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

All right. Thank you for coming. A quick note on disclosures. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures all appear as a handout available in the registration area and on the Morgan Stanley public website. I'd like to welcome Jeff Hirsch, President and CEO of Starz; and Jimmy Barge, the CFO of Lionsgate. Thank you both so much for joining us.

Thanks, Thomas.

So yes, maybe let's start off with a high level with you, Jimmy. To start, Lionsgate's announced that it's exploring strategic options for Starz. So can you give us an overview of the rationale? Any updates on potential avenues that you're exploring? And what makes this the right time to be exploring this opportunity, in particular, since Starz is going through an investment cycle?

Well, sure. Thanks, Thomas. First of all, I'd just say, look, it's great to be back in person. So thanks to Morgan Stanley and the team for getting us all out. So it's great to be able to talk more directly to investors. Had a great day of one-on-ones. And it's great to be here with you. Jeff and I are just glad to be here with you today. Look, it's exciting times because as you noted, our Board's approved a strategic review. I think that's a great inflection point in terms of just opportunities. And the reason for this is that we think it's very compelling when you look at the sum of the parts of our businesses, and this is an opportunity to unlock some significant shareholder value in the context of some of the parts versus where we've been in our current range of trading. And if you just look at that and you look at the nature of our businesses, and we'll talk a lot more about those as we go through. I'm sure you've got questions about each of our businesses. But if you look at it and you just step back broadly, we have a 17,000 title library, okay? And we just reported $771 million of trailing 12 months revenue, which is at a 50% plus cash margin, okay? It's pretty easy to do the math. Whatever multiple you want to put on that, and we can talk about that more later, but that could approximate reasonably our entire enterprise value of about $5 billion, okay? On top of that, in the studio side of the business, in addition to our library, we've got 2 major production studios, 2, film and TV. And look at what production studios without libraries to speak of have been selling for in private market transactions. So you look at that -- and then we have really this huge and I would say only 1 of 2 profitable global streaming services, 1 of 2 with 30 million global subscribers. Jeff will talk more about that. So you got all of that on top of the library, and so I think it's just really compelling that we unlock that value. In terms of an update relative to our transaction, I would say that we're exploring all the potential options that we laid out in our November 8-K. It's going very well. I'd say more convinced than ever that there's significant value to be unlocked here. So I'm not going to hear -- I'm not in a position to be able to make us an announcement relative to specific transaction or a form of transaction at this time, I would say because I get the question, in the context of just thinking about any potential spend, which is one of the things noted in the 8-K, it would be very possible to delever both companies during that process in a pretty significant way. And it happens every day in the marketplace in the context of partial spends or sponsored spends. So just a lot of opportunities here. I think in the context of why now, I think it's a perfect inflection point. One, it's never too soon to unlock shareholder value. So timing is of the essence in that context. It's great timing. But there's also incredible demand for content. And likewise, Jeff's business and Starz has reached these inflection points of being OTT -- not only profitable, obviously, but OTT first, in terms of over 60% of our domestic subscribers being in revenue is OTT, right, having transitioned from fixed to a la carte businesses on the linear side. So -- and having ramped up programming, by the way, which we'll talk about a bit later, I'm sure Jeff will mention, but just a huge opportunity. So I think it's never -- it's the perfect time to do this, and we're very excited about it.

Great. As you explore those potential opportunities, whether it's a spin or a sale, looking back, Lionsgate acquired Starz back in 2016, I believe. Jeff, can you talk a little bit about how that acquisition has benefited Starz over the last 6 years? And Jimmy, maybe in a potential transaction, how do we think about how you retain the value of that relationship that you've built over time versus the value of unlocking something that's in a separate asset?

