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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank much you for standing by and welcome to the Lions Gate Entertainment 2Q 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. [Operator Instructions] And as a reminder, this conference call is being recorded.
And I would now like to turn the conference over to our host, Head of Investor Relations, Mr. James Marsh. Please go ahead, sir.
Good afternoon. Thank you for joining us for the Lions Gate Fiscal 2020 Second Quarter Conference Call.
We’ll begin with opening remarks from our CEO, Jon Feltheimer; followed by remarks from our CFO, Jimmy Barge. After their remarks, we’ll open the call for questions. Also joining us on the call today are Vice Chairman, Michael Burns; COO, Brian Goldsmith; Chairman of the TV Group, Kevin Beggs; and Chairman of the Motion Picture Group, Joe Drake. And from Starz, we have CEO, Jeff Hirsch; CFO, Scott Macdonald; and EVP of International, Superna Kalle.
The matters discussed on this call today include forward-looking statements, including those regarding the performance of future fiscal years. 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 Lions Gate’s most recent Annual Report on Form 10-K, as amended and our most recent Quarterly Report on Form 10-Q filed with the SEC. The company undertakes no obligation to publicly release the results of these revisions to these forward-looking statements that may be made to reflect any future events or circumstances.
With that, I’ll turn over to Jon. Jon?
Thank you, James and good afternoon everyone. The paraphrase, Mad Men’s Don Draper, it’s a different universe today. I want to start by emphasizing how well our businesses are positioned in this incredibly disruptive environment; I’d highlight their strong performance. We just reported financial results that showed solid gains in revenue, adjusted OIBDA and earnings per share, and each of our businesses continues to stake out highly competitive, sustainable, and unique positions within the ecosystem.
As our industry continues to shift to a subscription streaming model, in which services are increasingly sold on an a la carte basis, Starz is uniquely well positioned to benefit from this paradigm shift. Thanks to our depth of content, versatility and speed to market. In that respect, we gained a record 1.2 million over the top subscribers in the quarter to 5.6 million, 28% increase in our biggest sequential gain ever with the release of the final five episodes of Power in January, and the return of the hit series Outlander in February. We’re primed to our projections of 6 million plus over the top subscribers by the end of the fiscal year.
Strength of our over-the-top business is driven by the success of our focused programming strategy. Power is the number one premium paid series among African-American audiences, continues to deliver significant growth in over-the-top subscribers and audience engagement year-after-year. After selling out Madison Square Garden, it scored the highest rated premier in premium television this summer and has maintained its place as a top-performing premium cable series throughout the season.
Power is official aftershow. Power Confidential ranks the number three premium cable series among African-American households, further evidence that the audience is fully engaged and ready to dive into an expanded Power universe. To that end, we continue to ramp towards a year round offering Power inspired, inspired programming, kicking off production last month on "Power Book II: Ghost", starring Mary J. Blige and "Power" showrunner Courtney A. Kemp and executive producer Curtis "50 Cent" Jackson. More new series to come.
We also continue to add depth to a slate that remains focused on our core audience of women, African-American, Latinx, and LGBTQ viewers are continuing to widen the creative aperture to attract new subscribers. We put more new projects in the pipeline in the first six months of the current fiscal year than we did in all of fiscal 2019. Upcoming new series like the greedy, crime drama, Hightown from Jerry Bruckheimer Television, which features Latinx star, Monica Raymund. Stylish Thriller, Dangerous Liaison, high-stage drama Heels set in the world of small town professional wrestling, and the two new comedy series run the world from Dear White People to Yvette Lee Bowser, a provocative comedy about four African-American girlfriends and Shining Vale, a horror comedy from award-winning writer and producer, Sharon Horgan, all reflects our commitment to being the platform of choice for audiences that have traditionally been overlooked and underserved in the premium space.
On the distribution front, we continue to pivot to a future of higher revenue al a carte subscribers with better unit economics. This year for the first time, more than half of Starz revenue comes from al a carte customers as we continue to achieve success with our traditional MVP, The Partners and new digital distributors alive. Earlier this year, we entered into a carriage agreement with Dish that aligns our businesses on a path of mutual growth and our recent deal with AT&T is structured around the same core tenant of accelerating growth together.
