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

Hello. Welcome to the 2021 Cowen TMT Conference. I am Doug Creutz, senior media and entertainment analyst at Cowen. I'm very pleased to have with me here today, Lionsgate CFO, Jimmy Barge. Welcome, Jimmy.

Doug, great to be here virtually.

Yes, virtually. Hopefully, soon, we can start doing these in person again.

Exactly. Working from home here in Malibu as you can probably tell.

Yes. And I'm in Larkspur, California.

So you just reported fiscal year '21 results last week, and you talked about the fact that you expect OTT sub growth to accelerate in fiscal '22 versus fiscal '21, both domestically and internationally. You've got a lot of original content coming to market in '22, particularly as we get deeper into the year. How tight of a link can you draw between the new content and sub growth? Is it just kind of a general feeling that with more content, you'll add more subs? Or do you have more detailed analytics that can give you the confidence in that projection?

Well, no, great question. There's definitely a strong link there, and we definitely have data behind that. And thanks for mentioning the earnings. I mean we just came off a very strong period. And we also, along those lines, as we -- as you noted, we commented about both accelerated growth domestically and internationally and our subscriber OTT growth going into fiscal '22. And our longer-term guidance of 50 million to 60 million subscribers on a global basis in fiscal '25, we really feel good about that. I feel like we're tracking more to the high end of that range. And really, the key aspect of that is really this leakage, to your point, with regards to content. So we're scaling content from -- at Starz from 7 originals, Starz Originals in fiscal '21 to 12 Starz Originals in fiscal '22 and probably 15 in fiscal '23. So it's an investment year in '22 as we're ramping up, but we're confident -- and again, it's our data. And this has been a long time coming because we've been working hard during the pandemic through production, keep productions going and ramping up that productions through Lionsgate TV to super serve Starz, okay, and our targeted audiences there and make sure we're in a good position to do that. So we're going to be offering unprecedented levels of historical kind of new programming levels at Starz going into fiscal '22. And our data that we get from our over-the-top providers as well as from downloading our app directly for those direct-to-consumer relationships that we have, we're pretty confident that what our audience that we're targeting is looking for and we're pretty happy about rolling out more of what they want, and there's a direct linkage into that and how we feel about our fiscal '22 acceleration of subscribers.

Yes. Okay. And how does your -- you didn't give any guidance on linear subs, but how does your view on that kind of align with your view on OTT?

No, great question. It's interesting. We're 20-plus million domestic subscribers, right, 10 of which are OTT direct-to-consumer. By the way, if you look at 80% of our subscribers domestically, okay, they're all in -- 80% of them are on a rev share-type model, right, whether it be a la carte with the more traditional providers that we've transitioned from fixed models or the $10 million-plus OTT subscribers. So we think that puts us in a really good position. And then if you look at the more traditional providers, right, which a lot are on a la carte now, we think that it's really a much more sticky proposition for the subscriber. So I don't see a lot more degradation really in the -- on the traditional side of the business, some, but not a lot. I think we've run the course and most of that as we transition a la carte models. And certainly our accelerated growth is in OTT and then hold serve with minimal degradation in the traditional side.

Yes. And then you do have a lot of content coming, but obviously, it's a big market and a lot of the other OTT services also have a lot of content coming to their platforms. How do you think about the competitive situation? I know that you expressed on the call that because you feel you're a more targeted service that you're not necessarily competing directly with the Disney+ and the Netflix and the Hulus of the world.

Yes. That's exactly right. I mean, look, that was our strategy all along. And Jeff and his team are laser-focused on really super serving what's generally been an underserved audience with women and particularly African Americans as well. And Kevin Beggs in our TV production group is again tied in very closely with the Starz team in terms of what they're looking for and developing, not only for Starz, but also third parties. So we're having a great year there. We'll maybe come to that in a minute. But in terms of the super serving Starz and focusing on that audience, again, that's our target. That's our focus, and we feel great about that because we don't want to compete with Disney, with Netflix. We're not doing sports. We're not doing kids programming. We're not doing news. We're focused on adult premium scripted programming, and we're super serving those audiences. And we think we're a great companion product. And by the way, I'll also add nicely priced at retail $8.99. We're very well priced to be that companion product. And we think that the way that's shaping up, there's fewer people actually in that space, right? We're not niche, okay? We're not general broad television. We're in a nice spot. And we think that's a great place to be, and we're going to stay focused on that.

