Lionsgate Entertainment Corp.

[Pages:13]Lionsgate Entertainment Corp.

2020 Q1 Earnings Call

Thursday, August 8, 2019, 5:00 PM Eastern

CORPORATE PARTICIPANTS Jon Feltheimer - Chief Executive Officer Jimmy Barge - Chief Financial Officer Michael Burns - Vice Chairman Brian Goldsmith ? Lionsgate Chief Operating Officer Kevin Beggs - Chairman, Lionsgate TV Group Joe Drake - Chairman, Lionsgate Motion Picture Group Jeff Hirsch - Chief Operating Officer, Starz Scott Macdonald - Chief Financial Officer, Starz Superna Kalle - Executive Vice President, International Digital Networks, Starz James Marsh - Head, Investor Relations

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PRESENTATION

Operator Ladies and gentlemen, thank you for standing by, and welcome to the Lions Gate 2020 First Quarter Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. Should you require assistance during the call, please press "*", then "0." And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. James Marsh, Head of Investor Relations. Please go ahead sir.

James Marsh Good afternoon. Thank you for joining us for the Lionsgate Fiscal '20 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 COO, Jeff Hirsch; CFO, Scott Macdonald; and EVP of International, 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 and our most recent quarterly report on Form 10-Q filed with the SEC. The company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.

I'll turn over the call to Jon now. Jon?

Jon Feltheimer Thank you, James, and thank you all for joining us this afternoon. We just reported strong Q1 financial results to get the fiscal year off to a great start. I'll begin with a few headlines from a very active and productive quarter, preview the rest of the fiscal year and close with a few thoughts about what we've been doing to create significant, additive, and lasting value across our company.

Let's start with the headlines. Starz domestic over-the-top subscribers grew to 4.4 million in the quarter, one of our best over-the-top quarters ever and have continued to grow as we head into the launch of Power in three weeks.

STARZPLAY International launched in 26 additional countries during the quarter and is now live in a total of 45 countries ahead of schedule and building on our early mover advantage. We announced three new Starz Original Series at TCA with several more being ready for production as we continue to widen our creative aperture.

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Lionsgate Television has launched or is readying for a launch new series on Apple, ABC, Starz, HBO Max, Turner, OWN, and Pop, demonstrating our ability to tailor our content and create different business models for every kind of platform.

John Wick Chapter 3 passed $320 million at the worldwide box office, as we continue to expand the John Wick universe into a series of new films and a television show for Starz. And finally, our Lionsgate Entertainment World indoor theme park opened in China as we continue to build out a global network of location-based entertainment and live stage attractions.

Now, let's drill down on each of our businesses. Beginning with Starz, we had a great quarter driven by the premieres of new series, growth of our domestic over-the-top business and the continued expansion of our international footprint. On the domestic front, as consumer viewing continues to move to a subscription video-on-demand world, Starz is continuing to capture overthe-top market share, outpacing its peer group.

With the debut of the expanded two-part sixth season of Power less than three weeks away, we expect this momentum to continue. With the continued growth of our higher ARPU-streaming customers, it's noteworthy that 23% of Starz domestic revenue in the quarter came from overthe-top subscribers compared to just 14% a year ago, driving sequential and year-over-year Starz overall revenue growth.

Internationally, we're delivering on the plan that we laid out on our last call. With international subscription video-on-demand market penetration currently at only 5%, we saw enormous upside opportunity, capitalized on it quickly with strong content and great distribution partnerships and are rolling out ahead of schedule, potentially giving us a two-to-three year lead over most domestic competitors.

As mentioned, during the quarter we launched in 26 additional countries to bring our live footprint to 45, and we expect to augment our existing distribution with more local platforms and the launch of our direct-to-consumer app, which will debut in early fall. This positions STARZPLAY to be broadly available on key video platforms, including Android, iOS, and others.

In terms of content, we start with an amazing portfolio of Starz original programming, Lionsgate films and television series, and our 17,000 title library. In addition, our speed to market and broad global availability have positioned us as a preferred buyer for some of the world's most acclaimed scripted series, enabling us to enhance our slate with over 20 exclusive premium acquisitions. These include highly sought after hit shows such as Killing Eve on BBC America, The Act and Ramy on Hulu, and the Batman prequel Pennyworth.

And our agility, content offering and attractive price point have made us the launch partner of choice for everyone, from global streaming platforms like Apple and Amazon, to top local distributors like Virgin, Bell Media, Vodafone and Orange, whether as a premium service sitting on top of general market television or as an add-on bundled with other services.

