Lionsgate Studios Corp. (LGFA) Earnings Call Transcript & Summary

All right. We're going to get started. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website. My name is Ben Swinburne, Morgan Stanley's media analyst. We're excited to welcome back to the conference this year Lions Gate. And to my left is Jimmy Barge, the CFO for Lions Gate. He's playing a key role at the company. I think you've been CFO since 2013, I believe?

Right.

Thank you for being here.

Absolutely. No, my pleasure. Good to be here, Ben.

So obviously, a lot going on in the media world. I wanted to ask you, you guys reported earnings, I don't know, maybe a month ago or so -- 3 weeks ago. What, from your perspective, Jimmy, were the key highlights for 2019? And what are your priorities as you guys look out over the rest of this year?

Well, for sure. And we're a calendar year March-ending, so I would really say our fiscal '20, so we still have a quarter to go.

A couple of weeks left.

Exactly, absolutely. And things are going well. I would say, when you look at our fiscal '20, if you will, or trailing 12 months, really, we're on pace, as we've said, to exceed 6 million over-the-top subscribers domestically, which is I think really, really strong. We have, likewise, launched in approximately 50 countries our international offering of STARZ PLAY, which is great. And our Motion Picture unit has come roaring back with hits like Knives Out and John Wick 3. So it's really been nice to see the strength there. And our TV production business, while not necessarily delivering that kind of eye-popping growth as our Media Networks, as our Motion Picture business, has been incredibly strong in developing our TV production pipeline, which should serve us very well in the future.

I want to ask you about the rest of this year and into next year by business, but maybe we could talk a little bit about your plans to try to unlock some value in the stock and, in particular, about raising capital, which is something you guys have talked about now for, I think, almost a year.

Sure. Yes, it's been maybe 9 months or so. But yes, for sure, we have. And as I've said on the last 2 earnings calls in particular, we will be patient and we have the luxury of being patient. Look, we'd like to do 2 things, as we pointed out, with the capital raise, not 1, 2, and really need to accomplish both of those things. One, we're going to delever naturally, okay? We're generating positive cash flow after fully investing in our business and net debt will decline. And the leverage will ultimately be a factor of what your trailing 12 months adjusted OIBDA is, which we've talked about as well, okay? We can be very patient in what we do. So we would like to accelerate the natural deleveraging, if you will. But more importantly or as importantly, we want to put a price point on a particular asset, so in the STARZ family, the STARZ in total or particularly STARZ International. And we'll do that. We can accomplish that, and we can be very patient at accomplishing that.

Okay. So no real sense of urgency or rush per se?

Well, I wouldn't put a timetable on it. Look, we like to move ahead quickly with everything, but I think it's important to understand that there is no burning platform here. We have no towers of debt due until 2023. We have $1.5 billion of unused revolver. The list goes on. So we can fully fund our businesses as we're going to do. On the other hand, the opportunity to put a price point on some very undervalued assets, at the same time accelerate deleveraging, could be very appealing.

Sure. So let's talk about the growth drivers upcoming here as we look to fiscal '21. Maybe we can start with STARZ PLAY International, since we were just talking about that. What are the things -- so our expectation is that the losses of that business are going to moderate in '21 versus '20. But operationally, what are -- what's Jeff and the team and the Lions Gate executive team thinking about putting in place to help drive the top line of that business and start to scale the cost structure?

Now look, we've got a great business opportunity there and a great business executive team. Jeff Hirsch, Superna Kalle, really a great team. And we've rolled out in almost 50 countries worldwide, which we said we would do and we've ramped up. We've got multiple partners. Apple has been a great partner. Amazon has been a fantastic partner. And we've got local partners as well, and the ability to go direct-to-consumer because none of those are exclusive arrangements. So we've been very active in rolling that out, acquiring content, doing the right things, gaining subscribers. And still in the early stages, but we like what we're seeing.

Great. And in the U.S., you guys have had -- I think, everyone is pretty well aware of a fairly public release in the press with Comcast sort of renewal process that's now finished. So how should we and investors be thinking about the Comcast relationship and overall the transition in the domestic STARZ business we're going to see over the next kind of 1 to 2 years?

