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

All right. So the next session, we have Jeff Hirsch, CEO of Starz. And it's great to have you here, Jeff.

Thanks for having us.

But obviously, it's very timely as well just given all the transition within the company. So maybe a good place to start is the changes that you're most excited about as you transition towards a stand-alone company. And what are you most focused on?

Yes. I mean, look, I think we're all excited. I think it's going to be really great for both the studio and the network to separate the companies and really allow each of us to focus on what we do really well. I think being owned by a studio rightly so, the Starz story is a little been lost. And so it's a good opportunity to get out now until the real transition story that we made from Starz, we are a company that does $1.4 billion in revenue. 70% by the end of this fiscal will be digital. So we've really made the transition away from the lending business to the digital. So we are much more of a digital company than we are before. We are sitting around $200 million of EBITDA, and we convert about 70% of that to unlevered free cash flow. So a very good investable business, and it will separate with about 3x leverage on the balance sheet. And so we have good plans to take the core business and grow that in terms of EBITDA growth over the next 3 fiscals, but also I think there's an opportunity to lever the platform that we've built in terms of our data stack and our own app with the disruptions still going on in the business to kind of grow the business from a real growth driver point of view. So we're excited to get out and really focus on what we do well. And I think the studio is just as excited to get out and focus on what they do well.

And so it seems like you're focused on EBITDA. I mean, is that the primary metric you're managing for, I mean, what are the other key metrics, is it revenue or subscribers? How are you thinking about the business in a few years?

Yes. So I think, look, we've said publicly we're really focused -- laser-focused on the core business of getting to a 20% steady-state margin long term. We're sitting around the 15% margin today. We've never really dipped below that 15% even as we went through the digital transition. If you look at our revenue over the last 7 years, it's been really durable on a time where the industry is down 12%. And so that has allowed us to continue to transition the business underneath that revenue line to digital and maintain profitability. I think we have to get that margin back to 20% coming out of fiscal '28. And so there's really kind of 5 components to drive that on the top line, and we think we can get the business growing 1% to 3% on the revenue side, and that's really made up of really 3 pieces, obviously, subscriber growth and subscriber growth with good ARPU, not giving it a way to get the subscriber growth. Rate increases. We've done a couple of those. I think we'll take the foot off the rate increased gas this year. And then partnerships and bundles, you're seeing today, a lot of noise around bundles. I think it's still very early, although we've been talking about being a complementary bundling partner for a long time. you're starting to see that really happen. We just launched the Max Starz bundle on Amazon. We're in AMC plus Starz bundle in VIZIO. I think you'll start to see other platforms really start to follow that. YouTube has done bundled to traditional kind of cable bundles for a long time. So those 3 components will drive top line. And then on the cost side, as we separate from the studio, we'll start to get some ownership back of content. So half the slate in fiscal '27 will be Starz owned. That gives us the ability, one, to start with fresh content. So a season 1 is obviously reset on cost for Season 1. Two, we can offload that cost by either taking on a production partner or actually selling that internationally. We don't have that economics today. I think John rightly so looked at the combined companies and said with an 11 or 12 or 13 multiple on the studio side and 3 multiple on Starz, putting $1 of profit on TV is better on that side. So that put pressure on our stand-alone P&L. So we'll unwind some of that going forward. And then there's some other content costs that we can actually work our way out of that aren't performing over time. So cash content spend is somewhere right now around $750 million. We think that needs to be somewhere between $600 million and $700 million. So those components long term get us to a top line growing 1% to 3% and a 20% margin business. And with leverage sitting somewhere south of 3x, I think that's a very investable business.

Got it. You saw some of the -- and maybe this was also part of the cost dynamics you're trying to manage, but you saw the Pay-1 window with landscape recently. And so walk us through how you're thinking about the windowing of content in general, specific to you, but also more at the industry level. I mean does windowing matter as much, given that every distribution channel seems to have a different scale of impact.

