Starz Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.27.13 | About: Starz (STRZA)

Starz (NASDAQ:STRZA)

Q4 2012 Earnings Call

February 27, 2013 4:00 pm ET

Executives

Courtnee Ulrich

Christopher Albrecht - Chief Executive Officer, Director and Member of Executive Committee

Scott MacDonald - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

David Carl Joyce - ISI Group Inc., Research Division

John Tinker - Maxim Group LLC, Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

Amy Yong - Macquarie Research

Christopher Merwin - Barclays Capital, Research Division

Robert G. Routh - Phoenix Partners Group, LP, Research Division

Ryan Fiftal - Morgan Stanley, Research Division

Peter Lee - Evercore Partners Inc., Research Division

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Starz Incorporated Fourth Quarter 2012 Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Ms. Courtnee Ulrich, Vice President of Investor Relations. Please go ahead, ma'am.

Courtnee Ulrich

Hi, good afternoon. Before this call starts, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements of our financial guidance, business strategies, market potential, future financial performance, new service and product launches and other matters that are not historical facts. These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues and continued access to capital on terms acceptable to Starz. These forward-looking statements speak only as of the date of this call, and Starz expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Starz expectations with regards thereto or any change in events, condition or circumstances, on which any such statement is based. On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA. The required definitions and reconciliations, preliminary notes and Schedules 1 through 3 can be found at the end of this presentation.

Now I'd like to introduce, Chris Albrecht, CEO of Starz.

Christopher Albrecht

Thank you, Courtnee. Welcome to the first Starz's earnings call, following our successful spin-off transaction from Liberty last month. I'm very pleased to be leading the newly independent publicly-traded Starz. We're truly excited about the opportunities our recent spin affords, and think we have a strong foundation and a solid plan to build on our success and create a new Starz. We're focus on delivering long-term shareholder value, and I believe we have an effective and prudent strategy to do this. We have the customer -- consumer and distributor relationships and the financial wherewithal to invest in our businesses in a disciplined way that can make Starz stand out in the premium category.

Now I'll take you through some of the highlights. At Starz networks, we were very pleased to extend our first-run output relationship with Sony Pictures Entertainment through 2021, allowing us to offer world-class theatrical movies from Sony into 2023. And while I will not be able to get into the financial specifics, we will believe the deal is consistent with other recent agreements between traditional premium TV networks and major Hollywood Studios and is comparable to our current economics for Sony's 2012 theatrical releases. We'll continue to benefit for several more years from our exclusive Disney products, including new Marvel and Lucasfilm titles, which will continue to air on our networks and digital play services, the first-run window product available into 2017. We're confident that we have ample quality products to fulfill our programming needs.

Since our last earnings call, Starz extended 2 additional distribution agreements with key multichannel providers on terms that are consistent with their prior agreements, which include annual contractual increases. These multiyear, multiplatform extensions close out the 30% of revenue that was up for renegotiation in 2012, providing us with further distribution stability and opportunities for growth. Our TV Everywhere PLAY services continue to make strong inroads, with recent launches of STARZ PLAY and ENCORE PLAY by DIRECTV, AT&T U-verse and most recently, Verizon FiOS. AT&T also launched our third TV Everywhere service, MOVIEPLEX PLAY, this quarter. The PLAY services give us further flexibility to help bolster our key distributor's video platforms and provide our subscribers with the benefit of convenient multiple device viewing options. We hope new PLAY distribution agreements with additional support devices and features are all expected to launch this year. Original programming, however, is the key to fortifying the Starz brand, expanding our global content portfolio and ultimately growing our already healthy business.

For 2013, we're already well underway with the final season of the worldwide hit series, Spartacus, which is currently licensed in approximately 200 territories worldwide. Following the series finale of Spartacus on April 12, we'll showcase the world premiere of the next new STARZ Original Series, Da Vinci's Demons, from David Goyer, co-writer of the Dark Knight movie trilogy. Audiences across the globe will get a fresh take on a young Leonardo Da Vinci. Starz owns full multi-platform rights for the series in the U.S. and English-speaking Canada, and the series will also have a global premiere on 120 countries, including distribution through the Fox international channels. Following Da Vinci's Demons, our wholly-owned series, Magic City, will premiere its second season. This compelling show stars Jeffrey Dean Morgan; Olga Kurylenko; Golden Globe nominee, Danny Huston; and Academy Award nominee, James Caan joins the cast. Our final premiere for 2013 will be the limited series, The White Queen, based on the international best-selling novels by Philippa Gregory. Starz owns key global multiplatform rights for this series, and they will be bringing it to the international marketplace for the first time at NDTV in April.

