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

Good afternoon, everyone. I'm here with Lionsgate. Our next presentation is Jimmy Barge, CFO. Jimmy, thanks so much for being here.

Thanks, Meghan. It's great to be here. Appreciate it.

So let's start off from a high level. As we emerge from the pandemic, what is your strategy to create value? And how are you going to do that for your various shareholders?

Well, sure. Look, we finished -- our fiscal '21 is March 31 year-end. And so we finished this pandemic year. It was tough in many -- in so many ways on everybody. On our business model actually, we actually excelled. We were able to pivot in the Motion Picture Group. Obviously, theatrical was most affected, but increased viewership at STARZ, increased demand on Television Production, our television product. We were able to stay in production with the right kind of protocols. So the whole team came together and just really did well. We actually -- as you know and saw, we exceeded The Street consensus on all the key metrics coming out of fiscal '21. We exceeded our previous global OTT guide as well. And we indicated on the last call, we're tracking to the high end of our calendar year 2025 subscriber guidance. So really in a good position and working closely together. So we're excited about going into fiscal '22.

Great. So that's a good place to start, but I wanted to start with STARZ and the streaming strategy because everyone's pivoting now. Finally, it's like the studios all got the hint. And I think you guys seem to have a more focused or targeted strategy. So how are you positioning STARZ to sort of compete in what's becoming a very competitive streaming landscape?

No. Meghan, I love it just the way you teed that up with everybody pivoting. Everybody else is pivoting away from an ad-based business. We've been at this 4-plus years, direct-to-consumer, no advertising. So everybody else is pivoting. We're powering on with a proven model, and Jeff would remind you that this is a data-driven premium network. So we've been getting data for 4 years now, direct downloads of our app. We get a lot of data from our platform partners when we're in the over-the-top world. So we're using all that data not only for marketing but more importantly, to integrate the kind of programming we need to super serve our audiences. And I don't think -- and we don't think of Peacock and Disney+ and Netflix, we don't think of them as competitors. We think of them as companion -- companion products, okay? And that's what we're doing. We're serving a very premium edgy adult space primarily focused on women. That's 54% of the global population, it's significantly African-American women. And by the way, this programming -- domestic programming travels incredibly well on a global basis. And so we're very focused there. So we don't spend at those levels. Our business model works perfect on a 50 million to 60 million global subscribers in 2025, right? We have -- we don't need 300 million global subscribers to be profitable. We're already profitable. We're investing internationally, as you know, with the rollout and net-net, we're profitable. And so we're in a good position. So again, other people are having to pivot. We're powering on 4-plus years and like where we are.

So we ended March with close to 17 million global streaming subs and I think 10 million of those were in the U.S. But your guidance implies that you're targeting 48 million global streaming subs by 2025. Is that correct? And then if that's right, that implies you're going to be adding, what, 8 million subs a year. So where are the subs going to be coming from primarily?

Yes. As usual, Meghan, your numbers are good. You've done your homework. So what we've said to kind of triangulate that for a minute -- and I alluded to it earlier when I said we're tracking the top end of our calendar year 2025 guide, which is this 50 million to 60 million subscribers. And we've said of that 60 million subscribers, approximately 80% of those would be OTT. So there's the kind of backing into the 48 million OTT subscribers. We've also said that those subscribers, the 60 million subscribers, would likely be pretty evenly mixed internationally and domestic. So you can see that, that would imply that more growth is coming from international, as you would expect, right? As we invest in international, we've rolled out territories, we're in 58 territories now. We're adding partners, and we're continuing to expand as you would expect in that business, but also still significant growth on the domestic side. So again, that's how we see that. We don't lay out exactly how it's going to pace year-by-year. But again, we just exceeded the '21 guide on global OTT and of course, OTT is where the real growth is. And likewise, we're comfortable with the top end of our previous guide on targets for calendar year '25.

