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

Great. We're joined next by Lionsgate. We've got Jeff Hirsch, Michael Burns and James Marsh. Gentlemen, thank you very much for joining us for the fireside today.

Thanks for having us.

Jeff, why don't we start off and run through some issues on Starz? You're now officially a streaming company. I think global OTT subs, just under 14 million, now exceed global linear subs. And maybe most impressive, in my mind, is the way you've recaptured revenue after cycling through the recent Comcast deal. So maybe you could just talk to us a bit about the trends that you're seeing in Starz subscribers, how you're positioning for OTT.

Thanks for having us. Great first question. I think we looked at the business 4 years ago when we kind of merged with Lionsgate, and we saw the consumer behavior switching to digital. We decided to make a real aggressive pivot at that point. And there was really 2 work streams that we went after, one was building a Starz app of scale so that we could get first-party data and really help inform our decisions going forward, and I'll talk about that in a minute, and really build a digital business to move to where the consumer was, not just in the U.S. but on a global basis. And we're now in 50 countries, soon to be 55 countries around the world. The other piece of it that we did was we made a real tough decision to try to try and stabilize the linear business by transitioning a lot of these great, large package deals where you have a lot of subs but very low ARPU customers to an ala carte basis so that long term, on both sides of the business, our incentives were aligned with the operator. And so now we share revenue with everybody, and we're incented that as we do better, they do better. And so all of our incentives are aligned. And by the end of this fiscal, 80% of our traditional business will be ala carte. So we really derisked the traditional side of the business, while growing where the customer is moving, which is a more profitable side. And now 4 years later, we've reached that inflection point where we now have more global OTT subs than we have linear subs. We will, in the next couple of quarters, have more OTT digital revenue than we have linear revenue, and we really are now have to be viewed as kind of a data-driven global streaming service versus the old traditional single revenue stream linear service domestically, and that's kind of where we are today. Other than, I think Disney and Disney+ and Netflix, we have the largest global footprint other than those two. And so you really have to think about us in that kind of bucketing versus the traditional kind of ad-supported linear networks in the U.S.

Maybe you could expand on that data point a little bit. So traditionally, you made shows and you bought White Knuckle and all the distribution deals to get your fair share of economics and distribution. Now you have a lot more granularity on how subscribers are behaving around your content. So what have you learned from this growth in digital and data?

Look, the first thing that's most importantly is we -- every decision we make in the business now is data-driven. 2 years ago, we were starting to get the data. Last year, I think we were reacting to the business. Now we're actually driving the business based on the data insights that we have. And first and foremost, it's really informed our programming strategy. We realize now and we can see it in the data that the female audience and the African-American female audience is what's driving our subscriptions to the digital world, and so we've leaned heavily into that with our programming strategy. We've also learned a lot about churn, acquisition, lifetime value. We've built a retail team in the business that actually can then use that data to kind of drive our business in those 3 buckets. So we look to spend a lot of time looking at 12-month churn, 24-month turn, 36-month churn. We have a lot of great statistics around if you watch one original, what your lifetime value is; if you watch 2 or more originals, what your lifetime value is. So we know that if you watch 2 or more originals on Starz, your lifetime value is 4x longer than it would be if you watched one original. So knowing that, what we've done is we've built a programming strategy and a slate to try to put a piece of content on every week week-to-week for those audiences so that we can move them from one show to the next to the next and ultimately bring churn down to low single digits and really accelerate the growth of the business. Part of what you see with the Power Universe and the 3 shows that we have coming out of Power was to give something every week, 52 weeks a year to that core audience. And so they don't come in and leave at the end of Power. But they come in for Power, they stay in for Ghost, they stay for Kanan and they stay for Force. And ultimately, what you see is great acceleration of the business. And so the data has really given us insight to who our consumer is. It's given us insight into where we can acquire. It's given us insight into how we line up shows to help churn. And it's really given -- I mean it's -- we are a data-driven company now. Every decision we make is data-driven at this point.

