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

I'm Thomas Yeh, media analyst at Morgan Stanley. Just a quick disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, I'm very pleased to introduce Jen Hollingsworth, who is the Chief Operating Officer for the Motion Picture Group at Lions Gate. Jen joined the company in 2007, and she oversees daily operations that positions the division for growth as well as leads the strategy and innovation team. Jen, thank you so much for joining us.

My pleasure to be here.

So let's start off at a high level. How has the pandemic, and in particular, the shuttering of production and movie theaters really changed the long-term outlook for the film businesses?

I think there's so many components to this. Part of this, I would say, pieces of this are an evolution that were already kind of happening. As many people have said, the pandemic has just been a catalyst for change that was already in place. So I'll start with just how we look at our film slate. We -- because theaters shut down, we had to figure out an alternative distribution strategy for these films instead of sitting on them for a year, 1.5 years, we didn't know how long. So we were able to explore new models for distribution. And I think what that did for us is it opened up possibility for distribution with unique partners that we never distributed with because we didn't have a theatrical window anymore. And new models were discovered. And I think for us, we determined that a more platform-agnostic approach to content was a real growth opportunity for us because not only can we have different genres, different target audiences, different budget levels, different marketing strategies, but we can also have different distribution outlets than we've had before, which further risk mitigates a slate approach that we have. So we found a lot of opportunity in that actually. And so we have decided to go with that moving forward as -- we don't know how the market is going to open. I wish I had a crystal ball, but we don't know -- theaters are opening, but it's still early days. There's not the content that used to be in the theaters quite yet. So that's still coming. Audiences are returning in varying degrees. So we're tracking that as well. But I think for us, the long-term opportunity is really for growth and how we monetize our film slate. We're super excited about continuing to make content. We think that being a content provider is a huge, huge advantage for us. And we still value all the things we value before, making quality content, talent relationships, all those things we did before. We're just interacting a little bit differently now just based on the environment we're in, but the approach has remained the same. Capital investment is super important for us to make the content to put out into the world on whatever platform it is. And we'll find the right home for that. So we feel good about it. We feel like there's opportunities.

How does that release strategy continue to evolve if the box office does return to pre-COVID levels? And what are the kinds of things that you might be seeing that -- you mentioned there are varying degrees of return to normalcy. Is there some sense of the underlying consumer domain for return to theaters? And how do you respond to that over time?

Yes. I think this is something that we've always -- everyone has always wondered, pre pandemic. Like if you release a movie direct to platform in its opening weekend, you're going to cannibalize theaters. And if you -- if you keep going in theaters, does it even provide the opportunity for at-home viewing in opening weekend? And what is that price point? And what is that -- and the pandemic allowed us to try all of that stuff. The entire industry was open to try that stuff. We appreciate our exhibition partners and want to provide them with films. But when they're closed, you're like, oh my gosh, we have to find an alternative distribution option. So we were able to explore a lot of those. And I think what we found is -- and through the pandemic, the reality is people's behaviors had to change because there were no theaters, but I do believe there's a lot of lasting habit changed for some people. And some people, I think, will remain at home for a lot of the movies that they used to go to the theaters to see and then some people will still go to the theaters. So I don't believe there's going to be as much cannibalization as we originally thought. I just think it's going to be 2 different audiences viewing in 2 different ways. So there will be opportunity in home for first run, and people will love that and pay for it because it's just more comfortable, it's for their family, it's how they like to view. And there are some people that are craving that theatrical experience still and want to go back to the theater. So I believe there is a dual path here that is going to work for content, for us at Lions Gate. And we are just going to have to be aware of the types of films that we decide to release on platform and decide to release in theaters, so I think that mix has changed, and I think we'll continue to see how that will evolve as we see movies hitting theaters and consumer behavior responding to that.

Yes. I mean, on that topic, it seems like the window for theatrical has evolved in response to theaters being closed. There's also some signs that in 2022, things might return at least a little bit towards the exclusive period. Some were talking about 45 days. What are your thoughts on where that industry might land on the right windowing strategy that maximizes the monetization opportunity for you?

