Q2 2023 Lions Gate Entertainment Corp Earnings Call
It is star then two please note this event is being recorded.
I'd now like to turn the conference over to Neal Shah Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us for the Lionsgate fiscal 2023 second quarter conference call will begin with opening remarks from our CEO , Jon Feltheimer, followed by remarks from our CFO Jimmy barge. After their remarks, we'll open the call for questions also joining us on the call today are Vice Chairman Michael Burns.
<unk>.
Oh, Brian Goldsmith Chairman of the television group, Kevin Beggs and chairman of the motion Picture Group, Joe Drake and from Starz, We have president and CEO , Jeffrey Hirsch CFO , Scott Macdonald and president of domestic networks Allison Hoffman.
The matters discussed on this call include forward looking statements, including those regarding the performance of future fiscal years, 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 landscape. Most recent annual report on <unk>.
Form 10-K, as amended and our most recent quarterly report on Form 10-Q filed with the SEC. The company 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 I will now turn the call over to John.
Thank you Neil good afternoon, everyone and thank you for joining us.
I want to start with a few words about the charges, we just announced and then I'll talk about the quarter and close with an update on our strategic process.
As you saw we're taking a noncash goodwill write down its stars as well as a charge primarily related to the restructuring of our Starz play International business now called Lionsgate plus.
We've made a strategic decision to exit certain international territories six markets in Continental Europe , as well as Japan.
This process has already begun and will be completed by the end of the fiscal year.
This was a tough decision the restructuring these stars with a streamline international business positioned to compete in places, where we can win with a strong and scalable presence in the U K, Canada and Latin America.
Domestically, we're facing equally challenging headwinds, which I will talk about from an operational perspective, and Jimmy will discuss in financial terms.
But stars remains a unique premium platform with a focused content strategy, a robust slate of hit series and significant upside as bundling and packaging opportunities come to fruition.
These charges are an acknowledgement of current market conditions and the challenges in our environment.
But they also represent an opportunity to stabilize our stores business reset expectations and drive higher adjusted OIBDA as we move forward.
Now, let's turn to the quarter beginning with stars.
During the quarter. There was continued degradation of the linear ecosystem, but stars continued to grow both international and domestic streaming subscribers.
Even more importantly.
<unk> continues its successful transition to digital.
Streaming now accounts for 71% of Starz subscribers and 62% of its revenues and the platform has remained profitable throughout this transition.
Starz continued digital transformation helps to insulate us from further erosion in the linear space, while positioning us to benefit from new marketing and distribution opportunities when they overall streaming ecosystem becomes more robust.
On the programming front the critically acclaimed P Valley emerged as a breakout success in its second season, becoming stars most watched shown with an average of $10 3 million multi platform viewers per episode.
All three of the quarter standout performers P valley, raising kanan and the serpent Queen have been picked up for additional seasons.
Starz now has five shows each with more than $8 5 million multi platform viewers and impressive track record for a streamer of any size.
Given this level of viewership and with a focus on two valuable and scalable core demos, we are well positioned to be part of every conversation as the business evolves into a bundled direct to consumer world.
Turning to our studio businesses.
Our upcoming film slate is filled with new installments of nearly all of our major franchises John Wick chapter for the hunger games prequel the ballad of songbirds and snakes Dirty Dancing now you see me three expandable for Soar and the John Wick spinoff ballerina starring Anne.
And the Army, which begins production next week.
With tent Poles and every quarter, we're putting together a lineup reminiscent of the slate that performed strongly in 2019, the last pre pandemic year.
But our film business is about more than 10 polls with pray for the Devil. Our most recent wide release and fall are smaller opportunistic release, we showed that we can create successful business models for every kind of film.
Upcoming releases like the Gerard Butler thriller plane prestige films like argue there God. It's me Margaret the action thriller Shadow Force and Alice Darling, starring Anna Kendrick round at one of our most balanced slates in years.
Slate that speaks to our optionality and ability to play in every part of the movie ecosystem.
I would also note that in a highly competitive bidding situation. We moved quickly to acquire director Tim stories horror parity. The blackening a film that fits our ethos of bold edgy and provocative fare well.
We're putting it on the schedule immediately and believe we have a real hit and a potential franchise on our hands.
In terms of TV. The headline is that we successfully operate as both a content arms dealer and a streamer.
Our television group has become one of the world's leading independent suppliers of premium scripted series to third party buyers. While also supporting Starz growth with a pipeline of 15 shows our licensing and windowing activities also extend to stores in terms of how they stream license and bifurcate the rights to their shows.
