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

All right. Thank you all for joining me. his is David Joyce. I'm part of the media team here at Barclays. Very happy to have today some of the senior management of Lions Gate Entertainment. We've got Vice Chairman, Michael Burns; Starz President and CEO, Jeff Hirsch; and EVP of Investor Relations, James Marsh. Thank you very much for joining us gentlemen. This is very kind of you to take the time and very interesting time to be talking about how the business model is evolving.

Michael, if I could start with you. Just wondering how you're addressing the shakeup of the theatrical window, which looks like it might be impacting releases for another year. Specifically, could you address how the economic model is changing with your co finance partners, your presale partners? Are you adjusting back end participations? Obviously, P&A gets affected. Really, if you could just help us understand how the calculus is changing, even if it is temporary.

I think that we have -- and by the way, thanks for having us, David. I think that we are making movies in the right price zone for this marketplace, gives us a great deal of optionality. We're not making these multi-hundred million dollar pictures that we, frankly, for all practical purposes, need a theatrical release without your own streaming platform to make money. So what we're doing is that we're making a bunch of pictures right now. You've seen some of the recent release patterns, the hybrid release patterns that we had like Britney on Antebellum. You saw that we recently licensed to run to one of the streamers. So we are staying flexible. The margins on our future film business are quite good right now. Obviously, it helps when you don't have a great deal of P&A that's going behind these pictures. But it's -- this marketplace is giving us a great deal of optionality.

Are you fighting for the, I guess, the releases that would have been coming up in the next year that you would be kind of like repricing the contracts with the talent? Is there anything that's changing there? Or are you still keeping the same sort of corporate reduction amounts that you were doing before. Is there anything changing on that front?

Well, we're platform agnostic. But obviously, if you're a high-end actor or director or a group of talent, you're going to want to participate in the upside on a picture. So the back end is still the back end. And that has not changed. It just is -- you obviously don't build into your contracts or box office bumps if your picture is not coming out theatrically, but you have to figure out a way to compensate the talent, so that they're well paid as they're used to being paid. And -- but we're finding ways to -- look, actors want to work, directors want to work, and we're putting an awful lot of people to work.

And traditionally, have you had contracts for the ensuing windows that were reliant upon how well the box office performed? Basically the rate cards, are they being changed in this kind of...

I would say that, not particularly, I mean, again, that I think that the big upfront payment for a less talent where they could win and the studio could lose, I think that was sort of disappearing already. And so I think what we're seeing on our contracts is that on success, they will benefit like they have in the past. It's just -- we've stayed pretty flexible. And again, we're platform agnostic. And so the talent and their agents and their managers and their lawyers, they all know that is an extraordinary time. So again, there are different ways to interpret success. And for us, it's not that difficult to figure out. It's what the bottom line is on a particular picture for us to determine how successful that was to the company.

And Jeff, if I could turn to you, from your perspective, as kind of a buyer of the films, how has COVID impacted your sourcing of theatrical outputs? And how important is that really to the Starz business model in the -- like the level of [indiscernible]

So films are very important to the combined product. I mean it's the premium service. We've always been big adult scripted originals coupled with pay one, who had for a number of years. And we have over 4,000 library titles that make up the service at an $8.99 price point. So we think it's a really good value proposition for the service. So yes, we have been impacted by the titles really not impacted probably until the second half of this year coming up because, again, it is a lag. So during the pandemic, we've had a bunch of selling payable movies come on, they have been very, very successful in terms of viewership and retention. But again, it's the big originals that really drive the business. What you saw in the last quarter of our great OTT growth was really on the backs of P Valley and the first Power universe spin-off Ghost. But ultimately, we've got the Sony Pay 1 coming up right around the same time that the Lions Gate some Pay 1 is coming up. And we do think that gives us great flexibility, great optionality and also, I think, being -- buying from yourself, gives you a lot of ability to help drive the slate in terms of really supporting the originals and putting more content for those 2 core audiences. So very important, but we've got great optionality and great flexibility into the future.

