UPDATED 4:50 PM with comments from execs during conference call with analysts: Lionsgate CEO Jon Feltheimer told Wall Street analysts during today’s earnings conference call that developing programming for Starz was the company’s biggest priority for the rest of 2017 and beyond.
The company earlier had posted solid results in its fiscal first quarter, with gains from the sale of its Epix stake and strong film revenue being overtaken by higher marketing costs and fewer new episode deliveries of TV series. (MGM agreed to pay $1.03 billion for Viacom’s 49.8% interest and Lionsgate’s 31.2% of Epix in April of this year).
“I don’t see us backing off on our theatrical business,” Feltheimer said on the call. “We’re continuing to show solid profitability in our motion picture business. We’re not a huge, monster hit-driven business. We love a hit when we get it.” Noting the lower risk profile of the specialty releases of units like Roadside Attractions or Pantelion, he then segued back to television. “We have no priority currently higher than creating premium programming for Starz that [enables us to] retain as many rights as possible. Let’s just say, any incremental cash we have I can see it going into that business. As I said before, we have a formula where it’s very simple where we invest in programming and we put great marketing around it and it leads to subs and it leads to revenue. So there is a formula there that is investable.”
He added that seven projects are in active development at Starz, including The Rook, a partnership with Liberty Global.
Results for the quarter ending June 30 were reported on a pro forma basis, given the recent acquisition of Starz. Revenue of $1.01 billion for the period slightly exceeded Wall Street estimates and was the company’s second straight $1 billion-plus quarter. Operating income before depreciation and amortization (OIBDA) came in at $90 million, or $182 million on an adjusted basis, with both figures well above Wall Street estimates.
Media Networks segment revenue rose 9.2% to $390.5 million, but segment profits declined 7.9% to $109.5 million, with margins dipping to 28% from 33.2% a year ago.
Starz debuted the new series American Gods and The White Princess during the quarter, and the fourth season of the hit series Power returned at the end of the quarter.
The film side offered a brighter picture. Revenue increased 15.8% to $472.4 million from $408 million last year. Driving the results were strong home entertainment performances of John Wick: Chapter Two, La La Land and The Shack. John Wick: Chapter Two became the highest-grossing electronic sell-through title in the company’s history.
Theatrical revenue in the quarter came in from All Eyez On Me and How to Be A Latin Lover, helping segment profit in the quarter increase 191.6% to $86.9 million from $29.8 million last year. The company cited benefits from higher revenue and lower marketing spend. Segment profit margins in the quarter increased to 18.4% from 7.3% last year on a combined pro forma basis.
Despite bullish sentiment about movies and news of a re-up with CBS Films and a vote of confidence in premium VOD, executives noted they were paying down $170 million in film production costs. That includes Power Rangers, which grossed an underwhelming $85 million at the domestic box office.
They also warned on the call of possible impact from marketing expenses for five upcoming releases in the second quarter, three of them in October. That trio includes My Little Pony, Tyler Perry’s Boo 2! A Madea Halloween, and Jigsaw, the eighth Saw outing.
Lionsgate executives signaled a possible new franchise on the horizon in the The Kingkiller Chronicle, a partnership with Hamilton creator Lin-Manuel Miranda. They teased that a prequel was planned. Previously, the company had announced that a feature and TV series were on the way, with the company also having an option on a potential stage production based on the Pat Rothfuss trilogy. The cross-platform play also includes a video game and other digital extensions. The story, which focuses on an adventurer who is also a musician, features a portfolio of characters ripe for licensing and merchandising, executives said.
Execs also touted the potency of Power, which was developed by Chris Albrecht and his team before the Lionsgate deal closed last December. The show’s fourth season drove three and a half times as many subscription sign-ups as Season 3. The show exemplifies a mantra that execs repeated throughout the call: “We’re retaining as many rights as we can.” (Disney is clearly also on that page — despite a soft quarter, with ESPN a particular problem child, it made news and sent Netflix shares reeling by announcing it was yanking titles off Netflix and launching its own subscription service.)
“We feel excited and very confident about the future of our OTT business,” Albrecht said. “With regard to margins, these are higher-margin subs than our traditional MVPD subs.” Churn rates are also higher, he noted, so the trick is to find shows like Power that spark continued interest. “What we’re seeing in our OTT business is that originals drive the business. … We’re seeing the acquisition power, no pun intended, of the originals.”
Feltheimer noted that Starz’s OTT offerings have about 2 million subscribers, which “is running well ahead of our own projections.”
Lionsgate believes Starz will add fuel to other entrepreneurial efforts. “We’ve been very successful in launching new product in the last year or two,” Feltheimer said. Kevin Hart’s mobile comedy platform Laugh Out Loud, which is free on iOS and Android platforms and $2.99 a month for an ad-free version, racked up 150,000 downloads in in its first five days, more than tripling Day 1’s downloads of 30,000 to 40,000.
Asked about last week’s Disney-Scripps merger, Lionsgate execs highlighted an ongoing relationship with Discovery as a supplier. (The company was a producer of limited scripted series Manhunt, the limited anthology that premiered last week on the Discovery Channel.)