You talked about those 2 demos that you're really focused on now in female and African-American. I think that's really interesting because a lot of investors think about you as sort of competing against Disney and Netflix. And in fact, you sort of zigged and focused on these particular areas. So can you speak a bit to those specific markets? And then what that means for kind of your relative content budget since you are a little more focused and not just in general entertainment?

We think the business is going to shape up into 3 tiers of SVOD services. That first kind of broad-based tier, which we like to call -- instead of broadcast basic, it's basic streaming, where they're trying to be all things for everybody in the home, whether it's Hulu or Netflix or Disney+ or an HBO Max, whether even a Paramount Plus, where you have sports and news and unscripted and scripted and kids. That's not who Starz are. And we're not -- we're never going to compete in that first SVOD in the home. It would be saying that we're competing with Charter or we're competing with DIRECTV. We've never competed with those folks. We've always been sold on top of those folks as a premium, non-ad-supported, adult, heavily authentic content that people are willing to pay for. So as the business unfolds and the new kind of first SVOD or control of the living room becomes to bear, whether it's Hulu or Amazon or Disney+, we've always played that kind of Tier 2 role where we're sold on top of those broad-based services. And that's, I think, how the business will continue to unfold in the digital world. And so as HBO becomes broader and becomes family with HBO Max and Showtime becomes Paramount Plus and becomes broader there, there's a lot of white space to go the other way, which we have, which is to become ultra-premium and be a complementary partner to all of these services versus kind of a competitive partner. And so if you think about how we price the product, we always wanted to be lower than Netflix. We always wanted to be lower than HBO Max, so that the consumer subconsciously, and there's a lot of research that we've done on this, things that were a complementary service, so when you look at [ 14 versus 8 ], the consumer thinks they're supposed to add it, not replace it. And so that's how we position Starz as we grew up on the linear side. We continue to position it that way on the digital side. And that way, we are globally as well.

And is the content budget enough? And how do you focus that content budget? And you've had some pretty notable recent successes that might be worth touching on as you continue to kind of focus on a couple of demos.

Yes. Look, we think we have the right amount of dollars in the portfolio. We're getting a lot of great looks at things from the Lionsgate TV Group right now. We just had a bunch of announcements on Blindspotting, which was a movie from the Motion Picture Group, that we now turn into a series. We think that's going to be an outsized hit for us as well. But I think what we've come to terms with is that we have this great audience. We have the #1 composition in women in premium. We have the #1 composition in African-American. And if we continue to put shows on every week, 52 weeks a year for those 2 core audiences, we can get turned on to the low single digits, which ultimately is a great place for us to live and accelerate the business. And so all of the content that we're putting on has to hit those demos. So we started the pandemic with Outlander season 5. It was the biggest season that we've had out of all of them. Not only did we see new people coming on to Starz for Outlander, but we saw 33% to 35% increase in the seasons 1, 2, 3 and 4. So the engagement to the product was there on top of people catching up. Then we launched Hightown, which is Bruckheimer. It's a great premium opioid murder mystery on Cape Cod. That set all kinds of freshman records for us. And then we launched P-Valley, which broke all records, and I owe Michael money because it's now bigger than Outlander. And so for a freshman show, it broke all kinds of records. It brought a ton of subscribers to the platform. And then we rolled out our first spin-off with Power with Ghost, and that was 42% bigger than Power's last season, which was also a massive season as well. So we're on a great content run. I think we're able because of we know who we're serving, and we're trying to continue to serve those core demos. We can bring audience the new shows right off the bat and continue to drive the business in a really aggressive way.

How do you think about how film fits into that? And we've mostly talked about sort of Starz domestic and the success you're having on originals. But I know internationally, it's more of an integrated Lionsgate product. So how do you think about: number one, film fitting within there; and then number two, overseas, the product looks and feels a little different? And then do you think that that's more the future of Starz?

