Starz Entertainment Corp (STRZ) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Lionsgate Fiscal 2018 First Quarter Earnings Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I'd now like to turn the conference over to our host, Mr. James Marsh. Please go ahead, sir.

Great. Thanks, Greg, and good afternoon, everyone. Thanks for joining us today for the Lionsgate Fiscal 2018 First Quarter 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 up 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; Chairman of the Motion Picture Group, Patrick Wachsberger; Chairman of the TV Group Kevin Beggs; Chief Operating Officer of the TV Group, Laura Kennedy; and Chief Accounting Officer, Rick Prell.

The matters discussed on this call will 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 materially differ and adversely from those described in our 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, and as amended in Lionsgate's quarterly report on Form 10-Q filed with the SEC on August 8, 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?

Thanks, James, and good afternoon, everybody. We've got a lot to talk about today. As you will recall at Investor Day in January, we talked about our plan for integrating Starz and moving our combined company forward. This afternoon, we'd like to update you on some of the successes we're already achieving as we execute that plan.

As you can see, our first quarter numbers have gotten fiscal '18 off to a great start. With our second straight billion-dollar revenue quarter, combined with strong bottom line profits, the scale of our global content platform is reflected in our financial results as well as our operational achievements. Since we last spoke to you, we have launched or announced significant new premium properties while expanding the reach of our current brands, again, demonstrating our ability to create, launch and monetize content that resonates with consumers in a crowded marketplace.

Our content has driven expanded strategic relationships with companies like Liberty Global, Discovery, CBS, Studio Canal, Amazon, Hulu and YouTube, along with new or growing talent relationships with the likes of Kevin Hart, Stephenie Meyer, Keanu Reeves, Courtney Kemp, Brian Glazier and Seth Rogen. And we continue to take steps to connect this content directly to consumers. Laugh Out Loud, our over-the-top comedy partnership with Kevin Hart has been a top trending app on Apple since its launch. Our recently announced Pantaya movie service brings an unparalleled slate of Spanish language box office hits to a market craving relevant, high-quality content.

Last quarter, we framed our growth story for you with the projected growth rates double the average of our industry peers. But as all of you know, you can't talk growth without discussing the related risks. That's why we think that the ways in which we are derisking our business is telling an equally compelling Lionsgate story that is just now coming into focus. First, we are deleveraging more quickly than anticipated. When we first announced the Starz deal, we discussed leverage of 5x to 5.5x our legacy metrics, adjusted EBITDA at the close. Today, we have delevered substantially and achieved our anticipated leverage range of 3.5x to 4x adjusted EBITDA in just 6 months rather than the 12 to 18 months originally forecast. Second, we've demonstrated that our film business can be managed like a portfolio. A year ago, The Street worried about our Motion Picture Group profits without a major franchise. We demonstrated that we could grow profits last year while moderating risk at the same time. And we believe that with our disciplined approach, we can do the same thing this year. We're off to a good start coming off the first quarter in which we achieved success across every part of our film slate. CodeBlack's All Eyez on Me and Pantelion's How to Be a Latin Lover found their mark with their target demos, continuing the growth of strong vertical businesses serving key Lionsgate audiences.

Our partnership with Amazon Studios yielded the biggest indie hit and one of the best-reviewed movies of the year, The Big 6. The quarter also saw us continue to build our John Wick franchise. We fast-tracked the development of John Wick 3, and have a premium television series, a mobile game and location-based entertainment properties in the works. We're planning to grow the John Wick cinematic universe as well. To that end, we're developing an exciting related property titled The Ballerina, a film showcasing a female assassin that we will spin out of the franchise.

Looking ahead this weekend, we opened The Glass Castle on about 1,500 screens featuring an award-winning cast and based on the runaway bestseller. Next weekend, we release The Hitman's Bodyguard, which was a hit with exhibitors at CinemaCon. It features great chemistry between leads Ryan Reynolds, Samuel L. Jackson and Salma Hayek, and it looks terrific. Our movie for the Thanksgiving holiday, Wonder, is our highest testing film ever. A feel-good premium property with the potential to become a fourth quadrant breakout. Early next year, Robin Hood, produced by Leonardo DiCaprio, offers a totally fresh spin on a classic adventure story featuring one of the hottest casts in Hollywood with a great performance by Taron Egerton, breakout star of The Kingsman. The eighth installment of Saw brings back Jigsaw at Halloween. And we have the action thrillers, The Commuter and American Assassins from our partners at Studio Canal and CBS, respectively. In fact, we're very pleased to announce today that we have just renewed our theatrical distribution agreement with CBS Films for another 3 years. Coming off of the success of last year's best picture nominee, Hell Or High Water, we're particularly pleased with the strength of our relationship with Leslie Moonves and his whole organization.