And how should we think about the economic trade-offs if you are going to be the new -- potentially the new Pay 1 platform for the Lions Gate and Summit films. How should we think about that? And I don't want to get too much down the accounting rabbit hole. But what's kind of the decision process there?

So look, I think as we do with any Pay 1, this is an arm's length negotiation, as we have done with any of our other partners that are in the marketplace. We've got a great long-term relationship with Sony and again, we'd love to keep Sony on the platform, and we're having great conversations with them as we are with Joe on the other side of the business. And so because there are third-party participants, and such, we do have to do an arm's length deal, and we think we can get to a great deal. I think the Lions Gate slate over the next couple of years with John Wick franchise coming back and Twilight and those type of movies. It's going to be a really powerful slate coming up. So we're excited about what Joe is doing. And I think by eventually with the optionality of putting it back on, I think it helps solve the rising tide lots on both kind of point of view for the company. We can also play with windows so that I can get what I need in terms of the service, but Joe can actually create second and third windows that continue to monetize that content as well. So I think there's some real great overall company synergy and benefits by having that Pay 1 together.

Both of you could chime in on this question here. You've talked about your 2025 direct-to-consumer goals of 25 million to 30 million subscribers domestically and 15 million to 25 million internationally. How soon do we reach a scale where you can weigh the economic benefits of releasing a film into the exhibitors window versus putting something directly on the Starz app? How should we think about that?

Do you want to start, Mark, I mean look, I think ultimately, it's -- it really isn't about scale. It's about the content and the consistency of the slate. I mean putting one title on, while I think it will give us a good bump. The tail of that bump is probably pretty short. And so I think you've got to get to a model where you actually have either a monthly release or a consistent cadence that then allows you to kind of maximize the return for both the studio and for the network obviously, in returning subscriber growth. So I think it's yet to be determined what the scale is. I think it also has to hang on basically with the breakeven on the studio side. So obviously, where we are today is not at that point. But for me, I look at it in terms of what can it do to drive the long-term growth of the business ultimately bring churn down to low single digits so that we can accelerate the overall growth of the business. And I don't think that's 1 or 2 titles, I think it's more than that. So totally different, obviously, answer to your question, but if you've got to have consistency for the consumer so they can continue to come back for that.

What else can I answer in that regard, David?

I was just wondering if you had any thoughts on like a breakeven analysis of the volume of regular pay subscribers, you would need to have the way against putting the film on your service versus into the theatricals?

I think we look at it. Again, this is probably a simplistic view. Jeff will tell you that they were -- they come to the service for that new originals, the TV shows, and they stay for the movies. And we think first-line movies are incredibly valuable. And again, it's always nice when you're going to be able to control the windowing because, obviously, as Starz and Lions Gate are one company. And so the idea that you've got flexibility in sort of when and how and what that first run window looks like, and we're putting those high-end theatricals through start. I think it's again highly likely that it ends up there. It's up to Jeff, frankly and felt to figure that out, but I think that is highly likely. And I do think there is a bunch of different ways as we've seen every day as -- and again, this is the advantage that the company has is the flexibility to be nimble and as windows move around and these opportunities avail themselves to take advantage of that.

And Michael, thinking about the broader production capability of Lions Gate in this increasingly direct-to-consumer world. How are you weighing where to sell the product to a third-party versus selling it to Starz to help support its rollout? And does that vary by geography?

I think -- obviously, there's some territories that starts is not yet in. I think, again, it's coming up with a windowing strategy that works for Jeff in Starz and then works for Lions Gate. And also, you remember, you have participants in a lot of this this content. So you want to make sure that you're bringing the cash register as often and as at the highest prices to take -- to make sure that everybody is getting a fair share here. So I think it's -- we look at it by a territory by territory, window by window opportunity. I don't know, Jeff, do you want to add anything else?