Sure. Look, it's nice to have that done. There was certainly a lot of press around that. We've got a good relationship with Comcast. Look, this is just about business, right? And business models are changing, consumer habits are changing. We've migrated long-term contracts. We're very happy to have, and I think they're very happy to have it. And it transitions from a fixed model to an à la carte model, which is really where the consumer is going. So from our business perspective, that's always where we've been headed. And then, as you know, our ARPU as well as our margins are better in that business and particularly over-the-top. But as we move towards an à la carte, where the consumer is making the choice, it's a better world. And there's going to be some pain in some of that transition, and we're glad to have reached an arrangement with them. There's plenty of incentives to transition that into the à la carte world. And we're very happy to have that in front of us.

So at the end of this transition, in an à la carte relationship, you feel better about that structure?

Absolutely. I think -- all the way around. And I would say -- not speaking for our distributors. But I think, generally speaking, our distributors favor that as well at the end of the day, right? Because what you're doing is you're aligning the consumer consumption with the trends and where the consumer wants to go, right? And the nice thing about our strategy is, and most people's strategy, right, you have to align it with the consumer. The nice thing about our business model is our business model is fully aligned and benefited by the consumer trend. So the more and more the consumer is fashioned into buying either in an à la carte world or otherwise or consuming directly from us and in an over-the-top world, where you know we have better margins and better ARPU and data, which is very helpful, the better we are. So we feel like it's moving in the direction where we wanted to go anyway. And it's a matter of transitioning there, and we're very glad we were able to work out an amicable arrangement for transitioning that in a very managed way.

Got it. And then the last one was, I wanted to ask you about the TV pipeline for your television business in '21, which I think looks -- I think you got a bunch of titles you can bring to market. What do you have? And what's the state of the market -- syndication market these days?

Well, Kevin and his team are killing it there in terms of stacking up the development pipeline, projects for STARZ. We've got at least 3 spin-offs of Power. We've got the Continental that's in play. All of these coming through TV production, ultimately slated for STARZ, the STARZ Originals. But also with third parties, we have Mythic Quest out now, which is doing great. We have Zoey's Extraordinary Playlist, which is doing extremely well. So we're very excited about that and positions us very well for fiscal '21, where we have some ancillary rights, speaking of syndication, rights with Mad Men and Weeds coming to market. And Jim Packer and his team will execute nicely there, and there's some great value there, which just underpins the whole value aspect of our library and our content.

Yes. It's interesting we just were interviewing Netflix before this and then we were talking about their transition to original programming. But then you also see these big deals like Friends and The Office. Where do you see the sort of syndication demand in the marketplace domestically or even globally today? Is that healthy in your view? You think it's growing?

Well, it is healthy. And the SVODs are very competitive in that context and aggressive. And library is an essential element of retaining subscribers. And likewise, when you're talking about the kind of content like a Mad Men or other people's content, The Office, Seinfeld and others, Friends you mentioned, can be very important for gaining subscribers as well. So very high-profile program...

You don't see the shift towards originals dampening demand in that area at all?

No, no.

Okay. And then I wanted to ask you a bit, just before we get into some of the businesses in more detail, about sort of the M&A capital allocation philosophy. We talked about your patient approach to raising capital at the STARZ International level. But broadly speaking, what are you doing with your free cash flow? And how might acquisitions or industry consolidation play into your philosophy?

Well, deleveraging, deleveraging, deleverage. But always, we evaluate the opportunities out there. We're obviously looking for strategic fits. Everything would need to be accretive. We're not the kind of company going out there and buying revenue streams without earnings and cash flow, right? So we're obviously mindful of our share price at the moment as well as our leverage. So we'll always keep that in mind. So right now, dollars are earmarked for, first, investing fully in our core businesses, which we're doing, including our international rollout and using the remaining cash flow to delever.

Any noncore assets or divestitures that you guys are considering?

Well, look, we've done that. I mean as you know, 3 years ago in a much larger way, EPIX, we sold the EPIX asset, which is a program or a channel network that we helped start, and we exited that. It was no longer strategic for us or as strategic after the acquisition of STARZ. So there's not a significantly -- particularly large asset of that magnitude right now for -- that would be noncore. But we've got a strong collection of assets we'll evaluate from time to time. But I don't see anything imminent.

Got it. Let's shift gears back to STARZ. You put on your Jeff Hirsch hat for a minute.

It's a big hat.

Exactly. You've laid out guidance. You talked about the 6 million OTT subs, and then also longer term, 15 million to 25 million on the international side by '25. But just high level, Jimmy, where does STARZ fit into the overall scripted drama streaming landscape? What are you guys trying to do from a brand and content perspective to differentiate that?