Boo 2!, the first of 3 upcoming Tyler Perry films, [ramping at a] fiscal '18 slate developed, produced, marketed and financed the Lionsgate way. This month we're also beginning production on a number major properties for next year: Chaos Walking starring Tom Holland and Daisy Ridley and directed by the Bourne Identity's Doug Liman; The Spy Who Dumped Me, a buddy comedy from Imagine Entertainment teaming Mila Kunis and Kate McKinnon; the hilarious Flarsky pairing Seth Rogen and Charlize Theron; and Uncle Drew with Kyrie Irving heading a Who's Who cast of NBA superstars along with world-class promotional partners including Pepsi, Nike and Footlocker. Exciting projects that put us in business with exceptional talent. Third, our Television business mitigates risk because our sweet spot is also the sweet spot of what's working today: premium scripted series and higher-end nonfiction programming. Starz, our flagship channel property, is an ad-free subscription-based premium pay platform with a robust direct-to-consumer offering. And our Television Production business, while selling to everyone, is focused on premium subscription buyers at the high end of the market. As a result, we think we have just the right level of exposure to the pay television ecosystem. It's also worth noting that as Starz continues to grow its presence in the over-the-top world, its performance becomes even more measurable, repeatable, and therefore, more investable. We no longer measure metrics on a monthly basis. We now do it hourly, looking at churn, conversion and retention by platform, demo and across every piece of content. The benefits of Starz positioning were evident in a quarter marked by great new premium content, increased ratings and robust growth in over-the-top subscribers. New series American Gods and The White Princess debuted strongly, while the recently launched fourth season of Power has been driving record-breaking subscriber adds. The first 5 episodes of Power's current season generated 3.5x the subscriber adds of the comparable period of season 3. Since the series debuted in the final week of the quarter, however, this growth will be reflected in next quarter's results.

Today, Starz over-the-top offerings have approximately 2 million subscribers, running well ahead of our own projections and fulfilling their promise as a must-have channel for every platform. Starz' upcoming slate continues to grow stronger. As you know, 2 weeks ago, we announced Lionsgate's first post-merger addition to the Starz lineup, a unique coproduction with strategic partner Liberty Global on The Rook. Acclaimed producers Stephen Garrett is serving as a showrunner and Twilight creator Stephenie Meyer as Executive Producer. The Rook will air on Starz in the U.S. beginning next year.

Fourth, our Lionsgate Television Group has been built for long-term growth and stability, achieving a 10-year compounded annual growth rate of over 20% with steady increases in annual profitability. We've had a great run of series renewals including Dear White People on Netflix, Graves on EPIX and Nightcap and Swedish Dicks on Pop. Most recently, Greenleaf was picked up by OWN for its third season and continues to be one of the highest-rated cable series of the summer. With many of our key series for fiscal '18 and '19 already ordered or renewed, we have great visibility to our Television business going forward.

We also continue to replenish our pipeline with a new series including Manhunt, which launched to critical acclaim in its debut on Discovery, another one of our strategic partners. And Kevin Hart's Lift Legend, the first of what we believe will be many shows with Kevin. Step Up High Water, adapted from our blockbuster dance franchise and shooting in Atlanta for YouTube Red and White Famous, currently in production for an October debut on Showtime, lead our very strong production slate.

And finally, we like how we're positioned in a consolidating industry. A year ago, some wondered if the Starz deal had cost us our pure content status. In fact, today, we find ourselves even better positioned to participate in the ever increasing global consumption of content. But in addition, with our ability to leverage our strong free cash flow, access to capital on attractive terms and efficient tax structure, we've created a unique infrastructure that we can continue to scale.

In closing, we like the space that we've carved out for ourselves in the media sector, bigger than the indies and a little more nimble than the other majors. And we now have a content engine and distribution infrastructure that reaches virtually every major platform around the world. We're not trying to be like everyone else, but believe instead that our agility does work to our advantage in an environment where new buyers emerge for our content every day, often in unexpected places. The line between content creators, distributors and technology platform is becoming less distinct and the rules of engagement are constantly changing with many of them tilting in our favor.

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

Thanks, Jon, and good afternoon, everyone. I will 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 5% to $1 billion, while adjusted OIBITDA increased a robust 32% on a pro forma combined basis to $182 million. Reported basic earnings per share was $0.84 a share in the quarter, and as expected, was impacted by a number of nonrecurring items, including the gain on the sale of EPIX. Adjusted earnings per share came in at $0.52.

Now let's take a look at the underlying segment performance on a pro forma combined basis. You can follow along on our updated trending schedules that have been posted to our website. Media Networks' quarterly revenues increased 9% to $391 million, while segment profits were down 8% year-over-year. Segment profit was impacted by higher marketing cost to support increased volume of original series and the success of our over-the-top offerings. Starz ended the quarter with 24.1 million subs, down just 100,000 sequentially despite headwinds from the U-verse migration. Over-the-top subs saw a nice lift during the quarter and has continued its acceleration following the premiere of Power.