Having a bespoke partner at Starz has allowed us to scale to over 100 shows across our scripted and unscripted business, while our content partnerships with three Arts Entertainment Debmar Mercury Pilgrim Media BBC studios in the U K Bell media in Canada stand in.
Dahlia and talent management and production company 42 in the U K have allowed us to build a truly global content creation capability.
This content platform continues to create hits this quarter saw the continued growth of accommodate goes on CBS a breakout phenomenon that has steadily grown its audience since launch emerging of Cbs's number one comedy in key demos and already sold the Paramount plus for <unk> as we begin to monetize its many windows.
Yes.
The John Wick TV origin story that continental is on its way to becoming another transformative property after licensing it to Peacock domestically, we announced earlier this afternoon that Amazon Prime as license this show internationally.
With Peacock and Amazon aboard as partners the global rollout of the Continental is positioned to be one of the streaming events of 2023.
It puts a solid exclamation point on the continued growth of John Wick into one of the world's premier action franchises driving value across our television and film businesses.
With ghosts and the continental on their way to becoming drivers that will sit alongside Mad men weeds and Orange is the new black and our library, we're continuing to convert this value into strong financial results with our television group expecting to generate strong and increasing segment profit this year as well as in fiscal 'twenty four.
Fiscal 'twenty five.
I want to close with a few thoughts about our strategic process.
As we've said before we are committed to separating our media networks and studio business as.
As part of this process to separate the businesses, we are disclosing today certain financial information prepared in connection with strategic and financial discussions with.
This disclosure provides additional information regarding management's expectation of the range of segment profit for each of the studio and media networks businesses in fiscal 'twenty, three and fiscal 'twenty four.
Now I'll turn things over to Jimmy.
Thanks, John and good afternoon, everyone I'll briefly discuss our second quarter financial results and update you on the balance sheet.
Second quarter adjusted OIBDA was $47 million in total revenue was $875 million the year over year adjusted OIBDA decline, primarily reflects the tough year over year comparison as motion pictures prior year quarter benefited from strong rollover revenue from the fiscal 'twenty two.
One slide.
Ported fully diluted earnings per share was a loss of $7 95, a share and fully diluted adjusted earnings per share came in at a loss of <unk> 12. This year.
Adjusted free cash flow for the quarter was $124 million.
As John mentioned in his prepared remarks, we took two large charges this quarter that impacted our unadjusted operating results.
First in the quarter, we took a noncash goodwill impairment charge of $1 $47 5 billion relate.
Related to our 2016 Starz acquisition.
This write down reflects changes in the market valuations for streaming assets and related factors stemming from increased competition and a slowing global economy.
Additionally, we recorded a $233 million charge, primarily related to the restructuring of our streaming service in several international markets.
We believe the star's focus on the remaining territories will provide our international business, a clear path to profitability, while continuing to grow subscribers off a lower base.
Now, let me briefly discuss the fiscal second quarter performance of the underlying segments compared to the previous year quarter.
Media Networks' quarterly revenue was $396 million and segment profit was $21 million revenue grew 3% year over year as we continue to see favorable shifts in subscriber mix driving continued OTT revenue growth.
Partially offset by continued linear pressure.
Domestic revenue was essentially flat year over year, while year over year International revenue was up 48%.
Media networks segment profit was up significantly year over year.
And primarily reflects lower marketing spend both domestically and internationally, partially offset by higher content expense.
We ended the quarter with $37 8 million total global subscribers, including Starz play Arabia.
Total global media networks, OTT subscribers grew 1 million sequentially to $27 3 million subscribers.
This represents year over year global OTT subscriber growth of 52% comprised of domestic OTT growth of 18% and international OTT growth of nearly 100%.
I want to update everyone on the impact of the international restructurings will have on our subscriber trajectory and financial outlook going forward.
While the exact timing is still being finalized we expect our transition to be completed by the end of this fiscal year and our total international subscriber base at year end to exceed $7 million.
We expect international segment profit will improve significantly on a quarter over quarter and year over year basis, starting with the current December quarter.
We remain committed to reaching breakeven in our international business exiting calendar year 2024 or earlier.
Now I'd like to talk about the studio business in aggregate.
Revenue was $655 million was down one 8% year over year, driven by the motion picture group segment profit of $69 million was down year over year, driven by declines in both TV and motion picture. Our total library revenue at the studio was $747 million.
On a trailing 12 month basis, which is in line with the prior quarter.
Breaking down the studio business between motion picture and TV, let's start with motion picture.
Motion picture revenue was down 32% year over year to $224 million, while segment profit of $56 million was down due to a difficult comparison with the last quarter's second quarter, which benefited from the rollover of the 2021 slide.