Yes. Look, I think we have a very specific programming strategy. Domestically, we're really focusing on 2-core demos, women, general as a general market and then the African-Americans below that. And so we're very specific. We want domestically. Internationally, we're a little broader. We're kind of what I like to call best of Western SVOD or best of Global SVOD. If you think about the Lions Gate TV group and the breadth of what they create there, you've got Pilgrim, which is arguably the #1 unscripted producer of content that doesn't really fit the Starz programming strategy. There's a lot of stuff that Kevin is coming -- that's coming through the ended up on other networks that we've looked at and said, doesn't fit our very focused strategy. And so when there is something that fits our strategy, we buy it, again, we have an intercompany agreement that is a marketplace deal but I think Kevin and his team do a really great job of broadening, doing a lot of broad-based programming that it all doesn't fit for us. And so that's a great opportunity to go out and maximize profits on those -- on that piece of content in other places.

So switching gears a little bit, Jeff. And thinking about your go-to-market strategy, you're in about 50 markets around the world. How does Starz differentiate itself among the other players? Is it purely your content? Is it your brands or pricing? Or is it your local distribution partners? How are you able to get your product to stand out above the other competition?

The simple answer is we ask all of that. But ultimately, it starts with content. And if you think about -- if you take a step back and think about the way I think the industry is unfolding right now, you've got a lot of players that are rushing to be that kind of first premium in the home or that first SVOD in the home. They're trying to be a broad-based streaming service. So kids, moms, dads, sports, weathers news unscripted, we're not -- that's not the hot stars is that we were never built that way. We are very adult, very premium, non ad-supported content that really services those 2-core demos that we already talked about. And so we are not competing with the Hulus and the Amazons and the Netflixes and the Disney Pluses in the HBO Maxes. We're a complementary service to these guys. Just like we're sold today in the traditional MVPD world. We don't really compete with Spectrum. We're sold on top of Spectrum. We don't really compete with Comcast. We're sold on top of that. And so Starz has been positioned and we'll continue to be positioned globally as that kind of next one in or that cherry on top, as we used to say in my time Warner cable days. And so that is very unique and focused programming that people are willing to pay for, non ad-supported, at a price point that looks like it's a complementary price point versus competitive. So we're always priced. Domestically, we're $2 to $4 below everybody else. Internationally, same thing. And so it's a combination of content that is adult in nature, non ad-supported and really deep character driven at a value price point supported with a ton of library movies. And we think that's a very unique position as HBO becomes broader in Max and Showtime becomes Paramount Plus, and everybody is really trying to drive scale to build an ad-supported kind of scale of a business, we have a lot of white space in being that first premium add on around the world. And so in those 50 markets plus the U.S., if we're the #2 or 3 or 4 SVOD in the home, that's a great place for Starz to live. We have done a ton of distribution deals around the world. I think that gives us a 2 to 3-year head start on top of having big global tech partners with the Apples and the Amazons, and we're the #1 fastest-growing channel in Amazon around the world. We also have over 70 local deals done in local markets. And when you have 3 to 4 distributors in each of these markets, 4 or 5, you really start to see countries accelerate and grow. And so that's our goal right now is to focus on adding more and more distribution partners as we get into each of these territories.

Jeff, in the past, you've talked about one of the benefits of developing your own as far as platform is that you get the first-party data. That's been helping you with programming decisions going forward. Do you have that similar kind of data as you roll out internationally? And could that lead you to producing content locally as a driver and a retention tool?