Yes, I think it's a good question. I mean there's really 2 core benefits that we have experienced since we have closed the deal, I think it was in December of '17. First and foremost, we've got 2 studios that are some of the best producers of television and movies in the business. And so to unlock the access to those titles, we've got 11 originals on the year this year. I think all but 3 are being actually produced by Lionsgate Television. So you've got great producers of television. We have great access to everything that Kevin is looking at. And so Kevin is out looking for content for us. We have a team out looking for content, too. So [ you've got 2 eyes ] looking for some of the best programming in the business, that's been very impactful. And then coming into this year, we'll actually move the Lionsgate Pay 1 over to Starz. And the nice thing about that is coming off of where we were at Sony, it's sitting in the building with Joe Drake. We're able to sit there and talk to him and go through the data about what's driving acquisition, what's driving retention and really help to kind of push that slate into a position where those Pay 1 movies really are complementary to the originals that we have on the air. And so we're not able to do that if it's a third party that we're no longer part of. So it's been real beneficial for us. And then obviously being with a global footprint also helps as we've expanded the business into 63 countries around the world. Having access to that 17,000 title library outside the U.S. has been a great fundamental platform for us to build content around as we go into certain markets.

Yes and, Thomas, to your question about transitioning the synergies, the operating synergies, actually that just happens very naturally. I mean we already have intercompany agreements that are at arm's length, fair value determinations. I mean keep in mind, we have participants who participate in the value of all the television productions that we supply stars with. So everything's at fair value. And clearly, in any type of separation, you'd make sure, as we would and this already exists, by the way, long-term licensing arrangements to the product and the franchises that are critical to the Starz platform. So we would just continue to be a great supplier and -- not the only supplier but a great supplier for Starz. And Kevin's business on television production is -- about 50% of it's going to Starz and about 50% of it's going to third party. So that relationship would continue.

Great. Jeff, I wanted to dig a little bit into that Starz side of things. You recently reiterated the long-term subscriber target for $50 million to $60 million. U.S. net adds cadence has seen, I think, a greater-than-expected slowdown relative to what we were hoping for at the beginning of last year. Has your view on the U.S. market opportunity changed at all? And what gives you confidence that, that growth really reaccelerates as the content pipeline kind of comes back?

I'm pretty excited about the business actually from what we're seeing right now. Unfortunately, we -- as we've talked about, coming into the pandemic, we've produced a year in advance. So we were flushed with content in that first year of the pandemic. But in the second year, we had a lot of COVID delays. We premiered Outlander last night on the service, which is the first time in 2 years we have Outlander on the service. So for the last 11 or 12 months, we really have been living off the Power franchise and not activating the general female demo that has been so impactful for our business. So last night, it was great to wake up this morning and seeing all the app data around Shining Vale, which is a new show we premiered last night, and Outlander, which was on the service basically for the first time in 18 months. And so if you look at -- back the first half of this year, it was a very content-bearing period. We didn't have any Pay 1 movies, which are really impactful for both our linear partners and some of our digital wholesale partners, not as much on the app. We didn't have any of our big tent poles in that first half of the year, and so we got a little behind. And then the subscription business, when you lose subscription potential months, you get behind it, it's hard to catch up. So if you -- and I use sports analogies all the time. If you think about a show being delayed like as an injured athlete, we lost 50 months of potential subscriber acquisition time last year based on all the COVID delays. Now that we're kind of through that and ramping back in, last night was the first time in over a year that we had Force on the air for the Power audience, Outlander on for the Outlander audience, and a new show with Courteney Cox and Greg Kinnear called Shining Vale, which premiered to really great reviews. And so we're kind of back in it now again, and we're activating both of our 2 core demos, so I expect the business to really start to kind of accelerate again on the domestic side. But internationally, it's just been -- we've seen great growth. We have Outlander in the U.K. for the first time. The international markets, while we're in 63 markets around the world, a lot of those markets we get as you buy content. So when you buy Mexico, you get all of Lat Am. And so on a wholesale business, it doesn't cost you much to be in Argentina. But the international business is really driven by 5 or 6 core markets, and 1 of them is already profitable, 1 is pretty close to turning. 2 other, we have partners in that give us a little bit of a backstop in this market. So I feel really confident that, that business will turn positive as we said it has on the call. And we're well on our way to hitting that high end -- in our mid- to high end of that range of the 50 million to 60 million subscribers. I really am excited about the business. I'm excited about the content that's coming. So...

