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

Thank you for joining Lionsgate. We're thrilled to have Jeffrey Hirsch here, President and CEO of Starz. So I'll get started. I'm joined up here by Brent Navon, who is on my team and I'll get started, and we'll [indiscernible].

So Jeff, several streaming services have raised or indicated they will raise prices for their D2C service. And you've indicated that Starz will raise your price for the first time from $8.99 to $9.99 at the end of June. What are you seeing from a consumer demand perspective? And your domestic subs -- over-the-top subs are down -- were down 500,000 in the June quarter. With the price increase, do you expect -- do you anticipate further sub declines?

Yes. So we've looked at the business over the last couple of years, and this is the first rate increase we've done since we launched our D2C app in 2016. So we've gone from 6 shows to 11 shows. We put on a Lionsgate's Pay 1, Universal Pay 2, so we've got a lot more content. And we've also always wanted to be priced below our peer group so that we're a complementary service, not a competitive service for these big broad-based streaming services. And with our peers doing 1, 2, 3, 4 rate increases over the last couple of years, it gave us a little room to increase our price. So we went ahead and did that June 26. We didn't just do it on D2C. We did it across our entire ecosystem. So Comcast raised its rate. So we are universally priced at $9.95 in the marketplace. And what we've seen to date has been really kind of encouraging. Actually, we said [indiscernible] I thought we could do more based on the response that we've seen. We did a lot of work around how to do the rate increase, how to launch it, when to launch it, when do we have open rates on e-mail, so people will be notified all the way through the customer journey in terms of if they want to disconnect, where do we land them. And we've been really encouraged about what we've seen. It's been kind of quiet. It's right within expectations. And so we feel like either we did a really good job of doing that. We had a little more pricing power. So we had a little impact in the last quarter because of the rate increase. I think the majority of what we saw, we've had 3 quarters in the history of the business of sub loss on the D2C product, really driven by lack of movies and lack of content. So I think we had Ghost coming off, which is our biggest show from the quarter before. We use content as retention tails. We put a show called Run the World Behind It. It didn't retain as much as we should. That coupled with the rate increase, we saw some downward pressure on subs last quarter. I do expect based on being back in all of our biggest content for the next 30 weeks to return to sub growth in the second half of the year.

And just to follow up on that. I mean the strategy across the industry just appears to be trending towards less content spend and higher prices in order to reach profitability. And you guys are already profitable at Starz. But do you anticipate following that similar playbook? And at what point do you think consumers push back on paying more for less and the demand for these streaming services in general begins to taper off?

Yes. So I think we're a little different than the rest of the industry. We didn't -- Jessica and I were talking earlier, we didn't create content specifically for our streaming service and not have it on our linear service. So we went from 6 to 11 shows. It was actually to make all of our distribution partners stronger and so we're not looking to cut back streaming specific shows to reduce costs to kind of generate where we want to get to. We've said it publicly, I want to get the business to a 20% margin business. We're sitting around 15.6% margin right now. In order to get there, we've got to get the cost of content back in line with what the portfolio requires. And so it's not less content. It's less expensive content. And the way -- there's a lot of ways to do that. You can put a go from scripted to unscripted, you can do instead of 58-minute shows, you can do 52-minute shows, you can do newer shows versus older season shows. And the arc of shows, when you go from Season 3 to Season 4, most of the talent get big raises. So there's a big cost spike there. So what we're looking to do is, actually, we do at Starz, we focus on 2 core demos. We focus on women and underrepresented audiences. So we know what our audience is like. And so we have mapped every one of our shows to 3 to 4 to 5 shows in development that we can then go ahead and replace those older shows with. So same amount of shows, just either fresher or shorter or newer shows to bring that content's cost down. So we've got real line of sight getting to that 20% by somewhere in fiscal '26 to '27 based on that strategy.

You announced on your last earnings call that you're exiting Latin America, the streaming market in Latin America by the end of the year. Can you walk us through the logic and what your international strategy will be going forward?

