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Home , Joe Drake (producer), Jon Feltheimer, Lionsgate, Lionsgate Television, MGM Holdings

Entertainment

Fourth Quarter 2020 Earnings

Thursday, May 21, 2020, 5:00 PM Eastern

CORPORATE PARTICIPANTS

James Marsh - Investor Relations

Jon Feltheimer - Chief Executive Officer

James Barge - Chief Financial Officer

Michael Burns - Vice Chairman

Brian Goldsmith - Chief Operating Officer

Kevin Beggs - Chairman, TV Group

Joe Drake - Chairman, Motion Picture Group

Jeffrey Hirsch - President and Chief Executive Officer,

Scott MacDonald - Chief Financial Officer, Starz

Superna Kalle - Executive Vice President, International

1

PRESENTATION

Operator Ladies and gentlemen, thank you for standing by, and welcome to Lionsgate Entertainment fourth quarter 2020 earnings call. At this time, all participants are in listen only mode. Later, we’ll have an opportunity for your questions. Instructions will be given at that time. As a reminder, today’s conference is being recorded.

I’d like to turn the conference over to James Marsh, head of investor relations. Please go ahead.

James Marsh Good afternoon. Thank you for joining us for the Lionsgate fiscal ‘20 fourth quarter conference call. We’ll begin with opening remarks from our CEO, , 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 the chairman of the motion picture group, . And from Starz, we have president and CEO, Jeff Hirsch, CFO, Scott MacDonald, and EVP of international, Superna Kalle.

The matters discussed on this call today 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 statement as a result of various factors. These include the risk factors set forth in Lionsgate’s most recent annual report on form 10K. The company undertakes no obligation to publicly release the results to 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

Good afternoon. Thank you, James, and thank you, all for joining us in these extraordinary times. I hope you’re staying safe and healthy. A few months ago, I could never have imagined some of the things we’d be talking about on this call--our employees working from home, and television production suspended, movie theaters closed, and all of the other emergency adjustments we’ve made due to the pandemic.

But, as we report a strong quarter to end a fiscal year in line with our forecast, I’m also struck by how much we’re continuing to accomplish, moving the company forward on all fronts despite all of the challenges around us and generating a lot of momentum heading into our new fiscal year. Let me share a few recent highlights, and then, I’ll drill down on each of our businesses and talk about how we’re transforming them to continue to operate successfully in this new normal.

Starz streaming business is thriving in the home environment as we reach 6.8 million paid domestic over the top subscribers in the quarter, well in excess of our projection, and it’s continued its strong growth since then. Our Starz Play international platform is showing strong gains as well, with viewership up 20 percent since the pandemic began, driving international subscribers, including the Starz Play Arabia platform and , past the five million mark at fiscal yearend.

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Pantaya more than doubled its subscriber base, from 315,000 to nearly 700,000 paid subs in the fiscal year, as it continues to deliver on its promise as the premium over the top destination for Spanish language movies and original programming.

We extended some of our biggest franchises, announcing the big screen adaptation of ’s Hunger Games prequel, The Ballad of Songbird and Snakes, to be directed by . The new book is already driving triple digit sales growth of the Hunger Games titles in our catalog.

American Hustle’s Eric Warren Singer is writing Now You See Me 3, and we’re preparing to begin production on 4. Spiral, our reimagining of , teaming Chris Rock and Samuel L. Jackson, opens next May.

And in television, we remain a supplier of choice for new buyers with the romantic comedy Lovelife, starring Anna Kendrick, debuting in HBO Max next week. They’ve already announced that the series will be a centerpiece of their first Emmy campaign.

As the global pandemic accelerates secular changes already in progress, our business is already well positioned to weather the current disruption and emerge stronger than ever in a new normal. To start, we have a great subscription platform, Starz, that is profitable, growing, and a major contributor to earnings. In this current environment, our content that has already been produced is more valuable than ever, with library revenue hitting a record $600 million in the fiscal year and our key brands generating higher licensees as we continue to extend them.

We have full film and television pipelines poised to resume production and a slate of movies ready to distribute when theaters reopen. And we have plenty of financial flexibility and liquidity, with over $300 million available cash at the end of the quarter and an undrawn revolver of $1.5 billion.

The goal of combining Lionsgate and Starz was to build a premium global subscription platform, backed by the full resources of our companies. Today, that effort is achieving results. Our global streaming business reached more than 10 million worldwide over the top subs at the end of the quarter and will continue to grow to between 13 million and 15 million paid subs by the end of the fiscal year.

In a world where the value of making great content is matched only by the importance of determining how it’s monetized, we’re increasingly able to control our destiny through the continued rapid growth of the direct to consumer Starz app, which is now our third largest distribution platform in the .

We continue to apply a consumer facing data driven strategy to the benefit of our over the top and MVPD partners alike. Our success in transitioning our shared customers to a la carte efficiently and effectively in the quarter allows us to continue to build on our longstanding partnership.

On the programming front, we’ve established ourselves domestically as the premium destination for women and diverse audiences, with a mix of proven hits like Outlander, which completed its fifth season, outperforming season four and earning rave reviews, returning favorites, such as Steven Soderbergh’s The Girlfriend Experience and a second installment of The Spanish Princess, and exciting new series like the recently debuted crime drama Hightown from producer Jerry Bruckheimer that is resonating with our subscribers.

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These will be followed by the sexy and spirited comedy series Run the World from ’s Yvette Lee Bowser and Leigh Davenport, the family drama Heels, set in world of small town wrestling, and then, next to highly anticipated series in our expanding power universe franchise, Ghost and Raising Kanan.

As we end the first full year of our international expansion, I’m pleased to report that we’ve launched in 50 countries ahead of schedule and exceeding our subscriber target. That growth is driven by a slate of Starz originals, first run in library features, and best in class acquisitions that make up an attractively priced best of global SVOD content offering for consumers, positions us as a complementary premium tier to other OTT services and allows us to align ourselves with top distributors from to Apple, to Orange, Airtel to Total Play, augmented by the Starz Play app already live in eight countries as we continue our march towards our target of 15 million to 25 million international subscribers by 2025.

