Hey. All right, good afternoon, everybody. Again, this feels like a marathon. You got to treat it like a marathon. Just go. You know, do not—it is not a sprint, just marathon. Use that training. Three days of just great time. Hey, welcome to the 46th Annual Raymond James Institutional Conference. I am Rick Prentiss, head of TMT Research, that Brent and I lovingly like to refer to as T for Towers, M for Media, T for Telecom Satellite Services. First, little thank you. We did get the results. II ranked this year. We do not ask for the vote. We do not plead for the vote. We do not beg for the vote. You just vote, and we say, wow, we did not even expect it. Thank you for that. Always heartfelt. Today, media time. Got Jeff Hirsch, President and CEO of Starz, here to talk to us. Brent is going to run the Q&A.
With that, gentlemen, start your engines.
Yeah, thanks for that intro, Ric. Yeah, I'm Brent Penter here, joined by Jeff Hirsch, CEO of Starz, currently part of Lionsgate, but not for long. I think that's probably a good place to start. Can you just give us an update on the split process? I think the last timeline we had was mid to late April for close. Is that still the case, and what milestones are left to get there?
Yeah, first of all, thanks for having me. I'm excited to be here. It's my first time, and it's a great conference. I think mid to late April is kind of the right timing of the separation. We returned the S-4 to the SEC last Monday morning. There was a handful of issues, some of them we pre-cleared before we were submitted. I think we're just waiting to hear back. Once that's definitive, we will schedule the shareholder vote. We're kind of off and running as two publicly traded companies.
Right. Next time you report earnings, it will be as Starz?
Yeah, it's exciting. I think it's—look, I think John and Michael were way ahead of the time in terms of separating the studio from the network business and creating simplicity and clear investable businesses. You have seen that with our peer group is looking at across the board, whether it's NBC and Comcast, what they have announced, or what Warner has set up in terms of their structure. I think John and Michael were way ahead of the industry on this. I think simplicity is important for investors, and I think it also is, from a management point of view, to really have the ability to focus on what we do really well and what the studio does really well. I think it will be beneficial to both companies as well as both shareholder bases.
Yeah, and I'd like to dig into that a little bit more. You know, what are the advantages both from an operational standpoint as well as a strategic standpoint of Starz being a standalone company?
I want to say I think the synergies that we've created by being owned by the studio will continue. I think we've spent the downside of being the separation taking three and a half years is it's taken three and a half years. The plus side of it is we've had a lot of time to plan for it. I think we've done a really good job of creating these intercompany dependencies post-separation where we will continue to lean on each other and get the synergies and the benefits we have. Kevin's Lionsgate TV Group, who does a great job producing television, will continue to work and produce television with them. We have the pay one deal with the studio, and the film slate is exciting coming up in 2026. Super excited about Ballerina and Michael and the various different slates there.
We'll benefit from that. We've extended that a year out to 2028. I think those synergies together will continue, and I'm excited about that. Ultimately, you know, the studio business is fundamentally different than the network's business. It's having the ability to focus on what we do well in terms of the, you know, art. We've got 20 million subscribers. We're about a billion in revenue. We're sitting around a $200 million EBITDA margin, and EBITDA, which is about a 15% margin. We convert about 70% of that to unlevered free cash flow. A very, very good investable business. We are also focused on two core demos that make us complementary to other partners.
I do believe there's an opportunity for us to scale the business around those two demos and really become a very—not that we're not today, but a much bigger important piece of the ecosystem in terms of a bundling partner on scale. That is something that I don't think we are able to do as part of the studio business. That frees us up to go kind of track that trajectory of becoming a focused streamer on scale that we couldn't do today.
Great. In terms of those two demos, what is the TAM there? How much of that TAM can Starz address? What are the benefits of being more focused as opposed to there are lots of broad-based streamers out there?