In 2014, we'll premiere film maker Michael Bay's first scripted project for television, the pirate adventure, Black Sails, currently shooting in South Africa, Starz retains full global multiplatform rights for this action series. We will continue to be prudent and highly selective in the original series we greenlight for the Starz schedule. The runway provided by the departing Disney output content will enable us to begin accelerating our original programming development over the next several years. Speaking of development, we're also really excited about several projects currently in our pipeline. Yesterday, we announced the development of Blackpool, a series from champion dancers and actors, Julianne and Derek Hough, who -- which is inspired by their years on the international dance circuit. Additional projects currently in development are encouraging, with Steven DeKnight and his science fiction themed action series, Outlander, from writer/producer, Ron Moore, who will adapt the drama series based on the best-selling fantasy romance adventure series of books, which has tens of millions of fans around the world.

We have a ballet project from Breaking Bad producer -- from Breaking Bad co-executive producer, Moira Walley-Beckett; and Inglourious Basterds producer, Lawrence Bender. It's a psychological drama that explores the glamorous world of ballet, as seen through the eyes of a young ballerina. And Power, hip-hop star, 50 Cent, will executive produce the series, which tells the story of a wealthy night club owner and business mogul in New York City, who finds himself trapped between a world of criminality and legitimacy. At Starz distribution, Anchor Bay will be looking for strong performances from Academy Award-winning Weinstein Company theatrical releases, Django Unchained and Silver Linings Playbook.

Now I'll turn it over to Scott MacDonald, Starz' CFO, to talk about our financial results.

Scott MacDonald

Thanks, Chris. STARZ and Encore again reached subscriber milestones with new all-time highs of 56 million combined subscriptions, 21.2 million for Starz and 34.8 million for ENCORE. This is an increase from year-end 2011 of 8.2% for Starz and 4.8% for ENCORE. Starz's revenue decreased 2% to $422 million in the fourth quarter and increased 1% to $1.6 billion for the full year. Adjusted OIBDA increased 8% to $101 million in the fourth quarter and decreased 1% to $445 million for the year.

Now turning to our liquidity. At year-end, Starz's had cash of $750 million and debt of $540 million. Pro forma for the spin-off from Liberty at January 11, Starz had cash of approximately $100 million and debt of approximately $1.13 billion. This month, we were able to take advantage of the credit markets with favorable terms on our recent senior notes offering of $175 million, which we upsized by $25 million due to market demand. These notes were issued under the indenture governing our existing $500 million 5% senior notes. This offering helps improve our balance sheet and the favorable pricing received underscores the company's market position. We used the proceeds from this offering to pay down our bank credit facility, under which we now have approximately $620 million of availability. Now I will turn it back to Chris.

Christopher Albrecht

Thank you, Scott. As I said at the beginning of the call, I couldn't be more optimistic about the new independent Starz and the significant good growth opportunities to develop into a leading global content provider. With our solid 2012 financial performance, a strong slate of originals for 2013 and the recent 5-year first-run output extension with Sony, Starz is in an excellent position to execute on its growth strategy.

Before turning the call over for questions, I would like to thank Liberty for its guidance and support over the company's history. I would also like to give special thanks to our new Board of Directors and its Chairman, Greg Maffei, and to our Starz employees for the commitment to the company's success in the future. And now I'd like to open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Vasily Karasyov with Susquehanna Financial.

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

Chris, I wanted to ask you about this deal, Disney and Sony deals. There was a lot of speculation here on the Street and in the press. Can you tell us maybe how you approached both of those deals? Did you see them equally valuable? Was there a trade-off? Was it a price? Any kind of color on your decision process there would be very helpful.

Christopher Albrecht

With regard to Disney, we were in active negotiations for an extension. There was a bidder in the process that significantly, with a capital S, increased the price that was being offered for the Disney films. We looked at the likely supply of those movies. We looked at our long-term goals for growth, had made a determination that original programming was clearly the way to go, although we wanted to secure a robust supply of theatricals, came to the determination that the premium that we would have had to pay to secure the Disney was counter to what our growth strategy was, and we did not proceed in those negotiations. With regards to Sony, there were the, I believe, other bidders in the process. We were able to conclude a deal based on terms that certainly seem advantageous to both companies that provide good economics on both sides and good flexibility moving forward for us to be able to grow our businesses in the future. So that seems like a win-win. And as I stated, while I can't comment on the exact terms of the deal, we believe that it is in line with recent deals made by traditional premium channels and major Hollywood studios, and it is in line with the current 2012 economics that Starz has for the Sony output.

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

And a quick follow-up, what's your philosophy? How necessary is theatrical products for a channel like Starz? Because some of your peers appear to be going back and forth how much of a theatrical product they need. Can you tell us what your view is?