I cannot overemphasize the value of our head start in lining up premier distributors, securing great content, and building a tech platform that supports managed services and our retail app alike.

On the domestic programming front, we continue to lean into our strategy that emphasizes premium content for women. Starz recently ordered the timeless and provocative thriller Dangerous Liaisons, the third installment of The Girlfriend Experience, and the first Power spin-

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off Power Book II: Ghost. And for those of you who missed the news coming out of TCA, I'm pleased to report that Ghost will feature superstar Mary J. Blige in a lead role in the next chapter of the franchise.

Power creator Courtney A. Kemp continues to deliver groundbreaking material as the driving force behind the expansion of the Power cinematic universe in addition to several other projects she's currently developing for Lionsgate Television.

With these new series joining a lineup that already includes the supernatural spy thriller The Rook, fan favorite Outlander, the critically acclaimed Vida, and The Spanish Princess and other new series like P-Valley and Hightown, complemented by a fast growing documentary slate. Starz is well positioned to continue building upon its leadership as the premium television destination for women, African American, Latinx, and LGBTQ audiences across our MVPD platforms and our own OTT service.

Turning to our Motion Picture business, we see plenty of room for our films at the theatrical box office and we've continued to focus our content strategy on places that play to our strengths and where we know we can win--action, comedy, horror, faith-based, and new and returning franchises.

The outsized performance of John Wick Chapter 3, which more than doubled the box office of the last installment, reaffirms our thesis that there is a place for mid budget action movies properly executed in today's marketplace.

The rest of our slate reflects our focus on diverse but well-defined audiences that we know how to reach effectively. From Roland Emmerich's World War II action epic, Midway and Rian Johnson's ensemble whodunit, Knives Out, to the eagerly anticipated award season release of the Jay Roach directed drama starring Nicole Kidman, Charlize Theron, and Margot Robbie as well as next year's wildly inventive reimagining of Saw with Chris Rock and Samuel L. Jackson, our slate returns us to what we do best: bold, original, and provocative films.

This quarter, we also integrated our location-based entertainment and games division more fully into our film group to facilitate the cross pollination of ideas as we continue to expand our IP into new markets.

As a matter of fact, Motion Picture Group Chairman, Joe Drake just returned from the grand opening of Lionsgate Entertainment World in China, a first of its kind vertically designed theme park built around six different Lionsgate properties.

It's the latest addition to a growing portfolio of properties that includes the Motiongate theme park in the Middle East, two branded attractions in Las Vegas, live-to-film concert tours built around The Hunger Games, Twilight, and La La Land and three Broadway shows in development. With nearly 20 projects already operating or in the pipeline, we've built an annuity expected to return significant high-margin revenue to Lionsgate over the next 10 years.

Turning to Television, on our last call, we talked about decentralizing our infrastructure by partnering with top-tier producers, leveraging their talent, relationships, and investing in their entrepreneurial success. I'm pleased to report that this pod strategy has been a resounding success.

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Lionsgate Television is coming off its best development year ever, with over 65 projects set-up at the networks as we continue to be able to utilize different, bespoke business models for every kind of platform. As many of these projects are moving towards production, a record development season is fast becoming one of our most promising television slates in years.

Earlier this week, ABC announced the major event limited series, Fall and Rise, which we'll produce together with our partners at 3 Arts. It joins new series like the musical drama, Zoey's Extraordinary Playlist for NBC; series Love Life for HBO Max starring Anna Kendrick; the Office comedy; Mythic Quest Raven's Banquet from creators Rob McElhenney and Charlie Day, which just wrapped production for Apple; our true-crime anthology Manhunt: Lone Wolf for Charter Spectrum; and the breakout series Florida Girls for Pop, yet another partnership with 3 Arts , which is earning some of the best critical reviews of the year. And if you've been watching television lately, you've probably seen the wall-to-wall promotional campaign for the groundbreaking live crowd-sourcing medical series Chasing the Cure anchored by Ann Curry for Turner which debuts tonight.

A number of the shows I mentioned earlier originated with our partners at 3 Arts. With three series and one pilot ordered, 10 properties sold and over 25 projects in development, the first year of our collaboration has been a huge success. They've become a major source of highend quality programming for our television business, while we've been able to offer opportunities across all of our businesses to their talent.

