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

All right, great. Welcome, everyone, to the next session at RBC Capital Markets' 2020 TIMT Virtual Conference. My name is Kutgun Maral. I'm the media, cable and satellite analyst at RBC. We are excited to have Lionsgate with us, including Vice Chairman Michael Burns; and President and CEO of Starz Jeff Hirsch. Thank you both for taking the time to meet with us today. How are you?

Good. Kutgun, thanks so much for setting this up.

Great. Thanks for having us.

Yes, of course. [Operator Instructions]

And just to start things off with maybe a high-level overview, there's still significant uncertainty ahead with the pandemic, of course, but it has been about 9 months. And we have all at least somewhat adapted. And hopefully, there's a bit more confidence in financial and strategic planning. Lionsgate just reported first quarter fiscal 2021 results, highlighting a very resilient and attractive business model, particularly at Starz and the broader library. So looking ahead, can you talk about your priorities for the balance of fiscal 2021, particularly given the macro backdrop?

Sure. There's an old Latin expression, "Ex malo bonum," that the -- one of the only good things that's come out of this pandemic, I believe that there's actually some momentum on the world of premium VOD. And I think that there will be a -- as you see from some of the recent Universal announcements, you'll see a lot of cooperation, I think, between the theater chains and the studios going forward. So that will be good because, ultimately, consumers get what they want to get at the right price point at the time frame that they want to watch a particular piece of content. Jeff will talk about the pandemic as it relates to Starz. I'll tell you that our priority, and we've said this pretty consistently, is that we are all in on Starz. Jeff is rolling it out internationally. Domestic subs, particularly on the OTT side, are very robust. And we are going to continue to delever at the same time we're going to grow our core businesses.

Okay. And just as a follow-up, when we move beyond, hopefully, the pandemic and think about a more normalized environment, how do you think the company is positioned in an increasingly scaled direct-to-consumer world? And where are some of the opportunities and risks you see ahead for each of your 3 businesses as the landscape continues to evolve?

Well, why don't we start -- Jeff, why don't you start on the Starz side? And then I'll jump in about the library and the studio after that.

Yes. Look, I think we are on a -- we had great momentum heading into the pandemic. We had great sub growth for the 2 quarters before. We are seeing great growth internationally with -- not only with launching content globally around the world but adding more and more distribution partners. And so we felt really good about where we were heading into the pandemic. And I think the stay-at-home order only helped accelerate the growth that you saw in the last quarter. We think we continue to play a very unique role in the ecosystem. If you take a step back for a minute and think about the disruption going on in the business, you're seeing large-scale companies really trying to be cable or satellite replacements. You see everybody chasing Netflix: HBO becoming HBO Max, Paramount Plus, Hulu, Peacock. All those services are really trying to be broad-based on the basic streaming or cable replacement services and trying to be that #1 SVOD in the home. That has never what's been -- what Starz was or is. That's not who we're trying to be. We've always been this really adult premium add-on. We like to say content that people are willing to pay for that is complementary to all those services. And so we've never competed with Charter. We've always been a partner of Charter and sold on top [ of the ] broad-based service there. We'll probably do the same thing with Peacock. We are with Hulu today. We are with Amazon today. And that's not just domestic, but that's around the world. So when you ask the question about scale, we're playing a very unique role in this ecosystem, and we're not trying to compete with the guys that have massive scale. I also would say I think in the environment that we're in, a disruptive environment, scale at some point can get in the way. It makes it very hard to pivot. And if you think about what we just showed this quarter, for the first time, domestic linear network is more global OTC subs than they have linear subs. I mean we spent the better part of the last 4 years to transitioning this business to become a global streaming company versus a domestic linear premium service. And in this quarter, we just reached that tipping point.

Okay, Michael, I don't know if there's anything you wanted to add on the motion pictures or television production side in terms of the opportunities you see ahead, just high level.

I think that Joe Drake has built a very nimble Motion Picture Group. And we are making the right-sized movies with the right talent attached to have a great deal of optionality in this marketplace. We're not going to get stuck with something that has to have some giant theatrical release no matter what. So he is able to pivot and do a hybrid-type release pattern on something like Antebellum, which, by the way, did -- we'd make as much money on that film that we had planned on pre COVID with a base case theatrical release pattern. So we've got -- we sold a movie recently, Run. We've got a couple of others that are the right budgets that I think will have multiple bidders or it will end up in the -- if the theaters open up in time, it will end up in the theaters. However, we're taking advantage of that. And what's happening is as others hoard their product or their content because they have their own streaming platforms, it creates a real value opportunity for us, which -- with increased global demand and limited supply. And I don't see that changing, frankly, for a couple of years.