Christopher Albrecht

I think theatrical product is an important part of our offering going forward, which is obviously why we made the extension. I think the answer to what -- how valuable the theatrical product is, is also a little bit like looking into a crystal ball into the future. We clearly believe that the way to define, differentiate and grow our brand is through originals. And so we have a prudent investment strategy in first-run theatrical output and library product that has given us the flexibility to work on ramping up our originals more aggressively.

Operator

And we'll take our next question from Vijay Jayant with ISI Group.

David Carl Joyce - ISI Group Inc., Research Division

This is Dave Joyce for Vijay. So I was wondering if you could provide some color around the adjustments to the ultimates, which assets those were. What the decision process was there?

Christopher Albrecht

I'm going to let Scott answer that question.

Scott MacDonald

Okay, with respect to our ultimate revisions, I mean, these adjustments related to our library of content that we've acquired over the years for our Anchor Bay business, also for -- these include titles for our -- that were included in our Overture subsidiary, and that was our theatrical distribution business that we closed down in 2010. But basically, we reassessed all the ultimate revenue streams and determined that there was an impairment there, and we recorded that in the fourth quarter.

David Carl Joyce - ISI Group Inc., Research Division

And separately, do you -- have you stated a target leverage for this year or going forward?

Scott MacDonald

Following the spin-off from Liberty, our leverage is about 2.5x, and we're comfortable with that level.

Operator

We'll continue onto John Tinker with Maxim.

John Tinker - Maxim Group LLC, Research Division

Just following up on that question, I -- given you are still a part of Liberty, I noticed that you announced between January 14 from 31, you bought back nearly 70,000 shares for $1.1 million. That leaves you $399 million, give or take, under your authorization plan. How aggressively are you going to pursue that or how are you sort of thinking about that going forward?

Christopher Albrecht

Well, we still have the authorization in place. But obviously, it hasn't been triggered by the response in the market to our stock. We're evaluating that as we go forward, and certainly look at stock repurchase as one way for us to build long-term shareholder value.

Jason B. Bazinet - Citigroup Inc, Research Division

Okay. And just another quick question. On -- I think you talked about you capitalized $89 million of production cost and $284 million for the year. How does that reconcile to the balance sheet?

Christopher Albrecht

Scott?

Scott MacDonald

Well, those will be the total amount that we capitalized during the year. The amount on the balance sheet would be net of amounts that have been allocated -- well, have been allocated to the shows that have been aired and expensed so this is the total amount that we spent.

Operator

And we'll take our next question from Amy Yong with Macquarie.

Amy Yong - Macquarie Research

On the film deals, I think Sony and Disney have contractual step downs. Can you explain what they are? And then also on the affiliate side, can you talk about how we should be thinking about future renewals?

Christopher Albrecht

I don't know what you mean by contractual step downs. We don't disclose the terms of our agreement. As I said before, the extension with Sony provides us with economics that are similar to our current economics. There's a lot of factor that go into these deals, how many movies a studio releases. We're expecting significantly less films from Disney into this year in calendar 2013, and also, their box office performance. So there's various rates for various films. There are a lot of factors that go into this, but we're certainly very comfortable with what our output expense will be and our original programming -- the ability to ramp up our original programming. With regard to our affiliate deals, as I said, we recently closed 2 new multiyear extensions that have contractual annual increases. That closed out the 30% that we talked about last year. And while we're not going to mention a specific figure for this year, it is dramatically less than the number that we announced last year, and being that -- affiliate agreements that are up for renewal in calendar 2013, dramatically less than we announced previously in 2012.

Operator

We'll continue onto Chris Merwin with Barclays.

Christopher Merwin - Barclays Capital, Research Division

So Chris, as it relates your originals, can you talk a bit your ownership strategy for that content? I mean, it sounds like you own a lot of your upcoming originals, which certainly makes the back-end economics more favorable, but obviously, a highly successful license program can also be very beneficial to subscriber acquisitions. So any color on how you approach owning versus licensing originals would be helpful.

Christopher Albrecht

Yes, good question. Very much a part of our strategy as we think about how to expand -- those are different levers that we can pull. Obviously, we're looking for the best shows, and we have a distribution platform, Anchor Bay, our digital distribution platform, and Starz Worldwide television distribution that we can monetize wholly-owned product, but that does require a bigger investment, and certainly, we have shows like that on the air. We have shows like that in the pipeline. At the same time, we've always shown our willingness to partner. We've done that now with BBC Worldwide on Da Vinci's Demons and a very unique situation, which we have with White Queen, which was produced -- which was initially commissioned with the BBC. We got it very early and purchased most of the rest of the global rights outside of the U.K. As -- we've licensed a show in the past, but as we look to scale our original programming in a prudent and economic, but effective way, we look at all of these things, including licensing. The important part of licensing a show from a studio, if you're a premium television channel, is being able to retain control over the SVOD rights because they have to travel with our networks, which provides different economic challenges for studio partners, but we certainly look at all of the opportunities that are out there in the various forms of partnering, licensing, fully owning as all things that we're interested in as we expand and ramp things up.

