Ladies and gentlemen, thank you for standing by, and welcome to the Lions Gate Entertainment Fiscal Second Quarter twenty twenty one Earnings Call. At this time, all lines are in a listen only mode. Later, we will have a question and answer session. As a reminder, today's conference is being recorded. I'd now like to turn the conference over to Executive Vice President of Investor Relations, James Marsh.
Please go ahead.
Good afternoon. Thank you for joining us for the Lionsgate fiscal twenty twenty one second quarter conference call. We'll begin with opening remarks from our CEO, John Feltheimer followed by remarks from our Vice Chairman, Michael Burns and CFO, Jimmy Barge. After their remarks, we'll open the call for questions. Also joining us on the call today are COO, Brian Goldsmith Chairman of the TV Group, Kevin Beggs and Chairman of the Motion Picture Group, Joe Drag.
And from Starz, we have President and CEO, Jeff Hirsch CFO, Scott McDonald 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 ks, as amended in our most recent quarterly report on Form 10 Q filed with the SEC.
The company undertakes no obligation to publicly release the results of 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 John. John?
Thank you, James, and good afternoon, everyone. Thanks for joining us. We're pleased to report another strong quarter, strong financial results, strong acceleration of our key nonfinancial metrics and strong in its affirmation of the business plan we created four years ago with the acquisition of Starz and our pivot to the streaming world. Let me give you a few of the highlights. Starz just reported its best domestic over the top subscriber growth quarter ever.
Domestic streaming subs have increased from 7,400,000 to 9,200,000 over the past three months on the strength of a focused content strategy and the launch of successful new series. Our new shows are not only driving subscriber growth, but boosting subscriber retention with record levels of engagement. Star's international business also achieved record over the top subscriber growth in the quarter, following strong content and distribution launches in The UK, Brazil and other key territories around its global footprint. Our best of global SVOD content strategy is resonating with consumers, while our partnerships with top global streaming platforms and local distributors are global streaming subscribers at the end of the quarter, including 800,000 from our Pantaya Spanish language platform. Having achieved our target of 13,000,000 to 15,000,000 global streaming subscribers a full six months early, we expect to end the year at the high end of that range.
In another great quarter for our library, we reported a record $738,000,000 in high margin library revenue for the trailing twelve months, up 33% from the prior twelve months. While we continue to deliver this content efficiently to an expanding array of platforms, it still serves as a cornerstone for the accelerating growth of Starz. I'm also pleased to report that the content businesses that refresh our library are back in production. In television, we have over a dozen scripted series and more than 20 unscripted shows back up and running safely and efficiently. In a world of vertically integrated buyers, we are an effective and profitable third party supplier of choice while continuing to ramp up our supply of premium series for Starz.
In our feature film business, we saw a massive imbalance between content supply and demand and responded quickly by greenlighting eight films in the past six months. One has already wrapped, four more are currently shooting and three others are slated to begin production early next year. As the theatrical business continues to pivot to new paradigms of distribution and monetization, we're prepared. Our slate has all the ingredients to resonate at the theatrical box office, while our organization has the agility to successfully embrace alternative release strategies when needed, as we did with Antebellum, RUN and The Secret. We accomplished all this while executing on our commitment to delever and strengthen our balance sheet, reducing our leverage ratio by over 1.5 turns in the past twelve months.
And we ended the quarter with more than $450,000,000 in cash on hand. Today, I want to widen the aperture and speak to the strategic vision of Lionsgate, giving
you
an update on what we've accomplished so far, where we're going from here and laying out a road map for the future to help you chart our progress. When I finish, Michael will share a few thoughts on the value we're creating across our businesses. Since we acquired Starz, we've been refining and repurposing our model to help us to do three things: accelerate our growth, capitalize on our resilience and successfully converge our studio and platform businesses. Let me talk about all three. First, we began pivoting Starz towards the direct to consumer sweet spot of industry growth four years ago.
Today, I'm pleased to report that we have reached a major inflection point six months ahead of schedule as our global over the top subscribers passed our MVPD subs for the first time in the quarter. We expect over the top revenues and profits to soon follow subscribers across this milestone as we continue to transition from a primarily wholesale licensing model to a more global, data driven, direct to consumer world. At the same time, we're working with our MVPD partners to transition our traditional business to a mutually beneficial a la carte model that allows us to bring greater stability to our business and to better control our own destiny. Digital or linear, we've positioned our platform for faster growth while also reducing our risk. Second, our model is proving to be resilient, both in ways that we plan for as well as in ways we never imagined.
