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

Good afternoon. I'm Alice Wycklendt with Baird research [indiscernible] Lions Gate Entertainment presentation. We're joined now by Jimmy Barge, the CFO at Lionsgate, where he has oversight for all financial operations, information technology and planning and is a member of the company's executive committee. We're going to be hosting a fireside chat today. [Operator Instructions] and I'll try to work them into our conversation. Jimmy, thanks for being here with us today.

Maybe to kick it off, for those who are less familiar with the company, could you provide a high-level introduction to Lionsgate and just an overview?

Sure. It's great to be here today, Alice, and absolutely. Just kind of very top side, we have 3 major business segments: STARZ, our data-driven global premium subscriber service; our Motion Picture business; as well as our TV Production business. And so we're over -- well over $3 billion in revenues. We just reported $540 million of adjusted OIBDA in our fiscal '21. We're a March 31 year-end fiscal year, so we just completed the fiscal year. Exceeded Street consensus nicely on both revenue, adjusted OIBDA and earnings per share, so really good. Had really a strong subscriber growth in the STARZ subscription premium business. We have been guiding to 13 million to 15 million subscribers, and we came in at 16.7 million global OTT subscribers. So this is -- this business is really doing very well for us. And in addition to these 3 business lines, we have a 17,000-title library, okay, that generated last year some $780 million of revenues and has about a 50% free cash flow margin. So really a nice business across premium services, TV, Motion Picture, backed by a one of a kind library. And so that's the business, and everything's been moving well. And happy to drill down any way you would like to on those.

Yes. Absolutely. I think we'll hit on a few of those topics that you just mentioned. I mean I think, first, as you said, you reported fiscal '21 results just a few weeks ago. A lot has happened over the past year. Maybe briefly talk about kind of the impact of the pandemic, what you've learned from that and then maybe review the expectations you've shared for fiscal '22.

Sure. Well, we fared actually very well during the pandemic, set aside the stress and all the other difficulties in life in general and business that we all have experienced. And -- but from our business, I think it was very good. I mean content, content, content is generally and continue just to go up in value. And so our businesses did very well. We weren't in the theatrical windows, so that was the downside. But on -- at the same time, we found alternative release patterns, spent less on marketing, which we refer to as P&A. So we were able to get a lot more mileage and actually ended up with better economic models. And of course, the Television Production, we were able -- in addition to our film production, with the TV production, we were able to stay largely in production, putting in the right kind of protocols. And so we were able to really continue to generate the content, and the TV content is just -- the demand has just been really special with more home consumption. But more platforms launching, right, globally and domestically and more windowing and capabilities. So we saw a significant increase in television production and demand for our content even pre-pandemic. The same for the library, and you saw that continue to carry through. And of course, STARZ, as I noted at the top of this, STARZ nicely exceeded fairly significantly the guide on the global OTT subscribers. And so we really feel good about that business. And in fact, we're tracking the top end of the 50 million to 60 million global subscribers we've talked about for fiscal 2025. So we're tracking well there. So it's been good for our business. I would say as we go into fiscal '22, we have really some great opportunities to invest in our -- and continue to invest in our content and our marketing. So for example, the STARZ premium service we're taking from 7 STARZ original series in fiscal '21 to 12 in fiscal '22. So we're increasing that content. Kevin Beggs and his team in TV Production are going from 12 scripted series to 24 scripted series in fiscal '22 with about half of those going to STARZ, the other to third-party programmers. And so really feel good about that, and we're ramping up, of course, as the theatrical window returns. And more importantly, the PVOD window here just gives us better economics. So we feel good about going into '22. It is an investment year, but we -- that's going to drive long-term revenues and short-term revenues. So there's a pretty big uptick in content and marketing spend, but it's going to be offset with revenues with just a modest P&L impact, which is being expected by the Street in terms of if you look at their projections. So really feel good about how we're poised for '22 and beyond.

And how should investors think about that cadence as you ramp that investment in content and marketing over the course of the year?

Yes. It will phase in. We think the year is more back-end loaded, probably across the second, third and fourth quarters. So it will really -- as you say, it depends on as you ramp the content spend up and the marketing spend. But we've got a lot of great programming coming out and expect that from an adjusted OIBDA perspective to be more loaded to, again, Q2 through Q4.

Great. I mean you've got a lot of content coming on. You're not the only one with a lot of content hinting. How do you think about the competitive situation and your positioning in the market as you ramp?

