Lionsgate

First Quarter 2022 Earnings

Thursday, August 5, 2021, 5:00 PM

CORPORATE PARTICIPANTS Nilay Shah - Exec VP, Head of Investor Relations Jon Feltheimer - Chief Executive Officer Jimmy Barge - Chief Financial Officer Joe Drake - Chairman of Motion Picture Group Jeffrey Hirsch - Starz President and CEO Kevin Beggs - Chairman of the Television Group

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PRESENTATION

Operator Good day and welcome to the Lionsgate First Quarter 2022 Earnings Conference Call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the Star key, followed by 0.

After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then 1 on your telephone keypad. To withdraw your question, please press Star, then 2.

Please note this event is being recorded. I would now like to turn the conference over to Nilay Shah. Please go ahead.

Nilay Shah Good afternoon. Thank you for joining us for the Lionsgate Fiscal ’22 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, and Chairman of the Motion Picture Group, Joe Drake, and from Starz, we have President and CEO, Jeffrey Hirsch, CFO, Scott Macdonald, President of Domestic Networks, Alison Hoffman, and President of International Networks, Superna Kalle.

The matters discussed on this call 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 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.

I’ll now turn the call over to Jon.

Jon Feltheimer Thank you, Nilay, and good afternoon, everyone. Thank you for joining us.

I’d like to begin with a few highlights from a strong financial quarter and then drill down in each of our businesses --

• We acquired the Spyglass Media Group library, while investing in Spyglass’s go forward business and entering into a first-look television deal between Spyglass and Lionsgate Television. In the past six months, we’ve actually acquired three libraries with a total of nearly 400 titles and more than $2.5 billion of underlying domestic box office as we continue to grow our stockpile of valuable premium content

• We announced a theatrical output agreement with Universal, giving Starz an exclusive 18-month post-Pay One window for Universal’s live action theatrical titles. Coupled with the Lionsgate Pay One theatrical output agreement announced with Starz last quarter, the Universal deal completes our strategy for establishing a strong and reliable pipeline of first-run features for Starz

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• Our Television Group is taking advantage of unprecedented demand by producing a record 34 scripted series this year, 15 of them for Starz, while maintaining our leadership as a top independent third-party supplier of premium scripted content. We’re coming off one of our strongest years with 13 new series orders, all seven of our pilots picked up to series, and all of last year’s freshman series renewed for their second season

• In our motion picture business, we continue to assemble a strong and diversified film slate for theatres, streamers, multiplatform distribution and Starz. And despite the pandemic, we’ve set up a total of 26 films in the past twelve months for delivery in F23 and F24

• And as we continue to execute our business plan, we’re also executing our strong commitment to greater diversity, equity and inclusiveness in our workforce, talent relationships and content.

Turning to our individual businesses, it was a strong financial quarter for Starz, but like the rest of the industry, we were impacted by a reduction in at home viewership and, importantly, a light content quarter due to COVID-driven production delays. We continued to grow our base of international subscribers in the quarter but domestic subscribers declined, a temporary drop that we have already reversed since the end of the quarter. In fact, two weeks after the quarter ended, Power Book III: Raising Kanan debuted to the second biggest Starz original series premiere ever, driving over 800,000 global subscriber gross adds in the first week alone and an 80% spike in viewership on the app.

As a result, we are again growing our domestic over-the-top subscriber base, which is already back to the March quarter’s record levels. And with our biggest and strongest Starz original series slate ever this year, with 12 scripted series compared to seven last year and a building cadence of five tentpole series over the next three quarters, we continue to expect Starz global subscriber growth this year to outpace subscriber growth last year.

Our confidence is buttressed by a very strong slate that, following Raising Kanan, includes wrestling drama Heels, starring Stephen Amell and Alexander Ludwig, getting great early reviews, the second season of the hit series Power Book II: Ghost, the sixth season of fan favorite Outlander, Curtis “50 Cent” Jackson’s crime family drama BMF, the horror comedy Shining Vale, starring Courteney Cox, and the debut of Power Book IV: Force. These will be followed next season by high-end properties such as the Watergate drama Gaslit, starring Julia Roberts and Sean Penn, the John Wick prequel story The Continental and The Serpent Queen, based on the dark legend of Catherine de Medici.