So can you quantify the size of your target market? Because you said you're targeting mostly women and African-American women. I think you're also sort of doing a lot of programming for LGBTQ people, right? So what is the size of this market you're going after?

No, a great point. Look, and we don't exclude anybody from our programs, right? And it actually crosses over to a lot of different demographics, if you will. So look, the total addressable market, you see a lot of people -- without using my number, but just the numbers that you see, talk about $1 billion global pay TV subscribers on a global basis. I threw out a stat a moment ago, that 54% of the population, again, not my number, but things that you see is -- and that's our primary focus. But we cross over to all other groups, including male. And so -- and by the way, we know women primarily control certainly the spend within a lot of families. And so we think we're focused on a great target there. And again, our model works extremely well at that 50 million to 60 million level that we've talked about. So again, we don't need that 300 million subscribers to be successful. So you can see the penetration levels really are very realistic to achieve that.

And what international markets are your biggest opportunities from here?

The content is traveling well, and so it would be a lot of these traditional markets that you see: Germany, France, the U.K., Latin America. But it's really traveling well. We're doing -- we're in India now. We've launched in Indonesia, again, South America. So we -- it's going to be across the board and we're adding -- the nice thing is we're going in with distribution partners. So it's more of a partner-first approach where we will ultimately be direct-to-consumer and B2C. But we're launching with partners, gaining scale. The model works well. So it's more of a wholesale model in the international side initially relative to more kind of retail, but obviously with partners domestically.

Understood. So can you talk about your ARPU currently? I mean, internationally, most streamers are having pretty low ARPUs, especially when there's distributors involved. Can you talk about what the difference is between your ARPUs, U.S. and international?

Sure. We're just a bit -- domestically, just a bit under a $6 ARPU. It will bounce a bit quarter-to-quarter based on trailing 12 months depending upon your launches, your promotional programs in any given period, the nature of your content lineup, et cetera. But we see that and Jeff has spoken of anywhere from the $5.70 to $6 range longer term in terms of domestic ARPU. And longer term -- while internationally is a lower ARPU, longer term, something in the $3 range for international.

And that's sort of as you -- as these programming partnerships sort of annualize, they start to lift, right, over time?

That's right.

If subs convert to paid, right?

Yes, exactly. And keep in mind, the international is a much more wholesale-oriented model, partner first. And as you roll into that, you'd expect a little bit more -- a lower ARPU on that relative to the domestic significant retail presence.

Right. So -- I mean, so if you have this cadence of originals coming online, how should the subs flow? And I think you've talked about this year being sort of back-end loaded. So what kind of programming are you most excited about? What's going to be the real drivers of your subs this year?

No. Look, there's a lot to be excited and we're very happy about ramping from 7 STARZ originals to 12 going from '21 to '22. And what we've said is both on a consolidated basis, adjusted OIBDA as well as subscribers, that the cadence of that is going to be more loaded to the second, third quarters and the fourth quarter as well. So again, we had Blindspotting came out this weekend, a STARZ original. We're excited about that. That's based off of the original Lionsgate film. So it just shows you this connectivity, if you will, between utilizing our IP across all of our businesses and how well Jeff and Joe Drake and Kevin Beggs and TV, how everybody is aligned in John's and the entire company's focus on what can we do so that some of the parts is worth a lot more than we are on a stand-alone basis. And so that's working particularly well. And then I would say, Ghost. Ghost, as you know, is a spin-off of Power and we have -- that's already shown and then we have Kanan, the next spin-off coming, and then we have Force coming after that. So Kanan will drop in July. We have Outlander coming back for a season 6. There will be also a season 7 planned as well, but season 6 in fiscal '22. And then you take that and then you roll right into programming that we broke this last year that did incredibly well like Hightown and P-Valley. So you can see that with 12 original programmings, and a lot of that new programming that I just mentioned coming online with existing improvement programming that we're going to have something we're offering new every week and arguably, on average, like 3 new series every quarter throughout the year. So again, but weighted more for subscriber growth in second, third and fourth quarters.

