaimed series ever. It scored a perfect 100% on Rotten Tomatoes and has become part of the national conversation about race and diversity. The pipeline of properties in development and production behind it is deep. And with most of our key series for fiscal '18 already ordered or renewed, we have great visibility into our television business going forward.

We've been encouraged to see recent demand from digital platforms for unscripted content as well. Pilgrim is off to a fast start in fiscal '18, with orders from Netflix, Amazon and YouTube. Our 360 partnership with Kevin Hart has shifted into high gear with series order from YouTube for his fitness show, What the Fit?, and the upcoming launch of his [Lift Legend] series for our own Laugh Out Loud over-the-top platform.

As our unscripted business continues to grow, we are readying our biggest and most eagerly anticipated unscripted property to date, Candy Crush, which premieres July 9 on CBS.

As I've mentioned before, we've been building a television business in the U.K. with production partners Primal Media, Kindle, Potboiler and Bonafide. Our initial steps are already paying off. Primal Media has scored a ratings hit in the U.K. with the game show Bigheads on ITV, and we're following up its success by bringing the format to the U.S. in partnership with Sony.

Fiscal '17 was also a year in which our interactive games, location-based entertainment, over-the-top channels, Atom Tickets and virtual reality initiatives all gained critical mass. As I mentioned, our games business launched its first 2 breakout properties with a half-dozen more titles in the pipeline.

We extended our location-based initiatives into Europe and China; prepared to open the Lionsgate zone of the MOTIONGATE theme park in Dubai; and continued to assemble a portfolio of branded attractions, auctions and live entertainment that we expect to generate significant long-term, high-margin revenue.

In fact, our 10-year revenue ultimate for our location-based entertainment initiatives alone, reflecting deals already made or in progress, exceeds $250 million, of which over half is guaranteed. This includes continued development of MOTIONGATE in Dubai, a build-out of the Lionsgate Entertainment World attraction in China and several planned projects in Europe and the U.S. with our partners Parques Reunidos.

Turning to our suite of over-the-top channels. Our Tribeca Shortlist platform continued its steady subscriber growth, and we're producing strong slates of premium content to support the summer's launch of Laugh Out Loud and our Spanish-language premium movie service.

We enter fiscal 2018 with a continued growth of our film and television operations, complemented by the coming of age of our newer businesses and our entire platform energized by the acquisition and integration of Starz.

Though our operating environment isn't without its challenges, we believe that its core tenets, the emergence of new buyers and new patterns of consumption, play to our strengths as a distribution-agnostic global content platform that has always thrived on the kind of change we're witnessing today.

With all of our businesses benefiting from the strategic advantages of a combined Lionsgate-Starz operation, we're positioned to deliver industry-leading results.

We are projecting adjusted OIBDA growth in the low to mid-teens over the next few years, with similar or greater growth in adjusted EPS and free cash flow as we capitalize on our tax structure and deleveraging efforts.

Now I'd like to turn the call over to Jimmy.

Thanks, Jon, and good afternoon. I'll briefly discuss our quarterly financial results, highlight where we stand on leverage and update you on our outlook.

We reported solid results for the quarter. Revenues grew 3% to $1.3 billion, while adjusted OIBDA increased a robust 27% on a pro forma combined basis to $163 million.

Reported basic earnings per share was $0.30 in the quarter and, as expected, was impacted by a number of merger-related items, including the noncash amortization of purchase price adjustments. Adjusted earnings per share came in at $0.59 a share.

Now let me briefly discuss the performance at the underlying segments on a pro forma combined basis. You can follow along with our updated trending schedules that have been posted to our website.

Starting with Media Networks. Quarterly revenues increased to $371 million, while segment profits improved 11% year-over-year, driven by tight cost controls. Starz ended the quarter with 24.2 million subs, up 250,000 year-over-year. Recently launched original programming like American Gods and The White Princess is resonating with viewers, and we expect sub growth to continue in fiscal '17 -- in fiscal '18.

In the Motion Picture Group. Quarterly revenues increased 7%, driven by films such as La La Land and John Wick Chapter 2, which will continue to benefit us for years to come.

Segment profit increased from $3 million in the previous year quarter to $52 million in the current quarter. Recall that the fiscal fourth quarter in '16, profits were impacted by the P&A spend related to the wide releases of 5 films. Looking ahead, the fiscal '18 slate looks a lot like the fiscal '17 slate: diversified, balanced, relatively low risk with breakout opportunities.