You know, we talk about scale a lot in the business. First of all, the demos are really women. We focus on women. Two-thirds of our consumers are women. Within that, half are white women, half are black women. There is a real opportunity to continue to lean in. Women are 49.5% of the planet. When people call us niche, I'm okay with that. I think there is a real opportunity to continue to drive up into the TAM. We think domestically, U.S. and Canada, the TAM is somewhere between 80 million-90 million households. We're sitting around 20 million subscribers today. We have a real opportunity to drive up into that TAM. It's a combination of a couple of things, right? One is continuing to put great content on the air that consumers, that our consumer, wants.
Right now, we have five shows that do anywhere between 9 million and 12 million eyeballs a week. Those are some of the biggest shows on television that no one really talks about. We will continue to lean into that. This current year, we only had three big shows because of the strike. Fiscal 2026 will have five big shows. You will start to see stability in the OTT subscriber base as well as revenue growth instead of a lot of stopping and starting that you saw this year with strike-impacted year. There is a real opportunity to lean in there. I do think there is an opportunity to separate the growth that you see on the subscription side by adding an AVOD business as well so that we diversify revenue and really drive revenue growth and push the business up in terms of growth.
Great. You talk about some of your shows getting 9 million- 12 million views on 20 million subscribers. You know, half of your subscribers watching those shows. That's obviously of a smaller subscriber base, but kind of unprecedented. Can you talk about, do you think that's appreciated? Really, what is the mousetrap that allows you to get such high viewership?
I think it's focus, first and foremost. We have become a destination for these two demos to come every week where we have these shows lined up against each other. Instead of having a show for the demo on, and then we're focusing on somebody else in the home, whether it's sports, news, weather, unscripted, made-for-TV movies, we are singularly focused on these two demos. We spend somewhere between $600 million and $750 million of content on these two demos. You can say that we don't have scale, but I would say most of the big broad-based streamers aren't spending that much money other than sports on, you know, a focused demo. We do have scale in the right places. We know what the consumer wants, right? We are very in tune with our demo and how to serve them.
If you look at the Power Universe, you know, we've spawned three other shows that come off of that universe, which are stories from the original Power show that we knew the fan base would like. Whether it was taking Tommy's role out into Force, or it was continuing Power with Tariq becoming his dad over time in Ghost, and the Canaan story, the backstory there, we've also announced two other spinoffs that are coming out of that franchise. These are shows that we know that the fan base is going to like, and they have the same kind of DNA of each of the shows. We pull characters from the existing shows into them. We know we can bring the audience across. Outlander is the other side of our base. We've announced a prequel coming.
It is 30 years before the original Outlander. It is the love story between how Sam and Katrina's parents have met in the show. One is a Romeo and Juliet story. The other is the first time in the history of the show that you will actually meet Katrina's parents. It is really exciting. I have seen the whole show. It is really spectacular. We have been able to drop in kind of kernels into season eight to reach back to the prequel. It is the same folks at Sony doing it. There is a lot of connectivity. We are excited about that. You also do not have to watch 90 hours of Outlander to get into it or have read 10 books. We think not only will we have the existing base come to watch it, but we think we can actually grow the audience with that as well.
It is that focus on those demos and the focus on the shows for those demos, which has made this super successful.
Great. When you're a standalone company, you know, the street is very focused on free cash flow right now, but the other metric people are looking at is subscribers. You've transitioned 70% of your revenue to digital, but you still have some subscribers trailing off pretty consistently. How should we, on the linear side, as you grow digitally, how should we think about, you know, when that part of it flips as well and digital subscribers kind of start to outweigh the linear subs and you're getting back to subscriber growth?
Yeah, look, I think you have to be very careful about chasing subscribers. I think the industry chased Netflix for a long time, and you saw a lot of companies that were very unprofitable for a long time. That's never been our strategy. Our strategy has been to kind of slow and steady transition the business away from linear to digital. Kind of as the linear comes down, the digital comes up while maintaining profitability at the whole time. Could I drive digital subscribers through the roof tomorrow? Sure. You won't like the profitability of the business. I don't think that's healthy for the long-term growth of the business or the investors. Managing EBITDA to, you know, free cash flow conversion is probably more important.
