Earnings Call Transcript - STRZ Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Starz Third Quarter 2025 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Nilay Shah with Starz Investor Relations. Please go ahead.

Nilay Shah, Investor Relations

Good afternoon. Thank you for joining us for Starz Entertainment's Fiscal 2025 Third Quarter Earnings Call. We'll begin with opening remarks from our President and CEO, Jeffrey Hirsch followed by remarks from our CFO, Scott MacDonald. Also joining us on the call today is Alison 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 10-Q for Starz Entertainment Corp. 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 8-K we filed this afternoon, which is available on the Starz Investor Relations website at investors.starzcom. I'll now turn the call over to Jeff.

Jeffrey Hirsch, CEO

Thank you, Nilay. Thank you, everyone, for joining us today. I am pleased to report that Starz delivered a strong quarter, both financially and operationally. Before I get into the highlights of the quarter, I want to give an update on how Starz is executing against our post-separation plan. As we laid out at separation, our growth strategy has two clear paths. First, our focus has been on growing our core business by increasing our margins to 20% as we exit calendar 2028, converting 70% of adjusted OIBDA to unlevered free cash flow and delevering to 2.5x as quickly as possible. Rebuilding our content library through ownership is a key component to delivering this result. Ownership of our series improves both the cost structure of our content and allows us to generate incremental revenue through international content licensing. Today, we are announcing a structural change to our Canadian operation. We are moving from a joint venture model to a stable, consistent content licensing agreement with our partner, Bell Canada. Under this new simplified structure, the Starz-branded service will continue to be available in Canada and Starz will generate international licensing revenue, while Bell will assume full operational responsibility in the territory. This approach is consistent with our strategy of owning our content and creating incremental licensing revenue without the need to operate international services directly. As we've shared over the past couple of quarters, we have been aggressively working toward delivering our previously stated goal of owning half of our slate. We opened several writers rooms just weeks after separation. A couple of weeks after that, we greenlit our first Starz-owned original, Fightland from Curtis 50 Cent Jackson. The series is currently in production in London, and we are thrilled with how the show is coming along. We have a stellar cast, an award-winning stable of directors and producers, and we plan to have it ready to premiere next year. I'm excited to share today that we're in the late stages of bringing on a co-commission partner on Fightland, which will improve the economics of the series. This will layer incremental international revenue on top of the previously discussed revenue from Bell Canada. The partnership will lower the per episode cost on an already attractively priced show and has the potential to expand to additional Starz-owned originals. Both the Bell and Fightland deals will be modestly accretive to adjusted OIBDA and free cash flow in calendar 2026, and they will assist us on our path to reaching 20% margins exiting calendar 2028. While we continue to strengthen our core business, we are also looking to build upon our valuable core demos of women and underrepresented audiences. With the potential for increased consolidation across the media landscape, we believe that we are uniquely positioned to capitalize on potential M&A opportunities. Given our track record of profitably converting our business from linear to digital and our industry-leading tech stack, we are poised to increase our scale as assets that are strategically valuable to Starz become available. Turning to the quarter, we delivered on all key operational goals we outlined on our last call, including a return to positive revenue and U.S. OTT subscriber growth. U.S. OTT subscribers have now grown by 670,000 year-over-year with growth in three out of the last four quarters. We expect to continue revenue and U.S. OTT subscriber growth in the fourth quarter and to finish another year with approximately $200 million of adjusted OIBDA. Digging deeper into the third quarter results, OTT engagement reached a 12-month high, driven by the performance of Blood of My Blood, the prequel to our hit franchise Outlander. The series successfully reengaged the fan base while also attracting new subscribers, demonstrating the continued strength of the Outlander universe. The quarter was also aided by the premiere of Ballerina from the John Wick franchise, which we strategically moved to air a quarter earlier than planned. Key tentpoles in the fourth quarter include Season 3 of Power spin-off Force and the new chapter in the Spartacus World, House of Ashur. Our slate continues to be strong as we head into calendar 2026. We have a full lineup of originals, including the return of some of our most highly anticipated tentpoles. These include the Epic Final seasons of Outlander and Power Book III: Raising Kanan, the premiere of Fightland, the return of Blood of My Blood and the new season of one of our biggest hits, P-Valley, from the award-winning creator Katori Hall. Even with the strength of the slate, we expect investment in content to decrease year-over-year, helping drive improved free cash flow in calendar 2026. In closing, Starz continues to execute well in a rapidly changing operating environment. While the media industry continues to face significant headwinds, we are confident in our ability to deliver on our plan, and we are well-positioned to take advantage of the structural changes we expect to take place in the sector over the next 12 to 24 months. And now I'd like to hand it over to Scott to go over the financials.