Revenue and segment profit trends reflect continued strength in our library, while we move into the second half slate with the return of some of our larger theatrical titles, including fourth quarter release of John Wick four as well as several major releases in fiscal year 'twenty four.
And finally, TV revenue was up 28% to $431 million driven by continued growth in output, which included both new and returning series segment profit came in at $14 million and was down year over year, reflecting the impact of <unk>.
<unk> content amortization related to our series cancellation.
Now, let's talk about our balance sheet, excluding the restructured landscape plus territories from the trailing 12 months adjusted EBITDA leverage for the quarter improved to five five times. We also continued to retain significant liquidity with over 500 <unk>.
<unk> million dollars of cash on hand, and a 125 billion undrawn revolver.
Currently we have no maturities until the fourth quarter of fiscal 2025.
We remain committed to strengthening our balance sheet and continuing to pay down debt, while funding our investment in content and marketing from adjusted free cash flow.
In anticipation of separating our studio and media networks businesses, you will see that we have provided an adjusted OIBDA outlook for fiscal year, 'twenty, three and fiscal year 'twenty for that breaks out each of these businesses.
Given some of the headwinds we're seeing from the slowdown in the global economy. Most acutely felt that stars we now forecast adjusted EBITDA for the year to be between $275 million and $325 million.
This implies a healthy ramp in adjusted OIBDA in the back half of the year driven by strong library sales, including the licensing of Shits Creek to Hulu the direct platform release, a shotgun wedding to Amazon and continued cost rationalization most directly evidenced in our international restructuring.
As for fiscal 'twenty four.
We see adjusted EBITDA in the range of $400 million to $450 million.
We see a strong year in fiscal 'twenty for Us John Wick, followed through along with the licensing of the continental the Peacock in the U S and Amazon internationally should make for a strong studio segment profits and margins.
Finally, you will notice that our eliminations or a larger than normal drag on adjusted OIBDA in fiscal 'twenty, three and fiscal 'twenty four.
This is due to the increase in intercompany activity between stores and the studio businesses as represented by the healthy amount of content per stores made by our television studio as well as the Q3 onset of the pay one deal between our motion picture group and start.
Over time, the eliminations at the profit line should normalize to zero, but I wanted to point out this near term impact on our overall consolidated adjusted OIBDA and.
And finally, it is important to note that when we separate the studio business from stars eliminations.
Eliminations will go away.
Now I'd like to turn the call over to <unk> for Q&A.
Great can you open the lineup for questions.
Yes.
Firstly to ask a question you May press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
And again that Scott I might ask a question.
And our first question comes from.
Good morale at RBC capital markets.
Great.
Thanks for taking the questions two if I could first can you provide some background on what seems to be a decision or maybe a path to spin off the studio business.
Set of stars and if Theres anything you could share on how those discussions are evolving any and any expectations around timing and just second when we think about the Lions gate plus exit in seven international markets.
I was just curious if that could offer any content licensing opportunities.
As you kind of dig into the business plan and more broadly if it does.
What does that kind of.
How does that impact your thinking on.
Other international markets or even starz domestically. Thanks.
Yes, I'll answer the first part.
Sure.
Regards to the decision to spin the studio and the separation.
What we have done a lot of work here and there is definitely as we've noted before structural benefits to handling in this fashion, particularly in the on the financial side of things.
There are advantages and I would just remind you that the debt structure, including the favorable interest rate bonds.
Reside on the storage side of the business. So there's obviously benefits to Spain studio lowest stars from a tax perspective, there's a couple of things because we've had the question. So I would just note that as we've said before that the separation.
And span of the studio would be done in a very tax efficient manner.
I would expect that it would be tax free for shareholders.
But in order to retain flexibility okay.
It would be taxable from our corporate spend perspective, but without without any significant cash tax consequences. The other thing I'd point out from a tax perspective as you've seen in our filings we have over one $4 billion of Nols, which would not be degradation during.
The spin process.
$1 2 billion of those Nols would travel with the studio.
Leaving a little over 200 million with starch.
With regards to timing in the regulatory process I would just say.
That we've done a lot of work here.
And I would just say that this does not preclude a transaction or deleveraging event prior to or in conjunction with pursuing any regulatory approvals. Okay. I would also note that we can also separate the companies without a deleveraging event.
Yes in terms of your other question guys. John I'll answer Jack May want to jump in if I understood. Your question. We are exiting mostly territories that had low <unk> a lot of bundled subs and frankly, when you think about it that way sort of the ability to pay in those territories for expensive content, whether it's our.
