Starz Entertainment Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 14, 2025

Key Takeaways

  • Positive Sentiment: STARZ’s distribution-agnostic streaming model has driven consistent adjusted OIBDA performance and management forecasts ~$200M of adjusted OIBDA in 2025 with 70% conversion to free cash flow in 2026, supporting a discounted valuation thesis.
  • Negative Sentiment: BMF Season 4 underperformed expectations, leading to a 120K sequential decline in U.S. OTT subscribers and a 2% quarter-over-quarter revenue drop to $319.7M, with adjusted OIBDA sliding from $92M to $33.4M.
  • Positive Sentiment: The Outlander prequel Blood of My Blood generated STARZ’s third-highest series premiere subscriber additions and delivered 40% higher viewership than the final Outlander episode, driving optimistic guidance for sequential subscriber and revenue growth.
  • Positive Sentiment: STARZ’s first owned and produced series, Fightland, achieved a 30% lower per-episode cost than recent premieres, and the company expects content spending to decline to $600–650M by 2028, targeting a 20% EBITDA margin run rate.
  • Neutral Sentiment: STARZ reduced net debt by $42.1M to $573.5M, resulting in 3.2x leverage, which is expected to temporarily rise to ~3.5x in Q3 before falling back to ~3.1x by year-end under a managed content spending profile.
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Earnings Conference Call
Starz Entertainment Q2 2025
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good day, everyone, and welcome to the Star's Second Quarter twenty twenty five Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please note, this conference is being recorded. Now it's my pleasure to turn the call over to Neele Shah with STARZ Investor Relations.

Operator

Please go ahead.

Speaker 1

Good afternoon. Thank you for joining us for STARZ Entertainment's fiscal twenty twenty five second quarter earnings call. We'll begin with opening remarks from our President and CEO, Jeffrey Hirsch followed by remarks from our CFO, Scott MacDonald. Also joining us on the call today is Alison Hoffman, President of Stars Networks. After our opening remarks, we'll open the call for questions.

Speaker 1

The matters discussed on the call include forward looking statements, including those regarding expected future performance. Such statements are subject to a number of risks and uncertainties. Actual results could differ materially and adversely from those described in the forward looking statements as a result of various factors. This includes the risk factors set forth in our most recently filed 10 ks for Stars Entertainment Corp. Stars undertakes no obligation to publicly release the result of any revisions to these forward looking statements that may be made to reflect any future events or circumstances.

Speaker 1

The matters discussed today will also include non GAAP measures. The reconciliation for these and additional required information is available in the eight ks we filed this afternoon, which is available on the STARS Investor Relations website at investors.stars.com. I'll now turn

Speaker 2

the call over to Jeff. Thank you, Nile. Thank you everyone for joining us today. Before getting into the details behind the quarter, I want to give everyone an update on how I see STARZ is positioned in the ever changing media landscape. As I laid out last quarter, Stars is a highly profitable digital first network that is able to punch above its weight class because it has remained focused on catering to two valuable demos of women and underrepresented audiences.

Speaker 2

Unlike our peers, STARZ took a distribution agnostic approach to streaming. This resulted in a profitable transition and a business that has delivered consistently strong adjusted OIBDA performance. We believe this decision not to follow the herd has positioned STARZ to be a very straightforward and predictable investment story. The investment case hinges on modest top line and domestic OTT subscriber growth coupled with lower content spend. We believe this combination should drive three key outputs.

Speaker 2

One, higher adjusted OIBDA margins, two, higher free cash flow and three, lower leverage. Given these business drivers combined with our outlook of generating approximately 200,000,000 of adjusted OIBDA in calendar twenty twenty five and converting 70% of adjusted OIBDA to unlevered free cash flow during calendar twenty twenty six, we see our current valuation of approximately four times adjusted OIBDA as very attractive. We believe this valuation disconnect will become more apparent in the coming quarters when several large media companies spin off their linear networks into standalone public companies. It's worth noting that even though these linear networks are heavily dependent on linear advertising and have immaterial digital revenue, most Wall Street analysts are valuing these businesses at similar or higher multiples than stars, making us a great value. Turning to the operating fundamentals, we delivered adjusted OIBDA and revenue results inside our expectations despite some underperformance of BMF season four.

