2018 Annual Report to Our Shareholders
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2018 Annual Report To Our Shareholders: We’re pleased to report that fiscal 2018 was a year in which we continued to scale our global content platform, deepened our product pipelines, invested in new businesses that make our Company stronger, and extended our reach around the world. During the year, we added hundreds of valuable properties to our nearly 17,000–title library, diversified our film and television production and distribution businesses, and positioned our Starz premium pay network as a premier global brand. In May 2018, we acquired a majority stake in the 3 Arts Entertainment management and production company, not only deepening our talent relationships but adding to a portfolio of emerging businesses that include location–based entertainment, interactive ventures and games, eSports, over-the-top (OTT) channels and Atom Tickets. Most of these newer platforms have already reached critical mass and are poised to make meaningful contributions to our bottom line. Financially, we grew adjusted OIBDA by 11% (on a pro forma combined basis) to a record $604 million in the year and continued to generate robust free cash flow of $330 million, with all of our business segments contributing to our strong financial performance.1 We also strengthened our balance sheet by restructuring our debt to lock in lower interest rates and increase capacity, and we continued to deleverage ahead of schedule, reducing our net debt by $650 million in the year. In addition, we resumed our quarterly cash dividend of $0.09 per common share. We enter fiscal 2019 positioned to accelerate the growth of our consumer–facing platforms while continuing to expand the content pipelines of our traditional businesses, backed by a vast library and a strong balance sheet. As we take a look at the year’s highlights, you’ll see the extent to which we’ve executed our “Lionsgate 360” strategy of leveraging our properties and talent relationships across all of our businesses. Starz Goes Global Fiscal 2018 was a growth year for Starz. With its integration into the Lionsgate family nearly complete, we focused on three primary goals — expanding Starz’s global reach, establishing its OTT offering as a force in the direct-to-consumer space, and driving its continued growth by investing in a robust, year-round slate of premium programming. During the year, we made significant progress on all fronts. Internationally, we accelerated Starz’s rollout by partnering with Amazon Prime Video to launch platforms in the U.K. and Germany and teaming with Bell Media to bring the Starz brand to Canada, while our Starzplay Arabia venture has become a leading subscription video-on-demand (SVOD) platform in the Middle East and North Africa. By retaining worldwide rights to nearly all of our content, we’re well positioned to continue this rapid international growth as a partner of choice for Amazon and other leading digital platforms as they expand their services around the world. We also more than doubled the number of Starz OTT subscribers in the fiscal year, translating these gains into solid overall revenue growth for Starz as our strong OTT trajectory more than offset headwinds in our traditional MVPD business. Finally, we continued to expand the slate driving this growth with the addition of exciting new series like the critically- acclaimed Latinx drama Vida and the drama Sweetbitter, which have already been renewed for their second seasons. The returning juggernaut Power continues to grow into a major Starz brand, with the debut of its fifth season in July 2018 driving OTT subscriber adds and significantly expanding viewership from last season. Combined with the upcoming return of popular series like Outlander and American Gods and the debut of new series such as the coming-of-age comedy Now Apocalypse and the Lionsgate-produced supernatural thriller The Rook, we expect Starz to continue building on its strength among African-American, Latinx and female audiences. And we plan to invest in this success by continuing to expand the number of hours of Starz original programming that we air through fiscal 2020. 1 See Appendix for reconciliation of certain non-GAAP financial measures used herein. 1 With a growing footprint of distribution partners, a robust and expanding slate of programming, improved consumer analytics and OTT churn already at its lowest level ever, we anticipate continued solid Starz subscriber growth in the year ahead. Another Profitable Film Slate Our Motion Picture Group continued to deliver a slate of commercially exciting, critically acclaimed films to target audiences in the fiscal year, with more than 90% of our fiscal 2018 theatrical releases expected to achieve ultimate profitability. We also continued to demonstrate our ability to convert targeted properties into global hits. The breakout success Wonder, with a budget of less than $20 million, earned rave reviews and took audiences by storm on its way to over $300 million at the