Starz Entertainment sees mixed Q2 results with adjusted OIBDA down, but expects subscriber growth driven by strong premieres and improved content economics ahead.

OPERATOR - (00:00:55)

Good day everyone and welcome to the Starz second quarter 2025 earnings call. @ this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To participate you will need to press star 11 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 11 again. Please note this conference is being recorded now. It's my pleasure to turn the call over to Nilay Shah with Starz Investor Relations. Please go ahead.

Nilay Shah - (00:01:32)

Good afternoon. Thank you for joining us for Starz Entertainment's fiscal 2025 second quarter earnings call. We'll begin with opening remarks from our President and CEO Jeffrey Hirsch, followed by remarks from our CFO Scott McDonald's. Also joining us on the call today is Allison Hoffman, President of Starz Networks. After our opening remarks, we'll open the call for questions. The matters discussed on the call include forward looking statements including those regarding expected future performance. 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 our Most recently filed 10K for Starz Entertainment Court. Starz undertakes no obligation to publicly release the result of any revisions to these forward looking statements that may be made to reflect any future events or circumstances. The matters discussed today will also include non GAAP measures. The reconciliation for these and additional required information is available in the 8K we filed this afternoon which is available on the Starz investor relations websiteinvestors.starz.com I'll now turn the call over to Jeffrey Hirsch.

Jeffrey Hirsch - President and CEO - (00:02:40)

Thank you Nilay thank you everyone for joining us today. Before getting into the details behind the quarter, I want to give everyone an update on how I see Starz is positioned in the ever changing media landscape. As I laid out last quarter, Starz is a highly profitable digital first network that is able to punch above its weight class because it has remained focused on catering to two valuable demos of women and underrepresented audiences. Unlike our peers, Star Starz took a distribution agnostic approach to streaming. This resulted in a profitable transition and a business that has delivered consistently strong adjusted EBITDA performance. We believe this decision not to follow the herd has positioned Starz to be a very straightforward and predictable investment story. The investment case hinges on modest top line and domestic OTT subscriber growth coupled with lower content spend. We believe this combination should drive three key outputs. 1. Higher adjusted EBITDA margins 2. Higher free cash flow and 3 lower leverage. Given these business drivers, combined with our outlook of generating approximately $200 million of adjusted OIBDA in calendar 25 and converting 70% of adjusted OIBDA to unlevered free cash flow during calendar 26, we see our current valuation of approximately 4 times adjusted OIBDA as very attractive. We believe this valuation disconnect will become more apparent in the coming quarters when several large media companies spin off their linear networks into standalone public companies. It's worth noting that even though these linear networks are heavily dependent on linear advertising and have immaterial digital revenue, most Wall street analysts are valuing these businesses at similar or higher multiples than stars, making us a great value. Turning to the operating fundamentals, we delivered adjusted EBITDA in revenue results inside our expectations despite some underperformance of BMF Season 4. While the season still drew a large audience, it didn't maintain the expected scale relative to our anticipated performance for the series. This resulted in modest sequential declines in OTT subscribers and revenue, which Scott will go into detail momentarily. Now more than ever, our priority continues to be laser focused on making great stories that also drive the business, and we are thrilled to report that our highly anticipated and critically acclaimed Outlander prequel Blood of My Blood is already exceeding expectations. It has generated the third highest number of subscriber additions for a series premiere and Starz history and viewership has exceeded the last episode of Outlander Season 7 by 40%. This impressive performance out of the gate has resulted in strong subscriber growth and importantly, we are adding these subscribers with higher price promotions than the prior season of Outlander. Based on this momentum, we remain confident in our expectations of sequential revenue growth and OTT subscriber growth in the September and December quarters following Blood of My Blood. The slate features high performing returning temples such as Force and Raising Canaan alongside the premier Spartacus, which is returning to the service after 12 years. With this temple heavy slate combined with strong film lineup that includes Ballerina and Oppenheimer, we expect to finish the year from a position of strength, setting us up for continued revenue growth in calendar 26. Looking forward, we will bring audiences several long awaited premieres including the final season of Outlander p Valley Season 3, as well as the launch of new power prequel series Origins, which will have a super sized 18 episode premiere season. We are also excited to bring our first Starz owned and produced show Fightland to our viewers. In short, this is one of the most compelling content slates that Starz has had in several years. Most importantly, the slate is being delivered at superior Economics on a per episode basis relative to prior years. We expect the structural improvement in our content costs will build over the next several quarters. This is a key tenet to our investment case and bolsters our confidence that we can reach our 20% margin target run rate coming out of calendar 28. Given the strength of our slate, we outlined the stability of our streaming first operating model and our improving content cost structure. We are excited about the outlook of our business and believe Starz is the most misunderstood and undervalued stock in our sector. Now, Scott will take you through our key metrics and financial results.