Recent additions like Tony McNamara’s The Great, starring Elle Fanning and Nicholas Hoult, Normal People, based on the bestselling book, and the award-winning anthology series The Act, combined with an anticipated ramp up of our local productions, will continue to diversify our slate and differentiate our platform. We’ve charted this course, funded it out of our own cash flow, and our growth is on schedule and outsized value creation is within our sight.

Turning to our motion picture group, we pivoted quickly during the quarter, showing the kind of strength and agility that has transformed us into a top five domestic box office market share leader. When theaters shut down two days into the release of the ’ I Still Believe, we immediately repositioned the film to launch in an exclusive premium video with structured price points, including a special Easter promotion followed by an early debuting package media, electronic sell through, and video on demand to mitigate its lost theatrical revenue.

When theaters reopen, we will be ready. Our slate is stocked with big brands and properties like Spiral, The Hitman’s Bodyguard 2, starring Ryan Reynolds, Samuel L. Jackson, and Salma Hayak, and John Wick 4. It is deep with comedies, like The Unbearable Weight of Massive Talent, starring Nicolas Cage and Barb and Star Go To Vista Del Mar, starring Kristen Wiig. It includes the horror thriller Antebellum, starring Janelle Monae, the Deon Taylor directed Hillary Swank thriller Fatale, and the Neil Berger directed sci-fi feature Voyagers. And it has uplifting stories for our times, like the Erwin Brothers’ inspiring American Underdog: The Story.

And though our feature film production operations have been paused, the process of refilling our pipeline with exciting blue chip properties has not. During the quarter, we launched --or landed-- excuse me--the movie rights to Judy Blume’s iconic bestseller Are You There God? It’s Me, Margaret, the first time one of her books has been brought to the screen, and a two time Academy Award winner Cate Blanchett to the cast of Borderlands, and won an auction to 16 States, the zombie thriller to be directed by Evil Dead’s Fede Alvarez.

Obviously, our theatrical production and release schedules are caveated by the uncertainty of the movie business right now--questions about when production will resume, what kind of protocols will we need to put in place, when theaters will reopen, and how moviegoer habits will change. But, we address all of these issues with an agile, data driven, and forward looking film business that continues to extend and expand our biggest franchises, collaborates with our talented three bold original new properties, and brings to all of our distributors the uniquely diverse and flexible slate.

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Turning to television, we shut down nearly 20 series and pilots virtually overnight when the pandemic hit. But, we repositioned ourselves quickly, keeping casts and crews safe, shifting our focus from production to development and setting up over a dozen virtual writers rooms to keep talent engaged. We’ve already seen a significant uptick in backup script orders to pilots and current series, paving the way for our productions to shift into high gear when it’s time to restart.

The resonance of our premium content continues to open doors with new buyers. On the heels of our partnership with HBO Max on Lovelight, it will launch our docusoap, The House of Po on July 16th, order two more production pilots, and picked up the first television series from our Point Grey partnership, the Christmas themed adult animated comedy, Santa, Inc., featuring the voices of and Sarah Silverman.

And our television group’s emphasis on creating great programming for Starz continues. A year ago, we had one series on the air at Starz and foreign development. Today, we have over 20 Lionsgate television series either in production, post production, or development for our platform, exciting properties like Heels, Dangerous Liaisons, Run the World, and the next three power inspired series are just a few of the shows ready to resume or begin production when production can resume safely.

Against a backdrop of economic disruption, we are the beneficiaries of diversification across our businesses and within each of our groups. In the TV group, Pilgrim will be one of the first companies going to (unintelligible) the competition reality series most likely in June. Debmar- Mercury transitioned its long running hit daytime talk show, Wendy Williams, to a fully remote production, filming from her living room. And Three Arts executed a quarantine episode of Mythic Quest: Raven’s Banquet, filmed entirely on cast members iPhones that debuts tomorrow.

In closing, I want to say how proud I am of our employees. They’re rising to the challenge of these unprecedented times with optimism, a can-do attitude, and a collaborative team spirit that is our trademark. We often talk about our culture being our secret sauce, and, during these past few months, it has driven our company forward.

We responded to the global pandemic with a simple four point plan. First, protecting our flank by making sure that everyone was safe and could work effectively from home, second, returning to the old normal by making plans to allow people to come back to the office and get our and television shows up and running again under new protocols, third, defining the new normal by reimagining our business and how they’ll operating going forward, and, finally, identifying the opportunities that are emerging all around us.

Everything in our plan is centered around our employees, our talent, and our production and distribution partner as we continue to navigate uncharted waters with a view towards emerging from the current crisis even stronger than we were before. And in this process, we’re guided by the same north star principles that have always guided us, being financial and strateg ically diversified, creating an owning iconic intellectual property with tremendous evergreen values, positioning ourselves where the puck is going not where it has already been, and reaping the benefits of our collaborative and entrepreneurial culture.

Thank you, all, very much. And now, I’ll turn things over to Jimmy.

James Barge Thanks, Jon, and good afternoon, everyone. I’ll briefly discuss our fiscal fourth quarter financial results and update you on our fiscal ‘21 outlook.

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Fiscal fourth quarter adjusted EBITDA was $126 million, while revenue was up three percent to $944 million. Reported fully diluted earnings per share was a loss of $0.20. And fully diluted adjusted earnings per share came in at $0.21. Adjusted free cash flow for the quarter was $175 million. For the full year, adjusted free cash flow was $349 million.

Now, let me briefly discuss the fiscal fourth quarter performance of the underlying segments compared to the prior year quarter. You can follow along in our trending schedules that have been posted to our website and show greater detail around our global media network subscribers. Media networks’ quarterly revenue of $358 million was relatively flat from last year and segment profit came in at $26 million.

Globally, on a pro forma basis and including Starz Player radio, the company added 4.4 million subscribers year over year, up 22 percent, reaching 24.6 million global subscribers at the end of the quarter. Domestically, total subs were 18.9 million, which was up 2.1 million from the prior year pro forma, which was adjusted for changes in distribution packaging. You can see more detail in the new sub disclosures included in our trending schedules.

