Filing summary
Entity and period: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-Q for the quarter ended June 30, 2020 (fiscal Q1 2021), not a filing by Starz Entertainment Corp. Amounts below are in U.S. dollars unless noted.
Business context and financial performance
Lionsgate operates Motion Picture, Television Production and Media Networks segments. Its businesses include film and television production and licensing, STARZ subscription services, STARZPLAY International and Pantaya.
| Metric | Quarter ended June 30, 2020 | Comparable 2019 quarter |
|---|---|---|
| Revenue | $813.7 million | $963.6 million |
| Operating income (loss) | $89.4 million | $(3.2) million |
| Net income (loss) attributable to Lions Gate shareholders | $51.1 million; $0.23 per diluted share | $(54.0) million; $(0.25) per diluted share |
| Operating cash flow | $81.4 million | $37.3 million |
| Cash and cash equivalents at quarter end | $376.1 million | $196.0 million at June 30, 2019 |
Revenue fell 15.6% year over year, primarily reflecting COVID-19 disruptions to theatrical releases and television production. Operating margin was approximately 11.0%, compared with a loss in the prior-year quarter. The filing does not provide a consolidated gross margin.
Segments and operating metrics
- Motion Picture: Revenue was $280.7 million, down 29.4%; segment profit was $101.1 million versus $7.6 million. Theaters were largely closed, and theatrical revenue declined to $0.3 million from $121.8 million. Digital media home-entertainment revenue increased.
- Television Production: Revenue was $195.7 million, down 30.1%; segment profit rose to $34.9 million from $25.0 million. Fewer episodes were delivered as productions paused; digital home-entertainment revenue increased.
- Media Networks: Revenue was $367.3 million, down 1.4%; segment profit was $71.8 million versus $60.6 million. Domestic STARZ revenue declined, partly offset by growth in STARZPLAY International and Other Streaming Services.
- Subscribers: At June 30, 2020, reported total domestic and international subscribers were 25.0 million, including 19.0 million STARZ domestic subscribers and 3.4 million STARZPLAY International subscribers. The comparable June 2019 pro forma total was 20.5 million; reported June 2019 subscribers were 28.1 million, a less comparable measure because certain bundled subscribers were removed from the pro forma figure.
Liquidity, debt and cash flow
- Cash was $376.1 million. Current assets were $954.5 million and current liabilities were $1,330.2 million; the resulting current ratio was approximately 0.72. The company adopted accounting guidance that moved $310.5 million of licensed program rights from current to non-current assets, affecting comparability of current assets.
- Total debt, net of debt issuance costs, was $2.72 billion, including $73.7 million classified as current. The revolving credit facility had no borrowings and $1.5 billion of stated availability, subject to covenants.
- Operating cash flow was $81.4 million; investing cash outflow was $1.5 million; financing cash outflow was $22.1 million. Cash increased $57.8 million before foreign-exchange effects.
- Film obligations and production loans totaled $388.9 million. Redeemable noncontrolling interests were $173.9 million and may require cash payments upon exercise of put rights.
- The company reported compliance with applicable debt covenants. Quarterly dividends had been suspended since November 2018.
Changes, outlook and risks
- COVID-19 caused theater closures, delayed film releases, paused productions and fewer television episodes delivered. The company recorded $10.9 million of incremental pandemic-related costs in the quarter and expected further costs; potential insurance recoveries were not recorded because they could not be estimated.
- Management said STARZ viewership and OTT subscribers had increased during the pandemic, but cautioned that this might not persist as restrictions ease and economic conditions evolve.
- Management expected Motion Picture segment revenue to decline in fiscal 2021 because of delayed theatrical distribution and production. The filing provides no quantified full-company earnings or revenue guidance and says the pandemic’s overall impact could not be estimated reliably.
- Operating cash flow increased year over year, helped by working-capital movements and lower film and program-rights investment; it also included a net $16.0 million cash use from receivables monetization programs.
- COVID-19, uncertain consumer return to theaters, production delays, economic conditions, content performance, debt obligations and covenant constraints are key risks. Goodwill impairment testing identified Television and Media Networks as at risk at March 31, 2020, though management reported no new quarter-end impairment trigger. The filing notes that adverse changes in assumptions could require future impairment.
- Adoption of new film and television accounting guidance was prospective and changed licensed program-rights classification and production-cost capitalization rules. Management reported no material impact from adopting the credit-loss guidance.
- Pending legal matters include litigation over insurance reimbursement related to a prior $92.5 million settlement. The company said additional losses beyond recorded accruals were reasonably possible but that a reasonable estimate could not be made.
Investor facts to verify
- Confirm the issuer: this is a Lions Gate Entertainment Corp. filing, notwithstanding the request metadata naming Starz Entertainment Corp.
- Track theater reopening, release schedules and production restarts against management’s expectation of lower fiscal 2021 Motion Picture revenue.
- Assess whether OTT subscriber growth and Media Networks profitability can offset linear subscriber and revenue pressure; note the subscriber-count comparability adjustment.
- Review cash conversion, receivables monetization, upcoming debt maturities and the $1.5 billion revolving facility’s covenant-dependent availability.
- Monitor goodwill and intangible-asset impairment assumptions, potential insurance recoveries, and the timing and value of redeemable noncontrolling-interest put rights.