While significant portions of our industry are impacted by skyrocketing costs for sports rights, closed theme parks and exposure to a bearish ad market, our diversified model is delivering consistency and growth even in the face of unprecedented change. Stars continues to build on its premium global streaming leadership. Our content businesses are finding new buyers and creating new paradigms, and our library has become more valuable than ever. Finally, I'd like to highlight how the individual pieces of our model are coming together. The convergence of our studio and platform begins with getting close to talent in our three Arts business.
It continues with a television group that has more than 20 premium television series lined up for stars and a film business that is already in the process of rethinking the financial and strategic priorities for its output deals coming up for renewal. And as our 17,000 titled film and television library continues to experience outsized growth, it will become an ever more important driver of this convergence. All of our businesses are aligning nicely behind the streaming platform that just reported its best OTT subscriber growth ever, and we expect that growth to continue. In closing, as we navigate the new normal, we continue to learn as we go. But we bring to this opportunity a forward looking business model, strong content slates, a streaming business that has reached a major inflection point, a healthy balance sheet and a resilient culture that is rising to the challenge of these extraordinary times.
Now I'd like to turn things over to Michael.
Thanks, John. I want to share a few thoughts about the disconnect between what we've been building and the recognition of that value in our stock price. I believe that our growth opportunities are a big part of our value creation story. Today, I'd like to highlight three areas in which we saw strong growth in the quarter and expect it to continue. First, our streaming business.
We're continuing our steady march to better unit economics and a more sustainable subscriber base at Starz. We're six months ahead of schedule and reaching our target of 13,000,000 to 15,000,000 global streaming subscribers and we expect to continue our strong growth trajectory to 15,000,000 to 25,000,000 international subscribers, giving us 40,000,000 to 50,000,000 subs worldwide by 2025. This growth is being supercharged by the wealth of data that we've been harvesting from our direct subs. The overwhelming majority of the subscribers will be over the top subscribers that generate more revenue and have a higher value, and they will continue to enhance our opportunity to be part of many OTT bundles while aligning ourselves with every kind of platform. This streaming growth is being driven by three key elements.
Our focused domestic and international programming strategy has been carefully planned and executed. And most importantly, it is working. Our partnerships with global streaming platforms and local distributors alike and the bundling opportunity that these partnerships are creating continue to accelerate this growth. And our disciplined strategy is allowing us to convert a great head start into sustainable and replicable long term performance. Now I'd like to talk a minute about our library.
Our library's unprecedented performance isn't a one time phenomenon associated with people watching more content at home. It's the result of many years of disciplined organic growth and strategic accretive acquisitions. We've had over 500 additional titles generate revenue in fiscal twenty twenty than in 2019. We've seen top line growth for four of the last five years. Our library is big, fresh, growing in size and most importantly, growing in value.
As a case in point, our most recent library licensing initiative with key titles like Knives Out and Twilight had price increases of nearly 60% compared to just a year ago. This result can be replicated again and again with high revenue, high margin deals across a wide array of library titles as the number of platforms licensing our content continues to expand. And as this expansion continues, we believe the value of our library is fast approaching the entire enterprise value of the company. And finally, our franchises. We're constantly renewing and refreshing our major brands and franchises.
We're quickly moving towards production of fresh installments of John Wick, Knives Out, Now You See Me and The Hunger Games prequel based on Suzanne Collins' runaway bestseller, The Ballad of Songbirds and Snakes. We are rebooting Dirty Dancing in nostalgic and romantic movie starring Jennifer Gray that will delight the fans of our best selling library title. We've just greenlit White Bird a follow-up to our global hit Wonder and Borderlands based on the blockbuster video game franchise. And we continue to successfully expand our power universe, which has turned into a global hit. These are world class brands that will drive opportunities across all of our businesses.
The continued renewal of our most iconic content replenishes our library, which in turn supports the global growth of Starz, a cycle of growth that will continue to enhance the benefits of the convergence of our studio And most importantly, we are growing these businesses through efficient capital allocation, utilizing our own free cash flow as we continue the delevering that John spoke about a moment ago, and we will continue to do so. Now I'd like to turn things over to Jimmy.
