Starz Entertainment Corp (STRZ) 2022 Q1 法說會逐字稿

Good day, and welcome to the Lionsgate First Quarter 2022 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Nilay Shah. Please go ahead.

Good afternoon. Thank you for joining us for the Lionsgate Fiscal '22 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 the call for questions.

Also joining us on the call today are Vice Chairman, Michael Burns; COO, Brian Goldsmith; Chairman of the TV Group, Kevin Beggs; and Chairman of the Motion Picture Group, Joe Drake. And from STARZ, we have President and CEO, Jeffrey Hirsch; CFO, Scott MacDonald; President of Domestic Networks, Allison Hoffman; and President of International Networks, Superna Kalle.

The matters discussed on this call include forward-looking statements, including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results could differ materially and adversely from those described in the forward-looking statements as a result of various factors.

This includes the risk factors set forth in Lionsgate's most recent annual report on Form 10-K as amended and in our most recent quarterly report on Form 10-Q filed with the SEC. The company undertakes no obligation to publicly release results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.

I'll now turn the call over to Jon.

Thank you, Nilay, and good afternoon, everyone. Thank you for joining us. I'd like to begin with a few highlights from a strong financial quarter and then drill down on each of our businesses.

We acquired the Spyglass Media Group library while investing in Spyglass' go-forward business and entering to a first-look television deal between Spyglass and Lionsgate Television. In the past 6 months, we've actually acquired 3 libraries with a total of nearly 400 titles and more than $2.5 billion of underlying domestic box office as we continue to grow our stockpile of valuable premium content.

We announced the theatrical output agreement with Universal, giving STARZ an exclusive 18-month post-Pay 1 window for Universal's live-action theatrical titles. Coupled with the Lionsgate Pay 1 theatrical output agreement announced with STARZ last quarter, the Universal deal completes our strategy for establishing a strong and reliable pipeline of first-run features for STARZ. Our Television Group is taking advantage of unprecedented demand by producing a record 34 scripted series this year, 15 of them for STARZ, while maintaining our leadership as a top independent third-party supplier of premium scripted content.

We're coming off one of our strongest years with 13 new series orders, all 7 of our pilots picked up to series and all of last year's freshman series renewed for their second season.

In our Motion Picture business, we continue to assemble a strong and diversified film slate for theaters, streamers, multi-platform distribution and STARZ. And despite the pandemic, we've set up a total of 26 films in the past 12 months for delivery in fiscal '23 and fiscal '24.

And as we continue to execute our business plan, we're also executing our strong commitment to greater diversity, equity and inclusiveness in our workforce, talent relationships and content.

Turning to our individual businesses. It was a strong financial quarter for STARZ. But like the rest of the industry, we were impacted by a reduction in at-home viewership and importantly, a light content quarter due to COVID-driven production delays. We continue to grow our base of international subscribers in the quarter but domestic subscribers declined, a temporary drop that we have already reversed since the end of the quarter.

In fact, 2 weeks after the quarter ended, Power Book III: Raising Kanan debuted to the second biggest STARZ original series premiere ever, driving over 800,000 global subscriber gross adds in the first week alone, and an 80% spike in viewership on the app. As a result, we are again growing our domestic over-the-top subscriber base, which is already back to the March quarter's record levels. And with our biggest and strongest STARZ original series slate ever this year with 12 scripted series compared to 7 last year and a building cadence of 5 tentpole series over the next 3 quarters, we continue to expect STARZ global subscriber growth this year to outpace subscriber growth last year.

Our confidence is buttressed by a very strong slate that following Raising Kanan, includes: wrestling drama, Heels, starring Stephen Amell and Alexander Ludwig, getting great early reviews; the second season of the hit series Power Book II: Ghost; the sixth season of fan favorite Outlander; Curtis "50 Cent" Jackson's crime family drama, BMF; the horror comedy Shining Vale, starring Courteney Cox; and the debut of Power Book IV: Force.