<unk> content at Starz, and Lionsgate or a third party content really it's not the most efficient.
Use of that content and frankly so.
We're a global distribution business, we will take the content rights that we own we will sell them hopefully we will do better in terms of even the write off.
And frankly expect to mitigate a large portion of that.
With our with our sales so does that does that answer your question.
Yeah, Yeah. It does thanks, so much I really appreciate it. Thank you both great well. Thanks, Catharine operator can we get the next question. Please.
Our next question is from Matt Thornton at Trust Securities.
Hey, good afternoon, everyone. Thanks for taking the question.
I think John I think the goal here was to strike and fight a transaction that enabled deleveraging provided the valuation marker and I think perhaps provide some strategic benefits.
If that can be found obviously the macro is pretty turbulent here, but deals are getting done as we saw with with Sky dance. So my question here is how is your confidence in getting a deal done that meet your criteria changed since the last earnings earnings update.
Yeah.
No I wouldn't say, so obviously, it's not helpful.
Number one when there is a big disconnect between the separate values.
Some of the parts if you will of our two core businesses.
And where our stock price is right now because obviously when people are looking at either of those sides. They may look at Topco and say well, maybe that's a better and smarter investment for me at least as part of my <unk>.
Investment thesis in being in business with us so.
That's not that's not particularly helpful. It's frankly, one of the reasons that we put out these numbers today to give all of our investors frankly.
We're playing field with anyone we may have given this information to before Frank Let me just show.
The transparency and frankly, particularly at the studio level.
Where I think sometimes the consolidated.
Company eliminations have somewhat masked I would say the real value of what we're doing at the studio and I don't know if everyone understands is elimination so Jimmy I don't know if you.
Fill them at a little bit.
Yes, certainly.
Yes.
AK is prepared in conjunction with preparing for separation and to John's point.
And as I noted in my remarks, the intercompany eliminations go away upon any separation.
This is important.
To look and see that you can see the sum of the parts adjusted OIBDA for the studio and Starz together.
Look at that excluding intercompany eliminations of course, which go away the midpoint of that projection is over $500 million.
Fiscal 'twenty four so thats worth, noting the other thing I think it's worth noting in particular.
Mask, perhaps a $1 billion of value in the studio is if you look at the corporate G&A. If you wanted to just use a 10 times multiple whatever you would want to put on it.
And any ultimate monetization of the studio the corporate G&A would likely be significantly reduced or eliminated.
And again.
That mask a billion dollars of value in the studio if you'd look at those numbers.
That's helpful. Maybe Jim Mack is asking for a quick housekeeping follow up the TV production accelerated amortization any quantification there and then just on currency in the quarter I would assume was probably some headwind top line bottom line and the international I guess any any quantification there. Thanks again guys.
Yes to give you an idea.
The FX was.
Over 10 million in the.
Quarter.
And primarily in Starz International as you would expect as well as the motion picture group. So.
In terms of the amortization.
Amortization.
In terms of the amortization, that's really timing there was a specific series that was not picked up for renewal and so we took that out of our ultimate estimates, which accelerates the amortization into the current period timing of cost it would have ultimately been amortized in following periods.
Thanks, Matt operator can we get the next question. Please.
The next question is from Phil Cusick at Jpmorgan.
Hi, Thank you a couple of if I can.
First can you quantify the level of profit improvement in the December quarter from international restructuring and then how it evolves from there and then second can you just talk about the latest data points in the theatrical business and how those influence your theatrical strategy going forward. What do you think the preferences today on the studio side for making.
Directed platform versus theatrical movies.
Hey, Jimmy Phil Thanks.
In terms of stores internationally in the restructuring.
Okay can you hear me.
Okay.
Sure.
Oh.
One moment please.
Okay.
Okay.
One moment please.
Yes.
[music].
Yes, we can hear you. Please continue.
Okay should I bring everybody in here.
Okay.
[music].
Yes.
Because at the conference you can continue.
Sorry for the confusion, everyone I think Phil Chiesi could just ask a question.
And so Joe why don't you finished the question on how we're approaching the theatrical and peak Mark Yes, I think we actually recovered annuity.
I don't know if everyone heard it Oh I see.
I Hope you hear the answer to the question.
Okay.
No you haven't that operate as you started to talk.
Okay got it.
What I was saying was that we have we're very we're actually quite bullish on the theatrical market.
And equally as we have said in past calls we have a very intentional additional leg of the business that's leaning into streaming for the theatrical side of the business. What I was saying was that we have on the one hand, the best lineup, we've ever had with John talked a bit about it with John Wick coming back into the into the new year.