Yes. As you think about that ramp in original programming towards a more regular release cadence, you've spoken historically about really this being a churn game rather than going broad on your audience. Is there any way to think about the subscribers that you reach annually compared to the subscribers that you have at any given time? Or asked another way, now that we -- you've been tying together series finales and series premieres a little bit more over the course of this year, how has the progress on churn been?

Yes, we're down to single digits, which is -- was our goal to get there. We want to get to low single digits long term. If you think about -- I think Brian said this, this morning that it's a click-in and click-out world, right? So we used to have Power on, and we only had 5 shows or 6 shows. We'd have -- a consumer would come on, watch Power for 10 weeks, disconnect and come back 12 months later for that show. And so the lifetime value for that consumer was 10 weeks. We looked at that and said, instead of trying to go out and spend a ton on content, a ton on acquisition and compete with these really broad-based streaming services, whether they're AVOD or Netflixes, Paramount Pluses that are really trying to be all things to everybody in the home, we were going to keep our focused strategy. But the way to really accelerate the business without extending a lot of money on the front end was on the content strategy. And so what we did is we extended the Power universe. And now for that universe, we have 6 shows. So we have Ghost, Raising Kanan, Force, BMF, second season of P-Valley coming back and then Blindspotting and Run the World. We now have the entire year coverage for that audience. So instead of coming in for week 1 and leaving the week 10, we move you from 1 show to the next to the next. So we now have that consumer covered for 50 of the 52 weeks a year. And so we've just extended lifetime value by 5x. On a $6 ARPU on profitability, that's a massive improvement in a revenue component for the business without spending anything on the front end for a consumer we already have. And so we are going to continue to play that back end game where it's about minimizing churn, spending on content to extend lifetime value and ultimately accelerate the profitability of the business.

You mentioned Power, and that's been a hugely successful franchise. How do you think about opportunities to maintain franchises and curate them and in particular, in kind of keeping talent happy in a very crowded streaming market where there's always kind of an opportunity for someone to maybe buy out that talent?

It's a great question. I mean we're playing a fundamentally different game. Our content strategy is focused on 2 core demos. It's the general female audience. It's the African American -- really the African-American female audience. And it's not ad supported, it's authentic, it's R-rated. And so a lot of the folks that we see out there that are these big, broad-based streaming services that are going after the home aren't looking for some of the content that we're looking for because of the nature of the content. But we really become the destination for creators for those shows. We're not binging, so we're up every week. And we're -- I think, our marketing is some of the best in the business. We've premiered a show that you watched last night called Shining Vale that had -- Sharon Horgan wrote, Courteney Cox is the lead, Greg Kinnear, Mira Sorvino, it's a phenomenal show. It's got great reviews. It had great viewership last night. I think it's going to set all kinds of records for us in the non-Power universe. And to your point about franchises, I'm not sure it's really franchises that we're really going for, but we're trying to serve those 2 demos with shows. So if you think about the general female audience, we had a show called White Queen, and we saw a ton of women coming to the service and buying it. Outlander came behind it, then we brought back Spanish Princess, White Princess. And so we have this great kind of genre that I like to call great women of history or queens of infamy, Colin calls them. It's kind of a franchise, but it's kind of not a franchise because it's not the same kind of anchor product. But coming behind Outlander right now, we have a show called Becoming Elizabeth, which is Elizabeth XV when her dad dies, coming into power and the fight with her brother of a period of time that nobody has really done around Queen Elizabeth. Serpent Queen, which is Catherine de' Medici story, which is the dark queen of France coming behind that. We're doing a Dangerous Liaisons prequel, which, again, this really super serves that female audience. So much like we talked about with Power, we now have something on every week, 52 weeks a year for that general female audience, ultimately bringing people in and bringing churn down again. Outlander, there's been rumors about a prequel, who knows, we'll see. But it's really serving this to demos, which shows that we know what they really like. And Power and Outlander we're kind of the anchor shows for that strategy. So whether they're franchises or they're genres that we know that they like, keeping it on the air 52 weeks a year brings churn really low to single digits and actually, ultimately, gives us pricing power on the front end if we can get churn down to low single digits. And so that's kind of what we're playing. And ultimately, from a talent perspective because we're so focused on the female point of view, that it's really unique in Hollywood right now. And we're seeing great creators and great talent coming to us. We're premiering a show called Gaslit on April 20. And I don't think they've announced it yet. So sometime in April, [ ruined that one ], which is Watergate. And now there's been 1 million Watergate shows that have done -- HBO's doing a Watergate show. This is Watergate through the eyes of Martha Mitchell. This is the Martha Mitchell story of Watergate. Nobody's told this real-life story. Martha Mitchell was the first person to actually tell people that Nixon was lying because her security guard was busted at Watergate. And nobody has told the story before. And Sam Esmail from Mr. Robot is producing it. And we wrote 8 hours about the story of Martha Mitchell, who is this -- penned as a drunk and telling a lie. She went -- she testified in front of the Senate and they were like, "You're drunk, you're lying," and she was telling the truth. She lost her family. She lost -- she ended up losing her life. And no one's really told that story before. So we went out and we decided to tell that story. Julia Roberts is playing Martha Mitchell. Sean Penn, who you won't recognize, is playing John Mitchell. Mo Dean is Betty Gilpin. Dan Stevens is playing John Dean. It's a phenomenal 8 hours. It's nothing like you've seen in television. And it was easy to come -- for them to come do it because that was our point of view. And so that -- we're playing a little unique, specific, different game, and it's not put us in that content world of having to spend a ton of money to get good talent, so excited about it.