I mean it's interesting with HBO massively broadening out, it does feel like there's a little bit of a vacancy in the spot that HBO used to be in. Is that how you guys are thinking about it?

Yes, I think so. And I mean, look, I spent time in my career in the Time Warner organization and also Viacom organization, and I know a little bit about programming and advertising when you're putting that, I guess. And look, the nice thing about HBO in its day and particularly Starz now, you can serve up some really great programming, adult-themed programming that doesn't sit side-by-side with advertising, doesn't it sit side-by-side with kids programming. And we super serve that audience. So we think that's the place to be. And I think there's less competition there now than before. And again, it's just making sure we know who we're competing with or more importantly, who we're not competing with. And we're really competing for the mindshare of the customers and consumers that we're targeting. And again, we have the data that supports what we're doing there, both in our marketing campaigns and quite frankly, our development pipelines, which are -- is really exciting to see those starting to come to fruition now.

Let's talk about international for a minute. You had added as many subs in fiscal Q4 of last year, I think, as you'd added to the service life to date up to that point. You doubled your subscribers. Can you talk about what the main drivers of that were and then what you're going to be doing in fiscal '22 to make sure that momentum continues?

Well, sure. Look, we're rolling out on platforms. We're serving up great content. And we also did a bundling deal with Canal Plus that helped drive fourth quarter as well in France. So we did that to -- it's a great opportunity to really drive market share quickly and brand recognition and build our brand. But I would also note that while that was a driver in the quarter, overall, our subscribers internationally were up beyond the lift that came from Canal Plus. So we'll continue to look for partners and expand our platform to distribution partners internationally and serve up great content. And a lot of the content that I just talked about going from 7 to 12, a lot of that content will be worldwide rights that will also drive the international service. So we feel really great about how that's ramping up, and thanks for noticing.

Absolutely. You've talked about international reaching a breakeven run rate by fiscal '23. And then the overall margin structure of the Starz, including domestic to be in the 20% range at scale. What is the path from $140 million in losses in international in fiscal '21 to that breakeven run rate in fiscal '23 look like?

Yes. We expect to -- when we exit the calendar year 2023, we would expect to be run rate positive from a P&L perspective. So -- and yes, we have some losses that we'll experience in '22 as we continue to drive market share, right? And then you'll see it tail off pretty quickly as we start to phase into that breakeven run rate at the end of calendar year '23. So really feel good about that. I would say on a cash flow perspective, I think we've already peaked out with our largest annual cash spend in fiscal '21. So really feel like we're poised and starting to see the other side of the tunnel, if you will, and look for this to be paying off nicely as we move into calendar year '23.

And then if you talk about that 20% scale target, is that a level where you're kind of -- is that sort of that $50 million to $60 million sub assumption, but to the degree that you would be able to grow international more than that? Is there potentially an upside to that 20% number?

Well, certainly, there would be. I mean -- and that's the key, right, is the engagement. We're obviously making certain assumptions with regards to that $50 million to $60 million range of subscribers, which we're tracking towards the top of that, and that's certainly factored into the 20% margins as well as, obviously, the content increase that we've just generally spoken about, so for sure. But more engagement and less churn really can have a significant impact and drive margin. And it's nice to get to that run rate margin and even drive beyond that because you don't have to always increase your content marketing spend the way we are from '21 to '22, right, and then expect another little step coming in '23. But you're going to reach a point where, yes, certainly, there's some ongoing increases, but they're not as significant, right? And so we're scaling up. We've been making that investment internationally. We're investing -- fully investing in our core businesses, the domestic business as well as we scale up this content. And really, with pretty modest P&L impact in '22, which I spoke to on our earnings call. So really feel good about being able to fully fund our business from our cash flow with modest P&L impact and really scale for the future.