Rather than watching our traditional ratchet down with each new unwinding of the television bundle, we’re embracing the realities of the evolving marketplace, elaborating with our linear partners to grow our respective businesses and transitioning our customers on an innovative and orderly path to an a la carte environment together, the right time, the right price, and in the right way.
Internationally, as U.S.-based companies announced their launch plans, we’re benefiting from the fact that Starz plays already live in nearly 50 countries and continues to scale its platform. During the quarter, we added distribution partnerships with Vodafone in India, local platforms, Izzi and Total Play in Mexico, while expanding our relationship with Amazon to include Mexico and France. From Amazon to Apple and Virgin Media to Vodafone, our offering is resonating with global streaming partners, top local distributors and consumers alive.
Coming off our biggest growth quarter ever, we remain on target for our fiscal 2020 goal of 4 million international subscribers. Our speed-to-market rate content in premium brand combined with the expertise we’ve gained from our STARZ Play Arabia venture are enabling us to partner with key distributors and to sit as a focused curated service on top of their platforms.
I’m also pleased to report that our state-of-the-art STARZPLAY app, a critical and proven driver of domestic OTT growth is now live in five countries with more to follow in the coming weeks. It gives us even greater control over our content offering and allows us to further enhance the consumer experience. You may have seen the headlines earlier this week about the cross-promotional partnership between Disney and Starz. Beginning at launch, Disney will offer the Starz app on all Disney owned streaming platforms and we will do the same for Disney Plus and ESPN Plus on our Starz own platforms. These are the kind of partnerships I referred to earlier that demonstrate how Starz is complimentary to and a value-add for all current and emerging platforms.
Turning to the Motion Picture Group. We embarked on a reorganization 18 months ago to create organizational efficiency, unlock creativity and collaboration and position the group for future growth around a reinvision of content strategy. We’re now realizing the promise of that work and are confidently positioned for continued growth. Theatrical box office results are expected to exceed $700 million by the end of the calendar year, up over 85% from last year. Our level of performance so far this year puts us in fifth place ahead of two major studios with a box office market share of 6%. Sitting squarely in the center of our content strategy John Wick: Chapter 3 – Parabellum continues to deliver for us.
This quarter, we saw the home entertainment release achieved sales beyond our expectations and further boost the value of the first two films in the franchise. We’re continuing to work on this incredible intellectual property as we dive into development on John Wick: Chapters 4 and 5 and the expansion of the John Wick Universe, who had strength to our content story. We had an impressive string of successful wide releases in the quarter. Angel Has Fallen, Rambo: Last Blood and Scary Stories all over performed at the summer box office. These are the kinds of movies that sit at the foundation of our strategy and provide a level of consistency that enables further growth and expansion of our pipeline.
As we look to round out the year with big and buzzy films, we kick off this Veterans Day Weekend with Midway, a retelling of the Epic Battle of World War II from celebrated filmmaker Roland Emmerich. This film delivers the kind of big action that speaks directly to its core audience. Heading into the holiday season, we shift our content narrative to our strongest lineup of award contenders in recent years. We lead with a highly anticipated release of Ryan Johnson’s, critically acclaimed to done it, Knives Out, and Jay Roaches already noisy Bombshell, starring Charlize Theron, Nicole Kidman, and Margot Robbie in a timely drama that is generating strong awards worthy buzz.
And finally, to add even more excitement to the awards conversation, our sister company, Roadside Attractions has been critical and commercial success for the biopic, Judy, with Renée Zellweger earning rave reviews for riveting portrayal of singer Judy Garland. As we look forward to the film profit margins at a five-year high, we’re committed to ensuring that our investments drive value to our shareholders. We feel confident in our plan for growth and we’ll continue to make disciplined content decisions driven by our strategy. The best-in-class talent deals we’ve talked about are nationally reliable productivity and feeding our robust content pipeline as we build towards the steady state.