Yes. So we launched significantly into the international markets, Continental Europe, U.K., LatAm, Canada 4 or 5 years ago. And the strategy was really a wholesale strategy. It was based on really Amazon, Apple and Google, expanding rapidly around the world with their streaming services. Amazon showed up in a big way, and we've had great success with them. Apple really has not shown up to the extent we thought they would and Google still hasn't launched yet. And so 2 of our 3 big distribution partners didn't show up. And so we were a little challenged there. And we had to revert back to local markets in our D2C product, which local operators outside the U.S. are really struggling as well. And so we've actually pulled out of Continental Europe just 9 months ago, and then we just followed with LatAm. The 2 really gating factors around our international expansion was, does the domestic content work well? So we don't have to spend more money in those marketplaces to expand there. And do we have great distribution? In LatAm, we had actually great distribution across the footprint. We had a deal with Disney, where they were bundling us in Disney+ and Star+. Content works really well there with the except of Mexico, where we had to augment some content there, but content in Mexico isn't that expensive to producing. We could use it in the U.S., so it was okay. Disney came to us a few months back and said not as excited about the partnership as we had hoped. And under the new regime, they were able to do some accounting principles around it. And so we negotiated an exit. And with Disney no longer backstopping the marketplace, we made the decision to exit. And it's also been our ability to actually reduce a lot of costs out of the business long term. And as we set the business up for separation, we're really going to be focused on English-speaking territories. So U.K., Canada and Australia. Canada is already profitable. U.K. was well on its way to being profitable before inflation spiked over 10% or 12%. We've seen that come down. The market has started to return to growth. So really focused for the global footprint is on the English-speaking territories.

So what does your content pipeline look like for the next 12 months, given the strike? Are there any adjustments that you've had to make with programming and your scheduling to adapt? Do you expect to license more library content to fill in the gaps if the strike lasts longer?

So as a premium network non-ad supported, we've always been about big originals supplemented with Pay 1, Pay 2 and library. But we do shoot a year, 9 months to 12 months in advance. And so most of our content for this coming year was done. We have a couple of shows. We had a show in the U.K. that needed 5 days left of shooting. We got a waiver to do that. So our slate is pretty much intact for fiscal '25. Fourth quarter fiscal '25, if the strike continues, we'll have to move some content around, but we're pretty solid in terms of our originals. And the Pay 1 and Pay 2 because we get those a year after they premiered in the theater, we're still going to get all those movies. So we're pretty robust in terms of our slate heading into fiscal '25 right now. If it continues longer into next year, then we may have to start to move some content around to fill gaps. We will go out and buy some international properties to have on the shelf like we did early in COVID to make sure that we don't have any gaps.

Do you -- before I ask the next question, you would like to just add does anybody have a sense of timing on this one. Like it just seems kind...

I don't know. I just hope everybody gets back to work. Business is much more fun when everybody is working.

Yes. Sure. So you've announced that you're separating your studio business from stores in Q1 of '24. How do you think about the stand-alone stores investment case versus how stores' position is perceived by investors inside of Lionsgate today?

It's a great question. I think we are -- I don't think the Starz story is clear as it could be because we're part of a bigger company. And as you learn in Hollywood, people making movies, it's -- movies are much more excited than television. So look, I think we are a premium add-on service, primarily English speaking. We are 20 million to 25 million subscribers. We have a 20% margin business that we'll get to by fiscal '26. And we'll be -- we will return to having a very robust unlevered free cash flow business as we move into fiscal '25, which I think is a really good stand-alone business. And I think we should see margin expansion on the business if we get to that margin portfolio and we continue to return unlevered free cash flow to the business. And so we're excited about that and being able to tell that story. I also think based on the fact that we are 65% digital, we really pivoted away from linear while being profitable is a really great story. So we have not as much dependence on the linear business that you're seeing with all these fights that are going on in the marketplace today. And I also think it sets us up to be a strategic platform for some of the assets that may fall out of some of our peer groups to kind of convert them whether it's into SVOD or AVOD and window content back and forth between the 2 different products. So I'm excited about the separation. I think it will allow both businesses to tell their stand-alone story in a big way. I think investors -- we saw this when we spun out Time Warner Cable, got in 2009. Investors like to invest in kind of simple stories, whether it's pure studio selling in an arms dealer or a network story because it's very hard for investors to get their head around kind of a combination company. So we'll separate. We'll do what we do best on our side, they'll do what they do best. And I think investors will find their way into both of those assets in a great way.