Internationally, subscriber growth continued but was slowed by a light content quarter as well as the global re-opening. Here again we have seen a significant subscriber uptick with the international launch of Raising Kanan which, along with Ghost, Run The World and The Girlfriend Experience, proves that great programming for our core audiences in the U.S. attracts a global audience as well. Combined with Lionsgate feature films and library titles that are driving our theatrical content offering and best-in-class third-party acquisitions The Great, Gangs of London and the international premiere of Dr. Death later this quarter, our “best of global SVOD” programming continues to set us apart as a home for original, adult, fiercely premium content, complementary to every platform and a compelling value proposition for every bundle.

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Turning to television, we continued to execute our strategy supplying Starz with a bumper crop of premium scripted series while delivering high-end programming to an expanding array of new buyers in the quarter. Home Economics debuted on ABC in April with the strongest Live +3 retention of any new comedy this season. The new comedy Ghosts debuts on CBS in the fall and Welcome to Flatch premieres on Fox midseason.

The growth of the nearly $10 billion AVOD market has created opportunities for us to license existing television series, with AVOD revenues up 104% from last year, to sell original new television series, an area where we have always been a first mover, and to extend the revenue food chain for shows entering syndication. In fact, AVOD accounted for nearly two-thirds of our recent syndication sales for the hit comedy Weeds.

With a diverse portfolio of television businesses that includes our collaboration with 3 Arts, one of the world’s foremost talent management and production companies, a partnership that has already generated three series orders including the Apple hit Mythic Quest, BBC Studios, with two series picked up by the networks, Pilgrim Media Group, with more than 20 unscripted series for leading platform partners, Debmar-Mercury, home to the evergreen properties Wendy Williams and Family Feud with Nick Cannon launching in the fall, and a roster of world-class production partnerships, the growth of our television slate is driven by our A-list talent relationships and future-proofed against headwinds in any one part of the business.

Despite the challenge of making films during a pandemic, we continued to fill our pipeline during the quarter, completing production on Borderlands, starring Cate Blanchett, Kevin Hart, Jamie Lee Curtis and Jack Black, the Kelly Fremon Craig-directed adaptation of the Judy Blume classic, Are You There God?, It’s Me, Margaret, produced by Academy Award winner James L. Brooks, White Bird: A Wonder Story, the follow-up to our breakout hit Wonder, the faith-based American Underdog: The Kurt Warner Story, Shotgun Wedding, starring Jennifer Lopez, and Roland Emmerich’s sci-fi epic Moonfall. And we couldn’t be more excited about returning to the set with the incomparable Keanu Reeves as we began shooting John Wick: Chapter 4 in June.

We also have three big brands that continue to move toward production, The Hunger Games prequel The Ballad of Songbirds & Snakes, the nostalgic re-imagining of the classic Dirty Dancing and Monopoly, based on the iconic Hasbro game, rounding out a strong and diverse slate that can navigate the twists and turns of today’s motion picture landscape by appealing to every platform.

Last month we announced an agreement to anchor the entertainment vertical for the NFT platform Autograph, bringing The Hunger Games, Twilight, John Wick, Mad Men and other top properties into the world of digital collectibles. It is the latest in a series of franchise extensions that provide us with a high-margin annuity from branded theme parks, exhibitions and escape rooms, live-to-tape global concert tours and adaptations of iconic Lionsgate film and television properties headed for the Broadway stage.

In closing, if the media consolidation of the past year has taught us anything, it’s that the global appetite for content is greater than ever. And to paraphrase Keanu Reeves in John Wick 3, we have that content, lots of content – in our world-class library, our deep film and television pipelines, and throughout our global streaming platform at Starz. We live right in the sweet spot of global consumer demand – bold, original, high-end premium scripted television and film. And with our talented and entrepreneurial employees working across every part of our Company every single day to identify ways to create, own and monetize this content, we’re well positioned to create outsized value for our partners, consumers and shareholders.

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Thank you and now I’ll turn things over to Jimmy.

Jimmy Barge Thanks Jon and good afternoon everyone. I’ll briefly discuss our F1Q financial results and update you on our balance sheet.

F1Q AOIBDA was $120M with total revenue coming in at $901M driven by new TV series deliveries and continued demand for library content. Reported FD EPS was a loss of $0.20 a share and FD Adjusted EPS came in at $0.18 a share. Adjusted FCF for the quarter was a $192M use of cash.

Now let me briefly discuss the F1Q performance of the underlying Segments compared to the PYQ. You can follow along on our trending schedules that have been posted to our website and show greater detail around our Global Media Networks Subscribers.