These will be followed next season by high-end properties such as the Watergate drama, Gaslit, starring Julia Roberts on Sean Penn; the John Wick Prequel, The Continental; and The Serpent Queen based on the dark legend of Catherine De Medici.

Internationally, subscriber growth continued but was slowed by a light content quarter as well as the global reopening. Here again, we have seen a significant subscriber uptick with the international launch of Raising Kanan, which, along with Ghost, Run The World and The Girlfriend Experience, proves that great programming for our core audiences in the United States attracts a global audience as well.

Combined with Lionsgate feature films and library titles that are driving our theatrical content offering and best-in-class third-party acquisitions of The Great, Gangs of London and the international premier of Dr. Death later this quarter, our best of global SVOD programming continues to set us apart as a home for original adult fiercely premium content complementary to every platform and a compelling value proposition for every bundle.

Turning to Television. We continue to execute our strategy, supplying STARZ with a bumper crop of premium scripted series while delivering high-end programming to an expanding array of new buyers in the quarter. Home Economics debuted on ABC in April with the strongest live-plus-3 retention of any new comedy this season.

The new comedy, Ghost, debuts on CBS in the fall and Welcome to Flatch premieres on Fox mid-season. The growth of the nearly $10 billion AVOD market has created opportunities for us to license existing television series with AVOD revenues up 104% from last year, to sell original new television series, an area where we've always been a first mover and to extend the revenue food chain for shows entering syndication. In fact, AVOD accounted for nearly 2/3 of our recent syndication sales to the hit comedy Weeds.

With a diverse portfolio of television businesses that includes: our collaboration with 3 Arts, one of the world's foremost talent management and production companies, a partnership that has already generated 3 series orders, including the Apple hit, Mythic Quest; BBC Studios with 2 series picked up by the networks; Pilgrim Media Group, with more than 20 unscripted series for leading platform partners; Debmar-Mercury, home to the evergreen properties Wendy Williams and Family Feud, with Nick Cannon launching in the fall and a roster of world-class production partnerships, the growth of our television slate is driven by our A-list talent relationships and future proofed against headwinds in any one part of the business.

Despite the challenge of making films during a pandemic, we continue to fill our pipeline during the quarter, completing production on Borderlands, starting Cate Blanchett, Kevin Hart, Jamie Lee Curtis and Jack Black; the Kelly Fremont Craig directed adaptation of the Judy Blume classic, Are You There God? It's Me, Margaret, produced by Academy Award winner, James L. Brooks; White Bird: A Wonder Story, the follow-up to our breakout hit, Wonder; the faith-based American Underdog: The Kurt Warner Story; Shotgun Weddings starring Jennifer Lopez; and Roland Emmerich's sci-fi epic, Moonfall. And we couldn't be more excited about returning to this set with the incomparable Keanu Reeves as we began shooting John Wick Chapter 4 in June.

We also have 3 big brands that continue to move towards production. The Hunger Games prequel, The Ballad of Songbirds and Snakes; the nostalgic reimagining of the classic Dirty Dancing; and Monopoly, based on the iconic Hasbro game, rounding out a strong and diverse slate that can navigate the twists and turns of today's motion picture landscape by appealing to every platform.

Last month, we announced an agreement to anchor the entertainment vertical for the NFT platform, Autograph, bringing the Hunger Games, Twilight, John Wick, Mad Men and other top properties into the world of digital collectibles. It's the latest in a series of franchise extensions that provides us with a high-margin annuity from branded theme parks, exhibitions and escape rooms, live to take global concert tours and adaptations of iconic Lionsgate film and television properties headed for the Broadway stage.

In closing, if the media consolidation of the past year has taught us anything, it's that the global appetite for content is greater than ever. And to paraphrase Keanu Reeves in John Wick 3, we have that content, lots of content in our world-class library, our deep film and television pipelines and throughout our global streaming platform at STARZ. We live right in the sweet spot of global consumer demand: bold, original, high-end premium scripted television and film.

And with our talented and entrepreneurial employees working across every part of our company every single day to identify ways to create, own and monetize this content, we are well positioned to create outsized value for our partners, consumers and shareholders.