Ballerina, which is the first spin off which we think has enormous potential we've got the hunger games Dirty dancing in a bunch of more targeted movies that we always talk about.
What I was what I wanted to share with you on the theatrical business is we think that even what we did this last week and really speaks to the strength of our strategy moving back into the theatrical marketplace.
Pray for the Devil did sub tenant in the opening box office and Thats actually in some way the good news for the business and that we have with <unk>.
Our ability to be super disciplined and PNA, what we're seeing happening in the AD market and I think some benefits we're going to get there the strength of the international values that we've talked a lot about and the strength of those downstream values, we got a very profitable business on these targeted movies.
At lower box office levels, and net when they break out tons of upside in the business. So from the theatrical side.
Even at these levels of box office that we're seeing today.
There is a super compelling business for us and we're really excited that we're moving back into the market with a 10% to 15 picture slate every year on the streaming side.
We have a very intentional business, we released a multi platform basis between 30 and 40 movies a year very low costs are very low risk very high return for us and so we've as we've said on past calls and still feel very strongly about it because we're still seeing the demand there is an.
<unk> to generate additional low risk high margin for our business and so all in all this is actually a fantastic time for us in the motion picture business.
Bill is that answer your question.
And our next question, Okay, we're going to actually we apologize for that delay, we all got up here, but.
We understand Jimmy got cutoff as well in the middle of his explanation on eliminations and I think that's important so I'm going to let him give.
I'll give a quick recap of what those elimination of mean.
It was on the Starz International and fill all thank you for your question a second time.
Just to round that out we would expect the second half.
Losses, and landscape plus to be less than half of what they were in the first half.
And then we will expect continuing sequential improvements into fiscal 'twenty, four reaching run rate positive in calendar year 'twenty four.
Thanks, Bill sorry, again for everyone for the delay operator can we get the next question. Please.
Certainly the next question comes from Rich Greenfield at <unk>.
Yes.
Hey, Thanks for taking the question.
I guess just from a high level.
Okay.
The.
Capital allocation I think he is sort of the something I hear a lot from investors there Blake.
How do you all think about.
Out where to put your dollars you know I heard what you just said about the theatrical business, but obviously it's.
It's changed a lot and there's obviously been some real headwinds to that business over the course of the.
Even in the post pandemic period until like as you think about sort of putting the capital you have to working.
Keep the spinoff as a separate issue for right now.
To put a dollar into each of your three businesses between movies TV and stars.
What's the best use of of Lionsgate capital today.
Yes, that's a great. It's a great question I think.
You should know I think we've mentioned before but there isn't a piece of the product that we go forward and make that we don't run a financial analysis that includes an MPV and a return on capital we think thats important.
As you know it's also important we've got corporate overhead Jimmy mentioned earlier if we.
A separate the businesses and if there is further transactions or monetization obviously.
It's a big number but thats a big number that's got to be covered on a gross basis and so.
We've got to build business, that's big enough to cover corporate overhead and obviously all the expenses but.
But we do an analysis of all of our business is getting out of the the territories that we got out of was an analysis of the return on that incremental investment.
In that area, obviously part of the analysis the calculus that we did at one point in time and the investment overall in the stores business and the Starz play International business was based upon multiples that you do that analysis, obviously when those multiples were 2025.
Even I mean no.
But nobody has seen the moves more than you have ridge.
Then you would have said, let's put even more money into it as those multiples have come down as we look forward at what they could be and will be where those stabilized we think they'll certainly stabilize higher than where the linear cable multiples are now but.
When you shift that a little bit so I would say, it's the analysis you would expect us to make on that.
More macro basis.
Micro basis in terms of every specific thing we invest in them.
I know that's a little that's a little broad, but I think thats, how we do it.
Thanks Rich.
Thanks, Rich operator can we get the next question. Please.
Certainly the next question comes from Barton Crockett of Rosenblatt Securities.
Okay. Thanks for taking the question.
Let me see I was wanting to ask a little bit about the.
Yeah.
Excuse me the outlook for 2024.
That you gave can you.
Give us a sense of.
The trajectory and stars that you're assuming versus the trajectory and the separated studio businesses.
We know you've got some more movies coming out but.
And maybe some of this is in the 8-K that I havent had chance to disclose but maybe talk through.
What happens I know you talked about the international except but just broadly what happens what's the EBITDA.
And the number that you were talking to you for 2024 by segment.
Look theres Barton thanks for the question.
As you can see in our outlook.
The ranges were giving that theres nice acceleration both in stores.