As we stated on our last call, we continue to expect sub growth for fiscal '18. Motion Picture Group had very strong quarter with revenues increasing 16% to $472 million, driven by robust ancillary media performance. Segment profits increased 192% to $87 million, benefiting from strong revenue growth and lower P&A related to smaller, more targeted releases. As we said last quarter, we continue to believe the fiscal '18 slate looks a lot like fiscal '17: diversified, balanced and relatively low risk with breakout opportunities.

TV revenues declined 19% to $157 million on the timing of episodic deliveries, which were mainly back-end-loaded to the second half of the year. Graves is a good example of that, where episodes were predominantly delivered in Q1 last year versus Q3 this year. TV segment profits increased 22% to $13 million as we benefited from the distribution of Power and mix of product. On our last call, we provided comprehensive multiyear guidance and we remain comfortable with these expectations. With regards to fiscal '18, we would expect the quarterly cadence of OIBITDA, adjusted OIBITDA to largely follow a similar pattern to fiscal '17. So the fiscal second quarter would be our seasonally smallest quarter followed by a strong second half.

Now turning to our balance sheet. With regard to deleveraging, we have made great progress and we're well ahead of plan. We reduced corporate debt in the quarter by over $400 million as we used cash proceeds from the EPIX sales to reduce Term Loan B. Free cash flow in the quarter was a negative $110 million, all of which is related to timing as we pay down several production loans, including Power Rangers. Our full year outlook for free cash flow remains unchanged. Net leverage at quarter end was down to 3.9x versus 5.1x on December 31. So as Jon mentioned, we're happy to report that we achieved our initial target leverage ratio of 3.5 to 4x within the first 6 months, which is well ahead of the 12 to 18 month timeframe we had set for ourselves at the time of the merger, and we expect leverage to continue to decline over the year.

And with that, I'll turn the call back over to James for Q&A.

Greg, can we open it up for Q&A now?

(Operator Instructions) And our first question comes from John Janedis with Jefferies.

Maybe a couple for me. Just on the Starz OTT sub number, obviously, pretty impressive in the context of what your peers have posted for similar offerings. Can you give us a little more color on how you view the potential subscriber number there going forward? And at what point will you have enough scale to accelerate margin expansion? And then more broadly on the 24.1 million subs, could you remind us when you fully anniversary some of those pressures or mix you talked about a quarter or 2 ago?

Sure, there's 2 sides of our OTT business, the wholesale side through Amazon right now, potentially other distributors in the future, and then our direct-to-consumer business. The one we have the most insight into, the one we're learning the most about is our direct-to-consumer offering, and that's the one where we see the most exciting changes. We've been able to impact churn. We've been able to impact [that] and we have a great platform. We have a great product and it's priced really well and people are coming and signing up. So we feel excited and very confident about the future of our OTT business. With regard to margins, or I think you said margins, I'm not really sure. Excuse me?

Margins and then U-verse.

Yes. So these are higher margin subs for us than our traditional MVPD subs, so that's a positive. Hard to say what the impact of that is because as you mentioned, there -- the MVPDs, particularly AT&T U-verse has been seeing real headwinds. There are definitely significant headwinds when you are shutting down your platform. So it's a very highly penetrated platform. We're continuing to see rolloff from them. We don't really know when that's going to end. What we do know is at the end of this month, we have cycled through our new deal with AT&T. So we think that, that will go to impact our results going forward. But we don't know really what the final rolloff of AT&T’s going to be.

Okay. Maybe just on programming, as you build out the Starz programming, as you know, most of your peers are doing the same. Several are introducing direct-to-consumer offerings as you heard earlier tonight. But in the context of what appears to be increased programming spend across the industry, can you give us an update on how you're thinking about programming investment? What's the right number of originals now? And do you need to expand into younger or different demos?

So we've always maintained a very disciplined approach to our original programming ramp-up. When we implemented our targeting of specific demographics, we saw that as a way to further make that investment more impactful. What we're seeing in our OTT business is that while we always knew that originals drives the business, the fact that we can see adds to our OTT business, and as Jon mentioned, 3.5x what we saw at the same point in Power season 3, we're seeing this year in Power season 4. So we're seeing the acquisition power, no pun intended, of the originals. We need to keep them with programmings. It's one of the reasons why we've added some library programming, kids, Spanish-language programming to our app and we think that, that will be a big help in keeping these subscribers for longer period of time. So anything, Chris?

[You got it]. Go ahead.

And next will turn to the line of Ben Swinburne with Morgan Stanley.

And a couple of questions. I'm wondering on the theatrical or the film side, if you guys think premium video-on-demand could be an opportunity for you as the industry sort of debates that opportunity versus risk to the theatrical window. And then on the Starz side, any sort of guidance for us on kind of OpEx growth for the year. OpEx was up a decent amount in Q1. I know that can be lumpy, but just curious if you could update us on the annual expectation. And then lastly, Jimmy, very strong free cash flow. Do you have any sort of rule of thumb for us in thinking about like a ratio of free cash flow to adjusted OIBITDA. There was a lot of working capital movements in the Lionsgate business but you guys are throwing up a lot of cash so do you have any thoughts as we think about our long-term forecast for the company?