Thank you. Now I'll turn things over to Jimmy.

Thanks, John, and good afternoon, everyone. I'll briefly discuss our fiscal first quarter financial results and update you on our balance sheet. Fiscal first quarter adjusted OIBDA was $120 million, with total revenue coming in at $901 million, driven by new TV series deliveries and continued demand for library content.

Reported fully diluted earnings per share was a loss of $0.20 a share, and fully diluted adjusted earnings per share came in at $0.18 a share. Adjusted free cash flow for the quarter was $192 million use of cash.

Now let me briefly discuss the fiscal first quarter performance of the underlying segments compared to the prior year quarter. You can follow along in our trending schedules that have been posted to our website and show greater detail around our Global Media Network subscribers.

Media Networks' quarterly revenue was up 4% to $382 million, and segment profit of $88 million was up 23%, driven by lighter content spend on a lower quarterly cadence of programming. We ended the quarter with 28.9 million total global subscribers. Global linear subscribers declined to 12.2 million, while total Global Media Networks OTT subscribers remained flat sequentially at 16.7 million, representing year-over-year growth of 58%.

As Jon noted, given the success we saw in the early launch numbers of Raising Kanan, we are again growing our domestic OTT subscriber base, which is already back to the record levels reported last quarter. Furthermore, we continue to believe that we will add more subscribers in fiscal '22 relative to fiscal '21 in both our domestic and international markets.

Turning to Motion Pictures. Revenue was up 4% to $291 million, while segment profit of $44 million reflects higher P&A spend from the theatrical releases of Spiral and Hitman's Wife's Bodyguard versus the prior year quarter, which had no theatrical releases due to theater closures. This was partially offset by continuing strength in library revenue.

And finally, Television revenue nearly doubled to $386 million, driven by new series deliveries, including Raising Kanan, Blindspotting and Heels, while segment profit came in at $3 million reflecting the delivery of freshman series and a tough comp against the prior year quarter, which included licensing of Mad Men.

Our total library revenue across our Motion Picture and TV businesses was $740 million on a trailing 12-month basis, which compares to $711 million reported this time last year and demonstrates the resiliency of our library in all economic cycles.

On the balance sheet, we ended the quarter with leverage of 4.7x or 3.6x, excluding our investment in STARZPLAY International, which, as expected, reflects the timing of P&A spend on trailing 12 months adjusted OIBDA.

We continue to retain significant liquidity and with $262 million of cash on hand and a $1.5 billion of undrawn revolver. We remain committed to strengthening our balance sheet and paying down debt.

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

Thanks, Jimmy. Operator, can you open up the call for Q&A.

(Operator Instructions) And the first question will be from Kutgun Maral with RBC Capital Markets.

I wanted to ask about Television Production. It's great to see the very strong results. I realize some of that includes sales to STARZ, but still, I think it may have actually been a record for quarterly domestic TV revenue. You called out 13 new series orders, 7 pilots being picked up and all the freshman series being renewed. It just seems like a very healthy pipeline that should not only help fiscal 2022, but perhaps 2023 and beyond.

So just 2 questions. First, are we approaching an inflection point for that business where there's maybe more visibility into a step function increase in revenue and maybe eventually profits? Or is this more a function of post-COVID catch-up that will eventually normalize?

And second, the traction you called out with AVOD is very interesting. Just any more color you could provide on the opportunity you see ahead there would be very helpful.

Yes. I'll let Kevin answer that question.

Yes, this is Kevin speaking. Just in reverse order, we're seeing in this AVOD space it's an exciting time that's reminiscent of really the emergence of originals in the basic programming -- basic cable space when we were doing Mad Men and shows like that. That -- those revenues and those ad dollars are moving and they're moving into AVOD and Roku is getting into originals, IMDb TV is well into originals, Tubi we're in conversations with about various shows. So I see this as a trend. I think there will be more. And within each of these verticals, they will dig into more originals as a point of differentiation from all the others.

They're not as focused on exclusivity as SVOD players. So they're often sharing similar windows and other products. So what makes them different will be the originals, which has always been the secret sauce in the cable space before, which they're inheriting.

