Starz's (STRZA) CEO Chris Albrecht on Q1 2016 Results - Earnings Call Transcript

| About: Starz (STRZA)

Starz (NASDAQ:STRZA)

Q1 2016 Earnings Conference Call

April 28, 2016 5:00 PM ET

Executives

Courtnee Chun – Senior Vice President of Investor Relations

Chris Albrecht – Chief Executive Officer

Scott Macdonald – Chief Financial Officer

Analysts

Vasily Karasyov – CLSA

Chase White – FBR Capital

Ryan Fiftal – Morgan Stanley

David Joyce – Evercore ISI

Bryan Kraft – Deutsche Bank

Tony Wible – Drexel Hamilton

Ben Mogil – Stifel

Operator

Welcome to the Starz 2016 First Quarter Earnings Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, April 28.

I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead.

Courtnee Chun

Thank you. Before we begin we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995, including statements about new service offerings and original programming, new packaging and new distribution platforms for our programming, subscriber growth, international distribution opportunities, the continuation of our stock repurchase plans, expectations regarding 2016 programming expense, 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.

These forward-looking statements speak only as of the date of this call. And Starz's expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Starz' expectations with regard thereto, or any change in events, conditions, or circumstances on which any such statement is based. Please refer to the publicly filed documents of Starz, including our most recent Forms 10K and 10-Q for additional information about Starz, and about the risks and uncertainties related to Starz' business which may affect the statements make in this presentation.

During today's call we will discuss certain non-GAAP financial measures, including adjusted OIBDA. The required definition and reconciliation can be found at the end of the PowerPoint, which you can find on our website.

And now I'd like to introduce Chris Albrecht, Starz' CEO.

Chris Albrecht

Thank you Courtnee, and welcome everyone to the Starz’s 2016 first quarter earnings call. We appreciate you joining us today, and for your continued interest in Starz. With me is Scott Macdonald, Starz’s Chief Financial Officer.

We made significant progress in the first quarter towards expanding the distribution of our brands to a larger and more diverse group of customers. Starz achieved sequential subscriber growth of 400,000 in the first quarter of 2016, with increases at both our core MVPD partners and new digital OTT retailers, setting another record high at 24 million subscribers. Encore, which is now newly repositioned as Starz Encore, grew by 200,000 subscribers to 32.4 million.

Our subscriber results during the quarter underscore our value proposition. We have maintained strong relationships with our traditional MVPD partners, and believe that as we look ahead, we can work together to come up with innovative ways to package and promote our services and content to meet the growing demand from consumers. Our digital OTT endeavor with Amazon, which launched at the end of 2015, is going very well.

And earlier this month we launched our all new all-in-one Starz app for TV everywhere access and with new digital retail partners Apple and Google. The app is simple and elegant, offers a large and varied content mix, and is the first in the premium pay-TV category to provide both streaming and download capabilities. We priced the Starz app at $8.99 per month, which according to our market research is highly competitive and should lead to incremental subscriber growth.

Furthermore, we simplified our digital offering. The new Starz app combines our previous authenticated play apps into one single platform and allows for authenticated viewing of our premium services by cable, satellite and telco subscribers at no additional charge. The Starz app is a great entertainment solution for the estimated 15 million to 20 million broadband-only homes and the millions more mobile-only customers in the US that cannot afford the multi-channel video stack, and thus don't have the opportunity to purchase our premium services. We are very proud of the launch, and believe that Starz is in a unique competitive position. We are premium, subscription-based, non-ad supported, capable of being delivered in many different ways, and well-positioned to take advantage of opportunities for incremental growth.