Before we move on, let me just follow up on something you just said. So as a stand-alone, what are the relationships that you envision? Like you said there were more opportunities you could partner with companies or become part of their bundle. Is it...

Well, look, I think when we have -- we're a stand-alone with a currency. There will be opportunities for us to get bigger one way or the other, whether it's we get acquired because of the asset that we've built or if you continue to look at some of our peer groups that are looking to delever their businesses and change their construct, their portfolio. I think we've become the natural consolidator of some of the space because of our platform. So I'm excited to see how that unfolds. I just think as the business kind of rightsize itself, there's opportunities for us.

Given the recent dispute and subsequent resolution between Charter and Disney, what is Starz's comfortability with its place in the linear ecosystem? Can linear networks survive? Or is your view that the entire ecosystem eventually makes that transition towards streaming?

It's a big question. Look, I'm a retired cable person. I spent 15 years at cable, so I'm always a big fan of the cable business. For us, we're an add-on service. So we're not a fully distributed service. So even in HBO's heyday when there was 108 million TV households, they got to 33 million subscribers. So a lot of opportunity left for us, I think, to work with our cable partners to grow that business. But we pivoted away pretty aggressively 7 years ago. And like I said, 65% or 64% of our revenue is digital. When I started at Starz in 2015, 90% of our customers were in bundles. Today, 88% of all of our customers are all the cart, which means consumers are picking Starz, right? What it also means is that we share revenue with our cable partners. So we're no longer a cost center. So for every $9 that we've taken from a consumer, the cable company benefits from that and gets revenue in that. And so we've changed the paradigm for our business since 2019 to be a cost revenue generator for these companies versus cost. And so it's put us in a different place. I also think the one thing that we've done differently than most of our peers is our content, as I said earlier, is the same no matter what the platform is, whether it's Comcast, Charter, DIRECTV, Amazon, our own app, it's the same product everywhere. Our view is we want to be wherever the consumer wants to watch the content. We're not -- that may be because we don't have advertising, that we are not trying to drive people away from linear to our app. We want people to watch it where they're comfortable watching it. And so that's also given us a much different relationship with our cable partners and our digital partners. And so I think there's a lot of opportunity still, but we'll continue to drive the business to wherever the consumer wants to watch it and it's profitable for us.

So you alluded to this in the response to the last question about M&A. But we'd love to get your views on M&A in general on -- regarding linear television. We know that Paramount contemplated -- maybe walked away from selling BET. And then Disney's CEO made comments about, I guess, I don't know if selling or disposing or even considering all options for linear television, just maybe not core. So how do you see the industry evolving and do you think there are buyers of these assets? Or will there just be consolidation of those that are left -- like how -- what's your vision?

Well, if I knew that, I wouldn't be sitting here. But look, I think there's a lot of leverage in a lot of these businesses, and I think that has to change, right? You look at people with a lot of leverage. It's not something people want to invest in today. And so there's ways to delever, obviously. I think the BET conversation, there was a lot of factors that made that complicated in terms of minority ownership and distribution and advertising sales. I think that became complicated. I think it's a great asset. I think there's a bunch of great assets there. But I do think some people will start to reimagine what that content business looks like, whether it's linear, it's digital advertising, it's fast. I worry that this rush the fast is really going to drive the destruction of the linear bundle faster. And I don't think people are paying attention to that right now. And I think that's a really good ecosystem still and we have to be protective of our cable partners that way. But I do think there's going to be opportunities where some of these assets that were core are no longer core, and they will fall out, and there will be opportunities for people to reimagine what they look like and how to take that content and distribute it and monetize it in different ways.

