Starz Entertainment Corp (STRZ) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Lionsgate Fiscal 2018 Second Quarter Earnings Call. (Operator Instructions) And as a reminder, today's call is being recorded.

I would now like to turn the conference over to our host, head of Investor Relations, James Marsh. Please go ahead, sir.

Great. Thanks, Cary. Good afternoon, everyone. Thank you for joining us today for the Lionsgate Fiscal 2018 Second Quarter Earnings 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 for your questions. Also joining us on the call today are Vice Chairman, Michael Burns; Starz' President and CEO, Chris Albrecht; Starz' COO, Jeff Hirsch; Starz' CFO, Scott Macdonald; Co-Chief Operating Officer, Brian Goldsmith; Motion Picture Group Co-Chairmen Joe Drake and Patrick Wachsberger; Co-Chief Operating Officer and President of Motion Picture Group, Steve Beeks; Co-President of the Motion Picture Group, Erik Feig; 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 from these and adversely from those described in the forward-looking statements as a result of various factors, including the risk factors set forth in the Lionsgate Annual Report on Form 10-K filed with the SEC on May 25, 2017, as amended in the Lionsgate's quarterly call and on Form 10-Q filed with the SEC on November 9, 2017. The company undertakes no obligation to publicly release the result 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 thank you all for joining us today. Our strong performance in the quarter keeps us on track for our fiscal year expectations, and our robust free cash flow is enabling us to continue our consistent deleveraging ahead of schedule.

In today's dynamic content environment, audience fragmentation, disintermediation, industry consolidation and the ramp in content spending by the major digital platforms touch every part of our company. We believe that we're very well positioned to benefit from these trends, leveraging our strengths, mitigating risk and focusing on segments where we can continue to win. You'll see the evidence of this as I take you through the performance of our business segments in the quarter.

At Starz, our programming strategy is working in terms of ratings, subscribers and rights monetization. The latest seasons of Power, Outlander and The Girlfriend Experience are all achieving record viewership and deep engagement with their fans. Focusing on targeted core audiences is resulting in strong brand loyalty among women and African-American viewers; and the recently greenlit new series, Vida, will continue to expand our Lionsgate and Starz' outreach to Hispanic audiences as well. Starz subscribers grew sequentially by 400,000 in the quarter, driven by the rapid growth of the network's over-the-top offering, which has crossed the 2 million subscriber mark. The data we're collecting in the digital world on subscriber acquisition, retention and churn is making our business more predictable and our success more repeatable.

The Starz distribution footprint continues to grow in digital and linear platforms alike. And today, I'm pleased to announce that Starz has entered into an agreement in principle to launch on Hulu as it continues to become a great value proposition for all platforms.

On the international front, Starz Play Arabia is performing well and continuing to grow its subscriber base across the Middle East and North Africa. Our success at Starz Play Arabia, coupled with our strong programming and rights retention, will allow us to expand selectively into other international territories. To close on Starz, the combination of our companies is everything we hoped for and more, and we're continuing to -- and we're going to continue to invest in its success.

Turning to our film business. The Hitman's Bodyguard, The Big Sick and Boo 2!, released in October, all connected with their target audiences. Hitman's Bodyguard, the kind of hip edgy film that we know how to make and deliver, topped the box office 3 weeks in a row. The Big Sick, one of several films we've released with our partners at Amazon Studios, became the biggest indie hit of the year.

While the industry suffered through a tough summer at the box office, our domestic slate was up 20% year-over-year. Moving forward, our slate will continue to focus on our core strengths. It includes tentpole properties like Chaos Walking and The Kingkiller Chronicle; our third movie in the John Wick franchise; star-driven films like the Seth Rogen, Charlize Theron comedy from Good Universe; and films targeted to Hispanic and African-American moviegoers such as Pantelion and MGM's Overboard, Uncle Drew and the next 2 Tyler Perry films.

Next Friday, we'll release Wonder starring Julia Roberts, Owen Wilson and Jacob Tremblay. And it's a great example of what we look for as we assemble our slate: bold, original content based on a great property and driven by AAA talent. The highest testing film in our history, it's tracking well and its Choose Kind promotional campaign has resonated in schools and communities across the country. Our exhibition presales are very strong. Audience reaction from early screenings has been exceptional. And we expect the film to play all through the lucrative Thanksgiving and Christmas holidays.