Our team has also been focused on the evolution of the Starz and Encore brands and the best way to position these products to consumers. To that end on April 5 we introduced a single master brand for the Starz and Encore networks. This master brand approach strengthens product offerings for both the networks by providing one point of entry for subscribers on air, online, and on-demand. We rebranded the Encore network to Starz Encore, thus tying the offering more closely with the flagship service. Furthermore we fortified the new Starz Encore network by adding prior seasons of current Starz original series to the line-up. Unlike other premium TV service bundles, we believe that this approach will help increase viewership and satisfaction on Starz Encore, as well as provide our MVPD partners with upsell opportunities for new Starz subscribers.

Starz also announced a new brand positioning with the introduction of the Starz Obsessable tagline, which reflects the authentic bold and award-winning original programming we create from Oscar and Emmy winning directors, writers, and actors that ignites the white-hot passions of diverse fandoms. Fandom is exploding as a cultural phenomenon, with 70% of adults identifying themselves as fans of a TV series. The Starz audience is not composed of casual viewers, but rather passionate fan contingents that engage more deeply, watch more closely, discuss more fervently, and evangelize more effectively.

One show that certainly fits that bill is our original series Outlander. Its fans are so engaged and passionate about the series that they represent the quintessential Obsessable fandom we are targeting. The second season of Outlander arrived early in the second quarter to great critical acclaim and consumer fanfare. The premiere episode yielded us the highest ever viewership at Starz for the first episode of a new or returning series, doubling the viewership of its first season premiere.

Likewise, our new limited series, The Girlfriend Experience from Executive Producer Steven Soderbergh, has won raves from critics and consumers with solid viewership and plenty of bingeing. We've platformed from the series to maximize consumer engagement, and are very pleased with the results.

Our Starz distribution segment secured several licensing deals of our original content at Starz Digital and Starz Worldwide Distribution in the first quarter, including Power, which was licensed to Netflix in the United Kingdom, Power and Ash versus Evil Dead to Hulu in Japan, and Ash versus Evil Dead and the Girlfriend Experience to Yes Israel and Mediaset in Italy. I will now turn the call over to Scott to discuss the financials.

Scott Macdonald

Thanks, Chris. For the first quarter Starz consolidated revenue was $431.9 million, adjusted OIBDA was $127.1 million, and operating income was $114.1 million. At Starz Networks, first-quarter revenue increased 2% to $339.3 million due to higher effective rates for our networks. Such increase was partially offset by lower average subscriptions due to video household losses at certain distributors, including fluctuations by large providers merging platforms.

Adjusted OIBDA decreased 10% to $116.8 million, primarily due to higher costs associated with original programming. During the quarter original programming amortization included in total programming expense increased as a result of more airings of multiple prior seasons of Black Sails and Outlander to support their premieres. However, while quarterly programming expense will fluctuate, we continue to expect total programming expense for the full year to be in line with last year.

In addition, advertising and marketing costs increased as we prepared for the launch of the Girlfriend Experience, which premiered on April 10. Also contributing to the decrease in adjusted OIBDA was an increase in litigation-related costs and payroll cost. Starz Network cash paid for investments in films and television programs increased $12 million to $81.1 million due to an increase of the number of original series in production during the quarter.

At Starz Distribution, first-quarter revenue decreased $17 million to $92.7 million and adjusted OIBDA decreased $15.8 million to $10.6 million, primarily as a result of lower revenue related to our Starz original series. By comparison, during Q1 2015 we licensed Spartacus, Magic City, and The White Queen to Netflix and Amazon. During the first quarter Starz Distribution's cash paid for investment in film and television programs decreased $24.5 million to $15.1 million, primarily due to timing of payments for the Weinstein Company titles.

From February 1 through April 30 we bought back 2.7 million shares of our common stock for $67.1 million at an average price of $24.82. Since January 14, 2013 when our stock began trading, we have repurchased 28.9 million shares, or 23.8% of our outstanding shares. We currently have $380.4 million remaining under our share repurchase authorization.

At March 31 we had borrowed $391 million under our revolving credit facility, with $609 million of borrowing capacity remaining. our leverage stood at approximately 2.6 times adjusted OIBDA. Now I'll turn the call back over to Chris.