This past fiscal, you saw a lot of yin and yang in the subscriber base as well as the revenue base because it was a strike-affected year. We only had three big shows. We took one of those three shows and cut it in half to create a fourth show. We had gaps in content. You saw great subscriber growth. You saw churn. You saw subscriber growth. In the subscription business, when you go, you want to build slow and steady so the revenue starts to snowball on itself. We had a lot of starting and stopping. This year, in Fiscal 2026, we are back to five full tentpoles, big shows. We have Spartacus coming back on the network for the first time in 10 years. We think that is going to be massive. Outlander we talked about and the Power universe continues.
We got four or five shows in development that I think will be as good as anything we have on the air. When you start to get content back on a consistent basis, you'll see what you saw, you know, in 2020 and 2021 and 2022, steady subscriber growth, steady revenue growth. That is what we're really looking forward to seeing. I do think you'll see a day where, you know, we'll get back to having OTT subscriber growth outpace the linear growth. We have to get back into that consistent cadence of content to get back there.
Yeah. The other part of revenue growth is ARPU growth. You all recently took a price increase. Can you just talk about how that went in terms of your expectations on churn? Going forward, what can ARPU growth look like both from a price increase standpoint as well as anything else that might increase ARPU, you know, like mix shift toward digital?
I think there's a couple of components to that. This year, we took a second rate increase because we knew that we were going to have a shortfall in content. In the shortfall of content, we knew we were going to have subscriber push issues. We took a rate increase. You have to be very careful about stepping on the rate increase too much. We did it two years in a row this year because we have that steady content kind of slate coming as well as I think some digital partners really pushing into the subscription business. We think we can grow the business just on subscriber growth and bundles, which we'll talk about in a minute. That's a way to do that. We will come back over the next couple of years and do another rate increase at some point.
We've always been positioned as this complementary partner to the broad-based streamers. As long as they continue to take rate increases, like Disney and Netflix and Amazon take rate increases, it gives us room to move our rate up at the same pace and keep that gap because in the consumer's mind, we're seen as complementary if we're not price parity. We'll always watch that gap and figure out where we're going to do rate increases next. I think we'll take our foot off the rate increase gas because we think we can grow the business with subscribers next year based on the slate. Bundling is a huge piece. Everybody's talking about bundling. I think you're going to see, you know, kind of super bundles for lack of a better term.
They look a lot like the cable packages back in the day where it's not just one or two partners. We just launched a bundle with Max and Starz on Amazon. We just launched BET Starz on Amazon as well. I think you'll start to see multiple partner bundles start to show up on scale, which looks a lot like the old cable tiers, and that will be really helpful. Right now, bundling is a very sub-10% of the subscriber base. What you see with the bundles we've launched is somewhere in the neighborhood of 24%-60% increase in lifetime value. The three things the bundles really do for the business is one, you share marketing expense upfront with the partners. With the Max/ Starz bundle, it's Amazon's putting in marketing costs. We're putting in marketing. Max is putting in.
You get this benefit of three people funding it on the front end. You get the combination of content slate. In February, they launched The White Lotus. We did not have a big launch there. That was healthy because those benefits of customers that took the package could get The White Lotus. Canaan is coming this week. For us, they do not have a big show coming. That is a benefit to them. By lining up content slates, working together, it helps with stickiness for the consumer. Ultimately, it is lifetime value extension that really drives it. We are seeing some great results from the bundles we have today. Again, it is a small part. We would like to see it accelerate to become a bigger part because ultimately that drives churn down. That is how you really grow your business.
Great. Trying to grow ARPU, grow revenue, and then you want to grow EBITDA. One target you've put out there is getting to 20% EBITDA margins from 15% today. That's pretty significant. You know, all else equal 33% increase in EBITDA. How do you get there? You know, what are the steps you can do on the cost side in terms of content and in terms of everything else?