Scott McDonald - Chief Financial Officer - (00:07:06)

Scott thanks Jeff and good afternoon everyone. I will walk through the financial and operational highlights from the June quarter for Starz Networks, which includes our operations in the United States and Canada. I will also provide an update on our balance sheet Starz Networks ended the quarter with 12.18 million US OTT subscribers, a sequential decline of 120,000. The decline in the quarter was primarily driven by lower subscriber additions resulting from underperformance of BMF Season 4. As Jeff noted, we ended the quarter with 19.08 million total North American subscribers, down 520,000 sequentially. The linear subscriber base declined to 6.22 million, reflecting continued declines in pay TV households. Total revenue for the quarter was 319.7 million, down 2% sequentially and 7.4% year over year. OTT revenue was 221.1 million, while linear and other revenue came in at 98.6 million the year over year and sequential revenue declines resulted from lower OTT subscriber additions and continued linear pressure. Looking forward, as Jeff noted, we are already seeing improved subscriber trends due to the successful premiere of Outlander Blood on My Blood. We continue to expect sequential revenue and OTT subscriber growth in the next two quarters. Adjusted EBITDA was 33.4 million and was expectedly down from the 92.0 million in the March quarter. The sequential decline was primarily due to higher content amortization related to the airing of 6 episodes of Raising Canaan Season 4 and and the premiere of BMF Season 4 during the quarter. We ended the quarter with 573.5 million in total net debt, down 42.1 million on a sequential basis. That includes 300 million of our term loan A and 325.1 million of our senior unsecured notes, less 51.6 million in cash. We had no borrowings outstanding under our 150 million revolving credit facility at the end of June, our leverage on a trailing twelve month basis was 3.2 times for the quarter. We expect leverage to increase to approximately 3.5 times in the September quarter due to the timing related to content payments, but we continue to expect to exit the year with leverage around 3.1 times. As we mentioned on our last call, we view 2025 as a transition year for our cash flow which we now directly manage for the remainder of 2025. We will have some ebbs and flows in the timing of our content payments before we get back to a more normal payment flow during 2026. This will set us on a good path to deleverage which will be our focus during 2026 and 2027. As a result of the passage of the One Big Beautiful Bill Act, interest deductions previously deferred will now be currently available to us to reduce any federal tax liability. Accordingly, when combining this favorable change in the tax law with previously existing net operating losses (NOLs), we we do not anticipate having any significant federal cash tax payments for the foreseeable future. We are very excited about the future here at stars. Now I'd like to turn the call back over to Nilay for Q and A Nilay.

Nilay Shah - (00:10:17)

Thanks Scott. Operator, can we open the call up for Q and A please?

OPERATOR - (00:10:21)

Thank you so much. And as a reminder to ask a question, simply press star 11 on your telephone and wait for your name to be announced. To remove yourself, press star 11 again. One moment for our first question and he's from the line of Brent Penter with Raymond James. Please proceed.

Brent Penter - Equity Analyst - (00:10:42)

Hey everyone, thanks for taking the questions. Jeff. Appreciate the comments on M&A and the industry landscape. How do you all think about what defines scale in this business? And if you were to participate in M&A, is there any prerequisites you would want to achieve before pursuing that? Whether that be your leverage target, improving your equity valuation, any sort of operational metrics or anything else that you would want to achieve before really actively pursuing.

Jeffrey Hirsch - President and CEO - (00:11:11)

Matt Hey Brent, thanks for the question. First of all, I think we have a pretty clear plan of delevering and getting to a 20% margin business coming out of calendar 28. So whether we participate or not in M&A, we will continue to focus on on delivering that plan to our investors and to the business. I'm not going to really comment deeply on M and A, but what I would say is we think we've built a very valuable business both with the serving of the two core demographics that we are kind of the destination for we have a phenomenal tech back end and a data stack that I think is unparalleled in the business. And so that makes us a very valuable asset. But it also sets us up to be a very strong platform to scale around. And I would think we like the demographics we serve today. We think there's a lot of opportunity in those demographics to expand outside of the subscription business, but still stay focused in those demographics. And so I do think in the next, you know, as other peers unwind their businesses and figure out who they are, there will be a lot of opportunity for us to scale our business in the next 12 to 24 months. Okay, got it.

Brent Penter - Equity Analyst - (00:12:21)

And then on the 20% EBITDA margin goal by 2028, you laid out last quarter kind of the path of how you get there on your content costs. If we get to 2028 and you've done better than that, what would be the likeliest reason? And vice versa, if we get to 2028 and you haven't quite hit that 20% margin, what would be the likeliest reason? What would cause you to overachieve or underachieve that expectation?