Today, I want to announce that we are green-lighting the valet to be produced by and starring Eugenio Derbez, a storyteller with a voice that reaches all audiences. Our fourth film with Eugenio, it continues to strengthen one of our most important verticals, coupled with multiple exciting project announcements from our partners at Seth Rogen and Evan Goldberg’s Point Grey and the Erwin Brothers kingdom, along with new deals with best-in-class talent, soon to announce. We’re just beginning to realize the value of our strategy.
turning to television. The arrival of even more platforms and buyers in the marketplace plays to the strengths of our content and talent strategy. As a truly independent company, aligned with prolific content partners like 3 Arts Studios, Tannenbaum Company, Universal Music Group, BBC studios, and Paul Seed, we’ve put a record 80 projects into development across nearly 20 different platforms in the past 18 months, whether we’re using traditional deficit financing models with our network partners, some variation of cost-plus models with the streamers are retaining all global rights on the shows we make for Starz. Our flexible and entrepreneurial approach allows us to play in every space, optimize our risk reward balance, increase our margins and combine long-term value creation with short-term monetization across our slate.
To give you a few examples, we’re currently filming the first season of the romantic comedy Love Life starring Anna Kendrick, an original for HBO max that was prominently featured at their recent Investor Day. The split rights model that we’re using enables us to create a star-driven brand-defining property to support the HBO max platform while incurring minimal deficit and risk and retaining international rights.
The high-concept dramas Zoey’s Extraordinary Playlist coming out of our partnership with Universal Music Group and one of the centerpieces of NBC’s 2020 slate carries a somewhat higher risk associated with the broadcast model that also brings a big network audience to a show with great financial upside.
As excited as we are about our new series, I want to remind everyone that the old is also new and we’re pleased to be bringing two of the most acclaimed shows in television history, Mad Men and Weeds to the global syndication marketplace next year. We’ll be launching the marketing campaign from Mad Men, winner of 16 Emmys and five golden Globes during its eight-year run later this month. And we’re thrilled to be back in business with series star and producer Mary-Louise Parker on what we’re calling Weeds 4.20 already in active development at Starz as we prepare a comprehensive and integrated rollout for one of television’s most beloved properties.
As our robust development pipeline continues to convert into high profile new series with attractive business models combined with contributions from recurring series: Debmar-Mercury, Pilgrim and 3 Arts. We expect double-digit revenue growth in fiscal 2021 with segment profit up over 50% on increasing margins.
I’ve talked about the strength of Starz positioned within the global streaming marketplace, but I’d also like to say a few words about the rapid growth of our premium Spanish language platform, PANTAYA. With a successful launch of its first original scripted series, the comedy Game of Keys, its first unscripted series dare best family vacation and relationships with the leading creative voices in the Latinx community. PANTAYA has already grown to 550,000 paid subscribers with 700,000 projected by fiscal year-end. 80% of these are direct consumers on our own app.
PANTAYA continues to efficiently mind the Lions Gate in Pantelion library while benefiting from close collaboration with Starz on series like Vida, whose first season streamed on the platform and attracted a new legion of fans, a premier destination for Latinx audiences, and a central pillar of one of our most important verticals. We believe that PANTAYA will add significant incremental value to our company.
In closing, our industry is undergoing the most dramatic secular change in its history, but wherever you fit in today’s ecosystem, studio, traditional network or streaming platform, it’s all about having great content and great people and we do. Lions Gate has a massive portfolio, bold, original premium content and incredibly-agile, dedicated and entrepreneurial workforce and deep pool of world class talent.
Quite a lot of noise in the marketplace, our own focus remains clear and constant creating value for our partners and shareholders, identifying ways to unlock and communicate that value and balancing our commitment to discipline growth with our focus on continued the leveraging of our balance sheet.
Now, I’d like to turn things over to Jimmy.
Thanks, Jon, and good afternoon everyone. I’ll briefly discuss our fiscal second quarter financial results and update you on our balance sheet. Fiscal second quarter adjusted OIBDA was $145 million, up 13% year-over-year while revenue was $984 million, up 9%. reported fully diluted earnings per share was $0.01 a share and fully diluted adjusted earnings per share came in at $0.22 a share. Adjusted free cash flow for the quarter was $61 million.
Now, let me briefly discuss the fiscal second quarter performance of the underlying segments compared to the prior-year quarter. media networks quarterly revenue of $374 million was relatively flat from last year and segment profit came in at $105 million. globally, Starz ended the quarter with 27 million subscribers, which were up 7% or $1.8 million year-over-year. Starz domestic ended the quarter with 24.7 million total subs, down about 400,000 from the prior year quarter.