Understood. Okay. Well, maybe just focusing in a little bit more on Starz. Jeff, the Starz domestic networks generated over 80% of the total company's segment profits last fiscal year. And I believe you recently delevered -- delivered the best OTT net adds in the quarter. So just trying to get a better sense of the success and transition towards direct-to-consumer and what that might mean for margins and cash flow going forward relative to linear.

It's a great question. I think we saw the consumer shift 4 years ago to a more flexible and digital platform. And whether we were smart or lucky or both, we made a real aggressive switch to go to transition the business from a single revenue stream, linear network to a data-driven global network all the while derisking the linear business. We've converted. By the end of this fiscal, 80% of our traditional business will be à la carte, which means our incentives are aligned together. And so the traditional business has really been derisked, and it's allowed us to focus on the growth side of the business, which is driving the OTT service. We were fortunate enough to have 4 pieces of content launched [ during the pandemic ]. All of them continue to be Starz hits for us. We had Outlander. We launched a freshman show, Hightown, which broke all kinds of records for us. Then we launched P-Valley against that, which broke all of those records. Then we came into the first Power spin-off, Ghost, which did 42% better than the last year of Power. And so we've had kind of a great run of content domestically [ on our service ] at a time people were looking for content. So not only did we see subscriber adds go up significantly, we also saw engagement on the service go up significantly. So it's -- again, it confirms what we said, it's content that people [ want to watch ], and they're watching it. As we've talked about prior to this, the more we transition from the traditional side to the digital side, the more profitable the company becomes. Our ARPU on the digital side is significantly higher than on the traditional side. So as we start to shift with the consumer, we become a more profitable company. And then you add the international component to it, then we become one of the largest global OTT services in the world from a footprint basis. I think only Netflix and Disney+ [ have more markets than we do ] today.

Understood. Okay. That's incredibly helpful. And just kind of maybe sticking to the domestic OTT net adds on the Starz side, you've seen very, very strong growth not only on subscribers but engagement throughout the pandemic. Of course, a key area of focus for us all is trying to figure out how much of the streaming adoption was maybe a pull-forward of demand or if the demand curve has just increased in the new world. So how are you thinking about it?

Yes. I think we've seen an increase. I think the pandemic is good because it has accelerated the people's acceptance of the streaming service, I think, more than -- at a quicker pace. But for a premium service that isn't -- that doesn't have 80 different pieces of content on in all different genres, we're really focused on 2 core demos. The engagement has been great. We had great acceleration heading into the pandemic. I think it was really more the 4 pieces of content that we put on the service that people found on top of the fact that we've been able to manage churn to an all-time low. So you couple 4 new pieces of content domestically that have set records coupled with the fact that we've been able to manage churn down to an all-time low, you see an acceleration in the business. I expect that to continue as we continue to roll through all the Power spin-offs. And I think it's much more just -- it's kind of here to stay versus we pulled the business forward.

Understood. Okay. Great. And so just maybe wrapping up on the OTT side. One of the major benefits of going direct-to-consumer is, of course, the availability to analyze first-party data. Can you talk a little bit about the kind of data you're gathering and how that helps you inform content decisions, subscriber acquisition and managing churn?

It's probably the most boring part of the business but for me the most exciting thing that we've built other than the content. We were very slow to go digital wholesale in 2016 so that we could launch our direct-to-consumer app and make it of scale. Right now, it's our third-biggest distribution partner, is our own app, and we get a ton of first-party data. I mean I can tell you almost every movement on a consumer. I can tell you lifetime value by content. I can tell you churn characteristics. I can tell you pricing, elasticity curves. And so all the nonsexy stuff that you really need to run a retail business, we get all that data. And we do share it with our partners. We've been sharing our data back and forth with Amazon on a regular basis. And that has really allowed us to really determine who's driving our success, who -- what our core audience is, refine our programming strategy, buy better in terms of advertising, marketing but also licensing content for those core demos. And it's really allowed us to even buy -- take digital buying in-house. And so today, we -- every decision we make is data-driven. 4.5 years ago when I got to the company, we actually [ didn't have any data to make ] decisions and were really truly wholesale. And so we really pivoted this business from a traditional linear wholesale to a data-driven over-the-top service. And in a click-in and click-out world that we're in today, being able to schedule content for the right audiences, to move them week-to-week, 52 weeks a year, to minimize churn is really the name of the game, and we've been able to do that, I think, better than most.

