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

All right. We'll get started here. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, I'm very happy to welcome back Jimmy Barge, CFO of Lionsgate Studios.

Thanks, Thomas. It's great to be back again.

Thank you so much. So I thought I'd just kick us off with a high-level question about the year in review. I think it's been coming up on a year now where Lionsgate separated its studio and Starz businesses. part of that rationale, I think you had suggested was to unlock greater strategic optionality as a pure-play studio. Can you maybe just give us an update on how that opportunity has evolved and what path you might be seeing the strategic optionality kind of take?

Well, sure. I think our timing is great. I mean it took a while, right? But you're right, we're coming up in May. It will be a year. And we accomplished what we wanted to accomplish. It's better strategically for both Starz as well as the studio. But the objective was to get back to a pure-play studio. And I think you're seeing what others in the industry had done kind of following suit. We started this really 3 years ago, ultimately to the separation. And you're seeing it play out nicely. And so our studio is well poised. We'll talk about it later, but we're at an inflection point for our business. We're coming off of a great year creatively heading into fiscal '27 as a March 31 year-end company and really well positioned and to be an agnostic pure-play content company has major advantages, and we've seen that. So you're seeing us hit all strides in motion picture as well as in TV. Our library sales, we're setting continuous records. We got major record-setting backlog, which is future contractual revenues and cash flows. So very well positioned. And then we see what's happening in the world of consolidation -- and everybody wanting studios, we've got a scarce asset here already completely separated. We collapsed the A and B shares, as you know, at the time of the spin. We announced on the last earnings that we're letting the poison pill expire in May. And I think we're just extremely well positioned with our business hitting on all cylinders. At the same time, we're a pure-play studio, which has got great scarcity value.

Great. On that industry consolidation point, I did want to ask your thoughts on the impact of potential consolidation on the industry as it relates to your I think it looks like this continued trend might be ultimate impact to the buyer pool of your content, but also, to some extent, also potentially an impact to the sellers and the number of sellers that are supplying third-party content. Can you maybe just level set for us the value that you bring as a third-party content arms dealer, as you've said in the past, and particularly just in a world of scaled vertically integrated studios where your value and your library really presents value?

Well, I think, again, it just underscores the scarcity value of library, and we can come back to that. But in terms of being an arms dealer or a seller to third parties, there's plenty of demand out there. We are literally one of the few that can really provide that content. Everybody needs content, content is king. And so I think in terms of us being able to sell, I think the combination of their libraries, quite frankly, is to our benefit. And I think there's been quite a bit of disruption during -- as you would expect, right, during mergers and acquisitions. So they've not been big buyers from us. So I don't see that as being an issue. I think they'll there'll be opportunities there to sell to them, but I think the ability to really sell to everybody else and particularly during this maybe next year of kind of continuing integration, et cetera, I think we do quite well. And when we get to TV, we'll talk about it. We've already got a significant number of series renewed. So -- and in our library, we've got a new Pay [ one ] deal coming up, right, that's split between Starz and Amazon. So we're set well there. And we've got a great pipeline coming in TV. And so I sit there and you asked about the library value. I look at it. And what's critical is the franchise is we have over 20,000 titles in library. I mean John and Michael have been building this for 20-plus years, right, always retaining rights. And so it's such a scarce asset, and it's so unique in the industry that we have this. And so I think what you've seen in the world of consolidation is that that's what everybody wants and the value of that. And if you just look at it and you look at Paramount's acquisition of Warner Bros. and you look at Netflix's bid and you kind of sort through, you see underlying multiples for the studio of 25-plus times. So mid-20s to high 20s multiples. And we've seen that before. We saw that when Amazon acquired MGM, okay? You saw it not too recently -- pretty recently for a minority interest where Apollo, very smart money, okay, took out Wanda for minority interest in Legendary, 25, 26 mid same level. So for us, we see that as a huge opportunity for us, one, to continue to exploit our library and drive value for our company. But also we're very cognizant of those values and the ability to create outsized valuation for our shareholders in the world of consolidation. So I think the library just becomes more scarce than ever and our production capabilities on top of that to replenish our library. And we're coming off of 5 consecutive records of library and no expectation that, that would not continue.

