Starz Entertainment. Nilay is also the Investor Relations for Starz, as well as President and Chief Executive Officer Jeffrey Hirsch with us. Quick background. Starz is the leading premium entertainment destination for women and underrepresented audiences, and home to some of the most popular franchises and series on television. It's available across a wide range of digital OTT platforms and multi-channel video distributors and is a bundling partner of choice. I won't get too much into it, since I'll let you go ahead and do that. Thanks so much for making the trip in from L.A., and we're so happy to have you this year.
Thanks for having us.
Yeah. We had Lionsgate up here earlier, and Michael Burns gave you a good introduction. You completed the separation from Lionsgate just over a year ago. How would you characterize where the business stands today versus where you hoped it would be? How has the first year as a standalone been so far?
Look, I think the business is structurally a lot stronger today than it was a year ago, and we've been separated now for about five quarters. We have spent the better part of the last year unwinding a lot of the constraints that were put on being owned by a studio for a network. Right off the bat, cash management is probably the first thing you notice. You look at year-over-year, we're probably $136 million better on free cash flow than we were last year because we're managing cash for the first time. We have set ourselves on a path to get to a 20% margin business by the back half of calendar 2027, and a lot of that is really twofold, really self-help, which is getting ownership of our own content back on the network.
For the most part, Lionsgate kept most of our IP when we separated. We've had three and a half years from when we announced the separation, so we had a lot of time to plan for it. Our first original will be back on the network July 31st called "Fightland," which is set in the world of boxing in the U.K., very similar to our Power type shows. 50 Cent's Attached to it. The cost of that show, because we own it, is somewhere between the neighborhood of $1 million-$3 million an hour cheaper than when it came from the studio.
If you think about six, seven, eight, nine shows that we can own on the network and somewhere between $1 million - $3 million per hour of savings, that coupled with, which we'll talk about in a minute, exiting the Universal deal, we've got a real clear path to a 20% margin business coming into 2027. As we roll into 2028 and 2029, you start to see free cash flow as a percentage of margin hit that 70% number. You've got this business that's got growing adjusted EBITDA, growing free cash flow. I think actually, if you look at the three years, we probably have more free cash flow than the actual market cap of the company today. We feel really good about the progress that we've made in kind of right-sizing the cost side of the business.
We're clearly on that path right now.
Jumping into the Universal Pay 2 exit, that was big news in the quarter. Walk us through the strategic rationale there.
Yeah. Does everybody know what a Pay 1 and a Pay 2 is? When movies come out of the theater, there's a first window it comes to a streaming service called the Pay 1. That's usually 18 months. It goes to another service in the second window. That's called the Pay 2. In 2020, when we had the Sony Pay 1, Netflix took it. We did a combination of Lionsgate Pay 1 and Universal Pay 2. We signed the Pay 2 with the Universal in 2020 before they had put partners into the Pay 1. Historically, in that Pay 1 was HBO, there wasn't going to be a big overlap between HBO and Starz. There was great value for that Pay 2 window for us. Last minute, Universal put Amazon into that window.
Amazon is our single biggest distributor. Think greater than 6 million subs are sitting and watching those movies on Amazon. They come to Starz. By the time they got to Starz, we were paying prices for Pay 2, but we're getting library performance. We are a massively data-driven company from our D2C product. We were able to see the revenue performance and the viewership performance of each of those titles and what we were actually getting versus what we were paying. It wasn't aligned. We knew we could go into the marketplace and buy library at $0.20 on the dollar for what we were paying. Working with Universal, we worked our way out of that deal. We've been able to get out of that deal.
We do have some payments to Universal in 2027 and 2028, and then when they drop off it's a massive spike in free cash flow in 2029. We're able to kind of money ball the performance of the Universal titles by going into the marketplace, buying library, and right-sizing the cost structure of the business. Fortunately, Universal worked with us, and we were able to do that, and that's partly why we've moved the guide from 20% margin from 2028 to 2027.
You touched on some of my additional questions in there already. No worries at all. Just more on kind of that database that you're talking about. How confident are you in the logic, and I guess what does it say about Starz's long-term competitive differentiation?
