Lionsgate Entertainment Corp. Q3 2021 Earnings Conference Call
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Lionsgate Entertainment Corp. Q3 2021 Earnings Conference Call Thursday, February 4, 2021, 5:00 PM Eastern CORPORATE PARTICIPANTS Jon Feltheimer - Chief Executive Officer James Barge - Chief Financial Officer Michael Burns - Vice Chairman Brian Goldsmith - Chief Operating Officer Kevin Beggs - Chairman of the TV Group Joe Drake - Chairman of the Motion Picture Group Jeffrey Hirsch - President and CEO, Starz Scott Macdonald - Chief Financial Officer, Starz Alison Hoffman - President of Domestic Networks, Starz Superna Kalle - Executive Vice President, International, Starz James Marsh - Head of Investor Relations 1 PRESENTATION Operator Ladies and gentlemen, thank you for standing by, and welcome to the Lionsgate Entertainment 3Q ‘21 Earnings Call. At this time, all participants are in a listen-only mode, and later you will have an opportunity to ask questions. Instructions will be given at that time. If you should require assistance during the call, you may press star and then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Head of Investor Relations, James Marsh. Please go ahead. James Marsh Good afternoon. Thanks for joining us for the Lionsgate fiscal ‘21 third quarter conference call. We’ll begin with opening remarks from our CEO, Jon Feltheimer, followed by remarks from our CFO, Jimmy Barge. After the 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; and Chairman of the Motion Picture Group, Joe Drake. And from Starz, we have President and CEO, Jeff Hirsch; CFO, Scott Macdonald; President of Domestic Networks, Alison Hoffman; and EVP of International, Superna Kalle. The matters discussed on this call include forward 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 Lionsgate’s most recent annual report on Form 10-K, as amended in our most recent quarterly report on Form 10-Q filed with the SEC. 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. With that, I’ll turn it over to Jon. Jon? Jon Feltheimer Thank you, James, and good afternoon, everyone. We’re pleased to report a quarter with strong financials, robust subscriber growth at Starz, and another outsized performance from our library, as our model continues to show its resilience in the face of the pandemic. Let me take you through the quarter’s highlights. Starz continued its strong growth, gaining 800,000 subscribers in the quarter as it increased international over-the-top subscribers by 26 percent and posted solid gains in domestic over- the-top subs. With 28 million global subscribers at quarter’s end, we’re well on our way to our goal of 50 million to 60 million global subscribers by 2025, the vast majority of which will be high-value streaming subs. Last week, Starz announced a new bundle agreement with Canal Plus that will immediately scale our footprint in France, anticipating a future in which we expect bundles to become an increasingly important part of our distribution strategy. Our production teams have been doing a great job of keeping our television and film pipelines operating at full capacity, with safety protocols in place and minimal downtime. Lionsgate Third Quarter 2021 Earnings Thursday, February 4, 2021, 5:00 PM Eastern 2 Amazingly, in spite of the challenges, we are currently shooting 19 scripted television series and another 20 unscripted shows around the world. Five feature films have returned to production. Three new film productions have started. And in the coming months, we’ll begin shooting the Wonder sequel, White Bird, from Director Marc Forster; Shotgun Wedding, starring Jennifer Lopez and Josh Duhamel; Are You There God? It’s Me, Margaret, from superstar producer James L. Brooks; Borderlands, teaming Kevin Hart and Cate Blanchett; and John Wick 4, of course starring Keanu Reeves, for release next year. Our Television Group continued its strong year, with a new series picked up at Starz, Apple Plus, ABC, Fox, and HBO Max, while all six series launched last year have been renewed for second seasons, with Love Life breaking out to become the top-performing original on HBO Max, as we continue to demonstrate our ability to put shows on the air and keep them there. These strong-content pipelines continue to feed a library that in the quarter achieved another record $765 million in high-margin revenue for the trailing 12 months. And we’ve accomplished all of this while continuing to strengthen our balance sheet, ending the quarter with more than $550 million in available cash, an untapped $1.5 billion revolver, and leverage that has been reduced by more than a full turn in the past year to under four times, while continuing to fund the growth of all of our businesses