Thanks, Michael, and good afternoon, everyone. I'll briefly discuss our fiscal second quarter financial results and provide some color on our outlook. Fiscal second quarter adjusted OIBDA was $156,000,000 driven by continued strong Motion Picture Group segment profit performance and record demand for library, with total revenue coming in at $745,000,000 Reported fully diluted earnings per share was a loss of $08 per share and fully diluted adjusted earnings per share came in at $0.33 per share. Adjusted free cash flow for the quarter was $113,000,000 Now let me briefly discuss the fiscal second 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 was $388,000,000 and segment profit came in at $93,000,000 driven largely by domestic OTT subscriber growth as well as the strong performance of Stars International as we continue to roll out in new territories. Globally, including STARZ PLAY Arabia, the company grew subscribers 2,100,000 sequentially or more than 8% as you can see from our trending schedules. Domestically, OTT subscribers increased 24% sequentially, while international OTT subscribers grew 36%. Total global media networks OTT subscribers reached 13,700,000, exceeding our global 13,400,000 MVPD subscribers for the first time ever, highlighting the inflection point in transitioning our model. We would expect revenues to follow this trend with the majority coming from OTT as soon as our fiscal fourth quarter, with profits to follow sometime after.
We believe we will continue to be an industry leader in the transition to direct to consumer and expect between 25% to 30% of our total consolidated revenue to come from direct to consumer by the end of calendar twenty twenty two, more than any other traditional media company. In addition, as John mentioned, we've already achieved the midpoint of our full year global OTT subscriber range six months into the year. Accordingly, we expect to be at the top end of the 13,000,000 to $15,000,000 range by the end of the fiscal year, representing 40% plus growth year over year. Now turning to our Motion Picture Group. As expected, revenue declined to $258,000,000 as a result of the theater closures and only one premium video on demand release in the quarter, combined with tough comps against last year's strong ancillary performance of Chapter three.
Segment profit came in at $83,000,000 driven by lower P and A spend and record demand for high margin library, which is indicative of the increasing value of our content. And finally, television revenue for the quarter came in at $197,000,000 while segment profit was $10,000,000 driven by contributions from Pea Valley and Spanish Princess. On the balance sheet, we continued to reduce leverage, ending the quarter at 3.9x adjusted OIBDA or 3.1x excluding our investment in STARZPLAY International. We continue to build significant liquidity with more than $450,000,000 of cash on hand and a $1,500,000,000 undrawn revolver. I would also like to remind you that we have no maturities before the end of fiscal twenty twenty three.
We remain committed to strengthening our balance sheet and paying down debt. Lastly, we remain very comfortable with all of our 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 a recession. Now I'd like to turn the call over to James for Q and A.
Thanks, Jimmy. Ryan, we could open up questions now.
Our first question will come from the line of Thomas Yeh. Please go ahead. Your line is open.
Thanks and congrats on the stellar results. Netflix has talked about kind of a pull forward effect on their subscriber growth given the extraordinary shift to streaming that we've seen this year. Can you maybe share some of the characteristics of the new customer joins that you've seen and any insights about retention or usage of that cohort? What do you think is kind of next driver for the next leg of growth? And then secondly, on Motion Picture, in light of the recent news of restructuring this morning, can you share your updated views on how COVID has structurally changed the studio business and how much of that might be permanent or strategic shift going forward?
Thank you.
Yes. Hey, it's Jeff. Thanks for the question. I think first and foremost, what really drives subscriber acquisition and growth is great content. And we launched three new shows in the quarter that ever had outside success.
Our first Power Universe spin off, Ghost, performed about 42% higher than the last season of Power. So we're really thrilled with the success there. Spanish Princess continue to have great success coming back in Season two. And then we saw a spillover from our Freshman Series P Valley that's really performed much better than we thought, and it's an outsized hit right now. And so we've seen great acquisition.
Cost per acquisition has come down significantly as the content has continued to come on. We've also seen churn both domestically and internationally come down to all time lows. And so we feel really good about the trajectory of the business. As John has said in his prepared remarks, we think we'll end the year at the high end of the range, and we feel great about it.
Yes. Thomas, this is Joe. Thank you for the question. So look, the restructure today was
a little
bit about COVID for sure, but mostly about the idea that changes and shifts that were happening before COVID have only accelerated. John mentioned a historic really imbalance between supply and demand with supply dwindling production starts for most companies are down. Stocks on shelves are down, while the appetite is really skyrocketing. The new windows that people were talking about have only accelerated. And this has created real distribution opportunities for us.
And so when we went into work from home, we started to look at what the future was going to look like. And for us, it was about really strategically aligning to capture what we see what we hope what we expected to be and we're now certainly seeing as real new opportunities to monetize our content. We do your question about whether they're sustainable, I would tell you that many of the changes I think the supply demand curve is going to be in favor of content suppliers for a long, long time. Windows are going to continue to evolve, and we see we just see a ton of opportunity moving forward in our business.