It's a great question. The Starz app that we built domestically, we've retrofitted for the world. So we're currently, I believe, in 11 markets all over the U.S. We're in those markets, not because we think that our direct-to-consumer app in those markets will be the biggest distribution channel, it doesn't need to be. It needs to be big enough to get us that first-party data. And all that first-party data from those markets all come back to our analytics team in Denver. And so the world will come back into Denver, and we'll do the same analytics that we've been doing for 4 years. Domestically to refine our programming strategy and our marketing and our retention strategies for the different markets around the world. And so it's given us a lot of insight into what's different about the U.K. versus Germany versus Brazil versus Mexico versus in those kind of markets. And so we do believe that we need to be in some local content in production we are today. We are doing a lot of local production in India right now. We just launched our D2C app in India on December 2, and we're seeing great results in the first week there. We've got a couple of local productions in Spain. We have a couple of local productions in Mexico. We do a lot of local productions out of the U.K., for the U.S. But I think what's different in our point of view on that is we're going to produce local, and they will play in the local markets, but they also have to be able to play everywhere in the world. So the content that we're producing in India right now, we are casting it with actors from Britain and from Spain so that they are global shows and they can work everywhere in the world. The content that we have in Mexico, we're going to put on in the U.S., we're going to put out in Spain. The content that we're shooting in the U.K., obviously, we can put on everyone in the world. The Originals that Starz Play Arabia is doing in the MENA markets we're going to be able to put on everywhere in the world. And so while we're producing local, they have to be global in a sense that they work everywhere for our footprint.

So that ability to produce content and transport around the globe presumably helps with your operating leverage kind of feeds into my next question now that you have more OTT subs than linear. And that revenue stream is being driven by the growth and your ARPUs are also increasing on that front. How should we think about as far as operating leverage from here and the path to profitability?

Yes, it's a great question. I think 4 years ago, we saw the consumer shifting to digital, and we really made a hard pivot to drive our business there. And as you said today, on the Media Networks segment, we've got more global OTT subs than we have global linear subs. And so we're really driving to where the business is and not so much more profitable customer for us because our ARPU is higher on the digital side. Than it is on the traditional linear side. So on one hand, we are driving to where the consumer is going, which is more profitable for Starz and ultimately for Lions Gate. But on the other side, the second step that we took was that we did -- we really derisked the linear business and pivoted our deals more from these large package deals where we look like cost centers or fully ad-supported networks to our MVPD partners to an a la carte or a rev share basis. And so by the end of fiscal, 80% of our local cable deals will be a la carte, which means as we make more money, our partners make more money, and so our incentives are now aligned. So if you think about our business this way, we've moved heavily to where their high-growth customer is going. And so there's a ton of opportunity for us there. All the while, we've derisked the core business. And so on a fixed cost business, we should start to accelerate profitability long term. And then when you get out into the end of fiscal '23, where international starts to turn profitable, I think you'll start to see big profitability on a global basis.

How should we think about your original strategy in driving customer growth and retention over the course of the next year for Starz? And is that going to vary by different region or country?

Yes. So I'll start with the U.S. The outside the U.S. is a little -- it's still early, so we're really trying to refine that strategy. Domestically, we've really taken that first-party data that we talked about. We know who's driving our OTT growth, and it turned out to be those 2-core demos that we talked about. And so our programming strategy is really laser-focused and our mandate is on putting programming on the air at 8:00 and 9:00, 52 weeks a year for those 2-core demos. What we see in the data is if you watch 2 or more originals, you're 4x -- your lifetime value is 4x longer, maybe just watch one. And so we've been really trying to move the development slate so that we can continue to fill the bucket. And so you can move a customer from a 10-week show and at week 10 to another 10-week show to another 10-week show. And so that ultimately, you keep that customer on the network, 52 weeks a year. And if you can bring churn down to low single digits, and the wonderful thing about our execution is every month, we've continued to grow. We continue to bring churn down the all-time low. And so if you can get churn and really get through this programming strategy to low single digits, which we're well on our way to, you can really accelerate the revenue of the business. And so we are laser-focused on just serving those 2-core demos domestically and we've seen great success. P Valley was as our second largest show and is an outsized hit. We just spun into the first Power spin-off and Ghost. We just brought that back for the second half. Huge results last week, and we continue to see great results there. We have 2 more of those shows coming. We think that's going to be a really great addition. We've got a show up 50 called BMF that will slide in between those. And so that kind of continuing of programming for that audience will be complete this year, and we're really excited about that. You think about outside the U.S., it's still early days. We are deploying kind of the best of global SVOD strategy where you have all of the Starz originals, you've got the Lions Gate library of 17, 000 titles. And then we're cherry picking what we think is the best of global span, shows like The Great, The Act, Killing Eve, Castle Rock, and so as we're in each of these markets and getting that first-party data, we'll start to understand the nuances in each of those markets, and we'll adapt based on what we're seeing. But right now, it's still early days, and we just think this kind of general adult premium best of global SVOD is the best way to learn each of the markets in the short term.

