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

Hi. I'm Brett Feldman, Goldman's U.S. telecom, cable and media analyst. It is my pleasure to host this next session of Brett Feldman with Lionsgate. We have from the company, Michael Burns, the Vice Chairman; and Jeff Hirsch, the President and CEO of Starz. Michael and Jeff, thanks for being with us today.

Thanks for having us, Brett.

Thanks for having us.

Let's jump right into it. So the media sector is undergoing a pretty significant transition as video consumption continues to shift from linear and traditional channels to streaming platforms. As a stand-alone company, what are the key secular trends that you see the position company -- see the company positioned to capitalize on? And how does this differentiate you from other media businesses?

I'll take it from the Lionsgate side and then Jeff, if you could talk about Starz in that regard, that would be great. It's a terrific time to be in the content creation business and particularly, distribution. So what we're seeing right now is a huge demand across the globe for content. And we make a tremendous amount of it. So some of it we make for Starz, and Jeff will talk about that, and some of it we make for others. And so what we're seeing is all these different markets emerge around the globe. And what I mean my markets, I'm talking about countries opening up, but I'm also talking about new revenue sources for us like AVOD. AVOD has turned out to be a real great business for us domestically as all these players emerge and is just opening internationally. So I think we see secular trends happening that we are becoming the beneficiary of. And ultimately, that shows up in our numbers. Jeff, do you want to talk a little bit about Starz?

Yes. I think from a Starz point of view, I would like to start with the consumer. And if you look at the world, both domestically and internationally, the consumer really shifted to SVOD 4 or 5 years ago domestically, and Starz got out really early in trying to pivot our business from being a linear-only network to a digital and linear network. And today, domestically, we have more revenue from the digital side than we have from the linear side. So we really completed that pivot domestically. We also saw a great opportunity from a wholesale basis to get out around the world. We're now in 59 countries around the world. We think we've had a 2- to 3-year advantage as the consumer outside the U.S. catches up to really shifting from traditional television to SVOD, we think we're really well positioned to capture market share outside the U.S.

All right. Well, there's another interesting dynamic unfolding right now in the media sector, which is that we've seen ongoing M&A, and it really does seem to be driven by the rise of these direct-to-consumer models. And more recently, we've really seen an uptick in acquisitions of private studios with the acquirers spanning from private equity-backed businesses to actually big tech companies, and the headlines that we're getting on the valuation has really caught a lot of people's attention. So the question here is, as the largest independent publicly traded studio, do you see Lionsgate as a takeout? And how do you think about assessing the strategic value of the company?

It didn't take you long to ask that question, did it? I'll tell you that we do...

It's my second question. I could have gone right to it.

Now we do expect to see more consolidation in the media space. That's a given. And we're obviously one of the last remaining very large independent companies, and there's great scarcity value out there. And what we're going to do is continue to identify ways for us to increase the value of our stock price.

So let me ask you the same question from a different angle. Which players do you think are going to be dominating the streaming landscape over time? I mean there's big tech, there's old media. And really, as you sort of think about who the winners are likely to be, how do you believe they are assessing the value of potential M&A targets?

Well, I can't speak for them, but I can tell you that I think our size in many ways is our advantage. The ability to be nimble, we always -- Jon and I always talk about we're the PT boats surrounded by battleships. So we can move very, very quickly. As Jeff talked about, 30 million subs worldwide on Starz is a really good business for us, and that's growing very nicely, and he'll talk more about that later on, I'm sure. So the idea that we can go out there and make strategic bolt-on acquisitions. Like for example, during the pandemic, where many of the giant conglomerates were trying to figure out what they were going to do when they're in the middle of making acquisitions, we were out there buying library product. And we looked at -- recently, we did -- over the last 20 years, we have acquired or invested approximately $20 billion in content. So -- but the ability to buy these libraries when everybody else is being still, that's a strategic advantage for us. So who's going to win? I think that there are going to be, in the streaming space, many winners. I think that there have been some casualties that have been written about. And I think that Starz is certainly going to be a winner in that space. And I think that some of these giant companies, when they get behind something, they are going to win. And the issue is to what degree.