Speaker 2

While the season still drew a large audience, it didn't maintain the expected scale relative to our anticipated performance for the series. This resulted in modest sequential declines in OTT subscribers and revenue, which Scott will go into detail momentarily. Now more than ever, our priority continues to be laser focused on making great stories that also drive the business. And we are thrilled to report that our highly anticipated and critically acclaimed Outlander prequel, Blood of My Blood, is already exceeding expectations. It has generated the third highest number of subscriber additions for a series premier and Starz history, and viewership has exceeded the last episode of Outlander season seven by 40%.

Speaker 2

This impressive performance out of the gate has resulted in strong subscriber growth and importantly, we are adding these subscribers with higher price promotions than the prior season of Outlander. Based on this momentum, we remain confident in our expectations of sequential revenue growth and OTT subscriber growth in the September and December quarters. Following Blood of My Blood, the slate features high performing returning temples such as Force and Raising Canaan alongside the premier Spartacus, which is returning to the service after twelve years. With this tempo heavy slate combined with strong film lineup that includes Ballerina and Oppenheimer, we expect to finish the year from a position of strength setting us up for continued revenue growth in calendar twenty six. Looking forward, we will bring audiences several long awaited premieres, including the final season of Outlander, Pea Valley season three, as well as the launch of new power prequel series, Origins, which will have a supersized 18 episode premier season.

Speaker 2

We are also excited to bring our first Starz owned and produced show, Fightland, to our viewers. In short, this is one of the most compelling content slate that Starz has had in several years. Most importantly, the slate is being delivered at superior economics on a per episode basis relative to prior years. We expect the structural improvement in our content costs will build over the next several quarters. This is a key tenant to our investment case and bolsters our confidence that we can reach our 20% margin target run rate coming out of calendar twenty eight.

Speaker 2

Given the strength of our slate we outlined, the stability of our streaming first operating model and our improving content cost structure, we are excited about the outlook of our business and believe STARZ is the most misunderstood and undervalued stock in our sector. Now, Scott will take you through our key metrics and financial results. Scott? Thanks, Jeff,

Speaker 3

and good afternoon, everyone. I will walk through the financial and operational highlights from the June for Stars Networks, which includes our operations in The United States and Canada. I will also provide an update on our balance sheet. Stars Networks ended the quarter with 12,180,000 U. S.

Speaker 3

OTT subscribers, a sequential decline of 120,000. The decline in the quarter was primarily driven by lower subscriber additions resulting from underperformance of BMF Season four as Jeff noted. We ended the quarter with 19,080,000 total North American subscribers, down 520,000 sequentially. The linear subscriber base declined to 6,220,000, reflecting continued declines in Pay TV households. Total revenue for the quarter was $319,700,000 down 2% sequentially and 7.4% year over year.

Speaker 3

OTT revenue was $221,100,000 while linear and other revenue came in at 98,600,000.0 The year over year and sequential revenue declines resulted from lower OTT subscriber additions and continued linear pressure. Looking forward, as Jeff noted, we are already seeing improved subscriber trends due to the successful premier of Outlander, Blood of My Blood. We continue to expect sequential revenue and OTT subscriber growth in the next two quarters. Adjusted OIBDA was $33,400,000 and was expected to be down from the $92,000,000 in the March. The sequential decline was primarily due to higher content amortization related to the airing of six episodes of Raising Canaan Season four and the premiere of BMF Season four during the quarter.

Speaker 3

We ended the quarter with $573,500,000 in total net debt, down $42,100,000 on a sequential basis. Debt includes $300,000,000 of our Term Loan A and $325,100,000 of our senior unsecured notes, less $51,600,000 in cash. We had no borrowings outstanding under our $150,000,000 revolving credit facility at the June. Our leverage on a trailing twelve month basis was 3.2 times for the quarter. We expect leverage to increase to approximately 3.5 times in the September due to the timing related to content payments, but we continue to expect to exit the year with leverage around 3.1 times.