No. Great question. And a lot of times, people are mistaken thinking that we're competing with Netflix and Disney+. We really don't compete there. We see ourselves as a companion product, right? Our business model works fantastically off of 25 million domestic subs, plus or minus, right? And then the international opportunity that you referenced is really huge. And so we target the audiences that we think are underserved, and particularly women, urban, African-American, Latin-x and premium scripted programming without advertising, which is really what the consumer wants. And it's not what everybody in the house wants, okay, which is why we're a nice companion product to Disney+ or Netflix or others. And we think we're uniquely positioned in that context. And there's significant upside relative to a domestic 25 million-ish subscriber base. And again, the international opportunity is big.

Right. So domestically, you've been in the OTT game now for a little while. Maybe you could catch us up on your various distribution partners, on the wholesale OTT side, like Amazon relative to direct-to-consumer. How should we think about the relative attractiveness of those channels for you guys?

Well, it's great. I mean as you know, higher margin, higher ARPU for us. Certainly, if you download our app directly, we keep the -- all of the $8.99 on the relationship. It makes future subscriber acquisition costs very efficient, reduces that. It likewise gives us this kind of data as to what's being consumed and helps us in many, many ways. It's a rev share model with Amazon. They're great partners, and they're doing well. It's certainly the largest distribution platform behind those, call it, over -- or what we look to -- at the end of the year to nicely exceed 6 million OTT domestic subscribers. So -- and what I would add is when we acquired STARZ nearly 3 years ago, right, we were just starting. They were just starting the OTT business. So we've effectively gone from 0 to over 6 million, okay, as you look as we move in towards the end of our fiscal '20. So this is heading a great growth. We're at 8.6 million OTT subs worldwide globally as we mentioned on the last call, and we transitioned -- continue to transition our business there, which is again higher margins, higher ARPU and directionally where we wanted to go and where we will continue to go.

And how does the STARZ product internationally compared to what we're used to seeing here in terms of both content and distribution?

Sure. You'd recognize a lot of the original content. Sometimes, we've licensed early on that international, original domestic content to other players. So -- but more and more, you'll see that aligned with the domestic original programming. We'll supplement that with some additional programming as needed in the country to round out the platform, and we utilize library. So if you look at the domestic business, you think of it as, okay, original content, think of that as 1/3, think of 1/3 being output deals, okay, so film, our film deal domestically is with Sony, and about 1/3 library. It's a little bit more weighted original content for sure, but that's just a good way to think about it. And you go internationally, the output deal with Sony is a domestic deal. So naturally, you're going to be more weighted towards original programming and library on an international basis. And then that will grow over time, as I mentioned, as we continue to channel the TV development pipeline and Lions Gate TV production in Kevin's team as it flows into STARZ Originals domestically and into the international territory.

Got it. And then on the distribution side, I assume direct is direct. But how would you compare, if you're willing to compare, Apple and Amazon as a partner? If you look at the economics or the effectiveness of the platform relative to -- I know different markets have different characteristics. But to the extent you can share with us, it'd be interesting.

Well, they're both capital As. They're great partners. And Amazon has been at this longer, and I would say has just been a fantastic partner. And Apple is a great partner as well. I think you'll see more of the marketing approach and the build-out of Apple, which started later, and you'll see that coming more full force in the future. So both great partners, both huge scale and great opportunity. And then we supplement that with local distributors as well in these markets, which has been going well.

And how does the churn compare when you look at an Amazon wholesale sub versus maybe one of your direct subs? Because I know there's a rev share, but I would imagine Amazon is pretty good at managing churn, I believe.

Yes. They are good, and we're all good about that. Look, as you know, in the direct-to-consumer side, in OTT, right, the churn's higher than it is because it's easier to click on, it's easier to click off. I remind people, if you're a consumer that clicks in twice a year, you've just doubled my churn. But it's a wonderful thing. It's a hell a lot better than just coming in once, okay? And so we know how to find the audience, right? They'll come back for the programming and we'll continue to manage it. That's for us to manage in the long term, and we just get better and better at that. And our churn continues to come down. And as we have more data, there's more ways to fill the holes when you tune in to see Outlander and you stay because you see the next program is something you're interested in. And then we build our programming that way, so that before it's over, we'd have you 12 months a year.

Got you. Let me ask you, Jimmy, about -- if you think about the -- now that Comcast is behind you, what's your visibility on revenue overall for STARZ? And how do you think about content investment now behind that business moving forward?