Turning to TV. As we highlighted in our fiscal third quarter call, the TV group faced a difficult comparison from the previous year quarter, which included the highly successful global network sale and linear window licensing of Orange is the New Black to Netflix. As a result, quarterly revenues were down 3% to $243 million, and segment profits were down from $42 million to $13 million in the quarter. Now that we have lapped this comparison, we expect to return to our solid segment profit growth trajectory in fiscal '18.

And turning to guidance. As Jon mentioned, we believe we have assembled a platform to drive industry-leading growth, one that can drive adjusted OIBDA growth in the low to mid-teens range. Consistent with our overall strategy, we have attractive investment opportunities and content, which we think will drive compelling returns.

In this regard, in fiscal '18, we are expecting to invest another $300 million in content, bringing our annual spend to approximately $1.8 billion as we previously mentioned on Investor Day. This incremental spend, which is factored into our guidance, is primarily weighted to Media Networks and TV.

That investment will likely lead to growth at the lower end of our guidance range in the near term, with growth rates accelerating over time. With regards to fiscal '18, we would expect the quarterly cadence of adjusted OIBDA to largely follow a similar pattern to fiscal '17.

Now turning to our balance sheet. With regards to deleveraging, we continue to make substantial progress and are well ahead of plan. Net leverage at fiscal year-end was 4.3x using our legacy adjusted EBITDA metric. That's down from 5.1x at 12/31, excluding the dissenters' cash. As previously disclosed, we used the remaining dissenter cash of approximately $400 million to pay down our term loan B. And in Q1, we expect to use the $400 million of after-tax proceeds from the EPIX sale to further delever.

Combined with the strong $180 million -- $189 million of free cash flow that we generated in the fourth quarter, this has put us well ahead of our plan to delever 1.5 turns off of our original projections. We now expect to be at the lower end of our 3.5 to 4x targeted range within the next few quarters, which is almost 1 year ahead of the 12- to 18-month period we previously discussed.

Now I'd like to turn the call back over to James for Q&A.

Great. Thanks, let's open it up to Q&A, please.

(Operator Instructions) And our first question, from David Joyce with Evercore ISI.

Two questions. First on thinking about the international film rollout strategy. Power Rangers seemed to be stretched out a bit. But I was wondering if we can get some comments from Steve or Erik about how you might tighten that up and get closer to day and date in case you might get more benefits out of the tighter rollout strategy going forward?

And then, secondly, Jimmy, if you could provide some more color on the trigger points in the quarter that led to the tax benefits and how the -- what the NOLs look like and how that should play into our thinking as the year rolls out.

David, it's Erik. I'll take that first question. So we work closely with our international partners in trying to find the right date and the right strategy for their -- for the movies in their territories. In the case of La La Land, Now You See Me, a staggered release platform worked well and contributed to really massive box office. In the case of Power Rangers, we were working up against spring break that had different times in different territories and also merchandising commitments. So that really kind of pinned us into a particular corner. But in each case, in every territory, it has a different strategy.

And David, on the tax side of things, certainly, the tax benefit in this fourth quarter was larger than you might have otherwise expected because of the benefits associated with onetime costs associated with the merger.

Going forward, I would also remind you that we'll have a near $200 million gain -- book gain, on the EPIX -- the sale of EPIX. And so that will get fully absorbed in the first quarter tax provision as well. So you'd expect a more modest tax benefit moving forward.

But having said that, I expect to have net tax benefits, from a P&L perspective moving into the near term, eventually giving way to what I would think of as low to mid-teens effective tax rate. And obviously, that's from a P&L perspective.

On the cash front of things, you'll see when we file our 10-K this evening that we finished the year with over $700 million of U.S. NOLs. So as Jon mentioned, we are well ahead of our schedule in terms of generating the $150 million-plus average cash tax savings moving forward, and that should take us well into 2021.

We go to Alexia Quadrani with JPMorgan.

On the TV side, I guess if you could talk to -- 2 things on that front. One, Dear White People, I know you talked about the great reviews we're seeing there. I guess -- I don't know if you guys have privy to a bit more information than we do on Netflix in terms of viewership trends, in terms of how it's being viewed and sort of being picked up by consumers there.

And then also sticking on the TV studio side, should we expect continued margin expansion this year? Are there any notable series going into syndication that could be a benefit?

