STARZ ENTERTAINMENT CORP quarterly report, Q2 FY2019

Business context and reporting period

The supplied filing is Lions Gate Entertainment Corp.’s unaudited Form 10-Q for the quarter ended September 30, 2018 (fiscal second quarter and first six months of fiscal 2019), not a standalone STARZ Entertainment Corp. filing. Lionsgate reports Motion Picture, Television Production and Media Networks segments; the latter includes STARZ Networks. Amounts below are in U.S. dollars, millions, unless stated otherwise.

Financial performance and position

At September 30, 2018, cash and cash equivalents were $372.3, current assets $1,856.5 and current liabilities $2,633.5. Debt, net of unamortized discounts and issuance costs, was $2,493.3, including $35.3 current; film obligations and production loans, net, were $468.3. The $1.5 billion revolving facility was undrawn and fully available, subject to covenants. The company reported covenant compliance.

Segment profit for the quarter was $12.9 in Motion Picture, $9.4 in Television Production and $122.7 in Media Networks. STARZ domestic subscriptions were 25.1 million at quarter-end, versus 24.5 million a year earlier.

Material changes versus the prior comparable period

• Quarterly Media Networks revenue rose 4.9% to $377.3 and segment profit rose 18.8% to $122.7, reflecting STARZ OTT growth and improved margins. Management cited higher effective rates, partly offset by lower average subscriptions at certain distributors.
• Quarterly Television Production revenue fell 28.0% to $152.1 and segment profit fell 48.6% to $9.4, primarily due to fewer television episodes delivered and lower domestic and international revenue.
• Quarterly Motion Picture revenue declined 1.7% to $379.0, while segment profit increased to $12.9 from $8.9. For the six months, Motion Picture revenue fell 13.3% and segment profit fell 32.3%, largely reflecting a smaller film slate and lower home-entertainment and international revenue.
• Six-month operating cash flow fell by $66.7 to $269.9. Investing cash flow was a $120.9 outflow, compared with $343.1 of inflows in the prior year, which included EPIX sale proceeds. Financing cash flow was a $152.4 outflow.
• The prior-year six-month result included a $201.0 gain on the EPIX sale; the current period included a $34.2 impairment of Telltale-related investments and notes receivable and $2.8 of unrealized losses on Next Games securities.

Outlook, commentary, risks and unusual items

• Management stated that operating cash flow, cash on hand, revolving-credit availability, tax-efficient financing and production financing should cover known operating and debt-service needs for the foreseeable future. The filing provides no specific earnings or revenue guidance.
• Management said it would not declare future quarterly cash dividends, citing investment in STARZ growth and balance-sheet strengthening. A $0.09-per-share quarterly dividend had been declared for payment in November 2018.
• The company recorded $114.1 of shareholder litigation settlement expense in the quarter and six-month period: $54.8 net for fiduciary litigation and $59.3 for the appraisal matter. The appraisal settlement was approximately $961 million; the September 30 balance sheet included a $961.3 current dissenting-shareholders’ liability. Settlement remained subject to court approval.
• The fiduciary settlement was $92.5 gross, with $37.8 of insurance reimbursement recorded as a receivable; additional reimbursement was being pursued. An insurer separately sued over its agreed contribution, which the company said it would defend.
• Other unusual items included $25.6 of restructuring and other costs for the six months and the $34.2 Telltale-related impairment. Management highlighted uncertainty in film and program revenue estimates, title performance, litigation outcomes, tax-law interpretation, interest rates and foreign exchange.
• Lionsgate acquired a 51% interest in 3 Arts Entertainment on May 29, 2018, for approximately $166.6, paid partly in cash and partly in shares, with additional shares due subject to conditions. The company also reorganized segment reporting; prior-period segment figures were recast, but current-versus-prior reported revenue was not restated for the new revenue standard.

Important facts for investors to verify

• Confirm the issuer and scope: this is a Lions Gate consolidated filing, not a STARZ standalone quarterly report.
• Track court approval and payment of the approximately $961 million appraisal settlement, and the final resolution and insurance recovery for the fiduciary settlement.
• Assess whether STARZ OTT growth can continue to offset distributor subscriber losses, and monitor subscription trends and Media Networks margins.
• Review film-slate timing, content spending and cash conversion; production and program-right investment was $697.1 for the six-month period.
• Monitor liquidity and leverage after the appraisal payment, covenant headroom, and variable-rate exposure. The company had hedged $1.5 billion of floating-rate debt with interest-rate swaps.
• Consider the revenue-recognition adoption effect: reported quarterly revenue was $16.1 higher and operating income $10.5 lower than estimated amounts without adoption of the new guidance.