Jeffrey Hirsch - President and CEO - (00:12:56)

Great question. Look, I think there's really two core. There's two kind of core ways to get to the 20%. The biggest way is actually turning the slate over, de aging it and getting ownership back on the network we have announced and we'll start production on Fightland. We talked about it being our first Starz owned and produced show. If you look at the season one of Fightland, the season one per-episode cost is 30% lower than what we've seen in season one premieres on Starz over the last couple years. So right off the bat with the first show, we're seeing significant reduction in cost structure. And if you think about us getting to half of our slate four shows by 2027 where we'll have ownership on that scale, you can see there's a real opportunity to put a lot of dollars to the OIBDA line. The other piece is we haven't even factored in the international sales of Fightland. So that's incremental dollars to the business. And so as long as we continue to execute against the strategy of turning over the slate, getting ownership and de aging, we'll hit that number coming out of calendar 28. I do think there's some other opportunities for us to take cost off the business. The other side of it is obviously revenue growth. We've talked about how revenue will start to grow again in third and fourth quarter and in calendar 26. So we can start to grow the top line again to 1 to 3% on top of cost controls on the content side, I think we can actually hit that number. We will be opportunistic. If we see some content that comes in that we think will really help the business, we will probably make a decision to put that on. But right now, again, I think we're simply laser focused on trying to grow top line but also get the cost structure of content into that 6 to $650 million range. And that puts us at 20% coming out of calendar 28. Okay, great.

Brent Penter - Equity Analyst - (00:14:47)

Thanks Jeff. Thank you.

OPERATOR - (00:14:51)

Our next question comes from David Joyce with Seaport Research Partners. Please proceed.

David Joyce - Equity Analyst - (00:14:58)

Thank you. A couple if I could first on BMF, can you pinpoint what didn't work with that this time that made it miss your expectations and what would you adjust since having a spin-off and franchise and new strategy is important for you going forward. And then secondly, wanted to ask on the ARPU that was above our expectations and if you could just go through the puts and takes of price increases in your different distribution relationships and how that's impacting arpu. Thanks.

Jeffrey Hirsch - President and CEO - (00:15:38)

Great question. So you know, look, the start of BMF was still a very large show for us. It just wasn't at the expectation we had in for growth in the quarter. And so it was really a gross adds issue. I don't think there's one thing that we can pinpoint to it. We did see some softness toward the end of season three, but we thought we had corrected it in the story. But that's not to say that there was a lot of different things that went into the softness on gross adds for bmf. We do have two BMF similar type shows in development with Lionsgate. We like both those shows but. But we have the last episode airing tonight. So we'll do what we normally do, which is get into the post-mortem on a show with the show runners and do analysis and see whether it comes back or not. We do have a lot of great content in development. We talked about Kingmaker, we talked about obviously Fightland, that's coming. And so we have a lot of opportunity to put shows on the air that I think serves that audience on scale that we can own. And so while I really was hoping that it would perform better, it's been a great show for us for the three years we've had it. We did see some softness in gross adds around that.

Scott McDonald - Chief Financial Officer - (00:16:52)

Yeah, with respect to arpu, this is Scott, it's been fairly consistent quarter over. Quarter on a year over year basis. Which we think is relatively good for the business. When you look at arpu, we were. Down just a little bit this quarter. Quarter primarily due to more customers on multi month type offers. And we really like that kind of. Transition and getting more of a mix of that because that does help us with reducing churn over time. And I think to your question about rate and distribution relationships, look, we are, you know, again, we are set up to be a complementary service and sold with our partners. We make a lot of money for our partners. 80% of our customer base is either à la carte or revenue share, which means two things. One, customers are choosing Starz because the content is working and two, we're making money for our partners. And so we've got a really good relationship with our partners there. We have done two rate increases in the last two years. We do not have any plans to do a rate increase this year or next year. We do think there's going to be a lot of new distribution platforms coming online next year that will allow us to continue to grow the top line through subscriber growth and not have to go to the rate increases to grow the business.

David Joyce - Equity Analyst - (00:18:11)

Great, thank you.

OPERATOR - (00:18:14)

Our next question comes from David Karnofsky with JP Morgan. Please proceed.

David Karnofsky - Equity Analyst - (00:18:21)

Hey, thank you, Jeff. With Blood of My Blood, maybe can you expand a bit on how much of Outlander's audience or subscriber base you think you've been able to carry over and then maybe just more broadly what kind of underlies your confidence that you can continue to transition audiences to these new iterations of prior franchises? Maybe you can talk a bit to your track record here. Thank you.

Jeffrey Hirsch - President and CEO - (00:18:46)

Yeah, I'm going to let Ali talk about Blood of My Blood and the track record and then I'll jump in as well.