Part of our ability to continue scaling our platform and mitigating risk lies in the quality of our relationships with many of the leading content companies in the world. During the quarter, we renewed and expanded our theatrical distribution agreements with STUDIOCANAL and CBS Films, 2 elite partners who are dependable suppliers of premium quality films. Last month, we acquired the production and distribution company, Good Universe, bringing Joe Drake and Nathan Kahane back to Lionsgate, adding a pair of respected entrepreneurs to our leadership team and continuing to diversify our content platform. Joe and Nathan are adept at creating business models, partnering with high-end talent like Seth Rogen and Fede Alvarez, enhancing one of our greatest strengths: unique, repeatable long-term talent relationships.

I want to remind everyone that our film business is more diverse than just our wide release slate. Our specialty and targeted releases and managed brands had another strong quarter with a full year contribution expected to increase by 20%.

Let me turn to television where our focus is clear, creating premium quality content in the most profitable genres, leveraging our platform-agnostic ability to sell to everyone and collaborating with our platform partners to create win-win business models. That strategy was evident during the quarter as high-end Lionsgate television properties were greenlit at Starz, acquired by Showtime and readied for launch at YouTube. The Rook, our first series for Starz since the acquisition, begins production in February. Coproduced with our friends at Liberty Global, executive produced by Twilight creator Stephenie Meyer and with acclaimed producer Stephen Garrett serving as showrunner, it heads a Lionsgate television roster of high-end properties for Starz.

We're also excited about the continued progress of our Kingkiller Chronicle franchise. Showtime announced last month that it's developing a premium television series adaptation of Kingkiller. The series will be a subversive origin story that leads up to the events of the trilogy's first novel, which will frame our Kingkiller feature film.

We're continuing to assemble a world-class creative team for the film as we move our unprecedented film, television and interactive game franchise forward under the direction of producer and creative mastermind, Lin-Manuel Miranda.

We're looking forward to premiering 2 new series on YouTube early next year. The first is Step Up, the television adaptation of our dance film franchise. The second is Kevin Hart's What the Fit, just one of several television series and other initiatives on which we're partnered with Kevin.

What you might see that's a little different for us this year is that we're now also focusing on broadcast procedurals, where we believe we can achieve outsized returns. We've taken 5 network procedurals to market this season, selling all 5 in competitive bidding situations. One of them was an ABC pilot order for Get Christie Love, the first series developed by power showrunner, Courtney Kemp, under her expanded development deal with Lionsgate and Starz.

Finally, our strategy of pairing our shows with the right network partners has enabled us to create a core of long-running series that includes Orange is the New Black, Nashville, The Royals, Greenleaf and Dear White People, all building evergreen value for our worldwide distribution team and our library. Let's not forget the very strong ratings for Wendy Williams and Family Feud this year, our long-running talk and game shows.

As digital platforms continue to increase their spending on content, just like legendary bank robber Willie Sutton, we're going where the money is. With the resources to adapt, be entrepreneurial and become an early and preferred supplier to every platform, we now have multiple films in partnership with Amazon; multiple shows in partnership with YouTube, Netflix and Hulu; and multiple projects with Facebook, which premiered the Laugh Out Loud Original Series Lyft Legend in the quarter. We're also building content alliances with Pop Sugar, BuzzFeed and other platforms eager to bring targeted premium content to their audiences.

I'm also pleased to report that this was one of our strongest quarters for growing our own consumer-facing businesses. Our first Lionsgate-branded theme park zone opened at MOTIONGATE in Dubai last month. We have 5 additional Lionsgate-branded theme parks and indoor entertainment offerings scheduled to open in the next 3 years. And our state-of-the-art Atom Tickets moviegoing app continued to gain traction among the nation's exhibitors.

In addition to the success of Starz' direct-to-consumer offering, we launched 2 new streaming services, the Pantaya premium movie platform for Spanish language and bilingual consumers, and the Laugh Out Loud comedy service with Kevin Hart. Both are off to fast starts.

In closing, though our operating environment is changing faster than ever, we believe that we have just the right balance between scale and agility, strong growth prospects with less than the usual risk and undiminished opportunities to win in the spaces where we like to compete. Disruption has always been our friend, and we believe that we're on the right path to keep it that way.

Now I'll turn things 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. As you've seen, we've reported solid results for the quarter. Revenues declined 10% versus the prior year on a pro forma combined basis to $941 million, largely driven by fewer theatrical releases in the quarter, while adjusted OIBDA increased 66% to $109 million. Reported basic earnings per share was $0.07 in the quarter, while adjusted earnings per share came in at $0.30. Free cash flow came in at $347 million with a commensurate reduction in the net corporate debt of approximately $330 million.

Now let's discuss performance at our underlying business segments compared to the prior year on a pro forma combined basis. You can follow along on the updated trending schedules that we've posted to our website.