Now, looking at sequential performance for fiscal fourth quarter, total global subs were up 2.3 million pro forma, driven by strong domestic OTT subscriber gains. Importantly, we now have over 10 million OTT subs, including Starz, Starz Play international, Starz Player radio, and Pantaya. I should also note that our sub counts all represent paying subscribers.

Now, turning to the motion picture group, revenue increased ten percent in the quarter to $393 million and segment profit came in at $101 million. Motion picture group turned in a very strong year, improving segment profits by more than 60 percent to $209 million. In the quarter, the performance in our film group was largely due to strong ancillary performance and lower G&A spend that more than offset box office underperformance related to theater closures.

And finally, TV production revenue came in at $258 million while segment profit was $22 million. Segment profit increased ten percent year over year as the strength of library titles and G&A savings more than offset the prior year quarter tough comp for Orange is the New Black.

Now, I’d like to provide an update on our fiscal ‘21 outlook as well as our balance sheet. As everyone on this call is aware, the impact of the COVID-19 pandemic and the governmental response to the pandemic has been unprecedented. Accordingly, we have a limited framework with which to recess the ultimate impact on our business model and forecast. We believe we have a diversified and a resilient business model that is well positioned to benefit from the shift to in home consumption.

But, there could be disruptions to our business as we navigate workplace safety, government regulations, and evolving consumer trends. Accordingly, due to the heightened uncertainty and limited visibility related to the COVID-19 situation, we don’t believe it is prudent to provide specific forecasts for adjusted EBITDA at this time. Rather, we will be providing some inputs to help you build your models. So, let me provide some color for fiscal ‘21 by segment as we did on our last call.

First, in media networks, as you know, it’s our largest contributing segment profits. Recall this is a subscription based business with heavy in home consumption. So, we have pretty good visibility, and we like what we see. With significant increases in viewership and over the top subscribers on both our domestic and international services.

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That said, we have potential disruptions to content deliveries, are cycling through a new distribution deal, and are fully investing in our international opportunity. So, our p revious flattish segment profit view is largely on track. As Jon mentioned, we expect media network’s over the top global subscribers of between 13 million to 15 million for fiscal ‘21 with the midpoint representing 30 percent plus growth.

Now, looking at motion picture and TV, recall our pre-COVID commentary on motion picture group’s segment profit for fiscal ‘21 was down due to difficult comparisons and timing of the slate and that the TV would also see significant profit growth in the year, in part, driven by the licensing of preexisting IP. That year over year comparison is largely intact. But, production delays and theatrical disruptions will result in some uncertainty and a shift in business to the right as some revenue and profit move from fiscal ‘21 into fiscal ‘22.

Now, on the balance sheet, our leverage ended the year at 5.2 times adjusted EBITDA or 3.9 times, excluding our investment in Starz Play International. During the year, debt decreased over $300 million, ending at $2.4 billion. We were opportunistic in the quarter and purchased some term loan B bonds and a modest amount of stock during the market dislocation, and we will continue to allocate capital in a thoughtful manner.

We ended the year with ample liquidity with well over $300 million of cash on hand and a $1.5 billion undrawn revolver. In addition, we have no maturities until the very end of fiscal ‘23. We remain committed to paying down debt with the bulk of our excess free cash flow.

Lastly, we remain comfortable with our maintenance covenants based on our revised forecast and having further stress tested them for longer production and theatrical delays as well as the potential negative impact of the recession.

Now, I’d like to turn the call over the James for Q&A.

QUESTION & ANSWER SESSION

James Marsh Thanks. Amy (sp), we’re ready to go with the Q&A at this stage.

Operator Ladies and gentlemen, to get into the queue, you may push one zero now. One zero for any questions. And one moment for our first question. Dave Miller (sp), your line is open.

Dave Miller Yeah, sorry about that. Some technical issues over here. Hey guys, congratulations on the stellar results. Jimmy, a couple questions for you, and then, Joe Drake, if you’re on, I have a couple questions for you.

So, Jimmy, on the free cash flow number, just outstanding even for a fourth quarter. It looked like there were some negative working capital effects going on in the quarter, particularly with receivables. Do you think that that contributed, or was it more amortization? Just love to get your comment there.

And then, Jimmy, could you also comment--as it applies to fiscal ‘21, what should we be modeling for corporate costs as it applied to the legal spat you guys have with MGM Holdings. I couldn’t

Lionsgate Thursday, May 21, 2020, 5:00 PM Eastern 7 tell if you had your legal counsel on or not. If you’re willing to chime in on that, I would appreciate it. And then, I have a follow up for Joe.

James Barge Well, first of all, with regard to any legal costs, no going to really comment on that. Likely be a onetime item, and, obviously, not going to speak to that.

But, with regards to the free cash flow in the quarter, thanks. It was a strong quarter. But, I’ll also point to a strong year. We finished right around $350 million of free cash flow for fiscal ‘20. No particular changes in the monetization program. They were relatively small, and we always have swings in working capital. But, we absolutely feel that our reduced working capital needs are sustainable and will continue to benefit us into the future.

Dave Miller Okay, great. And then, Joe Drake, if you’re on--once these theaters reopen, whether it’s late June, early July, whatever the date is, what do you think this thing is going to look like? And I assume you’ve been in touch with the theaters fairly regularly over the last two or three months. I mean, who’s going to show up? Is it going to be Millennials? Is it going to be couples without children? Is it going to be, call it, soccer moms from the suburbs that will show up with child ren? I’m particularly worried about the animated films and/or children's films. And will families take children in a COVID-19 environment? And so, that’s kind of the first part of the question.

The second part of the question is--we’ve heard from some of the theaters that certain old films will be licensed for sort of this, call it, mid to late June, early July time period, films from the 80s, 90s, what have you. Maybe they charge five bucks just to get people in the door, just to get revenue in the door. Given your extensive library, are you involved in that at all with the theaters? Thanks so much.

Joe Drake You . Thank you, David. That’s a lot of questions. But, I will attempt to cover it. So, on the first part of it, we--.

Dave Miller --Sorry, sorry--.