We've said coming out of Fiscal 2028, we think we can get the business back to a 20% margin business. That's, you know, there's about five things that we have a plan to do to kind of get there. One on the revenue side, you know, we think we can grow revenue steady state 1%-3%. That's a combination of subgrowth, rate increases, and bundles. We talked about that. On the content side, you know, we've been part of a studio for a long time. And rightly so, I think we've put a lot of the economics on the side of the business is trading at 11 or 12 or 13 multiple versus Starz today trading at a 3 multiple. As we separate the businesses, what we have to do is kind of get the DOE line. You know, we're spending about $750 million today on content.
That's got to get down to probably $600 million - $650 million a year. A lot of that is getting ownership back on the network. Currently today, we do not have a lot of library. We do not own our own shows. As we go into Fiscal 2027, half the slate will be Starz-owned shows, which means two things. One, they are new shows. Season one economics are much better than a season five or six economics. You know, we have been able to, you know, create franchises around new shows. BMF, when we put BMF on the air, it was 90% of the audience of Ghost, which was our biggest show, but it was a third the cost, right? We have been able to manufacture these new hits to put on the air.
As we get into fiscal 2027, you'll see half the slate will be new shows, whether it's a new Power show or a new show that was self-created. What that does is it allows us to get season one economics on the air, which are significantly lower where we are today. It also allows us to create a distribution line item where we can actually sell those shows to international and benefit from that. Today, in our corporate structure, the studio benefits from that. It is another way to get either more revenue on the business or bring costs down on the business. As we get out until fiscal 2028, some of our long-term studio deals, not Lionsgate, but some of our other partners come out and we'll renegotiate that.
Either we won't renew them and we'll buy library to replace them, which is much more economical, or we'll renew them at a much lower rate. That should get us back to that 20% margin business coming out of Fiscal 2028.
Great. The last piece kind of is bringing it all down to free cash flow. You talked about 70% free cash flow conversion. You know, when you split, I think Starz is going to be about three times levered, but you'll be producing a lot of cash. How do you think about capital allocation now that you'll be a standalone company? What are your priorities in terms of internal investing, M&A, and potential delevering capital returns? How do you think about all those pieces?
You know, we, if you looked over the last, since we launched Lion, I think we were $750 million of net debt. We're down last quarter at $568 million of net debt. We’ve delevered pretty quickly over the last kind of year, year and a half. We'll come out around three times levered, as we talked about. We've done a lot of work around small-cap companies and will be a small, small, small-cap company. Anybody who's got under 2.8 times leverage trades pretty well. We are really focused on getting leverage down from three to two and a half times pretty quickly. We think that puts us in a really good place in an investable business. That'll be our first focus. We'll continue to drive the profit line up to that 20%. Free cash will follow behind that as well.
We'll continue to deliver the business. I do think there's a really big opportunity with all the disruption going on in the space today to really kind of build this women's-focused streaming service on scale. What that means is we've got this phenomenal tech platform and data platform that we built homegrown from the day we said, "Go build our app and our data stack," in 2015 to today. We've spent about $90 million to do that. I think that's pretty economical considering our peers at Disney spent $3.1 billion for Bantec, and I think it works just as well. That gives us the ability to go look around the space and find networks that are focused on our same demos, but are marooned on the linear side and actually build them a digital future.
Whether it's a commercial deal where we take some of the economics for building them the digital product or we actually put the companies together, I think there's a real opportunity to build a really focused complementary streamer on scale for this industry that others haven't done today because of the way we set the business up.
Yeah. I want to go deeper into that as well. You know, how do you see this industry shakeup playing out over the next few years? Comcast spinning off cable networks, others kind of considering doing the same. You all, as the first one to actually do this, where do you fit into that? Are you a buyer? Are you a seller? You know, just to confirm, you do plan on remaining within these core demos that you've historically been in.
That's for sure. I mean, I think we are really excited about the room in terms of the TAM to grow around our focus around women. I think there's a way to diversify revenue from, you know, just ASVOD to AVOD in that same space. We'll stay within these demos. I think, you know, it's been, as others have been focused on sports and news and weather and kids and dogs in the home, our focus on women has been really successful and has allowed us to, you know, acquire content where others aren't. You know, we just picked up a book called All Fours from Miranda July, which is this really massive book in women's literature today that was very competitive.