Media Networks quarterly revenues increased 7% versus prior year to $393 million, while segment profits increased 42% year-over-year, driven by higher over-the-top revenues, lower programming cost and season 3 of Power license fees. Starz ended the quarter with 24.5 million subs, up 400,000 sequentially despite lower-than-anticipated conversion of U-verse subs to DIRECTV. Over-the-top subs exceeded 2 million at quarter end, driven by Power and Outlander. We will continue to opportunistically invest in programming and marketing to grow this business.

Our Motion Picture Group had a solid quarter, despite an anticipated revenue decline of 24%, driven by fewer theatrical releases. Segment profits increased nicely from a $6 million loss in the prior year quarter to $9 million of profit this quarter. The improvement was driven by lower P&A expense, and as Jon said, a solid performance from our managed brands business.

As expected, quarterly TV revenues slipped 5% to $169 million and profits declined $4 million to $9 million. The decline reflects the timing of episodic deliveries and is largely driven by comparisons to Orange is the New Black, which will be delivered in the third and fourth quarters of this year versus the second quarter last year.

We continue to feel comfortable with our adjusted OIBDA guidance range of low to mid-teens growth over the next several years. I would note that some recently announced changes in our theatrical release slate will likely result in some timing differences and impact the shape of that growth. Recall that we had previously expected adjusted OIBDA growth rates to build over time, but with changes in the film slate and opportunistic incremental spending on Starz' original programming, this could result in higher growth in fiscal '18 followed by flatter growth in fiscal '19 while still achieving a 3-year CAGR in the low to mid-teens range.

Now turning to our balance sheet. With regards to deleveraging, we have exceeded the initial target leverage goals we laid out at the time of the Starz acquisition. At quarter end, our net leverage was 3.2x. Free cash flow in the quarter was a robust $347 million. And we reduced corporate net debt by $263 million while increasing our cash balances by approximately $70 million. Free cash flow in the quarter benefited from the timing of certain payments, and our full year outlook of free cash flow remains unchanged. We expect to continue to maintain a strong balance sheet and deleverage over time, with quarter-to-quarter variances, depending on the timing of content investment and production schedules.

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

Thanks, Jimmy. Cary, can we open up to Q&A, please?

(Operator Instructions) And our first question comes from Ben Swinburne from Morgan Stanley.

A couple of questions for you. On the Hulu front, that's a nice addition. I wonder if you could just talk about timing of their making the product available, and if you have any sense for pricing or packaging on that service?

And then Jon, maybe you could talk high-level, we've seen a decent rush towards a lot of these digital players doing showrunner deals and locking up some of the top talent out in Hollywood. How is this at all impacting Lionsgate as you think about your relationships with key talent? And do you feel like you guys are well positioned, whether it's on the Starz side or the Lionsgate side, to sort of continue to play as the dollars get bigger and bigger?

On the first question, Ben. This is Chris. We've really said all that we can say right now about the Hulu deal, but more details will be forthcoming very quickly.

Yes, and a much longer answer on your other question, Ben. I'd frame it like this. No question that some of the big talent is now going direct to the platforms, but there's always been a lot of competition. I would say that most of the -- most of the talent that we see and have seen, I've been doing this about 35 years. Talent wants to have a lot of optionality, and I think that that's what we provide more than anything else. We are a film business. We are television business. We're a game business. We're location-based entertainment business.

When you look at property like Kingkiller where we're developing 3 different platforms all for the same piece of IP, I think that that's really the beauty of our company. And so we're going to continue to attract our share of talent, I promise you that. I think they see us as an entrepreneurial company that can do everything that has a worldwide distribution infrastructure. And again, it's going to be a major part of our focus.

And now to the line of Amy Yong from Macquarie.

And following up on the Starz question. Maybe Chris, I think Jimmy mentioned some -- that the U-verse started to do migration. How much longer should we expect this to happen? And then obviously there's been a lot of noise in this quarter on pay TV. Did you feel the impact from the storms or anything else that I think a lot of the pay TV and the MVPD players mentioned?

And then Chris, can you just help us think about the over-the-top and direct-to-consumer trends that you're seeing in the marketplace? And obviously, as you go deeper into direct-to-consumer, there's obviously a lot of data that you're collecting. Maybe you could talk to us about what the feedback has been.

Sure. With regard to the U-verse question. I mean, from everything that we are being told, they still plan to shut down that platform. Having said that, the bleeding seems to have slowed a little bit. We don't know what to attribute that to other than I think it's -- the data over the last couple of days is showing that maybe the pay TV business is healthier in general than a lot of people have projected. And on the storm. We have accounted for all of that, and it's not really a material effect, and it's been incorporated in all of our numbers.