Speaker 3

As we mentioned on our last call, we view 2025 as a transition year for our cash flow, which we now directly manage. For the remainder of 2025, we will have some ebbs and flows in the timing of our content payments before we get back to a more normal payment flow during 2026. This will set us on a good path to deleverage, which will be our focus during 2026 and 2027. As a result of the passage of the One Big Beautiful Bill Act, interest deductions previously deferred will now be currently available to us to reduce any federal tax liability. Accordingly, when combining this favorable change in the tax law with previously existing NOLs, we do not anticipate having any significant federal cash tax payments for the foreseeable future.

Speaker 3

We are very excited about the future here at STARS. Now, I'd like to turn the call back over to Nile for Q and A. Nile?

Speaker 1

Thanks, Scott. Operator, can we open the call up for Q and A, please?

Operator

Thank you so much. And it's from the line of Brent Panter with Raymond James. Please proceed.

Speaker 4

Hey, everyone. Thanks for taking the questions. Jeff, appreciate the comments on M and A and the industry landscape. How do you all think about what defines scale in this business? And if you were to participate in M and A, are there any prerequisites that you would want to achieve before pursuing that, whether that be your leverage target, improving your equity valuation, any sort of operational metrics, or anything else that you would want to achieve before really actively pursuing M and A?

Speaker 2

Hey, Brent, thanks for the question. First of all, I think we have a pretty clear plan of delevering and getting to a 20% margin business coming out of calendar twenty twenty eight. So whether we participate or not in M and A, will continue to focus on delivering that plan to our investors and to the business. I'm not going to really comment deeply on M and A, but what I would say is we think we've built a very valuable business both with the serving of the two core demos that we are kind of the destination for. We have a phenomenal tech back end and a data stack that I think is unparalleled in the business.

Speaker 2

And so that makes us a very valuable asset, but it also sets us up to be a very strong platform to scale around. And I would think we like the demos we serve today. We think there's a lot of opportunity in those demos to expand outside of the subscription business, but still stay focused in those demos. And so I do think in the next as other peers unwind their businesses and figure out who they are, there will be a lot of opportunity for us to scale our business in the next twelve to twenty four months.

Speaker 4

Okay. Got it. And then on the 20% EBITDA margin goal by 2028, you laid out last quarter kind of the path of how you get there on your content costs. If we get to 2028 and you've done better than that, what would be the likeliest reason? Vice versa, if we get to 2028 and you haven't quite hit that 20% margin, what would be the likeliest reason?

Speaker 4

So what would cause you to overachieve or underachieve that expectation?

Speaker 2

Great question. Look, think there's really two core, know, the big there's two kind of core ways to get to the 20%. The biggest way is actually turning the slate over, de aging it and getting ownership back on the network. You know, we have announced and we'll start production on Fightland. We talked about it being our first Starz owned and produced show.

Speaker 2

If you look at the season one of Fightland, the season one per hour episode cost is 30% lower than what we've seen in season one premieres on Starz over the last couple of years. So right off the bat, with the first show, we're seeing significant reduction in cost structure. And if you think about us getting to half of our slate, four shows by 2027 where we'll have ownership on that scale, you can see there's a real opportunity to put a lot of dollars to the OIBDA line. The other piece is we haven't even factored in the international sales of ByteLand, so that's incremental dollars to the business. And so as long as we continue execute against the strategy of turning over the slate, getting ownership and de aging, we'll hit that number coming out of calendar twenty eight.

Speaker 2

I do think there's some other opportunities for us to take cost off the business. The other side of it is obviously revenue growth. We've talked about how revenue will start to grow again in third and fourth quarter and in calendar twenty twenty six. So we can start to grow the top line again to 1% to 3% on top of cost controls on the content side. I think we can actually hit that number.