Yes. I wish I knew that answer. I think we -- I don't -- I think that we will not return to pre pandemic [ theatrical ] levels. And just my opinion, I think we are already moving there. I think if we hadn't had a pandemic, the consumer behavior was already changing, as I mentioned before. So I just think there was going to be a shift anyway, and we were going to have to get to a place that we've got to already, but in a year or 2. So that's just a change that is part of any industry-changing and consumer is changing. And we have to then create different ways to have our product be visible to people where they want to see it. So I just think that our overall approach to the windowing strategy for us is to capitalize on opportunities to put our content in the right places with the right partners. That means specific window exclusivity downstream is probably -- is gone. We've seen that it's gone. Many partners are buying for content now. So we'll pilot in a bunch of windows at the same time. So that works for us. I think there still will be probably a smaller theatrical exclusive window for certain types of content. You're already seeing that there are content providers putting -- planning to go day and day with theaters and on their own platform. So there's no exclusivity with theaters there, and theaters are okay with that. So I think that's where you're seeing theaters being like, oh, maybe this isn't going to cannibalize our business. We need this. We need to open, and we need people to come in here, and we believe that the movies we're putting here will serve -- will enable the customers to have the experience they want. So I'm not sure what the winning strategy is, but we are exploring any and all of them right now. And I think it's a really interesting time to be a content creator in a place where you are able to provide 2 partners in a kind of unique new way and experience new types of models. So we're -- and we're exploring all of them right now and learning.

Yes. And on that experimentation, you've done a number of films during COVID through this premium VOD window. How do you think the consumer appetite for that window evolves if the film potentially is also released in theaters, presumably, if we get back to normal? And what are some of the learnings that you developed during this period of time that you feel like you could take away as opposed it might just be temporary because of the fact that the situation was circumstantial, right based on...

Yes. Yes. We released -- I think we've explored not all, but many of the distribution options already. We did a [ flip ] to the streamer. We did a PVOD -- direct PVOD, and we did a short theatrical window to PVOD. So we've kind of tested a lot of the market already. And I think there is a PVOD market. Now what type of content that becomes sticky with as theaters open, we'll see. But we've -- on all of our content, I think what we've learned is, I don't believe there's not the same degradation on -- from opening weekend in theaters that there is on PVOD. PVOD just kind of ebbs and flows. And people discover it when they discover it. And it's almost like a snowball of when people discover it on the first weekend, there's a word of mouth. And if it's good, more people will discover the next weekend versus box office, which has a falloff for the second weekend that we've seen. So I think the -- there is a -- I think there is a place for this type of content in a PVOD structure. We will continue to test it. We'll test different price points. We'll test different pricing strategies. We'll test the kind of content we put in PVOD. But if we believe that, that's where the market -- our consumer will show up to watch it. That's what we're going to put it. We're going to do the absolute best thing for our content. If it's the best thing to put in theaters first, we are absolutely going to theaters first. So we're in a discovery process. Like I'd say we tested a lot, we've learned a lot, but we haven't -- we don't have the volume of learnings that we need. The industry doesn't have the volume of learnings we need. And the information on PVOD isn't readily available. So people can't see exactly what everyone else is doing. But we want to do the best thing for our partners, the best thing for our content and the best thing for our consumer. And we will discover that along the way, and we will make sure we place things accordingly.

Great. Great. I feel like PVOD, at least from a consumer experience level, kind of rolls more naturally into home video. Does the industry shift towards streaming put greater pressure on the broader consumer demand for electronic sell-through and video-on-demand windows that you've historically been able to monetize?