Joe Drake --No, no. It’s good. I’m glad you asked it. On the first part of it, , we’re in touch with our exhibitor partners literally daily and weekly, and so, working very closely with them. We believe that people are anxious to get out of their house and do things. We’re bullish on people coming back to theaters. But, we’re not naive about the environment we’re entering and that we’re in a fluid situation and there’s a lot of things that have to happen for audiences to feel safe a nd comfortable in theaters.

The exhibitors--everybody’s doing a great job of preparing for that and making sure safety protocols--and that people feel safe going back into that environment. I was on with one of the exhibitors this morning, and they’re going to extraordinary lengths to make sure that it’s a great and safe experience.

As it relates to audiences, I can tell you how we’re handling it, which is we have dated some films as early as August, as you’ve probably seen, and September and October. We’re very specific about the films we put in there. From our perspective, you have to operate now in a very flexible

Lionsgate Thursday, May 21, 2020, 5:00 PM Eastern 8 and agile way. And we’ve put a lot of plans in place to do that in the way we’re approaching our business.

And so, if you look at the first few films, they’re specifically chosen and dated. We think they’re great dates for the movies, in general. But, they’re dated also because they’re targeted at audiences that don’t require--and they’re targeted movies that aren’t going to require as long as the lead of a media spend. And so, they’re actually set so that we can get a lot of data before we actually trigger expenditure and have the ability to move quickly if things aren’t opening quite as aggressively as we hope they will and have places to put them, if we have to shift.

So, as I say, I think that we’re going to--I think the audience is coming back. And we’ve certainly done our share to try to keep that theater experience at top of mind. I don’t know whether you’re aware of Lionsgate Live, which is a program we ran in conjunction with our exhibitor partners and in conjunction with YouTube and Fandango and a whole bunch of partners to keep alive the idea of that theatrical experience. And it was a huge success, and it helped raise some money for the furloughed workers. So, a lot of good work is going on there.

As it relates to--I hope that answers the first part of your question. I’m happy to answer more if there’s more there.

On the second part, yes, they are--theaters are going to be playing legacy movies. We have a whole program of those. We’re very much a part of that, and we had put that together with them a couple of months ago, actually, to start to kind of plan that line up. And that’s both to get people comfortable back going into theaters as well as to make sure that the protocols are in place. And there’s obviously a lot of training of theater workers and a lot to do to get this right. And that’ll kind of provide--it’s a better question for an exhibitor. But, I know the idea is to provide a soft launch to work out the kinks and really create a great experience.

Dave Miller Okay, wonderful. Thank you very much.

Operator Thank you. And, as a reminder, if you’d like to ask a question, you may do so by pressing one zero. Our next question will come from Ben Zwineberg (sp). Please go ahead.

Ben Zwineberg Thanks. Good afternoon, everybody. I have a couple questions. But, I just wanted to come back, Joe, on those comments you were just--conversation with Dave. I thought it was really interesting. How are you--how do you decide whether it’s ready--it’s time to release the films that you’ve dated? I mean, you mentioned you’ve got--you’ve put movies in place that don’t require a long lead time for media to give yourself flexibility. Makes a ton of sense. But, what are you looking for to say two weeks out it’s a go?

Joe Drake So, we’re obviously digging as deep into data as we can about consumer habits and what sort of proxies we can use for appetites, coming back to the theater. But, additionally, you’ll notice that currently on the schedule we’re about six weeks out from the first big live release movie. And that will give us an opportunity to see how audiences are reacting leading up to that and on that opening weekend and sort of triangulate all of those data points and anything else we can get our hands on, as well as--we’ve obviously monitoring--we’ll be monitoring as those soft launches happen, what kind of capacities and how audiences are showing up to those theaters.

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That’s a part of it. Obviously, we’re also running--we’re always running our own tracking studies and the link on our material itself and how it’s working and the level of interest. And we’ll be doing some extra polling to understand audiences’ willingness--as our movies are starting to track, we’ll start to monitor, in unique ways, audiences’ willingness to come back to the theater.

Ben Zwineberg Got it. And then, for Jon, if you step back from all of the sort of volatility and anxiety of the last few months and look at changes to the business, what do you think the long term implications are for Lionsgate and how it operates its strategy and how the business runs as a result of this? What have you guys learned that you think will last beyond what we’re going through right now, as you sort of think about the business?

Jon Feltheimer Just from the way our employees work, I think we certainly have learned that we can operate in a more modern fashion using technology. I can tell you I’ve never been busier in my life. I’m too busy. I have about ten conference WebEx's. I have a one--start every single day. That's a crisis group that we have together, and then, we communicate with the employees all during the day.

So, just from the overall way we operate, looking at how much money we spend on travel, looking at the conferences we go to that we have to be there--from an expense perspective, we’re pulling money out of our business constantly. We’re up to over $1.5 million a month just run rate on things that we normally would have considered normal expenses.

In terms of sort of all of our operations, our businesses, number one, again, in this environment going forward, super happy to be diversified, diversified, again, financially--that’s important from year to year. Sometimes one group outperforms the others, might not. But, at the end of the day, strategically, the way that our three core businesses operate together, the priority that Starz has to Lionsgate television, Lionsgate television has for Starz, the ability to build our business on a global basis (unintelligible) to be able to provide our first run movies to Starz Play International in the U.K. and India and some other territories we’re looking at, including, obviously, the U.S.

I think that diversification, both financially and strategically will put us in a very good place. Clearly, having Starz turns out to have been, I think, a really smart investment that we made a couple of years ago. And in this at home environment, I think that we’re going to continue to build that business. It’s doing exactly what we hoped it would do. And great partnerships--we create them every single day with partners that understand the value of it. And so, that’s working out really well.

In terms of television, it’s going to be interesting. The buyers are all now becoming sor t of--they’re all looking a little different. If you look at NBC--right now, I think you have to look at NBC and Peacock together. If you look at , you’re looking at Hulu and FX and ABC together. So, TV- -we’re going to have to have some new kinds of deals, new calculus that makes sense for the buyers and for us, as we look at the back end value of those businesses, whether we need to take more money up front and give us some of the back end.

So, I think pretty much every business is going to be a little bit different. I think certainly, the experiment that we did--Joe’s team--Joe and his team did a fantastic job pivoting on I Still Believe. I mean, we’re out in the marketplace for three or four days and all the theaters shut down. And

Lionsgate Thursday, May 21, 2020, 5:00 PM Eastern 10 we’re going to pretty much get back to even on that, making up a huge hole in our ‘20 financials and a roll over in ‘21 that we expected.