Yes. I mean if I wear my network cap windowing, obviously, I'm much more in the category of content exclusivity than content ubiquity. I think keeping our big shows exclusive to us, you can see it in the data, it drives subscriber growth. Even when we have a season 4 on the air, season 1 sitting there exclusive with us, there's a lot of people coming in, seeing first title stream. So I'm much more in that keep everything exclusive, get people to come to your network as a destination. I think we've seen that in the numbers. I think we've got some real life examples of the Outlander on Netflix, we don't see the attribution back to Starz, people will wait for the current season and go to Netflix, they don't come to us. And so keeping everything exclusive for us really works. I think what we worked out with the studio was a really smart way to window to Pay-1. We're getting it multiple months earlier so closer to the premier window where all that P&A really drives marketing and the brand of that title. And so we think there's going to be a lot more subscriber acquisition earlier we get it. We also extended it another year that created an opportunity for the studio to create another window so they can then monetize again. And I think as the world gets bigger and bigger in terms of scale for these broad-based streamers, I know monetizing windows are going to obviously continue to be important for studios, but having a small premium network like us around $20 million to $22 million, you can put that in front of a bigger 70 or 80 and still monetize those windows. If you do it the other way, it really actually isn't able to monetize. So I think we still provide that great value of a smaller, I like to say, lightly used business in front of these broad-based streamers. So I think there's always going to be opportunities for us to get a nice Pay-1 sitting in there. But we've got Lionsgate locked up through '28 and their movies really fit our demos really well. And we're really excited about the deal that we struck with Lionsgate. I think it was a deal for both sides. It was really great.

And in terms of your distribution strategy, I mean, as the ecosystem evolves, there are newer models that are available so you can bundle your services with a whole bunch of different providers compared to what you could do in the past in theory, or you could approach the retail market yourself, which is pretty expensive. So how do you think about these distribution alternatives and the cost versus benefit equation.

So I think it starts with the consumer, right? We've always taken a distribution-agnostic strategy where if you think about IP digital coming in, that looks a lot like us to when satellite came in for cable. And so we never actually created a separate business that was our D2C business. every Starz product, whether it's on Amazon, our D2C, DIRECTV, Comcast, it's the same content portfolio everywhere. And so wherever the consumer wants to watch Starz, we wanted to be there, and I think that continues through. That's one of the reasons why we've been able to make this transition profitably. We didn't outsize spend to service ourselves versus our partners, and we've always been at parity with all of our partners because if a consumer wants to watch Starz on Amazon, we're happy, great economics for this. If they want to watch it on D2C, we're also great there. And the patterns are a little different so you want to be the same to everyone everywhere. And so that allows us, depending on whether it's our D2C product, it's -- whether we bundle BritBox into the Starz app or we're bundled with MAX on Amazon, if a consumer wants to watch our content that way, we're going to be there. And so it gives us a lot of flexibility to do that. It also allows our economics to be almost consistent across the board. Obviously, D2C is a little higher, but there's more cost. And ultimately, this customer is not as sticky as in other platforms. But if a consumer is really interested in watching our originals, and leaning in for originals, the D2C is probably the best location. If you want to watch the grid guide and see all the movies that we have from Universal and Disney and Sony and Lionsgate, then you watch -- like I do, I watch DIRECTV, and I scroll through the 17 channels. And so depending on the platform, the content portfolio flexes one way or the other. So again, we want to be wherever the consumer wants to watch us with the same product everywhere.

Got it. And in terms of your content spend, I mean you talked about $600-ish million kind of a number. I mean, you already have a content base that's smaller than your peers and you're trying to manage the business with less spending. So when you think about that balance is part of the answer on how you scale even with this less spending distribution or how you approach the market? How do you balance that.