Well, we really feel good. I mean the -- one, the demand is high for television products. So we've just come off of having 13 orders over the last 15 months. The TV production team has had 8 of their last pilots and series picked up for order. So really, really ramping well there. Similarly, we look forward to our content coming back in the theatrical world and that window. We did really well with Spiral, which launched a few weeks ago, still in the theaters. In fact, now that's part of the Saw franchise. It has just topped the $1 billion mark global box office with this last film release of Spiral. And we have Hitman's Bodyguard coming up. Several others we can talk about later if you like, but really feel good about that. And we're definitely, from our stores perspective, we're projecting not only do we exceed the top end of our guide in fiscal '21 on global OTT, but we're also expecting increased subscriber growth both domestically and internationally as we go into fiscal '22. And that programming really kind of ramps up. And again, we use a lot of data to inform our programming, obviously our marketing, but even our programming pipeline and development pipeline. And we really feel good what that data is telling us about the viewership and our ability to drive subscribers.

Yes. Absolutely. I want to dig in on the PVOD versus the theatrical a little bit. So during COVID with the movie theaters closed, Lionsgate launched a number of films through the premium VOD window. What are your thoughts on PVOD versus theatrical and the mix between those different release strategies as we head into a more normal environment here?

Right. Well, look, it's really good for us and particularly as the Chief Financial Officer, right? We've always had -- in the industry, as you know, you have the marketing spend, or what we call P&A, that is expensed immediately. It's significantly incurred as part of that opening weekend launch in the theaters, right? And that demand carries over. But generally speaking, for PVOD, really -- you really -- you've got to go to the theater. It's not available otherwise for the most part for up to 90 days, right? Well, now in a PVOD window, whether it's going to be 17 days, which is I know the universal window that's been spoken about a lot, or if it's 20 days or 10 days or -- but somewhere within 30 days, that gives you an opportunity to, again, generate new revenues from a new window and do so off the back and leverage the P&A spend, right, while it's still fresh in the consumer's mind. They saw that trailer. If you're like me, by the time you get around -- well, I watch all of our films, of course, but maybe not your average consumer. But by the time you get around to being able to watch it if you didn't get a chance to go to the theater, your desire to watch something has already been replaced by whatever else you've seen in the marketing program. So I think this will just allow for a lot more consumption and a better business model for us.

Yes. Absolutely. And then what are your thoughts on where the industry might land on the right windowing strategy that maximizes that monetization opportunity?

Yes. I suspect it's going to move around a bit, right? I mean everybody's going to manage that a little differently. And some people, right, by the way, are going direct to their own streaming platforms, right? I mean we've seen that with Warner product in HBO Max. You've seen some of that with Disney in Disney+. So we've -- I think people are going to work with that windowing for us. We're going to be back theatrically. Like I said, we're ramping up already and to very good results. But we're going to have alternative windowing even with the theatrical window, right, whether it be PVOD or in some cases, we sold directly to streaming video and demand services and actually ended up with better economic models than we were expecting on a base case theatrically. But we're looking forward to theatrical window returning and being able to do quite well there in kind of a revised windowing strategies.

Great. A couple more on the Motion Picture side of things before maybe we circle back to the library. But first, how do you think about the balance between midsized and tentpole films that works best for Lionsgate?

Yes. We do some of each, but we're more kind of smaller to midsize. When I think of tentpole, well, I'd like to think of it really more as franchise films, right? So think of John Wick, okay? Think of Hunger Games, think of Twilight. I mean if we go back historically, the Hitman Bodyguard. So -- the Fallen series, London Has Fallen, et cetera. So we build franchises. And then we have great films, whether it be horror genres, the faith-based genres that do very well and across the board, single-picture films. But we're focused in that more kind of that midsized film production budgets. And I think that works very well in this new PVOD window in terms of it just gives you a lot of optionality. We can break big on broad theatrical releases, and then we can also do multi-platform releases as well. And so we're kind of well positioned to take advantage of, if you will, the increased windowing and particularly the PVOD window.

Yes. Absolutely. And then how does the competitive spending environment on film impact your approach to talent and content acquisition?

We've always done quite well. We greenlight film by film. And so we know we can manage our budgets and set budgets in a way that drives the kind of profitability that is appropriate for the risk being taken. And by the way, we lay a lot of the risk off. We co-produce. We pre-license our international territories. So we've done quite well there. And again, we're not swinging at the fences. We're more, what I'd call, singles and doubles that turn into triples and sometimes grand slams, I mean, when you talk about the big franchises. So that's our bread and butter. And we're very talent-friendly. And we've certainly discovered a lot of talent, worked with a lot of young talent, worked with a lot of veterans as well. And we've got a good model, and we haven't had a trouble -- haven't had trouble really pulling that together in a very commercial way.

Great. And then I want to circle back to the library. You mentioned that earlier in our conversation. Can you just first talk about the importance of having such a large library and then how investors should think about valuing it?