Chris Albrecht

Thanks, Scott. In conclusion I'd like to say we are confident in our execution and path forward. The initiatives we are undertaking and our continued investment in original programming are leading to a growing consumer appetite for Starz, increasing the brand equity and subscriber growth.

Now I'll open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Vasily Karasyov from the company of CLSA.

Vasily Karasyov

Thank you. Good afternoon. Congratulations on a solid quarter. My question is about the SG&A expenses. This is the growth rate year-on-year is elevated. What is it going to look like for the full year, if you can give us an idea? And then Chris, can you tell us about what's going on with the shared app and Comcast? What is your view of the situation there?

Scott Macdonald

So, we had higher G&A, and it's primarily due to a couple of lawsuits that are out there, the Thomas matter and the shareholder litigation. We saw some higher G&A expense as a result of that. Again with respect to the selling part of G&A expense, we had The Girlfriend Experience here in the quarter. It's going to fluctuate by quarter. You need to again, as we've said in the past, look at it on an annual basis.

Chris Albrecht

Does that answer that the question, Vasily?

Vasily Karasyov

Yes. Thank you.

Chris Albrecht

So look with regard to Comcast, obviously there's been some reports that they as of yet have not authenticated to our single app. We have a great relationship with Comcast, long-standing. They have literally millions of Starz subs and literally millions of Encore subs. They have a great business together.

They have a lot invested in their Xfinity platform. We believe that the consumer is better served by having the choice of being able to authenticate to either or both. We have ongoing discussions with them all the time. We expect that the consumer will have a voice in this. And that there is no reason why these two products can't exist side by side and highlight the value of a subscription that Comcast is providing. We're optimistic.

Vasily Karasyov

Are you far apart on this one?

Chris Albrecht

It's not money issue. It's a policy issue with them. At the strategy issue. It is a discussion. It is not a negotiation.

Scott Macdonald

Vasily, just one thing to add on the litigation. The shareholder lawsuit has been recently dismissed.

Vasily Karasyov

So how much of the year-on-year growth was because of the suit?

Scott Macdonald

I would say -- we don't give specifics here, but it was a good piece of it.

Vasily Karasyov

Okay. Thank you very much.

Chris Albrecht

Thank you.

Operator

Your next question comes from the line of Barton Crockett with FBR Capital.

Chase White

Hi, guys. Chase White subbing in for Barton. I just had a couple of questions. First one is, could you guys provide a little clarity on the impact to subs and ARPU from the migration of your subs from AT&T DirecTV?

Chris Albrecht

I'll start and Scott can add. Look, we've recently seen AT&T's report results. They are certainly seeing fluctuations as they migrate from Uverse onto Direct. And that does affect us. And we have had lots of conversations with them. I think they are aware and very interested in preserving as many subscribers as they can while they make this transition. And having DirecTV be as strong a platform as possible.

Again, we have millions of customers with them for all of our services. Have a great long-standing relationship. Really excited about what AT&T has in store for the combined company. And we certainly hope that not only will they be able to see more positive results as they make this transition, but that we'll be able to talk to them about new business as well as we've retooled and rebranded our products and gone to market with this new consolidated app platform. Anything you want to add, Scott?

Scott Macdonald

No, I think you covered it well.

Chase White

Next question would be, programming cost goes -- was a little more than we expected. I know you guys said it was going to be flat be for the year. I believe that last quarter you guys said it was going to be down in the fourth quarter. Could you give us an idea of the cadence for the rest of the year? I guess specifically the middle quarters, but I guess also the decline in the fourth quarter as well so we could just get an idea?

Scott Macdonald

We still expected to be in line year over year 2016 as compared to 2015. And the fourth quarter will be the lowest quarter. And that's because, as you recall last year, we had three shows, Da Vinci's Flesh and Bone and Ash Versus Evil Dead. And that -- we're not going to have that level of programming in Q4.