Look, film is very important. Premium has always been big originals, a Pay 1 deal and a lot of library at a good value. And I think that's what we've built around the world, whether it's $8.99 domestically or that's EUR 4.99 like in the U.K., and I'll touch on that in a minute. But we have the Sony Pay 1 right now domestically, which continues to put up great shows like Spider-Man and Jumanji, and we've got 4,000 library titles from all the studios. We're hoping at some point when the Lionsgate and Summit titles come up, we move those onto the service. Having the integration between a Motion Picture Group and the network allows us to do things internally to help again align those movies to our consumer in a big way. And I think working with Joe has been great, and I think we'll get there eventually. So that's a real great mix. And then the U.K., we have the Lionsgate Pay 1B, which has been really successful, so we've taken the second half of the Pay 1 title there. I'm really excited about how that's performing in the U.K., along with the Starz Originals and a lot of third-party acquisition like The Act, Games of London, Killing Eve, best of all of the domestic SVOD that's not Starz. And then in India, where we'll launch our D2C app this evening or tomorrow morning there, we take the Lionsgate Pay 1 right to the service, and that's a really unique aspect of what we're going to launch in India, and we're really excited about that.

So I think you're on target to probably be at the top end of your 13 million to 15 million global OTT subs by the end of this calendar year. I mean if we wanted to think about sort of the journey of where you might be in distribution, do you think you're in the first -- the early innings, half time? Like how much headroom is here to grow subs globally?

Look, we've said that by 2025, we'll somewhere be between 15 million and 25 million international subs, plus, I think we'll be somewhere in the neighborhood of another 25 million to 30 million domestic subs. So I think globally, we should be around 50 million subs by 2025. I think we're probably in inning 3 in international, maybe inning 5 domestically. As we continue to get into this programming and execute this programming slate, I think we continue to see churn come down every month to all-time lows. And as that accelerates, I think we continue to see great growth. We're on track to hit our numbers, we're on track for our ARPU numbers, and I don't think we're getting credit enough for what we've built internationally right now. I mean we've done -- we're in 50 markets outside the U.S., soon to be 55. We've got over 70 deals that local operators signed. We've got global deals done. We're the fastest-growing channel on Amazon in any market they launch. And it's -- we're a couple of years ahead of anybody else right now. And while everybody is trying to reorganize domestically to build the retail business, we're head down, growing, and I think we'll have a couple of yearly head start on a lot of people.

Yes. And then maybe just lastly before I throw some questions at Michael. I mean, certainly, in some of these markets like India, we've often seen AVOD-type products also be successful, particularly as you scale into more and more markets. How do you think about this being an SVOD versus an AVOD service?

Yes. It's an interesting question. We get that a lot. I think AVOD is a different animal. I mean you have to have large scale for advertising, which means you have to serve everybody in the home to get the amount of eyeballs to really be able to drive a sales organization to steal share from some of the other digital operators. And I think we're pretty happy now in where we can grow to. I mean ultimately, if we're the #3 or 4 SVOD in the home around the world in our markets, that's a great place for Starz to live. It's a great business for us. So I would say -- and by the way, the nature of our content is very adult and very authentic, and I think it will be hard to put ads in front of that. So I really like the premium kind of SVOD business that we're in. I think in this pandemic, it's proven to be very resilient and very robust versus some of the ad-supported networks. So AVOD versus SVOD, it's a fundamentally different management animal. It's a different size and scale animal. And I just think we're pretty happy, and we see a lot of growth in our 2 core demos around the world right now, so we're going to stick to our knitting, I think, at this point.

Yes. Michael, this year, you've talked a lot about the library value. I think that the -- either the content licensing or the entertainment sales that you've done this year have grown significantly, not just Mad Men, but I think a lot of folks who were at home paying more for access to Lionsgate content. And I think you've contrasted that against some of the stock's performance. So the stock has rallied a bit here in recent weeks. How do you think about the value of that library now and the share price overall?