Now, looking at sequential growth from the fiscal first quarter, excluding STARZPLAY International, Starz domestic segment profit was up 35%. Global subscribers were up 500,000 driven largely by OTT and the strong early results of our international rollout. Domestic subscribers were up 300,000 and domestic OTT subs were up an impressive 1.2 million sequentially, representing our strongest quarter ever on both wholesale and retail OTT driven by strong slate of hit programming. International subs increased 8% sequentially and should ramp up even more meaningfully as our global partners continue to deploy their platforms and marketing efforts.
Motion Picture revenue increased 7% in the quarter to $406 million and segment profit came in at $51 million representing a threefold increase year-over-year. The strong performance in the film group was largely due to the solid theatrical performance of films in the quarter, including scary stories: Angel Has Fallen and Rambo: Last Blood as well as the continued outsized ancillary performance of John Wick: 3.
TV production revenue increased 80% to $274 million and segment profit increased 34% to $13 million. The improved results in the TV group were largely due to the timing of episodic deliveries for Power Season 6.
Now, I’d like to turn to our fiscal 2020 outlook. As you can see, our core business continues to perform well. Recall we previously discussed our core business before STARZPLAY International investment generating $650 million to $700 million of adjusted OIBDA in fiscal 2020 and projected Starz International investment of $150 million. That guidance remains own track excluding the impact of an upcoming carriage renewal. As you can imagine, we’re not in a position to discuss the related possible outcomes at this time. However, as Jon mentioned, we and our partners continue to pivot to a future of higher revenue a la carte subscribers with better unit economics.
Now, for a quick update on the balance sheet. We ended the quarter with leverage at 5.5 times including STARZPLAY International or 4.6 times excluding STARZPLAY International, representing improvement over the last quarter of 0.3 times and 0.4 times respectively. The sequential decline in leverage was the result of improved trailing 12 months adjusted OIBDA. While it is difficult to project year-end leverage based on our earlier comments, we want to make it clear that deleveraging remains a high priority as we allocate capital going forward. As noted in the past, our preference is to raise capital at the right price point to both highlight the valuation of stores and to delever more quickly than we otherwise would organically.
Now, I’d like to turn the call over to James for Q&A.
Great. thanks, Jimmy. Carl, we can open it up for Q&A.
Yes, sir. [Operator Instructions] And our first question will come from the line of Alexia Quadrani with JPMorgan.
Hey Alexia.
Hi, this is Anna on for Alexia. Thank you so much for the question. You had a nice revenue increase on Motion Pictures this quarter. Just wondering if you could provide us with an update on the rest of the 2020 slate and is it still a transition year or should we expect some continued momentum into the second half? Thanks.
Yes. this is Joe. I do expect momentum into the second half of the year. We’re really seeing the work as Jon said, that’s been done over the last 18 months, both in terms of content strategy starting to play out now as well as some of the efficiencies in our new marketing group really deliver the results. And when we look at the remaining films in the fourth quarter, there’s a lot to be excited about. Midways this weekend to a very targeted audience. Knives Out is a movie that is, I believe today, at 98% on Rotten Tomatoes and incredibly well-received, came on tracking today, very strong. bombshell is a movie that can compete, that’s really – that looks like it’s really found its intended audience as well as something that can compete in the awards season. And then we have the first movie out of our faith based business in March. So, lots of reasons to be positive about the momentum going forward.
And Anna, just this is Jimmy, just to give you a little color on the cadence financially with respect to Motion Picture Group as well as TV. We expect to continue to have full-year increases in both revenues and segment profit in both of those units. And with respect to the cadence in the second half of the year, Motion Picture, it’s a bit more back-end loaded in second half, relatively first. in particular, I would just note given the cycle of the release dates that there’s more limited P&A spend, which of course, would put more profitability end of the fourth quarter in Motion Picture. And then I would say with respect to TV, it’s a little more evenly balanced between the first half and the second half, but in particularly, a strong fourth quarter for TV.
Thank you, Anna.
Great. Thanks so much.
And next, we’ll go to the line of Steven Cahall with Wells Fargo. Please go ahead.