Scott MacDonald, CFO

Thanks, Jeff, and good afternoon, everyone. It was a strong financial quarter, as Jeff noted, and I'm pleased that we reached the key financial metrics that we outlined on last quarter's call. Specifically, we grew revenue sequentially and added U.S. OTT subscribers. Looking forward, as Jeff noted, we are affirming our guidance for the remainder of the year, which includes achieving positive U.S. OTT subscriber growth and positive sequential revenue growth as well as generating approximately $200 million of adjusted OIBDA for the year. Now let me walk through the financial details for the quarter, starting with subscribers. We added 110,000 U.S. OTT subscribers in the period, ending the quarter with 12.3 million. The increase in the quarter was driven by the successful debut of Outlander Blood of My Blood and the premiere of Ballerina. We ended the quarter with 19.2 million total subscribers in North America, representing a sequential increase of 120,000 subscribers. Our North American linear subscriber base ended the quarter at 6.2 million, which was flat on a sequential basis. During the quarter, the carriage dispute in Canada that we mentioned on our May call was resolved. As a result, we reinstated approximately 250,000 Canadian linear subscribers into our base, which offset linear declines in the U.S. As Jeff noted in his remarks, we modified the structure of our Canadian business, which will result in us no longer reporting Canadian subscribers starting with the December quarter. The Canadian content licensing revenue that we will start to generate next quarter will be a component of linear and other revenue in our statements of operations. Moving on to revenue. Total revenue for the quarter was $321 million, up $1.2 million sequentially. OTT revenue was up $1.7 million to $223 million, while linear and other revenue was down slightly to $98 million. The sequential increase in total revenue was due to the content slate, which drove improved subscriber performance. Next, our adjusted OIBDA of $22 million was expectedly down $11 million on a sequential basis due to higher advertising and marketing costs related to driving awareness and subscriber acquisition in connection with the premiere of the first season of Outlander Blood of My Blood. Additionally, advertising and marketing spend was impacted by the marketing associated with the premiere of Ballerina, which we aired a quarter earlier than originally planned. Next on to debt. We ended the quarter with $588 million in total net debt. As a reminder, debt includes $300 million of our Term Loan A and $325 million of our 5.5% senior unsecured notes, plus $37 million in cash. We had no borrowings outstanding on our $150 million revolving credit facility at the end of the quarter. Our leverage on a trailing 12-month basis was 3.4x for the quarter, better than the 3.5x we noted on the last call, and we continue to expect to exit the year with leverage at approximately 3.1x. As we have mentioned on our last couple of calls, we view 2025 as a transition year for our cash flow. For the final quarter of 2025, we will have some fluctuations in the timing of our content payments, but we will reach a normal payment flow as we move through 2026. This will set us on a good path to deleverage, which, as we have noted, will be our focus in 2026 and into 2027. Now I'd like to turn the call back over to Nilay for Q&A.

Nilay Shah, Investor Relations

Thanks, Scott. Operator, could we open the call up for analyst questions.

Operator, Operator

Our first question comes from Brent Penter with Raymond James.