Chris Albrecht

We're going to have great programming in Q4. But last year we loaded up on purpose so that we could have a more consistent plan for this year.

Chase White

So could we expect Q2 and Q3 to be kind of similar level to each other?

Chris Albrecht

Look, I think what Scott is saying is the year's going to be consistent with last year. We're still standing behind that. And that fourth quarter is going to be the lowest. We're not going to provide more detailed information. And I think that speaks for itself.

Chase White

Got you. Thanks, guys.

Chris Albrecht

Thank you.

Operator

Your next question comes from the line of Ryan Fiftal, Morgan Stanley.

Ryan Fiftal

Great. Thank you. I have one for Scott and one for Chris, if I can. Scott, I'm just trying to understand the revenue trends a little bit more. The improvement from last quarter was down 1%, 1.5% to up 2% this quarter at Networks. I mean, sub-trends in the ecosystem, or maybe a touch better. But it don't think enough to explain that kind of improvements. Is there anything you can point to, to help clarify?

Scott Macdonald

Well, you had positive subscriber trends as well as the impact from Amazon being in the numbers for a full quarter. And as Chris said in the script there, we are very happy with how that is going with them. So that's why you have the increase. There wasn't any oddities in the numbers.

Ryan Fiftal

Okay, great. That's helpful. And then Chris, so marketing was elevated in the quarter. But I get that it's lumpy. Maybe stepping back from that specific example, can you talk about just generally how you're thinking about marketing behind your originals? How you're thinking about your overall budget? Maybe even versus even a couple years ago? Thank you.

Chris Albrecht

Yes. We've obviously seen an increase in our marketing spend as we've seen an increase in the number of original series and programs that we do. As we've said before, we're kind of reaching what our target number was when we started to build our original programming component. We did see, as I think we spoke about in our remarks, increased amortization costs because as we bring back shows, we have more seasons to bring back in front of those new seasons. And that's led to an increase in amor, but not an increase in marketing expense. Again, these things should remain pretty consistent year over year in the BAU, as long as we see the programming spend being -- the programming strategy remaining how we've laid it out for you in the past.

Ryan Fiftal

Okay. And how about changes in your channel strategy? So you're stepping closer to direct-to-consumer. You're doing some rebranding. How do you think about marketing the overall brand and spending there?

Chris Albrecht

We have -- certainly Amazon is in charge of marketing the Starz service on their platform. And in our OTT launch, we purposely have not spent a lot of money on cross-channel advertising. We've done a lot more digital and social media work, which we think of where the customers are for this product. Also staying out of the way of where our traditional MVPD long-term partners advertise our brands and advertise their business.

We don't see a big marketing expense at the moment attached to our OTT offering. We think it's something where marketing is a lot more consistent with the way that people use the app. And that there are ways to tell them about it and introduce that product to them that are a lot more efficient than spending a lot of money on traditional media advertising.

Scott Macdonald

And you will have some lumpiness in the marketing -- advertising and marketing costs, just depending on the programming lineup. So in Q1 we were advertising for the launch of The Girlfriend Experience, which came in early Q2. And we didn't have that show last year.

Ryan Fiftal

Got you. Okay. Thanks, guys.

Chris Albrecht

Thank you.

Operator

Your next question comes from the line of David Joyce with Evercore ISI.

David Joyce

Thank you. A couple questions. As you relationships with the distributors have evolved over the years, how has your revenue sharing, the economics evolved? Some of the concern was over the AT&T step-downs. Just wondering what the revenue share versus rates concept is now with the new contracts? Secondly, if you could talk about the timing and then flows down to the free cash flow line and the spending on programming, what should we expect on the phasing of that this year? Thanks.

Chris Albrecht

I'll take the first one, Scott will take the second one. I just want to say unequivocally, there was no AT&T step-down. I don't even know what you mean by that. We don't comment specifically on the rates and the terms of the deals with the distributors. We are in business to grow our business. We are a very high-margin project for our distributors. And we continue to expect that they will value the Starz and Encore brands and continue to sell them.