Yes, thanks. Maybe, first Jimmy, I know you can’t comment on the deal with Comcast and how it may impact your guidance, but I was wondering if you could maybe, comment on just what leverage currently looks like and I think the stock is essentially pricing in that you could have a covenant issue depending on how that goes. So maybe, you could just comment or put to rest anything on how those renewals may impact your debt covenants.
And then just maybe, relatedly, Jimmy free cash flow has been a little weaker – quite a bit weaker actually to start the year. Can you talk about what’s going on, on the conversion side? And again, you’ve got a lot of earnings that are back-half loaded. So, should we expect a lot of the cash to come in, in the back half of the year as well?
Sure. Thanks. Thanks, Steven. Look, let’s just put the rest of the covenant discussion. As you probably know, the key covenants differ significantly in a very favorable way from just general leverage, primarily exclusion of all the investments to start up our international business on the Starz side. So that’s completely excluded. So, there’s not a covenant problem with or without the carriage renewal and with or without any capital raise. So, just to be clear there.
Now with regards to leverage, as I said in my opening remarks and Jon mentioned as well, deleveraging is one of the highest priorities within the company. Okay. And in fact, this year, we expect to pay down debt this year regardless of the outcome of any carriage renewal or capital raise. Okay. We are explored a number of initiatives to help it actually accelerate deleveraging including a capital raise, working capital improvements and likewise, a tight reign on all of our costs.
Now, with respect to your free cash flow question, as you know, we’ve always over-indexed relative to conversion of adjusted OIBDA of free cash flow. It was 42% in the quarter. You’ll remember in 2018 and 2019 fiscal years, it was closer to 55%. I would just remind you that we’re going to continue generating positive cash flow to fund all of our growth with regards to our core business as well as reducing debt at the same time.
Thank you.
Thanks, Steven.
And next we’ll go to the line of Ben Swinburne with Morgan Stanley. Please go ahead.
Thanks. Maybe, for Jeff on Starz, I mean this is a pretty wild quarter in terms of OTT ads and also kind of traditional losses. I’d love to just get some more color on what drove the OTT additions beyond, obviously content is key, but did you guys have any marketing push, any channels you’d want to highlight within OTT that worked particularly well? And the – maybe, any color on churn or gross ads. And then on the traditional side, I know you can’t talk about Comcast, but I would assume what we saw was not impacted by that situation. This is more just what’s been happening with AT&T and the overall ecosystem, add any color you can share. Thanks.
Thanks, Ben. Thanks for recognizing the quarter. We had our strongest – one of our strongest pieces of content on the air with power premiering on 825 in the quarter. 11 million multiple households watched the service and it’s a great driver of growth for us. I think over the last three years, we’ve really built a data capability on the back-end of the business that allows us to go from kind of reacting to the business to kind of actively managing and manipulating the business. And so we’ve been able to really put efficient dollars to work to drive – and drive subscriptions as well as conversions. It was the highest quarter we saw on our conversions from pretrial to paid as well.
And so we feel like not only have a great piece of content complimented with the data and the capability of the team to really kind of drive that growth to a level we haven’t seen before in terms of. And again, it’s really all about content. We’re excited to have, as Jon said in his remarks; we’ve got the backlog [ph] of power coming back on January 5. We’ve got Outlander coming right behind that. We have a new show after that called Hightown that Jon talked about that I think, it’s going to be one of the best shows on television next year. So, we feel really, really great about the upcoming programming slate.
In terms of the traditional business, I think is kind of what you’ve seen and what everybody’s talking about is we can continue to see erosion in the traditional bundle and has more and more services are launched. I think you’ll see that kind of continuum.
And just to pick up on the OTT stuff. So, I mean you obviously are expanding the Power Universe so to speak. Outlander, you mentioned, I mean, it would seem that the outlook for OTT growth, I know you have guidance out there, but it seems like you can, I don’t know – I don’t know, I’m sure you want to raise it today, but it seems like you’re on track for some continued strength in that channel or those channels as you look through the next 12 to 18 months.
Yes. We’ve seen about a 50% growth to date and we’ve said that we’re 6 million by the end of fiscal. We think that number is conservative.
Yes. Okay. Thank you.
And the next, we’ll go to the line of Alan Gould with Loop Capital. Please go ahead.
Hi, Alan.