Yes, and that makes sense. And turning to Jimmy on that investment priority. You've spoken about funding your investments from free cash flow and the healthy industry demand for content also warrants the decision to ramp up on the TV production side. So how should we think about balancing the investment priorities from a holistic point of view across TV and film versus Starz, where the original programming is also ramping?

Well, sure, I -- first of all, every piece of our IP and programming and production budgets and programming budgets go through a pretty strenuous filter on IRR, net present value, et cetera. And we're not building cars and putting them on the showroom floor and hope they sell through, right? We're greenlighting bespoke projects that we pretty much know the major licensor right up front, and we know how to monetize ancillary markets across the world, 24/7, every window. So we know how to price these out and we look through that filter always. And we can do really all of the above. I mean in the real context, right, on the television side, there's incredible demand. It's never been better. On the Starz side, we've ramped up, as Jeff has said, from 7 originals to 11 originals. So a lot of that ramp-up in content spend, we've done. I'll paraphrase David Zaslav here in the context of we're not trying to -- in this space, we're not trying to win the spending wars, right, we just need to serve up and satisfy the appetite of our subscribers. And what I would say there, we cannot only satisfy that appetite, but to Jeff's point, we're serving 2 demos here. We can super serve these, and we've really ramped up in that context, and we can do it vertically through our television production group, which we're doing. And so that's really great. And we got a great pipeline in the motion picture side of the house with a lot of optionality and the different ways to distribute, even beyond the theatrical experience. So really in a good position, and we're doing this through our free cash flow. At the same time, we're ramping up the STARZPLAY International investment. So -- and that will start to -- that investment is going to really pay off and start to move towards profitability. So really feel good. It's a strenuous process in the context back to the top of the conversation. But at the same time, we have the cash flow to do it, and it's a great investment.

You've spoken also about the potential strategic exploration being a deleveraging event. And as the company balances its investment plans with deleveraging priorities, can you talk about what you're comfortable with in terms of Lionsgate's leverage and where it sits?

Yes. And certainly, unlocking value is the primary reason relative to the strategic review, the deleveraging is just a really nice plus along the context of that. Look, we're right around 5x levered now, which is higher than we would like to be. But I have to tell you, as CFO, I'm very comfortable with that. I mean leverage is a metric, right? You really got to get in underneath it and understand it. Our absolute levels of debt continue to come down, okay? It's the investment we're making in content and marketing, which we've got a -- we control all those levers, and we know what that return is. I mean we can measure that, and we can see it, okay? And that's a great investment opportunity to be able to invest in your core business. And as that ripples through the trailing 12 months, it will increase leverage. But I think longer term, 3.5, 4x, as we've said, will be a nice place to be. But again, both of these businesses, on a stand-alone basis or a combined basis, are imminently financeable at very comfortable levels of leverage.