Yes. We think about that stuff all the time, especially as the industry is, as we know, merging and platforms are merging into different bigger streaming platforms. I think this is still a discovery process as well. We -- at Lions Gate, we have a gigantic library. So there's a lot of ways that we can monetize. We have EST and sell-through. We have started our streaming platform in Starz and that -- which is an incredible growth platform for our company. And I think we're still seeing testing whether or not how digital is being impacted or EST is being impacted by the streaming platforms that exist because there are more of them. But it's so interesting because there are more of them, so you have to buy more subscriptions. So inevitably, we're all getting back to the place where we're paying for a cable-type prices, but maybe we're getting more of the content we want. So I asked -- it was probably, I don't know, maybe it was like a year ago, 18 months ago. I was talking to a group of younger people, much younger than myself to ask what they watch and where they watch it, and how they find it. And what I hear overwhelmingly is I watch what my friends talk about. So it's the noisy content that people watch. And if that noisy content is available on EST on a certain platform, I think people will watch it that way. I think if it's on a streaming platform, if someone wants to then pay for that subscription, they'll watch it on that subscription platform. So I think people will find the content they want to watch wherever it is. And then that story will tell itself as we see how that works.

Yes. There's a lot of discussion on the value of library. And I think the Lions Gate team has definitely also talked often about the value of the content library. Without getting into any comparisons with film studio peers, can you help investors with a framework around thinking about the depth of your library and how to think about the catalog monetization opportunity?

Sure. So we -- I don't know the exact number of titles, but we always say we have around 17,000 titles in our library, give or take, and I'm not sure that changes over time. But it is -- I think we've always put a lot of -- we talk about our library in terms of the ability to monetize down -- in all various windows on all types of platforms, we've always talked about that as a huge strength of Lions Gate. And it has never been to me more true in my tenure at Lions Gate than it was during a pandemic year. A time where people were pretty much forced to stay in their house. And there is not much else to do. And so people were watching a lot of content on their televisions. We monetized our library in ways that I never thought were possible. We had value coming from everywhere. I would look at our -- because I look at our numbers all the time, and I would look at the numbers and like, how is this possible that our numbers are looking so good, and we're finding growth all over the place. Titles that we released 10 years ago in theaters, now all of a sudden, massive amounts of value coming from them. Wow, so people were discovering this content everywhere. And I just saw -- you saw it, you saw overperformance in so many areas of our business. AVOD is a big conversation right now. AVOD is growing and people are talking about that massive increase in growth in that area. And we're seeing that. When you have 17,000 titles and an area is growing in terms of one of the distribution models, we get the benefit of that. So we've had an incredible pandemic year, and I would say that a lot of that is -- part of that was getting into production very quickly in last summer with all the COVID protocols in place and starting to make content again. And part of that was the fact that we have a huge library that is just churning dollars for us, which is -- it is a pretty impressive year for us in that way.

Nice. So what's the right way to think about balancing that external licensing opportunity that you see compared to the value of retaining exclusivity to drive streaming growth internally, right? Starz is definitely also a major vehicle for growth.

Yes, absolutely. We value our relationship with Starz. And I think that has -- as we've progressed and -- as a company and together, we've realized that there is a way for us as Motion Picture Group to boost -- help boost Starz subscribers, which is why we did the Pay 1 deal with them, and we were excited to be able to provide our sister company with really great brands and first run titles on Pay 1. We -- and we'll always look for opportunities to put content onto our Starz platform. The beauty of it is, I think there, when you look at your drivers, the big franchise drivers and things that are unique and differentiate Lions Gate, those are things we're considering, like if you could provide an exclusive experience with Starz, will that increase the subscriber base? The answer is yes. I imagine we would then just put it exclusively on to Starz and try to increase the subscriber base. The -- but as we talked about this huge library, or content that is set at a different sort of lower budget level with a different type of model, maybe it's not a massive brand driver where the exclusivity will drive people to the Starz platform, but maybe it is a massive peel, piece of content that everyone is clamoring for, and we can then put it out to various distributors on a nonexclusive basis and generate even more revenue for the company. So it is kind of incredible that we have both opportunities. And we will program for Starz where Starz sees the value and where we can grow their subscriber base because they do have a specific audience target. So where we can do that, we will absolutely partner. And where it makes sense, we can go external and create value that way too. So it's really the best of both worlds.

That makes sense. So on the film slate, what's the latest update on the production process? And how has COVID impacted the way that your schedule and the way that you conduct filming has changed?