Yes. Great question, Alice. We have 17,000 titles in library as noted at the top of the hour. We did $780 million of trailing 12-month revenue this last year, fiscal '21, and the cash margins run around 50%. So if you just do the math, and to keep it simple, just take a haircut off the $780 million, no particular reason other than make the math easy, and just say $780 million -- $700 million and 50% cash flow margin, you're talking about $350 million of annual cash flow. And if you put a 20 multiple on that, it's pretty easy to see. It's $7 billion. It's $3.5 billion at a 10 multiple. So let's call it $5.25 billion at a 15 multiple. I'm not suggesting. That's just in the middle of some big ranges, right, and 10 certainly seems way too low given where the market is and I think 20 is closer to where MGM traded in the Amazon transaction. But if you just take the $5.25 billion, our enterprise value is about $6.2 billion, okay? So we have a market cap of about $4.2 billion at today's price and about $2 billion of net debt. So you very quickly look at that and say wow. Even at a 10 multiple, I mean, you look at that and say wow. On top of that, you've got a STARZ business that's 29.5 million global subscribers with 16.7 million of those in OTT. And so you look at that business plus an incredibly strong theatrical business that's constantly refreshing the theatrical portion of that library and the same for the TV business that's selling to third-party and supplying STARZ at the same time it's refreshing the library. You look at that and you say, wow, okay, there's a lot of value there. So look, it's not for me to tell people how to value it. But I've always said, look, if I'm buying library and I'm buying smaller libraries, I'm looking at it on a discounted cash flow basis. But this is not a small library. This is a unique -- these are just not available. They don't come to market, okay? They get [ stocked ] and somebody takes it down. But these are worth more than a discounted cash flow. It's like, what's it worth? And if you own this library, what could you do with that, okay? That's the value of these large libraries that are just very unique and generally not available.

Absolutely. Do you think you can sustain the library levels you saw this past year in a post-COVID world?

Yes, I think we can. I mean you're going to move up and down. Certainly, the $780 million was a trailing 12-month record. We had Mad Men last year. That was a great sale. We got Weeds coming up in '22. That's probably more across a number of quarters in the year. So we've got a tough comp coming up in Q1. But yes, we saw the demand for library increased before the pandemic, right? A lot of it is, is the number of platforms and global launches but as well as increased windowing. And so the ability to actually sell in on short windows on an exclusive basis and multiple windows on a nonexclusive basis to more buyers and the AVOD has been a big lift as well. Again, a whole new revenue stream that wasn't even on the radar screen, if you will, 18 to 24 months ago. So just continues to be increasing demand for content. So feel good about our ability to sustain and grow library revenue over time.

Great. You mentioned STARZ a few times. Obviously, that's a big deal for you guys. How successful has the partnership with STARZ been so far? And how has it been additive to both STARZ business and then your television group?

No, it's been great. I mean, Kevin Beggs, who heads up our TV group; and Jeff Hirsch, of course, who heads up STARZ; and Jeff's team, Ali Hoffman domestically and Superna on international side, have just done a great job. And they're so closely intertwined in terms of what STARZ is looking for from a programming standpoint. The nice thing is, is STARZ is -- STARZ is not competing with all these global networks. We don't think of Netflix and Disney and Peacock and HBO Max as competitors. They're really more companions because we're a companion product priced nicely at $8.99, really focused on premium scripted programming serving and targeting underserved audiences, women in particular, African-American in particular as well. And so we just continue to focus on that. So we feel like we're very well positioned in that context.

Great. And then how is the mix of your TV business changing in terms of the traditional rights structures in which you retain the syndication international licensing rights versus a cost plus margin worldwide rights deals with some of the SVODs versus maybe a more hybrid structure that have components of both of those?

Yes. Right, Alice. We've generally kept our worldwide rights, and the wonderful thing about that is those rights come home. Even when you pre-license internationally or to what I think of as the anchor tenant who's coming in and buying a lot of Kevin's third-party product that we're selling -- because, by the way, Kevin's business is about half the STARZ that we've talked about, how nicely that's aligned and now 1 plus 1 equals more than 3 as you use that product to not only make television production sales but also to drive subscribers. But about half of that product is going to third parties. The nice thing is our focus on the audiences that we're serving, at least plenty of product and plenty of ideas to sell to third parties. And so that's playing out very well for us. So I think, again, we're in a good position with that.

Great. And I want to just shift to your international opportunity a little bit. What are the main drivers of growth in your international subscriptions? And what can you do to sustain that momentum in the next year or so?