If you don't mind, I want to come back to the -- sorry, Jeff, I don't know if I interrupted you. Okay. I want to come back to the library comment. So I think it's really pretty interesting. As you pointed out, you've acquired 3 libraries over the last 6 months as Spyglass Media, I think, is probably the most notable. And as you outlined on your most recent call, those libraries bring 400 titles and have more than $2.5 billion of underlying domestic box office. This is a pretty significant portfolio that you've pulled together. And it's really a 2-part question here is, one, how do you think about the value of content libraries? And then as a studio, why are you stepping up your investment in acquiring library content when the major direct-to-consumer providers seem to be increasing their budgets for original content?

Well, a couple of things. One is the library license is extremely well. I got to tip my hat to Brian Goldsmith, who runs much of our acquisitions because he's a grinder, and some of these acquisitions are complicated. But if you take a look at what we have right now, I think we have all of the Weinstein product from 2005 to 2018, with, I think, the largest holder of Tarantino movies right now. This product, whether it's streaming or AVOD, which I talked about earlier, which is taking off in a big way, we have an opportunity right now to monetize library product like never before. And I will tell you this, again, I don't want to get into selective disclosure situation, but I will tell you that those library purchases that we've made, even the recent ones have worked out better than we expected.

There's one more, I think, maybe broad thematic question I want to ask you about and then we're going to get into some more questions about the operating businesses. But as we've seen this rise in direct-to-consumer models, it does seem like it's really impacted the relationships between studios and Hollywood talent, and it's really kind of upended the traditional compensation model. There's even been a couple of high-profile lawsuits between studios and actors. And so the question that I have for you is, how do you see this compensation model evolving? And more broadly, what is Lionsgate doing to be a talent-friendly studio in this new landscape?

I think we've always looked at the talent as our partners, whether with Tyler Perry, who I think we did 18 films with, or whether it was the guy that brought us Saw. I think that -- or, for example, the John Wick franchise that keeps getting better and better and doing better and better. I think that we've always looked at, as I said, the talent relationships with partnerships. I think that the way people get paid, the giant $20 million, $25 million actors will have a different compensation criteria that if something goes directly to streaming. But I do believe that we're in the wild west right now, and a lot of those deals are going to be a little different than they used to be. But again, I think this is an advantage that we have because of the ability to move quickly and be nimble, and that's working for us.

Are you finding that in the midst of this disruption talent that maybe hadn't worked with you in the past is seeking you out?

I think that we've been very clear about the fact that we believe strongly in the theatrical marketplace. Windows certainly will change and they have, and it took a pandemic to have that happen. But I do believe that actors, directors below-the-line talent, they all want to work. And if you have the right script, the right material, the right source material, you're going to get that A talent because they want to participate in that.

You brought up windows. And as you noted, there's been a real shift in how studios are thinking about that. We see agreements that keep windows as short as 17 days. We see other studios trying to stick with a 45-day window. Do you think there's going to be a new standard. I mean, from your standpoint, from the Lionsgate standpoint, how do you think about the right way to monetize your content in a world where DTC platforms are of increasing importance?

Well, I think 17 days, obviously, the reason for 17 days is 3 weekends. I've said this publicly a long time, which is if you're going to spend a significant amount of money releasing a movie on advertising costs, let's just say you're spending $30 million, $40 million, $50 million on a big movie and it doesn't work. It doesn't make sense for the studio to have to wait a tremendously long time before you hit the ancillary markets. Because the longer you wait, the less of a memory there is in the customer base. And so what's happened is you want to be able to piggyback particularly that stuff that doesn't work particularly well in the theater so you want to be able to piggyback on that marketing spend. And I think that the world has awakened or has woke up to that fact. So I think windows will bounce around. You've got 17, you've got 45 days, but I do think the theatrical is important for all of us.

Doesn't 7 weekends just seem infinitely long in this new world? I mean, is that the new standard?

Well, I don't even know if I would tell you what the right number is. I can tell you that I watched Inception, I don't know, a month or 2 ago with my son on the -- I think it was on Netflix. And it was a completely different experience, Netflix, than it was on the big screen.