We've seen the recent merger approved. And we've seen conditions be set on that, that we're all taking a look at. I think Starz is a in a different position than some basic tier channels might be where we are not going in, pulling through a lot of channels that distributors say that they don't want, or people don't watch. We're a premium service. We're a completely different economic model than the basic tier channels. And we think, as I said in my remarks, that we are extremely well-positioned to take advantage of revenue and growth opportunities. I'll let Scott answer the second part.

Scott Macdonald

Just from the general cadence perspective, again with the lower programming expense that we've talked about in Q4, Q4 will be the strongest quarter. Compared to 2015 where Q1 was the strongest quarter, where we had the SVOD sale that we recorded last year. So you're going to have Q4 being the strongest. The other quarters will track along. But the Q4 will be the strongest.

David Joyce

All right. Thank you.

Chris Albrecht

Thank you.

Operator

Your next question comes from the line of Bryan Kraft with Deutsche Bank.

Bryan Kraft

Hi. Good afternoon. I just wanted to ask you about the return of Encore subscribers to growth. Can you provide any color on kind of what drove that? Do you think this is an inflection point for Encore? Thanks?

Chris Albrecht

Certainly we think that the rebranding of Encore to Starz Encore is a very strong strategy, aligns our business -- puts the brands in position to help each other and puts them in position to help the distributors. And in an OTT digital distribution model, we are selling Starz and Encore together. So that's obviously an opportunity for both brands.

Bryan Kraft

Was that OTT piece a factor in the return to growth, Chris? I guess what I'm asking is, has it stabilized ob the traditional MVPD side as well? I know in the past you've talked about some repackaging by your distributors negatively impact Encore. Does it feel like that is stabilized at this point?

Chris Albrecht

Look, here's what I'll say about that without getting specific about one side. We are very pleased with the results that we've seen with Amazon, which is the only OTT piece that is included in these numbers. We didn't want our standalone app until Q2. But even as good as that is going, if it wasn't for the fact that the MVPD business is starting to stabilize as a result of time passing with these mergers, even as well is we are doing in the OTT space, we wouldn't have been able to overcome a bad story on the MVPD side. So I think without getting too specific, those are our trends that we certainly have seen since we last spoke to you.

Bryan Kraft

Great. That's really helpful. Thank you.

Chris Albrecht

Thank you.

Operator

Your next question comes from the line of Tony Wible with Drexel Hamilton.

Tony Wible

Thanks. I know it's a long time until the output deals come up for renewal. But would you guys have interest in adding another studio into the mix when that inevitably happens? Are you guys kind of content with the level of originals and the Sony live-action that you have?

And then also I was wondering if you guys done any work around what is the average price a consumer's paying for Starz? Obviously we can get it from some of the larger public players. But there's a longer tale of private MVPDs out there, and there's discounts and all But I was curious if you guys had roughly what the ballpark that a consumer's paying today in the MVPD to get Starz? Thanks.

Chris Albrecht

So with regard to your first question. Look, we certainly think that originals are the driving force of the premium space and that movies are real value added. Where we feel good about where we are, especially with the fact that we have library deals with virtually every major film supply. And those are films you get to choose instead of films that you get to kind of just hope that the output deal is going to provide you with strong titles.

We're always going to be looking at opportunities. It doesn't seem to me that in the immediate future there's a big studio that's going to shake loose. And it will be interesting to see what happens with DreamWorks now that Comcast looks to be acquiring them. They have a deal with Netflix. This stuff will be in flux, I guess, from time to time. We feel good, but we are always good look at things.

I'll let Scott answer the other question. But I can't imagine that he's going to be an answer. Other than, we don't comment on it.

Scott Macdonald

Well, the pricing varies by affiliate and varies by the strategy that they have. So you'll see the retail price to the consumer varies from you can see the $8.99 that we're charging for it now on our OTT offering to mid- to upper teens.