Our current series are performing well led by Dear White People and Orange is the New Black in their third and seventh seasons, respectively. They highlight our continued ability to create iconic, inclusive and enduring programming that speaks to a diverse global audience.

And the collaboration between the Lionsgate Television and Starz creative teams has shifted into high gear in recent months with the green-lighting of Power Book II: Ghost, three more Power-related series in the pipeline, an exciting new series about to be announced, and nearly 20 additional projects in the works.

To summarize, our feature film slate continues to gain traction. Our television pod strategy is working and capitalizing on its deep content, speed to market, and ability to operate as a premium overlay to virtually any kind of platform. Starz continues to grow over-the-top domestically while it expands around the world.

In closing, I want to spend a moment talking about how we're positioning ourselves in a world that is changing faster than ever before in which talent costs continue to increase and media consolidation has created scale of previously unimaginable proportions.

We've always found opportunities in a rapidly changing environment and we continue to rely on speed, innovation, and disruptive business models for our success. We continue to scale our Motion Picture business effectively and capture significant market share while finding those places where our agility, talent, relationships, and track record give us a competitive advantage.

Our Television Group has carved out a distinct position as the platform agnostic, independent content powerhouse that supplies everyone else. In today's environment, we like our role better than ever. And Starz continues to build on its leadership in delivering premium programming to women domestically while rapidly rolling out its SVOD service around the world.

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We continue to play our own game to find success according to our own terms and create value according to our own benchmarks. And as we continue to build upon a unique, non-replicable portfolio of assets that includes deep film and television pipelines, a 17,000 title library, and a premium global subscription platform, we will continue to create value that is incremental, enduring, and increasingly well understood.

Now, I would like to turn things over to Jimmy.

Jimmy Barge Thanks, Jon and good afternoon, everyone. I'll briefly discuss our fiscal first quarter financial results and update you on our balance sheet. The fiscal first quarter adjusted OIBDA was $67 million while revenue was $964 million. Reported fully diluted earnings per share was a loss of $0.25 and fully diluted adjusted earnings per share was a loss of $0.02. Adjusted free cash flow for the quarter came in at $24 million, as cash flow from operations was impacted by timing of changes in working capital and monetization of certain assets.

Now, let me briefly discuss the fiscal first quarter performance of the underlying segments compared to the prior year. Media Networks, quarterly revenues increased 5% versus the prior year to $372 million on strong over-the-top subscriber growth. Overall, Media Networks segment profits declined 32% year-over-year to $61 million as STARZPLAY International investment ramped up. Excluding SPI, Starz domestic segment profit was up 3%.

On a global basis, Starz subs were up $2.6 million year-over-year or 11% while subs slipped 175,000 sequentially. Domestically, Starz ended the quarter with 24.4 million total subs , which was up 500,000 from the prior year and down 300,000 sequentially as over-the-top gains partially offset MVPD losses.

Domestic over-the-top subs were up 400,000 sequentially, our largest sequential gain for a nonPower quarter. International subs increased 6% sequentially and should ramp up more meaningfully, once our global partners fully deploy their platforms and marketing efforts this fall. Overall, ARPU improved sequentially in the quarter driven by an increase in MVPD ARPU and over-the-top subscriber mix.

Motion Picture revenue increased 9% in the quarter to $398 million due in part to the strong theatrical performance of John Wick: Chapter 3. Segment profits came in at $8 million, reflecting the four wide release films and approximately $100 million of P&A spend during the quarter relative to the prior year, which only included one wide release.

TV Production revenues of $280 million were in line with last year, while segment profits increased 60% to $25 million. The strong performance of the TV segment includes timing of episodic deliveries for Orange is the New Black and Dear White People.

Now, I'd like to turn to our fiscal '20 outlook. Recall on our last call, we discussed our core business before SPI investment generating $650 million to $700 million of adjusted OIBDA in fiscal '20. As many of you have pointed out, this midpoint represents healthy year-over-year core growth of 20%.

We continue to feel comfortable with that core business forecast with projected Starz International investment approaching $150 million. The quarterly cadence we discussed on our last call remains unchanged with quarterly adjusted OIBDA improving sequentially from a low in the fiscal first quarter with the majority of adjusted OIBDA hitting the back half of the year.

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Now, for a quick update on the balance sheet and our plan to de-lever while still investing in our business. We ended the quarter with leverage at 5.8x including SPI, or just under 5.0x excluding SPI.