Okay. Great. And nice to see you again. So maybe if we just touch on the Starz domestic linear business just briefly. Can you talk about the relationships you have with MVPDs? I know you're transitioning away from that model. But just trying to get a better sense of how those deals are progressing as you move from the fixed distribution deals towards à la carte.

I wouldn't say that we're moving away from that model. I think we're pivoting that model to put the incentives in the right place. And so we're viewed more as a revenue center now than a cost center because we are in an à la carte model or a rev share deal. And so there's a lot of opportunity still on the traditional side. We are not a fully distributed or fully penetrated, ad-supported network. There's a lot of opportunity for us as we go to the skinnier bundles or smaller packages to drive that business. And now that our traditional MVPD partners share in that revenue, I think we've seen great success on that side. We saw a 16% increase on Comcast in the quarter, sequentially, [ from our ] pivot to à la carte. We continue to work well with them every day, and I think that will continue to grow. You can see for the quarter we were flat on the linear side. So we're holding our own there. Because we are now putting the product in the hands of the customer who wants the product versus being in a big bundle that potentially may not want the product, so I think it's a stickier customer at this point on that side. It makes more money for our partners. It makes more money for us, and we feel really good about that business. 80% of our traditional side will be à la carte by the end of the fiscal. So we've really derisked that side of the business. And I don't expect to see big blow-ups that we've seen in the past in the history of the business going forward.

Okay. Great. And before I switch over to the rest of the business, I do want to make sure to ask about -- sometimes, it gets lost on investors that beyond growing your domestic operations, you do have a global direct-to-consumer platform. So can you help frame the international opportunity for Starz? I think you're already at just under 40 million global subscribers exiting the September quarter. Just trying to better understand the trajectory and pacing of STARZPLAY international expansion relative to your multiyear targets.

So we looked -- when we were acquired by Lionsgate, we had the opportunity to access that 17,000-title library that gave us a lot of content very widely available. The world had shifted, and Amazon, Apple, Google realized they could do what they did domestically on a global basis. And so we were able to quickly, in a very risk-mitigated fashion, launched in 50 countries around the world. We have said that we're on a track to meet 15 million to 25 million subscribers by 2025. That's about $3 to $4 per ARPU. And we feel we're well on our way to hit that range and ARPU both in our subs. We had a great quarter. We grew another 500,000 sequentially on the true OTT side. And I think we'll continue to see great growth in that business. We had the luxury, because of that library and [ the tech in the world -- streaming tech ] to get ahead of everybody else, I think we're a couple of years ahead of most of our domestic peers of launching into these international markets. And so we're head down, running to try to build the brand, grow the subs and stand up this global footprint. And I think you've got to look at Starz now like people look at Netflix and Disney+ in terms of a global streaming service because we have more OTT -- global OTT subs then we have domestic linear subs -- or actually, global linear subs. And our revenue will soon there follow. And nobody has this many markets as we do other than probably Netflix and Disney+ right now. So we've got to be really -- we kind of think of Starz as a data-driven, global OTT service now versus the traditional linear service that it was [ when I got here in 2015 ].

Sure. Okay. No, that's great. Maybe just switching gears to the rest of the company. And before digging into motion pictures and television production separately, I want to ask about the recent strength in library monetization at both groups. You've recently reported record trailing 12 months' library revenue. I think it was 33% compared to the year prior. Clearly, library sales have been an incredibly bright spot for you during the pandemic. Can you discuss the increasing value of that library since it does seem underappreciated by investors?