Look, I don't think it's possible to talk to a management team and have them say their stock is overvalued. So I do think our stock is undervalued, significantly undervalued. And you talked about the library, and I'll talk about library in a minute. A couple of things. I don't think that we get credit for just how new or fresh our library is. I would much rather have Hunger Games, Twilight and John Wick than Wuthering Heights, not that I'm taking a blast at one of our competitors. I think our library is very current, and I think you see that in our revenue numbers. Also, we're sort of in the right place and the right time when it comes to that, meaning that you have other studios with big library product that are hoarding their content because they just want it to be on their platform, whereas we will not only license it to Starz, we'll license it around the globe to a bunch of different players, whether it be a broadcast television network. So you're seeing fairly significant growth, and I don't think that's going to stop anytime soon because the demand is increasing and the supply is shrinking. Those are -- you don't have to be an economics major to figure out that, that works in your favor. So we've seen that. And also, it's a very high-margin business. So when somebody says to me, "How much is the library worth?" I can make the argument in a pretty easy way, in a pretty compelling fashion, I think, which is worth more than the enterprise value of the company. And that's by taking a pretty low multiple and saying it's low to double-digit or mid-15 range, mid-teens, and then take a look at what sticks to us, which is over 50%. And so put a multiple on that, it's a big number. Now are we going to sell our library? No. But could we sell a piece of it and validate the price of it? Yes. Would we get a lot of takers? I'm sure we would. But again, that library enables us to do, as you mentioned, Steven, which is what we're doing with Jeff internationally, and it's always nice to have that library just when you create new windows. Jim Packer and his team do an unbelievable job with that, which is creating windows in various different places and times and creating revenue. And so I think that's going to continue for the foreseeable future.

And you mentioned the potential of even like a library sale. And I think sort of transformative or value-unlocking transactions or something that you've been pretty vocal about, Michael, whether it's with STARZPLAY International or something like this. So are those something that's still on the agenda for Lionsgate here over the next couple of years?

Here's what I would say about that. We've got to get the right value. As Jeff continues to roll out countries and rolling it out successfully with, for example, great partners, local partners, but also Amazon Prime, I looked at Jeff's numbers, he has a woman that works with him named [ Superna ] that runs international, I looked at the numbers coming out of Brazil, which we -- I guess we just opened up with Amazon just a few weeks ago, right, Jeff? I mean it's thousands and thousands of subscribers. And so what we're looking at is as we roll this out, we say, "Jeez, do we really want to sell a piece of this?" And the answer is, yes, if we got the right valuation. But if we don't, then I would say -- if we don't get the right valuation, then it's not like we need the money. We ended the quarter with approximately $0.5 billion of cash and 0 drawn on our balance sheet. We took our leverage down from -- it was a few quarters ago, 5.6. It went down to 2.9. That was always...

Yes. It was really impressive, yes.

And you know this with the OTT, whether you're doing it through Apple or Amazon or just going direct or even ala carte, a lot of that revenue -- that revenue sticks to you, so it's real free cash flow. So -- and I was laughing the other day when I was thinking about it, which is we all heard the argument. All these guys are capped out at 1 million OTT subs. And domestically, it hits 2 million and hits 3 million and hits 5 million and now here we are over 9 million, and I'm sure Jeff will be double-digit relatively soon, so that's just domestically. So I think that eventually, with this market, I had a friend of mind who was a money manager, one of the big Boston funds for a long time, and I said, "What's the dirty little secret about your mutual fund?" He goes, "We're actually just momentum players." And the fundamentals have sort of got out of the market for the moment. I think eventually, that comes back into play. And I think we will become a momentum play as people sort of look at these numbers and say, "Jeez, here's another great quarter." You have more delevering, here's this OTT, here are these shows, these hits that are working, look at the library sales and look at the margins in our Motion Picture business right now. It's not like that it's getting hurt, the margins, because even though theatrical is not there, there are certainly a lot of volumes to swing to. If you look at that hybrid approach on Antebellum, we made more -- we're going to make more money on Antebellum than we did in our base case theatrical release. So we also don't have this giant overhead and this residue to -- that we have to get rid of. So I feel like we've got a lot of cylinders firing at the same time at a very low interest rate environment, which I don't think is going to change anytime soon. So I think eventually, whether it's fundamental or momentum, that people will start recognizing the value of the company.