So, what we found, obviously, is there’s an at home audience for movies as well. We still believe entirely in the partnership with exhibitions. But, we do see that these models could potentially change, and hopefully we can find a smart way to do that with all of the various constituencies.

And the last thing I would say is the one thing for sure that this whole thing proves is t hat the library has incredible value, growing value. It’s something we’ve talked about a lot. We call it here a creep, which is every time we do an ultimate, it goes up in value the next time we do the ultimate. And you’ve seen spectacular increases in the value of evergreen library content. That, I believe, having so many distribution outlets, having so many, basically, audiences watching more and more content than ever before with a better technology that allows them to view it in a better way.

So, I think, overall, we’re pretty well positioned for this new world. But, look, we’re watching it every day, and we’re trying to adapt with it.

Ben Zwineberg Thanks for your thoughts.

Operator Thank you. And your next question will come from Alexa Quadraini (sp). Please go ahead.

Alexa Quadraini Hi. Thank you. Just a couple questions. The first one on--just if you could provide a bit more color on the reopening of production. I know you talked about it a little bit in your opening comments. But, in terms of how you prioritize what gets (unintelligible) go green again in terms of--where do you start? And then, do you have flexibility in locations, in the sense, if some states open up before the others. Can you kind of pull those levers there to kind of get everything in process all over again, get it going again?

And my second question is really just on the Comcast relationships with Starz. Any comments you can give in terms of how the (unintelligible) is going from the bundle from a la carte, how that transition is sort of going? Thank you.

Jon Feltheimer Great. And production, I’m going to have Kevin and Joe start, and Jeff can answer your second question.

Kevin Beggs Hi, Alexa. Kevin speaking. Just speaking to our (unintelligible) series kind of plants their flags somewhere and then stays there for years and years. Happily, our portfolio is pretty regionally spread around with New York, Atlanta, North Carolina, L.A., , right now, and several in the U.K. So, we’re looking closely at the rural states that seem like they’re going to open first and have developed plans. Several of those are in common with Starz and Jeff’s team. And we’re kind of holding hands and working with the local officials and local film commissions and various skills and unions to have a countdown to production, which we see happening in terms of camera work in mid to late August at earliest and prepping in late June and July. Pretty excited about the places that we think are opening up and are feeling good about what we can do there.

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Joe Drake And on the motion picture side, the team got actually ahead of it before the shutdown and in anticipation of this, I think, did a great job of both hiatusing but protecting those productions so then they can wrap quickly. Across Lionsgate and Starz together, there’s been an incredible collaboration to figure out the protocol so that we can all move quickly back into production. And that’s everything from safety protocols that are required on set and housing and feeding --meals and every--travel down to looking for alternative locations so that, as things open up, we’re in a position to move productions to the places that we can operate safely but quickly. And so, we are really well poised as soon as locations open up to get back to it.

Jeffrey Hirsch And in terms of the Comcast transition, to level set everybody, we transitioned to an a la carte model with Comcast on February 11th at the end of power, but heading into the premier of Outlander. We worked very closely with Comcast almost every day to put plans in place to grow the business. And I’m happy to report that, in the first six weeks of the transition, we grew to well over a million subs, both on the traditional platform and on their flex product, which has been a really--we’ve seen great growth on flex, and we feel really great about that.

That was really pre--before the in-home stay hit. And then, since then, we’ve seen great engagement on our services. So, linear viewership is up 33 percent. App viewership is up 44 percent. And so, we continue to see that transition to that revenue share a la carte model growth.

Alexa Quadraini Thank you very much.

Operator Our next question will come from Steve Callhill (sp).

Steven Callhill Thanks. Maybe first, Jimmy--so, you said the covenant--you don’t really foresee any issues. Could you just remind us where you are on that and if you expect to be free cash flow positive in 2021? Because I expect you do. And did you benefit at all in the fourth quarter from just not having theatrical releases in the P&A related? And then, I have a quick follow up on production costs.

James Barge Sure. First of all, I would expect to be positive on free cash flow. But, we are investing substantially in our ramp up of content as well as the opportunities that Starz Play International. in terms of covenants, as you know, they differ significantly in a favorable way from headline, leverage, if you will. In particular, they exclude all of the Starz Play International investment losses there.

And likewise, in light of COVID-19, as I mentioned in my remarks, we have stress tested these covenants over and over. And we don’t see significant risk there. We still see plenty of room. And to give you an idea where we came in is--our first lien ratio came in at 2.2 times under the covenant calculation, which will be well below the four and a half time threshold. The interest coverage came in at 3.95 times, which is well exceeding the two and a half time threshold. So, we’re in good shape there.

Steven Callhill

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Great. And then, just on the production side, I think in the release it looked like there was about $50 million in OpEx just related to COVID-19. I’ve seen a press article that productions could have like a 20 percent cost increase in order to keep everybody safe on set. So, I was wondering maybe if Kevin or Joe--if you could comment on what sort of cost increase or margin pressure might be impacted by when you are ready to reshoot and if that really starts to change the way that you think about the business in any meaningful way. Thank you.

James Barge Yeah, we factored into our plan what we think our operations costs are. This charge, the $50 million that you reference is--these are direct costs that’s primarily related to the delayed productions, the theatrical release schedules that Joe mentioned as well as development projects. A large majority of this, as you would expect, is related to theatrical products where development cycles are longer and projects tend to be more material.

As you can imagine, we’re working on mitigating this cost, everything from production insurance where we have coverage, negotiating contracts, and overall cost containment. So, in terms of looking ahead, we expect any remaining costs will be substantially smaller, certainly less than half. That would be weighted to the first half of fiscal ‘21 and we’ll be further and meaningfully mitigated through insurance proceeds and cost savings.

Jon Feltheimer Maybe Joe and Kevin could speak to the other part of that question in terms of future production costs.