So on the inflection point, I can just say that this surplus of buyers moving into the space, needing great, high-quality premium content is really beneficial to us as a studio supplier. There's no greater priority than our partnership with STARZ. We're thrilled that 15 of that roster are together with them in either sole production or coproduction. But things that aren't exactly right for them can travel elsewhere. We have 5 shows with HBO Max, we have a big project with Showtime in the First Lady and are getting -- jumping into business with Peacock and have had a long history with Hulu to -- on Apple. They're all digging in to do more, and that bodes well for us as an independent that can work everywhere and have a really finely honed creative machine churning out great development with terrific producer and pod deals and, frankly, great taste.

Jimmy, maybe take a shot at sort of the trajectory or the CAGR for the TV business over the next couple of years.

Yes, without giving specific numbers, I mean, I think you're right in terms of an inflection point in terms of coming out of this with the development pipeline flowing through and getting deeper and deeper beyond those freshman series that you just noted, and going in those back seasons where the margins are better, and you're going to really see some nice continuation is what we foresee relative to segment profit going into -- from '22, '23, '24.

Next question comes from Alan Gould with Loop Capital.

I've got 2 questions here. One for Jimmy and if Joe is on the line, one for Joe.

Jimmy, can you just refresh our memory? How much are you planning on spending on content production this year? And can you break that down a little bit between the divisions.

And the question for Joe is the box office seems to be having a real tough time. I think Barry Diller was just quoted saying we -- where there's 90% too many -- 90% of the screens are going to close down. What are your thoughts on box office and alternative ways of releasing your films?

Yes, Alan, I'll take the first one there. In terms of content spend, we had $1.6 billion of content spend last year. And what we've said on the previous calls is we're expecting 50% kind of increases from there. So call it in the mid-2s, $2.5 billion-ish. And I would just say that is on a kind of a net basis, meaning after we've eliminated the intercompany payments coming from STARZ to TV.

So if you really gross it up, look at it more comparable to maybe other companies, you're really talking about closer or tipping over $3 billion. But for us, it's a pretty cash efficient spend as we have that intercompany elements, we could put more on the screen with less cash.

And you saw in the quarter, we were more heavily weighted in Q1 because we had, as you'll see in the trending schedules, over $575 million of content spend in the first quarter and that was up about $400 million versus the prior year quarter. So ramping into that spend early. It will continue the cadence into the second quarter. And then again, we'll top out at somewhere around $2.5 billion, $3 billion on a gross basis. Joe?

Yes. Alan, thank you for the question. Well, first, I would say I don't totally agree with Mr. Diller. We actually have found this period of late -- this period of change really more as a place to look for opportunity than to see challenges. There's certainly some challenges with the marketplace. But when you look at the theatrical market, even though it's not all the way back, certainly brands are working. Big brands are working. There's an audience that want to come back.

I think we've got a ways before we can talk about what normalized box office is with the variants coming into the market and such. But I was really pleased to see the way certain brands played in the market. Equally, we've certainly spent a lot of energy and done a lot of work in the last year working with different distribution strategies, bespoke distribution strategies for each film.

Great examples of this are Hitman's Bodyguard (sic) [Hitman's Wife's Bodyguard] and Spiral, both of which we were able to reach our greenlight ultimates, just with slightly different patterns, different spends, different approaches to the market, when we spend media, where we put our media. And so I believe that the market is going to come back. What full percentage of theaters will be there when it's over or when it's fully back? I think there'll be a strong, robust platform for us to monetize our movies in the theatrical market. And at the same time, we have certainly explored and found some other really interesting ways to monetize the value of our content.

And I think that I know you hear this theme over and over and over, which is that the value of content is just getting greater. I think we're seeing it everywhere in the marketplace. It's really just a function of being nimble enough, and Lionsgate's in a very unique position in that regard for us to take advantage of all the opportunities out there, including a robust theatrical marketplace as it comes back.

And Joe, just to follow up. Speaking of brands, when is the next John Wick film again? And when is the prequel of Hunger Games?