How worried are you about piracy? That's been another topic that's come up recently as we've seen more titles go direct to consumer, particularly with day and date releases.

Am I worried about what -- I'm sorry?

Piracy.

I'm always worried about piracy. You know that there's no expression about being Irish in a fighting sense of tragedy overcome by temporary periods of joy. So I will tell you that I see danger everywhere. We all do. I can think that as product becomes more available and there's so much free product in the world of AVOD, so we're monetizing it, I think that piracy will be around for a long time. I mean, it will never go away. It's a little bit like a whack amole, but I think it's manageable.

All right. So sticking with just the content monetization strategy, I think you previously highlighted that out of 34 scripted series that you're producing this year, about half are going to be going to Starz, about half will be going to third-party programmers. What are you looking to do when you're trying to strike the balance between what you produce for third parties versus what you're retaining for your own Starz product?

Well, Jeff will tell you, he can talk again to Starz. He is tough to sell it a show to because he's very focused on his core demo, which is working, so it's hard to argue with that. So there are certain shows that are better on network television. I mean, for example, we're pretty excited about the deal we did for the Christmas movie for Zoey's Extraordinary Playlists. We're doing that for Roku. Zoey's was -- is a great show. It was on NBC. They chose to cancel it. It wouldn't have been a good show for Starz. But there are a lot of shows that we're developing together with Jeff and Kevin Beggs on the Lionsgate team. And so that will work for Starz. But again, maybe, Jeff, you could talk about sort of what you buy and why you buy it.

Yes. So we have a very definite point of view as a premium network, non-ad supported. We're looking for edgy adult content that is really character-driven in a way that you can't put on broadcast television or on ad-supported television. And the second filter of that is we're really focused on content that really is by, for and about women and underrepresented audiences. So like the "Power" Universe, which I think the only ancillary, comparison to that is the Marvel Universe. And so we've got very specific programming mandate that doesn't really fit everything that Kevin produces. And if you think about the kind of industrial logic of the company, Kevin has a wonderful broad development portfolio, whether it's Pilgrim Debmar-Mercury, Kevin scripted in a lot of his pods making a ton of great content that actually would fit on not just Starz, but on other streaming services and other broadcast networks. So we kind of have the best of both worlds, so to speak, where I see stuff that comes from Kevin first. We think of a show that we like it comes to Starz. If it doesn't fit for Starz, Kevin can sell it to other networks. And I think he's had great success in the last year. I think 13 of their shows have been picked up for second seasons, and the 4 broadcast shows were reordered. So we can actually play both sides of the world where we develop for Starz but also sell to the rest of the universe.

I want to spend a little more time talking about how you see Starz's position in the market because when you look at the streaming landscape, there's just a range of product types and business models out there. You have all inclusive. You have nichey products. You have subscription-only. You have ad light. You have completely free ad supported. You just alluded to sort of what your target demo currently is. Where do you want the product to be positioned? Do you see an opportunity to be in front of demos that maybe you haven't designed the product for historically? And do you think that there's maybe pricing models you should be exploring, including ad-supported models that might fit better than you would have anticipated just based on the success we've seen with some of these ad-light products?

It's an interesting question. I think we wrestle with it all day, but we're pretty happy with where we sit in the ecosystem. And if you take a step back and think about how the world is unfolding, we really think there's 3 tiers of services that you'll see in the digital world. There's this mass market kind of broad streaming services that really are trying to service everything in the home. I think that's the kind of cornerstone of the Warner Media Discovery deal. We have sports news, weather, unscripted reality. And you're really trying to service everyone in the home, and they're trying to get to somewhere between 300 million and 400 million subscribers worldwide. That's not Starz. That's not how we were ever built. If you think about back to the old linear world, we were always sold on top of cable or satellite as a kind of cherry on top of broader services. I think that's how we will sit today. And so we sit in that premium tier above that mass tier where we are very focused on 2 core demos. We know who we are. We are really trying to put content on every week, 52 weeks a year. For our demos and not try to play that big acquisition game, but really play a churn reduction game so that we can service our customer every week, 52 weeks a year, bringing churn down to low single digits and continue to grow. In that premium tier, we are very confident we can get to the high end of our 50 million to 60 million sub range. That's kind of where that premium tier sits. And then you have the higher tier, which is the niche services, which are really more genre-based services. I would say we're much more of a demo-based service. And those are much smaller passionate bases of customers but much smaller in terms of scale globally. And so we feel really good about the position we are like we were in the traditional business where DIRECTV built their business on giving premiums away free if you switch from cable. I think you're going to start to see the competition in that mass streaming area, whether it's Netflix and Amazon and Hulu and Disney+ and D+ or Warner Bros.+, that's going to be really, really aggressive in terms of trying to get to that 400 million. You can play on price, which I think Apple and HBO Max have played on for a while, but you can also bundle like the traditional business used to do. And so I think Starz has now positioned itself as a really great complementary bundling partner to compete for market share for those mass services that you see really developing right now.

