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

Okay. Great. Good morning, everyone. I'm Bryan Kraft. I'm the media analyst at Deutsche Bank. And I'm here on the phone with Jeff Hirsch, the President and CEO of Starz; and James Marsh, the Head of Investor Relations at Lionsgate. So thanks, guys, for joining us this morning. We'd, obviously, rather be doing this live right now at the conference, but we're doing it by phone instead. So welcome, everyone.

Jeff, why don't we just start off at a high level? The past year has been an eventful one for Starz. What are some of the key priorities that you're focused on in fiscal '21?

Yes, I think there's 3 key priorities. First and foremost is to continue to put great content on the air that is premium content focused on women. We believe that we are really the only premium service focused on this audience, and we continue to see great growth with shows that really focus on this audience. So our programming mandate now is to kind of fill the slate with content that really serves that audience in a big way. And so our -- we're really focused on finding shows, putting great pieces of content on the air with great talent, great writers, great directors, great showrunners, great actors and actresses and really just kind of leaning into this strategy in a big way. I think this year's slate is probably the best slate we've had to date in terms of executing, I think, that strategy. And the development pipeline is really rich and robust with shows around that, that fit not just the domestic arena, but the global arena as well. And then that leads me to our 2 other key priorities, which is to continue to drive subscriber growth domestically and execute our subscriber plan internationally. And those 3 things are what we're really focused -- laser-focused on and executing on.

Great. A lot of investors ask questions about how does a product like Starz, on an OTT basis, fit into the crowded landscape of SVOD services, given the number of services out there now and some of the launches that are coming up. Now how do you -- how are you positioned relative to others? What differentiates your strategy in that sort of crowded landscape?

It's a great question. I think it's something that everybody is wrestling with today, and you can see it in the media. Starz has always been a premium service, very tailored, bespoke content, very adult, very authentic. We don't serve kids. We don't have ads. We don't have news. We don't have daily shows, and we're laser-focused on staying into that lane. If you look at what's going on in the world today with the Amazons, the Apples, the Hulus, the potential HBO Maxes, the Peacocks, now Showtime broadening their point of view, I think everybody is really trying to be that, what I'm calling now, basic streaming or that cable replacement. And so they're trying to be that first SVOD in the home. We're not trying to compete with those guys. We've always been built and positioned as this second-tier or this premium on top of broad-based television. And we actually think, as more and more people actually start to become broader-based, family-friendly fare, our kind of point of view of premium content for women is a very complementary service to all of those services. As I'd like to say, if we're the #2, 3 or 4 SVOD service in the home around the world, that's a great place for Starz to live. And so we're actually going the other way, which is we're leaning into this premium nature of very bespoke, tailored adult content. And we think we'll actually be one of the only few that are doing it long term. When you talk to producers, most of the broad-based services are looking for a very family-friendly content and we're not. And so it's giving us a nice opportunity to get content and shows that we want without being -- having competitive bids for it because of that nature. So we feel this idea of continuing to lean into or go back to our roots of being this really tailored adult content tier on top of broad-based television is the right place for us. And we've been successful over -- historically in the traditional business, and you're seeing it in our over-the-top numbers today, and we're seeing it internationally as well. So we feel really good about that positioning. We're not competing with Charter. We're sold on top of Charter. We're not competing with Amazon. We're sold on top of Amazon, and we think that positioning will continue to play a great space for Starz in the ecosystem.

Okay. Great. So one other high-level question I think a lot of people are grappling or trying to understand across the industry and across all sectors is how do you see the coronavirus outbreak impacting your business? You're obviously not ad-supported, but what are some of the things that you're thinking about as you think about how it could potentially impact you?

Well, on the Starz side, I think the real big impact is going to be on the production side of the house and making sure that we have safety at our production sites, that everybody feels comfortable so they can do their job and focus. Also location-based, where we're going to shoot shows based on where this may sit. But right now, we're not seeing a major impact to the business. Again, we're an in-home service, so that's helpful. And if you think about Lionsgate as a whole, 70% of our profit comes from the Media Networks, which are really in-home services; 10% come from TV productions, again, in-home services; and 20% from the Motion Picture Group. And so the company, obviously, is very weighted toward in-home services from a profitable point of view.