And then kind of a nuanced accounting question. As your national business grows, does that help margins at the domestic business because you're able to amortize more of your content cost against that larger international revenue stream?

Doug, it's a great question. And I read that all the time relative -- not only in our sales but other services, but it's just not a fact for us, okay? The reality is, is that Jim Packer and his team are just outstanding at selling all rights in every window to every platform, 24/7, worldwide, in all territories. We charge our international service fair value rates, okay? They're bearing their full share of that pricing and -- but no more. And the reality is, is we -- if we were not utilizing these programs to drive subs on an international basis, we'd be selling to third parties and in some cases, actually accelerating the cash flow. So no, that's really not factored in or an issue in terms of -- it's a nice efficiency, believe me, and it's nice to have Starz paying Lionsgate TV because from my consolidated point of view, right, it's right pocket to left pocket. And so there's really some really cool aspects of that in terms of conserving cash flows and being able to -- but more importantly, it's about the business, right? It's about the content. It's just how Kevin and Jeff and his team of programmers, how closely they work together in the context of programming that channel, developing the programming, that's really the special sauce. But it's certainly nice when one unit is buying from the other unit. But all the pricing is fair value, and we could otherwise sell internationally, and Jim Packer and his team would be happy to execute that sale.

Makes sense. At one point you were looking for a partner to take an equity stake in the international business potentially. Have you moved beyond that thinking given that you've been able to reduce your leverage pretty significantly over the last year and you've also been able to fund this content growth out of your internal cash flow? Or is that something you're still interested in?

No. We've moved past that, and I'm so happy to -- that we have. Look, I always felt like we could be patient. We didn't absolutely need the cash, but back in that day, we were more like 5.5x levered, right? And -- but I always felt confident with the visibility in cash flows even with fully investing in our core content businesses ramping up content marketing that we could still delever and we have. And so we just finished the year right around 4x leverage. I think that's a great place to be, given our content investment cycle, $1.5 billion unused revolver, $500 million of cash on the balance sheet. So I think it was great to be patient. Look, the one aspect of that, that would have been nice, and it's certainly one of the things that we looked at is putting a price point on the international asset. It's nice to see. And I don't -- still don't think we're getting the recognized value for the STARZPLAY International, if you will. As you noted, we're running losses last year about $140 million, but those will be trimming down and moving towards positive territory in calendar year 2023. But probably not getting the full value for that, so a price point would be nice. But on the reality -- on the other hand, it's been nice to see our shares moving a bit. And I think the sum of the parts are significantly greater than the share price where we are now. And I think what's -- you're seeing in the marketplace in terms of consolidation is just showing more and more value for content. And so I feel very comfortable not having taken a partner, and we're in a good spot.

Great. Talking a little bit more about the investment in programming that you've undertaken and essentially doubling your shows on Starz between fiscal '21 and fiscal '23. When you get to that 15 originals run rate, do you feel like that will be kind of a sufficient level for the service to where you can level off the content spend? Or is it more the type of thing where in success you might continue to grow past that?

Yes. I -- look, I think that in terms of serving the consumer when you've ramped up the 15 or 16 in those out years, that's -- you've got programming -- even at 12, you've got programming every week, fresh programming every week of the year and -- to drive that engagement. So I do think you reach a level with which you can accomplish the subscriber growth and the sustainability that we've talked about in 2025. And obviously, there's going to be continuing opportunities to invest in our core businesses. But I think that's a good level to be. And I don't think you have to go beyond that. That's not to say you might not find the right opportunity to continue to invest and drive value. But we're going to recoup that value, and we're seeing that in our numbers and our projections. So we feel good about those levels.

So you guys had a pretty incredible year in TV production this year. You had all of your pilots picked up and all your freshman series renewed. And obviously, some of that's going to Starz, but there's still a lot that are going to external partners as well. What were the biggest factors in having that kind of success rate?

