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

Good afternoon, and welcome to the Lionsgate First Quarter Fiscal 2027 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nilay Shah, EVP, Investor Relations. Please go ahead.

Good afternoon. Thank you for joining us for the Lionsgate Studios Corporation's Fiscal 2027 First Quarter Conference Call. We'll begin with opening remarks from our CEO, Jon Feltheimer, followed by remarks from our CFO, Jimmy Barge. After their remarks, we'll open the call for questions. Also joining us on the call today are Vice Chairman, Michael Burns; COO, Brian Goldsmith; Chairman of the TV Group, Kevin Beggs; Chairman of the Motion Picture Group, Adam Fogelson; Chief Revenue Officer, Jim Packer; and Senior Adviser to the Office of the CEO at Lionsgate and Co-CEO of 3 Arts, Brian Weinstein. The matters discussed on the call also include forward-looking statements, including those regarding the performance of future fiscal years. Such statements are subject to a number of risks and uncertainties. Actual results could differ materially and adversely from those described in the forward-looking statements as a result of various factors. This includes the risk factors set forth in our public filings for Lionsgate Studios Corp. The company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. I'll now turn the call over to Jon.

Thank you, Nilay, and good afternoon, everyone. I'm pleased to report another quarter with strong financial results and growing momentum across our business. Our pure-play content strategy is working. The balance sheet is strengthening faster than anticipated. Our portfolio of intellectual property is becoming ever more franchise-driven and valuable. Library monetization remains a significant competitive advantage, and our company is increasing strategic optionality in a media landscape that continues to place growing value on scaled content assets. In our film business, we've launched 2 new marquee branded properties, Michael and The Housemaid in a span of just 4 months, ending the first half of the calendar year with domestic box office market share over 10%. Driven by these films and our strong library, our Motion Picture Group reported its best first quarter results ever. Beyond the box office results, both our performance and the type of content driving this performance, bold, original and provocative, are reinforcing the Lionsgate brand in real and tangible ways, attracting new creative projects, expanding our filmmaker relationships and paving the way for new partnerships that will continue to drive us forward. We've lined up a slate that includes more than a dozen branded repeatable properties over the next 3 years. 4 of these films have wrapped production and are being readied for release. Early indicators for The Hunger Games: Sunrise on the Reaping, show that it has the potential to become one of the biggest Hunger Games movies ever. The marketing campaign for Mel Gibson's Epic 2-part The Resurrection of the Christ will kick off next month with the theatrical rerelease of The Passion of the Christ in Dolby and 4K. We wrapped production on John Rambo directed by Jalmari Helander and starring breakout talent Noah Centineo as we rebuild the Rambo property into an important Lionsgate film and television franchise. It's set for release next June. And we also wrapped production on Caine with Donnie Yen directing and starring in a movie featuring one of the most talked about characters in the John Wick universe also set for release next year. We're preparing to start production on 3 others. We just announced the addition of Brittany Snow, Co-Star of our Netflix hit series, The Hunting Wives, to The Housemaid's Secret cast that also includes Sydney Sweeney, Kirsten Dunst and Paul Anthony Kelly. Production is slated to begin in October for a December 2027 release. Writer Chris Thomas Devlin has turned in an incredible script for our groundbreaking new chapter of The Blair Witch in partnership with Blumhouse and James Wan's Atomic Monster to be directed by Rising Star and the 3 Arts client, Dylan Clark. And we're out to cast on Naruto, which is shaping up to be a major tentpole, the next movie from record-breaking Spider-Man: Brand New Day filmmaker, Destin Daniel Cretton based on the top-ranked Manga property in the world. And with our diversified slate strategy, we're balancing this trove of IP with great original storytelling driven by incredible talent in front of and behind the camera. All of this is happening against the backdrop of a resurgent domestic box office heading for its first $10 billion year since before the pandemic. Turning to television. There has been a paradigm shift that we believe plays to our strengths. The name of the game in television used to be deep relationships with a handful of major buyers, first the broadcast networks, then the leading cable platforms and more recently, the streamers. But today, there are many new players throughout the television ecosystem, and our strategy is focused on diversification, having the creative strengths, pricing flexibility and innovative business models to play across a wide range of different platforms and different types of series in an increasingly fragmented world. We're on the cusp of going perfect 13 for 13 in current scripted series renewals. And notably, that success is spread across 12 different buyers. Our ability to cast a wide net was evident in the 2 series pickups we secured this week. Amazon's pickup of Friends co-creator Marta Kauffman's improvisational comedy DINKS, which if you didn't know, means dual income, no kids, driven by an innovative partnership with Media giant Publicis Groupe and the pickup of the medical action thriller Trauma, think Die Hard in the hospital, starring Richard Madden with Prime Video streaming in the U.K. and Paramount+ streaming in the U.S. and the rest of the world. But one thing in the television landscape hasn't changed, the rewards of playing the long game. When we bought Starz in 2016, the original Power series had just finished its third season. Lionsgate and Starz collaborated on growing Power through a total of 6 hit seasons, extending it into 3 hit spin-offs, Ghost, Raising Kanan and Force and expanding the Power Universe with the upcoming new pickups, Power: Origins and Power: Legacy. Together, we've built a strong, enduring and immensely valuable franchise spanning at least 6 different series and more than 200 episodes. That value was evident last week when we licensed the first 4 Power series to Netflix, all 4 internationally and the original Power worldwide for the next 3 years beginning in November. The deal proved 3 things: streamers need a lot of content, we have a lot of content, and that content becomes more and more valuable as it plays everywhere in the world. Turning to the library. We reported another strong quarter of trailing 12-month revenue. What's interesting to note because it speaks to the depth and diversity of our library is that the biggest individual contributor in the quarter was a 38-year-old movie, Dirty Dancing. It's also worth mentioning that our film and television backlog grew to a robust $1.5 billion in the quarter. We expect this strong backlog to translate into growth in upcoming library quarters. In closing, we continue to see encouraging signs in our operating environment. The domestic box office is strengthening as a new generation of moviegoers embraces the theatrical experience. New buyers and partners are emerging throughout the television ecosystem for those companies willing to look outside the usual places. Streamer demand for film and television series is helping to keep our library business strong. Our 3 Arts business continues to scale and diversify at a time when management companies have become increasingly valuable gateways to the media ecosystem. And AI properly harnessed is creating new opportunities to reduce cost, enhance revenue and accelerate the production process. That's the environment to which we're continuing to adapt our studio, becoming a little leaner, ever more focused, collaborating with digital and traditional storytellers alike, maintaining an entrepreneurial approach to both content and culture and above all, continuing to grow our incredibly valuable portfolio of branded intellectual properties. Now I'll turn things over to Jimmy.