Particularly as we've restructured the international operations.
And great acceleration on the studio side, so nice acceleration as John mentioned in his opening remarks were.
We're looking forward to really a strong fiscal 'twenty four and.
That's reflected in these numbers and I just think it's important as we noted that the eliminations mask some of that because the eliminations are going up as you would expect as TV product is ramping up further and further in terms of.
Stars.
Programming and we're also as you know this next quarter, meaning the current December quarter, starting to pay one window, starting with Nic cage movie into.
The pay one deal between motion picture and and.
In stores so overall.
Drawn trajectory on a consolidated basis.
And that includes some ramp up in eliminations, which ultimately go away.
Yes, and just to kind of follow up on that idea of a strong start.
Obviously, you flagged kind of increasing linear pressures.
And what's your view over time in this kind of outlook about what happens to those linear pressures.
Hey, it's Jeff Thanks for the question in the current quarter I think there was really three things that we saw that impacted the sub trajectory in the quarter. Obviously, the economic pressures that we've talked about really accelerated some linear loss. We did see some of that pressure hit some of our big digital wholesale partners. The good news in the quarter as P value.
Amir.
A massive growth curve for us and what we saw in P Valley was that half the audience was net new to the franchise.
So we saw great growth pushing up into the Tam the downside to that was only half of the audience overlap with the power cohort and so we did see some elevated churn we do expect to sit within this economic environment for another quarter or so but in the fourth quarter of the fiscal we have a DMF and ghost which are our two biggest shows coming on so we expect.
Turn to great growth in the fourth quarter.
Operator can we get the next question please.
Certainly the next question comes from Steve Cahall with Wells Fargo.
Thank you maybe first Jimmy Thanks for all of that info on the studios spin I was wondering if you have any target leverage ratios for studio and stars upon completion of the separation.
My guess is that some of the external interest might be greater in the studios business, but you would also maybe want to deleverage. The stars business. So does it make sense to put more of the debt on the studio then stars that separation to kind of expect that potential for for a transaction.
The FY 'twenty four guidance it looks like you've got the studio business above the fiscal 'twenty, one level of a OIBDA I'm guessing libraries pretty steady and there I understand what you're talking about eliminations, but is there more to that ramp are there. Some big TV delivery do you expect or is it really the film slate that's driving that thank you.
Well.
Let's.
Let's take the let's take that one first the.
And the projections looking out through that we've got in <unk>.
Library for sure strong.
Library continues to be strong and a great contributor and then it's a ramp up in the titles.
Coming out the actually with a great carryover from with a great carryover.
From the.
John Wick release, which is right in our March quarter of fiscal 'twenty three so good carryover there Kevin and the team has got a great lineup.
Rowling and deeper and deeper more mature.
Series that have higher margins, that's rolling into 'twenty four so really got a lot of good things happening there and and then strengthened stores as they continue and particularly with the international restructuring So that's that.
It's that piece in terms of the first part of the question was cut.
Come back to that.
Yes go.
Go ahead.
The debt on the leverage on the leverage side.
Side of things.
We have a lot of optionality, so I wouldn't make any particular assumptions, but as you've seen we concluded the quarter. When you look at it on a pro forma basis, given the international structuring we concluded with 555 times leverage.
As we've talked about before we'd expect to come in at the end of this year closer to the five times range and then moving into fiscal 'twenty four and the four times range. So even without a deleveraging event I think its imminently.
Financeable in terms of a separation and of course with any transaction that involves a deleveraging event, then you manage debt levels down from there.
Thank you.
Thanks, Stephen operator can we get the next question. Please.
The next question is from Alan Gould at loop capital.
Yeah. Thanks, I've got two questions.
First of all Jim you said before about the corporate overhead goes away with the corporate overhead go away or would it just gets split up among and between the two companies and then secondly on the free cash flow question I noticed in the quarter that you had a big increase in net production loans taken out.
I know you've done this regularly throughout the years, but it just is.
Usually high this quarter was wondering if you could just address that.
Sure well look in terms of the corporate overhead I think on the star side of the business, having been a standalone public company before they have a pre.
Large accompany him on not large but sufficient accompany amount of talent and abilities. There may be some more there that would be needed and separation, but it really depends on the ultimate.
Party in a monetization as to what may be needed, but generally speaking I think on the studio side, there wouldn't be a lot more needed within those operations.
From a.
Free cash flow perspective, yes, we are at peak content spend particularly on the TV side of things given the ramp up in TV production, which is a high quality.
Aspect and use of capital and we ramped up from a working capital perspective, we ramped up the production loans relative to TV product in the quarter and so that's what you saw there.
