How many subscribers does Starz have? Sometimes even Starz itself can’t be sure — as investors found out today.
This morning the company reported that Starz had 23.5 million subs in Q2, down 200,000 from Q1, while Encore had 33.3 million, down 500,000. That surprise led some to wonder whether the premium networks company took a hit in a contract renewal dispute with AT&T’s U-verse, resolved last week when they signed a new multiyear deal.
The sub number and lower than expected earnings contributed to a 9.3% drop in the company’s share price today.
But wait: Starz CEO Chris Albrecht said in a conference call with analysts that the lower sub numbers had nothing to do with U-verse, and weren’t really down at all. Cable and satellite companies tell Starz how many subs it has on their systems. And a major, undisclosed, carrier recently told the company that it had turned over slightly inflated numbers over several quarters. Once discovered, Starz had to report the right tally in its latest report.
All things being equal, Starz would have been up by 100,000 with Encore up 200,000.
As for AT&T, Albrecht says that the new deal doesn’t include DirecTV — it was signed before Friday, when the telco formally bought the No. 1 satellite company. The CEO says he’s “very pleased to have renewed for Starz and Encore on favorable terms.”
Stifel Research’s Benjamin Mogil says he believes the deal only lasts “a year or so” so it will sync with Starz’ carriage agreement with DirecTV. He’s concerned that some major carriers will see Epix as a possible substitute for Starz, and use that leverage to fight the company if it demands big price increases.
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Starz execs acknowledged that their costs will rise as the company boosts the number of original series it airs, an important part of its strategy as it looks ahead to the loss of Disney programming in 2017. “We have a marketing campaign for every show,” Albrecht says.
He adds that he’s “not concerned about the loss of Disney as it relates to any of our current distribution agreements…It’s clearly the originals that drive those. We’re feeling confident with our current distributors.”
Starz reported Q2 net income of $63 million, down 8.7% vs the period last year, on revenues of $417.7 million, up 1.9%. Analysts expected the top line to come in higher, at $455.2 million. Earnings at 59 cents a share also were short of the Street’s expectation of 66 cents.
But last year’s results included an $11 million cash payment from the sale of Joe Roth’s Revolution Studio. Also, this year Starz had an additional expense for the development of its Starz Play app.
“We were pleased with the performance of our businesses in the quarter,” Albrecht says. In addition to the revenue increase “we had a very successful quarter in terms of original programming and remain on track this year to achieve our goal of 75-80 episodes of new Starz Original series.” He adds that he’s “confident that robust original programming in combination with our quality movie offerings will further strengthen our distribution and subscriber relationships.
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