When we launched the app in 2015, one of the things that we really wanted to do is get first-party data, right? For those of you who don't know, when we were all 100% linear in 2014 or 2015, the cable companies basically send you a one-page email every month saying, "Here's how many subs we think you have, and here's what we're willing to pay you." That's how much data you have on the consumer. When we launched our D2C product, it was really to have a product in the marketplace that could help us if somebody got into a dispute, but also to get first-party data. We've really become, over the last 15 years or 10 years, a data-driven company. I wake up to three reports every morning. I mean, it's where we really retail the business.
We've got years and years of data points on revenue. It's actually been really great because we've been able to use AI to sit on top of the database to actually start to give us efficiencies in marketing costs, customer acquisition, price point, retention offers. For example, we have got a revenue model now that we built an AI tool on top of it that looks at the slate, looks at the movies that are coming, looks at gaps in content, and makes a recommendation for what the price point offer should be, what's the duration of the offer, and actually how much we should spend. If you look at last weekend, we had a movie called "Safe" with Jason Statham on. The tool said that we were underspent by about $500,000 going into the weekend.
We knocked it up and we came within 2% of the app in terms of the recommendation, in terms of subs. We feel really great about that differentiator, that using data to drive this business is a real big advantage for us.
That's helpful. Moving up the 20% adjusted margin target. Talked about the Pay 2 contributing to that. Anything else that you would like to highlight as driving that?
Yeah, I think there's two other things. One, which is owning our own content, right? When you control the entry point of a show, so when usually you buy a show from a studio, they'll write the show, they'll come back and they'll say, "Okay, we'll budget it out and this is what it costs." You go, "We're not willing to pay that." They take some pages out and they take some storyline out. Now that we control the inception point, we say to them things like, "We like the show, we'll pay $4 million, now write a $4 million show." They start that way. It allows us to control the entry point of cost. We get the international sales, which we weren't getting as part of Lionsgate.
Fightland," like I said, is our first original, Sky came out as the co-commission partner. "Fightland" will be a Sky original in the U.K. As we get more and more of our content on the network, we can then go out and do output deals in international territories that will bring incremental revenue onto the business or drop the cost per show down. That's the other piece. I think, again, as we continue to use data in our business and we continue to move, when I started in 2015, we were 100% linear. Today, 72% of our business is digital. As the business continues to become more digital, we continue to take linear cost off the business and just put that to the bottom line.
We'll continue to look at the organization and take cost out as we become more digital and less linear.
That makes sense. Starz made the decision last quarter to stop reporting sub counts as its primary KPI. How should investors think about what metrics matter most now?
Yeah. Back to your first question, I think the other piece that as we separated, we've really been aligned around what metrics matter, right? It's OTT revenue growth, it's adjusted EBITDA growth, it's free cash flow, and it's delevering, right? When we separated, we were probably 3.4 times levered. We ended last year at 2.9. We've guided at 2.7 this year, and I'm pretty confident that we're going to hit that number. Part of all of that is actually not focusing on quarterly subscribers. When you focus on a quarter metric, what you end up doing is you end up bringing in calorie-light subs to hit a metric at the end of the quarter. If you think about a subscription business, slow and steady kind of actually starts to build on each other.
If you bring in high-quality subs that last longer and you can just layer that on top of it, you end up driving an incremental revenue for the business. If you're slashing the business by starting and stopping, starting and stopping, if you look in December, there is always a holiday offer. Somebody does a $0.99 offer for two months. When you get to February, all those subs are gone, and when you get to March, you have got to replace those subs, and you have got to grow for the quarter or the metric. You put low price offers on to drive that. What it ends up doing is it is starting and stopping revenue, and it is actually bringing up your marketing costs because you are spending more to get those subs that you know are not going to be there.
When we stopped reporting subs, it allowed us to actually take a much longer view on revenue. The AI model that we talked about, we look at a 24-month revenue horizon now versus a three-month revenue horizon. That's been really healthy for the business. Our ARPU's up, our marketing costs are down, and there's more stability in the top line of the business. We think it was the right. Most importantly, from a morale point of view, there's less stress in the building now.