Yes. We -- last year, when everything shut down, you first go into a little bit of a shock, and you're like, oh my gosh, what do we do? Oh, my gosh, what do we do? We -- I think we did that for maybe a week. And then we said, okay, we got to start. We got to get back. And so we have an incredible production team that leaned in at that moment and said, okay, how do we partner with the right people, the right teams to develop COVID protocols for our production so that we can get back to making movies as soon as we are able to, as soon as we get the okay. So our production team worked tirelessly to get those COVID protocols in place. We were one of the first companies, I think, back to production. And we weren't just back to production with one film. We piled them up, and we started -- we were, I think, within 3 months, we were doing 4 -- we started 4 different movies. And the biggest -- I think the biggest shift for us was first of all, you have to add time, you have to add money for all this to ensure that everyone remains safe on set and safe from COVID. But also we had to shift locations to some -- in some degree because whether COVID was a little bit too hot in certain areas or whether they weren't allowing filming, sometimes we had to shift locations at the last minute, which caused a little bit of a budget increase as well, but it was the best thing for the movie to get it made. And so we had to move a lot of pieces around, but I think from it, we've become a stronger -- stronger and more resilient in our way that we approach filming and we approach our production. And I don't think it's changed at all the cadence. We -- like we got back in quickly, and we are scheduled to do a ton of volume of production this year that we're just going to be rolling out quarter after quarter. So there's no halt and we can only do a couple at a time. We are piling them up. We're just being very safe. And making sure that we follow all the protocols. So it's been -- I mean, I'm super proud of the team. It's kind of amazing to see what you do in times of turmoil and how you can recover and bounce back.

Yes, that's great. You mentioned also that the platform-agnostic approach widens the way that you think about greenlighting films, what's the optimal mix for Lions Gate of midsize and [ jumbo ] films? What's the strategy that works best and makes the most sense for you?

Yes. We've always had somewhat of a -- I would say -- and I'm not sure that there's any secret sauce to this or anything. We've always sort of ended up with a 2/3, 1/3. So 2/3 mid- to lower budget films that are a little more flexible in terms of risk profile and probably at this point, distribution options. And 1/3 big brands, flashy, whether it's a franchise extension or a new potential brand that we're building like Borderlands. So we -- it just sort of happened that way like 2/3, 1/3. Some years, it's a little -- it shifts a little bit. But we -- but right now, I think we're finding that, that mix tends to be a really great mix for a platform agnostic. Because you can have -- you can program for theaters with your big event movies and even lower budget event movies like we have Wonder. We had wonder, now we have White Bird, which is the continuation of Wonder story. That is not a huge budget movie, but it generated a lot of buzz, and it generated -- it is an event-type movie that I think people show up to theaters for. So we even look at that as sort of a 1/3 piece, where you're extending a brand. And we believe that those will be positioned well for theaters. People want to go into theaters to see Borderlands and Hunger Games and John Wick and White Bird and -- but then there's also these middling sort of budget movies or a little bit on the lower end budget movies that lend themselves well to alternative distribution strategies because they don't cost a ton of money. So we could lower the marketing a little bit, be more prescriptive and go -- and do a PVOD release that can generate the same amount of revenue as if we had gone into theaters and spent more on P&A and done a traditional windowing that we had done in the past. So we are finding that revenue is sort of replaceable on lower budget titles, and we're able to break even in the same sort of places. And so I think that we're looking at a 12- to 15-picture slate with sort of a 2/3, 1/3 split. But again, no secret sauce there. We're just -- that just seems to be working for us. And as we move into platform agnostic, that I think is proving to be a really good strategy for us as we look at greenlighting movies and look at all these options, like, oh, we could do one of these -- this movie could be -- live in 1 of these 3 distribution places. So we feel good that we can greenlight this movie.

Does the film output overall increase? You mentioned 15 films. Does capacity constraint coming to factor or scale opportunity in terms of leveraging that and building maybe in a bigger operation...