Allison Hoffman - President of Starz Networks - (00:18:52)

Yeah, so thanks for the question. I think successful franchising is a real power here at Starz. Just for reference, our spin off sequels, prequels typically deliver more than 85% of the original season's audience. And that compares to the industry that usually sees about half the audience go to sequels and spin offs and prequels. So we're very good at this. The programming team and the producing teams work well together to do this and to really expand the storylines, make sure that there's story to tell, that there's characters that the audiences want to see. I think with Blood of My Blood that was very intentional. As a prequel, the idea is serve the Outlander audience really well in all of the things that they're looking for time travel, history, fantasy, and of course, romance, but also make it very accessible to a new audience. You don't have to have seen Outlander to love Blood of My Blood. And that's just what we're seeing. I think with the stats that Jeff noted, you know, we're seeing a 40% lift over the final episode of Outlander. That means new audiences are coming in for this story and we're carrying over successfully the Outlander audience. So that's really exciting for us to see, but I think something that we are actually kind of accustomed to seeing based on this sort of machine we've built around franchising at the network.

David Karnofsky - Equity Analyst - (00:20:29)

Thank you.

OPERATOR - (00:20:31)

One moment for our next question. And it comes from Matthew Harrigan with the Benchmark company. Please proceed.

Matthew Harrigan - Equity Analyst - (00:20:41)

Thank you. I think we have some sell side groupthink going because most of my questions were already asked. But I was curious on Spartacus, it's been 12 years. I mean, the swords and sandals, you know, shows and movies sometimes work really well, sometimes they don't. Obviously, Peacock had a fairly racy entry in that genre fairly recently. But, you know, what gives you the confidence that, you know, there's that much awareness of it still and, you know, how do you get it to resonate with the urban and female demographic? And do you have, you know, fairly. I don't know. I'm sure you're not going to say you have lofty expectations for it, but is this something that you think could be a fairly long running series? And then secondly, I know it's absurdly early, but how would you characterize the changes in your relationship with Lionsgate Television, you know, thus far, you know, structurally, mechanically, and I guess, you know, socially, even though it's been just, you know, literally just a few weeks out of the blocks. Thanks.

Jeffrey Hirsch - President and CEO - (00:21:45)

Great question. I think, you know, I've been at Starz now 10 years and I don't think there's ever a time where I travel somewhere and somebody asked me, you know, when is Spartacus coming back? I think it's one of the network defining shows that we have. I think everybody in the building gets asked about Spartacus all the time. And so that's one of the reasons why we decided to bring it back after 12 years is because there is such this swell of people outside the building looking for it to come back. If you look at the research that we've done around the show, again, the existing customers and new customers show that there's an incredible desire for us to put the show on the Air and see it. If you look socially since Comic-Con and I was down at Comic-Con, you can just see the intensity around the show. And Steven Denight online right now, there is insane intensity around when it's coming back, when it's going to air. And so we feel pretty good that what we're seeing from the market outside, there's a real desire and to have that show back on the air. I think one of the things that we've done differently in this iteration of Spartacus is we have an African-American female gladiator in the show. The hope with that is for us to then be able to merge some of our existing corps demos into the show. But I think the story is as traditional Spartacus as it's ever been. We've had the Originsal crew in terms of Steven and crew doing it. Karen Bailey on our team here who worked on the Originsal, worked on it again. We were back in New Zealand. So it has all the markings of a great Spartacus. And so we're excited for it to come back on the air. Oh, and then the relationship with Lionsgate, I think the relationship's been great. I think having some natural, typical arm's length, real relationship now has been good. We continue to talk about various shows. We just picked up another show with them. Obviously Spartacus we're doing with them. We did 18 episodes of Origins, the power spinoff them. And that was a really interesting, I think, collaboration to get to a price point that we got to 18 episodes. And so the relationship there has been great. And so I think it hasn't really been much of a change. Obviously we have a lot of business with them. We have to pay one excited for Ballerina to come on the air. And there's still some good overlap with Lionsgate folks on the boards. On both boards. And so I think the relationship is as strong, if not better than it was before we separated.

Matthew Harrigan - Equity Analyst - (00:24:19)

I'm sure your black female gladiator will be just as hard to kill as John Wick. Thanks. That sounds great on Spartacus.

Jeffrey Hirsch - President and CEO - (00:24:27)

My hope. And she's a little more aggressive than the Baba Yaga for sure.

OPERATOR - (00:24:34)

Thank you. And ladies and gentlemen, this concludes our Q and A session. I will turn it back to Neela Shah for additional comments.

Nilay Shah - (00:24:43)

Thank you, operator. And thank you everyone. Please refer to the news and events tab under the investor relations section of our website for a discussion of certain. Non GAAP forward looking measures discussed on this call. Thank you.

OPERATOR - (00:24:56)

And this concludes our conference call. Thank you all for participating. You may now disconnect.