Because of our R-ratedness and our ability to really go to where we go in terms of content, the author felt very comfortable giving it to Starz. We were able to get a very competitive book out of the marketplace because of what we do. We think this is the right thing to do and we'll stay in there. I think there's a lot of opportunity to build around that. You know, the space, I think a lot of people think there'll be a ton of M&A to start this year because of the administration and what's going on. I think people will actually start to look at who they are and what they do well and actually start to shed assets before they actually combine assets, which gives us a really big opportunity to sit there and collect assets on the other side.
I also think Starz has built a very unique mousetrap in terms of our technology, our data collection, and our demos are very valuable. That makes it a very valuable addition to any bigger company as well.
You alluded to advertising and ad tiers and the investments you all have made there. Can you talk a little bit about the transition that the industry is making toward these ad tiers, Netflix, Max, everyone introducing a lower-priced ad tier? How you all compete with that? You have R-rated content that does not necessarily cater to ads, but then the investments you have made and how you could benefit from that trend.
Yeah, I mean, I think the industry moved obviously significantly to ads, as everybody knows, into ad points. I think it's very difficult. Once you move from linear to digital, you now bring in large digital companies to compete for ad dollars. I don't think that was really well thought out, to be honest. Starz will never be, I'm not saying never, but for now, won't be an ad. You know, our content is too R-rated to put ads around it, and we don't have enough content to put ads around it for scale. If we do get in the advertising business, it'll be through, you know, partnerships with ad-supported networks that want to have a digital future that we can build for them or through, you know, acquiring some of those networks and building an ad tier.
I think it's been helpful for us because it lowers the entry point. Instead of paying $20, $30, or $100 for cable with ads that you then put Starz on top of it, it lowers the entry point. You can bundle an ad tier with Starz and get the same kind of content at a much cheaper price. You know, the virtual MVPDs were great because they were much cheaper than a traditional cable stack, so it allowed people to have more share of wallet to add Starz on top of it. It's been very healthy for us. You know, again, I think the Starz business is a really good business as an ASVOD business and will kind of stay that way.
Great. You alluded to the implied valuation of Starz within Lionsgate, and hopefully the split will highlight that valuation. Is there anything you think the street is misunderstanding about Starz that you hope to be able to communicate as you become your own company?
Yeah, I think they're missing almost everything. I mean, I think people look at us as a, you know, linear dependent cable network, and that's just not who we are. 70% of our revenue at the end of this fiscal will be digital, you know, 20 million subscribers. You know, 80% of those customers are à la carte or rev share, which means, one, we're a revenue generator for our partners. Two, people actually picked Starz as the content. I remember when I first started at Starz in 2015, there was this wonderfully, awfully written Bernstein analyst report that's saying nobody buys Starz. It's dragged along in the cable bundle. Once the cable bundle breaks, Starz will have zero customers. That's just not the case today, right? We are a very important part of the ecosystem. We are profitable. We are digital first.
I think when people look at our valuation, if I look at the sum of the parts of our revenue, no one's going to give me a Netflix multiple because of their size. If they're at 34x , you put Starz down to 8x or 10x , you put a 1 or 2 multiple on the linear side of our business, you should see this business trading 7x or 8x , right? I think everybody looks at us like AMC Networks, but we're not. I think the reality is once we get out and really start to tell the story, which we've been doing, part of the reason why we're here today, people will start to see underneath the very durable revenue line for the last seven years.
You know, our revenue has been really durable and flat over the last five or six years while the industry is down 12%. We're profitable. We're growing. We're converting free cash flow, I think, is a very different business than most investors think about. Some of it's been, we've been owned by a studio, and the studio story has been the bigger story that's told, which is okay because that's what the corporate structure was at the time. It is a real opportunity to get out and show how much we've really converted this business to digital and how, you know, forward the business is and how it really fits in the ecosystem.