But are the buyers -- like in the case of BET, there were 4 -- reportedly 4 strategic private entities, individual or not with access to capital. And then in some cases, it feels like it might be private equity, so it's run for cash. Like what do you think they are more strategic buyers, maybe private -- people aren't thinking of? Or do you think it's really kind of private equity will just come in and [indiscernible] down the cost?

I think it's a combination of all that. I mean I look at us as a strategic. I look at a lot of private equity with a lot of money that could partner with somebody like us to do something. I look at some of the big companies that would like the infrastructure we built to help drive their OTT business that we could be acquired. So I think everything is on the table right now. I'm not close, so obviously, you'll have to ask [ Bob ] and those guys. I'm not close enough to what happened there. I think he's got a lot of wonderful assets that have big audiences that fit well with us, but it's -- I think the next 6 to 10 months are going to be really fascinating.

On the most recent earnings call, you guys discussed eagerly anticipating some of your Pay 1 films from Lionsgate coming to Starz in the near future. Can you talk a little bit more about the importance of the Pay 1 movies for Starz? What you're seeing for movies on your service in terms of driving acquisition and retention?

Movies are really important for pay services. It's always been this combination of big movies, big originals at a good retail price as a way to drive video. I mean, Comcast built a lot of their video packages on -- buy this video and get Starz, HBO and Showtime included. And so we've always been that kind of cherry on top to help drive services. And we actually started as a movie service. I mean there's a lot of people that I talk to today and say, "Oh, Starz [indiscernible] movie service, right? So movies are really important to us. Last quarter, as we talked about, was the lowest quarter of movies we've had in probably last 5 years based on a lot of production delays and in the end of the second year, I think everybody thinks movies are back, but there's still we're here, feeling the second year of COVID coming through. That's behind us now. Friday, we premiered John Wick 4 on the service, which we're really excited about coming from Lionsgate, and that's a great movie. It will be a wonderful acquisition tool for us, and we have it on Friday, so we're excited. And if you think about the way we retail our business, we have premiers on Sunday nights of big originals that in between that, we promote movies. And so when you don't have movies on a service like Charter or a service like Amazon where people go the old-fashioned way to scroll and find stuff to watch, it's hard to retail your business when you don't have anything fresh to talk about during the week. And so the return of the Pay 1 movies with Lionsgate to Pay 2 movies with Universal with our originals has really completed our programming portfolio. And I really expect us to start to return to growth in OTT in the second half of this year because of that.

There was a recent announcement of extending Pay 1 between Starz and Lionsgate's Motion Picture Group through 2027. Can you talk about what drove that?

I think there's 2 key things that drove the extension of the deal. One, it's getting harder and harder as an independent defined Pay 1 movies. People are keeping their own Pay 1 for their own service. And so as we looked out over the next couple of years, we got worried that there wouldn't be one out there and it's such in a critical part as we just talked about, for our growth is having that Pay 1. So given the opportunity to extend with Lionsgate, knowing -- being in the building and knowing what their slate looks like for the next 4 or 5 years, with some of the John Wick's and John Wick's spin-offs and Highlander with Chad and the Michael Jackson movie that they've been talking back and forth. So a really great Pay 1, and those are big titles, so we were excited about that. I think it also demonstrates to the Street, even if we're a separate company, we're still going to be working together and tied at the hip. And I think that's important for everybody to understand that even though we're separate, we've got 14 to 16 intercompany deals that kind of talk about how we're going to make it easy to work together and keep those synergies going. And so this was a great example of that also.

Will you -- before we do the next one -- but what about like on Pay 2, I know Universal sells a lot of films. They have -- Peacock took a lot of the Universal films, but then did Pay 2 or even Pay 3 deals with others? Is there an opportunity for you to get content from some of these other studios?

So we are the Pay 2 partner of Universal.

Okay. And then others, are there...