Thomas. Brian, next question please.
Our next question comes from the line of Alan Gould. Please go ahead. Your line is open.
For taking the Two questions. One, can you discuss your thoughts these days on theatrical windows? And second for Jimmy, can you discuss how we should start thinking of cash flow a year out when you start spending and investing cash more on productions and there's not quite as much of a back end coming in given the drought that COVID has caused this year?
Sure, Alan. Look, on theatrical windows, it's a really interesting question. We do fully expect the theatrical business to come back. Probably it's not going to look exactly like what it looked like before we went into COVID, and I don't know exactly the timing of it. But to add on to what I was saying earlier, I think theatrical windows are shifting, but I think windows up and down, the revenue stream are shifting.
What it is actually creating is just more optionality and more opportunity in different ways to monetize content. Michael talked about the value of library and the shift in value there. What we're seeing is that monetizing in these new windows, whether it is leading with theatrical, whether it's going to be theatrical and Pvot combined or whether you go direct to Pvot or other ways of exploiting, for sure, demand is up, supply is down, and the values are there for us to go and monetize.
Yes. Thanks, Alan, for the question. Well, for sure, you can see that we've generated strong free cash flow in the first half of this year. We've delevered 1.3x in the first half. So really strong there.
I would say in terms of the Motion Picture Group changes and just the dynamic here that Joe has talked about is it's becoming really a less capital intensive business where we're able to drive cash flows earlier in the curve. But certainly, we're generating strong positive cash flows, expect to continue to do so. And we're fully investing in our content, not only ultimately in a re ramp on the theatrical side of the business, but also in TV and Stars content and fully funding don't forget, we're fully funding the investment in Stars Play International. So I would expect that as we go forward, we're going to continue to fully fund the business. I think the cash flows are going to continue to be strong.
And we'll obviously be ramping a lot of that up for future growth, but we've already been ramping up content spend. So I think we're in really good shape, and we've deleveraged substantially, as you can tell already.
Our next question will come from the line of Alexia Quadrani. Please go ahead. Your line is open.
Hi, this is Anna on for Alexia. Thank you so much for the question. I was just wondering if you can provide us with an update on your recent progress in production, both domestically and internationally?
Sure. You're asking a question about theatrical or television or That's a go for.
If you can touch on things, that would be great.
Sure. We'll start with Kevin. Hey,
thanks for asking the question. We're I mean, the outcome of the presidential election is not clear, but one thing I know we're doing is making boatloads of television. We are back in full production on 12 shows right now, moving to 20 by next March and more orders to come. We just had a nice announcement last week with Fox.
And that doesn't include non fiction.
Yes. And another 20 non fiction productions on top of that. Our focus, of course, is growing our Stars business. We now have 12 shows together that I touched on and more coming. It's a real a great contrast to where we were even over one point years ago when we had one together.
We feel that working closely with our partners really gives us a strategic advantage in the industry. And together, we got back to production four to six weeks ahead of our studio competitors. And the results that Jeff touched on about the shows working, I think, speak for themselves. And we have a really robust third party business as well with HBO Max and Showtime and our broadcast partners all across the business. And we're moving into production.
COVID has
been a road bump, but speed bump, but
it is not slowing us down ultimately.
And I would say the same is true of the feature business. We made it a strategic priority between the whole company to be back to production early and fast and ahead of many of our competitors with state of the art COVID protocols. And we've done that. As John mentioned, we recently greenlit eight films. We finished one recently.
We've got five in production right now, another five that will go in production over the next four or five months. And there are movies that are chosen across the spectrum to serve different audiences and have optionality on a variety of release strategies and platforms. So we're leaning in heavily in this space and expect to be able to continue to do so.
Great. Thanks so much.
Thanks, Hannah.
Our next question will come from the line of Jim Goss. Please go ahead. Your line is open.
Thanks. A little bit more on the notion of what you do with your films in the absence of a video or a theatrical window at the moment. There have been some examples that seem to suggest that there'd be willingness to sell a film into a streaming service for a fairly substantial amount, but it would seem like you would need to do more than cover your costs or why bother taking the risks. So I'm wondering how you value that calculation? And would any sale to a streaming service in lieu of a theatrical window be for a specific window with retention of future rights?