Yes. Look, Kevin and his team are just knocking the ball -- the cover off the ball, I mean they're killing it. It's really great to see, right? 8 of the last pilots and scripts ordered to series, okay? All of this freshman series from last year renewed. So it's really a great pattern. And by the way, of those 8 pickups, 4 are going to Starz and 4 are going to third parties. So it's not just Starz, even though we've got a great alignment there. We've got great relationships across the board with others that we sell to in this business. And I'll tell you, Kevin has shifted his entire model, and it's really been great. I mean we've transformed -- he and his team have transformed the TV business really to working more with overall deals with production companies, whether it be the Tannenbaums or BBC Studios. We also, as you know, have a majority ownership in 3 Arts, which is a talent management company. So we're doing a lot there and working closely with the Starz team. And that's -- they're really doing more with these third-party production groups as opposed to internal production teams. And that's really given us a whole new gear, if you will, and just a lot of creativity and new ideas and working closely with our third-party clients as well as Starz has really led to some great success there. So we're really excited about that. And you're right, that is a great year, and we look forward to that driving the future.

And how should we think about that impacting the P&L? And presumably, there's a pretty big revenue impact immediately, but I know that typically shows earlier in their life cycle are hugely profitable. So can you talk about what that means this year but then also maybe 2, 3, 4 years down the road?

Yes. This is one of those kind of unusual situations where the CFO is actually very happy with a modest margin relative to historical levels because you're building market share, and you're right, you're driving revenues. But in the early -- in season 1, there's a small profit or maybe even a small deficit, although the model shifted there, by the way, to get really where you don't have the deficit financing that we had in the old historical days, right? So you're really talking about a profit but a smaller profit out of the gate. And yes, really, the profitability is coming when you get into the season 3, 4s and 5s and 6 and 7s and you go the distance, so that's really great. And I think the fact that we're super serving Starz and our third-party clients is just going to increase the likelihood that all of these orders go the distance in terms of the number of seasons. So that overall level of profitability follows the revenues, but it's really nice to have and you've got to lay the groundwork first, which is what we're doing.

Great. Let's talk about movies for a minute. A Quiet Place II came out this past weekend and had a performance that arguably wasn't too far off what it might have been prepandemic. But if you look at the marketplace overall, it still feels like there's a lot of -- still a lower ceiling for most films. Do you think that 3, 6, 9 months out, we're going to get back to prepandemic levels in the aggregate? Or do you think that audiences are going to be a bit more discerning about what they go to the theater to see versus wait for it to come on one of the many OTT services that are out there.

Yes. It's an interesting question, right, and nobody really has a crystal ball. I think our Motion Picture Group team would see theatrical coming back maybe close to what it was in 2023, but maybe some smaller share than what it would have been otherwise. I think people are really wanting to be back in the theaters. We're big fans of theatrical exhibition, by the way. But obviously, the model has changed forever. And from a CFO's perspective, I think it's a wonderful thing that we've got PVOD now. We're going to have that in the future, right? People are -- instead of having to wait 90 days to see something they saw advertised. And by that time, they'd probably forgotten what it was they wanted to see or life's moved on and there's 2 other things they want to see instead. Now they're going to be within maybe 17, 20 days or certainly with -- inside 30 days, they're going to be able to see that in a PVOD window. And I'm not so certain that, that really cannibalizes the theatrical exhibition because you've got different audiences, right? And not everybody is going out or able to go out or feel like they're going to go out to -- on Friday or Saturday night for that theatrical experience, which by the way, is a wonderful experience. So look, we're looking forward to that being back, but we're also looking forward to different ways in which to monetize our product and reach the end consumer. And I think it's just going to be beneficial really all the way around. For us from the standpoint that we're able to, again, leverage that P&A spend and that marketing spend in close proximity. And we've seen this as very helpful as we've made our way through the pandemic year. And we certainly stacked some larger theatrical distributions that we're looking forward to. We've got Hitman's Bodyguard coming out this month. We're very happy about that. I think it's going to really do well. We're very happy with, by the way, how Spiral did. That really has performed nicely for us, and I would say, higher than our base case going in, which is great. So I think things are coming back. Hopefully, they're going to come back faster, but they're also going to come back differently. And I think as they do come back differently, it's going to better serve us in terms of just an overall financial model.