Speaker 2

We will be opportunistic. If we see some content that comes in that we think will really help the business, we will probably make a decision to put that on. But right now, again, I think we're simply laser focused on trying to grow top line but also get the cost structure content into that 600 to $650,000,000 range and that puts us at 20% coming out of calendar '28.

Speaker 4

Okay, great. Thanks Jeff. Thank you.

Operator

Our next question comes from David Joyce with Seaport Research Partners. Please proceed.

Speaker 5

Thank you. A couple if I could. First on DMF, can you pinpoint what didn't work with that this time that made it miss your expectations? And what would you adjust since having a spin off and franchise new strategy that is important for you going forward? And then secondly, wanted to ask on the ARPUs that was above our expectations.

Speaker 5

And if you could just go through the puts and takes of the price increases in your different distribution relationships and how that's impacting ARPU? Thanks.

Speaker 2

Great question. So, look, to start off, BMF was still a very large show for us. It just wasn't at the expectation we had in for growth in the quarter and so it was really a gross adds issue. I don't think there's one thing that we can pinpoint to it. We did see some softness toward the end of season three and so but we thought we had corrected it in the story.

Speaker 2

But that's not to say that there was a lot of different things that went into the softness on gross ads for BMF. We do have two BMF similar type shows in development with Lions Gate. We like both those shows. But we have the last episode airing tonight and so we'll do what we normally do which is get into the postmortem on a show with the showrunners and do analysis and see whether it comes back or not. We do have a lot of great content in development.

Speaker 2

We talked about Kingmaker, we talked about obviously Fightland that's coming. And so we have a lot of opportunity to put shows on the air that I think serves that audience on scale that we can own. And so while I really was hoping that it would perform better, it's been a great show for us for the three years we've had it. We did see some softness in gross adds around that. Yeah,

Speaker 3

with respect to ARPU, this is Scott. It's been fairly consistent quarter over quarter on a year over year basis, which we think is relatively good for the business. When you look at ARPU, we were down just a little bit this quarter, primarily due to more customers on multi month type offers. And we really like that kind of transition and getting more of a mix of that because that does help us with reducing churn over time. And I

Speaker 2

think to your question about rate and distribution relationships, we are we are set up to be a complementary service and sold with our partners. We make a lot of money for our partners. 80% of our customer base is either a la carte or rev share, which means two things. One, customers are choosing Starz because the content is working and two, we're making money for our partners. And so we've got a really good relationship with our partners there.

Speaker 2

We are we do not we have done two rate increases in the last two years. We do not have any plans to do a rate increase this year or next year. We do think there's going to be a lot of new distribution platforms coming online next year that will allow us to continue to grow the top line through subscriber growth and not have to go to the rate thing to grow the business.

Speaker 4

Great, thank you.

Operator

Our next question comes from David Karnovsky with JPMorgan. Please proceed.

Speaker 6

Hey, thank you. Jeff, with blood of my blood, maybe can you expand a bit on how much of Outlander's audience or sub base you think you could be able to carry over and then maybe just more broadly, what kind of underlies your confidence that you can continue to transition audiences to these new iterations of prior franchises? Maybe you can talk a bit to your track record here. Thank you.

Speaker 2

Yeah, I'm gonna let Ali talk about Blood of My Blood and the track record and then I'll jump in as well.

Speaker 7

Yeah, so thanks for the question. I think successful franchising is a real power here at STARZ. Just for reference, our spin off sequelsprequels typically deliver more than 85% of the original season's audience and that compares to the industry that usually sees about half the audience go to sequels and spin offs and prequels. So, we're very good at this, the programming team and the producing teams work well together to do this and to really expand the storyline, make sure that there's story to tell, that there's characters that the audiences want to see. I think with Blood of My Blood, you know, that was very intentional as a prequel.