Jimmy, why don't you take 2 and 3, and I'll circle back on PVOD.

Sure. On the free cash flow, you're right. I mean, obviously, we're affected on a quarterly basis by timing. So as you'll recall on the last quarter, we, and in Q4 of last year, we reported $189 million of positive cash flow. And of course, it swings to a negative position this quarter. As we said in the fourth quarter, that was impacted by timing and we reiterate that here for the first quarter. The timing in this quarter was, several things were affected but almost entirely to be attributable to the fact that we paid down -- you'll see this in the 10-Q, we paid down $170 million of production loans. That included Power Rangers as a part of that. So overall, as we've indicated, our overall free cash flow for the year is not impacted by that. And all of this has been factored into our deleveraging. So I would think in terms of framing your models for the future, you're right. We do have strong conversion. Think of this as not a quarterly play but how things look on an annual basis, and we expect to continue to delever over the remainder of the year. With regard to operating expenses, Starz, overall expect cost to be contained over the year. From a programming cost standpoint, things will be down but you have the increase in marketing. And overall, that's going to net out to, as we said on the last call, to not only increase revenues but below the line, to increase segment profit and expanded margins.

Then on premium VOD, I would say there are a lot of reasons why it hasn't happened sooner, but it will happen. And I do believe it will be great for everybody involved in the Motion Picture business. I think it will expand the pie. I think it's what clearly consumers want. And I would dare say if it was possible for us to all get in a room together and have the exhibitors and studios and digital distributors all get in the room together, I have seen enough research to really believe that this is really something that would be good for everybody. And I really believe in the next 12 months, you're going to see it. As a matter of fact, I believe you're going to see some tests done at least in some territories in the near future. I hope that will happen. I think it will be great for the business.

And the next question comes from the line of Bryan Kraft of Deutsche Bank.

Chris, I was wondering if you could talk about the content pipeline for the remainder of '18 for Starz? How many episodes do you expect to have versus last year? How we should think about maybe the timing of the programming expense recognition this year? And lastly, Chris, how do you think about the number of episodes or hours that you ultimately want to get to ideally on Starz network?

Thanks, Brian. So I think we'll have around 80 episodes of program this year. What we've done is we've moved around our scheduling of these to be able to have an original premiering approximately every 4 to 6 weeks. That's because that gives us the ability to use those, as I said before, as retention, as acquisition products. And then The Library, or the next original becomes hopefully a retention. As we're targeting different demos, we're finding that we're getting great results on a lot of the properties. Next up in a couple of weeks is Survivor's Remorse which we think will appeal to the Power audience and hopefully keep them subscribing longer. We've got some great library product for that demographic as well. Outlander, great for women, returning after an 18-month hiatus. And then we're following that up with Girlfriend Experience later in the calendar year. And then in beginning of 2018, we have Counterpart from Boyd Tilton starting -- starring JK Simmons, sci-fi. We think it has the potential to be a big show for us and we'll be airing that in early calendar 2018, again, to try to just keep the momentum out there in the marketplace. As we're looking at lower cost things, there's some nonscripted shows that we are developing so that we can continue to augment our schedule and have not just shows premiering but keeping the audience happy with more things that are directed towards them specifically. We like the female demographic. We're doing really well with them, African-Americans, obviously, American Gods, which did really well, over index in both African-Americans and Hispanics. We're looking to really market towards the Hispanic audience. We think the LBGTQ audience is also something that can have a positive impact on our business. And we're just -- this strategy of reaching out to diverse groups is working for us.

And you used to think about -- you used to talk about I think a number of episodes of 80 to 85, which you're basically there. Is that still a target? Or do you think about it as much open-ended at this point?

I think we need more. And what we're seeing as someone pointed out, it was you or Ben, the great results that we're having on our OTT business. This new partnership with Lionsgate and the combined company, we've got a terrific slate of potential projects that are in different stages of development. This company can really ramp-up its product, can ramp it up very cost effectively and we have the monetization platform now both in terms of international distribution or partnering with SVOD platforms outside the U.S. So we feel really good about our ability to target this investment and to get the right return on the investment. So I think more is better when you have a good strategy, but we're going to be very disciplined, as always, on that approach.

Yes, I think that -- also I'd emphasize one of the things Chris just said that we've already shown and reported some of the success we're having with monetizing some of the content that I think Chris and his team have focused a little bit more on marketing their service and having the content on Starz. But we've shown them how much we can monetize that content off of Starz. And I think just as importantly, planning series together where we're going to retain all of our rights and being able to give them a sense of how much we can bring in from coproductions, from tax benefits that we can get in certain territories that we can plan our series and our expansion of our series in a more strategic way than I think Starz would be able to do by itself. So I think you're going to be able to see us both invest more money in programming for Starz but also bring more money back in a very profitable way.