So then what do you have to do to be better positioned in those types of bundles?

I mean we have to continue to get through the content slate this year. We have the largest and broadest slate that we've had in the history of the business. We'll have 12 big originals, and we'll have them lined up for the first time. So we're coming off the second power spin-off, Raising Kanan, which is growing like weeds right now. The finale episode is this week, and I think it's the best episode on TV all year. We'll premier BMF, which is the new 50 Cent show coming out of that. So for the first time in the history of our business, we have a show for a demo followed by a show for a demo. When BMF comes off the air, we'll bring Ghost back, which is the first power spin-off. When that comes off the air, we'll go into Force, which is the third spin-off. And so we've really completed that programming going into the year and that we continue to just focus on those demos. I think we'll continue to grow at the pace that we need to hit our range. I mean the female audience, there's 49% of this planet are women, and so I think that's a pretty big niche audience to go after, I guess, we could say.

You kind of answered my next question, which is that you do feel confident that based on the demos you're targeting and the content strategy that you have for Starz at that 50 million to 60 million subscriber target is something you can meet without substantially altering what you're bringing to market? Is that the fair conclusion?

Yes. I feel really good about the content slate, how it's lining up. I think the focus on this female demographic and this underserved demographic, to your question earlier, is bringing great pieces of content to the network. We have a share in Horgan half hour that Courteney Cox and Greg Kinnear and Mira Sorvino are going to lead. We have got Sam Esmail produced limited series that Julia Roberts and Sean Penn will be on. And so because we're focused, I think the town knows exactly who we are and what we stand for, and we're showing great success and growth, we're seeing great talent and great writers wanting to be on the network. I mean, they get just snowballs on itself. And as we continue to grow and see these new shows come on the air, acquisition continues to go up, churn continues to come down. We're well on our track to hit that 50 million to 60 million subscriber base.

I was going to...

I was thinking -- go ahead, Michael.

If I could, again, I think what -- if you ask around town, whether the agencies or management companies, they will tell you that Starz and Lionsgate are very responsive and that nobody moves faster than we do if we want something.

Understood. Sticking with the Starz content strategy. You recently signed some theatrical output agreements, I think, most recently with Universal. How do films factor into Starz content strategy? And to what extent do you see that as a key point of differentiation versus the other streaming products out there?

Look, I think having a complete portfolio of content for your consumers, so these great big Starz originals coupled with the Lionsgate and Summit Pay 1, which we also just moved over -- we'll move over to Starz, which we'll talk about in a minute. Then with the Universal Pay 2 coming on right behind that, and then library deals with almost every studio in town at a $8.99 price point, I think we've got the best value proposition for our 2 core demos in the business. And so I feel really good about the portfolio. Movies really are important. Pay 1 movies are important. I think moving Lionsgate and Summit over to Starz was something that Jon and I had talked about a couple of years ago. It allows us -- I was on the phone with Joe Drake last night around 11:00 talking about a film that they're looking to do and how does it fit to the Starz demos. And so now Joe and I can work together to really help, not that I'm ever going to greenlight a movie, but I can help drive the slate so that they're really impactful for the Starz consumers. Because we know that if you watch 1 or 2 or more originals, your lifetime value on Starz is 4x longer if you watch one. But if you watch 2 originals and 3 Pay 1 movies, we know your lifetime value is even longer. And so that Pay 1, Pay 2 combination gives us on an annual basis, somewhere in the neighborhood of 50 to 60, very fresh kind of within 20 months of the box office movies from, I think, 2 of the best studios in the world. And so that makes -- that, coupled with our great big originals, make the service a really compelling value proposition.