That makes sense. You raised price effective April 1st, I believe. An early indication suggests it's going to plan with minimal churn, which everything you just talked about probably factors into. What specifically gave you the conviction to move when you did? Talk a little bit about Starz's position as a complimentary service and bundling.
Yeah. We're not a broad-based streamer. We don't news, we don't have sports, we don't have advertising, we don't have kids, we don't have Bluey for the dog in the home. We focus on women and underrepresented audiences, and we do that deeper than anybody else and more efficiently than anybody else. That makes us complimentary. We're partners to all and competitors to none, I like to say. We're sold on top of Amazon, we're sold on top of Hulu, we're sold on top of YouTube TV, we're sold on top of all the cable companies.
What we consistently do is we look at the industry and we look at the broad-based streamers, and as they raise rates, we always want to have a significant gap below them, because in the consumer's mind, when prices are similar, the consumer says, "Well, subconsciously, you're making me pick one versus the other." If there's a big gap between, call it Peacock, Hulu, and Starz, they were like, "I have to pick one of those two, and I can add Starz with it." We will watch the industry. We'll see where it goes. We'll watch what content we have in terms of a slate. We'll make a decision based on where we think our consumer is in the economy to make a rate increase or not. We did one April 1st. It's going very very well.
Maybe because people think we were kidding when we did it on April Fool's Day, that was part of what you do when you do a rate increase, is actually you try to do it and defend it. You look at when do you send the notification, when do people look at it, that kind of stuff. Coupled with the fact that we're not chasing subs anymore, churn is at a historic low for the business, which is great for ARPU because we're keeping more full price subs.
That makes sense. Mentioned "Fightland," which premieres July 31st as your first fully owned original, and talked about the Sky co-commission model, improving unit economics. What does each party own? Who bears the production cost? How does this change the P&L and balance sheet treatment relative to a licensed show?
On "Fightland," we own the whole show, right? Obviously, we offload some of it with a co-commission partner with Sky. They take on a piece of the budget. We run it through our output deal in Canada. That cost is there, but we're on the hook for it. We do have production loans that actually help us time cash content spend with when it comes on, and then we pay that off. We have some of that, which is a very good use of leverage to get it to the right place cheaper than our revolver. It's a good working capital there, and we only have one or two of those. We bear the price of that on a co-commission. We cover a piece of it.
The models are all different depending on this, but it's a much better model than just licensing because ultimately you're renting and you don't really have that long-term IP growth and building that library and the ability to monetize it in second windows domestically, second windows internationally. It's really getting ownership back onto the network on scale is a key goal for us as we separated from Lionsgate.
What are you anticipating in terms of owned versus licensing content moving forward, and when do you want to get there?
We got it to 50% of the slate in 2027. I think in 2028 it'll be almost, if you think about our shows, we'll have an "Outlander" show from Sony, one or two shows from Lionsgate, and the rest will be Starz own. On 10 originals figure, seven or eight will be Starz owned long term.
You mentioned cash content spending. Have you talked publicly about what you're anticipating and expecting to spend over the next several years?
Yeah. In 2025, we had $750 million of cash content spend. I think we've talked this year we'll be sub $650 million, and probably coming down somewhere between $550 million-$600 million long term is kind of the steady state where we think we'll be.
Okay. That's helpful. On the returning franchise slate, you have a bunch of shows coming back in 2026. What does your viewership data tell you about audience re-engagement for these properties?
It's a great question. Our engagement is up 8% year-over-year, which is, I think, significant considering what's going on in the rest of the industry. I think the fact that we're focused on two demos and we have something on the air week in and week out for those demos keeps engagement really strong for us. "The Housemaid" was on last couple of weeks, and that has been a massive. It's the number one movie that we've ever had from Lionsgate. We're getting "Michael" in the fall, so that'll be great for us. "Raising Kanan" comes back for its final season June 12th. We'll premiere "Fightland" out of "Raising Kanan." "P-Valley" comes back for its final season. It's been off the air for two years. That's one of our biggest hits. We bring "Blood of My Blood," which is the "Outlander" prequel back.