I think you have to take a step back and think about what we do differently than what our peers do, right? So we're very focused on women, right? So 2/3 of our base are within that half of it's White women, Black women, right? So we are only relentless focused on serving women in the demo. So we're not trying to serve the husband in the home, we're not trying to serve the dog in the home. We're not doing weather. We're not doing news. We're not doing -- we're not trying to be all things to everybody in the home. So we're not competing with Netflix and Amazon. Those folks are #1 or #2 in the home. We've never been viewed as a choice. No one picked Starz versus Comcast back in the old linear days, they picked DIRECTV or Comcast and we sat on top of both, right? We've kind of mirrored that same approach into the digital world. And so while we're only spending $600 million to $700 million, it's laser-focused on that demo, right? So what I would say is if you looked at all of the other content spend from our peer group, very few are spending that much money on 1 demo, right? And so it's allowed us to be in a lane that others can't -- aren't focusing on because they're focusing on everything. And so while our content spend is smaller in aggregate. I think the focus allowed us to be a destination for women around Outlander and White Queen, White Princess, Serpent Queen, Power, Ghost, Force those kind of shows. We just had an announcement there's a book called All Fours that we just won the rights that produces a TV show and every film studio and wanted it. But because we are so laser-focused on this demo, and we are R-rated and we are adult. We're able to actually do the kind of show that Miranda wanted the book to be on television. I think that was the big asset for us winning the rights to make that book into a TV show. And so I think that's served us very well. And what it does is it makes us complementary to everybody, right? So we're not competing with to be that first person in the home. If we're 3, 4 or 5 in the home, we can grow the business all day and be very successful. And so it's allowed us to just continue to push down this path of profitability and growth into the digital world, while everybody is very hypercompetitive for consumers on this side.

Got it. And I guess we are in a unique environment in a way where a lot of media companies are looking to sell assets and maybe M&A is a bit more acceptable from a quality perspective in terms of the scale that has allowed and you've talked about using your equity as currency potentially to scale into a larger business. So could you talk about what kind of assets you would be interested in? What the ultimate objective is.

Sure. Look, I think the other thing that Starz has built and not a lot of people know about is that we built a really significant data stack and app business on the back end. I mean from inception to today, I think we spent $90 million on building this phenomenal back end that has allowed us to scale our business profitably, compare that to Disney's purchase of BAMTech at $3.1 billion. I think we've got a good deal. And that gives us the flexibility to do a digital transition for others like we did for Starz. If you think about our focus, if you think about women's buying power is moved from the linear world to the digital world, there's a lot of great brands that sit in the linear world today that have never made the transition to digital because they don't have the back end or they're part of a larger company that isn't focused on them. And so those brands have been disconnected from the buying power sitting on the digital side, and they've been marooned on the linear side. And I don't really look at them as linear networks. I look at them as ad-supported content that focuses on the same demos we focus on wrapped with a lot of cost which I already have. And so I think there's an opportunity to go into the linear side of the world, find brands that marry our demos on a non-R-rated, non-ad-supported basis, but our made for TV movies and holiday movies and really more ad-supported content, take that content in those brands, build them a digital future and make the same transition that we did with Starz as linear revenue comes down, you stand up digital revenue on the other side, marrying that with the Starz business and working content back and forth and taking cost out underneath it. I mean, we run -- most of these networks are built the same way. And so the back ends of all these networks as duplicative costs. So that cost coming out while we make the transition allows us to really buy time to bring revenue up as linear comes down and make those -- gave those businesses a digital future. And so brands that fit with our demos that are marooned on the linear side are really great opportunities for us to run through our infrastructure and build in digital future.

Got it. So I guess in that sense, as you transition some of these, I mean, in theory, even if you were able to acquire some of these assets and you transition content over, is there a risk that there's some kind of cannibalization and that eats into your cost synergies? I mean, obviously, there will be some cost benefits that you realize out of it. But is there a risk that maybe you have to somehow manage it on the linear side with some degree of equilibrium in the sense that you don't lose revenues to offset the cost benefits.

There's always that risk. I think ultimately, what you're doing is the product on the digital side is an exact mirror of the product on the linear side, much like we took this distribution-agnostic approach with Starz, it's the same approach, right? And so if you think about our cable partners today, almost 50% of their footprints are broadband only, right? A lot of these brands could actually be sold over broadband today, but they don't have a digital mirror to do that. And so the idea was to create that, not just for the D2C side or for YouTube or Hulu Live, but also created for our cable partners as well so that they can monetize those businesses on their broadband side, Charter and Comcast are going to launch Xumo in a pretty significant way. And so to have those brands sitting on Xumo, where you can sell digital ads, you can have the content there, opens up 50% of their footprints that they don't have access to today. And so you're not creating something to benefit one versus the other. Again, you're creating a digital mirror of what they have on the linear side and align all of our partners to work on the economics on it.