Yes. Well, it's good. Visibility is good. There's still the need to transition, right, in the case with Comcast from fixed to à la carte. Most of our major distributors are in that à la carte world or transitioning that way, for the most part, right? There's still a little additional transition, but more smaller distributors of -- in terms of number of subs, et cetera. So it's moving in the direction of the consumer, and so we'll continue to manage that. And at the same time, we'll continue to grow, and we saw 75% growth in OTT last year, okay? So great growth and that will continue. And so we'll just continue to manage through that. So good visibility. From a programming standpoint, we like what's coming through the development pipeline and we continue to -- again, like I mentioned, Power has finished its last season. It still has great ancillary value and still has great value in the context of the spin-off and things we're working on that have been announced. So really feel good about programming, and Outlander is going strong.

I think you guys have said you'll be at about, what, 80% of your subscriber base on STARZ will be à la carte, I think, by the end of fiscal '21?

Yes. What's interesting, if you go back, speaking of the -- going from fixed to à la carte transition in the MVPD world or the traditional side of the house, we were about 40% -- 60% fixed, 40% à la carte at the time of the STARZ merger. And that today is just almost a flip of that, right? 40% fixed, 60% variable, I think -- or à la carte. I think by the time we get to the end of fiscal '21, may well be over 80% or close to 80% at that time à la carte.

Got it. And at least in theory then, that creates a little more visibility into the business. You don't have to worry about these fixed deals.

Well, it does. I think it makes it easier for us and our distributors, right? When we're both fully aligned with the consumer and the consumer habits, okay, and their viewing patterns, then yes, it's no longer a dispute as to who's watching and who's not. I mean we all have an idea who's watching. There's Nielsen ratings. We know the DMA. So there's a way to figure that out. But it's not an absolute reporting relationship where we know exactly how many subs, and we're being paid per sub. So this is just a nice way economically for both our business models collectively, not talking about any one distributor, but for all of our distributors. And I also think it plays to our favor long term, and everybody's favor to the long term when you align the billing arrangements and the business models around the consumer. And that's where we are. And for us, it happens to be higher margin and better ARPU.

Why don't we shift gears to the movie business, which we haven't talked about yet.

Absolutely.

You are in the movie business.

Would love to talk about it.

Yes. And we'll talk about Knives Out. But you guys made a management change on -- maybe 18 months, something in that zone?

Yes. Joe Drake and his team.

Right. Joe and the team. I guess Joe came back to Lions Gate. But talk about the strategy that's been implemented there and your expectations for that business as you look out over the next couple of years?

Yes. Well, Joe and his team have done a great job. Nathan Kahane, Helen Lee. And then on the distribution side, the team that was already in place, Ron Schwartz and then Jim Packer on the worldwide ancillary sales. So the team has been doing great. '19 was -- or rather the '19 slate going into fiscal '20. Fiscal '20 has done very well with John Wick 3 early in the season. We still have 1 film coming out a few weeks from now. I still believe it's tracking very well. And I like how we stand on that. They've put together a great portfolio of films because that's the way we approach it. And it's a very good year. We're going to have good carryover going into fiscal '21, and '22 looks even better.

You guys have talked, I believe, about a Knives Out sequel? Spin-off?

That's right. That's right. Well, in fact, the cast, I mean, Daniel Craig and producer and writer, Rian Johnson, have both indicated that they'd love to have a sequel. Obviously, we'd love to have a sequel because it did over -- it's about $165 million in domestic box right now, over $300 million worldwide box office. So absolutely, the kind of dynamic that you would like to have. And it has real franchise capabilities, this kind of story you can continue to tell and in different variations. So for sure, yes, look for that in the future. And I would just add -- I mean along with like John Wick, Angel Has Fallen, Now You See Me, Knives Out is a franchise opportunity that originated internally and working with others externally without an underlying piece of IP. So you can create those kind of franchise opportunities. And we're always looking for that, not in every film, but certainly across the portfolio of films. We're looking for those that would have the ability, they all, I know, will get there, but the ability to be a repeat in a franchise world. And we've got quite a few now.

And when we think about the Motion Picture segment outlook, I think '21 is a bit of a lighter slate. And then '22, you may have bigger stuff?

That's right. Yes, on the earnings call, we talked about that just year-over-year in the Motion Picture Group, you would expect that the EBITDA performance would be lower. And the reason for that is because John Wick was very front-end loaded, right? It's a May release. So not only did you get through theatrical, but you're into your ancillary windows, et cetera, and you're fully recouped on your P&A. And when we move into fiscal '20, we've got a very good slate, but we have -- it's more back-end loaded. So we have 4 or 5 releases, including, as you know, we expense all the marketing and the P&A cost in that quarter. So you wouldn't have fully recouped that. But then again, that will put the wind at your back going into fiscal '20 -- or excuse me, going in fiscal '22.