Tony Wible

Great. All right. Well, thank you. Appreciate the feedback.

Chris Albrecht

Thank you.

Operator

And your last question comes from the line of Ben Mogil with Stifel.

Ben Mogil

Hi. Good afternoon. Thanks for taking my question. So sort of two of them. Chris, I think first one for you. HBO has got about a three-year-old window before it licenses its product to SVOD. Showtime does a blackout, or a blockout for anything on their spot while series is still airing on its service. Now that you've got an OTT product and it seems to be getting some traction, what's your thought around sort of how long you want a window before something goes to SVOD, in the case where you've got the rights, obviously?

Chris Albrecht

Right. I think the OTT model, especially our standalone app, shows that we are SVOD. Our product is the brands that we've put together for the consumer and that we are selling there. It's an accumulation of talent. Having said that, I think that there is a possibility in this case of having your cake and eating it too. And after -- I think what HBO has done in the past, and what we've done -- so far we've sold shows that were off the air and we've retained the rights to continue to air them. As you see with The White Queen, we're now going to be doing White Princess.

There are things that are -- those are fairly easy decisions to make. It's nice to go out and make the sale and still keep it on your service. I think after a few years of a successful show being on Starz, will we consider selling one season at a time? Yes, we will. And that would be a way to monetize that investment, get a return on that investment. But I don't think that we would ever -- I can't imagine that we would ever find ourselves blacking ourselves out in order to provide programming for another service because our main business is selling the service.

Ben Mogil

And do you find at all of, now that you have a big of a larger platform, are you finding that as producers come to you with new show ideas, I mean the larger producers, the Sonys of this world, et cetera, I don't want to call them out specifically. Any more leverage you have in terms of getting some economics so you can participate in international and participate in sort of anything other than just the domestic licensing?

Chris Albrecht

Every deal is different. And in a lot of cases it's determined by what the marketplace is doing. Netflix has been very bold in going out and trying to buy worldwide rights and kind of capping what people are making. I'm not sure that's going to hold for them for a long time. But that's their certainly decision. HBO has shifts in what they're doing. Showtime has shifts in what they're doing.

We're looking to retain more rights as we increase the investment, especially because it's going to help us to launch our brand and platforms in other territories besides the US. And I think we'll factor that into decisions that we make as we look to greenlight new shows. Obviously we want to put the best things on. We also need to look at our overall business and make sure that we're making the best decision for that as well. It's definitely a moving target.

Ben Mogil

Okay. And then sort of lastly, as you seen the impact of the disruption when you've got two MVPDs merging and just the impact that you guys are kind of collaterally affected, obviously. As you've got sort of Time Warner and Charter coming through, obviously just to proves so you'll start to see some impact relatively soon. Proactively is there anything that you want to do on the marketing front that you sort of learned, in quotations, from the DTV/AT&T scenario?

Chris Albrecht

I think the Comcast/Time Warner -- not Comcast, sorry. That one didn't happen. The Charter/Time Warner merger is a very different situation than the AT&T/DirecTV. In the one that just got approved, you've got the same type of platforms, the same technology. Yes, they have some differences in packaging. But the merging of that -- it's a completely different endeavor than the merging of two completely unrelated platforms and technologies, which AT&T had with Uverse and DirecTV had with their satellite platform. So in that case it sort of apples and oranges. And in this case it's oranges and oranges.

Obviously, we've got Tom Rutledge's phone number. And we'll miss Rob Marcus. So we're going to be making sure that we can do everything we can to have this consolidation not be just a good story for Charter and Time Warner Cable, but a good story for Starz as well.

Ben Mogil

That's great. Thanks a lot. Chris. I appreciate the color on the answers.

Chris Albrecht

Thank you. And thank you all for your questions and you continued interest in Starz. Talk to you next quarter.

Operator

This concludes Starz first-quarter earnings conference call. Thank you.

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