I know you guys tend to presell a lot of your international rights as a way to lower your risk on your films and also it keeps your cost of distribution down. How is that market? Do you feel it's as healthy as it was prepandemic? Or are people a little cautious and kind of waiting to see how things go?

It's coming back. We've got fewer slate deals, if you will, prelicensing deals and more film by film or a group of films, right, by territory. That's also -- we were seeing that even prepandemic, right? Because the importance there is to have these rights where you can package them downstream and ancillary windows on a global or pan-European basis, right? And therefore, you want to have the ability to package that in different ways really to maximize the downstream value. So we've been doing a lot more smaller packages, if you will, in the theatrical window, even prepandemic and strategically in the context of thinking about it that way. And so we were already headed that direction. I think that will help us rebound more quickly. And I think we're seeing plenty of demand for our films internationally. And those markets are, I think -- is primed to come back as is the U.S. I mean a little bit of different timing, territory by territory, but I think the consumer demand is there. We're seeing demand for our product.

Revisit -- if we go back to OTT for a second. The phrase peak TV has been in vogue now for several years and yet it just keeps -- seems to keep getting peakier and peakier. When you think about churn, which is obviously something that you guys, I'm sure, watch like a hawk, are you at all concerned -- does any of your market research suggest to you that people are likely to start churning more aggressively between services so they can kind of cherry-pick the shows they want to watch?

No. Look, we're -- again, we're focused on our core audience, right? And then we're serving them that premium scripted programming, adult programming that's not always available everywhere else. And so again, what our data is showing us is if we serve up the right kind of programming, this audience is going to be very loyal. And they're going to be very engaged, and that's going to ultimately reduce churn as well. And again, it helps to be at the right price point and being -- and to be a companion product as opposed to competing directly with all the other product where people -- again, they've got to search for what they're looking for and you can't find it. They know when they come to stores, what they want and paid for and secondly, what they're going to find, and it makes it easy for us to serve them in that way. But -- so that's our focus. We're not worried about it. We're focused on what we do and how we serve these audiences.

Yes. And earlier, you kind of touched on the recent M&A we've seen or me of Discovery, Amazon, MGM. Just from your perspective, do you think this is the beginning of another round of consolidation in the industry? Or do you think that those were more deals where there was some unique circumstances?

Look, it certainly could drive additional consolidation. I mean there's a lot of discussion out there. But I think the clear thing is it shows you the value of content. Content, content, content. And if you just look at our sum of the parts and look at our 17,000-title library with $780 million trailing 12-month revenues that we reported last year -- and as you know, we've said before, we have 50%-plus type of free cash flow margin against that piece of the business. It doesn't take a lot to put a 20x multiple, I think it was in the MGM deal, but just take -- if you want to keep the math simple, do a 10x, 15x multiple, I mean, certainly north of that. But you put that kind of multiple there and then compare our enterprise value. And then you realize, wow, on top of that, I've got a television studio that can really drive not only the programming that -- much of the programming that Starz needs, but much of the programming for the entire industry, right? And one of the last really agnostic platform arms dealer, so to speak, in terms of selling television content. Not only that, then you've got -- you realize 80% of that library revenue is just probably film related, right? And you got a Motion Picture Group that can drive easily 10 or 15 -- brought theatrical releases a year, another 25 direct-to-consumer or direct-to-home video, more smaller theatrical release types of platform release films, right? And you've got that business. And on top of that, you've got Starz, right, where you've got 20 million domestic subscribers and significant international subscribers growing and 80% domestically a la carte over-the-top internationally, direct-to-consumer. You start to look at that and say, wow, you got an incredible value that you've built there around this business. And our management team, as John said on our earnings call, we're going to keep our head down. We're focused on what we're doing. But for clearer -- for sure, we're shareholders. We work to drive shareholder value. So if something comes our way, we're obviously going to take a look at that and consider it and drive shareholder value, but we're confident that we have the scale where it matters to continue to drive value in our current form.

Okay. Well, I think we reached our time limit. So Jimmy, thanks so much for being here today. Really appreciate it.

Doug, thanks a lot. Appreciate it. Thanks, everybody.

Thanks, everyone.