So do you think the takeaway, I guess, in terms of the impact of potential M&A across your peer set is that there's potentially a little bit of disruption from a near-term perspective of pencils being down as they integrate, but the diverse set of buyers that you're still interacting with it's still a healthy backdrop to continue to be able to monetize the content that you have.

Yes, I'd say that. And I'd say that in terms of buying content, which is easier than producing, right, that we've had a little disruption during the entire process as buyers. So I think some of that will open up even though they've not -- those 2 studios haven't been big buyers of our product recently. But I think some of that will open up quicker. I think some of the disruption may be in the production and everything else in development along the lines. It takes time to integrate. But we're off and running, and we've had great development. We've just finished some really strong content creation cycles. And we're poised very well for fiscal '27 and quite frankly, say, the next 2 to 3 years.

Got you. Okay. Let's move on to the motion picture a little bit more in depth there. Coming off of the success of some of the more recent films, most notably the Housemaid. Can you just talk about your ability as a smaller player in that studio world to source and generate franchises that relative to your larger peers, how that works?

Well, sure. The -- I mean, Adam Fogelson and his team have done a fantastic job, and you're starting to see their slate come to the forefront. So we've just come off of this in our fourth quarter or Housemaid was in December, so late December. The Housemaid, as you noted, has been fantastic. It's, let's call it, a rumored to be $35 million, $30 million film that's done $380 million, maybe closing in on $400 million of global box office. So just a fantastic -- and that team puts that together, and that team has also hit it on the Long Walk, okay? And don't forget, Now You See Me: Now You Don't. So kind of the third installment of that franchise, refreshing that franchise, created a whole new franchise with the Housemaid. By the way, there's 3 books there. So there's a lot more to come. We've already greenlit the second film. And we finished the year with a really nice film and nice price points in a faith-based film called I Can Only Imagine 2. So nice to have a sequel to the original film in that space. So we're just very well poised there. And I'd say they're focusing on a lot of things. I mean, first of all, I think it would tell you, look, you got to have the right filmmaker, okay, for the right genre, who's proven in that genre. I would just say Paul Feig was a fantastic selection in Housemaid. They bought the books thinking, hey, this could be straight video, but then realize there's something bigger here. And put the right talent around that. Paul Feig as a Director. Likewise, you look for something with a marketing hook. This was sexy, edgy, different, not a romcom. If you haven't seen it, you've got to go see it. I guarantee you're going to love it, and it's going to -- the twist and turns. It's a killer and there's no pun intended there. So it's a great film. And then you put a -- and it has great international appeal, right, with the underlying IP and the book sold well around the world. Actually, my wife picked up her book when we were traveling in Europe. She picked it up, finished her book, picked up another one and said, "Wow, this is great. She didn't even know we were doing the movie. And said the second one, by the way, was her favorite book. So there's clearly that one has already been greenlit called The Housemaid Secret. And so I think you look at that, you got the international appeal, the marketing hook, you got a director, a filmmaker that knows how to do it, proven in the genre. And then you add known cast, recognizable cast. So Sydney Sweeney, Amanda Seyfried, who just -- they killed it again, no pun intended. It was really great. And all of a sudden, there you are with a new franchise. And we're pretty good at doing that. And I'd say Adam and his team have shown just excellent skill set. And so I expect more to come out of this franchise, and we're always every year looking for creating more franchises.

There always does seem to be a little bit of an ebb and flow in sentiment around the health of the box office more broadly, maybe also more specifically on the midsized film budget side. Do you feel like operating in that space as one of the bigger suppliers of content into that theatrical window that you have any insight into whether there's a broader consumer trend and appetite for any particular film?

Yes. Well, I think you have to be more selective, right? You got to know what audience is there. And we've always done that and particularly, I think our team is good at it. Look, we see 8 to 12 broad theatrical releases a year, right? That's just fine. And nice to have 3 tent poles. We've got 3 tent poles coming up next year. That's kind of a nice franchise/tentpole that supports underlying your slate every year. It's always a slate approach. And we stay focused on genres where we can win. We do a lot of action do faith-based, do horror and then we'll do edgy stuff, again, that has the right kind of marketing hook and edge to it just new originals, mid-budget like mid- to small budget such as the Housemaid.