Joe Drake So, this is Joe, Steven. On the production costs, still a little bit to be figured out. But, it is not anywhere near 20 percent. We have gone very deeply into what is going to be required and a thesis around how you would run a safe production. And, frankly, it’s a little different from production to production, depending on the movie locations and the movies and how much talent and crowds and the like. So, it’s going to vary. But, it’s nowhere near that level as well as--it’s very early days. There are a lot of ideas around how we go about mitigating a lot of those costs. So, I think it’s going to have an impact, but I don't think it’s anywhere in that range.

Steven Callhill Thank you very much.

Operator Thank you. Our next question will come from Matthew Thornton (sp).

Matthew Thornton Hey, good afternoon, everyone. Thanks for taking the question. Maybe a couple, if I could. First, you talked a little bit about the value of library content earlier. I think you’ve got Madmen and Weeds both up for relicensing. Any update there? I would assume that networks are fairly hungry for content. Do those end up Starz? Do those end up elsewhere? Any thoughts there?

Secondly, trials--obviously, COVID really kicked off late March. So, a lot of the impact has been since March. I’m just curious if there’s any framework you can give us or sizing you can give us in terms of what the trial base looked like versus a normal quarter or kind of where we are right now versus the end of March. Any color there would be helpful.

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And then, thirdly, Jimmy had talked a little bit about insurance. I’m just curious when you think you’d have line of sight into what that might look like and then how material that could be hypothetically. Just any color there would be great. Thanks, guys.

Jon Feltheimer Alright. Kevin first and then Jeff.

Kevin Beggs On Madmen, we’ve been--Jim Hacker (sp) and his team have been in kind of a fourth month sales process, which has gone really well, exceeded our expectations and probably benefited from the COVID suspension and the lack of fresh originals coming. So, nothing to comment on officially yet, but coming together nicely. And we think we’re going to have very good news to report.

In all those processes, we work closely with Jeff and his team, evaluating, in a free market fashion, what may be good for Starz versus other buyers and getting the top dollar for our participants and our shareholders. So, we’ll--again, we’ll have more to say about that when we can announce where it’s wound up domestically and internationally.

Weeds is still another year out. But, as we’ve seen and Jon alluded to, the value of the library continues to go up and up and up. We’re encouraged by what we see with Madmen and looking forward to monetizing Weeds further on its fourth cycle.

Jeffrey Hirsch In terms of trials, we had guided the end of the year to be six million of those OTT subs domestically. We’re well past that number through the first two months of the quarter, and then, it accelerated as we got into March.

Unlike some of our peers in the industry, we’ve stayed away from long free trials. We never really liked 30 day free trials. The data showed that the conversion is lower. The lifetime value is lower. And so, we looked at the pandemic and said this is going to be a little more elongated than just 30 days. And we went out with $5 offers for three months or $25 up front for six months to try to give some economic breaks to people that are in challenging times. What we’ve seen historically from those two offers that we’ve used in our normal business is great conversion to full pay, and we expect that to be the same.

James Barge And Matthew, with regards to your questions, with regards to production insurance, it’s still early stages. But, we absolutely have coverage there. Would expect it to be really meaningful, and we’ll focus on that. We’re already focused on it.

Operator Thank you. Our next question will come from Alan Gould (sp). Please go ahead.

Alan Gould Thank you. I’ve got a few. First, Jimmy, with no production, is it fair--obviously, revenue is going to be low. But, I would assume any video or any library product will be coming in at a ve ry high profit margin. You typically lose--it typically costs money up front for your production. Is that fair to assume?

James Barge Yes.

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Alan Gould And the last three years, Jimmy, you’ve invested about $1.5 billion a half a year in film and TV. Any idea how much you’re going to spend this year, or is that all a function of when you start up again?

James Barge Well, I think we’re expecting, even with the delays, that we’ll be increasing our content spend probably $200 million plus, relative to this year going into the year. So, we’re clearly investing in content and our growth in the future.

Alan Gould And the last thing--do you typically have completion bonds on all of your production? I assume completion bonds are different from business disruption insurance. Do they cover pandemics?

James Barge We do have production bonds, and we plan on finishing all our productions and that not being a factor.

Alan Gould Okay, thank you.

Operator Thank you. Our next question will come Doug Crutas (sp). Please go ahead.

Doug Crutas Thanks. You had a lot of OTT ads obviously since shelter in place started. As you look at the data, particularly from your direct consumer app, is there anything about those cohorts that looks different to you than the cohorts that you had added before that point or their usage patterns and what they’re watching look pretty similar?

Jon Feltheimer Great question. What we’ve really seen is actually more in new customers coming into franchises. So, while we had a record season on Outlander for season five, we continue to have record viewership on the end of Power in the first quarter. We actually saw a large spike in people finding those franchises for the first time. So, we saw binding of season one and two of Outlander spike almost 38 percent, the same on Power as well. So, the value of people being stuck at home is they’re finding our big shows, and they’re continuing to reach into the content in a big way.

And so, we expect that to continue. We expect those customers to stay with us as they continue to get up to speed in seasons five and six in both of those shows. And so, we’ve seen a lot more customers coming to the franchise than we had before.

Doug Crutas Great. Thank you.

Operator Thank you. Our next question will come from Robert Ross (sp). Please go ahead.

Robert Ross Good afternoon. Thanks for taking my questions. How are you? It’s been a while.

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Jon Feltheimer Welcome back.

Robert Ross Thanks. Anyhow, first question is--given the change, it seems as though eventually theatrical releases may not be theatrical. They may be direct to home, kind of like we see Amazon already doing with a few things with their premier cinema where you can rent a movie for 20 bucks, although it’s limited. I was curious. Is there any way that you guys could do that and just take (unintelligible) low budget, low risk and save the P&A and release it directly to the consumer at home where they can enjoy it given we don’t know how long it will be before theaters get back to what they were and such. And no one’s done it yet that way. But, I think it’d be kind of cool, and eventually someone will. Is that something you’ve thought about, kind of a direct to home literally where people rent it from Lionsgate and pay you for movies?

Jon Feltheimer Sure. Look, they’re all kinds of models that we look at. One of the things that this company prides itself on is being flexible and agile. We still believe that theatrical is a big driver of our business and are going to continue to play aggressively in that space. And yet, when we see opportunity for direct to home and if there’s an opportunity there, I don’t think any company has done a better job at exploiting niches and opportunities with audiences and we’ll continue to do that. So, it’s certainly a possibility in the future.

