Filing summary
Entity and period: The supplied filing is Lions Gate Entertainment Corp.’s unaudited Form 10-Q for the quarter ended September 30, 2019 (fiscal 2020 second quarter), not a filing by an entity named STARZ Entertainment Corp. Starz is reported within Lionsgate’s Media Networks segment. Unless noted, amounts are U.S. dollars.
Financial performance
| Metric | Three months ended September 30, 2019 | Six months ended September 30, 2019 |
|---|---|---|
| Revenue | $983.5 million; up 9.2% year over year | $1,947.1 million; up 6.2% |
| Operating income | $57.6 million; operating margin 5.9% | $54.3 million; operating margin 2.8% |
| Net income (loss) attributable to Lionsgate shareholders | $1.8 million; $0.01 per diluted share | $(52.2) million; $(0.24) per diluted share |
| Cash provided by operating activities | Not provided for the quarter alone | $218.5 million, versus $269.9 million |
| Cash and cash equivalents | Period-end balance: $232.6 million | Period-end balance: $232.6 million |
| Debt, net of issuance costs | Period-end balance: $2,885.9 million, excluding film obligations and production loans | Period-end balance: $2,885.9 million |
- Quarterly revenue growth was led by Television Production, up 80.1% to $274.0 million, and Motion Picture, up 7.1% to $405.8 million. Media Networks revenue declined 0.9% to $374.0 million.
- For the six-month period, segment profit was $58.6 million in Motion Picture, $37.6 million in Television Production, and $165.2 million in Media Networks. Media Networks segment profit fell 21.8% year over year, while Television Production segment profit rose 52.8% and Motion Picture segment profit fell 9.7%.
- Quarterly operating income improved from $39.1 million a year earlier. The prior-year quarter included $114.1 million of shareholder litigation settlement charges; the current quarter had none. Six-month operating income declined 29.7% year over year.
- Six-month operating cash flow included an estimated $147.3 million benefit from monetizing accounts receivable. The company sold receivables with a carrying value of $830.4 million for net proceeds of $824.3 million, recording a $6.1 million loss. Investing cash outflow was $21.8 million and financing cash outflow was $147.8 million.
- Current assets were $1,357.1 million and current liabilities were $1,494.8 million at September 30, 2019. The company reported $1.5 billion available under its revolving credit facility and no revolver borrowings. Debt covenants were reported in compliance.
Changes, outlook and risks
- Traditional affiliate amortization: In response to the industry shift from linear television toward OTT and direct-to-consumer viewing, Lionsgate changed the amortization pattern for Starz’s traditional-affiliate customer relationship asset. The change added $11.3 million to quarterly amortization expense and reduced quarterly pretax income and earnings per share by $0.05. Management said the asset remained recoverable at September 30.
- Starz distribution risk: Lionsgate was negotiating a carriage arrangement with a distributor. An adverse outcome could materially reduce Media Networks revenue, segment profit and consolidated net income. Management expected OTT growth to help offset any decline but gave no assurance about the timing or extent.
- Streaming investment: STARZPLAY International expanded into additional territories; international subscriber units were 2.3 million at September 30, excluding STARZPLAY Arabia. Expansion increased programming and marketing costs and contributed to negative international segment profit. Domestic STARZ subscription units were 24.7 million, versus 25.1 million a year earlier.
- Management outlook: No specific earnings or revenue guidance was provided. Management said operating cash flow, cash on hand, revolver availability, receivable monetization and production financing were expected to meet known operating and debt-service needs for the foreseeable future; it also noted that further capital could be sought for international expansion.
- Impairment exposure: Goodwill was $2.8 billion, indefinite-lived intangibles were $250.0 million and finite-lived intangibles were approximately $1.55 billion. Television and Media Networks reporting units were identified as at risk for goodwill impairment, with estimated fair values less than 20% above carrying values. A decline in forecasts or other assumptions could result in future impairment charges.
- Other material items: The company reported $142.4 million of redeemable noncontrolling interests that could require cash if holders exercise repurchase rights. It also said loss in excess of accrued liabilities on pending legal matters was reasonably possible, but a loss estimate or range could not be made. A lawsuit by an insurer over a previously agreed $10.0 million contribution to litigation insurance reimbursement was being vigorously defended.
- The quarterly dividend had been suspended in November 2018. No shares were repurchased during the quarter. The company adopted lease accounting in fiscal 2020 and recognized $174.2 million of operating lease liabilities at September 30.
Important facts for investors to verify
- Confirm the filing identity and reporting period: Lions Gate Entertainment Corp., quarter ended September 30, 2019.
- Assess the distributor carriage negotiations and the sensitivity of Media Networks results to traditional affiliate subscriber declines versus OTT growth.
- Review the sustainability of operating cash flow, including the substantial use of receivables monetization, and the timing of film and programming investment.
- Track leverage, debt maturities, covenant compliance, production-loan obligations and the potential cash requirements from redeemable noncontrolling interests.
- Monitor the assumptions behind the Traditional Affiliate asset amortization change and the impairment headroom for Television and Media Networks goodwill.
- Check the outcome of pending insurance litigation and other contingencies; the filing does not provide a clear estimate of potential additional losses.