It's Kevin speaking. On the Dear White People front, the reviews are great. Look, the key to success in a streaming service is noise and buzz, and then they look at their algorithms over time. So it's doing exactly what, I think, they we were hoping and we were hoping for. And now as you move into awards season this should get a lot of attention in the Emmy race.

So, so far so good, we're just standing by to hear more and I'm sure we'll be in discussion with Netflix about that upcoming. Laura will touch on the TV question on the revenue.

Yes. Just -- I mean, we have a particularly strong portfolio at this point with our TV business. We launched more new series than ever on the scripted side last year, so we'll see continued growth, from hopefully those shows getting renewed and continuing their trajectory to long-term profitable series and as well as a strong portfolio of returning series like Orange is the New Black and Wendy Williams and Family Feud, Casual World, et cetera. So we are anticipating continued growth in the TV division this year.

And we'll go to Ben Swinburne with Morgan Stanley.

Couple of questions around Starz. I'm just curious if you could talk about the outlook for spending this year in terms of number of original hours or overall expense growth. You have the benefit of synergies, which it sounds like are kicking in nicely. You also talked about some incremental investment there.

So maybe we could hear from Chris and/or Jimmy around how we should think about the strategy on programming as well as how the numbers may flow through. And then I was just curious, in the quarter, really nice margins at Starz Networks. Looks to be a function of maybe marketing or programming amortizations. I'm just curious if could you help us think about any timing impacts that might have driven that, that would be helpful.

Ben, so our output costs are going down relative to the first-run product that's coming to Starz, and that's giving us the opportunity to continue to invest in our originals, which we see as a key factor in driving the growth of our business.

We expect to continue to ramp up that investment in the same disciplined fashion that we have. We have approximately 10 series that were launched -- still working out the fourth quarter schedule in fiscal 2018, and I think that will ramp up as well. There'll be some marketing costs associated with that, but we look at the marketing costs as a further way to drive that growth as we're learning more about our OTT business and targeting more of that marketing spend towards that opportunity.

There are certainly synergies that we're seeing as part of Lionsgate with the really powerful spend that Lionsgate makes on the marketing side across all their businesses. So programming investment, but we think that it's a well-invested decision that will result in really good returns. On the margin side, Scott, you want to mention something about that?

Yes, we have favorable programming. Again, Disney's rolling -- starting to roll off as it amortizes off over its first window the last movies we received from Disney. And that -- we did have some higher amortization associated with originals, but the output more than offset that, which helped contribute to the higher margins.

And we'll go next to John Janedis with Jefferies.

Maybe one quick one, sticking with Ben's theme on Starz and then maybe a separate one. But just -- can you talk a little bit more around your thoughts on OTT more broadly in terms of the platforms which are driving subs? Can you talk more about churn? And I guess, to your comment you just spoke to, is the view there that we stick with, say, 10 series or so annually? Or do you expect that to grow further? And then I have a follow-up.

So on OTT, as we said, we're well over 1 million subs, which is definitely up from the last time we talked about that number. We expect that to continue. There are lots of conversations going on with new potential partnerships on the wholesale side. We're learning a lot more about our direct-to-consumer business, which we launched relatively -- a short time ago, about this time last year.

As we learn more about that business and get more effective, we expect the churn rate to go down, [SAC] costs to go down. We're seeing that trend happen already. This is a good story for us. The disruption in this industry is creating great opportunities for premium channels like Starz, both in the innovation and skinny packaging that we're seeing on the MVPD side, new entrants into the digital OTT side.

And as you heard Jon mention, we've just entered into a really exciting relationship with Sprint, which we look forward to working with them to grow the Starz business, which will benefit them as well. And on the series side, yes, we will continue to ramp up. More is better here. As you heard, we have 7 projects in development with our colleagues at Lionsgate, and I would expect some announcements around a couple of those pretty soon.

Okay, that's helpful. And maybe separately, I think maybe for Jimmy. Your outlook for low to mid-teens adjusted OIBDA growth is probably a little bit healthier than we would have thought. So can you talk a little bit more broadly about the drivers? Is the opportunity similar across the segments? And to what extent there may be more cost opportunities to speak to?

Yes, sure. Look, Jon has -- as Jon mentioned in his opening remarks, we're exceeding on the synergy front. So that obviously includes the $50 million-plus of operating cost savings as well as we've spoken to some of the exciting revenue synergies that we're seeing, Black Sails and Power being good examples of that. But that certainly would be part of the uplift, but that's factored into the guidance that we have.

