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

Good afternoon, everyone. My name is Meghan Durkin from the media team here at Crédit Suisse. Next up, we have Jimmy Barge, who's the CFO of Lionsgate. Jimmy, thanks so much for being here.

Thanks, Meghan. It's great to be with everybody.

Yes. So I wanted to start with the big announcement you made on your last call. You said that you're in the process of trying to separate Starz from the Studio, perhaps doing a spin-off. It looks like you talked about the end of the summer being able to have some news on this. And can you just perhaps give us an idea of why this is the right time, what the rationale is? Why a sponsor?

Sure. Look, we're not to the end of the summer yet, but we're quite busy. So things are going well and just happy to be here with you. Look, from a timing standpoint, look, I understand the markets are difficult. There's a lot of things out there. But from a timing standpoint, you really think about it, the whole purpose for this is really to unlock shareholder value, okay? And we're confident that the value of the combined entity on a sum of the parts is worth so much more than where we're trading, okay? And that gives us confidence that we can unlock shareholder value here, and these 2 companies will do great. Trading separately, they can pursue their own initiatives, opportunities that might not otherwise arise for the combined company would rise for each of the individual companies. And when you look at it from a sum of the parts perspective, I mean, Starz, and Jeff talked about this in a lot of the conferences and we've spoken to it on our earnings calls, I mean we're one of only 2 profitable streaming companies. One of only 2, but we get painted with brush about being broad entertainment and needing 200 million to [ 300 million ] of subs to be profitable. Well, believe me, we're not only one of 2 profitable streamers. We're the only streamer that's profitable at 20 million plus domestic homes, okay? And then we're pursuing an international strategy, which we think has got great growth, and we're seeing great promise. And so that's added another, call it, 12 million subscribers. So we're over 30 million subscribers. We're the only one with that model that's profitable at those levels. We don't need 200 million to 300 million subs in order to reach profitability. So we're totally different in that context, and it's a very valuable asset, okay, with great lineup and programming in IP. On the other hand, right, we got this iconic library, 17,000-plus titles, those of $770 million a year of revenue, okay, at 50% cash margins, okay. You can just put a multiple on that. It's hard to figure out how that could be worth less than $4 billion. Well, right now, that's about our enterprise value in total at the moment, okay, and which we're not happy where we're trading at the moment. But it just gives you an indication. And by the way, if you just focus on that library, you're missing significant values in the Studio business, okay? Because in addition to that library, we have 2 major production studios, 1 film and 1 TV. And if you just look in the world of M&A and look at what production studios, either TV or film but not necessarily both together, which is even better, okay, are actually trading for with no IP to speak of and no library. So really, I think of it this way, I think of 4 major assets, okay? Starz, okay? And you can really look at that as 2 components, right? The domestic as well as the international, okay? And then you look at the studio and you say, you know what, there's 3 separate assets right there. There's a library, there's a movie production studio and there's a television production studio. So when you look at the sum of the parts, we're confident that the value significantly exceeds where we're trading, and that's -- this is a way to let the 2 companies trade separately and unlock that value. On timing...

So -- timing, go for it.

So just kind of the other part of your question on the timing. We feel really good about our timing. We've said that we would expect to be in a position to announce something by the end of the summer, and we'd expect to close the transaction by the end of our fiscal year, which, of course, is March 31.

And why the sponsor?

Well, First of all, there's a lot of interest, okay? So we've got multiple parties interested in this, including strategic partners that would bring something to the table in addition to just a cash investment. In a spend, you generally see an 80% spend and a 20% type sponsor or a hold back. And look, the sponsor additional cash will be used. We've always said this would be a deleveraging transaction. We'd expect any transaction to have a component of deleveraging, okay? It will delever, it will be tax efficient, and it will provide us and it will not -- it will provide us with great flexibility on creating shareholder value.

So what do you see as the ideal leverage for the businesses?

Well, I think, first of all, I would expect deleveraging and then depending upon the amount of the deleveraging, then you allocate appropriately across both businesses. We're going to remain open. I mean at that point, you ultimately would allocate your debt in the most efficient way across those businesses. I would say this is imminently financeable, no issues there. You look on the Starz side of the business, you've got consistent generation of cash flow, a subscriber base on the domestic side of that business. So you've got good visibility into that repetitive cash flow stream. So imminently financeable there. And then on the Studio side or RemainCo, if you will, the legacy studio, I've already spoken to the library about a significant amount of cash margin coming out of that business. Content business is a little more lumpy as we know. But if you look at the underlying assets there with which to finance against the studio is imminently financeable as well.