Brian, to your question on the timing of the programming expense, as we've mentioned it's down generally year-over-year, of course, as the output programming cost declined relative to increasing original cost. Keep in mind in terms of second quarter or rather the quarterly cadence, it looked a lot like last year. I mean, generally speaking, there is seasonality and you're burning off amortization when you're airing the original -- the originals which should be heavier in Q2 relative to cost. So I would just look at that and maybe pattern your models off of last year's cadence.

And next we'll turn to the line of Amy Yong with Macquarie Securities.

Two questions, I guess, just following up on Starz and then maybe a bigger picture question. On the over-the-top front, I think Starz inked a few content licensing deals with Hulu but they're also a distribution partner. Wondering if you could talk about how you see that relationship developing over time? And then my second question is Discovery is clearly one of your strategic investors. How do you think about their tie up with Scripts and maybe how you might fit in with that overall?

Well, Hulu has been a buyer of all Starz product. Today, they are a distributor of Starz the way Amazon is. That could change in the future. We're always happy to have conversations with people that are out there, especially since they're already selling other premium brands. So we look at the wholesale and the retail side of the OTT business as being really powerful for us and unique from the MVPD universe. Jon, you want to answer the others?

Sure. The comment on what do I think? I think it's a great deal. I think it's very clever. I think it doesn't look to me like it's going to be any cannibalization on the revenue side. Clearly, great in terms of cost synergies but I think Discovery mostly are male-oriented channels and sports internationally and Script's very much female-oriented channels including international markets as well. I think David Zaslav is a fantastic executive. He is a fantastic Board member. We just had a great experience. I think Kevin Beggs is on the phone, he's not here in the room with me so I can't guarantee that, but he can certainly chime in. But we just had a great experience with Discovery on Manhunt. Extremely well reviewed, great, great partnership with them. I would expect to do more with them in any case but having them scaling up obviously the better opportunity for us to do more business like we already have the nonfiction business, actually a lot of it with Pilgrim together. So I love working with Zas and I would expect this to propel even more business. Kevin, do you want opine on that?

Yes, I completely agree. We have a lot of business with Pilgrim with both Discovery and Scripts, and the potential of doing more scripted together should they need momentum. So we're quite excited about the partnership.

And next we turn to the line of Matthew Thornton with SunTrust.

Jimmy, you reiterated kind of the outlook for the Media Networks business. I think revenue up year-on-year, profit up year-on-year, I think, margins up year-on-year as well. On the content sales to Hulu and to HBO Europe, can you kind of remind us just how those will continue to hit the P&Ls throughout the rest of the year? And then separately, when you think about TV production and Motion Picture as relative to last quarter, I think you talked about TV production revenue and profit being up year-on-year and Motion Pictures revenue down but profits, I think flat to up, if I'm not mistaken for the year, any update to that commentary would be helpful as well.

Sure, thanks, Matt. Regarding the sales of over-the-top, the sales to Hulu with regards to Power, seasons 1 and 2 were recognized in the first quarter and then the season 3, because the timing and availability of the [avails], will be recognized in the second quarter. So that's the largest component of that. Otherwise, we continue to have ancillary sales throughout the year relative to the product that came over from Starz as well as the library that's being distributed. With regards to the guidance in terms of on the content side of the business, Motion Picture Group and TV, in TV, as we said last quarter, we're expecting increased revenues as well as increased segment profit. The margins ultimately will be determined, as you know, by the mix of product. So with new series being launched, it's generally lower margins and so the ultimate mix will determine whether that margins expand or not in the TV business for fiscal '18. In terms of Motion Picture Group, we expect increase in segment profit and expansion of margins in fiscal '18. And I'll remind you though that, that's off of declining revenues because we have predominantly, because we have 15 live releases in fiscal '18 compared to 18 live releases in fiscal '17. So by definition, you'd expect lower box office, lower revenues. We still have great breakout potential. And I'll remind you that that's all off of a lower and total and on average investment spend in the context of film cost as well as P&A spend.

Very helpful, maybe just one follow-up if I could on just capital allocation. With deleveraging well ahead of plan here, when can we start thinking about deleveraging giving way to buybacks? Any kind of incremental thoughts there? And just kind of consolidation or M&A in general both your appetite, the industry, there's been a lot of chatter obviously in the press of late. Any updated color there, maybe from Jon would be helpful there as well.