Speaker 7

The idea is serve the Outlander audience really well in all of the things that they're looking for, you know, time travel, history, fantasy, and of course romance, but also make it very accessible to a new audience. You don't have to have seen Outlander to love Blood and My Blood and that's just what we're seeing. I think with the stats that Jeff noted, we're seeing a 40% lift over the final episode of Outlander. That means new audiences are coming in for this story and we're carrying over successfully the Outlander audience. So, that's really exciting for us to see, but I think something that we are actually kind of accustomed to seeing based on this sort of machine we've built around franchising at the network.

Speaker 6

Thank you.

Operator

One moment for our next question. And it comes from Matthew Harrigan with The Benchmark Company. Please proceed.

Speaker 8

Thank you. I think we have some sell side group think going because most of my questions were already asked. But I was curious on Spartacus. It's been twelve years. I mean, the Sores and Sandals shows and movies sometimes work really well, sometimes they don't.

Speaker 8

Obviously, Peacock had a fairly racy entry in that genre fairly recently. But what gives you the confidence that there's that much awareness of it still? And how do you get it to resonate with the urban and female demographic? And do you have fairly I'm sure you're not going say you have lofty expectations for it. But is this something that you think could be a fairly long running series?

Speaker 8

And then secondly, I know it's absurdly early, but how would you characterize the changes in your relationship with Lionsgate television thus far, structurally, mechanically, and I guess socially even though it's been just literally just a few weeks out of the blocks? Thanks.

Speaker 2

Great question. I I've been at STARS now ten years and I don't think there's ever a time where I travel somewhere and somebody asked me, you know, when is Spartacus coming back? I think it's one of the network defining shows that we have. I think everybody in the building gets asked about Spartacus all the time. And so that's one of the reasons why we decided to bring it back after twelve years is because there is such this swell of people outside the building looking for it to come back.

Speaker 2

If you look at the research that we've done around the show, again, the existing customers and new customers show that there's an incredible desire for us to put the show on the air and see it. If you look socially since Comic Con and I was down at Comic Con, you can just see the intensity around the show and Steven Denight online right now. There is insane intensity around when it's coming back, when it's going to air. And so we feel pretty good that what we're seeing from the market outside, there's a real desire to have that show back on the air. I think one of the things that we've done differently in this iteration of Spartacus is we have an African American female gladiator in the show.

Speaker 2

The hope with that is for us to then be able to merge some of our existing core demos into the show but I think the story is as traditional Spartacus as it's ever been. We've had the original crew in terms of Steven and crew doing it. Karen Bailey on our team here who worked on the original, worked on it again. We were back in New Zealand and so it has all markings of a great Spartacus and so we're excited for it to come back on the air.

Speaker 1

What was the relationship with? Oh, and

Speaker 2

then the relationship with Lionsgate. I think the relationship's been great. Think having some natural, know, typical hand arm's length real relationship now has been good. We continue to talk about various shows. We just picked up another show with them.

Speaker 2

Obviously, Spartacus we're doing with them. We did 18 episodes of Origins, the Power spin off them and that was a really interesting, I think collaboration to get to a price point that we got 18 episodes and so the relationship there has been great. And so I think it's been hasn't really been much of a change. Obviously, we have a lot of business with them. We have to pay one.

Speaker 2

Excited for Ballerina to come on the air and there's still some good overlap with Lions Gate folks on the boards, on both boards and so I think the relationship is as strong if not better than it was before we separated.

Speaker 8

I'm sure your black female gladiator will be just as hard to kill as John Wick. Thanks. That sounds great on Spartacus.

Speaker 2

My hope is that she's a little more aggressive than the Baba Yaga for sure.

Operator

Thank you. And ladies and gentlemen, this concludes our Q and A session. I will turn it back to Neeler Shah for additional comments.

Speaker 1

Thank you, operator, and thank you, everyone. Please refer to the News and Events tab under the Investor Relations section of our website for a discussion of certain non GAAP forward looking measures discussed on this call. Thank you.

Operator

And this concludes our conference call. Thank you all for participating. You may now disconnect.

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