Yes. We sort of -- we're sort of scratching our heads sometimes when we look at our stock price when you take a look at the value not only of Starz but the Motion Picture studio, the television studio, on top of that, the library. The short answer about why library is doing quite well, and we think that's going to continue for some time, is because you've got gigantic demand around the world, whether it's a streaming platform or a basic cable channel. You've got huge demand. And now what's happening as some of the bigger past suppliers have started to hoard their own content for their own platforms on an exclusivity basis -- or an exclusive basis, what's happened is, is that you have the same amount of demand, but you have less supply. And that puts us in an enviable position of [ being able ] to monetize our library like we never have before. And we also have the luxury of a lot of rights returning back to us every single year, every single quarter and as you saw recently with the fact that Mad Men came back to us. And so we got a chance to another bite at the apple to go out there and sell that. We have -- every few quarters, we have another piece of significant IP coming back to us. The next one up will be -- I'm sure, will be a lot of demand for our show Weeds, which was a Showtime -- which was on Showtime, which we have coming back to us. And so that will be licensed, my guess, at a very interesting clip. So I think library is -- if you look at our library and you say, well, as we've said publicly, it's a very high-margin business, calling -- call it, over 50%. You saw the revenue number. If you took half, half of the multiple that some of these music publishers are enjoying right now, that means that our library is worth more than the enterprise value of the company. So that's worth paying attention to. The question really is, how long will it last? And I think a lot of these big companies, Disney with the streaming service; obviously, it is Netflix' primary business; but then on top of that, you take a look at what Time Warner is doing with HBO, these guys are all in. So I do not see their content being available around the globe for quite some time, which should give us a lot of running room.

Yes. That's great. And just briefly on content production, sticking again with motion pictures and TV together. Can you update us on the current state of production as we're seeing some semblance of normalization? And related to that, as you kind of ramp back up, has the cost of content meaningfully moved up because of the various health protocols and longer completion times? Or is that not as significant as we might think?

It hasn't been -- I'll have Jeff talk about Starz because he can give you the specific budgets there. Or I think as far as our television production outside of Starz and the Motion Picture business, we're not seeing a gigantic uptick. And we also are running quite hard. The Motion Picture Group is making an awful lot of movies. We're making them in the range that we have a lot of optionality if theaters don't open anytime soon, which it looks like that won't be for a little while. So we don't have the requirement to have a giant theatrical release to make money. So again, going back to what we did with Antebellum and what we've done with Run and a bunch of other movies in the right budget frame, we have a lot of vines to swing to and a way to slice and dice that release the way we release that particular movie. Joe and Jon have greenlit, I don't know, in the last few weeks, I think, 8 to 10 movies. We have a lot of movies in the can. We're shooting a bunch of movies and a bunch of television shows. I think we have 20 television shows in production right now. We're trying to really, really crack down on our protocols to make sure that people are safe. We're going to have some hiccups. I think we recently had one on one of the sets where some of the crew members got sick, but then we'll shut down the production, and then we'll start back up when it's safe for everybody. A vaccine would be terrific, would help everybody. And I feel like that's coming, although that's not going to be here for a while. That's the way I read all that -- all the tea leaves there. But we are amping up production in a safe way. And we feel like there's going to be an enormous appetite for new quality content. And Jeff was very early on making sure that he had his scripts ready so that as shooting opportunities opened up, he could take advantage of it. So Jeff, maybe you'll talk a little bit about Starz' productions.

Yes. We've got -- working very closely with Kevin and Joe. We've put great protocols in place to make sure that people stay safe and healthy. We've got 9 shows in production right now. We just finished Girlfriend Experience in the U.K., and that -- we got that shot and finished, and that's a very intimate show, without any hiccups there. We finished one of the Power spin-offs in New York City. We got a wrestling show going in midstream in Atlanta right now. And the nice thing about the way we shoot the shows, because we have all the scripts done, if we do have a hiccup with somebody who's above the line, we're able to shoot around that person and go to a different episode and shoot different kind of scripts and content because of it. And so we're full on in production again, and I'm excited about the slate that's coming. And again, Lionsgate TV has done a phenomenal job of kind of getting the productions going, getting the protocols in place and making sure that everybody is following those protocols.

Okay. Great. And we started a few minutes late. So I'm just going to go over, if that's okay with you. And just briefly touching on Motion Pictures, you've touched on PVOD. You've touched on the evolving theatrical window. Of course, we saw some new developments today with Comcast and Cinemark -- or Universal and Cinemark. How are you thinking about that window evolve on a go-forward basis and what it means for Lionsgate?