So for a success like Housemaid how should we think about how that translates from the upside that we're seeing on the box office performance into potentially further upside in the downstream windows thereafter. Maybe just walk us through how you're monetizing that and if there's continued evolution in the opportunity that you see downstream post theatrical.

Yes. Well, the nice thing about a late December release is it just keeps giving. So we got great rollover coming out of that. Now you see me as well and the other 2 theatrical releases I talked about earlier. So we got great carryover coming into '27 and the Housemaid will be clearly part of that. And again, I would fully expect 3 films out of that, if not more, even though there's only 3 books, it's the type thing story you could keep telling, right? And so I see that extremely strong. It's going to play on in our library forever.

Great. So on the film slate more broadly, -- you've announced some big tentpole's that are anchoring fiscal '27, Michael coming up, Hunger Games Prequel. As we think about how to really consider the sustainability of Motion Picture momentum from an earnings generation perspective into the following fiscal years, how do you think about the appropriate run rate for your slate in terms of managing that tentpole versus midsized kind of film release.

I think it's that 8 to 12 and the tentpoles, you don't want to rush something when it's not ready, but we're set up for 3 tentpoles for the next 2 years, right? So you mentioned, one, we got great carryover again coming out of '26 into '27, right? So that's great to have. And then we start the year with Michael, April 24. By the way, I've screened it. It is fantastic. You can't stop moving your feet. And it's just spectacular. And the way it ends, I can't give it away, but it's clearly a part 1. I mean it ends, you won't so much more. And just really, really great and so well done. And so you've got Michael April 24, you got Hunger Games in November. This is a story everybody has really been waiting for. This is the Haymitch character, Woody Harrelson character that actually won the -- I think it was the 25th quartile. So you know we won, you're recasting, younger recasting, new people play in the roles, by the way, which makes it nicely nice, cost effective, something the CFO always loves to see. And this is -- the fan base is just going crazy over this. We set trailer records all time with Michael when it dropped. and the Hunger Games trailers have been so well received and just the online presence every time -- and they did a masterful job of just rolling out the casting character after character. And every time it was just complete online buzz. So there's just so much demand to watch this. By the way, that book was the fastest-selling book out of the entire series. So you know the audience is there in the fan base, and we're ready to reengage with them. And then we have -- we finished the year on -- good Friday. I suspect it will come out on Thursday, given the industry standards. But this is the long awaited, probably the most awaited sequel ever. 20 years later, it's the sequel to Mel Gibson's Passion of the Christ. So Resurrection part 1. We're doing it in 2 parts. It's filming in Italy now. Production finishes in May and principal photography finishes in May. And we're just so excited about that. And then the second one will follow in the following year. And then you fast forward in the following year, I really do believe we've not announced that we're going to have Michael Jackson 2. I just told you when you finish the film and they're so set up for the rest of -- you just can't wait. And there's so much more story to be told. We publicly said we had 3.5 hours of footage with Jaafar nephew playing the scene at people there and says, this is not a kid playing Michael Jackson. This is Michael Jackson. I mean when you hear people talk about it and you see him as I have in the first part in part 1, it's just magical. And so we're excited about that. And then you have a Resurrection part 2, Michael 2 and then you have The Housemaid's Secret. So right there, you've got 3 tentpoles moving into '28 and so fiscal '28. So you got great carryover coming out of '26 into '27, more great carryover from '27 to '28 and then more great carryover from '28 to '29. And we've got a lot of other franchises Naruto as well, we were talking about that early, could be Monopoly, just a lot of opportunities there, could be more John Wicks as well in some of those years. So just excited about having the tentpoles that feels about right, 3 a year, maybe 4. It's always nice to have more. But plan those out. and then go with the mid-budget films as we do in the genres that we're known for to have very high probability with modest budgets, disciplined P&A spend, international presales to really drive the slate and the profitability like we've done.