So I wanted to get into the EBITDA because I think you suggested that it's very back-end loaded on the call as well, kind of gave this 12-month trailing leverage target. And it suggested that early in the year, you were going to be -- have some negative EBITDA that turned positive in the back end of the year. So what's driving that?

Yes. It's interesting. We always have -- I mean, and in our business, particularly with the Content business and particularly too on the Starz side in the context of content-driven premiers and marketing costs there's always a bit of lumpiness when you go on a quarter-to-quarter basis, which is why we don't try to provide quarterly guidance, and we look at things on a trailing 12 months basis. But for sure, if you just look at the cadence of things and particularly, you look at Starz, as an example, so we premiered Gaslit, which is, I think, our most expensive programming. Doing great, critically acclaimed Julia Roberts, Sean Penn, so we premiered that in the quarter. We've got P-Valley coming back for a second season, which is just blown the doors off in terms of ratings and an interest in that program. The program that [ couldn't ] has done it. I mean it's really been very special on Starz. And then we have Becoming Elizabeth has premiered this last week yet. So you've got 3 major premiers. You've got the marketing costs associated with that. And we have a little bit of, as I said on the earnings call, you have a bit of rollover of amortization from the prior year because remember, in '21 going to '22, right, fiscal, we had -- we ramped up from 7 originals to 11 originals premiering, okay? So you had a big ramp up in '21 coming into '22. The ramp-up going from '22 to '23 smaller, we're going from 11 to 12, okay, original series. But they're front-end loaded in terms of the premiering and the marketing and you've got some carryover of prior year programming ramp, which is still available and still being viewed and running strong, amortizing through to in the early part of the year. So -- but at Starz, I would expect the full year margins to return on the domestic side to return to something similar to where they were in fiscal '22. It's just they're going to be lower -- profitability is going to be lower in the first couple of quarters. And then on the film side of the business, you've got -- we released The Unbearable Weight of Massive Talent. You've P&A spend associated with that in the quarter. So any time you're dropping those marketing dollars and expensing them immediately for future revenue streams, that's going to impact the timing and the cadence, if you will. And then motion picture is just naturally going to -- rather TV is just naturally going to build through the year. I mean we're just killing it there from a content perspective, Kevin and Sandra and the team there in terms of just what we've done has really been special. So -- but all of that kind of when you shape it up, lends more towards the back half of the year, which from a leverage standpoint, means your absolute levels of debt will be reducing, but your trailing 12 months will be down in the first half of the year, and so leverage will move up, and then it moved back to, again, levels similar to where we finished fiscal '22.

I wanted to get your thoughts on, Jeff Shell was at the conference yesterday, and he said that studios and he said this applies to all studios, won't really be back to normal until fiscal -- until '24. Basically, it's going to take time because of COVID, we stopped producing and then we're ramping. And so that was his view. How do you feel about that comment? I think he was talking about getting back to 2019 levels when he said that.

Well, look, I don't want to challenge his comment. I mean, everybody's got a perspective and certainly, the theatrical window has been affected and everybody's got a point of view as to when it returns. But clearly, we're not back to where we were in a pre-COVID level. So rather than kind of going in that direction, what I would tell you is we're clearly not every studio. We have a lot of optionality, and you're seeing that in terms of the size of our films, we have some that clearly deserve and need, and they all deserve a big wide theatrical release, but they're not all built for a wide theatrical release, right? And so we've got a lot of optionality and the ones that are really ready for those broad theatrical releases. We can be patient about returning those. We've got -- John Wick is set up. We've got some incredible films coming up. So that can carry its weight in any market. We've seen big films return. And then we've got optionality with other films to either release theatrically or go directly to streamers. There's just a lot of demand for our film business, and we've got a good pipeline. We'll wait for the market. We'll wait for our windows and release patterns and then we'll also evaluate as we do our optionality, and optionality is good. When you're a Chief Financial Officer, you love nothing more than optionality and quite frankly, have no concerns whatsoever being able to really drive great value on the theatrical side of our business.

Let's move to your spending on content. So I think you spent over $2 billion of cash in fiscal '22. That was a big jump from your '21 spend, I think, 40% growth. So Starz up the number of originals which you just talked about, and of course, the TV group has been busy. What do you think is the right content spend going forward? Is that going to be a level that keeps growing? Or is that going to be sort of the right spend for the business?