We have a great slate for the rest of the year. We roll into next year where we bring "Power: Origins" on, which is 18 episodes, which is a longer run for us normally. That is the reboot of the original "Power" with them at 20. It's "Raising Kanan" moves into "Origins." The Kanan character that was 50's character will highlight that into "Origins" who will bring the audience from there with that character in. It's a young Tommy and a young Ghost that brings that on for 18 episodes. We will announce another "Power" show probably next week with Lionsgate. We actually are a co-commission partner in there, so we'll own half that show. It's the first time we'll own a piece of our original IP again.
That's a really big step for us, and thank you to John and team for working with us on that. The content slate has never been as robust as it is, and we're really thrilled about it. I think it's going to continue to be a great year.
How much incremental marketing spend is required to bring people back to franchises? Is it significant?
It's not significant at all. The downside of the digital business is you can connect and disconnect by clicking a button, right? Unlike my cable days where you got to call a call center, you got to wait, and so people just didn't want to do it. Inertia was big back then. The good news is that win-back is a zero-cost game. If you watch the "Power" show and it's coming back, we just send you an in-app message and say, "Hey, it's back on in two days, three days." That's a zero-cost win-back. You don't really have to spend more marketing costs to bring it on.
If you think about the way we schedule the network, so because we're focused on those two demos, it's not like a show comes on the air for delay, then a show comes on for my sister, then a show comes on for my dog, Bernard. We have a show for that audience. "Kanan" will come on, then "Fightland" will come on on week eight. They're very similar audiences. We will, unlike other networks that actually binge where they force you into the next episode, we don't binge, so we're weekly. What we do is after your episode airs, we'll put you into another show that we think that the data says you'll like, whether it's a movie or a show. After "Kanan" Episode 8, we will actually then premiere and stitch "Fightland" to that episode so we can bring audience across.
If you look at Ghost Season 4 into BMF Season 1, 80% of the audience came across and went through it, and that was a huge gain. Generally speaking, the industry average on prequels, sequels, and spinoffs is about 55% of the audience goes to the other piece. We're north of 75% of most of our spinoffs and prequels and sequels.
Yeah. That's great. Talked a little bit about Pay 1 relationship with Lionsgate. How do you think about the economic contribution of that Pay 1 window versus your own slate? How's that relationship evolving post-separation?
Well, we have a long-term deal to 2028, so that relationship continues to be great. We're across the street. We see them all the time. We have some overlap on the board. While we're separate, we still have a lot of connectivity into the business, but we are separate. The Pay 1's great. Housemaid was as big as any of our originals from our first title stream, which is acquisition and viewership. It's as big as any of our originals. That movie was massive for us. Michael coming, I think, will be even bigger. We really like the Pay 1. Pay 1 has always been a hallmark of premium. I think most of the movies, there's like Pay 1 because we're smaller. I like to say we lightly touch these movies before they get to a big streamer.
Lionsgate, if you look at what we did before we separated the 18-month pay-one window, we split it. We get it for six and Amazon gets it for 12. Lionsgate's able to monetize that movie in that first window a lot better. We were able to get a discount. Our data shows that on our service, the first six months are the most valuable, so we were okay with that. Great relationship there. I think it will continue. They continue to make great movies and so that's been great.
Shifting gears a little bit towards M&A optionality, capital allocation, these sorts of dynamics. You've been explicit that M&A is not required to maximize value for Starz, but also said there's a second path for growth through acquisitions that would have to be complementary to your core audiences within leverage parameters and create clear value. Talk specifically about what you're looking at in terms of M&A and what opportunities?
Yeah. I think you said it right. If you look at the path 20% and the free cash flow conversion, we're not eager to do a bad deal, right? The core business is operating really well. We're going to return a lot of cash to shareholders, and I think the business as it is is a very investable business. You look at the chart, their run-up, I still think we're undervalued for where we think the stock should be based on the free cash flow conversion of the business. However, I think there's a real opportunity based on what's going on in the space today to go and scale the business, right? We've done a lot of work around our customer base, women underrepresented audiences, where they're watching shows on Starz and where they're going to other networks.