I mentioned, we're deep in production super, super, super excited. It is definitely going to be bigger and better. In terms of when we're going to date the movie, we're having those conversations now, not quite ready to put our flag in the ground, but you'll be hearing something soon. As soon as we're ready, we will let you know.

But that is in production as we speak. And Chad and Keanu are doing incredible work. On the Hunger Games, our plan is to be in production in the first half of next year and looking to -- I'd have to actually go back and look and see whether it's late '23 or early '24 fiscal when we're going to -- when we intend -- when we're currently targeting to put that movie in the market, but both are moving along really, really well.

I would say, again, Borderlands is looking great. Super excited to see that. And Dirty Dancing, I think, is going to be special. So a lot of brands coming back into the marketplace for us.

The next question will come from Steven Cahall with Wells Fargo.

Maybe a couple for Jeff. So on STARZ, could you just unpack that subscriber forecast a little bit about adding more subscribers this year than last? I know you have a big content pipeline coming in the rest of the fiscal year. It just seems like a lot of what we've seen in streaming is that the pandemic might have provided some pull forward. So just curious what gives you the confidence that -- now that we're coming out of the pandemic, you'll be able to have a strong year for net adds as you did last year.

And then related on STARZ International, how should we just think about segment profit for that segment this year? I think maybe you've talked about it on a profitability basis, looking similar to last year? I just didn't know if there was any update to that outlook.

Great. As Jon and Jimmy talked in the remarks, it's very light content quarter for us. We premiered 2 half-hour comedies that were great shows that I think that, coupled with the world opening back up, it was not our strongest quarter as we had guided on the last call. But as they said also in their prepared remarks, we're very confident that this year will be stronger than last year.

We've gone from 7 originals to 12 originals. We have 5 tentpoles in the next 3 quarters that drive large, large growth of subscriber acquisition. We also saw our churn at a historic low in this quarter. So those 2 things coupled together give us great confidence that we will accelerate growth this year.

Kanan obviously premiered, as Jon said in his prepared remarks, to huge numbers, huge viewership. And simply put, if Kanan was 6 weeks earlier, we will be having a different sequential conversation than we're having right now.

And on the segment profit portion of things, Steven, yes, you're right, plus or minus in line with the prior year investment. And that's really based off the timing of content, et cetera. We like what we're doing there. We like the market share we're capturing. We're leaning into it.

(Operator Instructions) The next question is from Thomas Yeh from Morgan Stanley.

Two quick ones for Jeff. On STARZ ARPU, the domestic ARPU appeared to be relatively stable sequentially with last quarter, which is a little lower than the historical trend. I think you had cited some heavier promotional activity happening then. Did that continue into the quarter? And then a related kind of question, if you can give us an update on the unit economics across linear and U.S. OTT and whether or not the mix of direct versus retail partners kind of impacts ARPU going forward, but the outlook is there, that would be helpful.

So on the ARPU basis for the quarter sequentially, we've said that ARPU will fluctuate around $5.75 to $6.10, depending on when subs come in, in the quarter and some of the promotional parts of the business. Again, churn was really low in the quarter, a historic low, and so that kind of stabilized it a little bit.

But we didn't have as much coming in the front door. So it was actually pretty flat sequentially. When you look at ARPU linear versus domestic, I'll remind everybody that over the last couple of years, we've moved most of our linear deals to be a la carte deals. So over 82% of our linear deals are a la carte. And so over time, that a la carte ARPU has actually started to collide with the OTT ARPU. Because, in essence, it's a rev share deal. And so you actually see those numbers coming together pretty quickly.

Long term, we think that, again, like I said, somewhere between $5.80 and $6.10 for the domestic business.

Actually this concludes the question-and-answer session. So I'd like to turn the conference back over to Nilay Shah for any closing remarks.

Thanks, everyone. Please refer to the Press Releases and Events tab under the Investor Relations section of the company's website for a discussion of certain non-GAAP forward-looking measures discussed on this call. Thank you very much.

And thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.