Thank you. I’ve got a few questions. First, Jon, does it make sense for the company structurally to still be together, Starz and the legacy entertainment business? Or would it make sense to separate the two?
Yes, great question. I think when you look sort of the quickest and easiest example to look at the benefits of these companies being together at the international launch. It’s Superna and her team has really done an amazing job, as we’ve mentioned, we’re in almost 50 countries and honestly, couldn’t happen without the lions gate library without the fact that we are making available in the UK and in India. The feature films in a pay television window that we work together, original series from Lions Gate. Kevin has got Love Life. We mentioned it today on the call. We’ve got the international available if it’s the right thing right now for STARZPLAY International and there’s just tremendous synergies that we’re just starting to tap about 20 shows in development Lions via television for Starz.
So, I think it’s a shame that, that it does look like that the – from a valuation perspective, it does look like who you look at this part separately and it’s a lot more money. And that obviously is a concern for us. But at the end of the day, right now, when you look across the board at the access that, that Jeff and his team have to all of the assets, the marketing, when we’re marketing that Motion Picture, when we’re selling something at a home entertainment, we just did something super-interesting with Roku, where we made hunger games available for a one-week period of time. I think we’ve got 18,000. We did a promotion against Starz. I think we got 18,000 free trials going.
So, the fact of the matter is that there is a tremendous energy going on right now. And again, we’re still pretty early in the process. But yes, I’m concerned that we’re not getting the value in our stock obviously. But I will tell you, I’ve never seen the company or teams work together as closely as we do it at our company.
Thanks. Can I just follow up with one distribution question? The thing that’s sort of so surprising to us is historically in this business dish has been the toughest company to deal with; recently AT&T has had a few blackouts. There historically hasn’t been, or maybe, it’s been all behind the scenes. There haven’t been too many issues with district, with programmers and Comcast. Now, I also always thought that historically pay TV services, the traditional distributors were making some good money on. So, I’m just wondering what’s changed and why it’s so difficult now.
As always, we’re not going to comment on our carriage renewals, and as Jon talked about and his prepared remarks and you alluded to, we have completed two deals this year, where we’ll be able to work with our distribution partners that determine a great transition to an a la carte world, where we can take care of our shared customers and get the business to where we’re both means to be beneficial and growth to making money together and we think that we will continue to do that with all of our partners.
Again, our data suggests that the content that we have with Power and Outlander, the shows that are coming that are in the same demos as those two shows plus all of the 4,500 movies we have are a great value to consumers and we think both our consumers and our distributors will continue to see that value.
Thanks, Jeff.
And next, we’ll go to the line of David Joyce with Evercore ISI. Please go ahead.
Thank you. And thinking about the television production business, historically, you’ve been in the 10 or a low double-digit and kind of margin range and you’ve – when people are looking for greater margins, you said really don’t want to see margins like in 30% range, because that would indicate that you’re not making any more episodes. So, I was just wondering are you really ramping up the capacity and the production level here or are there cost pressures to be coming in because the industry is so busy, and are you able to pass through those cost pressures? So, you’re really just keeping your economics basically the same. Thanks.
I understand your question, David. I think the answer is partly in my remarks, which is we’re finding it’s a fascinating time to be able to sort of look at a mix of product that makes us sort of three things really, it’s that sort of bigger deficit, bigger back-end longer-term investment scenario around broadcast. It’s the streamer scenario anywhere between getting a 120% to 140% immediate profit or getting almost all that paid for and retaining a bunch of rights immediately to monetize also a very good shorter-term value proposition.
And then the Starz, supplying Starz, we retain all of the rights; we can window them both domestically and internationally as we choose. And I think in the answer to is there enough budget, is there enough budget to do anything we want, as we said, we have 80 projects in development right now, number in production, some very close to being greenlit. So, I think it’s more about measuring the risk reward for our entire portfolio and actually making sure first and foremost that we are supporting Starz.
Great. Thank you.
Yes. Thanks, David.
And next, we’ll go to the line of David Kreutz with Cowen. Please go ahead. Excuse me, Doug Kurtz. I apologize.
No problem. Thank you. Hey first of all, just regarding Jimmy’s verbiage around the guidance you said remains on track, excluding the impact of upcoming character role. Is it fair to say that that’s the potential impact given that you presumably still remain in negotiations and then secondly, in the event that there is an adverse outcome or are you guys preparing to put plans into place to try to protect as many potential sub loss as possible by getting them back through other distribution channels? Thanks.