Does your strategy -- your more targeted strategy suggest that you need fewer originals since -- I mean if you are targeting an African-American female, there's probably less content out there that's really targeted towards that group?

Yes. I mean, look, we think that's an underserved audience, women in general across the board. So yes, it's exactly why, and everybody is always amazed when they look at what we can do with our content spend, right, and of course, some marketing. And certainly, '22 is an investment year as we ramp up content and marketing. But as I've said before, we're going to drive short-term and certainly long-term revenues. So it's just a modest impact, nothing that -- by the way, the kind of street consensus aren't really -- are also expecting that. And so really, it's a modest impact for a nice drive in terms of content, and it secures -- it builds off of what we've done to drive the future. So really feel good about that.

So how does film fit into the STARZ programming strategy? You're pulling off all of the Lionsgate and Summit films from third parties and putting them on to STARZ. When does that start? And then you passed on the Sony output deal which runs Netflix, how do you think about allocating your budget towards film?

Yes. No, that's great. Look, we're focused on, is the originals that kind of drive that big have to see -- have to be on this platform? And then the films help round it out in the context of having that volume to offer and retention. So it's really great. And look, we studied this a long time. I mean even back when we sold Epix, right? We had a distribution through the Lionsgate titles through Epix, which we didn't renew because we wanted the flexibility. I mean that goes back, what, 2 or 3 years ago? So we've been studying this for a long time. There was a short pay one window in the interim as we started to lining up the Lionsgate-Summit titles closer. And in discussion with STARZ, when you look at it, I mean Sony has got great product, take nothing about them away from them, they got a lot of volume. And I think it's exciting to see how much Netflix paid for that. But for us, we know exactly what we wanted. Other than Venom and Spider-Man, there was nothing there that was kind of absolutely had-to-have. And we looked at how our subscriber base lines up with franchises like John Wick, The Hitman's Bodyguard, the Saw franchise. I mean Spiral, we just topped the Spiral, recent theatrical release, just topped $1 billion of global box office on the Saw franchise. I mean I wasn't -- I didn't even have that metric on mind in my -- on my radar. And that's just fantastic. And it really lines up well with our audience that we're serving, and it leaves us with a lot of flexibility, right, and window and with different kind of strategies. You're going to see Spiral and Saw franchise on STARZ, for example, this October around Halloween with a special run. And those are the kind of things that just makes it so much easier to do if you're all in the same family, so to speak, and you're coordinated. And again, Kevin and Joe and Jeff are so fully aligned in terms of really focused on that program and what we need. And again, that programming need is being driven by data. So we have a really strong indication of what's going to work and what to prioritize.

So how much is this all going to cost? What is the ramp in spending going to look like as you're marching towards that 60 million subs?

Yes. We're looking at the -- well Saw, for example, was a very modestly priced film. That -- the horror genre, the faith-based genre was the same way. We're not swinging at the fence on the film side. But you're going to see some ramp-up in P&A spend in theatrical as we start to increase the number of theatrical releases. We had 5 broad releases in fiscal '21, probably ramping up to 8 to 10 in fiscal '22 back to maybe more of a typical-sized film slate in fiscal '23, maybe 12 to 15. But again, we've got a lot of opportunities there and we're going to, as always, follow the content, follow the consumer and ramp up with -- in a very commercial way.

So let's touch on linear. I think your guidance sort of suggests that there's not going to be too much -- I think there's going to be a modest decline in linear is sort of implied in your guidance. So how is linear holding up? And what's going on with -- as pay TV subs come back, like what are you expecting from the bundle and your linear business?