Robert G. Routh - Phoenix Partners Group, LP, Research Division

Okay. And then I also had one on margins, if I could. I mean, you sort of spoke to this earlier, but you're going to be investing incrementally in originals over the next 2 years and you also mentioned that you might get some rate relief from your output deals and maybe fewer films that would potentially offset some of that costs. So is there anything you can say about the order of magnitude of those 2 costs and how that might affect the margin on a go-forward basis?

Christopher Albrecht

First of all, I didn't say anything about rate reductions on the film. I just want to clarify that. We talked about the number of output films that we get. We are looking to continue to grow our business and invest prudently in original programming. We believe that we can do that effectively in 2013, and as we look into 2014, we don't see any significant changes in the way that we're approaching those investments.

Operator

We'll take our next question from Ben Swinburne with Morgan Stanley.

Ryan Fiftal - Morgan Stanley, Research Division

It's Ryan Fiftal, on for Ben. Just a follow-up on the earlier question about the buyback. I mean, you're now in a situation where the cash that's generated by your business can be used really solely to maximize the value at Starz rather than perhaps be redirected to Liberty's broader investment strategy. So can you maybe more broadly talk about how you're prioritizing use of capital? Obviously, we saw some buybacks in the period, but maybe some color on organic reinvestments, M&A, and it sounds like delevering isn't really a priority.

Christopher Albrecht

As Scott said, we're very comfortable with our leverage now. All those things you mentioned, we look at, and we're coming to this call from our first board meeting, which was an active and very productive meeting. Our focus is on growing long-term shareholder value. And just as I said on the ramping up of the programming side, there are lots of different levers that we can pull and things that we look at. But I think the key point that you made, which is one that we made to the board today, is that the reinvestment of the assets from the Starz business are now at the discretion of the Starz board and Starz management, and so that is a fundamental change in -- for Starz going forward.

Ryan Fiftal - Morgan Stanley, Research Division

Okay. And then on the programming expansion, I'm not sure if I missed it in the prepared remarks, but have you given an update or had a chance to reevaluate your target hours for programming in the medium term? I think you used to have a 40 to 50-hour goal. I don't know if that's been impacted by the loss of Disney in any way.

Christopher Albrecht

Yes. Well, the Disney deals doesn't -- we get the 2015 releases, which are 2016 avails, and that will go -- could keep even go into '17. So on a practical matter, it's not exactly like there's all of a sudden some windfall from -- the way the deal is reported, you thought the films were leaving Starz the next day, when in fact, they're on for several more years. Having said that, we know that we need to ramp up in our originals to be ready for that time. That won't impact anything in terms of our planned number of hours in 2013. We're still targeting 50 hours over the next couple of years, but we're certainly evaluating that, and a lot of that has to do also with our change in our portfolio mentality of really being able to consider other kind of partnerships and financial arrangements such as licensing, which could allow us to dramatic -- not dramatically, but to accelerate the growth of the number of hours without dramatically impacting the rest of our operations.

Ryan Fiftal - Morgan Stanley, Research Division

Okay. And maybe a quick follow-up on that, if I may. I think a lot of other cable networks are really increasingly moving or trying to move towards increasing ownership of their content. And it sounds like your discussion of financing arrangements could be an opposite direction, where actually, maybe give up some ancillary rights to lower the costs of programming. So can you talk about how you're thinking about balancing those factors?

Christopher Albrecht

The right -- I mean, right now, the Starz channels businesses are obviously are the main driver of the Starz revenue. So as I've said, it's important that we control the rights that are necessary for us to ensure active distribution and successful distribution of our channels with our core distributors and through any new emerging distributor opportunities that come into the marketplace. And the other thing that we'd like is, as much control as we can over our branded products within continental United States. So there are certain rights that in any scenario, we need to be able to retain. International, it's an opportunity for us, but less important to own all of those all the time. But just as we look at a mix in terms of how we finance this, I think we look at a mix in terms of the rights that we need to retain to keep these businesses active, but we're -- as I said, premium is in a different space than ad supported TV. HBO, Showtime have, I think, similar strategies and needs when it comes to the rights they need to retain. I think they might have different threshold as to what they're willing to do. I think Starz is willing to be more flexible, but at the same time, we need to protect our entire network offering.

