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

Welcome, everybody. My name is Thomas Yeh, a Morgan Stanley media analyst. First, a note on important disclosures. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So I'm very pleased to introduce Jeff Hirsch, President and Chief Executive Officer for Starz. Since his promotion to CEO of Starz in 2016, Starz has significantly grown streaming to nearly 15 million subscribers, including the expansion of its international footprint to over 50 countries. Jeff, thank you so much for joining us.

Great to have -- thanks for having me. I'm really excited to be here.

So we've reached an inflection point at Starz, it seems, where streaming subscribers exceed linear subscribers and revenues are on pace to do the same. Maybe you can kick us off by telling us what this means for the broader outlook at Starz and how this changes, how you might operate the business going forward?

Well, again, thanks for having me. It's been a great pivot. About 4 years ago, we made the decision to make a hard pivot into the digital world on the domestic front. And we built the retail app of scale. We built our organization to bring folks in that knew to harness data to really do customer acquisition, look at lifetime value, build pricing disciplines. And we've seen the fruits of our labors over the last 4 years where, as you said, now the business is -- we have more global OTT subs than we have linear subs. I'd also point out that by the end of this fiscal year, 80% of all of our subscribers domestically will be in some kind of revenue share à la carte deal. And I think what's important about that is, one, it aligns all of our incentives with our partners, whether they're the Comcasts of the world, the Spectrums of the world, the Amazons of the world. We're all incented to grow the Starz business together. But what it also says is that the subscriber growth that you've seen over the last 24 to 36 months are customers that are choosing to buy Starz. And that gives us great confidence that the programming strategy that we have domestically and we will have eventually around the world is working. We're no longer being dragged along in a big bundle and at the bay of somebody maybe getting the service and not wanting it. These are -- 80% of our consumers are choosing Starz for the content that we have in, whether it's our big originals, whether it's our movies and our library at our compelling price point. And so we feel really great about what we're doing right now. A couple of years ago when we merged with Lionsgate, it was a confluence of a couple of great events, where we got access to a 17,000 title library on a broad scale. Global tech companies like Amazon and Apple and Google decided to take what they were doing domestically around the world. So that gave us a real risk-mitigated way to take all that content and build streaming services now in 56 countries around the world. And we feel really great about that. We do believe that we can get to 60 million subs by 2025 globally. And if you think about the way the business is unfolding right now, you have these large, broadscale, I call them, tier A-type services that are either ad supported or trying to have programming for all -- everyone in the home. Starz was never that in the traditional world. We're never going to be that in the new world. We're a great premium, adult, nonsupported service that we can see now consumers are wanting to pay for. And so we feel really good about our position in the ecosystem. And we think we'll continue to have great success.

It does feel like we've been hearing about new streaming services being announced almost every month. And you've kind of reached the peak point of streaming Analyst Days, at least. And Starz has been at this for a while longer. What's your latest view on the streaming landscape ultimately and where that kind of lands? And can the market sustain all these services? And where does Starz play into that thesis more broadly?

Again, as I said, I think there's 3 tiers of streaming services. There's these A tiers that are these big broad-based services that have to get to 200 million to 300 million subscribers globally to either compete on an ad-supported basis to pull digital dollars away from a Facebook or a Google or an Instagram or just trying to be all things to everybody in the home. And you see all kinds of flavors. Like I said the other day, everybody is now on the field with their ball. So now it gets fun, right, because we've been talking a lot about them but now they're here. And I think what you'll see is competition in that A tier of broad-based services for growth is going to be very intense. And people are going to fight on advertising. You see the amount of advertising that Paramount Plus is spending right now to launch the service this week. You saw what Discovery did when they launched their service. You have others that are competing on price right now. Apple has continued to extend their free trial. HBO Max continues their discount and their service. And I think the last area where people are going to start to create is kind of value bundling, which you saw on the old traditional business. And so you'll see these large A tier services want to start to bundle with other services. And that brings me to the second tier, which is where Starz sits, which is this premium add-on service that's not trying to be all things to all people. We're very focused on our programming mandate of content narrated by and about in 4 women and underrepresented voices. And that's very unique, and we continue to have a great -- the largest composition of women 18-plus. In the category, we have the largest African American. And this is all domestic. Obviously, we'll talk about international in a minute. And so as HBO has moved into Max and become that tier A and Paramount Plus becomes the focus of CBS-Viacom, we sit in a lot of white space in that tier 2 or that B tier as a great premium complementary add-on, much like we were in the traditional cable days where I came from, on top of Time Warner Cable or on top of Spectrum, on top of Comcast. And then there's the C tier or the third tier, which are these really focused niche services like the Pantayas, the Acorn, the Shudders, the ALLBLKs and the IFCs. And those are also complementary services as well. But we think we'll be able to play a very valuable role, both as a bundling partner to the tier As but also as an à la carte or a stand-alone company in those tier Bs.