without a capital raise and with our own free cash flow. To drill down on our performance in the quarter, I’d like to continue the narrative we began on the last call by laying out three of the broader themes that have contributed to our success. First, we continue to mobilize all of our resources behind the growth of Starz. From the acquisition four years ago through the international rollout that began in 2018, we’ve been converting and scaling Starz into a modern, data-driven, global subscription leader that has become the first traditional service to have more over-the-top and linear subscribers, a critical digital inflection point. By the end of next quarter, we expect streaming revenue to surpass traditional for the first time as well. Domestically, our programming for a broad spectrum of women and traditionally underserved audiences is differentiating us from our competitors, driving subscriber acquisition and retention and setting new viewership records. New series P-Valley and Hightown and the docuseries Seduced are resonating with our audiences. Power Book II: Ghost set viewership and acquisition records in its first season, becoming the highest performing new series ever on Starz. With its initial season ending on a viewership high, we’re bullish on the performance of future seasons as well as upcoming installments of the Power franchise, Raising Kanan and Force. We’ve established ourselves as a go-to premium service for grownup audiences. Our brand continues to set us apart in a crowded marketplace, and we have our biggest and most ambitious Starz slate coming in the year ahead. With a programming and marketing spend informed by the consumer data that we’ve harvested from our direct-to-consumer business, we just completed another quarter of high ARPU over-the-top domestic subscriber growth that drove solid revenue gains, while we continue to convert our Comcast linear subscribers into higher value, a la carte subs ahead of schedule. Internationally, we’ve expanded into 55 countries, including our Starz Play Arabia joint venture, with launches spanning 10 partners and 20 countries in the quarter. We also continued to bolster consumer data and engagement by rolling out our retail app in another five countries. Our partnerships with global streaming platforms and top local distributors alike are thriving. From Ghost to Gangs of London, Seduced, The Spanish Princess, our best of global SVOD Lionsgate Third Quarter 2021 Earnings Thursday, February 4, 2021, 5:00 PM Eastern 3 content strategy is resonating with consumers, helping to drive out second straight quarter of nearly 30 percent over-the-top subscriber growth. We’re capitalizing on our early traction by building scale in existing territories while opportunistically expanding into new ones, most recently leveraging the fast start of our Indian platform, Lionsgate Play, into Indonesia. Second, we continue to accelerate the convergence of our studio and platform businesses to support this growth, whether lining up 20 Lionsgate television premium series for Starz, using our library to drive Starz’ international growth, or leveraging our properties and talent relationships across all of our businesses. This afternoon, we announced that our collaboration with 3 Arts on The Serpent Queen, the story of French royal Catherine de Medici, from Bohemian Rhapsody’s Justin Haythe, executive produced by Hunger Games’ Franchise Director, Francis Lawrence, and 3 Arts’ Erwin Stoff, has been green lit at Starz. It’s the latest example of our ability to marshal all of the resources within our Lionsgate family to support the growth of Starz. As everyone scrambles to vertically integrate their legacy businesses behind the growth of new streaming platforms, our ability to continue converging our studio, platform, and talent businesses is critical. Third, we continue to deepen our content pipelines, while taking advantage of our distribution optionality. Our strong performance in fiscal ‘21 allows us to greatly increase our content and marketing investment in fiscal ‘22 to be funded with our own cash flow. We’re responding to the record imbalance between content supply and demand in the marketplace by expanding our slated Starz, ramping up our scripted series production at Lionsgate Television, and readying a robust film slate that anticipates theaters coming back next year, while addressing huge demand for content across all platforms. Our success in generating strong returns from early P-VOD, multi-platform, and hybrid models for the films, Fatale, Antebellum, Run, I Can Only Imagine, and The Secret, speaks to our ability to monetize current films while at the same time working with our theatrical exhibition partners to plan for the future.