With regard to the OTT business, we're very bullish on it. The wholesale business, which is going well, will certainly be bolstered by the Hulu deal. By all accounts, they've done a really nice job with the other premiums and we're really looking forward to that relationship.

The exciting story for us is also the retail business, the direct-to-consumer business. And that's where the data is really coming into play. I mean, what it's showing is that the strategy is working. The originals are driving the acquisition. The retention is obviously, part of the story. We're doing a good job with that. But our goal is to get the [sat] cost down, to get the churn numbers down. And we think we'll do that as we see more shows come on. The demographic groups that we're targeting are responding really well. We've got a great product offering with the originals. We've got a great product offering with the depth of the movie lineup. The technology is really well received.

There was a survey out that was published yesterday and today as well. USA Today picked it up, which shows Starz is number 6 in the list of the top 10 SVOD services in our category, obviously behind names like Netflix and Amazon. But considering that we're the last to launch in that category, I think that's a terrific showing for us, and we're very confident about our position going forward.

And now to the line of Matthew Thornton from SunTrust.

Maybe 2 if I could, I guess one probably for Chris here. Can you talk a little bit about just what you're seeing on the OTT side in terms of churn trends as we kind of worked through September, October into November? And I ask that question because obviously, Power and Outlander are kind of behind this. So I'm just kind of curious what you're seeing there.

And then secondly, maybe for Jimmy. Just wondering how you're thinking about any updated thoughts just around capital allocation? Obviously, the leverage is coming down really nicely. Any updated thoughts there how you're thinking about M&A versus buybacks versus just continuing to delever as quickly as you can? Any help there would be great.

Matthew, on the OTT space. I think what we're seeing and what the data is telling us is that shows like Outlander and Power are doing the job they need to do. They're attracting the subscribers. We also are seeing that there are different habits or different behavioral trends between those 2 groups, and we're reacting to that. This is terrific information. We think we have the resources and the right shows to extend the life of these subs, which obviously is how you reduce the churn, obviously how you reduce your [sat] costs. Because the best way to grow your subs is to keep the ones that you're acquiring. We're very focused on that. The programming strategy going forward is -- has that as a main goal. And we think that'll also just lift the boat in terms of our visibility and the success we're having with our long-term MVPD partners, which shouldn't be forgotten in all of the rush to be excited about the SVOD space, which we certainly are as well.

And thanks, Matt. With regards to the capital allocation, I mean certainly delevering below those initial thresholds down to 3.2% very quickly and way ahead of schedule has given us a lot of flexibility. As you've seen from the quarter, the company, clearly we have significant free cash flow generation capability. So this is all nice. Certainly from a capital allocation standpoint, we're going to look to drive shareholder value. First and foremost, invest fully in our core businesses, and incremental content spend, Starz originals, excited about the kind of data that we're getting from our retail services, which helps you make smarter investments. And it gives us a lot of optionality. So at the end of the day, it's going to be about driving long-term shareholder value, and we're in a good position to do that.

And now to the line of Alan Gould from Rosenblatt Securities.

I've got 2. Chris, I was wondering if you can give us a breakdown. The 400,000 sub gain was quite impressive. Can you give us a breakdown, how much of that was OTT versus traditional? And Jimmy, can you give us some sense of the timing of program spend for the year? I guess you've done 680 so far this year -- so far for the first half. What do you think the program spend is going to be for the full year?

So Alan on the OTT breakdown, we're not breaking those numbers out specifically. But I can tell you that Jon's report on having crossed the 2 million mark, especially since it's as of quarter end, which is a relatively short period of time since we announced approximately the 2 million number. And we think that both sides of the business are healthy and are a great force in helping us grow our overall business on a yearly -- on a year-over-year basis, which is how we look at it.

And Alan, regarding the content spend, I think you'll see content spend pick up in second half of the year relative to first half. We're not going to peg a particular number for the full year or provide guidance on that. But clearly, there's a lot of opportunity for us to invest in owned content, and you'll see that pick up a bit in second half.

And now to the line of John Janedis from Jefferies.

Just one for me. As you guys broaden out the demographic focus at Starz, can you talk about the balance between going deeper with pure demos rather than broadening? And digital player spend, can you update us on the expectations you have now for the number of Starz original? Does that ramp say from 18 to 20? Or are we hitting now at a flat number going forward?

So on the -- I was thinking about the answer to the first question. I might have missed the second one. But on the demos, we are -- we've just gone to production with our first show for the Hispanic audience, which we think is a terrific opportunity for us. We're continuing to expand on our relationship with women, African Americans. And one of the benefits of that is now that we've established a relationship, it's easier for us to extend the life of those subscribers. And we think that's really important. We're also -- we also have a really interesting offering for the LGBTQ group. And as we expand and target these groups, what you also have is a terrific representation of Millennials in each of these categories.