No, for sure. The growth is in the OTT side. But I think on the linear side, it's actually pretty exciting because if you look at it, we've transitioned over the past couple of years, as you know, from fixed ala carte. And so the consumer is actually putting their hand up saying, I want that, I'll pay for that. And that creates a whole new dynamic and relationship not only with the MVPDs on the traditional linear side but more importantly, to the consumer, right? And they know how to find us, whether it's on that platform or whether it's direct-to-consumer, downloading our app through Amazon. So we're not necessarily trying to push that shift. But I think as you get closer to your consumer through whatever platform you're on, it becomes stickier and it's more engaged. So look, we would expect there's going to be probably lessening headwinds on the cord cutting for us as a premium service in an ala carte world, but the growth is certainly on the OTT side. But we're happy to serve these subscribers wherever we find them and have as close a relationship with them as we can and cater to what it is they'd like to see.

So the OTT business, the OTT channel is -- mirrors your linear business, right? You're not putting anything special on OTT that's not on the linear channel, right?

That's correct. They're all out there competing together, all the platforms. And again, we're fairly agnostic as to where the subscribers come from. Of course, we love it when they download the app, the economics are a bit better. And certainly, the data is probably at the max. And that's working incredibly well. But we have great partners and we're just going to continue to work with those partners. And they're making money, too, and that's a wonderful thing even in MVPD world where you're no longer a cost center, you're incremental revenue, and that's where you want to be because what you're doing is you're serving the consumer, right? And the consumer is raising their hand, they're paying for it separately, okay? And it's premium, edgy and also no advertising, right, which is where the consumer has been headed for a long time.

That is true. So on the studios, your TV business has been doing really well. You sell content to other streamers and to the networks and you sell some content to STARZ. So others have pulled back from doing that even after they said they could do both. Some have shifted strategy. So why are you able to do both? And why have you set out on that strategy? Is it a benefit to Lionsgate?

Well, I think -- well, it's absolutely a benefit. And I think it really is kind of back to the earlier discussions we were having about STARZ not competing with these other networks, but being more of a companion product, right, more premium, edgy, adult programming with a focus, right? So everybody else is looking for something else. And so the areas don't cross that much. So Kevin and his team on TV production are able to serve third parties as well as he's able to sell to STARZ because they're generally looking for something separate. And we've been very successful at that. Again, the team put in great protocols this past year, and we were able to keep our productions going. So we're slated -- I mean, Kevin is slated for just a fantastic year. I mean last year, just keeping the production going. He and his team have had 8 of the last pilots and scripts go to series orders. That's 8 for 8. And about half of those are going STARZ and half of those are going to third party, which is actually a pretty good indication of the mix of his business. He's had one new series order, 13 new series orders over the last 15 months, so almost 1 a month, and he's ramping from '21 to '22 from 12 original series to 24, okay? So really, there's just increased demand. And again, we're refreshing our library with worldwide rights. We've got anchor tenants on each and every one, which is a more derisked model, but we're keeping those worldwide rights. It all comes back to us at some point. And Jim Packer and his team are just driving sales across all the windows, all the territories as there's increasing demand for television product.

So what genres offered the most attractive returns? You do it all. You do high-end, scripted, unscripted, you actually make one of my favorite shows, Selling Sunset, on Netflix, I noticed. So my husband loves it, too.

Great.

They're witches in that realty space. But anyway, what kind of content do you think makes the most sense for Lionsgate to sort of boost profitability since there's competition in all genres right now?

Right. Well, look, I love it. Selling Sunset is great. So I'm glad you and your husband are big fans. Yes, it's fantastic programming. And look, our team, look, we've got a well-diversified revenue stream there between scripted series and unscripted. And our unscripted business, being run by Craig Piligian and rolling up through Pilgrim, is really a great business and selling an entirely to an different set of consumers and buyers. And so it's great to have both of those. That gives you diversification. And they all run in different cycles, but it's all important programming and all continues to generate library. And certainly, the scripted side has longer legs on the library side and dramas, in particular, for STARZ. But we're across the board. And again, refreshing our library and have dual revenue streams and multiple revenue streams across all those genres, scripted and unscripted.