Yes. And what's the latest on The Hunger Games prequel?

Scholastic is releasing the book in May, and there's got to be a film in there. So I'm not going to make any news here today other than the fact that, look, obviously, it's been a great franchise for us, and we look forward to the opportunity to do more there.

Okay. And then maybe just wrapping up, and then we'll see if the audience has any questions. I want to ask you on the television side. So much happening, disruption really on the traditional television business. What are the demand dynamics for your TV business when you look across broadcast, cable and streaming? Sort of who's pulling back and who's leaning in?

It's high. The demand's high. Kevin and Sandra and their team are out there on all fronts, taking more calls than ever. The SVODs are very aggressive, obviously. It's also we have one -- also a nice new and major customer over the last several years in the context of STARZ. So Kevin and Sandra and her team is working with Jeff and Superna side by side in the context of what we're producing for STARZ. But we continue to be platform-agnostic, if you will, and selling to third parties. There's fewer and fewer people doing that, which is great. That means more demand. We're seeing more demand. And again, we got a very strong development pipeline to fill not only what STARZ needs are, but the needs for others. And one thing everybody needs in this competitive world is content. And so we're in a good position there.

But what about on the supply side? I mean the competition for talent, showrunners, ideas, IT has got to be through the roof. Is it getting harder to source?

You've got to be smarter about it. I mean you saw -- we did an acquisition, a merger, if you will, with 3 Arts, which is a talent management company, putting us closer to talent. You've seen us announce a lot of talent deals with Courtney Kemp, 50 Cent, others not only in the television world, but on the film side. I mentioned the Erwin Brothers and others. So yes, we're definitely closer to the talent. The thing I would say is, remember, the way both our film and our TV business works, we don't greenlight -- we know what our costs are when we greenlight a production. You may not know everything, but you're pretty close on that, right? So we're not building cars and putting them on the showroom platform hoping they'll sell through. We've got our anchor tenant, if you will, committed to production fees early on in that process before we greenlight something or certainly, certainly shortly thereafter. So a lot of that cost you can either pass it through and on and generate the appropriate profit or you can't. If you can't, it's not going to ever get greenlit.

Yes. Yes. Okay. Let's see if we have any questions from the audience. If you could wait for a microphone, that would be helpful. Yes, we got one in the front row, please.

I just had a question around your largest shareholder, MHR Funds. Like, what's their expectations are? And how they think about you being a public company? And if there's any -- in this world that we live in, there's a lot of private capital. So why you remain public?

Well, look, if you're trading at a level where you think that the sum of the parts is greater than where you're currently trading, certainly, that kind of question is the type that might come to mind. Look, I would just say, MHR -- great -- they're great shareholders. We're in it to create shareholder value every day for our shareholders. And I think over time, you'll see that some of the parts, that valuation come through and be reflected in our share price. But again, I wouldn't comment in any case. And secondly, other than the fact, they're really good shareholders, and we have a lot of good shareholders and we're going to drive value from here.

Yes, in the back.

How do you think about the valuation for your content library in terms of dollar value? And in terms of also, where you think that will be going forward today versus 3 or 5 years?

Well, I think the value of content in our library, in particular, is going up. And it's a very rare commodity. And I think that's a value that's often overlooked. So back to the point about some of the parts and how our most significant shareholders look at that, very familiar with what the value would be on some of the parts basis, and the library is particularly one of those. There are 17,000 titles in the library. It generates $500 million-ish plus of revenue every year with a high percentage of margin, both cash and adjusted OIBDA. So incredible value. And sitting along side by side with that are very efficient and risk-reduced production companies in the context of TV and motion picture, right, that's constantly refreshing that library. So I look at it -- the value of a library is not a discounted cash flows, as a lot of people would suggest that. To me, the value of that library is not only the discounted cash flows, but what can you do to generate additional cash flows if you own that library, okay? And in many cases, we're doing that by driving subscriber growth through STARZ and particularly through this international rollout. But I think, in particular, the value of the library is substantial and going up in value.

Okay. Look, we're all out of time. Thank you, everybody. Jimmy, thanks for being here.

Great. Ben, thank you.

Appreciate it.

Thanks, everybody.