global box office. Fiscal 2018 was also a year in which we continued to grow our existing franchises while creating new ones. We began principal photography on John Wick 3 for a May 2019 theatrical release, readied the John Wick television spin–off, The Continental, for production and began developing our next John Wick mobile game. Our Kingkiller Chronicle franchise, based on author Pat Rothfuss’ best-selling fantasy book trilogy, is moving into production with an elite creative team that includes Sam Raimi (the Spider-Man franchise) directing the feature film, John Rogers (Leverage, The Player) serving as showrunner for the premium television series, and creative mastermind Lin–Manuel Miranda (Hamilton) shepherding the entire project. We’ve also lined up world-class partners for Kingkiller mobile, board and console video games. The success of our film business is driven in part by our ability to serve an increasingly diverse movie-going audience and to focus on genres that play to our strengths. During the year we continued to build our leadership in serving Latinx audiences with the release of Pantelion’s highest-grossing film ever, the hit comedy Overboard. We delivered a steady supply of quality films to African-American audiences with Tyler Perry’s Boo 2!, the comedy Uncle Drew and the critically-acclaimed awards contender Blindspotting. And following in the footsteps of The Shack and double Oscar® winner Hacksaw Ridge, we teamed with sister company Roadside Attractions to release our biggest faith-based hit ever, I Can Only Imagine. Looking ahead, we’re continuing to assemble a strong and diverse slate deep in areas of proved strength, including: the star- driven comedy Flarsky, teaming Seth Rogen and Charlize Theron; the stylish thriller A Simple Favor, starring Blake Lively and Anna Kendrick; films based on iconic properties like Robin Hood and Hellboy; and potential needle movers such as The Kingkiller Chronicle, John Wick 3, and the sequel to last year’s breakout comedy hit The Hitman’s Bodyguard. Supplying Content to Top Streaming Platforms Our Television Group had an active and productive year supplying premium programming to the top streaming platforms who have become major buyers for our content. Lionsgate produces six series for Netflix, including Orange is the New Black, the critically–acclaimed Dear White People, recently renewed for its third season, and the Joel McHale Show, which landed an order for additional episodes shortly after its global launch in January, We’re also producing two of YouTube’s first original series, the dance series Step Up: High Water, adapted from Lionsgate’s hit film franchise, and Kevin Hart: What the Fit, one of several series emerging from our multifaceted relationship with the global comedy superstar. Both shows have been picked up for their second seasons. In addition, we’re producing our first original series for Facebook Watch. Traditional MVPD’s have begun to ramp up their own original series production, and Charter Communications recently ordered two new seasons of our critically-praised anthology series Manhunt, which we will coproduce with them for their platform. One of our Television Group’s highest priorities is to supply our Starz platform with premium programming. The supernatural thriller The Rook, our first series for Starz since the acquisition, is currently shooting in London in collaboration with our partner Liberty Global. It will air on our Starz platform next year. The John Wick TV spinoff The Continental enters production later this year as part of a growing slate of Lionsgate television properties for Starz. 2 During the year we also continued to deepen our talent relationships. On the heels of our acquisition of a majority stake in 3 Arts in May, we’re already collaborating with our new partners on several exciting projects that we will announce shortly. Extending Our Brands Around the World Our consumer-facing businesses have become an important part of our content portfolio. During the year we opened our first Lionsgate branded theme park zone at Motiongate in Dubai and a permanent Saw-themed escape room attraction in Las Vegas as we begin to roll out branded theme parks, indoor entertainment centers, attractions and shows across the U.S., Europe, the Middle East, and Asia. By the end of fiscal 2020, we expect over 25 million consumers to have visited more than a dozen Lionsgate live and location based entertainment experiences featuring Lionsgate properties like The Hunger Games, Twilight, Now You See Me, Saw, La La Land and Mad Men. We also continued to ramp up our interactive ventures and games slate. From John Wick and Saw to The Kingkiller Chronicle and Ash vs. Evil Dead, most major Lionsgate properties now have a video game component to engage new fans and drive fresh monetization opportunities. Power Rangers: Legacy Wars and the John Wick Chronicles virtual reality game demonstrated our ability to extend our content platform to millions of gamers, and by the end of 2020 we expect to have released more than 40 titles.