Yes. We're rolling out -- still have been rolling out in additional territories. We're in 58 countries now and territories and -- but we're also driving growth within all those countries on a same-store basis. So again, we're picking up more platforms to distribute. What we find as we go into a country and we start to distribute with a particular platform, pick Amazon as an example, they've been a great partner and a great platform for us to launch on around the world. And then all of a sudden, other consumers are saying, I've got to have that, and they're demanding that be available in other platforms. And so we're picking up multiple platforms as we go into countries. We're using our -- again, our STARZ originals domestically travel very well internationally. And there's nothing that we greenlight domestically that we're not thinking about, hey, does this travel internationally and how do we populate that international programming. Generally speaking, those STARZ originals are going to STARZ platforms internationally. And helping drive that, we [ seed that ] with a bit of local programming. But that's really driving the international subscriber growth that we're seeing. We really feel good about the demand for that product and also the data that we get back, the stickiness of that product and how engaged the audiences are.

Great. And then we've got a question from the audience. On the international side, where do we need to get to hit breakeven? And do you think that some of the losses in international are a factor in valuation today?

It is interesting, right? We reported, I think, $140 million of losses in STARZPLAY International, which was down from the previous year, I think, of $150-ish million plus. And we look at this business as going to profitability -- run rate profitability at the end of calendar year 2023. The high-water mark for annual cash flow was -- investment was fiscal '21. So we've cleared that hurdle, and we're focused on driving this to profitability. And I think from a valuation standpoint, I think in many cases, people just throw that into the mix and we end up sometimes with a negative valuation, right, [ where somebody's putting ] a 10 or 12 multiple on a negative $140 million, $150 million, right, as opposed to breaking out sum of the parts as opposed to, for example, [ putting ] per subscriber value on it. I mean different analysts handle it differently, and it's hard for me to say exactly what the Street's given credit for or not. But it certainly doesn't feel like -- back to that sum of the parts we just talked about the library, it just doesn't feel like that valuation there. We're going to earn that valuation, and we're confident of that and we're focused on it. We know we're building value. We see it with everything we look at internally. And so we're going to continue to do that and be recognized for that at some point.

Great. And how should investors think about the drag in fiscal '22 relative to that $140 million loss in '21?

Yes. We don't -- we're not forecasting -- or rather, we're not -- we're certainly forecasting, but we're not projecting or providing guidance on the '22 levels. But we're in an investment mode in '22, right, with marketing content, okay? And we're still in the, call it, the third inning or whatever on the international rollout. So it's early, and there's a lot of opportunity to invest and drive that future value. So we want to get it right. This is about for the future. It's not about any particular quarter or kind of annual pace. But we expect to, again, drive this towards profitability and achieve that at the end of calendar year 2023.

Perfect. Switching gears just a bit to the balance sheet. In terms of debt reduction and leverage, where do you feel comfortable?

I'm comfortable where we are now. I was comfortable before, although we were focused on deleveraging it appropriately so. So we've come down from 5.2x leverage a year ago to 4.0x at the end of this fiscal year. And what I've said is looking ahead, given '22 and our -- again, we have great investment opportunity with great data and visibility into our returns. So as we move into '22 and invest in that content and marketing, we'll have some peak periods where leverage will move up again slightly. But I would expect to finish that -- the fiscal year-end back around the 4.0x area. And I think that's a great spot to be during this investment cycle and then longer term, of course, deleverage further. And it doesn't mean gross debt's going up at all. The gross debt will be declining. The net debt will be declining as we go through the year, but it's a factor of trailing 12 months and how that cycles through. So when you cycle back to the end of fiscal '22, I'd expect to be somewhere around that 4.0x leverage. And again, I'm very comfortable with that.

Great. Maybe we've got time for just one more here. Recent periods, there's been kind of another round of M&A in the ecosystem. Do you think this is another round of consolidation? Or are these just more unique one-offs? And what does that mean for the landscape overall?

Well, when you've had a pattern over time, it's hard to say that they're unique one-offs. I mean they come one at a time, of course, but we've certainly seen the consolidation in the industry. Look, we're focused on running our business. We have the scale where the scale matters. We're not, again, trying to compete with these global platform services. We've always done well in our TV and our Motion Picture businesses as well. So we have the scale we need there. At the same time, we work for the shareholders. We're always focused on driving shareholder value. It's always flattering when people talk about our incredible library and our businesses as a target and part of consolidation. And when people tell you how great your business is, it's -- we like hearing that. But we're not taking victory laps. We're focused on running our business, as Jon said in our last earnings call, and that's what we're going to do.

Great. Well, I think that's all the time that we have for today. Jimmy, thank you so much for joining us here virtually. We appreciate your time and sharing the Lionsgate story with us. For those of you that are in the room, up next, we have presentations from Five9, WEX Inc., [ Asana, Inc ]., FormFactor, CTS Corporation and Synopsys. Thanks, everyone. Thanks, Jimmy.

Thanks, Alice. Bye.