So I think thank you for the question, Jim. I think that the way to start to that is that when we're looking at green lighting a film today, we go through a process. We look at it, frankly, on a platform agnostic basis. We create a strategy and plan and model for a theatrical release for a combined theatrical Pvot release, Pvot only and a number of other scenarios, including streaming sale, whether that be globally, certain territories, certain rights. The thing to really take away here is that whether you're a streamer, most downstream platforms acquire films in a whole variety of fashions and a majority of what they ultimately broadcast is acquired in one form or another, and we're a supplier of that content.
So what we're doing is looking at all of the various opportunities and measuring those against how do we maximize the value of that film, how do we use that film to bifurcate rights and maximize the value of library, how do we grow our brands. And the silver lining in this moment is that between the shift in supply and demand and new windowing strategies and distribution optionality, we're able to have a variety of options for each piece of content, which is just to kind of go back to the first question I was asked, part of our restructuring was to take 10 groups and turn them into four distinct verticals that are built around skill sets so that our executives here live across the life cycle of a film.
So we're able to
have subject matter experts live regardless of platform, regardless of how we're going to monetize it, across that whole life cycle of film, and it's helping us move faster, make better decisions and unlock more value.
Okay. And one other thing, sort of an ancillary notion. You've had some pretty good demonstrated success in the past with contributing to the success of Netflix and AMC with some of the series you've created. And I'm wondering how you approach those sort of things as you come up with ideas now in terms of how long the retention of rights is to those sort of I know there's not one question or one version of all of this, but how are you looking at how long you would dedicate those rights to whatever service you sold content to then making that decision whether you put it on Starz?
This is John, Jim. I'll answer this question, refer back to your last question, which is it's kind of a pretty simple calculus for us.
The longer we're going to
let a third party other than Stars hold on to the content, the more the upfront return has to be, the higher the ROI has to be. Again, we calculate that. It's very, very rare that we will give up rights for a very long period of time. And again, it's interesting. You might say, well, why don't you produce everything for Starz?
Well, the fact of the matter is Starz is a very specific focus premium channel. And if something is right for Starz, obviously, that's where we would like it to be. But we service many, many other platforms for a number of reasons. One is obviously for profitability. Two is because we're so active, we have so much scale in the television business that it puts us in play with talent every day, not just through three Arts, which is a huge competitive advantage.
But by being so active in the business and business with so many writers, stars, it gives us, again, a lot of optionality. And again, we always would love to serve SARs, and a hit on SARs is worth $1,000,000,000 a big hit. But this gives us a lot
of optionality. And again, as I say,
the longer we're going to give the rights to somebody else, and again, we always get them back, the longer we'll give any right to someone else, we would demand a higher profitability, a better ROI upfront.
All right. Great way to think about it. Thanks very much.
Thanks, Jim.
Our next question will come from the line of Katkan Meral. Please go ahead. Your line is open.
Great. Thank you. Not a novel question perhaps, but I wanted to ask about your updated perspectives on industry consolidation and where Lionsgate might fit into that. I think there are plenty of strategic merits for M and A in the context of how rapidly the ecosystem is evolving, as we're all aware. But perhaps in addition to that, as the pandemic has pandemic and its knock on effects have continued to ripple through, has your thinking on M and A evolved, whether it's across the premium networks business or TV and film studios?
I'd answer it this way. Obviously, we don't tend to talk about M and A.
But we've been pretty consistent in
the past looking at certainly bolt on acquisitions, particularly, again, we love library, see these library numbers. Most of the latest increase has been organic, if you will, but we're always looking for bolt on transactions. I would say, overall, we have everything that we need right now to be very effective building two sides of our business, the studio side, including library and the Starz side. But I will tell you that Michael and myself and a number of the key executives here, Brian Goldsmith, are always looking at everything. And I think if there are opportunities, I would say, particularly if because of some of the consolidation at a very high level that has happened recently, if some pieces of other people's business come fall out, I can promise you, again, we've got a lot of powder dry right now.
We've got a lot of cash on our balance sheet. I can promise you we will look at everything. And if it's accretive and most importantly, if it's strategic, I think we will hope to take advantage of it.
Understood. I mean I only ask just because a lot of chatter on certain deals seems to have died down a bit for a variety of reasons. But one would think that as we've seen some pressure elsewhere across your peers perhaps, certain deals can make sense. But I appreciate the perspectives.
Okay. Thank you.
And we have no further questions in queue. Please continue.
Great. Thanks, Ryan. I'd like to thank everybody for joining us on the call today. And please refer to our Press Releases and Events tab under the Investor Relations section of the company's website for a discussion of certain non GAAP forward looking measures discussed on this call today. Thank you again for joining us.
Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.