Okay, I'll take deleveraging aspect first. Look, we're focused on deleveraging. I mean, we're moving to the lower end of that initial range of 3.5x to 4x over the year. But certainly as we move into the lower end of that range or even further, we have a different optionality. I just like to underscore that we have very visible free cash flows. There are certainly some timing issues but on a full year basis, we have a lot of visibility. We have ample capacity, and will, in fact, support our core business in a very strong way. Likewise, we can participate in niche acquisitions. Clearly, if there was some larger M&A opportunity, that would really have to depend on the opportunity. But we're always focused on creating shareholder value. Not going to go down the path of trying to predict any point in time that we might feel comfortable with share buyback or dividends or anything like that to drive shareholder value. But clearly we have optionality, but our first focus is on deleveraging.

The other question about consolidation. I would say what's interesting is we don't generally go looking for acquisitions to get bigger, nor do we look for people to come looking to acquire us. I think we are opportunists more than anything else, and we have the ability -- we're nimble enough to move quickly and we have the kind of balance sheet to move quickly when we see the right opportunity. And I think that's basically where we are. Our focus right now, is as Jimmy said, deleveraging. Our focus now is the continued integration of Starz. The content partnership between Lionsgate and Starz, and actually as well using the Starz platform which these guys are doing an incredible job in terms of the over-the-top space to actually help us launch some other of our initiatives in which we're investing right now including LOL, which has an extraordinary, something like close to 20 million downloads and views in the 5 days since its launch. Pantaya, which we're doing with Hemisphere really a tremendous partner in the Spanish-language programming world as well as Univision. And so that's what we're focused on. We're focused on our current business. I think we have great set of assets right now. We're looking to expand Starz into the international marketplace. We're doing great right now with Starz Play Arabia, we're actually right now looking at a business plan for another territory. So those are our main concerns. But obviously, as we continue to deleverage, we certainly will look at opportunities that come across our threshold.

And next we turn to the line of Alan Gould with Rosenblatt Securities.

I've got two questions. First, for Chris, I was wondering if you could tell us how the scaling has been of the AT&T migration in terms of how it's impacting the Starz subs? We are 3/4, I think, into their migration from U-verse to DTV. Is there less Starz subs being impacted by that each quarter? I know you said the end of the year, we'll have higher sub numbers but given how strong Power OTT has been, should we soon see sequential increase in the Starz subs? And then for Jon, a more general question, given the success say, of Black Sails and Power and the licensing of TV product in general, are you thinking -- is there any change in how you're allocating your capital between traditional movies, TV and into the OTT in the Starz film investment?

So Al, this is Chris, on the AT&T U-verse shutdown, we are not 3/4 of the way through. We've got longer than that to go. That doesn't mean that they're going to drag it out, as I said before. I don't really know, we just know what we've read about when they think they will be finished with that platform. It was really highly penetrated, with not just Starz subs but all the premium channels. So we're seeing significant headwinds from that roll-off but we continue to do really well because of the adds that we've been able to do on the OTT space which, as I said, with the investments we're making, with experience and the knowledge that we're gaining, we think we can continue to keep the foot on the accelerator there. So they're not -- they're certainly not capturing 1:1 from AT&T to DIRECTV and we wish they were doing a better job. And we really don't know where those subs are going.

In terms of your other question, I don't see us backing off on our theatrical business. As you well know, it's 2 different businesses really that we combine. One is our wide release business which is 15 to 18 pictures a year. This year, it's a little down at 15. As well as our segment 2 pictures and we get to almost 40, that includes the CodeBlack Pictures, Pantelion Pictures, Roadside Attraction Pictures. And so we like that business. We think it's a risk-mitigated business. Again, we're continuing to show solid profitability in our Motion Picture business. We're not a huge monster-hit driven business, we love a hit when we get it, that's obviously a lot of data for our business. So we like that business. But I would say that we have no priority currently higher than creating premium programming for Starz that we retain as many rights as possible. So let's just say any incremental cash we have, I think you can see it going into that business. You see, as I said before, we have a formula where it's very simple that we invest in programming and we put great marketing around it and it leads to subs and it leads to revenues. So there's a formula that, as I said in my remarks is investable and therefore, there is no greater priority and we have 7 projects in development already. Or the Rook, which has actually been ordered already and I think you're going to see again a very, very strong emphasis on exactly that.

And next we turn to the line of Stan Meyers with Piper Jaffray.

One for Jon, one for Jimmy. Jon, so we're seeing some progress with your larger IPs such as Chaos Walking. Maybe you can update us more broadly on others, Kingkiller Chronicle, Hunger Games and Twilight? And then Jimmy, I wanted to go back to your guidance. I believe you mentioned your OIBITDA cadence this year will mirror last. However, in the quarter median network segment probably came in slightly below expectations on higher marketing costs. So I was wondering if that's more of a timing? Should we expect more improved results next quarter or not?