Do they go to a linear network and watch a show there? The nice thing about social media now is you can go out and actually scan what people post. You can create connectivity between networks. There's about 14 networks that we think there's high correlation between people watching on Starz and watching there that are interesting for us. I think long term, we can build a business that has SVOD at Starz, AVOD with a bouquet of other services that we know the customers watch back and forth, so that we can put that content into the Starz app without ads and bring churn down, because we know that that's what they watch in between watching our shows. That should be engagement should go up, churn should come down.
We think we can use that ad-supported content that they have to create an AVOD business that looks like Starz, but so you have an AVOD business, an SVOD business together, so you're diversifying revenue at Starz and scaling it. The nice thing about all these networks, and I've been in the business a long time, they were all built the same way, right? The back ends are exactly the same. You look at our G&A is about 7.8%. Most of the networks that are public are around 20%. If you can put the businesses together, there's a lot of cost you can pull out while you're standing up a digital business for both of us.
Put digital revenue on the top of the business, take cost out of the bottom, and stand up a really profitable business that is revenue diversified in terms of AVOD, SVOD with a low-cost base. There's a lot of unrest in the industry today. We have to wait till some of that settles down. I think once a lot of these deals close and people start to operate their businesses, some of these networks will fall out, and I think you can buy them pretty reasonably pre-synergies. With the synergies on scale, I think you can actually buy them really well and make a lot of money for shareholders.
That makes sense. Then just on the leverage side, mentioned you're targeting 2.7x at year-end and moving down from there at the end of 2027, given the free cash flow inflection. At what leverage level does capital allocation change? Would you feel more comfortable doing some of this M&A once the unrest calms down?
Nilay and I did a lot of work pre-separation. We looked at small cap companies, and anything that had under 2.8x leverage traded really well. That's really important for us to get down. 2x-2.5x is kind of our stated target, and I think we'll be there pretty quickly based on the characteristics of the business. What we do when we get there, I think that's a good conversation to have. I don't think we're prepared to have that conversation today, and I still think we're five quarters out, so I think a little bit of a show-me stock still.
As we keep stacking great quarters and marching to that 20% margin with that free cash flow conversion, leverage at the end of 2027 should be around that two number, then we'll have that conversation on what to do with capital for shareholders.
Yeah. Starz put a shareholder rights plan in place in March after Byron Allen's stake was disclosed. That'll be in place through, I believe, March 27, before coming up for a shareholder vote. Can you talk to us a little bit about the board's thinking here?
Yeah, look, I think in any kind of special situation where you separate from a company, they're trying to find the right value of the company. I think you've seen that in the stock. I think the board was coalesced around the fact that the company wasn't valued properly. Also, I think they're very focused on our strategic vision to scale the business. To protect all shareholders, we think that was the right step to put in place so that we can have time to get the value to the right place, I think you're seeing that in the stock today, and give us the opportunity to go take advantage of the disruption that's going on in the industry to scale the business. The board, we think that was the right approach to make sure that all of the shareholders were treated equally.
You alluded to it earlier with the stock price momentum more recently. What would you highlight as kind of the key catalyst from here, or in terms of valuation, why is now a good point to still enter the stock despite the run-up?
Look, I think Nilay said this yesterday, he said, "Don't look at the chart, look at the math," right? I think if you still look at the math at 20% margin, converting to the free cash flow trajectory divided by the 16.7 million shares outstanding, the math says that there's still a lot of value left in the company. I think the chart's fun to look at, but I think when you look at the performance of the business, the trajectory that we're on, the fact that everything that we've guided, we either hit or beat, I think we'll continue to do that. To me, that means there's still a lot more value discovery going on in the stock, and we'll see there. Look, our goal is to execute, right? We've stated a plan. Our goal is to stay focused and execute on that plan.
Fightland's going to be the first real big kind of mark to market on us having our own originals. I feel very confident about that. I saw the trailer yesterday. It's spectacular. I've seen the whole show too, so I know what it looks like. It feels like the original Power, just more robust. Our goal is to execute, right? We keep stacking good quarters, keep showing and executing against the plan. I think the rest will take care of itself.
Yeah. When I think about the stock, ultimately when I think about the valuation multiple, the multiple should be a function of growth and visibility, right? How much growth is there in the business, and how confident are you that if something were to happen, the company can still hit its forecast. Given what we've outlined and the self-help we have in the business, we're very confident that this is a business that we know what the trajectory looks like, and we know that it is a growth business on an EBITDA front. When you look at what the multiple we get compared to, it's against a lot of businesses where it's really hard for them to grow their EBITDA. It's hard for them to de-lever when the denominator in their leverage calculation is falling.
