Filing summary
Issuer and period: The supplied filing is a Lions Gate Entertainment Corp. Form 10-Q for the quarter ended December 31, 2018 (fiscal 2019 Q3), not a filing identified as STARZ Entertainment Corp. The company reports Motion Picture, Television Production and Media Networks segments. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Year-over-year | Nine months ended Dec. 31, 2018 | Year-over-year |
|---|---|---|---|---|
| Revenue | $933.2 million | Down 18.3% | $2,766.9 million | Down 10.4% |
| Operating income | $86.8 million | Up from $80.2 million | $164.0 million | Down from $200.3 million |
| Net income (loss) attributable to Lions Gate shareholders | $22.9 million | Down from $193.0 million | $(129.0) million | Down from $382.3 million |
| Basic earnings (loss) per share | $0.11 | Down from $0.92 | $(0.61) | Down from $1.84 |
| Cash from operating activities | Not stated separately for the quarter | $255.7 million | Down from $369.3 million |
Quarterly operating margin was approximately 9.3% versus 7.0% a year earlier; nine-month operating margin was approximately 5.9% versus 6.5%. These margins are calculated from reported revenue and operating income. The filing does not provide a consolidated gross margin figure.
Segments and key drivers
- Motion Picture: Quarterly revenue fell 32.7% to $362.6 million and segment profit fell 19.9% to $43.5 million. Management cited fewer theatrical releases and the prior-year success of Wonder, alongside lower home entertainment, international and television revenue. Nine-month revenue declined 20.8% and segment profit declined 28.1%.
- Television Production: Quarterly revenue declined 18.7% to $216.5 million and segment profit declined 23.7% to $21.2 million, mainly due to fewer television episodes delivered and lower international and home entertainment revenue. Nine-month segment profit fell 48.0% to $46.5 million.
- Media Networks: Quarterly revenue increased 3.8% to $366.8 million and segment profit increased 9.6% to $134.1 million. Nine-month revenue rose 3.9% and segment profit rose 9.8%. Management cited OTT growth and higher effective rates; domestic STARZ subscriptions were 25.1 million at period-end versus 24.0 million a year earlier.
Cash, debt and liquidity
- Cash and cash equivalents were $106.2 million at December 31, 2018, down from $378.1 million at March 31, 2018. Operating, investing and financing cash flows for the nine months were $255.7 million, $(145.8) million and $(380.3) million, respectively.
- Total debt, net of discounts and issuance costs, was $3,012.3 million, including $520.0 million drawn on the revolving facility. The company reported $980.0 million available under its $1.5 billion revolver and stated it was in compliance with applicable debt covenants.
- Film obligations and production loans totaled $589.7 million net. Current liabilities were $1,590.7 million and current assets were $1,414.0 million.
- On February 4, 2019, after quarter-end, the company issued $550.0 million of 6.375% senior notes due 2024. It expected to use the proceeds to repay revolver borrowings and for working capital.
Material changes, unusual items and outlook
- Nine-month results included $114.1 million of shareholder litigation settlement expense. The company paid approximately $964 million to settle Starz appraisal litigation and paid $92.5 million to settle fiduciary litigation, of which $37.8 million was reimbursed by insurance. It was pursuing additional insurance recovery and disclosed related insurer litigation.
- The nine-month investment loss was $43.2 million, including $36.8 million of investment impairments and $6.4 million of unrealized equity-security losses. The prior-year period included a $201.0 million gain on the sale of EPIX, materially affecting comparisons.
- Film write-downs were $17.4 million for the nine months, compared with $26.8 million in the prior-year period. Share-based compensation expense declined to $43.7 million from $74.5 million.
- The company acquired a 51% interest in 3 Arts Entertainment in May 2018 for approximately $166.6 million, partly funded with Lions Gate shares. Its results are included in Television Production from the acquisition date.
- Management said cash from operations, cash on hand, revolver availability, receivables monetization and production financing should meet operational and debt-service needs for the foreseeable future. This is not quantitative earnings guidance. The board did not plan to declare future quarterly cash dividends, citing investment in Starz growth and balance-sheet priorities.
- Risks highlighted include unpredictable film and television performance, production and marketing costs, debt and covenant restrictions, interest-rate and foreign-exchange exposure, litigation, and estimates used for content revenues, costs and impairment. The company had $1.8 billion of remaining performance obligations at December 31, 2018; certain future Sony output-program fees could not be estimated and were expected to be significant.
Important facts for investors to verify
- Confirm the intended issuer: the provided 10-Q is for Lions Gate Entertainment Corp., despite the request metadata naming STARZ Entertainment Corp.
- Review the appraisal and fiduciary litigation settlements, insurance recovery status, and any remaining exposure; the company said a possible loss beyond accrued liabilities could not be reasonably estimated for certain pending matters.
- Check post-quarter-end use of the $550.0 million note proceeds and resulting revolver balance, total leverage and interest burden.
- Monitor cash conversion and liquidity, including the $125.9 million of receivables sold but still serviced at quarter-end and the substantial near-term film and production commitments.
- Assess whether subscription growth and OTT rate increases can offset continuing film-slate volatility and weaker Motion Picture and Television Production comparisons.