Sticking with the outlook for subscriber trends at Starz. The customer base, the domestic customer base did decline in the most recent quarter, although it proved to be temporary, as you revealed on the call, that as you brought Power Book III out, you already saw a recovery in the gross add volumes. Thinking ahead, how do we think about the principal drivers of subscriber growth at Starz? In other words, how hinged is it going to be to the cadence of original content being released or maybe bringing new movies onto the platform or maybe just broadening distribution?

So I think it's a combination of 1 and 3. It's really -- growth really hangs off these big originals. This year will be the first year we'll have 5 or 10 full originals on the service. And as I said, this quarter, we launched Raising Kanan to start the quarter. Hells came in mid-quarter, which is having a great run, and we're about the premier BMF this weekend. And so really 3 big core hour dramas, whereas last quarter, we had 2 smaller new shows. And again, because of COVID, we didn't have any Pay 1 or big movies coming in. So we are a little bit barren in terms of fresh content in the quarter, and you saw the results of that. But now that we're back deep into the slate, we're seeing great growth, and I feel really good about the business going forward. It really is that lining up of those shows. So the idea would be to have 2 shows on every week, 52 weeks a year, serving our 2 core demos, supported by the great Pay 1 movies that we get from Lionsgate and Summit and then the Pay 2 from Universal. When we get -- continue to get in there, we're now really into the first big mile marker of this new slate this weekend, and we'll see how we can move customers from Kanan into BMF and what that does for churn, I feel really good about the trajectory of the long-term business.

When Jeff came over to run Starz, he was very adamant about we have to have new terrific content available all the time, month in, month out for the consumer, and that's working.

Other than that, other than your cadence of content, are there any other tactics that you're exploring or utilizing to manage and minimize churn?

Well, look, I think there's a couple of things. And the second half of that question again to is distribution. And if you look at our international business, where we're seeing great growth is in the countries we've been in the longest. As we continue to lap those distribution deals and add new distribution deals on top of it and then bring new content on to all of those distribution platforms, we're seeing those markets really take off. And so it's really a combination of the content strategy and slate, coupled with distribution partners, that's really fueling our international growth right now. There's other things that we can obviously do. The female demographic is a large demographic that we don't -- I don't think we do a good enough job with the Latino community right now. We've got 2 shows in development coming on the platform in the next year, 1.5 years that I think will bring that audience to the service in a much bigger way than we have today. And so within the kind of core demos, there's a lot of pockets that we can actually program against that we haven't today. And so we'll continue to lean into that in a big way and use data to confirm that our hypotheses are correct.

So last month, you reached a settlement agreement with Disney that resolved a complaint you had filed over their use of the Starz+ brand in Latin America. You said that this had resolved the dispute by entering into this agreement and that there were significant benefits to both parties. Can you elaborate on that? At a high level, what does this agreement mean for Starz and Lionsgate?

Look, I think we said there's significant benefits to both companies in the long term, but I think ultimately, what it really does, and it's -- it really kind of fits with Lionsgate's DNA, where we've got really a risk-mitigated model on movies and TV. And what we've done is, I think this derisks the international plan in a significant way and kind of future-proofs the business. But at this point -- and there'll be more to come as we start to roll into the deal. So -- but significant benefits for both sides, for sure.

Not really a direct follow-up to that question, but just thinking more broadly about your presence in international markets and you alluded to distribution partners, I mean how do you think about that opportunity? How important is it that you add new distribution partners, whether they're telecom providers or maybe some other type of direct-to-consumer provider to reach or maybe exceed that long-term subscriber target that you've hit?