I would say across the business segments in terms of -- everybody's contributing to our growth in adjusted EBITDA across the board. You've got Media Networks, where you're going to see revenue growth as well as segment profit and expanding margins Laura and Kevin spoke to on the TV side. We've got increasing revenue growth and segment profit growth. The ultimate margins will be determined hopefully by the mix of new programming.

And then, on the Motion Picture side, we would have increasing revenues -- or excuse me, we'd have increasing segment profit and expanded margins on lower revenues, and the lower revenues being reflective of, we have 15 wide releases in fiscal '18 compared to 18 wide releases in '17. So that'll give you a little color, again, everybody contributing to that low to mid-teens adjusted OIBDA growth.

And we'll go to Amy Yong with Macquarie.

Two questions. So first on the $300 million investment in content. How do we think about the time period? Can you just clarify over what time period we should see growth accelerate? And I guess for Starz, is this really to [field] the linear over-the-top or licensing revenue? And then on the TV side, business impact, I guess, the mid-teens margin target that you set aside historically? And then Jimmy, I have one question on leverage.

Yes, I think in terms of the margins on TV, obviously they're -- that does have an effect. A lot of this increased content spend, as I mentioned in my remarks, is targeted at Media Networks and TV. And again, the launch of new series, et cetera, at lower margins, affects the TV mix on margin.

But again, we're looking at nice revenue growth and segment profit growth as well. In terms of the $300 million, I mean, you'll see us continue to invest in content and ramp up beyond the $1.8 billion that I mentioned as we go into the out-years because we see this is as a real good return.

Yes, Amy, this is Chris. I think the answer to your question is both. We look at it as driving our subscription business, both in the MVPD universe and in the emerging OTT opportunities. And as Jon talked about, these rights are very valuable. And our ability to retain them now makes more sense than ever with the power of the Lionsgate distribution team achieving results that we didn't even factor in when Starz was a stand-alone company.

And Amy, to your question about leverage, all of this is factored into our guidance and does not prohibit us from deleveraging quickly as we're expecting to do.

Got it. And just on leverage, now that you're ahead of schedule, any thoughts on priorities of cash at this point, whether or not it's M&A, investing in the company or even perhaps capital returns?

Well, certainly, our focus right now is on deleveraging. But certainly, as we get to the lower end of our range, as we stated, it gives us a lot of optionality. And certainly, driving shareholder value has always been significant to us, and that will give us a lot of optionality, whether it be the right kind of accretive, strategic M&A and/or other alternatives of driving shareholder value.

We go to Matt Thornton with SunTrust.

A couple here, if I could. I guess, starting with the Black Sails sale to Hulu, I was just wondering if you'd be willing to quantify the contribution in the quarter. I think you talked about a greater-than-$100-million opportunity over the next couple of years. Just curious if any of that's factored into the low to mid-teens that you talked about for fiscal '18.

And then secondarily, just wondering if you would be willing to quantify the total Starz subs number. I know you gave the core number and the -- I think, OTT, I think you said at quarter end was well over 1 million, if I heard that correctly.

And then, finally, just one point of clarification. I think you said for next year, at the lower end of the low to mid-teens growth in OIBDA for fiscal '18. And that's off the $543 million pro forma number for fiscal '17. Just want to make sure I heard that correct.

I'll take the -- I'll leave the Starz subs questions to Chris. But in terms of Black Sails and Power, yes, as you had guessed, we're not going to quantify that. But obviously, I think a good way to think of this is, is that these are high margin from an incremental standpoint, because clearly, the really only costs associated with that is participations and residuals and some sales commissions.

But keep in mind, from a reported standpoint, you're going to be allocating production costs to those. So they'll get their share of allocation, which will impact margin. Again, these flow out over time as these products are delivered. So -- and it has already been factored into our guidance as you would expect. And with regards to the low end of the range that I referred to near term, that is definitely against pro forma basis for fiscal '17. Chris?

Yes, you want to repeat that second question?

Yes, on that subs numbers, I think you talked about the greater-than-1-million OTT at quarter end, wondering if you'd be willing to share the total Starz number. I know the core number was [24 spot 2], but wondering what the total number was.