Brent Penter, Analyst

First one for me. Jeff, I appreciate the color on Fightland and good to hear that, that's starting to make it through the process and expected next year. Can you just go over a little bit the mechanics in terms of the cost savings that you get as well as the international revenue you get when you produce your own shows with your own IP? I think you said like $1 million to $2 million in savings per hour from that in the past. So just can you help us understand where those savings come from?

Jeffrey Hirsch, CEO

Yes. Brent, thanks for the question. I think there's two components to getting IP ownership back on the network, which really helps drive us to that 20% margin goal exiting 2028. First and foremost is we're de-aging shows. So we're going from late-stage shows, which are more expensive on a per-hour basis to newer shows, which, generally speaking, are much cheaper than a season four or Season five. We also can control the economics in terms of how we start the show. And so we set the budget and what we're willing to pay as we come into the content. And so as we open the writers' room and they think about the show, they know what kind of financial envelope they have to work within, and we're rigorously defending that number against that. The second side, obviously, is as a U.S.-based company, we're creating our own content. We can monetize that around the world. And much like if you think about the output deals that HBO and Showtime used to do outside the U.S., as we get to scale and we add two, three, or four shows each year that we own, we can actually package those and really drive kind of an originals output deal that puts an MG or a good amount of incremental revenue on top of the business. And so creating and owning your own IP domestically allows you to control costs on the front end, but it also creates a lot of incremental revenue from outside the U.S.

Brent Penter, Analyst

Okay. I appreciate that. And then when you all originally announced Fightland in the writers room, there were a few other shows that you talked about as well. So any update on any of those other shows? And should we expect those also to be coming in the near term? And could that help improve your EBITDA margin then once you start to get more of those owned shows?

Jeffrey Hirsch, CEO

We announced rooms for four shows right after our separation. One of the shows is about to close, and we have most of the script materials. It's likely going to be shot in Venice, and we are exploring production partners as well as brand partners to help reduce the costs. The second show, Kingmaker, is almost done as well, and we are actively looking for production entities to assist with that. Both shows should start airing on the network in 2027, with half of the slate owned by Starz. The fourth show we discussed is in the process of finalizing a production partner, and we will begin working on the writer's room once we select a runner and a writer. All these shows are progressing well, and we have added several more into development since our separation. We are focused on ensuring that half of the slate is owned by Starz by 2027, allowing us to package four or five shows each year for distribution partners outside the U.S., which will significantly drive incremental revenue.

Brent Penter, Analyst

Okay. Great. And then final question for me. On the EBITDA guide, can you just walk us through the moving pieces? Obviously, it bounces around quarter-to-quarter based on the costs. So what are the kind of bridge to get us to the $51 million, I think, that you need in 4Q to hit the $200 million? And then through the separation process, you all had talked about the $200 million EBITDA and then that could be something that you would grow off of. Can you talk about your level of confidence that, that's still the case that you hit the guide this year, but then you continue to grow off of that in the future?

Scott MacDonald, CFO

Yes, this is Scott. Regarding our path to reach $200 million, we are confident about achieving that as we look at November. The first quarter was our best quarter in terms of EBITDA. We anticipated that Q2 and Q3 would be lower in adjusted OIBDA, with Q4 expected to perform better. This expectation is mainly due to the timing of content and programming amortization in that quarter. We are clear about these factors now, and we believe we will reach the $200 million target, which requires about $52 million in Q4.

Brent Penter, Analyst

And just in terms of confidence level that the $200 million is a level that you can grow from?

Scott MacDonald, CFO

Yes. We've continued to deliver against that $200 million. And if you think about the building blocks that we've talked about, getting ownership on the network controlling cost. You'll see our content cost spend will come down next year in '26. That will further come down as we get four or five shows that Starz owns on the air in '27. And that as we start to really get that content cost spend down, which is stuff that we can control, you'll start to see the business move that margin up to 20% coming out of calendar '28. And so we feel very confident that we can move that EBITDA up based on the fact that this is self-help and self-control.