So let's shift to film where theatrical obviously has been pressured, but you sort of shifted pretty fast to doing a PVOD strategy and selling some to third parties. And you kind of made it through, right? So what have you learned, first of all, on PVOD? Nobody really has much data on what PVOD is doing and how that sort of is impacting the rest of the windows.

Yes. You get a lot of questions about what are the economics in PVOD and the margins. And look, it's always hard to allocate the cost, right, and allocate the P&A spend or the marketing spend, right, across these various windows. What I will tell you is, look, our experience during fiscal '21. We had films that we had -- and the team, Joe Drake and his team -- pivoted with the theatrical closures. We sold Run to Hulu, a direct-to-an-SVOD service. We did better than our mid case on a theatrical release. Antebellum, we did a very small theatrical release. And then PVOD, we did better than our mid case. So there's definitely a model there. But look, the theatrical exhibitors, they're our friends, they're our partners. We're pulling for them in a major way. We love them. They're back. We put Spiral out. Again, Spiral did better than our mid case. We have Hitman's Bodyguard coming up. So things will be back there. One thing, though, that will be with us, I think from now on, and it will move a bit, which, to your question, PVOD, right? It will shift around whether kind of the universal AMC window of 17 days is ultimate or it's more like 45 days or 30 days, whatever. I think when we go out with Hitman's, I think it's a 45-day exclusive in theaters before going to PVOD. But from a CFO's perspective, the great thing is, right, as you know, the P&A spend -- and we spend less than everybody else, okay? We're very efficient with our spend. But even when you're spending $25 million, $35 million, and it's not available in the theater or anywhere above the theater for 90 days, people will have lost interest, their life has moved on. Well, they haven't completely lost interest, I should say. But for sure, their life has moved on. I mean, right? 3 months is a -- I mean it's just kind of crazy. And so now what we can do, just take a 30-day period. I'm not saying that's going to be the industry standard or our standard, but just take 30 days. The fact that most of our kind of mid- to smaller budgeted films in particular, they may still be in theaters in 30 days and they will be, but it's not necessarily the theater right around the corner from you, okay? It's not as broadly carried. And then all of a sudden now, you've got the ability to basically access it in your home, for those people that missed it in the theatrical experience. Look, we're big fans of theatrical experience. I think having something available sooner than traditionally is a big plus for the economic model all the way around because you can leverage your P&A spend without necessarily -- and without, quite frankly, spending more P&A. So we're excited about that. We're also very excited about the exhibitors coming back strong.

So let's move to content costs because there's talk that there's a lot going on because you've got the COVID protocols, you've got the production delays. It sounds like you guys kind of were able to keep things going. But how are costs per hour programming trending for you? As there seems to be a lot of demand for studio lots, things like that and crews, how is -- how are content costs trending?

We're pretty lined up in terms of our ability to -- one, we continued production with the right protocols. There were certainly some increased costs, but it wasn't inordinate. We were all learning and figuring our way through that experience with showrunner to showrunner, director to director, location by location. And so each one was a bit different. But we were able to keep the productions going. We had to suspend some production here and there with the right protocols, right, when you have somebody test positive. But we've learned so much from that, that we've been able to just again continue on. And so we're in a good position going into fiscal '22. I think a lot in the protocol -- we'll keep protocols, but just a lot of the natural costs would decline. Not to say we're not going to have better protocols than ever because we will, but as vaccinations come in, you're going to have some reduction in some of that day-to-day cost which you otherwise had. I know there's a lot of competition for talent, but we are very aligned with talent and these Television Production pods that Kevin and his team have going, and Sandra along with our interest in 3 Arts talent management. I mean these guys are just doing fantastic and it sources product for the Television Group that may go to third parties, may go to STARZ. But again, I think as that -- those relationships that we have are allowing us to source talent at what I would say, very competitive rates. And likewise, we green light title by title. So we make sure the economics work or it never gets green-lit. So we haven't had an issue there. So we just continue to keep those close relationships and move on.