You mentioned incremental investments in STARZPLAY International. Jeff, maybe for you, can you give us an update on the playbook abroad and how it differs relative to the U.S.? I mean which markets do you see meaningful penetration opportunities still ahead? And how do we think about the distribution partnerships playing a role there?

Yes. Look, I think we had a lot of learning from our domestic launch in April of '16 into the digital world, and we realized that the world was shrinking and the Amazons, the Apples, the Googles we're looking at taking what they were doing domestically around the world that we actually could be a great wholesale partner for them and even the local partners like the Telefónicas, the Izzis, the Oranges, all over the world, we had access to the library. We had content available. And we launched pretty quickly around the world. As I said, there's 5 or 6 markets that really drive the lion's share of the opportunity here. 1 is already profitable; 2 is pretty close; a partner in 3 and 4; 5 and 6, we've tried some content stuff there to see what happens. There may be a market in that Tier 2 that pop, but then the rest of the markets, you really buy content as a group. So that's not on a wholesale basis, it's not really that expensive to go into those markets. I feel really good about the path, the trajectory that we're on in terms of subs and revenue right now. We've got a lot of content. We've got almost 85 -- 80 to 85 content deals with local partners that are driving the business as well. And I think we're going to look back in 2 years and pretty happy that we got out early. We got in front [ already ]. We've got the brand out there. And we've got great content now actually working for the general business. If you think about the Starz' domestic slate over the last -- it takes about 2 years to turn a slate over. This is the first year that the content actually will work broadly across the world instead of augmenting with third parties. So the Becoming Elizabeth, the shows I've talked about, will work broadly across all those markets. Whereas the Power universe really works in 4 or 5 markets. So as the domestic slate turns over, we become less reliant on third-party acquisitions. We start to see the business accelerate. And so we feel really good about that path. I was saying to somebody this morning, I remember in April of 2016, when we launched our OTT service, the investment community said Starz is being dragged along by bundles, nobody's choosing Starz, they can't build an OTT business. And you look today, and we're probably one of the few that have transitioned a linear business into a global streaming service, and I expect that same path to follow. Well, how can you compete on scale? Again, we're not trying to be all things to everybody. And it's a pretty good mousetrap that we've built, and we're seeing great growth. And I feel really good about the team's ability to execute. So I only expect great things to come as we come out of the breakeven in calendar '24.

So as we think about -- I think there's been an increased debate generally about the kind of academic exercise of looking at linear versus OTT as a business in U.S., international, even potentially, given the fact that programming largely is increasingly more of a global focus. Are you largely agnostic to which distribution channel the Starz subscribers coming through, whether it's a linear partnership or OTT or direct retail?

Yes, I mean, [ as a nonasset point of service ], we kind of are partner agnostic. I mean if you look at -- again, when I started Starz in July of '15, 90% of our revenue came from -- not 100% of our revenue came from linear and 90% of those subs were packaged or bundled. Today, over 80% of our subs are some kind of a la carte or revenue share. So that means that most of our consumers are choosing to buy Starz based on the program we have. That's really compelling. But we want to be where the consumer is. So if a consumer wants to watch Starz on Comcast, we want to be there in a big way and support Comcast. They want to be in Orange or Telefónica or Izzi in Brazil or Mercado Libre in Mexico, we want to be there, too. We are much more of a wholesale model than we are a retail model, primarily because we're not ad-supported and we're not going to be ad-supported so we don't need to control the consumer. As you've looked at the path domestically, that linear ARPU, as we've pivoted to a la carte, actually looks just like the ARPU on our app. And so we are -- again, we've become more profitable. I think that our linear ARPU has gone up almost over $2.5 over the last couple of years as that move has happened. So we're more profitable, but we're also agnostic in terms of as long as we're where the consumer wants to consume Starz, we'll be there, and we'll support that partner in a big way.

You mentioned the no-ad-support model, and it seems like that, to date, has increased. Discovery is certainly going after that a little bit more aggressively, and we will be hearing some more from Disney on that shortly. But is there a view on the opportunities there not being as attractive for Starz? Or it doesn't make as much sense with the business model that you have?