So as we expand there, we're going to be interacting and hopefully being able to attract that group as well, which historically has been a group that premiums have stayed away from because they weren't able to afford to stack. So with a direct-to-consumer model that we have now, we're able to go after a whole new audience. And basically, the story is that Starz is now going to be available to every person that has a cellphone and $9.

And then John...

And what was the second one, what was the second question?

The second part of the question, John, was about what, just original programming, episodic goals. Something like that?

Yes for example, to your point if you're going to have, say, focusing on 4 or 5 demos over time, do you need, say, 2 or 3 shows per year for each of those? Or is it 1 or 2? So I guess asked more broadly, will the number of originals of Starz increase going forward? Or are we sort of at a flat run rate here going forward?

Well, I think there are 2 things. One is that Jon has stated that there's no priority higher than Starz. And as we look to the allocation of resources of Lionsgate, that's one of the first places that we're going to look. But it's because we see the opportunity there to grow our business not because we hope there's an opportunity there.

We also look at shows at acquisition and retention shows. The acquisition shows being maybe a little bit more high profile. Kind of jumping the gun a little, you're going to see a press release shortly that announces our first foray into docu-series, non-scripted series, which we look at as retention vehicles for these demos and are dramatically less money, a fraction of the cost of these big scripted shows. So there's a lot of levers that we can pull to satisfy these audiences, build the relationship, expand the audiences and grow our overall subscriber base.

And I should add that we're having such a tremendous amount of success in taking some of the shows that Starz had put on the air previously and monetizing them on a worldwide basis that I think that the really simpler answer to your question is: we are going to be putting on more programming. But frankly, we think we can do it very efficiently and that the results will more than pay for themselves. So I think that's kind of the right answer to your question.

Next question there Cary.

And that comes from Stan Meyers from Piper Jaffray.

So I have 2 questions, if I may. First on film. We're getting closer to comping last year's breakout hit, La La Land. And I was wondering how you guys feel about Wonder tracking relative to La La last year. Maybe your -- how you feel about your spending there? And then on the TV side, we're seeing some reacceleration in that segment here midyear for you guys. How do you see the segment growing over the next few quarters?

This is Joe. On Wonder, we're very happy with the tracking. I think that even more important than the tracking, we've done I believe over 500 screenings that have had extraordinary (technical difficulty) tested incredibly well. And our presales are really, really strong. So we think we have a movie that's going to open well and play all the way through the holiday season.

And with regard, Stan, to your question on TV. We expect seeing continued strong growth in second half of the year. As we said earlier, the episodic deliveries are weighted towards the second half of the year. And for the segment as a whole for the full year, we expect to see revenue and segment profit growth.

And now to the line of Barton Crockett from B. Riley FBR.

I was wondering, I think Jimmy Barge, you threw out some commentary about a higher growth rate this year and a flattening next year. And you were a little bit kind of thin on the details around that. I was wondering if you could flush that out a little more, what's changed versus what you were thinking before in more detail to drive that kind of outlook?

Sure, Barton. I mean we're not going -- as you can imagine we're going to refrain from giving year-by-year guidance. So we're staying to the 3-year guidance, if you will, of the low to mid-teens. But to give you a little more color on that, the film slate that we've announced certain changes in film releases. So for example, Robin Hood in particular, moved out of March of our fiscal '18 into September of our fiscal '19. So that will take P&A out of '18 and move it into '19. We feel great about the film. It's just all about what's the right thing for the film, which is that's how we run our business across all business sectors and particularly in film where release dates are important. So that will affect to the benefit of '18 and lower the '19 result, which will have a tougher comp against '18 as well when you think about growth rates.

And then the other aspect of that, that I alluded to was the incremental investment in Starz originals. As Chris alluded to and has discussed, and Jon, we're getting more and more data out of the retail sector of our business. So we have an opportunity with the free cash flows. We have to actually make incremental investment in that space which we'll consider. So all of that will affect the ultimate shape of that growth rate over that 3-year period. So that was what I was trying to give you some color on.

Okay. That's helpful, And then one other quick question. Orange is the New Black on Netflix, a core kind of property for you on TV. But Netflix is putting a lot more content in as they ramp up to $8 billion of expense, and more than that in terms of cash spent on content. Is Orange is the New Black still able to attract the audiences that it could before? Or is it getting diluted by all the other content at Netflix? How do you see that kind of holding up?