Robert Ross It just seems like eventually someone will. That will be the theatrical release, and you’ll pay a lot of money and watch from your house. And how technologically it would work, I don’t know, a nd platform wise. But, (unintelligible) you guys are the perfect ones to try that. And it just kind of makes sense.

Second question is--given what’s happened, when theatrical does open up again, do you plan to spend the amount in P&A as you were going to before the pandemic? Because do you really think it’s going to make a difference? It would seem people who want to go to movies are going to go. People who don’t aren’t. So, it would seem you could save a lot of money by cutting back material on P&A spend in the future with theatricals just because of this situation, which would really help your cash flow. I may be wrong. But, does that make sense, or do you think you still need to spend the same amount as you would have had the coronavirus never ha ppened?

Jon Feltheimer I think what you’ll see--I think you may notice that we delivered a really strong margin this year, and that's a result of a lot of very strategic decisions were made by a leadership team that is special and hitting on all cylinders. And that was driven a lot by data driven decision making. We brought that into the equation. And in addition to restructuring the organization and a content strategy that really identifies specific movies for audiences, it continually informs how we geared our spend and will continue to do so. We think that’s part of the secret sauce.

Robert Ross I agree, and I know the management team very well. Trust me on that one. The question is more a matter of--do you think you need to spend that much? Because I think you have (unintelligible) that are going to be doing anything to get their house. As soon as they’re going to do it. And others--it doesn’t matter what you spend. They ain’t going to do it. So, I would think that’s an opportunity for you. But, I don’t know what data you have or if you could be something that could

Lionsgate Thursday, May 21, 2020, 5:00 PM Eastern 16 really help you or not. That’s kind of the angle I was looking at. Does the incremental dollar after a certain amount make a difference like it would have previously? I guess we don’t know.

And the last question I have is--do you see any opportunity for doing this like American Express just announced that they’re giving $20 a month to the end of the year for anybody for streaming services. So, you sign up for any of it, they’ll credit your account. You have a gold card, platinum, or centurion. And I was thinking that fits perfectly with what you guys do. Is there any opportunity for partnering with someone like an Amex, a Visa, Mastercard, where they’re basically payin g it anyway for anyone who signs up for it from now to the end of the year to really grow subs and also penetrate and partner with someone solid? It seems you guys could do that with Starz better than HBO or Showtime could given the independent nature of Starz relative to the other two and their sizes. Is that an opportunity for you or not?

Jon Feltheimer It’s a great question. We think it’s a really big opportunity for us. We are in talks with Amex. We are in talks with other credit card companies. We are in talks with our billing platform to expand in terms of whether it’s prepaid or in store couponing. We’re also--have a program going right now with . We think some of that consumer base overlaps. We think there’s a great partnership there. And we’ll continue to talk to almost every--whether it’s insurance companies that have large subscription bases that we can--or airlines--like we have a program with United where we can be in their loyalty program as ways for consumers in economically challenged times to get our service and enjoy our service. So, I think it’s a great opportunity, and we continue to lean into those in a big way.

Robert Ross Last thing I’ll say (unintelligible) myself is people now are getting frustrated, not only because they’re home, but they’re running out of things to watch. It doesn’t matter how fast Amazon can put-- can throw things up there. They’re really running out of things to watch. And a lot of people have never experienced Starz. So, it seems you have a real opportunity there, given people have seen just about everything that’s out there now, given the situation.

Jon Feltheimer We’ve had a great benefit of having Outlander on and then bringing Vida on and then coming and just premiering High Town. And so, we’ve got a lot of fresh content coming on, coupled with the pay one movies. So, Once Upon a Time in Hollywood came on and Zombieland. We all saw 4,000 titles in our library at a very economically set price for the value. So, that’s part of what we’re seeing.

And then, internationally, I think it’s the same kind of point of view where we’ve got great Starz originals coupled with best in global SVOD that we’re seeing. And so, we’re also seeing viewership expanding in the international markets. And to the point where the partners are seeing the value of our services. And so, we’re now getting inbound calls in different countries like U.K. and Germany to start to bundle our services with other partners to even expand our reach even further.

Robert Ross That’s what I would think. It makes sense. It makes perfect sense. And you guys are perfectly positioned for that. So, that’s great. Thank you very much. I really appreciate it.

Operator And our next question will come from Todd Younger (sp). Please go ahead.

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Todd Younger Thank you. Hello, everybody. So, Jeff, if you don’t mind, we’d love to explore just a little bit on the changed definition of Starz subscribers. I just want to make sure I understand it correctly. So, it looks like--latest we have--end of December, under your new definition of what counts as a reported Starz domestic subscriber, we lost about 11 million subs, 11.5 million subs in the new definition. We can read that. I think we understand those are the fixed deal bundle subs. We get it.

My question is--can you help us understand at all what the direct economic benefit to Starz was from those 11.5 million subscribers--was or is and how that trails? And then, on the other side, since I don’t think we can calculate it, can you help us understand what the (unintelligible) is of your now direct linear and OTT subs. We can sort of understand the breakeven there.

And then, the final add on--I promise it’s the last part is--I wonder what data or information you have about those 11 or so million subs in terms of how much they use the Starz service and your expectations that how many of them, based on that, you expect you might come back and actually start paying for it? Thanks?

Jeff Hirsch Great question. We think it was actually about 6.8 million subscribers that pivoted off of a bundle- -I’m sorry--6.2 million subscribers that pivoted off a bundle through the change in that deal. As I’ve said earlier, we’ve now captured back about a million of those subscribers in the first six weeks.

But, those subscribers were heavily bundled, very low (unintelligible) subscribers. So, the breakeven is about, I think, a third on those subscribers. I think the interesting thing that we’ve seen is, as the business has transitioned from this traditional linear business to the kind of digital side of the world, our customers become more profitable as we transition. And we’ve captured that base really significantly.