You mentioned Antebellum and these kind of new revenue models that you can look at. Has this year proven that there might be better ways to monetize certain theatrical releases, especially relative to what P&A can be? And do you think you'll just always approach it on a more case-by-case basis going forward?

I think that we're all hoping that theatrical business comes back, but I think it's important to note that we don't -- we're not making movies at the budget size that were required to have a big theatrical release to drive the profitability of that picture. We're making them for the right -- I just had a conversation with one of the big digital companies today with Jim Packer, and they're talking about, hey, we want to have a -- well, Jeff knows it. He won't tell you what the movie is, which is we'll look -- we'll take a really short window, and we'll pay you this price because we want to do this for our giant customer base. So we look at everything. But we're all hopeful that theatrical business will come back soon. I don't -- again, I don't have a crystal ball, but I don't think it comes back in a big way until the summer, into probably June. But I do think that, that's still a very significant window for us.

You talked about some of the impressive deleveraging you've done this year. Is it negative for leverage when you start rereleasing into theatrical windows again because of the cost resumption?

Yes, it is because we get the money back so quickly. Because you think about -- there's -- you think about theatrically, you get the money back in a few months from film rental. And then you've got the electronic sell-through, which has moved up a little bit. Video-on-demand, that -- you're collecting that money very quickly. And then the Pay 1 window is in 7 to 8 months later where you're starting to get paid. And those -- the other thing I was going to say that Jeff and I talked about this the other day. He's got the Pay 1 window for Sony, and he talked about Lionsgate coming ultimately his way, which I think it's his to lose. I mean if he wants it, he's going to get it. But you have to look at these pay windows, that pay slots that Jeff had from going way back when. I mean he's still got a ton of Disney movies in various part of the windows. Those Sony movies will be around for many, many years in second and third windows. So he's got a huge library inside a library of pay -- big theatrical titles that are going to be on Starz for a long time.

Yes. Maybe in that vein, a question for, I guess, for all 3 of you, which is that the big content players do seem to continue to get bigger. And Disney and Netflix might be some of the obvious examples of that. You all have carved out a really nice space for Starz, and theatrical continues to be really successful. But as you think out 3 years, 5 years or even longer, do you think that the current structure of the industry in terms of big and small studios is sustainable? Or is there a point at which you kind of need to tack your boat to bigger ones or be more tied to some of those behemoths? Or does it work the way it does for the long term?

Yes. I'll let Jeff answer part of that on the Starz side, but I will say this. We haven't talked about our television studio, which is producing the shows with Jeff on the Starz side. But we announced -- I think we announced that new Apple show today, didn't we? Okay. So this -- Eugenio is producing that. Derbez is producing this movie with us. We're doing it with Apple.

Acapulco.

What's that? Acapulco. Terrible name. I bet we'd change it. But anyway, we have -- that's going to be a very profitable show for us like this show we're doing with them, Mythic Quest, which is Apple+. So the television studio, it -- I mean, we're selling -- we're licensing shows everywhere, and all of these platforms have the same issue, which is they need hit shows. So I think that business is a really good business for us because we have the infrastructure in place to produce those shows. We obviously can front-run the money on it because it's -- we have the balance sheet to do that, so it really puts us in rarefied air to be able to do that. So Jeff, you want to answer the rest of that question?

Yes, look, I don't know if necessarily we have to be attached to somebody else on a structural basis. But I think on a commercial basis, I think as the world continues to change and the more things change, the more they look the same. You'll start to see kind of interesting bedfellows in terms of bundles approaching. And I think we've positioned ourselves, like I said, to be a very complementary partner to everybody. And so I expect to start to see some more traditional kind of content bundles between companies, whether it's Hulu and Starz or you could pick in a Geico and a Starz, I mean some nontraditional bundles where people have large groups of customer bases trying to provide a lot of value to the consumer. So I think you're going to start to see bundling start to become that next generational thing, and we're very well positioned to be the complementary partner to almost everybody. I mean we're sold on top of Disney+ in the U.S. and in 6 or 7 countries outside the U.S. right now. I think you'll see that continue. And I just think you'll see more bundling and partnering from a commercial basis show up in the next 12 to 36 months.