Yes. So that is the number for Starz. We've made the decision to follow in the footsteps of our competitors, the other 2 brands in the category, which report the flagship brand. We previously would report the Starz ENCORE numbers as well. We're not going to continue to do that because, as we've said many times, fluctuations, up or down in the Starz ENCORE brand, have very little impact on -- very little material impact, if any, on our overall financials.

Sure. Maybe I can slip one more in, then -- if I could, on the Starz outlook for the year. Anything that you're thinking about or that you can share with us in terms of additional distribution via virtual MVPDs or skinny bundles, anything that you're kind of baking into that outlook?

Well, certainly, we just announced the Sprint deal. There are lots of conversations going on, and we hope to have further announcements in the very near future.

We go to Alan Gould with Rosenblatt.

I've got a couple of questions. First on the film side, 2016 -- fiscal '16 was a tough year. Fiscal '17 really turned around, starting midyear. What is the sort of a normalized steady-state film profit for a normal year with a normal back end?

And then, 2 Starz questions. Sort on Ben's question, is programming cost going to be up or down at Starz this year? And you did mention that you expect to see an acceleration of the core Starz subs or continued acceleration in Starz subs. Are we behind the AT&T issue? Because they were up 0.2 for the year, but down sequentially.

Scott, do you want to answer second question first, spending?

Spending on Starz? Well, the spending on Starz, overall, is down. I mean, programming spend is a combination of our output, our movie spend and our original programming spend. But as we've said before, we're going to look to continue to invest, so that is the trend going forward.

With regard to subs, look, the AT&T shutdown of the U-verse platform has had an impact on our subscriber numbers, but that's not a Starz-only issue. They were 60% penetrated on that platform with the premium channels, so it obviously affects not just all the premium channels, but the basic channels as well.

They were a large distributor, and -- but this is an out-of-the-ordinary occurrence. And we certainly expect the growth -- as we said, ex AT&T, we had growth in the MVPD universe, which we take as a very good sign. And the OTT business continues to evolve in a positive way and certainly is one of the really exciting factors of the future Starz story.

In terms of -- Alan, in terms of what you would think of in terms of a typical film year, I just think -- you go back and you look at the profitability we've had over the last several years and recognizing that we continue to grow off of that. And we -- again, as I said earlier, we expect to continue to grow from there.

So we also would note that we've never had a down year in the context of a slate that lost money. All of our slates, year after year after year have made money, obviously, some larger than others. And then, I'd just also mention our library continues to drive significant growth and underpin our business there.

And don't overlook our segment 2 business, as you know, is more platform releases and direct-to-home video and -- again, there's very significant -- we have significant capabilities there and it continues to perform for us year over year. So it's a portfolio approach and it's hard to put an average number on it, but we do expect growth from here and returning to some of our more historical heights of the past.

Jimmy, just a follow-up. I would think, though, that going into the back end of fiscal '17 will give you a lot more going into fiscal '18 than the back end of '16 gave you into '17. Is that correct?

Alan, good carryover. I mean, look, with films like John Wick 2, La La Land, obviously, and The Shack as well are great examples of what the team is doing here in the context of their strategy and being able to do a lot with films that aren't necessarily supersized in terms of budgets. And I think we've got more of that to come in fiscal '18. We're excited about it.

And we'll go to Stan Meyers with Piper Jaffray.

Jon, you mentioned in your prepared remarks the licensing of Power and Black Sails. I'm just curious to hear your view on kind of balancing those sales and potential maybe negative impact to the subscriber growth versus potentially growing the actual audiences as you guys have done on your studies and how you look at that.

Yes. So to be clear, the sale we talked about is -- I call that a second window. You could call it a syndication sale. The history of television has actually been that when you move into syndication, your actual ratings of most series goes up. You're introducing it to more customers. I think this will be the case, indeed.

And I think, again, we talked about low-hanging fruit before, and we are finding, as I said, we had no ultimate on the books of Starz for these shows. And I think Chris rightly has been really concerned with growing the network, which he's done -- and he and his team have done a spectacular job, but I think a little bit less focused on retaining rights, exploiting rights.

And -- so we jumped into this and looked at it and packaged it up with a number of other pieces of business. And again, I see absolutely nothing negative. I see actually only positive news for the flagship channel. And you're going to see us doing a lot more of it.

