Starz Entertainment Corp. (STRZ) Q3 2025 Earnings Call Transcript

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Overview

The earnings call summary presents a mixed picture. Financial performance shows a decline in OIBDA due to increased marketing costs, though leverage improved slightly. Product development updates are positive, with progress on new shows and a strong viewership trend. Market strategy faces challenges in the streaming landscape but expects growth. Financial health is stable, with plans to reduce content spend. Shareholder returns are not clearly addressed. The Q&A session reveals cautious optimism, with confidence in achieving EBITDA targets but vague M&A discussions. Overall, the sentiment is balanced, leading to a neutral stock price prediction.

Key Financial Performance

U.S. OTT subscribers Increased by 110,000 during the quarter, ending at 12.3 million. This represents a year-over-year growth of 670,000 subscribers. The increase was driven by the successful debut of 'Outlander Blood of My Blood' and the premiere of 'Ballerina'.

Total subscribers in North America Ended the quarter at 19.2 million, a sequential increase of 120,000 subscribers. The growth was supported by the resolution of a carriage dispute in Canada, which reinstated approximately 250,000 Canadian linear subscribers.

Total revenue $321 million for the quarter, up $1.2 million sequentially. The increase was attributed to the content slate, which improved subscriber performance.

OTT revenue $223 million, up $1.7 million sequentially. The growth was driven by the content slate, including 'Outlander Blood of My Blood' and 'Ballerina'.

Linear and other revenue $98 million, slightly down sequentially. No specific reasons for the decline were mentioned.

Adjusted OIBDA $22 million, down $11 million sequentially. The decline was due to higher advertising and marketing costs related to 'Outlander Blood of My Blood' and 'Ballerina'.

Total net debt $588 million at the end of the quarter, including $300 million of Term Loan A, $325 million of 5.5% senior unsecured notes, and $37 million in cash. Leverage improved to 3.4x from 3.5x in the previous quarter.

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Operating Highlights

Fightland series: Starz greenlit its first owned original series, Fightland, currently in production in London. The series is expected to premiere next year and has a co-commission partner to improve its economics.

Content library ownership: Starz is aggressively working towards owning half of its content slate, which will improve cost structure and generate incremental revenue through international licensing.

Content investment: Investment in content is expected to decrease year-over-year, driving improved free cash flow in 2026.

Canadian market restructuring: Starz transitioned from a joint venture model to a content licensing agreement with Bell Canada, generating international licensing revenue while Bell assumes operational responsibility.

OTT subscriber growth: U.S. OTT subscribers grew by 670,000 year-over-year, with 110,000 added in the last quarter, reaching 12.3 million.

Revenue growth: Total revenue for the quarter was $321 million, with OTT revenue at $223 million, driven by successful content like Outlander Blood of My Blood and Ballerina.

Adjusted OIBDA: Achieved $22 million in adjusted OIBDA for the quarter, with a full-year target of $200 million.

Leverage reduction: Leverage improved to 3.4x, with expectations to exit the year at 3.1x.

M&A opportunities: Starz is positioning itself for potential M&A opportunities, leveraging its transition from linear to digital and its tech stack.

Target audience focus: Starz aims to build upon its core demographics of women and underrepresented audiences.

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Risk or Challenges

Market Conditions: The media industry continues to face significant headwinds, which could impact Starz's ability to execute its plans effectively.

Strategic Execution Risks: The company is undergoing a transition year in 2025, with fluctuations in content payment timing and a focus on deleveraging in 2026 and 2027, which could pose challenges to achieving financial targets.

Regulatory and Operational Changes: The structural change in the Canadian operation, moving from a joint venture to a licensing agreement, may introduce risks related to operational adjustments and revenue reporting.

Content Investment and Cost Management: While content investment is expected to decrease year-over-year, there is a risk that reduced investment could impact the quality or appeal of future content, potentially affecting subscriber growth and revenue.

Competitive Pressures: The potential for increased consolidation across the media landscape could intensify competition, making it challenging for Starz to maintain or grow its market position.

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Guidance & Outlook

Revenue and Subscriber Growth: Starz expects continued revenue and U.S. OTT subscriber growth in the fourth quarter of 2025, with a target of approximately $200 million in adjusted OIBDA for the year.

Content Investment and Slate: The company plans to reduce content investment year-over-year in 2026, which will contribute to improved free cash flow. The content slate for 2026 includes major releases such as the final seasons of Outlander and Power Book III: Raising Kanan, the premiere of Fightland, and new seasons of Blood of My Blood and P-Valley.

Margin and Cash Flow Goals: Starz aims to achieve 20% margins by the end of 2028 and convert 70% of adjusted OIBDA to unlevered free cash flow. The company is also focused on deleveraging to 2.5x as quickly as possible.