Great. Yes. It sounds like the visibility on the slate is really building in terms of -- on that international presales front, you did mention Housemaid has a lot of international appeal. One area that I think you've spoken about before is also pretty healthy demand from an international presales perspective, particularly for Michael that's also coming up. What lessons can you take from that experience? Is it so specific to the resonance of any particular film subject that you're seeing that strength? And how you really try to replicate that level of enthusiasm in that market?

Well, Michael is a global sensation in his music. So it's -- you can just imagine demand, but we've got a very disciplined model there. We brought Universal in on the international distribution. We did keep Japan as a territory because we had a very high level of interest that we knew existed there. And so Helen Lee and her team just did a great job as they always do of the international presales. So we've got a fantastic model there. We distribute the U.S. And by the way, on Housemaid, as with any presales, we're set up to earn overages. So in success after our international partners recoup and make a really nice profit, then we start to share the back end. So our international distributors are just super excited and over themselves right now in terms of how well the Housemaid has performed. So clearly, they're going to be looking forward to new ones. And then we're the only people out there or really the only distributor out there with these kind of broad projects, whether it be Michael or whether it be Resurrection, it almost have to have to participate. And we've got a proven track record with our partners of delivering, okay? And also earning some back end ourselves, but being a great partner. And so they're super excited right now for our entire slate, right? But Michael, in particular, and the Resurrection, I would add as well.

Okay. That's good to know. Interesting. All right. Yes. I mean also, I think on the downstream window front, you've entered into a new calendar year where the subsequent films that you're releasing will be delivered into a new Pay 1 agreement. So I wanted to ask about that evolution of the Pay 1 monetization opportunity and how we should think about how the aggregate value of that window looks now relative to your prior deal under Starz.

Exactly. And by the way, on the last question, I'd be remiss if I didn't back up and talk about how excited the international markets are with regards to Hunger Games as well. So you can just see the demand there. But with regards to the Pay 1 window, this is great. This is where 1 plus 1 equals more than 2, high margin. We split the window, the Pay 1, traditional Pay 1 window. We split that with Starz taking the first part of the window and then Amazon taking the second part of the window. And so that's one, just reaffirmation of the strength of our slate, Amazon's interest. It's high margin. It creates more opportunities. Again, like I said, 1 plus 1 is more than 2. And that starts with the calendar year '26 releases, right, which really start soon. So we see that benefit will start in fiscal '27. So that's -- again, that's driving library sales is driving downstream ancillary revenues. It's great visibility because you know it's all priced off of the box office, and we've done very well. So that's going to be nicely profitable and incremental to us in fiscal '27 and beyond.

Okay. Got you. Let's move on to the television segment. You mentioned in the past, doubling the number of TV series delivered next year relative to the prior year. What do you attribute to the catalyst that's really driving that strength and the rebound in terms of pickups and renewals? And how sustainable should we think about that level of delivery as we get into fiscal '28 and beyond?

Well, a lot of this is the same as on the film side of the slate. We spent our fiscal '26 kind of rebuilding franchises and rebuilding our slate because we didn't get the carryover coming out of '25 into fiscal '26 that we would have wanted, okay? But now we have what we want. We've rebuilt that. If you think about it, we created 3 major franchises in fiscal year '26 that really doesn't show up in the numbers to speak of, okay? The Housemaid we've talked about, [indiscernible] talk about on the TV side, the studio okay, coming out of season 1 already renewed for season 2, okay? And Hunting Wives on Netflix coming out of Season 1 going into season 2, okay? So both of those are renewed. And what we've seen in TV is of their 13 scripted series, we've had 12 of 13 already renewed, okay? The 13th, I expect to be renewed too. I can't announce anything, but it is Spartacus, it is on Starz and it's 98% fresh rock and tomatoes. But they have an option to pick that up and people generally don't exercise options earlier. But even 12 of 13 is unprecedented -- okay? Included in there is Ghosts going to Season 5 and 6. We had a 2-season order and pickup of that, which we haven't seen for a long time. So that's going in Season 5 delivered going into season 6. The Rookie Season 8 that came out of the eOne acquisition. We were Season 7 when we did that 6 when we did that acquisition, we've had 2 more seasons picked up. So included in that also is we have Origins that we're looking forward to 18 episode order as part of the Power franchise. That's in addition to the renewals I mentioned. So we've got a really strong TV creative carryover. And you look at that as being sustainable because you know what you've got. Right. And you'll see it in the $1.6 billion, $1.5 billion, $1.6 billion of backlog, which I referenced earlier. But that is contractual revenues and future revenues and cash flow, okay? And that's part of that. And those are at near all-time record the backlog is. So you're just seeing that benefit there. So you have that visibility. And there's no reason to think it's not particularly sustainable into [ 18 ] and [ 19 ] because the tougher season to get renewal on is season 1 and going into 2, right? And once you've got the fan base and you're in season 2, and of course, the margins go up and your leverage goes up as you go into season 3, 4 and 5. So there's good reason to believe with that creativity of both a lot of junior programs carrying over, as I just mentioned as well seasoned programs and particularly something like a procedural, The Rookie could run forever. The Ghosts has got a huge fan base behind it. We're actually with BBC doing a film version of Ghost. So there's all kind of spin-off opportunities and other ways to serve that fan base, and the team is great at doing it. So I really like seeing that, and it's nice coming off of, again, we had a rebuilding year in fiscal '26.