I'll say the same thing about Hunger Games and Twilight, as we said before, which is that we think there's a lot more stories to be told and we are ready to tell them when our creators are ready to tell those stories. Chaos Walking, we start in about 2 weeks. I think it's going to be fantastic. We continue to fill out the cast, it's a great cast. And obviously, we've got a great director with a huge track record of success for commercial movies. Behind that, we continue to develop Kingkiller both as a feature film based on the first book as well as a television series, based upon -- and creating an original prequel to it and then fitting the 2 of them together. We think it's going to be an amazing franchise, obviously, with Lin Manuel Miranda, executive producing both the movie and the television show. We've got a project called Naruto, which we're very high on and a number of others, very exciting ones that we either are already developing or 1 or 2 of them frankly, we've been negotiating for a very long time which we hope to be able to announce soon. So we've got a lot of big movies and potential franchises coming down the pipe. But again, as I just said, our core business is not to rely on that but to be solidly profitable every year with a diverse slate aimed at as well the audiences that we know well, market to the audiences that we know well and so we're going to kind of stick to our knitting in that respect.

And Stan, with regards to your questions about the cadence on the adjusted OIBITDA, I mean, certainly we factored increased marketing spend. That's already factored into our guidance originally as well as the cadence. So keep in mind that it's seasonal. You have the second quarter, is seasonally a lower quarter. Certainly, I've talked about the programming and the amortization associated with the originals that's on the Media Networks side. But I think a bigger factor on the seasonality is really in our Film business, so keep in mind that we are releasing 5 films that we're really excited about. We are releasing 5 major releases in the second quarter. That's compared to 1 that we released wide in the first quarter. Okay. So you should see the P&A associated with that affecting and as it generally does in the second quarter affects our Motion Picture Group. I would also add that there are 3 October releases that are occurring and My Little Pony which occurs early in October, so there will prespend on P&A perspective -- from a P&A perspective on those releases as well. So that would affect the second quarter. And as I had alluded to earlier in terms of television production, the episodic deliveries are back-end-loaded to the second half.

And next we'll turn to the line of Barton Crockett with FBR Capital Markets.

Barton? Okay, why don't we get the next question there, Greg?

And we turn to the line of David Joyce of Evercore ISI. He may have dropped off, excuse me. We'll go back to the line of Barton Crockett with FBR Capital Markets.

Greg, are you having any problem with your line, there?

No. I am fine. Can you hear me? I'm -- my line is fine.

All right, just keep moving down the list. We want to wrap this up at 3:30.

Hello, can you hear me?

David Miller, your line is open.

This is David Miller, can you hear me? Okay, that was weird, 2 analysts got on at the same time. So a couple of questions. Jimmy, you stated in an answer to one of the other questions about alternatives for use of cash when or if net debt-to-EBITDA gets down, you know, to below 3.5x or some level of capital efficiency. Where would that ratio have to be for you to pare off your dissenters liability? I would appreciate your thoughts there. And then Jon, we're now, and hopefully you have read what I've written, I mean, we're now thinking about Power in the same way that we think about Walking Dead or Game of Thrones or Empire or Ray Donovan or NCIS, as a true branding mechanism for the Starz network. So with that in mind, to what degree do you attribute the lift in Starz subs to just that 1 show? And in a related matter, when does the show gets stripped out, and when will we see international, both domestic and international syndication revenues attached to that show?

Okay. I'll take the first one. We've not set a formal target leverage. We initially set 3.5x to 4x. As we mentioned, we're vastly -- we're well into that range and we'll be approaching the lower end of that range over the course of the year. I think we would always consider the use of capital for appropriate uses. And it will depend on what drives shareholder value. We're not setting a specific amount in terms of the leverage range. Relative to the dissenter liability, obviously, we focus on that but as you probably have seen or will see in the 10-Q, the court case for that has been scheduled in the second half of our fiscal '19. And it generally takes several quarters, if you will, to get a ruling back after -- even after the court date. So this is really -- I think of it as a long-term obligation. And we'll be significantly delevered before then but nevertheless, we keep our eye on that. But I don't think that's going to affect our allocation of capital here in the next 18 months, 18 to 24 months.

And Jimmy, before Chris talks about Power in general, could you talk about the timing of some of that revenue which some of it has already been recognized or maybe you could explain that to David.

Yes, that's correct. On Power, we recognized the ancillary sales for season 1 and 2 in the first quarter. And the season 3 ancillary rights will be recognized in the second quarter, and that's all really related to the timing of avails.

Yes, and there may be subsequent windows after that.

Correct.

With regard to Power subscribers, the viewers are voracious fans of Power. Certainly, we've seen a multiple of adds last year with the launch of season 4. We're launching Survivor's Remorse in a couple of weeks to extend the life of those subs. The good news, bad news about OTT, is they can sign up easily, they can disconnect easily, but as we learn more about this, the goal is to extend the lives of those subs, hopefully forever. So we're going to go from that into Outlander and we think we have a really good shot at creating more growth in the OTT business around the females fans of Outlander, potential subscribers and we're going to continue to leapfrog from acquisition vehicles with different demographics, to retention vehicles with different demographics as we are able to ramp-up and bolster our programming to invest in the opportunity that we see.