Great. We've got a few minutes left. I'll take a second to see if there's any questions from the audience. I'll throw another one over. You know, subs, a lot of that is going to be the content you have, and you've talked a lot about that. What series and do you have coming to the platform over the next few quarters that you're most excited about and that could really drive subs?
Spartacus coming back for the first time in 10 years is going to be really great. It's going to bring an audience that we haven't had for a while. I've seen it. I think it really, we've done a nice job of retrofitting it into the demos that we serve. That will be great. It looks wonderful. We're excited about that. We have the prequel for Outlander coming on, which is going to be, I've seen the whole thing. It is, you know, it is back to season one of Outlander where you're in Scotland. It's clan lore. It's going to be actually a phenomenal show for us for the next, you know, you could go 20 years till you hit the original Outlander. That's got a lot of room to go.
You'll see, you know, Katrina's parents for the first time in the history of the show. It's not even in the books. That'll be a real big, big, won't be a surprise now, but it'll be nice for the fan base to see that, to see that origin story for them. I think Power Origins, which we've announced, which is the kind of origin story of the original Power where, you know, all the original cast is 18, 19, 20, and how they got into the game and where that show came from will be a massive hit. There's another Power spinoff coming that we haven't announced that I can't talk about because it will, I think the fans are speculating, but it's going to be also great. Those are good.
I think we've got a couple of things in development that will be very unique to the marketplace that we haven't announced yet, but I think will be as big as anything that are on the networks. I'm actually really excited about the content portfolio and the slate that's coming. You know, Kanan coming back this weekend, I think that show was one of the best shows on television. Patina Miller, who's the lead, is I think one of the best, based on last night, actresses in a lead role on television, and she should get, you know, nominations galore for what she does. That's a massive show for us. We've got BMF coming back, which is one of our biggest, you know, coming on the heels of that. That audience will go right from Kanan to BMF.
There won't be a gap like there was this year. I'm super excited. We've got a doc coming called Magic City, which is about a very famous club in Atlanta. I've seen it. It's really fun. I think the fan base will really like that as well. We've got the BMF doc coming, which is interesting as well. There's a couple, you know, we've announced, I think we've announced a show called Fightland. If not, I'm announcing it today, that is a really great kind of adjacent show to our audience that 50 is attached to that I think will be a really great kind of show to bring on. I think that's a very franchisable show that we could actually do in a lot of different places. Content slate has never been as strong.
I've talked about All Fours. I think that'll be a nice addition as well. That's got a big groundswell in the country around women in their, in 40-something women. I think that'll be a very, very great draw to the network. I am very excited about Starz and the path that we're about to embark on as a separate company. I think the team is as well.
Perfect. In the last minute here, to put a bow on it, sounds like revenue growth, low single digit, EBITDA should grow faster than that, converting a lot of free cash flow, trading at implied three times EBITDA. What are the biggest risks here that you think the street is thinking about? Is it the decline of linear going faster, you know, competitive environment? What keeps you up at night?
Other than my dog, I sleep pretty well. Look, I think the thing that investors worry about is our scale, right? They look at these large, well-funded companies and say, how can you compete in an industry with these massive goliaths? I was saying to somebody earlier today, you know, a specialty retailer always has a home in an industry, right? When Home Depot and Lowe's came in, everybody said True Value Hardware was dead. Having a specialty retailer has always been kind of a component of industry. We are, in a sense, a specialty retailer. We do things very well for a very targeted group of people that really respond to what we do. That means that we'll always have a home in the ecosystem.
I do think, you know, there is this misconception that scale matters. If you look at, I think scale in the right place is important. I do think we can build something of scale with focus, which will be really impactful. Scale for the sake of scale just becomes waste. I think you've seen that in the space. I think the biggest hurdle we have to get over is our size. I'm not sure I think we can get there, but we've got to, you know, every quarter, we've got to just keep putting it up. We've put some ambitious goals out there for the business. We just have to execute against those and show people that it's what we said and we're going to do it. That's what we're going to do.
Great. Thanks for being with us, Jeff. That wraps it up.