Right. Okay. Great. Moving on to another topic, talk about your contract base a bit. Last year -- or excuse me, this current fiscal year, fiscal '20, Starz went through a contract renewal with Comcast that really fundamentally changed that relationship, moving from a fixed package structure to a variable a la carte structure. What are some of the trade-offs between the 2 models from your perspective?

Well, first and foremost, I think, as the world changes, we've now -- working with Comcast, I think, come with a great deal that gives us an orderly transition to this, I'll call it, a la carte or revenue share model, where we're both incented to be successful. And what we've seen to date since we've been de-packaged in February 11 is I have been saying I'm thrilled with the progress to date. I think Comcast is thrilled as well. We're working very closely with them on a daily basis to make sure that we have the plans that are in place and we're executing to grow the a la carte business. And I think we're both thrilled with the progress to date. And again, our content is resonating for those consumers that are in Comcast. We can do that going in. We are confident that we could pivot, as you've seen with our OTT business, to a la carte growth, and I think we're both thrilled with that today. The trade-offs are, when you're heavily packaged in a service that the operator is going to push, there's not a lot that we have to do other than put great content on the service because they're using their machine to push that package and we're getting dragged along. When you switch to an a la carte or an individual-based service, we've got to really incent the organization to drive the service and use the service. And so there's a lot more working together on a daily basis, there's a lot more discussion around offer management, there's a lot more discussion around getting into the call centers and training the reps that can sell it on the phone, a lot more, obviously, electronic sell-through. And so it's a different beast, but you really have the opportunity, long term, to be a much more profitable company. And we like that model. I think we said at the end of the fiscal, we'll be at over 60% a la carte revenue versus package revenue. And I think, by the end of next fiscal, we said it would be over 80%. When I got to Starz in the summer of 2015, it was 80% package and 20% a la carte. And I think that revenue share model makes us a much more valuable partner to everybody that distributes our product around the world.

Okay. And it sounds like it's going well so far. Aside from that, what's your confidence level in being able to make this transition a net positive from a revenue and EBITDA perspective a few years from now?

I feel really good about that point of view. If you look at the OTT business that we've built in 3.5 years, which is really a true rev share or a la carte business, the consumers want the product. And at the end of the day, as long as the content resonates to the extent that it does, and it is, we'll continue to be successful and see great growth on that side of the business -- on both sides of the business. And as we get deeper and deeper into the sub growth on the a la carte side for all of our partners, they make money when we make money, and so our incentives are aligned in the right place. And so if you look at the trajectory of Comcast, we've -- we're pivoting from being a cost center for them to looking like a broad-based ad-supported network to a true premium service where there's a rev share and we make money together. And so over the next couple of years, we think we have a plan to get back to where we were on a revenue basis pretty quickly, and the results in the first 5 or 6 weeks give us great confidence that we can get there.

Can you talk about what you're seeing in terms of the subscribers that are coming on in Comcast territory, from Comcast on an a la carte basis versus what you're seeing in terms of incremental OTT sub growth within their footprint?

So it's really too early to tell and get into that now. I mean we're 5 weeks into this right now, so we'll spend a lot of time with them post the quarter, deconstructing what we saw and how to continue to accelerate growth on that platform. There are -- I think, Dave and Greg do a phenomenal job of putting that company in a great place to grow, and we continue to work really closely with them. And as we are with all of our rev share partners. I mean we're on the phone with the Amazons and the Apples and the DIRECTVs almost daily trying to work together to drive the product. So too early to tell what the base looks like, and we're really focused within the Comcast footprint of driving that business together on the traditional side because I do believe there's still a lot of growth for a premium service on the traditional side.

Okay. And is there anything to learn from looking at some of the other fixed-to-variable transitions that you've gone through as far as the overall impact on subscriber and net revenue levels?