Got it. And you talked about underserved demos or demos that you are focused on. And it's clearly been an area that not a lot of companies seem as folks. I mean, Netflix is all about breadth and increasingly every streamer seems to be about breadth rather than depth within a particular demo. So from your perspective, is that something that's difficult to scale for the others, just given that you've done this for a long time, you have a piece of content that you can target it with? Or what are the other hurdles for others to replicate this strategy?

Well, look. Creating content is hard. The one thing I learned coming from the cable side to this side is creating kid shows is very hard. It's not easy. I think people just say, "Well, they can recreate a show that's serve your demo and they put it on and your business goes to 0." And I think years and years of content creation, it's hard and creators that make the great content that we have on the air and all of our peers are super talented in a way that I can never really understand because I'm just a linear cable retired guy. And so it's hard to recreate that. And I think once you start to have kids for those demos and you have repetition and you know that you become the destination for it, I think it's very hard to replicate that brand destination for others. We have 5 shows that do somewhere between 9 million and 12 million eyeballs a week, right? Those are some of the biggest shows on television, and we're 1/3 the size of most of our peers. If he took those 5 shows and threw them into the Netflix data that they released not last time, but 2 times ago because 3 of those 5 shows would be the top 1% of anything viewed on Netflix domestically, right? And we're 1/3 of their size. And so these are shows that really punch way above their weight class. They are phenomenal shows. We had 2 NAACP awards this weekend for Michael Rainey [indiscernible] and so that was great to see the recognition there. So these are some of the biggest shows on TV that not a lot of people are talking about, unfortunately. And so it's very hard to replicate the success that we've had. And because we have not just 1 show for them like some of our peers, we have 4 or 5 shows, and then we string them together, it creates that habit of coming back repeatedly and becoming that destination I think unless you're really willing to focus on scale that we are and instead of doing 1 for a bunch of different audiences, it's really hard to replicate that kind of destination feeling that we have created.

And I guess that also from your perspective, I guess, when you think about a platform like Netflix, I mean, does this also create this opportunity where you have these originals, you focus on a particular demo, use Netflix for scale and then feed it back into your system?

Yes. I mean, look, I think that's the theory of the case. We have 2 -- that's not where I am. Again, I said earlier, content scarcity is much more important. I think if you look at Outlander, as an example, we don't see the value accruing back to us. I think people will wait till the current season comes on. We also saw that with Power on Hulu, where we actually had the older seasons of Power on Hulu and our app was on Hulu, and we just didn't see people accruing up. And so I think it's really important to keep your content exclusively for yourself so that you can drive people to the destination. First title streams, obviously, is a great marker for acquisition. Like I said earlier, when we have shows that are in the fourth or fifth season, and we put season 1 on where we sample season 1 out there, it drives a lot of acquisition for people catching up. And so I think ultimately, from a network point of view, being -- keeping stuff exclusive content exclusive to your brand is really important to continue to drive growth.

Got it. Another area where some of your peers have obviously focused a lot more on is international growth and it's a pretty big market, but it's always been challenging from an ARPU perspective. So how are you thinking about international from a growth perspective? I mean is that an opportunity you would tap into.

So we were in international. We pulled back significantly. Currently, we're just in the U.S. and Canada, and I think that was the right decision, I think we had a plan that was built on 3 wholesale partners and expansion on their backs and one of them showed up in a big way, which is great, and 2 never really showed up. So that kind of hurt our ability to grow. It's never predicated on launching a D2C business internationally. And so I think we were early. I think some of our partners didn't show up and so we pulled back. And I think that was the right decision for us. And so right now, we're very focused on U.S. and Canada. If you look at our domestic TAM right now, we think there's somewhere between 80 million to 90 million households that within our demo, and we're sitting around 20 million. So there's a lot of room for us to grow. I think we have a really good lead in terms of -- we talked about the destination for these demos. And so as a small management team, we're very focused on growing the domestic business and never say never going back to international, but right now, I think we're on to something very good. And so we're just sticking to our knitting. I think focus and simplicity is incredibly important in times of disruption, which we sit in today. And so we are going to be laser-focused on the U.S. and Canada business. and trying to push up into that 80 million to 90 million TAM.