Thanks, Jon, and good afternoon, everyone. I'll briefly discuss our fiscal first quarter 2027 Studio financial results and provide an update on the balance sheet. For the quarter, Lionsgate Studios revenue grew 48% year-over-year to $777 million, while adjusted OIBDA improved to $79 million. Operating income was $26 million, reported diluted loss per share was $0.10 and diluted adjusted earnings per share was $0.06. Free cash flow was $129 million in the period, reflecting strong operating performance, including the April release of Michael. Trailing 12-month library revenue was $987 million, roughly in line with the prior year, and our backlog of $1.5 billion was up 21% year-over-year. The continued strength of the library and our growing backlog demonstrate the enduring value of our intellectual property portfolio and provide an important source of recurring revenue and cash flow across market cycles. Studio segment profit, which reflects our Motion Picture and Television segment profits before corporate overhead expense, increased significantly year-over-year to $115 million. We began highlighting our Studio segment profit a few quarters ago because this important metric is generally more comparable to the studio adjusted OIBDA figures reported by many of our peers. The increase in Studio segment profit was driven by strong Motion Picture performance. Looking further into Motion Picture, we saw revenue more than double year-over-year to $587 million, while segment profit reached $105 million, the highest first quarter Motion Picture segment profit in the company's history. Results were driven primarily by the exceptional performance of Michael as well as the continued strength in ancillary contributions from The Housemaid. Turning to television. Revenue was $189 million and segment profit was $10 million. Revenue and segment profit were expectedly down versus the prior year due to the timing of episodic deliveries. We remain confident that television will achieve significant year-over-year growth in fiscal 2027 due to both our previously announced outlook to double scripted episodic deliveries and our recently announced Power licensing deal with Netflix. We expect TV segment profit to improve sequentially in the second quarter and then accelerate in the back half of the year. Now turning to the balance sheet. We ended the quarter with net debt of approximately $1.5 billion, a $121 million sequential improvement. The primary driver was better-than-expected free cash flow performance, reflecting better in-quarter theatrical performance and recent release ancillary revenues. As a result, leverage improved to 4.3x, down nearly 2 turns since the end of March and reaching our mid-4x leverage target earlier than anticipated. We continue to believe that deleveraging will occur naturally over time with growth in adjusted OIBDA and free cash flow. And we're encouraged by the progress we've already made during the first quarter. Additionally, we ended the quarter with $426 million of unrestricted cash on the balance sheet and $800 million of available capacity on our revolver. Our capital structure remains well positioned with no significant near-term corporate debt maturities. We remain highly confident in our fiscal 2027 outlook, which is supported by continued monetization of recent theatrical releases across downstream windows increasing television deliveries, sustained strength in our library business and the Q3 release of The Hunger Games: Sunrise on the Reaping. Accordingly, we continue to expect significant growth in adjusted OIBDA and free cash flow this fiscal year and beyond. Now I'd like to turn the call over to Nilay for Q&A.