Yes. Look, I think, in all of them, they're all a little different though everybody's had a different point of view on how they package and use the product. Again, I think it comes back to content. And as long as you continue to have great content on the air that resonates with the consumer, then you're able to transition from a package to a la carte because the consumer wants the product. And we're very confident, having Power and Outlander on the air right now, that there's a huge consumer pull for those 2 shows, and we'll continue to lean into those type -- those shows -- the audience for those shows. We've announced 4 Power spin-offs that are coming, one coming this summer, that looks great. I've seen the first 3 cuts of that. And I think that show is going to be a great kind of transition off the first chapter into the second chapter. The Kanan origin story, which is really '50s, growth in the '90s in Queens as a 15 year old, and his mom teaching him how to become a gangster is just a really rich, phenomenal story. And then we run into more writers right now, and so we think we'll have something on the air almost every week, 52 weeks a year to really continue to drive the business around that audience. We've picked up shows like Dangerous Liaisons, which is a global show and has to work on a global footprint, and we'll talk about that, I'm sure, in a little minute. We're bringing Girlfriend Experience back. We're starting to shoot Becoming Elizabeth. We've got the show coming in May called Hightown with Jerry Bruckheimer TV, which is an opioid murder mystery set in Cape Cod, and I think it will be as good as anything there is on television. And so I've got great confidence that the content coming out on the year will continue to drive great subscriber growth and, ultimately, help in all of these transitions.

What about the amount of original programming that's right for Starz? Is there a certain target that you're kind of aiming toward? Do you think what you just laid out now gets you there? How should we be thinking about the ramp for original programming from here?

Well, if you go back to what we started talking about, which is we're not trying to be all things for all people, and we're very tailored, we're very bespoke, we're very premium, we're not looking to have to compete on the arms race of content. We would think we need to have 1 or 2 pieces of content on every week, 52 weeks a year, to super serve this premium content for women strategy that we're really focused on. And so I think we are pretty close to being where we need to be from a content perspective, but I think you'll see us over the next couple of years add 3, 4, 5 shows to the slate to get to where I think we'll be fully deployed on that strategy in terms of having something on the air every week, 1 or 2 things on the air every week, 52 weeks a year. The name and the game right now for -- as you go into the digital world, where you can click out and click out -- click in and click out after watching a piece of content, it's much more about retention than it is anything else. And so you have to be able to move your audience from one piece of content to the next every week in order to reduce churn and drive revenue growth. And so that's kind of what we're trying to deploy right now.

Starz, obviously, started out as really a movie service. How are you thinking about the Pay 1 window for movies now? How important are those movies to Starz to the overall product? And with the Sony deal coming up and Lionsgate and Summit film output deals with EPIX coming up next year, will you be approaching these differently than in the past?

Pay 1 continues to be very important for premium services. We see it in all of our data that we have, and we have a pretty robust data set coming off of our app. We can tell you by importance, by -- based on, I guess, time from the box, so movies that are newer within 6 months, 18 months, 2 months, 4 years have a different value proposition for the service, both domestically and internationally. And if you look at what we just did in U.K. we've split the Lionsgate Pay 1 into -- and shared it with Amazon, so we took the Pay 1 [indiscernible] [ global ] which we think will be really important for the service there. So Pay 1 continues to be very, very important. We will continue to talk to Sony about a renewal on that service, but we've also lined up the Lionsgate and the Summit titles so that we have flexibility if we have to go -- put -- go with Lionsgate and Starz, we have that flexibility -- Landscape and Summit. But again, I think if you look at the Lionsgate and Summit slate over the last couple of years, it's been -- they've done a phenomenal job with movies, and we'd more than welcome have that great -- those great slates onto our service as well.

And how about library films? Are these important for retention? And also, are they still -- is it really available on an exclusive basis, as they've been historically?

Library continues to be important from a usage and a retention point of view. I think it helps justify your price point in the marketplace, both domestically and internationally. We continue to have library deals with every major studio. We continue to do exclusive deals with every major studio. We think exclusivity is very important to justify the price point of a premium service, and we'll continue to be in the market to refresh our library deals on an ongoing basis.

What are some of the shows that you expect to drive subscriber acquisition this year? And I know you mentioned a few of them, but maybe if you could just hit the big acquisition shows and what the timing is on those releases, that'd be great.