Well, as you know, Netflix doesn't share any of the data on their originals. We continue to hear from them that it's a huge performer. It certainly opened the doors to their international launch. We know just by virtue of the cast being sent all over the world to open up markets. It's a mainstay. Getting a hit for any platform is hard enough. Keeping it on and continuing to have great creative output year-after-year from Jenji and her team is essential. She's one of the most sought-after writer-producer-creators in the business. We expect it will be on for years to come. And I think it only grows more valuable with time and actually amidst other shows, because not many stand out and Orange has been a hit from day 1.

I think yes, from a more macro perspective, there are definitely more shows. There's more competition for eyeballs. But if you just look over the last 5 years, consumers are viewing 2 hours more of content on digital platforms. And I think that what you're going to continue to see is the area that I think is our real sweet spot in television, which is premium content. It's going to be kind of the haves and have-nots. And we're really focused on premium content. But again, people are watching more television than ever before. We just want to get our fair share of that.

And now to the line of David Joyce from Evercore.

I guess another corollary to the question about the episodes that are -- where you would maximize on Starz. How should we think about the opportunity to be producing at the TV division and putting more content on Starz? Do you have a preference for selling externally versus internally? And how should we think about when we would be seeing the cash flow impacts versus the income statement impacts on that?

I'll let Jimmy respond. It's Jon. I'll let Jimmy respond to the financials. The thing that I have said over and over again, we didn't spend over $4 billion on Starz to not invest in it. And so there's nothing that is a higher priority at our company than creating hit programming for Starz.

On the other side, we are for our talent, as I expressed earlier, we are a full-service global studio. And in television, we probably have currently right now shows on 35 or 40 different platforms. And there are times when a certain show will be better on another platform than it might be in Starz.

The beauty of doing things with Starz is that Kevin and Chris and I can put our heads together and we can actually really plot out the most efficient way to produce a film from a timing perspective, from a partnership perspective. We can make assumptions about monetization that we might not be able to make otherwise. We can make assumptions about how many shows we need to order in order to actually make it a more efficient production. So clearly, for all of the right reasons, pairing our internal resources together is the best and most efficient way to go. But again, it's not the only way.

And David, to your question about the timing of the cash flows and the P&L impacts. To Jon's point, obviously the preferable solution here is to be producing this internal for Starz versus acquisitions. And when you are producing internal the cash flows are more upfront during the production cycle.

And then the P&L side of that comes to the benefits through TV when those are made available to, in this case, to Starz original programming. And then ultimately, Starz is monetizing that through subscriber growth, et cetera. And ultimately, as you know, all of this goes to the library, and the P&L benefit continues on and on well after the cash outlay has been made. And obviously, with the future P&L comes all the future cash flows as well that more than replenishes the cash that we spend upfront.

Yes, again, it's definitely preferable to keep things in the family, if you saw what we did when we launched All Eyez On Me, a film targeted at the African-American audience. We also had Power debuting at the same time. We did a cross-promotion on it. If we want to open up a window that, contractually, we wouldn't be allowed to in order to monetize content on another platform, we can do it if it's an internal project. So again, there are so many reasons why to invest internally that it just makes a whole lot of sense.

And if I could just dial back the free cash flow question to the more near term. With the big results here in this quarter, was there anything unusual in the timing of receipts that drove it or the timing in other quarters where you would be spending? I'm just trying to figure out if there's some sort of seasonality, given the new combination with Starz that we should be thinking about in the free cash flow?

Yes, I appreciate it, David. Look, the free cash flow out of Starz is fairly consistent. It will move a bit based off the timing of investment. But certainly more of the variables come from production cycles in motion picture in particular as well as TV. So you'll remember that in the first quarter of this year, we were negative to the effect of a little over $100 million in free cash flow, then to come roaring back at $347 million positive this quarter.

So some of that is timing that we noted in the first quarter where it was negatively affected by timing. And some of that obviously benefited second quarter, as you're seeing again being timing-related. Second quarter did benefit from some performance as well, because you've seen the strong performance in the second quarter. So that was nice. Not everything was timing, but there's certainly timing involved here. And I think you'll continue to see though, free cash flow in the second half of the year in a positive manner. And quarter to quarter we'll always be impacted by the timing of production schedules, payment of production loans, participation payments and things of that nature.

And now to the line of David Miller from Loop Capital Markets.

Joe, question for you. Nice to hear your voice. Welcome back. I was actually just very curious as to why you came back to Lionsgate, and what enticed you to come back. Then I have a follow-up for Jimmy.