I mean do you think the penetration opportunity and the overall market size differs between tier A and tier B? If you look at kind of linear and OTT business, it's kind of in the aggregate. Given your content strategy that you just spoke of, what's the TAM that you're addressing? And how is Starz positioned?

No. I think it's somewhere between 20% to 35% to 40% of that $200 million to $300 million globally. If you think back to the traditional days, where I grew up in HBO in the heyday, and you could say, HBO has had probably some of the best content in the history of the business, got to 33 million or 36 million subscribers on a base of 108 million. There's just some people who don't want to pay for adult content or some people who don't want to pay for the storylines we have. And we're not trying to serve everybody in the home. We don't have news. We don't have sports. We don't have kids. We're not doing a lot of unscripted. We're not doing a lot of reality. And so our base is -- our opportunity is smaller. But I think it's still somewhere between 20% and 40% of the global tier A services.

That suggests a pretty healthy opportunity ahead still. And I mean we've seen very strong subscriber adoption over the last year, in the U.S. in particular. Knowing that it's hard to parse out, how should we think about the COVID impact of that? And maybe more broadly, what did you and the team learn about the Starz business and the consumer during the pandemic that might inform your kind of strategy going forward?

Well, look, I think the first and foremost thing that we learned is the robustness of Lionsgate as an organization. I think working with the Lionsgate TV group and the Starz group to get our productions back up and running, we've got almost 15 productions around the world going right now. I know Lionsgate and Pilgrim have a bunch more. But we were very early to get protocols done and get production back up and running. We actually started and completed The Girlfriend Experience in the middle of pandemic without any issues. And we've been able to keep our production up and running. And I think the fortitude and the teamwork on both sides of the business was really outstanding. And as a leader, it was really great to watch and see. And so that's the first and foremost. Obviously, with everybody, we saw large -- we were able to launch 5 new pieces of content during the start of the pandemic. Outlander had one of its best seasons yet. We launched Hightown to record fanfare and results, only to launch P-Valley behind that. It broke all the Hightown records. And then we launched the first Power spin-off of Ghost. And so we were able to launch real big content and drive subscriber base there. We also saw consumers going back into the catalog and watching Seasons 1, 2 and 3 of Outlander. We saw 1, 2, 3 seasons of Power. And that wasn't just domestic. We saw that in every 1 of our 56 countries around the world. We saw a lot of -- a lot more consumer engagement. I think we learned a lot about our offer strategy. Unlike others that did 30 days free, we thought this was going to last a little longer. And so we discounted our price without a free period. But we did it for 3 months and 6 months to kind of keep the consumer on the service. I think long term, we've seen churn come down because we didn't allow people to go through the catalog pretty quickly and really saw the value of the long tail of the service. And it's given us a lot of more insight into -- with our data analytics engine that we've built, we've really been able to build a great pricing discipline around offer strategy and retention strategy. And we've been able to really bring and buy content on the service that will complete the gaps that we had in between our 2 audiences after a show ended so that we can actually move consumers from week to week, show to show and ultimately bring churn down to low single digits. And this spring and summer will be the first time we're fully in this really robust slate. And it will be the best slate that Starz has ever had on the air.