So we came out of Power -- the back 5 ended in January. Power is always a huge acquisition show for us. Outlander is on the air now, continues to be a great, huge acquisition show for us. Then we roll into Hightown, which I think, like I said, it's Bruckheimer TV, it will be as good as anything there is on television. I think it will be a good acquisition driver for us. What we've seen from the data is when you get to season 2, season 2 becomes an even better acquisition tool for us. So I think it will be a good acquisition tool, but when we roll it -- when it rolls into season 2, I think it will be even bigger one. So we're excited about that show. Then in summer, we come into the first Power spin-off, and we think that will be a huge acquisition driver for us. And then we continue to put shows around those -- the Outlander audience. We'll bring back Spanish Princess. We'll bring in a new show called Run the World, which is really targeted toward the Power audience. And so again, we think this year's slate will have the most robust week-to-week schedule, where we're really focusing on is premium content for women and moving customers from one week to the next.

And how about the development pipeline, I mean, for some of the shows that aren't necessarily on the schedule yet? How rich is the development pipeline? Do you have a lot of new projects that you're working on potentially developing into new programs?

Yes, I'm really excited about our pipeline. As we hone this strategy, this programming mandate that we have now, we really pivoted the pipeline into not only show that we'll meet -- and the audience that we're focused on, but also play in the global arena. Because everything that comes off of Starz domestically will serve as the foundation of the global footprint, and so you've got to make sure that the shows that we pick up will work everywhere in the world. So we've announced Dangerous Liaison, which is the 2 of them at 18, in the slums of Paris, falling in love and then wreaking havoc on the French court. We think that show will be shot and feel like Outlander, and so we think that will play globally and will be a big show for us. We've taken Girlfriend Experience, which season 1 was a huge show for us, and moved it to London, and we're shooting a very international story. Again, we'll play everywhere around the world. We've just announced Courteney Cox and then Sharon Horgan, Jeff Astrof's show called Shining Vale. We'll be shooting the pilot for that very soon. Very excited about that show and Courteney joining the network. And so we continue to have great pieces of adult, very authentic content in the pipeline that are coming online. We've got 2 of the Power spin-offs that are sitting in rooms right now writing scripts. And I think we are, as everybody is going to this broader-type programming schedule to kind of compete in that first realm of SVODs, we're actually going the other way, which is we're hunkering down and becoming even more premium than we were before, not that we weren't. But I think we're going the other way, which is going back to old school premium and just trying to be very focused, very tailored, great premium adult content for women on the service. And what we've seen to date is the growth has come from that. So...

It doesn't sound like you're having any trouble finding new projects, but I wanted to ask the question, has it become more challenging to source new potential shows just given the broad demand for content across the industry from SVOD platforms and traditional buyers? Do you have to do anything differently to secure those projects? What are you seeing in terms of -- in terms of procuring new ideas and getting new projects at Starz?

I mean good ideas and fresh voices, it's not a commodity. I mean there's always a new fresh voice. And I just looked at -- we just picked up a show from our new writer, a new young writer that I think is just a powerful piece of content, and she's not a name, she will be a name at some point soon. But we -- good ideas, good stories, different perspectives on stories come from all over the world and fresh places. And as we continue to look for this really rich, authentic adult content, where others are looking for family-friendly fare, it's given us an opportunity to go get content that serves that female audience that others aren't looking for. But it's competitive -- I think as it's become competitive out there for content, there's also more content being created, and so it's a little bit of a chicken and the egg. But we have not found it to be -- we've been in some competitive situations, but I think the fact that we're focusing on this audience and that behind the camera, 65% of our showrunners, writers and directors are women, it gives us a leg up because we're really a network for women, by women. And even if you look at my direct reports it's building and some 70% of my direct reports are women. I mean -- so that's our DNA as a company. And I think that comes across when you tell the story. And so we're finding a lot of great talent who actually want to work with us. I also think the fact that we aren't -- we don't have 800 shows, we're not binging shows that we curate and we really treat every piece of content as if it's our only show that, that actually plays out well in the marketplace as well.

Jeff, how much of the pipeline of shows coming over the next year are produced by Starz Lionsgate versus third-party production companies?