Got it. One last question. I think we did not see the time. But basically, when you think about content -- we have time, okay. I was getting a little worried that we were -- when we think about content, 1 of the things to consider, I guess, is we are in an environment where everybody else is cutting down on volume similar to yours. We had a lot of folks, the WG and so on today basically talk about potentially a recession kind of an environment for content creators in general, had that opened up creators who typically wouldn't talk to you starting to maybe migrate to you and therefore, maybe better quality content feeding into your system?

Look, I think we took a different approach to that. We've always looked at content and scheduling of content as a way to drive reduction in churn and lifetime -- and increased lifetime value. So if you take a show that you have for 10 weeks and have a similar show that you put the first episode with the 10 episode, you move another 10 weeks and another 10 weeks, you can drive lifetime value from 10 weeks to 40 weeks just by spending money on content not having to spend marketing money on the front end, not having to be competitive and really driving your business by a longer lifetime value. And so that's always been our approach. And so there's a right number of shows that fits for our network. I think where we are looking at dealing with the cost of content isn't so much on the number of less or more. It's keeping to that same number, but actually looking at shows that are newer in a sense, right? Shows as they get older, become much more expensive. And you can look at, obviously, acquisition as a marker, you can look at audience as a marker and as shows start to get older and get outside of the financial envelope that's acceptable based on acquisition and viewership the idea is to take similar stories and repeat them with newer shows so you get season 1 economics. If you look at 1 of the things I think that we've been really good at doing with Lionsgate and our partners in Lionsgate TV is creating franchise spin-offs. There's 4 Power shows today. There's 2 more that we have in development coming. Those stories will continue to go. And what you get is you keep the audience, you get acquisition, it's familiar to the audience, some of the characters are the same. And so you get people to come from those older shows to those newer shows. We've got everything that we have mapped in development today is similar to that, right? Outlander just completed the second half of the seventh season. We have an eighth season coming, which is the last but we have a spin-off coming that is 30 years before the first Outlander. It is back in Scotland. It is younger. It has 2 love stories. It's very -- I've seen it, it's spectacular. I think, well, not only will you get the Outlander base to come across, but you'll get a new audience to come because you don't have to read 10 books and watch 90 hours of television to get caught up. And so that's 1 way to continue to do it, and that's a season 1. And then we have a bunch of acquisitions co-pros are doing the way to minimize cost. But we have to maintain the same quantity of shows in order to continue to drive churn down and drive the profitability of our business. And so there's other ways to do it versus just cutting shows. And again, because we're focused on those 2 demos, it's important that we keep that quantity at the same level. I would argue with you that our shows, as I said, are some of the best, not only from a viewership size, but a quality point of view, I don't think us getting great content has never been an issue. We are a premium adult non-ad-supported business. And so if you wanted a show that is authentic and racy to the real world. There's really only a few destinations and we're 1 of them. And I think our studio partner, Lionsgate, has been a wonderful partner understanding that and knows how to make shows for us that way. And it's been a great relationship for the last 9 years.

Got it. And I guess when you think about some of the permutations that might be available to you to build on this content going forward, I mean, there's a lot of companies, obviously, Comcast is doing its spin and then want to restructure its businesses and so on, and there are some networks there, which are -- which overlap with your demos quite a bit. So when you think about these opportunities, are you thinking about these as maybe an opportunity to pick up a few assets from some of these businesses? Or are you thinking about this as a much more skilled kind of an opportunity where the whole thing is available and then maybe it becomes a...

I think it's somewhere in the middle, I would define it as focus with scale right? I think we've learned in the business over the last couple of years or 5 or 7 years is the scale for the sake of scale has not really worked. We have a very good focused target in the audience that has made us transition to digital profitably in a period where few -- very few have been profitable in this transition. And I think there's opportunities to scale that business around this focus, and that's what we're laser-focused on doing. I mean I just think getting networks, again, I think focus is really important. And what we know what we're good at. And so getting bigger for the sake of getting bigger isn't the right approach. I think that will cause us a lot of distraction. So we focus on our 2 demos. We diversify revenue by -- into AVOD with different types of content for those demos is the way that we think about scaling the business. So whether it's onesie-twosies here or there or it's a bouquet of 5 or 6 or 7, we think there's an opportunity to do that.