I should note, when talking about before the $300 million of incremental spend in investment in film and television this year, the parts of it that are going to television and the channel and Starz, so Starz and Lionsgate television, it's a great opportunity for us to actually look at that spend and have a much better outlook on not only where we're going to spend it, how we're going to collateralize that spend, but also how we're going to get the money back from that spend.

So we can -- it's a much more efficient way for us to plan. This was part of the beauty of doing this deal of Chris and Kevin and their teams putting their heads together to think about how to spend the money together.

It's the same in terms of all of the other revenue synergies that we've talked about, whether that's our development spend across both platforms, taking producers like Courtney and being able to do more than one thing, about being able to package our OTT and what Jeffrey Hirsch is calling a federation, where we'll have more pricing efficiency and packaging opportunity.

So again, the ability to plan better and to use the spend in a more efficient way, I think, is again, part of the beauty of this integration.

And we'll go next to Barton Crockett with FBR.

I was curious about library -- film library, which is a meaningful part of the asset value. I was just wondering if you could update us on what the revenue and margin would be on that through this fiscal year. And just generally, is that as stable as ever or if there's any kind of changes happening in the secular kind of cost currents in the industry?

Bart, this is Steve. So library, which you asked, library has continued to grow in revenue. As a matter of fact, we are significantly over $500 million in revenue this past year. And generally, due by the -- due to the evolution of the marketplace into more electronic media, the operating margin continues to grow. It's the highest level it's been, particularly on a percentage basis.

One of the things we have seen, even with the evolution in the marketplace, obviously, the evolution from packaged media to digital is well documented. But the good news is a lot of that, especially on an operating margin basis, is being taken up by electronic media. We just feel pretty good about library as we always have.

And I think you can look at that $1.4 billion backlog and sort of look at that as that is sort of the river flowing into library. You know where most of it's going. And that's a solid backlog, and we keep reporting that every quarter.

All right. That's very helpful. And then, on your guidance, just to make sure I understand this, when you're talking low to mid-teens normally, the lower teens this year, this low to mid-teens, is this like a 3-year view or is this some indeterminate period? Just want to make sure I understand that.

Barton, it's over the next couple years. So we plan on a 3-year basis, so 2 to 3 years. But again, that's coming right out of our bottoms-up forecast.

And we go to David Miller with Loop Capital.

A couple of TV-related questions. First of all -- and Kevin or Chris, just feel free to chime in here, and Jimmy, maybe you could just chime in on your side. How many shows that are Lionsgate owned are on the air right now? And how many do you think you'll have by the end of fiscal '18? And how does that factor into your guidance, if at all? And then I have a follow-up.

This is Kevin. There's about 16 scripted series on the air from Lionsgate right now. And there's anywhere from 40 to 65 or even more at any given time in the non-scripted area, including our Pilgrim business, our syndication business, our own unscripted business. Those fluctuate. Those come and go a little more quickly than scripted.

Obviously, we're looking. And our goal, as we have done historically, is to add new series every year. Some series finish and sunset out like Mad Men. It's going to be continuing to create revenues for many, many years to come, but not in originals. And others that (inaudible) mentioned are in their infancy.

A bunch of new shows premiered this year, including Dear White People. White Famous' is coming later in the year. Step Up starts shooting on Tuesday for YouTube Red. Chris alluded to the multiple scripted dramas that we have in the pipeline with Starz.

But it's all about when they come to air, and the long-term goal is to keep them on the air for as long as possible because that's when they create the profitable -- the profit opportunities and long-term revenue opportunities. It would be hard to project what we'll -- where we'll be at the end of '18, but we have our own internal goals. They're very ambitious, and it's a high bar and we intend to hit it

Okay, great. And then just a follow-up. Chris, I believe -- or maybe Kevin, at one of the industry conferences in April -- perhaps, it was in late March, you guys had mentioned that at that point, there were no Lionsgate shows yet greenlit for the Starz platform, and now, you have 7. All of a sudden, 5 weeks later or 6 weeks later, you have 7. Is the 7 a brand-new development? Or am I missing something?

So the 7 are in development. Several of them are highest priority and in very advanced stages. And I -- and we're certainly optimistic that we will have a Lionsgate-owned show on Starz in the very near future. So it is a -- the result of a really concentrated effort by both teams.

And we go to Steve Cahall with RBC Capital Markets

A few for me. Maybe first, I was just wondering if you could talk about what you expect in fiscal '18 for the ARPU at Starz. My thinking is that maybe the U-verse transition to OTT should give you a pretty nice ARPU lift. I just want to make sure I'm thinking about that correctly.