Media Networks quarterly revenue was up 4% to $382M and segment profit of $88M was up 23% driven by lighter content spend on a lower quarterly cadence of programming.

We ended the quarter with 28.9M total global subscribers. Global linear subscribers declined to 12.2M, while total global Media Networks OTT subscribers remained flat sequentially at 16.7M, representing YOY growth of 58%. As Jon noted, given the success we saw in the early launch numbers of Raising Kanan, we are again growing our Domestic OTT subscriber base, which is already back to the record levels reported last quarter. Furthermore, we continue to believe that we will add more subscribers in F22 relative to F21 in both our Domestic and International markets.

Turning to Motion Pictures, revenue was up 4% to $291M, while segment profit of $44M reflects higher P&A spend from the theatrical releases of Spiral and Hitman’s Wife’s Bodyguard vs. the prior year quarter, which had no theatrical releases due to theater closures. This was partially offset by continuing strength in library revenue.

And finally, Television revenue nearly doubled to $386M driven by new series deliveries including Raising Kanan, Blindspotting, and Heels while segment profit came in at $3M, reflecting the delivery of freshman series and a tough comp against the PYQ which included licensing of Mad Men.

Our total library revenue across our Motion Picture and TV businesses was $740M on a TTM basis, which compares to $711M reported this time last year and demonstrates the resiliency of our library in all economic cycles.

On the balance sheet, we ended the quarter with leverage at 4.7x, (or 3.6x excluding our investment in StarzPlay International), which, as expected, reflects the timing of P&A spend on TTM AOIBDA. We continue to retain significant liquidity, with $262M of cash on hand, and $1.5B of undrawn revolver. We remain committed to strengthening our balance sheet and paying down debt.

Now I'd like to turn the call over to Nilay for Q&A.

Nilay Shah Thanks, Jimmy. Operator, can you open up the call for Q&A.

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QUESTION AND ANSWER

Operator Certainly. Thank you. We will now begin the question-and-answer session. To ask a question, you may press Star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star, then 2. At this time, we will pause momentarily to assemble our roster.

And, the first question will be from Kutgun Maral with RBC Capital Markets. Please go ahead.

Kutgun Maral Great. Thank you for taking the question. I wanted to ask about television production. It's great to see the very strong results. I realized some of that includes sales to Starz, but still I think it may have actually been a record for quarterly domestic TV revenue. You called out 13 new series orders, seven pilots being picked up, and all the freshmen series being renewed. It just seems like a very healthy pipeline that should not only help fiscal 2022, but perhaps 2023 and beyond. So, just two questions.

First, are we approaching an inflection point for that business, where there's maybe more visibility into a step function increase in revenue and maybe eventually profits, or is this more a function of a post-COVID catch up that will eventually normalize? And second, the tracks you called out with AVOD is very interesting. Just any more color you could provide on the opportunity you see ahead there would be very helpful. Thank you.

Jon Feltheimer Yeah, I'll let Kevin answer that.

Kevin Beggs Yeah, this is Kevin speaking. Just in reverse order, we're seeing in this AVOD space, it's an exciting time. It’s reminiscent of, really the emergence of originals in the basic programming, basic cable space when we were doing Mad Men and shows like that. That--those revenues and those ad dollars are moving and they're moving into AVOD and Roku is getting into originals IMDb TV is well into originals, Tubi, we're in conversations with about various shows. So I see this as a trend. I think there will be more and within each of these verticals, they will dig into more originals as a point of differentiation from all the others. They're not as focused on exclusivity as SVOD players, so they're often sharing similar windows and other products, and what’s the--what makes them different will be the originals, which has always been the secret sauce in the cable space before, which they're inheriting.

So, on the inflection point, I can just say that this surplus of buyers moving into the space and needing great high quality premium content is really beneficial to us as a studio supplier. There's no greater priority than our partnership with Starz. We're thrilled that 15 of that roster are together with them in either sole production or co-production. But, things that aren't exactly right for them can travel elsewhere. We have five shows with HBO Max. We have a big project with Showtime and the First Lady and are jumping into business with Peacock and have had a long history with Hulu, two on Apple. They're all digging in to do more and that bodes well for us as an independent that can work everywhere and have really, finely honed creative machine, and churning out great development with terrific producer and pod deals and, you know, frankly, great taste.