I think that it's a good segue, if I could, David. James why don't you -- James just talk about the inflection points that you feel so strongly about?

Yes. Sure, Michael. So I guess we've talked a lot about just the evolution of the business model here. And obviously, we have 2 sell-side folks on this panel here today. David is one of them. I'm an Excel cider. So I kind of tend to look at the world through that lens. And what I've seen is really that change in our model, inflecting from the old wholesale licensing model to one that's more direct-to-consumer is more data-driven. It's more aligned with a direct-to-consumer platform with a studio bolted on with the library bolted on behind it. So I think that's been an important demonstration of our model. We've talked a lot about it over the last few years, acquired Starz 4 years ago. But I think right now, the narrative is really starting to be supported by the numbers. And I think that's an important time for the stock. I think there's been some compliance from some investors that we lack the scale to compete with our peers. But I think if you look at the model carefully, you'll see that we have all the components that we need to be successful. We've got that direct-to-consumer global platform that Jeff has running. We've got a motion picture business. It's got plenty of production capacity. It's got an output deal, so it's still relevant in theaters. Got a TV production business. That's one of the top in the country. And we've got a robust 17, 000 title library to anchor it altogether. So I think it's an interesting time for the stock overall, where you've got this inflection point in the model. You've got all the components that you need to be successful and the numbers are supported -- supporting the narrative at this tide. So I think that's all very important from a stock perspective. But I'll turn it back over to you guys for more operational discussions.

Just help us with the investment piece. I do want to wrap up with one -- the final thought from Michael. If you could please give us the big picture of what it means to be Lions Gate in terms of the film and TV studio? What is your competitive advantage in attracting talent and projects to your platform versus others?

Well, I think the short answer -- well, maybe not a short answer, but it is definitely a -- we are making an awful lot of content. And an awful lot of content in a lot of different -- for a lot of different places, whether it be the theatrical titles that may come out in theaters. I hope that down the line they do or we sell those to a variety of platforms. I think we move very quickly. I think we're now seeing -- I think Jeff could tell you this, we talked about it the other day, just on off-line, and Jeff said, I'm seeing everything right now. And that is very exciting for us. I think Joe Drake, if you were on this call, the Motion Picture group has seen everything. We have a great deal of capacity. We -- I don't know, last quarter, we ended up with 5 -- almost close -- to $0.5 billion in cash and $1.5 billion of an undrawn credit facility. We've been stockpiling cash. So we have the ability to delever, which, as you saw there, David, last quarter, we went down pretty significantly to where we were a couple of quarters ago. So I think that we have a terrific creative team. And I also think that it's a very flat organization in that I see the layoffs that some of the other studios and conglomerates are making, which are multiples of the number of people that we have in the combined company and that itself should tell you that we are very streamlined and moving very, very quickly. You can see that we haven't laid off a lot of people in this environment because, frankly, we're pretty skinny right now, and the profits are coming. The delevering is coming. And Jeff, on the Starz side is creating a bunch of hits you can see that in the numbers. You can see that in the people that are adding the app or going to their cable or satellite company in purchasing Starz, a la carte, it is a terrific indication that the content is working. So I think that's our competitive advantage. We move fast. We have great content, great creators. We are, I would say, very talent friendly. And at this moment in time, and I think it will continue into the future, we're seeing every -- in creating every bit of content that's out there. I don't know, Jeff, do you want to add anything on those Starz create? Thank you, David, for having here.

Michael, Jeff, James. Thank you very much.

Thank you to, David. Thank you.