Operator

And we'll now hear from Peter Lee with Evercore.

Peter Lee - Evercore Partners Inc., Research Division

Just a quick follow-up on the Sony deal. It was our understanding, I guess, just from comments that Liberty had made in the past that the extension for the Sony deal that there would be some sort of rate step down. So I just wanted to see if you could confirm that there would still be a rate step down during that extension period, starting in 2013 going through 2016? And then also just a quick follow-up after that.

Christopher Albrecht

Again, I can't -- I know in the past, words "rate step down" were referred to -- like I said, there are lots of factors that go into making the assumption that the payment for that output gets stepped down. What we are looking at in the deal that we made with Sony, as I said, are economics comparable to 2012. And looking at that going forward, how many films Sony distributes, how well they do at the box office, one of the nice things about Sony output is that they distribute a lot of movies, which gives us bulk. At the same time, those movies come from their Classics division and their Screen Gems division, and it would be wrong to assume that all films are created equally. So we do have the opportunity and flexibility to grow our original programming business and meet our output agreements requirements.

Peter Lee - Evercore Partners Inc., Research Division

Just to clarify, did the terms of the '13 to '16 extension change at all as part of the new agreement?

Christopher Albrecht

No.

Peter Lee - Evercore Partners Inc., Research Division

Okay. And then just a quick follow-up just with, I guess, a little bit of housekeeping question. What was the breakdown of fixed-rate versus consignment subs?

Christopher Albrecht

You mean in terms of the growth?

Peter Lee - Evercore Partners Inc., Research Division

Yes or just the total subs.

Christopher Albrecht

Yes, most of the growth came from fixed rate subs.

Operator

And we'll continue on to Doug Mitchelson with Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So Chris, I know you mentioned 50 hours for 2013 and 2014 as a target for originals. A long way off, but if you think post Disney, let's just assume you don't replace that with other film output deals, which I know is a big assumption, is there a level of original content that you think is the right level? If it's Sony plus library films plus originals?

Christopher Albrecht

Yes, just to clarify, in 2013, we'll have about 36 hours. And we'll look to that 50 number over the next couple of years. We haven't finalized plans for 2014 other than what we've announced, which is Black Sails from Michael Bay. We look at our partners in the premium space and where we sit in terms of our originals, in terms of our movie output, in terms of the usage of our on demand platforms. Now, of course, we're going to be deploying our authenticated platforms. And we look at that number and realize that we need to be competitive, which is I think, a formula of a critical mass of programming, not a specific number of hours, an impactful kind of programming, successful marketing arrangements with our distributors to have that programming be meaningful in their systems, but there's not a magic number that we look at. But clearly, we are looking to increase our investment in original programming in a responsible and prudent manner because we realize that we have to ramp that up to be in the place that we want to be amongst -- in the category that we sit in.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Yes, I mean, I think I understand the answers. Basically, we'll know it when we see it, right? I think...

Christopher Albrecht

No, I'll know it when I see, then you'll know.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Okay.You might see it first, but the -- in terms of use of free cash flow, going forward, maybe it will be helpful for investors who understand the range of possible uses of cash. And I guess what I mean by that is there's sort of a debate between will it end up being used for share repurchases, the free cash flow generation, will you invest in more originals instead and what does that mean for margins? Is there a third or a fourth possibility for cash that we're all not thinking of, like strategic investment in a film supplier, that sort of thing?

Christopher Albrecht

We look at our distribution platform, again, being Anchor Bay, digital distribution and our international as a potential revenue opportunity with third-party product, just like we have done with the Weinsteins on Anchor Bay and also with Walking Dead on Anchor Bay, and in digital with both those groups of programs. We'd be interested in expanding our ability to monetize that internal structure that we have and that capability that we have in the marketplace with all -- with some already robust titles. Look, we have a good balance sheet. We have cash. I think all the things that you mentioned are things that we have the ability to discuss with our board as they come up appropriately and from the appropriate offices. But yes, yes, yes, is I think where we are -- we are actively thinking about ways to create growth and the resources, the cash from our business is certainly one way that we can generate that.

Operator

And ladies and gentlemen, that's all the time we have for questions today. I'll turn things back over to our speakers for any additional or closing remarks.

Christopher Albrecht

Well, I just want to say thank you very much for joining our call, and look forward to seeing you next call or talking to you next call, quarter. Thanks, everybody.

Operator

Thank you. And ladies and gentlemen, once again, that does conclude today's call. Thank you, all, for your participation, and have a good day.

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