So then as theatrical comes back in, what's your profitability going to look like? You're going to have to market. You're going to be getting some more theatrical revenue. We probably have some less of the later windows flowing through. How is that going to look as things start up again?

Yes. I think on the P&A side, as we ramp probably closer to 10 titles in '22, I mentioned I think on our last earnings call, I've looked at the P&A spend as somewhere between, maybe, call it, 60% to 70% of the pre-pandemic level for fiscal '20, okay? So there's some ramp-up there. Again, I think though we're going to get better leverage across that with the PVOD window. Certainly, theatrical revenues will be back as part of that. So maybe you have some lower margins, but you're still again in a great position and you're starting to ramp up that content and refresh the libraries, right? So we're excited about that. On a consolidated basis, we've talked about just overall, it's a great investment year and it's a great position to be in where you've got data and things to support the investment in your core businesses, right, where the risk is less where you know the business. And so we'll be ramping up content and marketing across all of our businesses. So from STARZ, Television Production, to film. But again, driving short term as well as more importantly, long-term revenues. And so it's, again, modest impact in the fiscal year. So we feel good from a P&L's perspective. And from a cash standpoint, we can fully fund all of this and still have positive free cash flow. So you've seen us do that in the past couple of years, and we'll do that in fiscal '20, as we -- again, as we invest in our business, we fund SPI and on a strong cash position.

So I wanted to get your view on the media consolidation. You used to be at Time Warner and soon enough they're moving again. So what do you think about the media consolidation that's happening? Finally, Amazon is getting serious buying MGM. Does Lionsgate have the scale to really compete? I think I know what you're going to say.

Well, we certainly do. But first, I'd just shout out my colleagues at Time Warner. They bounced around to a few different homes. And I think with David Zaslav, one of our former directors, and we're close with those guys, I think in the Discovery, WarnerMedia, that's a good home for all of them. So I know they'll be excited about that. For us, we're just a different model, right? We have the size and scale to compete, but I'll tell you what I love about the consolidation. A lot of that was inevitable. You just never know about the timing. But what it does, it just underscores the value of content. Content, content, content and then shouldered with premium distribution platform where you're not pivoting, right? You're powering on, you're not trying to take an ad-based business and either -- and create an entirely new model, right? So I think we're very well poised there. And when you look at the sum of the years -- or excuse me, the sum of the parts, I mean we did $780 million of library revenue last year. We said we're a 50% type of cash margin. I mean just to keep it simple, just take $700 million, right, just take a haircut off to $780 million at 50% margins and do a 15x multiple, I think the MGM multiple is more like 20x, 10 is clearly too low. I'm not trying to set a value. I'm just making the math easy, 15 times $350 million, $5.25 billion and our entire enterprise value is about $6.25 billion, okay? So you do that. And on top of that, you've got approximately 30 million global subscribers with over half of them in a direct-to-consumer model, okay? And a big portion of the others, they have transitioned from fixed a la carte. And on top of that, you got Kevin's business in the TV world selling to third parties and producing vertically for STARZ as well effectively on a wholesale basis, I mean it gets priced out at arm's length fair market values. But again, you're producing to yourself and closely aligned, producing for third parties, and then you got Joe Drake's business and the Motion Picture Group coming back into the theatrical with the new PVOD window. So you do the sum of the parts and you compare it back. And I think, again, it just underscores the value of content is much greater than what some people might have otherwise thought. So I'll just leave it at that. But we're focused. As John said, we're focused on running our business day-to-day, driving value. We feel like we have the scale where it matters and there's a lot of shareholder value creation in front of us whatever comes our way.

Well, that's a good space -- spot to stop, I agree. I think it definitely underscores the value of content for sure. Thanks for being here, Jimmy.

Okay, Meghan. Thanks, everybody. Appreciate you listening in. Take care. Bye.

Bye.