Operator, Operator

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

David Joyce, Analyst

Could you please provide some color about particular programming viewership trends? You did have to cancel BMF recently, and you've kind of alluded to that last quarter. But how should we think about the performance of these shows granted that we look at the multi-day period?

Alison Hoffman, President of Starz Networks

Yes, this is Alison. One thing we mentioned alongside Jeff's remarks is that we observed improved engagement in the last quarter. Specifically, our monthly active viewers reached a 12-month high, which is very encouraging. This marks an increase of about 7% compared to the previous quarter. This growth reflects the success of strong content like Blood of My Blood and films such as Ballerina. It positions us well for the Outlander universe and what we can anticipate from it. Force premiered last weekend and performed very well. Our initial analysis indicates that it has generated stronger gross additions than our previous two major releases, which is promising. We are entering a robust viewing and subscription season with Black Friday and the holidays approaching, which we believe will create a great opportunity for growth. Additionally, Spartacus will launch in December as a new title, and it’s exciting to think about how the Power universe can help attract new viewers to Spartacus. Looking ahead to next year, we have Outlander concluding its final season, along with Kanan, P-Valley returning, and Fightland, as mentioned by Jeff. Overall, we are optimistic about our content slate, the engagement we are seeing, and our upcoming releases.

David Joyce, Analyst

And can you provide color on how much of your overall viewership of your services is on theatrical content as opposed to these originals?

Alison Hoffman, President of Starz Networks

Yes, certainly. Generally, in relation to viewership and our approach to subscriber acquisition, we assess this based on first title streams. It's approximately evenly split, but it can vary by platform. For example, our retail app leans slightly more towards original series, attracting more viewership and new subscribers for our originals. On the other hand, some distributors may focus more on movies. Overall, this creates a well-balanced portfolio. Additionally, if we consider our amortization in relation to viewership and subscriber acquisition, everything aligns well with performance.

Jeffrey Hirsch, CEO

The other thing I'd add, David, is if we look at the lifetime value of our customers, the consumers that watch an original on a movie, their lifetime value is significantly longer than if just one watch one or the other. So having a good mix of the portfolio of both originals and movies together really helps drive reduced churn and increase lifetime value.

Operator, Operator

Our next question comes from David Karnovsky with JPMorgan.

David Karnovsky, Analyst

Jeff, it would be great to get your thoughts on the streaming landscape currently. I think investors sometimes have concern generally as they look across domestic operators on how much incremental volume or pricing growth there is from here. So I'd be curious to get your thoughts broadly, and then if you can tie that context back to your confidence on continued OTT subscriber revenue growth at Starz, that would be great.

Jeffrey Hirsch, CEO

Yes. I think as I said in my prepared remarks, there's a lot of headwinds out there. I think there's a lot of moving parts. There's a lot of integrations of platforms. There's a lot of consolidation going on. And I think all of that creates a lot of noise in the marketplace for consumers, and it makes it hard, especially for us because we are a complementary service, and we do depend on these large broad-based streamers to package us, bundle us and sell us. We're sold on top of Hulu; we're sold on top of Amazon. I think we're the most bundled service on Amazon today. I think we're over two-thirds of all their bundles have a Starz component, and that's really been our strategy. And so as people continue to change and focus on themselves to figure out what their platform looks like, it gets a little more complicated for us to get sold on top of. But as you saw, we've had three out of the last four very strong subscriber quarters. We think that will continue based on the strength of our content slate in the fourth quarter and through all of next year. And as people continue to raise rates as a way to drive revenue, it creates room for us to also raise our rate because as a complementary partner, we've always wanted a large gap between the stated retail rate of our broad-based streaming partners versus our complementary service. And so it continues to give us the ability to raise rates if we need to. But for now, we really think based on the strength of our content, we can continue to grow subscribers on an organic basis without having to put rate on the business today.

David Karnovsky, Analyst

Great. And then I want to follow up on your M&A comments. I don't know if it's possible for you to give any more detail in terms of assets you might be interested in and how you think that can transform Starz'. And then how should we view Starz' potential financing of any deals just given your goal to delever and maybe use of equity being a challenger.