All right. Thanks, David. Nice to hear your voice as well. Look, I think Jon hit it on the head a little bit. I just think that there is -- Lionsgate, from my perspective, is one of the most dynamic content distribution platforms out there. And there's a real opportunity here, which is talent wants a bespoke experience. Talent doesn't just want to be bought out on everything that they do. They want a film that can be released. They want to tell their stories across television. They want to tell their stories in video games. They want a place where they can have the opportunity to tell their stories across different platforms and have a different creative experience.

And when you look at Good Universe, a great deal of our success was built on very deep valuable relationships with top-tier creators. And I think that Lionsgate has the platform and the assets that create a really unique opportunity to bring creators in here and build deep relationships. And so we -- I came here because I think it's a place where we can be a very aggressive there and win.

Okay, excellent. And then Jimmy, if you don't mind me asking, what was the pro forma Media Networks revenue number from last year?

One second, we'll put our hand on it. It's in the trending schedules, but they're here.

Or you could just give me pro forma revenue growth, if you want.

Pro forma revenue -- the pro forma revenue number for the quarter -- second quarter in fiscal '17 was $369 million.

You mean fiscal '16 -- or fiscal '17, right, right, right.

Yes, the prior year.

367, okay.

Right.

And now to the line of Steven Cahall from the Royal Bank of Canada.

Just 2 for me. Maybe first, now that you've had a few quarters with Starz under your belt and some strong sub growth this quarter and a good view as to what's going on, can you give us an expectation as to maybe where you might end up with sub growth for the year?

And then also I think we saw a deal today signed for a new show with Apple. I was wondering where your television studio is in terms of working with some of the emerging players who are, it sounds like, are splashing a lot of money around Hollywood, including Apple and Facebook. So any update on relationships there?

Look, with regard to sub growth on the OTT platform, certainly the Hulu deal is going to help. And although we can't project any numbers, we looked it as a positive trend. And I think that we are learning more about the business as we have more shows that impact the acquisition and the retention. We expect that to be a positive trend, but I can't really give any specific numbers. Jeff? No? Yes? That's it. That's it. What was the second question?

On the new platforms, it's Kevin speaking, we're in business. We're calling on them, we're pitching them. We're in business with all of them. We're excited about YouTube Red in YouTube, where we have 2, both a scripted drama and a nonfiction show coming. We've had multiple shows on Hulu. We have 2 series ongoing at Netflix. We've had a fair amount of development in the TV side with Amazon. Obviously, there's a feature film relationship. We're calling on Facebook quite regularly. We have -- got our first offer from Apple on a piece of development. That's great. We're in there quite regularly, too.

So any new player that really is in the new game of premier programming, premiere scripted programming and nonfiction programming, as Jon mentioned, we are wearing out their welcome mat and getting in there as often as we can.

Just a follow-up, Kevin, are the new players asking for exclusive global rights? Or are you still able to retain some rights in those?

Every single one has a different model. They all vary. There's not a single one that is the same. Sandra Stern spends much of her time crafting new models with these players. And it really just depends. We start with the premise of the right show for the right platform creatively, and then work backwards into engineering the right business deal. And depending on the level of competition, the models are also pretty flexible. Some are pure long-term buyouts of distribution rights, and for the right show, that makes sense. For other shows, it doesn't.

As Jon mentioned, the optionality and new partnership that we have with Starz in the family makes it really attractive to present as much as we can there. If it makes sense, we develop, and they choose to go forward. And if not, we go elsewhere.

Next question, please?

And that comes from the line of Todd Juenger from Sanford Bernstein.

Chris, I'm afraid I'm going to put you back to work again. So I just want to talk a little bit about international opportunity for Starz. Just thinking about where you're sitting now. You've had Starz Play Arabia out for I think at least 2 years. I mean, surely whatever you were hoping to learn there, you've got a lot of learnings under your belt. You've got your OTT service here in the States that you're clearly very excited about, and I'd say you believe is doing well. You seem to be in a really sweet content cycle on a number of original fronts. All begging the question, is the time seems mighty ripe maybe to pursue a lot of these places around the world.

And so I guess boiling that into a question, my question would be what would keep you from doing that? If you could walk us through some of the even sort of investment start-up efforts that it would take, both from a cash and a just a bandwidth perspective, in terms of: setting up operations and launching a service and the subscriber acquisition; and if there's any conflicting syndicated rights that you'd have to cover back, and any other rights that you'd need to add to your own originals to make a full service; and what the sort of cash flow from launch plan you think might look like as you open markets around the world.

Todd, could you repeat the question please? So look it's -- I mean, you obviously have a crystal ball because you're asking about things that we're working on as we speak. International is a terrific opportunity for us, and I think it's one of the great benefits of the combination with Lionsgate. It just gives us more muscle, more firepower, more rights and more ability and a greater ability to do this effectively and efficiently.