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Jon Feltheimer Yeah, Jimmy, maybe take a shot at sort of the trajectory or the CAGR for the TV business over the next couple of years.

Jimmy Barge Yeah, without giving specific numbers, I mean, I think you're right in terms of an inflection point in terms of coming out of this with the development pipeline flowing through and getting deeper and deeper beyond those freshmen series that you just noted, and going into those back seasons where the margins are better, and you’re going to really see some nice continuation is what we foresee relative segment profit going into from ’22 to ‘23/’24.

Kutgun Maral That's perfect. Thank you both.

Nilay Shah Thanks, Kutgun. Operator, can we get next question please?

Operator Certainly, and that question comes from Alan Gould with Loop Capital. Please go ahead.

Alan Gould Thanks, I’ve got this--hi there. Excuse me.

Jon Feltheimer Do we need to send somebody over, Alan?

Alan Gould I've got two questions here, one for Jimmy and if Joe's on the line, one for Joe. Jimmy, can you just refresh our memory? How much are you planning on spending on content production this year? And, can you break that down a little bit between the divisions?

And the question for Joe, the box office seems to be having a real tough time. I think Barry Diller was just quoted saying there's 90 percent too many--we need--90 percent of the screens are going to close down. What are your thoughts on box office and alternative ways of releasing your films?

Jimmy Barge Yeah, Alan, I'll take the first one there. In terms of content spend, we had a billion-six of content spend last year and what we said on the previous calls is we're expecting 50 percent kind of increases from there. So, call it in the mid-twos, 2.5 billionish. And, I would just say that is on a kind of a net basis, meaning after we've eliminated the intercompany payments coming from Starz to TV.

So, if you really gross it up, look at it more comparable to maybe other companies, you're really talking about closer or tipping over $3 billion. But, for us it's a pretty cash efficient spend as we have that intercompany element we could put more on the screen with less cash.

And you saw in the quarter we're more heavily weighted in Q1 because we had--as you'll see in the trending schedules, over $575 million of content spend in the first quarter, and that was up about $400 million versus the prior year quarter. So, ramping into that spend early, it'll continue

Lionsgate Thursday, August 5, 2021, 5:00 PM 7 the cadence into the second quarter, and then again, we'll top out at somewhere around $2.5 billion, $3 billion on a gross basis. Joe?

Joe Drake Yep. Hi, Alan. Thank you for the question. Well, first, I would say, I don't totally agree with Mr. Diller. We are--we actually have found this period of late, this period of change really more as a place to look for opportunities than to see challenges. There are certainly some challenges with the marketplace.

But, when you look at the theatrical market, even though it's all the way back, certainly brands are working. Big brands are working. There's an audience that wants to come back. I think we've got a ways before we can talk about what normalize box offices with the variants coming into the market and such. But, I was really pleased to see the way certain brands played in the market.

Equally, we've certainly spent a lot of energy and done a lot of work in the last year, working with different distribution strategies, bespoke distribution strategies for each film. Great examples of this are Hitman's Bodyguard and Spiral, both of which we were able to reach our greenlight ultimates just with slightly different patterns, different spends, different approaches to the market, when we spent media, where we put our media.

And, so, I believe that the market is going to come back. What full percentage of theaters will be there when it's over or when it's fully back, I think there'll be a strong robust platform for us to monetize our movies in the theatrical market. And, at the same time, we have certainly explored and found some other really interesting ways to monetize the value of our content. And, I think that, I know you hear this theme over and over and over, which is that the value of content is just getting greater. I think we're seeing it everywhere in the marketplace. It's really just a function of being nimble enough and Lionsgate is in a very unique position in that regard for us to take advantage of all the opportunities out there, including a robust theatrical marketplace as it comes back.

Alan Gould And Joe, just to follow up, speaking of brands, when is next John Wick film again and when is the prequel to Hunger Games?

Joe Drake --mentioned, we’re deep in production, super, super, super excited. It is definitely going to be bigger and better.

In terms of when we're going to date the movie, we're having those conversations now. It’s not quite ready to put our flag in the ground, but you'll be hearing something soon as soon. As soon as we're ready, we will let you know. But that is in production as we speak, and Chad and Keanu are doing incredible work.

On The Hunger Games, our plan is to be in production in the first half of next year and looking to--I’d have to actually go back and look and see whether it's late ‘23 or early ‘24 fiscal when we're going--when we intend--when we’re currently targeting to put that movie in the market. But both are moving along really, really well.