Jeffrey Hirsch, CEO

Yes, I won't specify any particular companies, but I previously mentioned that we aim to diversify our revenue streams from solely a subscription video on demand model to include advertising-based models. Given the adult nature of our content and the volume we have, expanding into advertising is challenging in terms of competing with larger players. However, we can explore partnerships with linear networks whose audiences have shifted to digital, while their brands remain tied to linear formats. Our technology platform can assist in transitioning those brands into the digital landscape, which would complement Starz's existing subscription content. We've observed that positioning complementary advertising businesses alongside our subscription service significantly reduces churn and can enhance both subscriber and revenue growth. We are keen on pursuing this strategy. As large companies consolidate, parts of their businesses that are no longer central to their operations may become available, and some networks could strategically align with Starz. We believe we are in a strong position due to our successful transition from a linear to a predominantly digital model, doing so profitably, and having our own technology and customer acquisition capabilities. This enables us to integrate those networks effectively and drive substantial growth. Regarding our balance sheet, it is structured in a way to be tax-efficient for potential deals. However, I want to emphasize that we are not interested in transactions that would significantly increase our leverage. We will only consider deals that allow us to maintain our ideal leverage levels, align with our core demographics, and enable us to successfully transition businesses from linear to digital, which we see as our key opportunity.

Operator, Operator

Our next question comes from Thomas Yeh with Morgan Stanley.

Thomas Yeh, Analyst

I just wanted to follow up on your comments about the subscriber momentum into the back half of the year. Can you maybe just tease out the dynamics around churn relative to gross acquisitions supporting that momentum? Are we at a point where the slate is bridging consumers over from one series to the next and retention is benefiting? Or is this more like a gross acquisition story, given some of the bundling dynamics that have been picking up a little bit more?

Jeffrey Hirsch, CEO

Yes, I believe that in the quarter, two-thirds of our performance was driven by growth and one-third was related to churn, varying by platform. The churn for the Starz app continues to decline to record lows. This improvement stems from strategies like linking shows together and offering longer-term deals. If we can retain consumers through the seventh and thirteenth months, churn drops to low single digits. We are focusing on pricing strategies to guide consumers to these critical points, which significantly reduces churn and increases customer lifetime value. As we approach our 2026 slate with shows airing consecutively, we expect to rely more on reducing churn rather than just adding new customers. We announced Power: Origins, which features a longer season, allowing for more episodes over an extended timeframe—between 18 and 22 weeks instead of the typical 8 to 10 weeks. We believe this approach may help further decrease churn, especially at key points after a show's premiere. We're exploring not only back-to-back shows but also the duration of series to manage this effectively and cost-efficiently.

Thomas Yeh, Analyst

Okay. Understood. And can we revisit the Canadian business model shift? I might have missed this, but are you expecting licensing revenues to cover the existing subscription revenues? And is that licensing fee variable to what the partner benefits from, from a subscriber adoption perspective?

Jeffrey Hirsch, CEO

No, it's a great question. Yes, it does more than cover what we had in terms of the subscriber business. It's also much more stable in a sense. It was a unique deal where we had three partners in that deal. So it was incredibly hard for us to do what we do here in the U.S. in terms of managing the customer acquisition, retention, save cues, all of the different life cycle management. And if you think about, again, the building blocks of how we're getting this business to extend adjusted OIBDA and get to that 20% margin, Canada and licensing is, again, another international territory. So you have to think about it as a kind of overall output deal with Canada for our content. We hope to have more of those around the world in terms of driving stable incremental revenue to the kind of linear and other line item in the revenue side.

Thomas Yeh, Analyst

Okay. Great. And just last one for me. Can we revisit the cash spend outlook? Is $700 million kind of still the right number for 2026, and then it kind of continues to go down beyond that just based on some of the timing of how you transition to fuller slate?