In the quarter, net debt declined slightly to $2.7 billion on positive free cash flow. Accordingly, the increase in leverage was a result of the lower trailing 12 months adjusted OIBDA. We expect that to reverse by year-end with an increase in trailing 12 months adjusted OIBDA, as quarterly adjusted OIBDA increases sequentially throughout fiscal '20 and we start to lap the fiscal '19 rollout of SPI.

We continue to be focused on deleveraging to 4.0x, including SPI, by the end of fiscal '20. As noted on the last call, our preference is to raise capital at the right price point to both validate the valuation of SPI and de-lever more quickly.

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

James Marsh Great. Thanks, Craig. We can open up to questions...for Q&A right now. Thank you.

QUESTION AND ANSWER

Operator Thank you, sir. Ladies and gentlemen if you'd like to ask a question, please press "*", then "1" on your telephone keypad. You'll hear a tone indicating you've been placed in queue and you may remove yourself from queue at any time by pressing the "#" key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press "*", then "1" at this time. In just a moment, please for our first question.

We first turn to the line of Alan Gould with Loop Capital. Please go ahead. Your line is open.

Alan Gould Thank you. I've got two questions, please. First, Jon, can you give us some idea on how your progress is going on finding an international strategic partner for Starz? And second, I know you said you like to play your own game, and I've seen Lionsgate grow over the last decade plus against the majors, but how do you position an $8.99 Starz product against a $6.99 Disney+ product?

Jon Feltheimer Yes, I'm going to let Jeff take the second part of that.

Jeff Hirsch Great question, you know, we don't actually start off positioning against a $6.99 Disney+ product. We think we're additive to that. If you look at the history of Starz, we've always been a premium add-on service sold on top of broader general television, and I think the Disney+ product will be a broader general television. And as I said at TCA, we think that the...our focus on premium programming for women, coupled with a Disney+ kids' product is a really great combination. I think we'll see and we'll talk more in the fall about a compelling proprietary marketing product program that we'll have with Disney.

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Jon Feltheimer Yes. Alan, you mentioned international strategic partner. I don't think that's been really a part of our thrust, I would tell you the international is going extremely well. If you are referring to the fact that we mentioned that one of the things we may be doing is looking for a capital raise specific to STARZPLAY International. I'll let Jimmy take that. Is that sort of what you are referring to?

Alan Gould Yes Jon, thank you.

Jimmy Barge Well, certainly, as Jon mentioned, the SPI business is exceeding our expectations virtually every territory we've launched in. Superna and her team under Jeff's leadership are doing a great job. We're very excited about our results to-date, as well as our future opportunity here. But it's clear we're not getting the value for that in our share price. And obviously, we're exploring parallel paths to raise capital and unlock value. We're looking at several alternatives.

And at this point, I'll make it clear we're not planning an equity raise at the parent company. I also want to make it clear we do not have to raise capital to fund our business. We have plenty of existing financial capacity. We have a $1.5 billion unused revolver. And organically, without a capital raise, we would be well under 5.0x by the end of this year, in fact, closer to mid 4.0x leverage without a capital raise. Nevertheless, we made it clear and want to make it clear we prefer capital...to raise capital at the right price point both to validate the valuation and also to de-lever more quickly.

In terms of the size of that, I would just say that we factored that into our target of 4.0x leverage by the end of the year. And similarly, I would say in terms of timing that we'd expect the capital raise by the end of our fiscal year.

Alan Gould Thank you, Jimmy.

Operator And next, we turn to the line of Ben Swinburne with Morgan Stanley. Please go ahead.

Ben Swinburne Thank you, guys. Just sticking on the Starz International topic, Apple TV+, I think, is a big part of your distribution strategy across many markets. I'm just wondering, it's a relatively new distribution platform. Can you guys give us an update on how that's performing relative to your expectations, I don't know if you have any sort of qualitative comparison to how it's done versus what you've seen from Amazon in Germany and the U.K., and then if there are other distributors you are working to launch on that we should be thinking about.

Superna Kalle Ben, thanks for the question. Its early days with Apple, but in almost every market that we've entered, as Jimmy had mentioned, we've exceeded our subscriber targets. We're growing quickly. Our content is resonating and our distribution deals are definitely expanding. You'll hear more about distribution deals in the near future as we're ready to announce them. So again, we're very excited about our growth to-date, remain positive about our future outlook. And as these markets and these platforms continue to develop, in the early fall, we'll see more and more deployment and marketing efforts against them.

Lions Gate Entertainment Corp Thursday, August 08, 2019, 5:00 PM Eastern

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