And we'll turn to the line of Barton Crockett with FBR Capital Markets.

So I wanted to just ask, I guess, two questions. One is on the Starz sub number which is so impressive. How much of that was the OTT sub number? How much of that was after the end of the quarter, that 2 million? I mean, is that a big percentage of that 2 million came after the quarter? That's one question. And secondly, you guys have your EPIX output deal and they're now owned by someone else. I was wondering if you could talk about, you know, how you see that transitioning that deal over time?

Barton, all I can say is that we had a really healthy number at the end of the quarter, and we've continued that. So as Jimmy said, where the adds are going to show up in the second quarter from a financial point of view, but this wasn't all of a sudden, a dramatic shift. It's just continuing the strong business that we've been developing.

And in terms of EPIX actually as part of the deal, we has an option to extend the deal for 2, I believe, years, might have been a little longer than that, and we chose not to extend it. So our obligation to EPIX lasts, I believe, through theatrical releases of '19. So we've retained our optionality, frankly, as you know the other half of our output is with HBO. So we thought it was important, frankly, to retain our optionality with such an important product of ours.

And next we turn to the line of David Joyce.

I wanted to get some more color on how the Television production business is evolving not just you, a little bit more broadly in the industry. Granted you've got the lot of back end weighted timing according to your deliveries. But where should the margins be heading given that you've got so much demand for original content for a lot of different platforms? And I know that it also depends on whether another entity is buying all the rights or a few retaining them. But when should we be seeing double-digit margins on the TV production business as a recurring sort of item?

Well, David, by definition, we were a high single-digit last year. We've guided to the fact that this year's margins will depend on the mix. So I wouldn't be looking for double-digit margin this year. That's because of the healthy mix of new series that we're launching and the overall health for our business. So we continue to invest in the development and the expansion of that and roll out new programming which will drive increased margins in the future.

Again, the point I think we've made before but Jimmy is making is your very success in launching new product tends to hold down your margins. And we've been very successful launching new products in the last year or 2. The only way that doesn't happen is if we do all of our shows with, let's say, Netflix and don't retain any rights and that's not our game, frankly. We're retaining as many rights as we can with the right show, obviously, we love Netflix. We have done a lot of great stuff with them but in general, we want to retain as many rights as possible to play them across as many, frankly, owned platforms of ours or partnered platforms that we can. And so that will hold down margins although we do expect to keep increasing our margins from where we are right now.

Even with all the international demand, there's still a fairly high level of deficit to finance a sub series?

Well, high level of demand doesn't change the formula. It just changes the ultimate result. And when you recognize -- when you can recognize those avails, but you're still starting typically with a deficit, again, we're tapping in, we think very well. We think -- I think this coproduction with Liberty Global is fantastic. It was a very unique coproduction that we put together. They're retaining a lot of rights in their territories, we've retained the rest of the rights internationally. There's probably more upfront margin, if you will, but again, the premise remains the same that it takes a year or 2 to actually start really recognizing the profits, opening up those windows for all of the ancillary sales and so again, your very success kind of dampens those margins a little bit.

David, we also have limited risk because you've got great visibility when you're green lighting those television productions going in. So what you're looking to is start the new series with really low risk, again, with a bigger return in those early periods and then ramping those up when you get into that second, third, fourth year.

Your final question comes from the line of Steven Cahall with Royal Bank of Canada.

Maybe just 1 for Jimmy on guidance. I think you said that you're comfortable with all the previous guidance that you gave and I think you previously talked about fiscal '18 as being at the low-end of the mid-teens guidance for adjusted OIBITDA growth. So I guess, number one, after such a strong first quarter, should we expect that some of this is just pull-through and not necessarily flow such a strong beat all the way through to a higher growth rate for the year? And then secondly, as we think about the segments, I mean, you had a great quarter for Motion Picture. So in terms of adjusted OIBITDA or segment profit growth rate, is that going to be the strongest one this year followed by TV, followed by Media, where you've just got a little more cost growth in the year?

Well, on the guidance, it's a little early, Steven. I appreciate you acknowledging and then certainly we did have a strong quarter and Motion Picture Group in particular is off to a nice strong start, but too early. We're still on our target overall which is why we're comfortable with our guidance. I would still stick to the lower end in this year and the early years and then accelerating in the back end in terms of our low to mid-teen overall guidance. I think Motion Picture Group, as we've said, you're going to see an increase, a nice increase in revenues. You're going to see nice increase in profits and expanded margin as well so we're expecting them to have a good year and we think we're off to a good start.

All right. I'll just wrap it up here with a closing statement. Just want to refer everybody on the call to our reports and presentations tab under the corporate section of the lionsgate.com website for a discussion of certain non-GAAP forward-looking measures discussed on the call. Thanks for joining us.

Thank you, everybody.

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