We think of this as an EBITDA growth business. We're inflecting on free cash flow. We're going to be de-levering pretty quickly. I look at it and say the multiple that it's trading at today, if we do the things we're doing, I think the market's going to look and say we were wrong to kind of juxtapose it against a lot of linear-first companies, right? I think that, as Jeff alluded to, I think Fightland is going to be a really important proof of concept. We're highly confident that that will be a very successful original that we have, and we're doing it at a lower cost. The operating leverage when you can cut your content costs significantly and keep your revenue flat to growing over time will be pretty significant.
We feel like we're in a really good position, and we're excited to kind of execute on the plan that we outlined.
Great. Any audience questions before we wrap here? Okay. Oh, here we go. One.
Great content. Thank you for keeping it all in the market. On the unscripted side of the business, also content that is kind of like in the TV renaissance era of 2015 - 2020, a lot of the content is driven by the relationships with the showrunners and relationships with the EPs. I guess, can you share anything about your pipeline for EPs and showrunners?
Yeah. That's a great question. We've got 40 - 50 shows in development today. We've talked about Masquerade, which is kind of our version of "The Talented Mr. Ripley," but Ripley as a woman, because everything we do is focused on women-represented audiences. Got a show called "Kingmaker," which is a D.C. political show that Beau Willimon of House of Cards is attached to. We just announced an untitled Black rodeo show that feels a lot like P-Valley. We have a lot of content in development. What we've done is we've mapped the content that's on the air, right? A little bit of what content development is, it's assembly line, right? If you look at the shows that are on the air, you look at the cost.
The cost of the shows escalates, and then between Season 3 and Season 4, it really steps up. We know what the allowable portfolio it is for us to get to 20% and stay at 20%. We've kind of mapped all those shows, the untitled rodeo show feels a lot like P-Valley. P-Valley's got its last season. That will then come on next to replace it. That's at Season 1 cost versus Season 3 cost, we're staying within the allowed portfolio to keep us at that 20%. Everything that we have in development is mapped to what we have on the air. There's three or four shows.
It's a lot like the NFL draft in a sense, which when you have a player on a rookie deal and he gets to the end of his rookie deal, if he's a special teamer, you won't sign him. He'll go somewhere else. You go back to the draft and you get somebody on a rookie deal. That's kind of how we think about cost management around content. We've got development with all great showrunners and writers. There's a book called All Fours that is one of the hottest books for women in their 40s in this country. We were able to get that competitively because we are adult, we are R-rated, and the author really felt like that talent and that story would best be told on Starz because of what we do and how we do it.
We're able to attract that in a competitive way. We didn't overpay for it. It was just because of what we do and how we do it. We're also domestic only, right? When you look at a lot of the content coming out of the U.K., Amadeus is on the service today. We can buy the U.S. from people that have what need to keep rights in the U.K., and other competitors will want the world. Because they can't get the U.K., they won't take it. That gives us a leg up on getting a lot of great content coming out on an acquisition basis coming out of the U.K. The development pipeline's as robust as it's been. We do work with all great writers and showrunners and directors.
I would say, I think the world of these big overall deals that you've seen are kind of becoming few and far between. Other than a handful, and you can count them on one hand, people that have had more than three hit shows. Great stories, great content come from fresh voices all the time, and because what we do in terms of women in underrepresented audiences, and we have women at the forefront and the female gaze as kind of the lead, a lot of the stories aren't being taken to other places. We get some of the best writers, some of the best stories. We've self-developed a lot of great stuff. We've always had a team of 20 great developers. Most of the stuff that as content we're talking about has been self-developed. Then we bring great writers on and great directors on.
I feel really comfortable and great about the content slate going forward. That coupled with the Lionsgate movies, I think we're in a kind of a really sweet spot for content over the next kind of two to five years.
Thanks. I think we're actually about at time already, so have to table this question to another time. Thank you so much for being here.
Thank you.
We really-