By the end of this fiscal year, a little over 70 percent of our subscriber base will be revenue share a la carte customers, which are much more profitable customers for us. And, as Jon allu ded to in his prepared remarks, our direct to consumer app, our retail app where we control the data, we pay some processing fees, is now our third largest distributor. And that’s the most profitable of all the customers because we are closer to the customer there.

So, as we continue to kind of capture this transition, we’ve become a much more profitable part of the overall company.

Jon Feltheimer And on the (unintelligible) question, do you (unintelligible) versus OTT?

Jeffrey Hirsch Yes. So, on the (unintelligible) question, again, if you look in the quarter, you’ll continue to see (unintelligible) increase. That, again, is because of the transition from a traditional world to the digital world. There’s a little noise in the quarter because of the Comcast transition. But, we continue to see our (unintelligible) increase as we continue to go into that digital side.

Our own direct to consumer app is over two million subs right now. And so, that does a lot of great things for us. It throws off a ton of data, which is part of the reason why we were slow to do

Lionsgate Thursday, May 21, 2020, 5:00 PM Eastern 18 wholesale when we launched it four and a half years ago. And we really have been able to collect a lot of data that makes us much more efficient in acquisition, much more efficient in retention. We’ve seen churn come down year over year four percent because of the way we’re managing the business. We’ve seen post Power churn from season six to season five come down ten percent, which is one of our churner pieces of content. And we’ve really been able to harvest that data to make, not only marketing decisions, but content decisions going forward as well.

Operator And the next question will come from Jim Crow (sp).

Jim Grow Hi. Several questions. First, I’m wondering if the annual slate objective numbers have changed at all in the new environment. Also, regarding some questions that came up a couple of callers ago, regarding theatrical window and direct release--are you threatening your theatrical window excess if you are too much of one way or another in terms of what ones you’d like to have a theatrical window and what ones you move to like a direct to video type access?

And then, lastly, I was wondering about prioritizing programming for Starz versus other considerations, specifically say the Anna Kendrick series. Would you have more likely gone to Starz, or did you think the returns were much better going to HBO Max?

Jon Feltheimer Thanks, Jim. So, on the theatrical question, obviously, as a result of the theater shutdown, we’ve - -our lineup or our slate pushed to the right. And so, we will have less films this year. We’ll also, as a result of it, have less expenditure this year, and we’ll book less expense. And so, the impact on the year shouldn’t be significant other than revenue will be down but so will expenses. And yet, we--in our planning--as soon as this is over, our plan to gear up.

As I said before, we’re still very bullish on the theatrical marketplace and just paying very close attention to how it’s going to open up and the data that that gets us.

As it relates to the windowing question, we’re in contact with our exhibitors every single day. We believe in that business, and we’re going to continue to make movies and participate in that business at the absolute highest level. And so, nothing’s changing there.

As you talk about windowing, for us, we’re obviously going to at the same time, if other opportunities direct to consumers open up, that potentially could be an extra leg of our business. That is a business that we traditionally looked at as a segment to business. Today, we’re releasing 30 films a year out of that business that may not be the noisy films you hear about, but a very consistent, very high margin, very low risk piece of our business that will continue to do great business, had a record year this year. And we certainly see opportunity to grow it going forward but not at the expense of our theatrical business, our exhibition partners.

Unidentified Speaker Let Kevin answer that second question.

Kevin Beggs Yeah. I mean, basically, that was--Lovelife, which we’re obviously super proud of and is coming to HBO Max as part of their launch, we’re very excited about, but sold and put into development almost two years ago. So, kind of a different era in the Lionsgate Starz relationship.

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But, we speak constantly with each other about what their needs may be, what we have in the lineup, how we can be helpful, what we can source and find for them. And the timing has to be right, and the creative fit has to be completely in line. I think Jeff’s been an amazing brand builder. And if it’s not right in line with the brand they’re building, no matter who it’s from, it’s not going to be something he moves on. So, we’re always focused on what is the exact right creative fit. And when it’s not, we’re obviously out in the larger marketplace.

Jon Feltheimer I want to add one more thing, which is the fact that Lionsgate television is so proactive and so prolific in a television business, applying, at any one time, 20, 30 shows, that--and that’s not even including our Pilgrim shows--that we attract a tremendous amount of talent. As Kevin has said over and over, his most important buyers--obviously Starz is a critical component of our company. But, the fact that he has such significant access to talent because we have so many buyers, it gives Starz the opportunity to see things early, see a tremendous amount of things, and then buy the things that are right for their brand, right for their audience that is an incredibly foc used and curated brand.

Unidentified Speaker We have time for one more question, I think, operator.

Operator Yes, and that one comes from Matt Thornton

Matthew Thorton Hey, guys. Thanks for (unintelligible) back in here. Just one quick follow up here. Maybe this one’s for Jon. But, you guys have talked a little bit in the past about maybe kicking the tires on some type of a capital raise transaction may be at the Starz level. But, I think the intent there was maybe to shine a light on valuation as well as help you maybe accelerate deleveraging. Obviously, we had the Comcast issue late last year and early this year. Now, we’ve had the COVID pandemic, which is ongoing. But, I’m just curious if that’s still something that you’re thinking about, if there’s opportunity there or maybe just kind of where your head is around that as we sit here now. Thanks, guys.

Jon Feltheimer Great question. You kind of answered it because there are two criteria to that raise that we talk about. One is clearly our emphasis on deleveraging. But, the second is unlocking value. And any transaction that we do should do both of those things and, frankly, should be with great partners, particularly if they can be strategic partners. We are having a lot of really interesting conversations. I would say the COVID in terms of actually completing any transactions probably from a timing perspective does push things, as we keep saying, off to the right. But, again, absolutely no urgency. We’re throwing up cash. We’re finding our own businesses. And we are continuing to look at a transaction or transactions that fulfill those three criteria.

CLOSING

Unidentified Speaker And (unintelligible), I just have one final closing statement here. I just want to refer everyone to our press releases and events tab under the investor relations section of our company’s website for a discussion of certain non-GAAP forward looking measures discussed on this call. Thank you very much. See you next quarter.

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Operator Thank you. And that does conclude your conference for today. Thank you for using AT&T event services. You may now disconnect.

Lionsgate Thursday, May 21, 2020, 5:00 PM Eastern