Well, the ramp up into '22, again, being a March 31 year-end, so in this past year, the ramp-up was the most significant that I would expect to see, okay? Again, a couple of reasons, but primary reason, again, is when you're ramping up your Starz originals from 7 to 11, that's a pretty significant increase, okay? And a lot of that, too, is being funded through our television production group, right, as they're ramping up production to fund that -- the Starz originals. And then with the Starz originals come the marketing dollars, as you would expect, to actually promote the content spend. So when you have content spend, you also have marketing spend, at least on the Starz side of the business as well as the Motion Picture Group side, right? And so that's the biggest piece of the ramp-up. Again, if we go from 11 original series to 12 and from '22 to '23, which is what we expect fiscal years, I think you get to a steady state where you're now kind of super serving your 2 core demos. I think this is one thing that people miss most about Starz is we're serving 2 demographics. We're not doing family programming. Don't want to do family programming. We're not doing sports. We're not doing news. Don't want to do news, okay? Don't want to do sports, okay? We're servicing women in African-American audience, okay? We are very focused on our demographics, okay? And when you have 12 -- think about it, if you have 12 premiers a year, so 12 original series a year, you've got 1 a month, math is easy, okay? Just assume they're on average 10 episodes each, okay, that's 120 episodes a year. That basically means every week, you've got 2-plus new episodes coming to your service. And you're serving 2 core demos. So the goal is to ramp up so that you've got something new for each 1 of those demographic audiences every week. And so the purpose of that, of course, is to -- is retention, okay, and reducing the churn. And we like what we're seeing there. And we think and Jeff and the team and the programming team Ali Hoffman, the team is that we get to 12, that's what we need, that's going to be a lot of programming, and that allows you to basically make it a year-round service for everybody in both of those demographics, you control your churn, and we're nicely priced. So that ramp-up has largely occurred from a cash standpoint in particular. And in the P&L, as we talked about earlier, follows that a little bit, so there's some carryover P&L into the first half of the year from the amortization of the prior year ramp. But that's kind of how the cadence gets set. Then I would say on the film side of the business is, as you ramp up your content, we got a lot of inventory, a lot of projects, a lot of good things in the pipeline already. And that will start to monetize the cash as we go forward and release. With it will be some P&A spend, obviously, for those films that go broad theatrical release, and you'll see some of that timing come through. Television, I think, though, on the content side is, look, you know what, when we greenlight something, we already have effectively what I call your kind of key tenant, right? Somebody has ordered this. It's been through a green light process. You know where your anchor tenant is, so to speak. And we know Jim Packer and his team monetize worldwide 24/7 in every window around the world. And they can forecast in a green light process just based off of the genre of the product, whether it be TV or be film, exactly pretty close as to what you're going to be able to achieve. And so we're not building cars, putting them on the showroom for. We're building bespoke content, okay, premium content that already has a buyer lined up, and then we know how to monetize those territories that haven't been presold or are prelicensed. And then all of that adds to our library over time. So I think it's a long way of coming back to the point, but to put the rationale behind the point, and that is that we've built our content spend largely. And so now that we're around that $2.2 billion. By the way, you put marketing on top of that, you're probably closer to $3 billion, okay, that level may be increasing a couple of hundred million, but not increasing $500 million, $600 million, $700 million, $800 million. So I think we've really ramped up. We're getting to that level. And more importantly, though, to understand why that's a sustainable level is just understand the dynamics behind particularly the programming at Starz and the programming lineup as well as the ramp that, that created in Lionsgate TV, and then also looking separately at motion picture as you start to return to the theatrical window.

So what about the TV studios margins? Because you've been talking about how well it's been doing. And it's had an amazing year, and segment profit was flat year-over-year. Margins went from 10% to under 6%. What caused that drop? Was that just the ramp in the content that you're putting on Starz? Was it mostly, it's content for yourself? Or was it stuff that you were selling to others? I know you produce one of my favorite shows on Netflix, Selling Sunset. My husband and I love that show.

That's great. Yes, that is great, and that's one of those nuggets that not everybody's found, but a lot of people have. It's funny, I get that comment frequently. Yes. Look, we love all our programming. And Kevin and the team down there really are killing it, right? They've had 15 of 15 series renewed, which is just unheard of. So a few things relative to the fiscal '22 margin relative to being flat year-over-year on segment profit or margin down year-over-year coming out of '21. And remember, '21 was a tough comp with regards to Mad Men having sold through in syndication and library. By the way, just another, I mean think about how long it's been since Mad Men was released. I mean you still have generating significant income from that. And that was in the fiscal '22 -- or excuse me, the fiscal '21 period. So first of all, you would expect some margin pressure there in comping to that prior year margin. But the current year margin is lower because of the significant number of freshman series, okay? So when you have new series launch and we're still retaining and generally retaining worldwide rights and building that back-end library value, right? And so when you're doing that, you're deficit financing that first season, okay? And then -- so that's going to either perhaps give you a small negative margin or a minimal amount of margin in that season 1. And then you go into season 2 and 3, and then you start to grow the margins from there. So the significant amount of programming that we sold to Starz and to third parties is about 50-50 of our programming, 50% goes to Starz, about 50% to third parties. There's nothing magic about that. That's just how it's working out. And so we're one of the few studios out there still selling to all parties, right, kind of agnostic in terms of who we're selling to. And so we've just had great success and demand for our television product. And so in addition to funding Starz with the programming, we've been selling significant programming to third parties. You look at Ghosts, is a good example to CBS. That was the #1 new comedy in broadcast this past year, already renewed for season 2. Great programming like that. And so those will yield higher margins and revenues for a long time to come. So that's the purpose for kind of '22, if you will, margin, and I clearly expect to see margin improvements in TV moving into fiscal '23.