Last quarter, you did mention that 33% of your library revenue now comes from TV, which I think historically has been a much lower number relative to the motion picture contribution. mean recognizing that TV licensing deals can be lumpy, can you talk about the industry demand for film versus TV catalog and how you see that changing? Film always to me at least feels a little more evergreen in terms of the demand that these streaming services.

Yes, you know you need both. And just to lay out in the last 10 years, we've gone from 15% of the library being TV to 33%, okay? Over that same period, we've had a 10% growth CAGR on trailing 12 months library. Jim Packer and his team, they do such a great job there. We've set our fifth record, which I mentioned earlier. We've had 2 quarters now with trailing 12 months over $1 billion, okay? Very high margin, 50% plus cash margins. 40%, 45% segment profit margins. So just a great business. So TV has become more and more of that. And I think that's really indicative -- it's indicative of demand, but it's also indicative of success of our TV program and program, and we've been at this a lot, right? So you got to create the franchises to kind of stoke the library and then you've got more to sell and execute. So we're doing a lot there. And we're also mining our deep catalog. We're actually using AI to help mine the deep catalog or the longer-tail catalog, creating incremental revenues, very high margin. These are usually unrecouped projects, okay? And doing rev share, whether it be subscription or advertising models without cannibalizing at all the licensing -- the traditional licensing model. So feel very strong about library and its success and TV, in particular, being a major part of that.

Great. Great. Let's talk about AI. I mean it's obviously a big topic that's been affecting everybody across industries and a big topic at this conference. You appointed a Chief AI Officer pretty recently and have done multiple partnerships, I think, most prominently with Runway that you announced and spoke about some internal initiatives there. Can we talk about how AI is delivering a tangible benefit to Lionsgate today and how you see that evolution of that technology really changing the ability for you to monetize your content?

No, sure. And I think this, by the way, is just very positive for the industry, very positive for us. First and foremost, we're going to be talent first. We hired Kathleen Grace from [ Vermillio ], very focused on artist talent relationships. But the opportunities here are fantastic. And Kathleen reports directly to John, our CEO. And we're going to -- we're taking that approach, but we were early movers with Runway, as you mentioned, in a partnership there, allowing them to use part of our library to actually build tools, not to replicate the library or do something else in terms of distribution but to build tools, and we're using those tools. We're using other AI platform tools as well, right? And we're already using it. We're doing this in many areas, as you would imagine, Previs, which is the pre-visualization of film and TV. I think we saved 2 weeks on Hunger Games where you're just hitting camera angles, all the other things, storyboarding, the things you would do, sequencing of scenes, et cetera, and utilizing it there, utilized it in Spartacus to amplify a lot of the fight scenes, used it on another television episode to actually change the lines using the voice of the course at their artist agreement without having to bring people back in and reshoot or do something to change a line for a better line. So we're already using it. That's on the cost side. But -- and I mentioned on the revenue side, I think, is really probably some of the greatest opportunity, right? And I mentioned already what we're doing on our longer-tail deep library. But there's just incredible opportunity, I think, there to do more.