Thanks, Jimmy. And before we start the Q&A section, I want to remind everyone that last quarter, we added some slides to our IR website that highlighted several drivers of our business, and we plan on updating those slides in the coming days. Operator, can we open the call for Q&A?

[Operator Instructions] Our first question today is from Vikram Kesavabhotla with Baird.

My first one is a higher-level question on the industry. When we look at the box office trends this year, I think there's been a few examples where existing proven IP has continued to perform very well. But I think there's also been some examples where proven IP has struggled or at least struggled relative to broader expectations. I'm curious to hear your perspective on some of the factors that are influencing the success and relevance of IP in today's market. And the real question behind that is, when we look at your film slate over the next few years, I think there are several examples of sequels or revivals of existing films and franchises. As you've gone through the process of greenlighting these ideas, what are some of the factors that have given you confidence in the health and the relevance of the IP that you're working with and the likelihood of your film slate being successful in aggregate? And I realize it's a bit of a high-level question, but it'd just be great to hear your thoughts on how the film slate is positioned relative to some of the broader industry trends that we're observing.

I appreciate the question. Obviously, each individual studio has its own perspective and the metrics that are used to determine what makes a film a good idea or a good bet include box office and all kinds of other ancillary opportunities that come with it. As it relates to Lionsgate specifically, I can tell you that the lens that we're looking at with these projects is does the movie in question answer an audience demand or interest about a particular character or a particular storyline or when we invite the audience to think about an idea that they may never have considered, do they get excited. And we have a very robust ongoing communication with our fan bases. Our digital team is, I think, top of class in making sure that we are constantly listening to our fans. And so you could pick any of the titles, large or small across our slate for the coming years. And I would tell you that the characters that the stories are focused on or the storylines that are being advanced are answering very direct and very specific questions that have come from the prior films. And as long as you are then also making each of those films for the right budget and with the right filmmakers, I think while nothing is certain, your odds of success go up exponentially. And as I said, every single one of the films on our slate has more than met the threshold criteria for myself and Jon and the company to feel great about what we're doing. And then it was Adam, if you didn't know earlier.

Okay. Great. I appreciate the comments there. Separate from that, I also wanted to follow up on the licensing agreement with Netflix for the Power Universe. Can you talk more about the potential impact of that deal and what that could represent for the value of your library? And perhaps as part of that, if you could just talk about the broader health of your library business today and how that revenue contribution can trend from here, that would be great.

I'll have Jim Packer answer that.

First of all, it's just a really great time right now to have library series, especially high-profile signature franchises in the marketplace. I'm sure you've seen a couple of the announcements that are out there. This particular deal has a couple of strategic wins. First of all, Power has been strong internationally, but this is going to be transformative for the show and for the franchise. Netflix has an international footprint and the entire franchise is going to grow significantly, I think, because of that. And then we also try to set ourselves up for the next cycle, too. So we only did a 3-year deal. So domestically, we'll have Kanan and Force available for the first time in the U.S. for SVOD. Internationally, we're going to have Origins and Legacy available. So it's going to set us up for an even bigger global opportunity at a time when I think the franchise is going to be hitting some new peaks. And really, I think long term, while these deals don't -- of this scale will happen every day, we have a number of important series returning to our distribution organization over the next couple of years. We have Orange is the New Black, Mythic Quest, Mad Men post HBO. And I think all of those are going to give us another global pipe at a time when series are really in demand. So I feel very good about it.

The next question is from Omar Mejias with Wells Fargo.

Jon or Michael, I just wanted to see if you could give us an update on the M&A front. There's been several press reports indicating parties interest in Lion, including Bollore, Banijay among others. Just want to get your updated thoughts on how you're thinking about the consolidated media environment and where Lion sits within the ecosystem.

Thanks for the question. In spite of what the headline suggests, we haven't engaged in any substantive conversations. As a policy, we don't comment on M&A speculation. What I will say is this, given the strength and the breadth of our IP and our franchises, we remain one of the most compelling assets in a rapidly consolidating marketplace. We also recognize that scale matters more than ever in this environment, and that's precisely why the value of our portfolio only becomes more relevant over time. And given the M&A backdrop, the strength of our assets and our stand-alone operating performance, we believe we have real strategic optionality, and that's something we're focusing on every single day.

That's very helpful. And maybe just shifting to the earnings power of the business. I mean you guys just started the year very strong. Clearly, you have a lot of momentum on the Motion Picture business. On the TV side, you just did the licensing deal with Netflix that you talked about and you have a very robust backdrop backlog. So just curious, how should we think about the earnings power as we look ahead into '27 and beyond with all the pieces putting it all together?