Okay. Well, I don't want to get run out of time before we talk about international. So you have Starz International where you've been investing, I think you talked about '24 as being breakeven. Can you walk through the confidence in that forecast and the key markets for growth and profitability going forward?

Sure. Look, we're already seeing territories that are moving towards profitability faster than others, which is what you would expect. And that gives us confidence that when you start to see markets moving towards that profitability or becoming profitable, we're already profitable, that gives you the confidence that as you look at the other territories that we either launch later or have different patterns, gives you the confidence that you can move in total to profitability exiting calendar year '24. But again, we're focused on each and every territory. We continue to evaluate our plans by territory, every territory is a little bit different. But key territories, look, we're at U.K., France, Latin America, Canada. So really -- Spain, look, we love all the territories, but we've got some key drivers and things that are moving to profitability faster, and that gives us confidence that with regards to our broader plan. And then we learn -- every time we learn something in a particular territory, we say, what did we learn here that might be applicable to other territories. So again, we like that. We know it's taken a bit longer, but it's not easy standing up a global business. And again, we don't need 200 million to 300 million subscribers to be profitable.

And I think you just said your 12 million subs internationally or so, is that -- was that...

Yes, right around, I think, 12 million, 11 million to 12 million. And we've given the guidance that company-wide, we look in fiscal '25 to be or 2025 to be 50 million to 60 million subscribers on a global basis. And we've said we think that's generally we think about as 50% domestic and 50% global. So we're, call it, 12 million international now and a little over 20 million domestic currently.

And how do you feel about what the streaming has been topic du jour? Netflix obviously sort of took the air out of the balloon. And sort of -- it's been a big topic for investors. But you obviously sell to them. Has there been any sort of impact on the demand from them that you've seen in the marketplace? Or is there any impact on how you're thinking about streaming, TAM going forward? I know you that have a much different strategy and you're not going after the world, but...

Yes. I think -- look, I think it creates a buying opportunity. First of all, we're getting painted with the same brush, right, in the equity markets. And that's understandable, right? That's generally -- I don't have to tell you guys know the markets better than then I do. You study it every day. I only study it every other day. I'm just kidding. But the reality is, is that we're being -- the industry is being painted with the same brush. But I think, first of all, we wish the best to Netflix and all the streamers because we see these as really companion products to what we do at Starz. We do adult programming that's premium, and we just make great companion products. We think long term, we end up being bundled with these other products. Again, we're great companion products. And in terms of us selling programming to them from Lionsgate TV, we're not seeing any backing off there. And just know that for every program we do, back to my point about, we don't build the car and put it on the showroom floor and hope people like it, okay? We're shopping development ideas, okay? And on any program we have, we have multiple buyers, okay, and Netflix being one of those. And it's great to have nothing better than having 4 buyers, potential buyers instead of 3 on any given program. But whatever the marketplace, there's still significant demand, and I expect continuing demand because, quite frankly, again, when you've got to reach 200 million to 300 million subscribers on a global basis in order to have your business model really work. That's a lot of demand. And the one thing you got to have is you've got to have programming. They don't come to you because of the brand. They come to you because of the programming. And that's what we do. Kevin and his team, they kill it. And our results are showing that, and we don't see that being affected by Netflix. On the other hand, I think for everybody being more cost conscious is a good thing, right? We all talk about we don't want to win the spending wars. I think it was [ Zaz ] maybe that said that first. But yes, for sure, and our model is just uniquely different. So again, we see ourselves as a companion product to be bundled, not a direct competitor because we're not trying to be all things to all people.

And I think you continue to say that you would not be adding advertising to Starz, right, while everybody else is doing so?

That's correct. And look, we love it when people move out of our space because it just gives us more white space, and it makes us more and more of that perfect companion product because we're not the direct competitor.

Well, I think we're out of time. Thanks so much for being here, Jimmy. I love our chats.

Okay. Yes, Meghan and for everybody watching, and I look forward when we can all get back in person. But anyway, thanks for tuning in virtually. Cheers. Bye.

Yes. Thanks.