Look, there's a few different models we look at. The Starz Play Arabia model has been a great and successful experiment for us. It's a business that's growing its subscriber base, as Jon mentioned. It's on track to become profitable in the next 2 years. It's got a great content offering, a great technology platform. It's extended its position into premium SVOD in the region, UAE, Saudi Arabia, Morocco, Tunisia, Egypt, other places. Right now it's an equity investment, so it falls below the line. It's one of the models that we look toward.

Another model that we look toward is maybe the similar -- a similar relationship to a company like Amazon. Actually, Amazon specifically, where we can do a kind of plug-and-play. And there's also an aspect of the relationship that we have, with the business model that we have with Starz Play Arabia where we partner with a local telecom or a large media company to piggyback on them as well.

All of this are plans that are being made. A little like Operation Overlord in World War II, where we're looking at different territories, targeting which model might work best, seeking out the best partners, trying to do the best plan that we can with regard to investment. And we think that we'll be having more announcements in the near future. This is a priority. And thanks for your question, Todd.

And the intersection, I would add, Todd, the intersection of Lionsgate and Starz means as we think about which territory we should go into, which partner, retail, wholesale, we're also thinking about what rights we retained both from our Lionsgate television business as well as from our theatrical distribution business. And thinking about it in certain key territories whether we want to change our all-rights theatrical distribution to one that accommodates freeing up those pay television rights. So again, this is the beauty of this integration, the consolidation of (technical difficulty).

Fair enough, and if you don't mind me asking a follow-up to my very long question, just bringing Jimmy into this. From a guidance perspective or even from a cash flow perspective, how do you think about the opportunity to launch some of these services relative to targets you put out there and how did that all fit in? Have you accommodated any room for this sort of stuff in your plans?

Look, I think the key, from a cash flow perspective as you heard Chris and Jon mention, we'll likely be partnering in those territories so that certainly mitigates the effect. We've not pushed through changes with regards to our current plan, but obviously continue to evaluate those. And the long term, regardless how it may shape -- affect the ultimate shape of growth period to period, this would obviously be undertaken in the context of expanding our overall growth long-term to create shareholder value.

And now to the line of Jim Goss from Barrington Research.

To the extent that you are expert at super serving demographic niches both in theatrical and Starz, would it make any sense in the OTT service to have it be not just one channel, but have a collection of channels that would be sold as a package that could appeal to multiple demographics and might appeal to a family on that basis?

So we talk about what we call federation model here with the Starz platform, the direct-to-consumer platform. And there are other obviously SVOD businesses that have launched here within Lionsgate. There very likely could be an association there that helps us widen the opportunity with several of these demographics. And we think that as we've established the core of that federation idea, which is the Starz platform, these ideas are just going to become more likely to happen and we think that there will be more opportunity that will come our way. So it's definitely part of a projected strategy.

Okay, and one other topic. You mentioned Atom Tickets earlier on; I know that's one of your investments. Are there any ways you expect to experiment with it? Are there things that we should look at beyond just being an investor in that business?

I think Michael Burns will answer that question.

I think if you look at Amy Miles, she talked about, in our conference call, she talked about the idea of the testing being launched for dynamic ticketing. To us, it always seems sort of crazy that the theatrical business didn't take advantage of that when every other industry is doing that. So we think there's an opportunity there.

But as we've talked about it in all these over-the-top platforms, what Lionsgate is focusing on, particularly obviously the data that Starz is now getting, is getting as close to the consumer as possible. We have great partners at Atom. We're getting more information than we've ever gotten from our theatergoing population. So you'll see more and more of that, and obviously, we have 2 big studio partners in there right now. I would expect more if we have Disney and Fox alongside us and a bunch of exhibition as well. So the closer to the consumer we can get, the better we think we are, and so I think you'll see more and more of that.

And just one follow-up, does that mean that you would also use that information to help drive the programming you create?

I think the answer is the more data you have, the better information. And we can use it in a lot of different ways, including programming.

We have no one else in queue. Please continue.

Okay, great. Thanks, Cary. I just want to give one final closing statement here. Please refer to the Reports and Presentations tab under the corporate section of the company's website for any discussion of certain non-GAAP forward-looking measures discussed on this call. Thanks for everyone for joining us today. Thanks.

Thank you. And ladies and gentlemen, this conference will be available for replay after 4:30 p.m. Pacific time today through midnight, November 16, 2017. You may access the AT&T replay system at any time by dialing 1 (800) 475 6701 and entering the access code of 431170. International participants may dial (320) 365-3844.

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