Got it. And when you think about content consumption on the linear side versus streaming. And I mean you've seen the patterns on both sides. So is there any kind of a difference in how people engage with your content on the digital side versus how they used to engage in the linear side?

I don't think it's so much digital versus linear. I think it's wholesale versus retail is the difference. I can remember back, I don't know, 15 years ago, with Richard Pepper was talking about when we first launched [ Goliath ] 65% of the audience on linear is watching movies and it's flipped on the app. And I think it's still consistent in wholesale retail. And if you have all those channels in the grid guide, that's how I watch TV, I'm old-school cable guy. So I watch I just surf and if I see a movie I like. And so the fact that we have originals that premier once a week, but we have 800 movies on the service that are big movies. Of course, on that, people are going to have watch a bigger scale of movies and they watch the originals. But on our D2C where people are actually actively coming to watch our originals is split, right? And so there's a different usage pattern. That's why having data is so important. That's why sharing data with our partners is important so that we know what Amazon, the consumer on Amazon watches more than on our own app versus on Hulu versus on Comcast. When we go out to buy content, we are buying with all of our partners in mind. And so we know that we can't just focus on something that works for our D2C product because we need something that's going to work for our big partner in Amazon and Comcast and DIRECTV. So we share data back and forth with our partners that we know when we go out and buy, we're buying efficiently for our partners, not just ourselves.

And then when you think about some of our partners like Amazon, for instance, I mean, they've driven a lot of growth for not just you guys, but a lot of streamers across the ecosystem. How do you think about the trade-offs associated with some of these opportunities, right? When you think about a partner like Amazon, they can immediately give you a lot of distribution scale, reduce your acquisition costs, give you some churn benefits. But on the other hand, you also lose a little bit of control in the process. How do you balance those trade-offs?

Again, I think if you have a distribution-agnostic strategy, you want to be on all of the partners where the consumers are, right? Where it will be very hard for us on our scale to try to grow our direct-to-consumer business to be heads and above our biggest platform. Now our direct-to-consumer business when we built it was designed to do 2 things: provide data for us because in the old cable days we didn't get a lot of data. So it's who is our consumer not -- so we pivoted into the strategy and focus on women because the data from our direct-to-consumer app said this is what was driving our business, and we said, let's lean in, but it was also supposed to provide an avenue that if we got into a distribution fight with one of our digital partners, we had a place to run. It's now our second biggest channel. And so it's been widely successful. And the learnings from the data from the D2C product has really helped strengthen our business across not just the linear to the cable world, but also the digital wholesale world. So it's been very beneficial there. But ultimately, where you have partners that have large groups of consumers like our cable partners like Amazon, like Hulu, we want to be there as that complementary add-on on top of it like we've always been in the old world. And so obviously, the economics are a little different. But if you look back to us when we were a cable only, I think our ARPU was somewhere around $4 to $4.50. Today, our ARPU that from last quarter, I think we just published was $6.32. I think that was the right number for last quarter. So you've seen as the business has moved from the old cable world to the digital world, we've become much more profitable in terms of subscribers. So that's allowed us to grow the business that way, too. I think part of that also is when I started at Starz in 2015, 100% -- about 90% of our customers were in bundles. I remember there was this great -- one of your competitors wrote this great piece that angered all of us that said, no one is buying Starz, everybody is just getting in the bundle and no one even knows what's on it, and it's going to die a slow death. This was 10 years ago now. Today, 80% of all of our customers are rev share or à la carte, which means 2 things. One, we're making money for our partners. So we're not a cost center anymore. We're a revenue center. But two, it means customers are choosing Starz and that means the program is working. And so that's part of the reason why you've seen this phenomenally durable revenue line item over the last 7 years when the industry is down 12%, we've been flat. And so you've seen the content performing to these demos, we've been digitally agnostic, which means we're everywhere with those demos, and you've seen this business go from 100% linear revenue in 2015 to 70% digital revenue today, right? And that's what you've seen in the business.

I think we're out of time. So thank you, Jeff.

Thank you. Thanks for having me.

Thanks for the time.

Appreciate it.