Look, it's a great question. I think if you again take a step back and look at how the services are unfolding around the world, most of the large mass services we talked about earlier are really going straight retail because they want to control the customer, they want to control the ad inventory. And they're really competing globally, not only with themselves, but the local partners, so you have the Skys and Oranges and the Vodafones and Telefónicas, all of those local partners in each of these territories are looking for a wholesale streaming partner to help compete. And our international strategy is really mitigated on the wholesale. So much like we launched domestically 20 years ago, we are signing wholesale deals all over the world. We do have our app in 13 countries to get the data to help us inform our programming decision in those countries, but this is really kind of medicated on wholesale. And so we're finding great partnerships that are looking with the local partners to compete with these large global streamers, whether it's the Amazons or the Googles or the Apples or the Netflixs. And so distribution is super important to us. If you look at our -- the 50 million to 60 million sub growth, the majority of that growth is coming from international partly because we just -- we're in inning 3 there. And so distribution is really important for us. We're seeing great growth in the U.K., France, Brazil, Mexico. And in those countries, we've been there the longest, and we have the best distribution or the most distribution. So distribution, as you lap that sub, start to lap and you add and it's really -- it's predicated on that wholesale model, unlike what the other large mass streamers are trying to do. So we've got a little bit of an advantage there. I would also say on international on the content side, because they're trying to be broad in all things that everybody in the home, and we're still looking for that adult edgy content, we found ourselves in a really good position buying, I think, some of the best content outside the U.S. that fits our service that wouldn't fit on an ad-supported service. And so we're able to mitigate increased content costs outside the U.S. because of that.

One of the key things I imagine to potential distribution partners is the wholesale price that they're going to pay to you. Obviously, the less they have to pay, the more inclined they're going to be your partner. How do you think about balancing that? Because obviously, the lower the price, the bigger the TAM, the more the partners, the longer the road it is to get to your breakeven. Is this something you feel like you're going to continue to experiment with? Or do you feel you're getting pretty close to understanding the right way to price your content in those types of partnerships?

So it's a great question. I think it's a territory-by-territory kind of answer. It depends on what content portfolio we have for that territory at the time. What we've done in the Nordics is much different than we've done in the U.K. and Spain. Because of that, some of the partners really want to have us included in a package or a bundle, and so those economics look different, but those bring large scale of subscribers, which benefits the brand as we launch the brand. And ultimately, as we roll through that deal, we've become stronger in those territories and be able to have more of an economic impact. So it really depends on content in that territory, what the local partner wants and how we see the strength -- the size of that market. But that's -- I think, the secret sauce is that we are wholesale. We are very partner-friendly and we are very flexible in terms of doing different types of deals based on what the local partner wants us to do.

I've got time to squeeze in one last question here. So just going back to the balance sheet and capital allocation decisions. Coming out of the last quarter, your net leverage was about 4.7 turns, and I believe that your target is to get down a bit closer to 4x. And that's still sort of on the higher end of where media companies tend to operate. What do you see as the right long-term leverage for Lionsgate? And how are you going to be thinking about prioritizing capital allocation as you move towards that? And then how could that change once you've achieved it?

Well, we've always said that as we invest more money in content, you're going to see sort of -- you're going to see fluctuation in our leverage ratio. We don't think we're particularly highly levered, although our goal, we've said, is 3.5 to 4x. We're comfortable with that leverage because of a very reliable cash flow, for example, coming from places like the library from subscribers. We've never really -- we never budget the fact that what happens to us if we have a hit. But when you're talking about a company, which has a $5 billion enterprise value and $2.8 billion or $3 billion wherever we are on a market cap standpoint, that's a big factor for us. So we're very comfortable that we're going to get to our leverage ratio. We're very comfortable with the investment that we're making in content because we think that every time we make that investment, it becomes more and more valuable. And so I think you'll see us hit our target of 3.5 to 4x. And as I said, we'll go up and we'll go down based upon the content spend and some of the other stuff, marketing spend, for example, for movies. But we'd like to get down to that ratio because we'd like to be able to take advantage of the tremendous free cash flow that we expect. And then we can do things that we would like to do, which is once we make the rating agencies happy, when we get to that leverage ratio, we have a stock buyback plan in place. And right now, that would be a good place for us to spend some money.

All right. Michael, Jeff, thanks so much for being with us today.

Thanks for having us.