Well, as I said before, I think that one of the few good things to come out of this pandemic is I think we are going to have consensus in many ways on the importance of the PVOD window. So whether it's the 17 days or you saw the 30 days if a movie opens at less than -- or at $50 million plus on an opening weekend that stays there for a month, I think all that's good. And I think that if movies don't work initially, and it certainly happens to all of us, the idea that you can piggyback off the P&A campaign where you spent tens of millions of dollars to quickly pivot into a VOD or PVOD or EST window, that's a good thing for us, and it's a way to quickly recoup off the back of what I said, of the marketing spend you have on a movie. So I feel like there are some positives that are coming out of this. And I also believe that we're making the right-sized movies so that we have a tremendous amount of optionality to -- once the pictures are ready, depending on what's in the marketplace and whether the marketplace is open in certain windows.

Okay. And just lastly on television production, maybe before we move on to a few balance sheet and M&A questions. On TV production, I guess for Jeff, when you think about the content production that -- it's a great studio that you guys have on the TV side. How do you balance selling content to Starz versus third parties over there? And how do you evaluate that, of what makes the most sense and with the highest ROI?

So we have a very specific programming strategy. We're really focused on putting premium content that's adult in nature, non ad-supported. We like to say content that people are willing to pay for and a service that focuses on our female audience and an African-American audience. And so not everything that Kevin produces on his side kind of fits our programming mandate to that extent. But I do see everything that comes through Lionsgate first, and we get to make a decision whether it's something that we want to have on Starz, whether it's Blindspotting that we're starting production today or a reimagining of Step Up [ coming back ] from YouTube and shows like that. And so -- even Run the World, which is in production in New York today. So we see everything that comes across first, even on the library side, when stuff becomes available. But because we have a very specific programming mandate, not everything that they produce works for the network, and then they go out and sell it to other outlets.

And I was just going to add, if you take a look at shows, that we have a variety of places. Zoe's Extraordinary Playlist, which we partner with NBC on and UMG, those -- that show probably wouldn't be a Starz show. Mythic Quest, which is on Apple, which is a hit for them, again, terrific for Apple, maybe not a great Starz show. So again, there are a lot of different options for us. And Kevin is making deals with the network or streamer or broadcast channel that we think that is the best home for a particular show.

Yes, I will add that last year at this time, we probably had one show in development with Lionsgate TV. Today, we have 20.

Great. Okay. And just because we're running a little over, I'm just going to ask one last question and maybe on M&A just because it does come up very, very often. How are you thinking about the future of industry consolidation and where Lionsgate, at least from our end, [ is as, of course, ] an attractive pure-play content and streaming asset? And so where does Lionsgate fit into this evolving future and ecosystem, particularly thinking through your premium networks business or the TV and film studio?

I think that our size is actually an advantage right now particularly in this crazy new world today that we can move more quickly than many others. I do think that we have a great deal of capacity if we wanted to pick off an asset or a company that was accretive to us and a great return on capital. We could do that. We have -- as you saw at the last quarter, we have almost $500 million of cash on balance sheet, and we have $1.5 billion of an undrawn facility. However, there aren't a lot of deals out there that we're going to chase that -- we're not big on overpaying. However, if we found the right accretive transaction, we would do that. I've heard Lionsgate is going to be sold and bought and all that. I've heard that for 20 years. What we're doing is just focusing on our core businesses. We're excited about Starz. We had a lot of -- took a lot of heat for Starz because they said, oh, they can never compete. They'll cap out on 1 million OTT subs, then it was 2 million, then it was 4 million. And now Jeff's over 9 million domestic OTT subs. So we're pretty excited about how that is going. And we also look at the sum of the parts, whether it's the studio, the library that we talk about. And then you look at what Starz is building, talking about, we've said publicly, 15 million to 25 million OTT subs -- worldwide OTT subs in the next few years. You're the analyst. Put a value on that and say, all right, here's how much each one of those would be worth if these guys are right. And it all leads to the same place, which is a higher equity value.

That's a great place to cap it off. Michael, Jeff, thank you both for joining us today, and hope to do it again next year in person.

Thanks for having us.

Thanks for having us.

Bye.

Bye.

Bye.