Great. Yes. I mean I think the view that there has been a little bit of a pull-forward associated with streaming adoption, it sounds like from the content pipeline perspective, you feel like the trajectory of growth should still be pretty strong heading into the next fiscal year as well.

Yes. I'm excited to see how these new shows perform. And we've got 3 Power spin-offs and those drive a tremendous amount of growth for the business and filling in the gap with P-Valley in there. And a show called BMF, which is the 50 Black Mafia Family show, really completes the every week arc in terms of the -- for our African American audience. And then we're shooting Becoming Elizabeth right now in the U.K. We've got Catherine de Medici with 3 Arts and Lionsgate shooting in France. We've got a 0.5-hour comedy with Sharon Horgan and Courteney Cox and Greg Kinnear leading. That's going to be great for Starz. We just announced a Julia Roberts-Sean Penn show. And so we'll complete the loop of that general female audience as well. And when you create those -- when you fill those gaps, we should see churn come down significantly. And so much of our subscriber base is driven by the originals coming on the air. And now that we don't have gaps anymore, we should see that consistently grow and accelerate.

Okay. Well, I think the international momentum has also been pretty strong. Can you share some details on the progress there? I mean we just had Greg Peters at Netflix talk about launching into a market being kind of the easy part and then country optimization evolving as you penetrate more into a market. Maybe talk a little bit about the priorities around the work that's needed to follow in markets after launch, maybe the timing of further rollouts as well and kind of balancing those 2?

Yes. I mean look, we're in 56 countries right now, 19 of them are MENA markets through our STARZ PLAY Arabia venture, which is a little different content strategy we have. And I think he's right. When you launch into a market, obviously, we have much different -- we're more of a wholesale strategy launching into markets right now than we are in the retail strategy. But we have put our retail app into 12 markets to really get that first-party data. It was our domestic app that we built in-house. We've then taken out into the U.S. overseas. So all that data comes back to Denver and we built that out. We've transitioned that app to be an international product. So we get all that data. And so for us, it's been getting all those distribution deals done because it -- our distribution strategy looks a lot like the U.S., where depending on where the consumer wants to watch it, whether it's on Orange or Telefónica or on our own app, we want to be there. And so we've got a team that have done almost 80 distribution deals in the last 18 months across the world. I think the goal right now is we're good with the 56 markets we're in. We just want to go deeper in terms of penetration in each. But we have put our app in each of those countries to get the first-party data to refine our programming strategy. We are doing originals in India right now. But those originals in India have to be able to play everywhere in the world. So we're casting them with talent out of the U.K. So that they are expanding out of India. We have 2 shows shooting in Spain right now that, I think, are local shows but can play global. We have 2 shows in Lat Am right now. And we do a bunch in the U.K. And so we are putting our toe into local production. But again, we have to produce local and act global in a sense.

Makes sense. I mean on that distribution point, you recently signed a deal with Canal+. And it seems like it's an increasingly important part of driving subscriber growth. Can you share your views on how the retail versus wholesale approach will evolve?

[Technical Difficulty]

Jeff, did we lose you?

Hello? Does that mean I froze?

Yes, I think so.

Sorry. I switched to my phone. It's amazing. I'm in the office, I froze. Sorry, I've been doing this whole thing...

No problem. No problem at all. Thanks for joining back in. I'd love to continue the chat with your phone if that works.

Okay. I'm not sure how to get my video coming up but let's just keep going.

Okay. Yes. No, I mean whatever works for you. Yes, we were just talking about the distribution partnerships that you've been kind of using as leverage to build a presence internationally. I would love to hear your views on the role that, that plays and how retail versus wholesale kind of evolves over time? There you go.

Yes. Sorry for the technical...

No problem. Thank you. Appreciate the...