Scott MacDonald, CFO

Yes, this is Scott. We expect to be just under $700 million in 2026. We're still evaluating this and will provide more guidance on our next call. That's our plan, and we're looking to reduce costs as we move forward, which is important as we refresh our content. As Jeff mentioned, gaining network ownership helps lower the average cost per episode across our shows. This will help us reach the $600 to $650 range in a couple of years.

Operator, Operator

Our next question comes from Matthew Harrigan with The Benchmark Company.

Matthew Harrigan, Analyst

Firstly, aside from the de-aging on the slate, I believe you mentioned some cost advantages in terms of development, and perhaps a bit more flexibility in utilizing your data lake to optimize for Starz. Even with good intentions, you might have faced some issues related to suboptimization while closely tied to Lionsgate television. Secondly, I noticed that your cash burn was lower than I had expected. I usually don't pose many detailed questions about cash flow timing, but does this suggest that some of that might be pushed into Q4, indicating that cash burn for the year will likely remain consistent as you approach normalization over the next couple of years?

Scott MacDonald, CFO

No. As previously mentioned, this is Scott. Following the separation, our cash management was expected to be somewhat uneven. In the last quarter, Q2, our performance was better than anticipated, which was partly due to our initial efforts in managing cash. This quarter, we've experienced a slight negative trend, which we anticipate will continue into the next quarter. However, we expect to see improvement as we progress through 2026. The transition won't happen overnight. One of the challenges we faced was related to our previous production model, where we consistently financed shows over their production cycles, leading to a steadier cash flow. In our previous role within a larger studio, the timing of cash payments depended heavily on corporate needs, resulting in greater fluctuations than we would prefer as an independent company. We're actively working to align our cash flow more closely with industry standards, and we're making progress toward achieving this by year-end. We will continue to refine our approach in early 2026, which should help us return to a more normal pattern. Next year, we anticipate our content spending will decrease to just below $700 million, marking a significant reduction from current levels. Overall, this process will take some time to stabilize, so we expect some variability in Q4 and possibly into Q1, but we anticipate a more consistent cash flow thereafter.

Matthew Harrigan, Analyst

And I guess, then, on the development question, the development costs and your latitude for more creativity and maybe being faster on that side and getting costs down.

Jeffrey Hirsch, CEO

Look, I think all of having control over when you open a room, when you greenlight a show, when you go into production, to Scott's point, timing and aligning all of the production to the on-air date to the cash spend. I mean when you get to a consistent kind of assembly line from the day you put it into development to the day you greenlight, to the day you deliver and you pay on delivery and then you air it, ultimately, we should get cash content spend should be 1:1 with cash air over time if you are consistent. Having control over our own production gives us the ability to align these shows and deliver them when we need to and so that we can get the choppiness of cash content spend out of the business. And so ultimately, the goal is when we get there is that cash content spend at amort should be almost 1:1 as the business goes forward.

Matthew Harrigan, Analyst

And then on the marketing side, I thought you might have some ideas, particularly given the huge demographics actually that you're targeting. But at the same time, I thought you might have some more opportunities there. Are you hamstrung by having such a high bundling component in terms of really being able to do marketing yourself to address those groups through a targeted process?

Jeffrey Hirsch, CEO

I don't believe we are. Bundling provides several benefits. It allows us to align our content slate with others’ to fill gaps and offers a discount to the consumer. Essentially, we are merging two slates to enhance benefits and value for the consumer, which leads to increased lifetime value. Furthermore, we are present across various platforms, including our own retail app. When we market to our target demographics in our unique ways, it not only boosts our own retail performance but also positively impacts the components of our bundles. Our data shows that when we promote offerings at the top of the funnel, it benefits not only our app but also all of our partners, regardless of whether they subscribe a la carte or through a bundle.

Operator, Operator

That concludes today's question-and-answer session. I'd like to turn the call back to Nilay Shah for closing remarks.

Nilay Shah, Investor Relations

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. Thanks all.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.