Yes. We -- I mean, I think we would be open to that. Right now, we are built for -- our team is built for 12 to 15. And when I say 12 to 15, that is more like the wide release, whether it's a wide release on platform or wide release in theaters, that we are built to do that. We do have another 25 to 40 films that we distribute on a more of a -- it's always been traditionally a day-and-date sort of platform. It's our lower budget acquisition business, where we have a label, like Grindstone is one of the labels in that business. And Roadside is our sister company we do through that business, but it's a huge volume of titles that during the pandemic it turned out its biggest slate ultimate for us that we've ever had in that business. So that is added to the volume of the 12 to 15. So we could be doing 45 to 55 movies in total just of varying budget sizes. So -- but as opportunities arise to, we have capacity to do more wide release, to add more to the 15, we would absolutely do that. But I just -- I think right now, we have the team for probably 15 max on that wide. But obviously, as content creation is huge, huge differentiator right now, and we can do it, it might -- it's definitely worth a -- worth some thought to make more.

Yes. That makes sense. We have seen an increase in investments in film for streaming, including most recently the high profile investment from Netflix to acquire the Knives Out sequels. How does the competitive spending environment on the film impact your approach to talent and content acquisition and all of that stuff you [indiscernible]?

Well, I think we know -- we know who we are, we know where we play. And we have a different, I guess, value proposition and valuation when it comes to looking at content to buy. So when you look at Netflix, they just have a whole different model for monetization. They have a subscriber base, they have a ton of subscribers, they have a certain vision for their company. And certainly, they're trying to grow. And we also have that, but it's just different. So we don't have the level of subscribers, nor I think do we ever think we would. So we just have a much different business. So when we look at the opportunities for us to acquire, we look at the films that make sense for us, that we are good at marketing, where we have relationships and prices that we can pay for that. And we recognize, sometimes you have to overpay, especially in a market like this, but we can't overpay to the levels of Netflix. And some of these companies that are just -- their market caps are just out of this world. So we know who we are, and we know we can compete. And there are places that we will win because it's the right fit for us and maybe not the right fit for other platforms. So they're just -- that will just work itself out. It is definitely more competitive for sure. When you don't have deep, deep, deep pockets that you just can spend crazy amounts of money. But we -- I mean, we definitely know we are in the place. And with regard to talent, pre pandemic, I think people would say, well, talent, talent would never make movies just for platform. Well, now that they've all done it, many of them have done it, it's not as scary. You're like, oh -- and some people are like, well, I can get used to this. But I can play both sides. So for us, I don't think our approach to talent has changed because we've always wanted to have really great partner, true partner relationships with talent. We wanted to let our talent have that creative influence because that's what they're good at. We want to provide the ability to make a film with partners that is we're really proud of, that we can put into the world and together, say, wow, we -- look at what we made, look at the story we're telling. And so that has not changed. It's just the different approaches to deal making have changed with talent, and that's just a -- I think a piece that was already going to happen. So it's just, again, an evolution that has happened quicker because of the pandemic.

Right, right. We're almost out of time, just to squeeze one last one in. Can you share your thoughts on how to properly nurture some of the most important franchises that you have like John Wick and Hunger Games? What's the best way of sustaining and building the longevity of that IP?

I think we've learned a lot of lessons in the -- from the Hunger Games time in that having films come out and then a break for 2 years without really much connective tissue, I think is something that was a missed opportunity for us. So I think for us to build -- continue to build those franchises for strength and adding consumer to the mix and providing them with more frequent touch points is really important. Extending stories in organic ways is really important and making sure that the story is uniform across any of the areas where you're trying to exploit this type of content. So for example, John Wick, we've done 3 movies. We're on the fourth. We're very excited about it. We keep wanting to extend the world, but we also want to create these touch points where we have -- we have gaming -- video game opportunities with John Wick. We have our television team working on a series for John Wick. We have -- so we have -- we're creating experiences outside the theatrical -- typical theatrical window to provide consumers another way to interact with John Wick. We want to do that with a lot of our big brands so that people have touch points, different experiences and just create more frequency, so that -- not that people forget about it, but that they continue to be excited throughout. And that they are on the journey of wanting to know more about the story and continuing on that journey with us to help us [indiscernible].

Yes, that makes sense. Well, thank you so much, Jen, for your time.

Absolutely. Thank you for having me.