I think eventually, Steven, we're not going to get penalized for the amount of money that we're putting into launching the international marketplaces. So if you put a multiple, if you have -- if you're knocking your EBITDA down $125 million, $150 million a year and you say you're trading at a -- I'm just using round numbers, 10 multiple, you're knocking $1.5 billion of market cap off the company, which is ridiculous.

Yes. Michael, you mentioned the TV business, and that isn't one that we've spoken as much about. It seems like there is that mercenary opportunity, and then there's also the opportunity to continue to push more and more content to Jeff's business. So how do you all think about the gradual integration of TV within the company versus the external opportunity?

The short answer, and I'll let Jeff give you the longer answer, the short answer is, he only wants stuff that he thinks is going to work on Starz. We can't jam it.

I mean, look, I think if you break apart the Lionsgate TV Group, you've got Pilgrim, which is probably the best and most exciting producer of unscripted television in the business right now. That's not stuff that will ever end up on Starz. You've got the [ Tenenbaums ] who are tremendous producers that do a lot of single-camera comedies, really more broadcast [ networks ] for Starz. And then you've got the Lionsgate TV Group side that is doing a lot of stuff for us because they understand what our programming mandate is and what we're looking for. And so we have shows like Run the World. We're reimagining Step Up that we took back from Hulu to make it premium. We've just announced the -- we just dropped the trailer for Run the World today; The Continental, where we're going to do the prequel to the John Wick movies about the hotel. And so I think we have a great kind of combination where Kevin and his group know exactly what we're looking for, but not everything that comes through the doors that's great is right for us because we are very specific and focused, which gives them the opportunity to kind of be an arms dealer and sell across all the different platforms without having that kind of, well, isn't this just going to end up on Starz because it just doesn't fit our programming mandate.

Yes. And he can take an existing piece of IP. He said Hulu for Step Up, but it was really YouTube. But he can take this show, Step Up, this massive brand coming from the theatrical titles, and he can really edge it up on Starz and make that thing a giant hit.

We've done that with Blindspotting, and I'm beyond excited to get that into the marketplace. Filming started today, and I think it's going to be a huge hit for us on the network.

I love the Step Up movies, too. Watched them all during the pandemic. James, Michael said we had to make sure that you earn your paycheck. So I want to maybe save the last question for you. What do you think is the most important catalyst over the next 12 months that maybe investors don't have in mind?

I would say getting away from specific catalysts. I think the thing that's missing at most of my discussions with investors is how quickly we've inflected our business model. I think just 12 months ago, people were thinking we had too much exposure to the traditional MVPD ecosystem, and that was going to create problems for growth in the future. And I think right now, we're demonstrating that our model is at that inflection point already. It's always hard to pick these inflection points. Investors look for them all the time because that's where the alpha is. But if you look at our total global OTT subs, we've exceeded MVPD for the first time, so we've got more exposure to growth and less exposure at the high-risk MVPD business. I think also the resiliency of the model is something that's been missed. We went into this pandemic with people very worried that production would be shut down, theaters will be shut down. We have a levered balance sheet, and that would be a problem. And we've consistently outperformed our numbers throughout the pandemic with the strength of the library and the strength of Jeff's Starz business. And then the last thing I'd point out is just as we keep score with other traditional media companies, I think we look really good there. Right now, we've got about 20% of our total revenues coming from OTT right now. I think the only other traditional media company that's close to that is probably Disney. Our CFO said on our last call that we'd be approaching 30% by the end of our fiscal '22, which is just over 15 months from now. We'll be approaching 30%. We think that's industry-leading. So we really feel like we're in a position right now to take a pole position in the leadership in the transition to OTT.

That's great. Gentlemen, we're out of time. Thank you very much for joining me today.

Thanks, Steven, for having us.

Thanks, Steven.

Thanks, Wells.