And then second, for Jimmy, just thinking about the guidance as it applies to free cash flow. I think you did about $1 of free cash flow in the second fiscal half of '17. Do we think about the base for free cash flow growth as about $2 a share? Or you're going to get this sort of mid-teens growth from there?

So we really don't spend a lot of time on the ARPU of the Starz business. We have so many deals across so many different distributors. But what I can say is that the OTT business is definitely a strong business, where we see a greater share of the subscriber fees going to Starz than in our MVPD business. And as we look to that expanding, which we certainly see as being one of the key factors in the growth of the future, we think that that's a good trend for us.

And Steve, regarding free cash flow, I don't think you can take the kind of the second half of '17 as an example because certainly, we didn't complete the Starz merger until December 8, and of course, had a significant change in our whole capital structure.

So I would point to the fourth quarter as a very strong free cash flow. We had 100 -- almost $190 million of free cash flow. You can't really take that and extend that into 4 quarters either. As you know, free cash flow was going to move from quarter to quarter. So I do think -- I can say obviously that's factored into our deleveraging capabilities, and we do have strong conversion of adjusted OIBDA into free cash flow.

And we get extra leverage below the line from our tax benefits. But we're not going to provide the specific guidance, other than to say that it's robust and we will continue to invest in content and have plenty of free cash flow left over to significantly delever.

Just maybe as a quick -- just follow-up on that, is there a pro forma free cash flow? I may have missed that in going through all the filings, that we can work off of, kind of like you've had for adjusted OIBDA?

No, there's not. I mean, look, we've even talked about it internally here. But it's very hard to pro forma that, what it would have been had you had a capital structure a year ago. So really, the pro formas we're working off of is down to the adjusted OIBDA line.

And then below the line, in free cash flow, I think you should just -- what presumably you will do is you'll model off of the guidance we've given for adjusted OIBDA and then work your way down to earnings per share and free cash flow.

We go to Matt Harrigan with Wunderlich.

With all the flux in the media environment, cable network ratings and social media and everything, I mean, you've always been very adroit -- [guerilla] viral marketing on films. How do you see film marketing evolving over the next 3 to 5 years? And do you think you're going to achieve some compression on costs, including hopefully, the tighter aligning the in-home window with the theatrical window?

You didn't note, Matt, our investment in Atom Films -- Atom Tickets, which is another way we've gotten closer to the consumer. And they've done an amazing job, not only building their company, but also providing an outlet for us to sort of reach the consumer digitally in a smart way. Erik, why don't you take the rest of that?

I think, also, that's part of one of the things that we are drawn to is targeted audiences. For instance, All Eyez on Me, right there, we can be really, really efficient with our marketing spend on that because we know exactly who we're getting to. And I think you'll see -- it just showed up on tracking right now today with a really strong heartbeat. And it has a very efficient spend in terms of P&A.

The Wonder trailer that just debuted, the experience that we had with The Shack all really speak to the power -- and also even the experience that we're seeing right now with Glass Castle. All 3 of those properties show the power of having pre-existing IP, that you know an audience you can get to. And that you can get to them quickly and efficiently, you already have a pretty fervent fan base that just seems to be activated by the movie.

And then, even in terms of some of our bigger movies, whether it's Robin Hood or Chaos Walking or Kingkiller, there too, it either is IP pre-brand awareness that allows us to be a little more efficient than some of the bigger studios or being able to maximize our huge footprint in digital marketing to really kind of enlist the members of our social media [backlog].

Yes, I would add, we maintain tremendous relationships with companies like YouTube and Facebook and Snapchat, partly because, frankly, our combined marketing spend right now is over $700 million. And again, that's part of that efficiency between Starz and Lionsgate.

So we're using that effectively, we're going to cross-promote across all of our film and television properties. Obviously, again, we have a huge social media footprint, 450 million Facebook fans. It's going to be a really important part of our business going forward.

And I would think it's making our marketing far more efficient, particularly with movies that are aimed at that 1 or 2 quadrants that I stated before, is where we start with most marketing campaigns.

Laurie, we're going to just wrap it up here with my closing statement.

We refer everyone to our Reports and Presentation tab under our Corporate section at our website for a discussion of certain non-GAAP forward-looking measures that we discussed on the call. Thanks very much.

Ladies and gentlemen, this concludes the teleconference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.