Okay. Thank you.
Thanks, Alan operator can we get the next question. Please.
The next question comes from Thomas <unk> at Morgan Stanley .
Thanks, so much following up a bit on Barnes earlier question within the media segment network. Our media networks segment profit improvement that's expected for next year could you help us think about the U S business in particular, it seems like based on what Jimmy said about the international profit cadence into the latter half of this year and in snacks that <unk>.
The driver of the improvement and in the quarter. It looks like U S. Stars expenses came down just wondering how youre thinking about what the cost structure. It looks like domestically into next year in light of the industry headwinds is it right to spend through it.
And then if I could squeeze a housekeeping one in for Jamie.
The corporate G&A expectations are baking in a 20% growth in fiscal 'twenty, four which is I think its typically been pretty flattish at $100 million is there anything transaction related that might be going on there and any way to kind of help think about how to allocate that 120 in the event of a separation between studio and media. Thank you so much.
Sure I'd, just say on the corporate G&A that ramp up is related to bonuses expectations with regards to going from a from fiscal 'twenty three to fiscal 'twenty four so thats. The thats the delta there primarily with regards to the domestic side of the business and international.
National Am I going to frame and break those out separately other than what I.
<unk> said to you with regards to the kind of improving international numbers relative to the restructuring Jeff is there anything else you want to add to that yes, I would say in terms of your question about the expense portfolio going forward, obviously, when youre in any kind of tough economic time and you have.
Pressure on one side of your business you always go back and look at all aspects of your business to make sure you're putting the expense where the growth and the profitability is even if you look at what we've done over the last five years. We've pivoted this business from a linear only to a digital first business with over 70% of our subs being digital 62% of our revenue coming from digital and so we are.
<unk>.
Sure.
It pushed on the linear side, especially because we don't have advertising, but again, we're looking at every part of the business and making sure that as one part of our business is shrinking we are putting resources and efforts against the places that are growing.
Thanks, so much.
Thanks, Thomas operator can we get the next question. Please.
The next question is from Jim gross at Barrington Research.
Okay.
Thanks.
<unk> been a rebuilding of the theatrical business I was wondering if you could talk about the.
The value that may have been created with.
Windows of various types.
And how it might vary by size itself.
You might also comment on the sequencing of windows from theatrical to other downstream windows and how that might vary by size of movie.
Sure.
I think that the.
I think that the.
Most obvious opportunity for us has been in the and the intentional growth on the streaming and multi platform side of our business is where it has had the most current impact.
We've been we've been growing in that business. Both in terms of the kinds of movies that were making directly for streamers as well as those that were either making or.
Or or acquiring we ended up picking up three movies in Toronto two of those would be multi platform and <unk> and in the let's say 30 films that will release through that side of the business.
There might be eight to 10 different release strategies across those 30 movies with different windowing, some going the shorter window P. Bod some day and date theatrical releases.
We did that with this movie fall recently.
And.
Similarly.
We have an opportunity with our partners share. It stars as you know that our theatrical slate is now rolling into stars.
To drive value there.
And we are able to have conversations with them regularly about different windowing on movies as we see opportunities in the marketplace and so.
On the direct to it's been a real growth engine for us on the theatrical side, depending on the size of the movies I think youll see our big brands.
Stick to slightly more traditional I don't know that were going to be having for old fashion pay windows, we may accelerate those a bit but there'll be exclusive theatrical releases.
And as we get into some of those more targeted movies, you may see us move up to slightly shorter.
Windows into <unk> and the like so it just created it's created Optionality for US. It has helped us stand up a whole additional leg of the business.
And continues to evolve.
<unk>.
I would just add one more thing really to make it simple the windows are shorter the prices are higher.
Many of the Windows are split and at the end of the day when you add all of that the downstream revenue from the theatrical movie it's significantly higher than it was before.
Okay and sort of unrelated thing.
Knives out which is now being brought for a very limited release.
Netflix.
Are you watching that with interest to see whether that night.
Offer another opportunity and once you hadn't even considered window too.
Well.
Netflix controls knives out.
Two and three and obviously, we wish we wish them luck with it.
And obviously again talking about the downstream revenue I promise you.
PR that they're putting into this and the next one is.
It's going to make our knives out one significantly more valuable.
No I meant similar movies that you might have where you wouldn't really considered a <unk>.
Might have gone direct to.
Hum.
Videos.
Or direct to streaming.
Reconsider that.
Great. That's a great question, if I understand you are saying, if we created a hit movie franchise, but the money was good enough would we consider doing the next one.