So right now, on the service, we have Pay 1 with Lionsgate. We have Pay 2 with Universal. We're in the Pay 3 window with Disney from our original Pay 1 deal, where in the Pay -- actually Pay 2 window with a Pay third window of Sony from the original Sony Pay 1 deal. And then we have a library with everybody else. So we probably have the most movies [indiscernible] any of the streaming services out there based on that. We thought the combination of Lionsgate Pay 1 and Universal Pay 2 was a great combination of movies for our audience. And the nice thing about Universal is because they're pulling movies out 70 days, it's really like a Pay 1 [indiscernible] on a Pay 2. We're getting them earlier than you normally would. So they're fresher when they get to our service.

And given their market share, it's actually probably a great deal for you guys?

Well, there's a big -- they have a big operator in their Pay 1 window. So -- but yes, it goes back to Peacock than it comes to us. But it's a great deal. We've got 3.5/5 on the service today. Marry Me, which I am a rom-com guy, so I watch Marry Me every time it's on. It's a terrible movie and I will keep admitting it, but I'm a J-Lo fan, so. So we've got a lot of big movies. We're excited for Joy Ride to come. Margaret is going to be coming soon. We'll get Expendables with [ 50 ], which will be great for us because it ties to a lot of our originals. So it will be a good one when we get it too. So it's -- I feel really good about the content portfolio going forward, and I think that will continue to drive the business.

Staying on content, when you look at your pipeline of shows over the next 12 to 18 months, what are you most excited about right now?

A lot. We've got -- obviously, we're now in force, which is one of the power spin-offs, so we've got 30 straight weeks of power shows, and that's really great for the business. And so we're excited about that. We've got a prequel for Outlander coming, which is we've announced called Blood of My Blood, which is 30 years prior to the first year of Outlander. It's kind of a Romeo and Juliet story, about [ Sam's parents ] and I think it's great because at this point, if you haven't watched any Outlander and it's in season 7, and you haven't read the books, it's hard to watch 7 years of television to get caught up. So this is a prequel, so I think it will bring a lot of new people to the fan base, excited about that. We have a show that we haven't announced yet with our partnership with Lionsgate and 3 Arts, that's [indiscernible] of a Big Little Lies, but it's set in Texas, and it's really kind of fun and exciting. I'm excited about that. We've got a political drama based in D.C., but based on our demo side of the world that I think could be really compelling for the country. So a lot of good stuff coming, lot of stuff on the air that I really like right now. I mean we just got through Outlander. Minx was a great save that we were able to save from HBO Max. Heels, which is a great wrestling. It's my favorite show right now. So I really -- I like our content portfolio. I like the fact that we're really focused on 2 demos. So it allows us to be consistent every week with a piece of content that fits that demo. I was saying earlier that our content spend is really our retention spend. It's our marketing spend because we're able to take that audience to go from -- like the power audience now, we have 30 straight weeks. I don't have to go market to that customer because I know they're going to stay for 30 straight weeks, right? So it's a really nice way of actually being efficient in terms of how you spend content and how you market, so it's tough out there. Streaming is very tough, but I think we're doing better than most, and I really like the position of the business right now.

I'll ask one more question and then we'll open it up to the audience. There's been a lot of debate about where peak margins are in streaming. Netflix made a little bit of news like just talking about their margin outlook, but their margins are actually higher than anybody else's. Where do you think margins on the streaming side of the business ultimately lands? Like what's the range?

I can't speak to the other companies. I think it just depends on -- it's harder when you're trying to be all things to everybody. Scale obviously helps. I know for us, we think peak margin is around 20%. I mean, I think the days of the 30% to 35% cable margins are kind of gone just because of the change in the business. But I think for us, again, if we can get to a business that's growing 3% to 5% on revenue, 20% margins and returning free cash flow, I think that's a really good investment grade company. And I think people should look at putting money into Starz that way. And so that's the goal ultimately is to get to that margin. We've got a really good plan to get there. We just got to get the strike over, so we can start working toward it.

So with that, are there questions? Anybody? If not, thank you for coming. Thank you, so much.

Thanks for having me.