Yes. So I think, look, the international expansion that we launched 18 months ago or a little longer now, the goal was to get to 15 million to 25 million subs net range by 2025 with an ARPU of between $3 or $4. And we're well on our track to getting there. I think it was a wholesale deal. We had 3 kind of distribution partners, global partners like the Amazons, the Googles and the Apples. And we continue to be the fastest-growing channel on Amazon around the world. And then local partners like Claro and Telefónica and Izzi, where consumers are there as well and then our own app. And again, our own app is really in the market to get the first-party data to really know and hone our programming strategy. But when we looked at the international expansion, we looked at each market as a stand-alone market, we said, "Okay. What's the broadband penetration in the business as a tier B premium add-on, which we are outside the U.S. just like we are in the U.S.? What's the breakeven penetration and where we are going to get the steady state by 2025?" In most of the cases, by country, breakeven is somewhere between 2% to 4% penetration of broadband homes. So we feel pretty comfortable that we can make that pivot to profitability by fiscal '23. At the end of fiscal '23, as we've said, and we're well on our way to achieving that goal and, again, getting to that 60 million -- 50 million to 60 million subscribers by 2025 globally.

That international penetration breakeven, is that based on an assumption of kind of a wholesale approach going forward? And retail is, as you mentioned, more of like an ability for you to be able to kind of test that in the market as well?

Yes. So what we did as we -- typical Lionsgate kind of risk-mitigated approach was we looked at each country and said, "Okay. We're going with wholesale." We know we're generally breakevens at year 3 based on penetration. We'll watch the market. If the market accelerates, we'll drop an app in there to harvest to really harvest and get more data and really grow the business. If it's on track, we'll stay wholesale. And if it's actually not working, we can Lionsgate actually license the content back into that market. So we have a lot of flexibility in terms of each of the markets we're in. And as we've learned, we've shifted money from one market to another. And even within markets, we've shifted money from one partner to the next to optimize our growth. And so we -- I think we've been pretty flexible and pretty mobile in the sense.

It makes sense, yes. I also wanted to touch briefly on the linear subscriber trends. We've now lapped the 1-year anniversary of the Comcast transition to a variable deal structure. You talked about greater exposure to à la carte relative to fixed. But I do believe you still have some exposure to the latter. Should we expect a full shift over time by linear distribution partners into a more à la carte mode? And help us kind of weigh the differences between those 2.

Yes. I think long term, you'll see that -- like I said, 80% of our subscribers at the end of this fiscal will be on à la carte basis. So 20% are in some kind of either fixed deal or a rate per basic deal or something that's not true revenue share. And I do think over time, you'll see that move into the 90s. There are some operators who really have this packaging -- simple packaging strategy that believe that simplicity and inertia is a wonderful thing for the business. And so they don't really like to sell à la carte. And I think that's just the way that operator wants. And we're happy to serve the operator in the way that they want. And so I like the idea of à la carte better than fixed because it allows us to continue to grow upside while fixed limits your downside. When you have the programming slate that I think we have coming up and what we'll have for years to come, we see it on Comcast. When we launched Ghost and Outlander, we saw great growth à la carte. We've gotten, I think, over 1.5 million customers in the first year and a much higher ARPU than it was in a package deal. And I think when you have 23 million sub-footprint that they have as we continue to get the slate that we have, there's a lot of upside on the traditional side for us. And I like the opportunity of our incentives being aligned, working together to make money together and grow the business. So I expect only great things to continue to come from Comcast.

Yes. I mean even in the midst of kind of the accelerated core cutting environment that we're in, domestic linear subs seem to have outperformed the industry trends and have shown the stability in the last few quarters. Are your linear distribution partners doing anything differently than before to drive uptake through their systems? Maybe talk about how the nature of those partnerships have evolved since the launch of OTT.