Well, one, I have to change my content strategy because based on the adult nature of our content, it limits the amount of advertisers that will put their ads next to our services; two, I'd have to rebuild the entire tech stack to have ad insertion; and three, now I have to go manage a team of ad salespeople. And no offense to anybody who's been in ad sales in the room, but they're very difficult people to manage and keep. And so I just think the allure of having this broad-based streaming service that serves 400 million people around the world sounds great. But in order to transition where we are today, in that premium tier, which is very complementary to all those services, to then now compete with them means I've got to change my content strategy, I've got to spend a ton more money to service other people in the home that I don't want to, I've got to hire a whole group of people that are incredibly hard to manage, and now I've just put Starz that we sit in this premium nature tier where HBO has moved away, Showtime has been devalued by Viacom, where we're standing alone as this great premium partner. I'm now going to move Starz into -- they -- where the most competitive spend is going to be in the streaming world for the next 5 years, it just doesn't seem to make sense to make that move to sell ads.

And arguably, I guess, if more of the peers are going after that ad-supported tier, that potentially elevates your status as a premium.

Yes, if you think about that first big tier, not only are they competing with each other, but they're competing with the linear businesses and the local over the air because they're trying to be that first SVOD in the home and steal market share from the cable companies that are already in the home. I'm not trying to create anything other than there's an old distribution model of coax and linear where we were the cherry on top of broad-based services. Now we're moving to an IP-based distribution service where we -- again, we want to be that cherry on top of broad-based services. So we're just making sure that Starz is available in all aspects of the world in the way we've always been. And that will, I think, bode well for us as this great premium bundling partner with all of these ad services and broad-based services, much like we are with DIRECTV today, much like we are with Charter, much like we are with DISH.

Great. That makes sense. Yes, before we run out of time, Jimmy, I want to step out of Starz for a moment and talk about theatrical and TV. Theatrical attendance remains quite challenged, I think, with the exception of a couple of major films that have really outperformed. You've spoken about pivoting towards a greater degree of flexibility on film monetization. I think historically, Lionsgate's derisked to some extent on international presales and syndication deals. Do you see more opportunity to move down that path? And what does that look like for you guys?

Yes. We continue to follow a derisked model on the prelicensing and international territories. And look, Joe Drake and his team have done a great job, even pre-COVID but particularly throughout COVID of really keeping a balanced slate. We generally tend to more medium- to smaller-sized budgeted films, which really allows itself to pivot, if you will, to whether it's direct SVOD as we did very successfully with Run or whether it's a PVOD release as we did very successfully with Antebellum. So we're going to keep that optionality. At the same time, we love the distributors. And we're looking forward. We've got some big IP and a great lineup in our pipeline in fiscal '23. We have John Wick 4. We have Expendables. And going into fiscal '24, we had the Hunger Games prequel and Borderlands. So we've got a lot of great IP, we're looking forward to be back in theatrical.

Great. Last question from me. TV production, big increase in deliveries of first season series last quarter that weighed on near-term margins. Has your view on the long-term margins of the TV production business changed at all? How does the ultimate -- if you're looking at TV series on a full ultimate basis, what does that look like on a margin basis?

Look, the business is stronger than ever. In fact, as a CFO, I mean, again, margins just 1 KPI. I mean it's actually refreshing to see a bit lower our margin when it's for the right reason, right? And in fiscal '22, really about 90% of our television productions were either freshman or sophomore series and they build into much more significant profitability in the back end, so that really suggests great things for the future. And if you look at Kevin Beggs and his team and Sandra Stern and what they've done there, we've got over 25 productions underway in TV. That's in scripted series. We have -- we do another 30 to 40 of productions underway on the scripted side or the unscripted side. And then we probably have 50 projects in development, of which at least a dozen or more are with Starz. So just incredible demand there. And again, we're going to fill that demand and it's a great opportunity to serve that demand.

Great. Well, that's all the time we have. Thank you so much both for coming in person.

Thank you. I appreciate everybody being here. Thank you.