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I would--I don’t--I would say it again too, Borderlands is looking great, super excited to see that, and Dirty Dancing I think is going to be special. So, a lot of brands coming back into the marketplace for us.

Alan Gould Okay. Thanks a lot, Joe.

Nilay Shah Thanks, Alan. Operator, next one.

Operator The next question--

Nilah Shah --Yeah, thanks.

Operator The next question will come from Steven Cahall with Wells Fargo. Please go ahead.

Steven Cahall Thanks. Maybe a couple for Jeff. So, on Starz, could you just unpack that subscriber forecast a little bit about adding more subscribers this year than last?

I know you have a big content pipeline coming in the rest of the fiscal year. It just seems like a lot of what we've seen in streaming is that the pandemic might have provided some pull forward. So, just curious what gives you the confidence that, now that we're coming out of the pandemic, you'll be able to have as strong a year for net ads, as you did last year?

And then, related on Starz International, how should we just think about segment profit for that segment this year? I think maybe you've talked about it on a profitability basis looking similar to last year. Just didn't know if there was any update to that outlook. Thanks.

Jeffrey Hirsch Hey Steve. How are you? Yeah great. As Jon and Jimmy talked about in the remarks, it’s a very light content quarter for us. We premiered two half hour comedies that were great shows that, I think that coupled with the world opening back up, it was not our strongest quarter as we had guided to on the last call.

But, as they said also in the prepared remarks, we're very confident that this year will be stronger than last year. We’re going from 7 originals to 12 originals. We have five tent poles in the next three quarters that drive a large, large growth of subscriber acquisition.

We also saw churn at a historic low in this quarter. So, those two things coupled together give us great confidence that we can--we will accelerate growth this year. Kanan obviously premiered as, Jon said in his prepared remarks, to huge numbers, huge viewership.

And, simply put, if Kanan was six weeks earlier, we would be having a different sequential conversation than we're having right now.

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Jimmy Barge And, on the segment profit portion of things, Steven, yeah, you're right plus or minus in line with the prior year investment. And, that's really based off the timing of content, etc. We like what we're doing there. We like the market share we're capturing. We're learning into it.

Steven Cahall Great, thank you.

Nilah Shah Operator, can we get the next question please?

Operator Once again, if you have a question, please press Star, then 1. The next question is from Thomas Yeh with Morgan Stanley. Please go ahead.

Thomas Yeh Thanks. Thanks for taking my questions. Two quick ones for Jeff. On Starz ARPU, the domestic ARPU appeared to be relatively stable sequentially with last quarter, which is a little lower than the historical trend. I think you had cited some heavier promotional activity happening then. Did that continue into the quarter?

And then a related kind of question, if you can give us an update on the unit economics across linear and U.S. OTT, and whether or not the mix of direct versus retail partners kind of impacts ARPU going forward, but the outlook is there, that'd be helpful. Thank you.

Jeffrey Hirsch So, on the ARPU basis for the quarter sequentially, we've said that ARPU will fluctuate around $5.75 to $6.10, depending on when subs come in in the quarter and some of the promotional parts of the business. Again, churn was really low in the quarter, a historic low and so that kind of stabilized it a little bit, but we didn't have as much coming in the front door, so it was actually pretty flat sequentially.

When you look at ARPU linear versus domestic, remind everybody that over the last couple of years, we've moved most of our linear deals to be a-la-carte deals. So over 82 percent of our--of our linear deals are a-la-carte. And, so over time that a-la-carte ARPU has actually started to collide with the OTT ARPU because in essence it's a rev share deal, and so you actually see those numbers coming together pretty quickly. Long-term, we think that we'll--again like I said, somewhere between $5.80 and $6.10 for the domestic business.

Thomas Yeh Okay. Thank you.

Nilay Shah Thanks, Thomas. Operator, could we get the next question, please?

Operator Actually, this concludes the question and answer session, so I'd like to turn the conference back over to Nilay Shah for any closing remarks.

CONCLUSION

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Nilay Shah Thanks, everyone. Please refer to the Press Releases & Events tab under the Investor Relations section of the company's website for a discussion of certain non-GAAP forward- looking measures discussed on this call. Thank you very much.

Operator And, thank you. The conference has now concluded. Thank you for attending today's presentation. You may not disconnect.

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