That's a good question. I would say probably all but 2 -- 2 of our slate are actually done -- developed and produced by Starz Lionsgate, and we have 2 externals that we licensed from. Again, we're trying to take all rights because we're now in 50 countries around the world, and so we continue to do our own development and working with Lionsgate to produce. We've got 7 projects set up from Lionsgate as a studio right now, and I'm really happy with the progress of where those shows are coming along, some big pieces of IP that we're excited about. But for the most part, we are -- we do bring in some third-party studios. Lionsgate is generally attaching themselves as the co-pro partner on most of those, but it's mostly development that we're doing together.

Okay. And you mentioned global rights. Is -- are there still major markets where you're going to be licensing some of those big shows that you're producing? Or are you really focusing on the exclusivity side and keeping it exclusive to the Starz platform?

For now, everything that comes off of Starz, we will have exclusively on our service outside the U.S. I think, over time, as some of those services get deeper into their arcs, we may consider licensing them. Right now, we'll license them outside of our global footprint as well. But right now, everything that we will produce in Starz domestically will be exclusively on the service. We also -- the way we built the international business, it's a traditional Lionsgate kind of risk-averse profile, which is we are riding on the backs of others from a technology point of view. We launched with these global tech partners, Apple and Amazon. We have local deals we've just completed and launched 49 platform deals in 30 countries. And we continue to -- and we've dropped our app into 7 countries to test the water there, and the results to date have been really extraordinary. So we feel really good about that. But each of the territories that we're in that were built with individual P&Ls and have their own breakevens. And if we look at each of those countries, as they move toward breakeven, if they're accelerating, we'll continue to lean in. If they're not what we thought they would be, we can always go back to license in those territories as well. So we have great optionality.

Okay. And on the international strategy, I mean, how do you feel about the progress in the business plan? Are you on track for the 5-year target of 50 million international subscribers?

Well, the international target that we've said publicly is we're trying to get between 15 million to 25 million subscribers outside the U.S. to then -- coupled with the 25 million to 26 million we have domestically today, and that's where we get to the 50 million number. So we're on track. Sub growth has been great. Reaction to the product in these countries has been great. I just spent 7 days in 3 countries in Europe, talking to our distributors and partners and to producers of shows that we're going to buy in those territories. And the reaction to the products has been great. Some numbers were on track, on plan. We feel really good about it and are finding that we can get content. Again, I had a -- we're one of the few SVOD services in some of these countries that is looking for that really premium adult content, and so we've been able to get in rooms and really acquire great pieces of content that I think will play globally, both here in the U.S. and LatAm and in Europe. We'll have some announcements about those shows coming soon. But again, they were -- because of the nature of what we're looking for, they weren't competitive. And so we feel like we've got a unique strategy there as well. But I feel really great about what we're seeing internationally. Subs continue to grow. The app continues to grow where we've launched it. And we're on plan and then we feel good about it.

Okay. Great. And can you comment on -- just an update on the efforts toward raising capital for the international business? And also, if you could talk about any update in the path to a buy-in of STARZPLAY Arabia, please?

Two really good questions. We continue to take meetings and talk about that international raise. Again, as we've said before, we definitely don't need to do it. We can continue to fund the expansion through operations, and we may make that decision to do that. We may make the decision to bring on a partner. A partner can only help us accelerate our growth, and that's what I'm excited about. So we continue to talk about that, but there's no decision there yet, but I will say there's really good interest in what we've been doing to date. In terms of STARZPLAY Arabia, we really like that business. I think we're a 32% owner in that business, continues to be the market leader in the 19 markets only with Netflix, built a really great tech platform. I think the content is resonating really, really well. We'll dip our toe into some international original content for those markets as well. I think Maaz is doing a really good job of continuing to grow that business. And at this point, we don't feel the need to consolidate it, but we do think at some point in the next 18 to 36 months that we'll make the decision on that. But we -- again, it's a key part of our international strategy and we feel really good about the growth to date.

Okay. And you talked about -- you mentioned your international distribution partners. Can you just talk about how important the distribution partners are in international markets, both the traditional and the new distributors like Apple? But I think a lot of people tend to focus on the new distributors, like Apple and Amazon and -- but I think you've had actually a pretty good fortune with traditional. So maybe if you could talk about that a little bit, please?