And after that.
Where the streamer and I'd say, we're pretty agnostic to how we make money, we just want to make money, but I would also say part of that making money is keeping a franchise.
Alive and important if you see what's happening right now with John Wick.
I think really we've done Joe's team they've done an amazing job.
Not only keeping it alive and actually making each moving more and more valuable. So that now we have the spinoff TV show and we're talking about a AAA a video game.
<unk>, a spinoff Val arena, which is really exciting and so you could give up by taking the short money frankly, you can give up the much larger along money and so.
Those are decisions, we make every single day like Rich's comment about about where you spend your capital I mean, you've got to think about short term profits because you have to cover your overhead.
<unk> got our most important I think about long term value creation for your shareholders.
Okay. Thanks very much.
Thanks, Jim operator can we get the next question. Please.
Certainly the next question is from Brett Feldman with Goldman Sachs.
Thanks for taking the question so.
I'm curious.
To the extent there was a spin you were able to complete the proposed transactions what level of long term commitments might there be a ton of that between Sars and the studio and the reason I ask the question is I'm looking at the 8-K and I'm looking at your fiscal 'twenty four forecast and it looks like youre expecting that in fiscal 'twenty for the studio business is going to see OIBDA grew.
So year on year by nearly $100 million at the midpoint of the range.
But you're also highlighting that you would expect eliminations at year end corporate level to increase by about $40 million, maybe I'm reading it wrong, but that would imply that you were expecting about 40% of the growth and the studios business as OIBDA. They come from increased business with stars and I'm wondering if that's indicative of the level of business that you would expect between those businesses.
He is on a go forward basis.
Once they are separated and that there'd be any commitment to that or if there's something unique about fiscal 'twenty four.
Yes, I think that's a great. It's a great question.
We've said a number of times that regardless of the separation we have built.
Our business between.
Kevin and Joe and Jeff.
That is incredibly efficient communication that happens every single day.
And I think we know at the studio side, what Starz is looking for in terms of series and again I expect there to be after the separation significant crossover in terms of production development and production as well as distribution opportunities stars doesn't have a built in just our global distribution business theyre expensive to.
To Ron and I think that you will probably see.
A synergistic relationship there.
But hard to look forward and sort of extrapolate that exact <unk>.
<unk> a business I would doubt that there will be any sort of specific requirement like that but I can promise you there will be numerous things, we do to create that synergy.
Officially and unofficially that relationship is pristine.
Does that answer your question.
Yes. Thank you.
Welcome.
Thanks, Brent operator, I think we have time for up to maybe two more questions.
Okay. The next question is from Matthew Harrigan with benchmark.
Oh, I'm, sorry, I thought I'd kick back off out of the Q I was going to ask you about John where are you pretty much answered. It saw law walk you guys through worldwide since its been a long call.
Okay. Thank you. Thanks, operator can we get the last question then please.
Lee we have Matt Thornton at your Securities.
Please go ahead.
Yeah.
Can you guys hear me okay.
Alright perfect.
Real quick one.
Maybe one for Jeff.
Would you guys consider any price increases at at Starz, whether thats 50, or a buck obviously, we've seen a lot going on on the pricing curves across all of the streaming services I'm curious how you are.
How youre thinking about that and then just one.
Maybe a clarification I think you've noted a John Wick video game, but thats something new that's enough.
The pipeline or were you referring to prior IP. Thanks again guys.
Hey, it's Jeff we continue to look at doing pricing studies all over the business.
Not only the U S. But every territory, we're in and we actually have just completed a pricing increase in the U K in the last six months that we think we're very well and we saw great <unk> increase and not a lot of spike in churn on the back end I think right now at least domestically we've gone from 6% to 11 original we've got to pay one with Lionsgate, we've got to pay.
<unk> coming on with Universal and a bunch of library to 899, and if we take a step back and think about our strategy of being complementary to all of the other partners. We always want to be priced below those big broad based services that we're seeing and so that coupled with the state of the economy right. Now we think it's best to kind of hold serve for our audience and our core demos.
With the content portfolio and the price part we're at right now, but it is something that we consistently look at it.
And in terms of John Wick AAA I don't want to get ahead of myself here, but I would say we believe that there is a.
Big Triple a game to be made out of John Wick, we have been fielding proposals.
We certainly are interested in.
And moving that forward, but I don't want to say anymore about that at this time.
Thanks, everyone. Please refer to the press releases and events tab under the Investor Relations section of the company's website for a discussion of certain non-GAAP forward looking measures discussed on this call. Thank you everyone and our apologies again for the technical issues. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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