So I think we've certainly been out there with a bit of a guide to a strong earnings year '27. You mentioned '27, that's this year, actually. And we're well on our way to a really strong year. I think the momentum should continue into '28, and we'll see nice growth in '28 as well. Obviously, our earnings sometimes depends on the performance of 3 or 4 different pieces of content. But certainly, if they do better than sort of what we're covering as our base case, I think we can have a really strong year in '28 as well.

The next question is from Brent Penter with Raymond James.

A few questions. First one on 3 Arts. You talked about the value of that business. Can you update us on the strategic review process there? Is that still ongoing? And then just can you update us fundamentally on that business? It sounds like some positive trends, but anything you can say there?

Sure. Brent, it's Brian Weinstein speaking. Thanks for the question. Look, to take it in parts, first, we are focused and remain focused on potential transactions, but not ones that are purely financial. There's some interesting strategic elements in some of the deals we're looking at. So we continue to explore those conversations and find some interest in that. I'd say, operationally, we're pleased with the business, the trajectory of the business beyond the core, as we've talked about over time, we're seeing nice momentum, real momentum in new verticals like sports and creator. That's not our roots, but that's where we see lots of excitement. In sports, we've got activity and additions with our clients, Travis Kelce and Myles Garrett and now Taylor Rooks and new clients like Colston Loveland and Sophie Cunningham. But that group together with others, it just demonstrates the strength of the platform and opportunity to develop content around those relationships. So that's how we think about the sort of new areas. And then getting back to the core, at the same time, our bread and butter, our collaboration between Lionsgate and 3 Arts has really never been stronger. So we have projects like The Hunting Wives and real robust development like Ride or Die and Las Culturistas, the award show and The Algorithm and Medal of Honor and others that's driving about roughly 30 shared projects between Lionsgate and 3 Arts. And then let's finally, just talking about the industry and the asset class at large, transaction like THE TEAM transaction with Providence Equity buying more of that asset, just reinforce what we know, which is these are scarce businesses with premium multiples and scale of talent representation businesses like 3 Arts remain a good place to be. So overall, I hope that answers it, but that's how we feel.

Yes, it does. And then on Michael, now that we're seeing the strong from that movie. I think there's even more anticipation about the sequel. So just any updates on maybe where that is in process and potential timing? And then what are the puts and takes on the sequel in terms of the economics? I think maybe some of the film from the first movie can now be used for that. So anything just in terms of budget or cost that you can talk about?

Yes, Brent, it's Adam. Thanks for the question. We are hard at work on making sure that we can put together a sequel that is worthy of the success and the enthusiasm that the first movie generated, and we're fully engaged with everybody. While we are not ready to announce everything at the moment, I would tell you that we are targeting a production start towards the end of this year and early next. And think that somewhere between the end of calendar '27 and the first half of calendar '28 would be a current thought of roughly where the movie could go. We do have a number of sequences, particularly some big musical sequences that were shot previously that are almost sure to be incorporated. But we are mostly focused right now on how to make sure we can deliver at the right price, the biggest, best sequel that is what the audience is going to want and deserve after the experience we gave them the first time. So we're not ready to give guidance on the budget yet, but we certainly will be able to take advantage of some stuff that we previously shot, as I had said before.

All right. And then final question for me. The Paramount Warner Bros deal now on pause and the trial not scheduled until March. I guess what's the view from Lionsgate on that situation? How does it affect you kind of being in limbo here? And then if Lionsgate -- are you all better off if that does or doesn't close?

Yes. It's kind of a mouthful. I'd say this, uncertainty is the worst thing for our business and uncertainty and delay is not good for anybody. We know David Ellison well. We did his first series, Manhattan, some years ago. I can tell you that I was super impressed with him. He loves content. I have no reason not to believe that he will be investing very heavily in content, whether it's a 30 film slate or whether it's at a bolstered Paramount+, I would say for us, a more -- a better financed streamer, a competitive streamer will be better for us, better for us in terms of original programming, better for us in terms of selling library. And so that part of it, I think, is a real positive for us. I can tell you we're already -- we've already sold them a new television show. We hadn't been doing that much with Paramount. We hadn't been doing that much with HBO. So I'm already seeing signs of it. I'm already talking to them about potentially co-financing feature films. That would be good for us, and that would be good for the industry. And I would say, overall, the more movies that are in the marketplace, while it's competitive, it's good as the rising tide moves all boats up. And so I guess I would say I'm in favor of this transaction, but most importantly, I'm in favor of certainty and getting all of the delay out of it.

The next question is from Sean Diffley with Morgan Stanley.

Two, if I may. First, you talked about a paradigm shift in the TV demand backdrop. I was hoping you could elaborate on that a bit. What would you say your special sauce is in terms of why your content is resonating so much with the streamers? And then second, your utilization of AI. I know you guys have a deal with Runway. Maybe you could just talk about how you're using AI to energize and leverage your IP and what kind of cost savings you envision or what kind of creative unlocks you're seeing?