What about at the consumer level? Is there a broader existential threat about the value that consumers place on premium scripted content. There's, I think, a lot of increased focus on a shift in least consumption towards user-generated content. Is there any view from Lionsgate about how to potentially participate in that? Or if you feel like there's a differentiation factor that becomes more prominent? .

Sure. Look, I think the first thing to say is that historically, when you've seen technologies, which has almost always been really a friend of content, okay, and IP. But when you see technology lowering the cost and maybe more production feasible because of lower cost, what you see with more supply is an increase in demand and value for the higher end of known IP and fan bases and it's something that's already been created. So our franchises actually go up in value. You could see that actually with Sora 2, right? Because as soon as you know, it is going to happen, all the industry writes letters, including ourselves, say you can't use our IP, you're going to get sued, okay? And all of a sudden, the downloads and the interest and usage of that just went down significantly, okay? But that doesn't mean there's a world where we might not extract the fee and licensing and share with talent and the guilds in an appropriate format as we always do with the revenue streams coming out of our creative process and being able to allow people or the fan base to more interact. And so there's definite fee opportunities there. It could be short form or not, but I don't think it's ever going to replace long form, okay? And if you think about it, the creative community just using Housemaid as an example, just talking about what went into creating that. No one person creates it on their own, okay? And the creative people, the future, Paul Feig's and even now or Steven Spielberg's or James Cameron or Michael Jackson's, they're going to work in a creative community that's collaborative, okay? And that's the nature of this business. And you're going to want to be working in that collaborative environment. Are you going to be using AI tools? Sure. But your ability to kind of emerge and maybe you do emerge through short form or other, but even then, you're going to want to change the world. You're going to own the big screen. You're going to be everywhere. You're not just going to want to be on YouTube and TikTok. You're not going to be happy with 100 million TikTok, YouTube followers. You're going to want to be much more broadly distributed, disseminated and work with people that actually create with you more. And to be the best you can be. And I see that as being very beneficial to what we do already, okay, in terms of working with talent, it's consistent with being talent-first driven, and it's consistent with driving future revenue streams for everybody to share and participate in.

Got you. On that value of IP point, it certainly feels like there's more momentum in your desire to expand your monetization potential into other ancillary formats like live events or video games. Can you just give us an update on the traction you're seeing there and how we should think about how meaningful this might be in terms of a contribution to your earnings?

Well, it's all incremental. It's global experiences from gaming, stage plays, experiences the John Wick experience, the Saw franchise. All of these franchise, the fans want to interact in so many ways -- and you can actually create those environments. And I think AI will actually even help further in that context. But what you have to have is you have to have the known content. And so it makes the library even more valuable. So the more library, more franchises, the more opportunities. And we're doing that already. And I think there's just going to be more opportunities to do it. And you probably saw Meta entered into an agreement with Fox for, I think, $50 million a year for 3 to 5 years to have access. So the future revenue streams is not the same industry, but the concept that you'll participate in future revenue streams, et cetera, and be able to interact more with your fan base, I think, is enhanced here.

Got you. I'd be remiss to not ask you a little bit more about free cash flow. given your position as CFO. And the last few seconds, maybe you can just tell us a little bit about how you think about the cash needs of the studio. I think there was an initial ramp as you got back to more of a steady-state production on the investment level. But maybe just talk a little bit high level about what you see as free cash flow conversion over a more steady state and deleveraged situation.

Sure. We've got strong free cash flow coming. We -- as we said, we're back-end loaded in fiscal '26. It was a replenishment year, if you will. So you were spending more cash than you were amortizing cost off through the P&L. So less of a conversion of EBITDA into free cash flow. So it's a use of free cash flow very judiciously. We've talked about franchises that we've created. And so you'll start to see those cash flows coming in the future, and you'll also see future cash lower than amortization. So actually, it will be additive. It turns around. So that's a working capital benefit going into the future, and we see very strong free cash flows coming out of the trailing 12 months and also the trailing 12 months driving delevering as we go into mid-fiscal '27.

Thank you so much. That's all the time we have. Okay. Appreciate it.

Thanks, Thomas. Appreciate it.