Well, one, because we're not heavily packaged anymore, we're not at the whim of the general industry trend that you're seeing. Two, because our incentives are now aligned, we're a revenue-generating product for most of our partners as we continue to improve our slate. And again, the better shows that we have performing like the Powers and the Ghosts and the Kanans and the Forces and the P-Valleys and the Outlanders, they come on air, all of our partner [indiscernible] large growth. And because they're à la carte, we're all [indiscernible]. We're also sharing our first-party data with our partners now about offer strategy and churn and lifetime value and what that means. We're also scheduling our content around those same tenants to help drive not just our own app and not just our digital partners but our traditional cable partners and our traditional style -- and telco partners as well. And so unlike other fully distributed ad-supported networks, we've never been fully distributed. There's a lot of opportunity and a lot of customers on the traditional side that now that our incentives are aligned together, we can go grow the business at a faster pace.

Yes, that makes sense. I wanted to shift to pricing briefly. The competitive streaming landscape has certainly evolved so that we are seeing more of these services. Some of them offered at $4.99, $5.99. Can you talk about how underlying engagement trends kind of speak to your pricing power and how your views around pricing have evolved over the last few years?

We always -- it's a great question. And there's a ton of research on consumer pricing behavior. We've always wanted to be that tier B service or that complementary service as an add-on. And so it was always important to be priced for us below $10. Because the consumer, in their mind, anything over $10 compared to something else over $10, it's an either/or decision. And if something is like $14 and we're $8 or $9, the consumer will see us subconsciously as an addition to. And so it was important for us to be priced as that premium tier add-on. I think the one nice thing that our app has done in the marketplace is it's driven our traditional cable partners to match that price point. Where we've been as high as $13, $14, $15, we're now on, for the most part, around -- at the same price point across the board on all of our platforms, which is where we think the right price for our services based on our demos. The game for us right now is not -- we're not playing an acquisition gain. We're not, like we said, not trying to get to scale for advertising. We're really playing a retention game. And so the goal here is to put shows on week to week that we can move the customer from one show to the next week to week to week and bring churn down to a low, low single-digit number. And so that allows us not to have to drive the front end of the funnel to spend a lot of money on churn. It also allows us not to have to play with price in the short term until we really fully understand the impact of this robust slate that's coming. In the next probably 16 to 18 months, we'll have a better sense on the amount of content on the air, how we schedule, what it means for churn. But ultimately, raising rate on the front end just to create more short-term dollars and create more shorter lifetime value, more churn on the back end isn't healthy for any business. And so we're really focused on the retention component of the streaming business, not the acquisition component.

Makes sense. Makes sense. And that's a good segue into the content side of things. And you and I were talking about the exciting pipeline that's coming pretty soon over the next few quarters. And you already highlighted a lot of the key originals that are going to be a linchpin that are driving kind of subscriber growth. What's the right amount of original programming that's needed to kind of retain and drive the next leg of adoption, do you think?

So domestically, we think it's somewhere around 16 originals. We'll be around 12 this year, up to 16 the year after. Obviously, COVID pushed up some of our launches about 1 quarter. So this late spring, early summer is a really big start to us getting into that fully robust slate for the first time. Internationally, we think it's somewhere between 120 and 150 hours, probably right around the same. Again, it's about completing that kind of programming arc every week, 52 weeks a year for our core demos. We're not trying to service kids in the home. We're not doing a reality. We're not doing new sports and weather. So we're really focused on those 2 core demos. So you put 16 big originals, coupled with the Lionsgate Pay 1 that we announced this morning and the Summit Pay 1, with over 7,000 library titles that we have at $8.99 and internationally around that same hours with the Lionsgate Pay 1B in, say, the U.K. and in India, where the movies are coming right to the service at EUR 4.99, we think it's the right price point with the right amount of content to really drive to that 60 million -- 50 million to 60 million subscribers worldwide.

Does the genre content have to expand as well as you're kind of programming locally and internationally? Can you talk a little bit about how programming might travel between countries as you increasingly become more global?