Yes. Our distribution strategy on international looks a lot like the U.S. in a sense where wherever consumers want to watch television, we want to be there. So in the U.S., we're on every major platform because the consumer is going to make a choice where they want to find the service. So in each of the territories we're in, we'd like to go as deep as possible. So markets like Spain and Mexico, where we have 4 to 5 distribution partners already, we're seeing great growth. In countries where we're only on one or another, we're seeing good growth, but not great growth because we've got to get deeper. As you know, the premium nature of our service, we've never really been able to get consumers to switch just core broad-based distribution partners for a premium tier. It's just never been what premium has done. So we need to be on all platforms so that wherever the consumer wants to watch Starz, they can. And at any given time, we have 3 or 4 people somewhere in the world working on deals. And as I said, we've completed and launched 49 deals in 30 countries to date. We've got a bunch more coming. I was just in France, talking to a couple of our potential distribution partners. I was in Germany as well. And so the good news is the content is really resonating and the -- we're walking through a lot of warm rooms to try to get deals done. And so the goal is just to be in the 50 countries we're in now and just go deeper in each of those, and that's really what we're focusing on. On a global basis, Amazon continues to do a really, really good job for us. And we're just gearing up with Google. And Apple is really trying to get -- really -- get going, and I think they'll start to really accelerate as they really learn each of the territories that they're in. And so we're excited about what they can do for us as well. But we think we have got a really good mix of both global -- big global partners than supporting in each of the countries with the local distribution partners. And again, as I said, we've dropped our direct-to-consumer app into 7 countries and we're really starting to see great growth on that product as well with very little off-channel marketing, and so we feel good about that. The product works great. It's GDPR-compliant. It's got a great language toggle and so we can deploy it almost anywhere in the world.

And then in terms of international profitability, I think you're expecting smaller losses in fiscal '21 and breakeven in fiscal '23, is that correct?

Yes, that's correct.

Great. And maybe just going back to wrap up. On the domestic side, wondering if there was anything you would be willing to share with us about some of the trends you've been seeing in churn, gross adds and cost per acquisition in terms of the directional trends there?

So churn continues to creep down to all-time lows every month. One of the things that we did 3 or 4 years ago is we built a retail team in the building, brought in people that are really working B2C businesses that understand acquisition, that understand lifetime value and churn. We've built a really strong data analytics tool behind the business so that we had the data to do that. 60 days ago, we brought all-digital buying in-house because we believe that we could do it better and more efficiently than a third-party agency, and we found that to be true. And so as more and more of this content strategy comes onto the network this year, we think we'll continue to see churn reduce. Just the nature of the subscription business as you get years and years and years away from launch, your churn naturally comes down because you're building a more stable base. But we think where our ability to operate the business, coupled with the content, is going to get churn -- continue to have churn dragged down to all-time lows. In terms of cost per acquisition, it differs by each piece of content, and it differs week-to-week. But I can tell you by the Power base, it's a fundamentally different cost per acquisition than the Outlander base, but the lifetime values of each of those pieces of content are different. And so we make -- we do offers and retail the business based on lifetime value by content, and so we can be profitable in terms of [indiscernible]. We also have a good sense of what that kind of breakeven acquisition cost is. And so we'll spend to $0.01 below breakeven to drive the business for each of the content that we have. And again, we're looking at a lot of variable pricing based on free trial periods, where you are in the season arc, whether you come on week 1 or week 8. So there's a lot of different variable pricing things that we're doing around the business to help drive revenue and minimize churn and extend lifetime value. It's been kind of interesting and fun.

Okay. Great. We have a few minutes left. Why don't we see if there's any questions on the line. Operator, do we have anyone queued up for a question?

No, not that I see.

Okay. All right. Well, why don't we wrap up then? Jeff and James, thanks to you both. I thought this was a great discussion, so thanks for taking the time and getting up early this morning to do this.

Our pleasure. Happy to do it.

Thank you for your time.

Thanks, Bryan.

Thanks.

Yes.

Bye-bye.