Canadian Operations: Starz has restructured its Canadian operations, transitioning to a content licensing agreement with Bell Canada. This change is expected to generate international licensing revenue and contribute to adjusted OIBDA and free cash flow in 2026.

Strategic Partnerships: The company is in the late stages of securing a co-commission partner for the Fightland series, which will improve the economics of the show and potentially expand to other Starz-owned originals.

Market Position and M&A Opportunities: Starz is positioning itself to capitalize on potential M&A opportunities, leveraging its transition from linear to digital and its industry-leading tech stack.

Debt and Leverage: Starz expects to exit 2025 with a leverage ratio of approximately 3.1x and aims to focus on deleveraging further in 2026 and 2027.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Can you explain the cost savings and international revenue benefits of producing your own shows with your own IP?

A:Producing own shows with own IP helps achieve a 20% margin goal by 2028. Cost savings come from de-aging shows (newer shows are cheaper than late-stage ones) and controlling the budget from the start. Additionally, owning IP allows monetization globally, creating incremental revenue through international output deals.

Q:What updates can you provide on the other shows announced alongside Fightland?

A:Four shows were announced post-separation. Progress includes: [indiscernible] nearing script completion and likely to be shot in Venice; Kingmaker's script is almost done, with production partners being sought; [all ours] has a production partner and is moving to the writer's room. Half the slate is expected to be owned by Starz by 2027, enabling packaging for international distribution.

Q:Can you walk us through the EBITDA guide and confidence in achieving $200 million EBITDA this year and growing it in the future?

A:The company is confident in achieving $200 million EBITDA, requiring $52 million in Q4. Growth is expected through cost control, content cost reduction, and owning more shows by 2027. This will help achieve a 20% margin by 2028.

Q:What are the programming viewership trends and the performance of shows like BMF?

A:Monthly active viewers hit a 12-month high, up 7% from the prior quarter, driven by strong content like Blood of My Blood and Ballerina. Shows like Force and Spartacus are performing well, with Force showing stronger gross additions than prior tent poles. The slate for next year includes Outlander, Kanan, P Valley, and Fightland.

Q:How much of the overall viewership is on theatrical content versus originals?

A:Viewership is split 50-50 between theatrical content and originals, varying by platform. The Starz app leans more towards originals, while distributor platforms focus more on movies. A mix of both reduces churn and increases customer lifetime value.

Q:What are your thoughts on the streaming landscape and Starz's OTT subscriber revenue growth?

A:The streaming landscape faces headwinds like platform integrations and consolidations. Starz, as a complementary service, benefits from bundling with larger streamers. Despite challenges, Starz has had strong subscriber quarters and expects continued growth through content strength and potential rate increases.

Q:Can you provide more detail on potential M&A opportunities and financing?

A:Starz is interested in diversifying revenue by adding AVOD to its SVOD base, potentially through acquiring linear networks transitioning to digital. The focus is on deals that align with Starz's core demographics and do not significantly increase leverage.

Q:What are the dynamics around subscriber momentum in the back half of the year?

A:Subscriber momentum is driven by 2/3 gross acquisitions and 1/3 churn reduction. Strategies include back-to-back shows, longer series, and pricing strategies to reduce churn and increase lifetime value. By 2026, the focus will shift more towards churn reduction.

Q:What is the outlook for the Canadian business model shift?

A:The licensing model in Canada more than covers previous subscription revenues and provides stable income. It simplifies operations compared to managing multiple partners and aligns with the strategy of driving stable incremental revenue globally.

Q:What is the cash spend outlook for 2026 and beyond?

A:Cash content spend is expected to be just under $700 million in 2026, with further reductions in subsequent years. The goal is to align cash content spend with amortization for consistency.

Q:What are the advantages of having control over production and development costs?

A:Control over production allows alignment of development, greenlighting, and airing schedules, reducing cash content spend variability. This ensures cash content spend aligns with amortization, improving financial consistency.

Q:Does bundling limit Starz's marketing opportunities?

A:Bundling does not limit marketing opportunities. It allows alignment of content slates with partners, providing value to consumers and increasing lifetime value. Starz's marketing efforts benefit both its own app and bundled subscriptions.

Q:Review of Unclear Management Responses

A:Management avoided directly addressing specific M&A targets, providing only general comments on strategic interests and financing constraints.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

STRZ Transcript

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The earnings call presents a mixed sentiment. Despite a decline in revenue and challenges like regulatory issues and competitive pressures, there is optimism about future revenue growth, margin expansion, and subscriber growth. The Q&A reveals some concerns about management's clarity on certain issues. The focus on deleveraging and potential shareholder returns is positive, but the lack of immediate capital return plans keeps the outlook neutral. Without market cap data, the precise stock movement is uncertain, but overall, the sentiment is balanced, suggesting a neutral stock reaction in the short term.

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