Yes. We've gotten a lot of data on -- one of the cornerstones of the international expansion is the Starz Originals [indiscernible] a lot of the business. Obviously, we're using the fixed cost business here to drive international. We've taken our app that we built internally and expanded it around the world and we did that internally as well. A lot of the Starz Originals show up on the international. So the international programming is about 1/3 of the Lionsgate library, 1/3 from the Starz Originals and then 1/3 from other third parties like we have The Stand on right now globally. We have The Great, The Act, Killing Eve in some markets, Castle Rock, Normal People. As the Starz slate becomes more robust and licensing on some other shows come back, more stars will be on the international fair. But -- however, some of it, like you said, doesn't work in some countries. So we've got a pretty good sense. I mean the Power Universe travels really, really well in the U.K. and France and in Brazil. We have -- we know some of our other shows will play very well in Germany. We have a couple of shows in the pipeline that we know will play well in Lat Am. We also are producing locally in India right now, as I said. We're producing locally in Spain. Obviously, in the U.K. and France, we're producing, and in Lat Am. We're producing in a lot of different countries. So we feel like we've got a great mix of these best of global SVOD service content shows that are just Starz Originals and other third parties that will then buttress with locally produced content from around the world.

All right. That makes sense. I mean you mentioned the deal that was announced today associated with the Lionsgate Pay 1 film. And COVID has obviously changed the recent Pay 1 pipeline, at least in the near term. Movie consumption, more broadly, seems to be evolving. Can you talk a little bit about the role of movie content on Starz and how you see that from an investment perspective going forward as a contribution of value to the subscriber?

Movies are important on our service. Obviously, we talked about big originals driving subscribers on the OTT side. But big box office movies also drive a lot of acquisition and a lot of conversion to subscribers. We've had the luxury of having Sony for the last couple of years. And movies like Jumanji and Spider-Man play very, very well. But we are excited that when the Lionsgate and Summit slates came up, we were really excited to get those because I think title for title, top to bottom, those mid-budget movies perform better for our service than anything that we've seen from our first-party data. So that was a real great win for us to pull that on to the service. Also, I think it's great that I can walk across the street with Joe and say, "Hey, look how these movies are performing. Do you want to make another one of these whilst you have it similar?" So we can really crack and help craft that slate to really help perform, not only for the Starz app but for our partners like Spectrum and Comcast and Amazon and Hulu, where on each of those different distribution partners, movies play a different role in terms of level of importance. And we have that first-party data. I also would remind everybody that we still have Sony in the second and third window. And we still have a bunch of Disney titles in the second and third windows. So we feel good. Again, 12 to 16 big originals, the Lionsgate Pay 1 and the Summit Pay 1 with a lot of library content at $8.99 is a really compelling price point for consumers. And we're seeing that in that uptake of that 80% à la carte consumer.

Got it. I wanted to squeeze one last one in and thank you so much for all the time. But just in terms of thinking about the path of profitability for Starz play internationally, you talked about that penetration path being the driver of opportunity to reach breakeven with larger scale. Can you maybe talk about the subscriber opportunity more holistically in terms of how much you believe it warrants incremental investment? And how we should think about the cadence of that over the next few years as you kind of continue to deepen your presence in some of these markets?

So in terms of investment, I think last year was the deep water mark in terms of investment. And we've seen that come down this year. We'll see it continue to come down in terms of impact to the bottom line of the business. By the end of fiscal '23, we'll turn positive in terms of cash flow for the international business. And by 2025, I think long term, we'll be at that 50 million to 60 million subscribers. And again, I think, long term, we'll somewhere in the mid- to high 20s in terms of margin for the business. And so while I think we are investing or self-funding this international expansion out of our balance sheet, we feel good about that. We see great subscriber growth. We continue to see people wanting to do distribution deals with us and subscribers coming off those distribution deals. And while it's a bit of a hockey stick in terms of the ramp. But as you add more distribution partners and you lap those partners, you start to see those subs accelerate. And that's what we're seeing in the numbers today.

That's great. I think we're all out of time. Thank you so much, Jeff, for taking the time and thanks for bearing with the technical difficulties. Appreciate it.

No problem. Well, that was our fault. I always love coming to your conferences. Thanks for inviting me.

Thank you so much. Thanks all for joining.