Well, the comments that I made with regards to guidance is just excluding whatever the impact would be from renewals at this stage as we say, it’s just too early to be speaking to that or trying to frame it for you.
But I would, in response, to your second question, as Jeff said, look, we know on that particular system we have 4 million really passionate viewers just at our two big shows alone. And I think that if you just start with, which I think, both distributors and suppliers should be thinking about, if we start thinking about the customer, I think that the idea would of course, be to make sure that they can continue enjoying the incredible content that we’re offering. So, I think we’ll be reasonably smart about that.
Okay. Thank you.
And next, we’ll go to the line of Todd Juenger with Sanford Bernstein.
Hi, good afternoon. Thanks for taking the question. Hey Jeff, if you don’t mind, I’d like to maybe, revisit Ben’s question a little bit, press you little further. Just because I know there’s more knowledge in there. We’d love to benefit from it. When we think about the traditional subscribers to Starz and why they might be weeding your system. And listen, I know that you don’t have visibility into exactly those subs, because of the wholesale relationship. And I know that’s part of the benefit of the OTT. So, I know you can’t see it directly. I know you do your own research and I know you have information on this. When somebody weave Starz some additional distributors, is it usually because they cut the code entirely and Starz as part of that entire package? Or to what extent is it, well, they stay within the system, but they drop a bunch of premium channels, including Starz. Is it often they specifically just drop Starz? There’s a whole bunch of different answers to that that I think would be super-helpful for us to understand exactly the dynamic there if you’d share it. Thank you.
And then if you don’t mind one more, and then I’ll shut up. For whoever wants it, there’s notion of the library, the content library we haven’t talked about for a while, at least with you guys, investors still ask about it. In fact, it wasn’t happened years ago, I think you would sometimes describe the annual revenue from just licensing what I’ll call your library and there’s different definitions of the library. You can understand why investors would ask that. It’s a theoretically sort of an asset that has kind of an annuity like revenue characteristic. There’s a lot of buyers seeking content. However you would want to define what a library is? Would you be willing to talk to us about how much revenue that is sort of generating for you today, and the growth trend there? Thanks a lot.
Great question. It’s Jeff, let me try to unpack a little bit of that, a short call that we have. I think what you’re seeing is just you’re seeing a macro industry trend of the traditional business shrinking it 3% to 4% annually. I think some of our distributors are struggling based on just their set of products that they have versus others that have a different set of products into the home. And so – but it’s a combination, I think it’s primarily most as they cut the quarter, they’re taking the service with us.
So, on some of our operators, we’re seeing, our penetration level actually go up and some of the operators were seeing our penetration kind of go with the course of their publicly announced numbers. And so I think it’s a little bit depending on the operator, how they use the product and what kind of products we have.
And Todd, relative to your question of library, I mean, absolutely, there is a significant revenue there, $500 million plus on an annual run rate and very good margins.
Thanks, Todd.
And next, we’ll go to the line there of Rich Greenfield with LightShed. Please go ahead.
Hi. Thanks for taking the question. So, just from a high level, as you think about kind of what’s going on in the TV ecosystem, it seems like, there’s an increasing shift to all of these platforms, whether it’s Roku or Apple TV, Amazon channels, even Hulu likes to sell other people’s channel packages including Starz. And I’m just wondering like I know you still have a lot of legacy subscribers that come from the multichannel bundle such as Comcast. but ultimately, is it really a bad thing since you make more money selling directly like other than the negative transitional impact, ultimately, are you better off not being part of cable packages and cable bundles, and being able to just have a direct relationship with your subscribers? How do you think about the short-term versus the long-term there?
Rich, it’s Jeff, great question. I think first and foremost, we think there’s a lot of opportunities still to grow our businesses with our traditional MVD partners. As you know, premium has never been fully distributed like ad-supported networks. And I think we’ve spent the better part of the last year. We’re negotiating our pay one deals to give our partners more flexibility, so they can compete in a more unbundled kind of a la carte world. And we continue to work with those partners, because we think there’s a lot of opportunities to grow there. But as you do mention, there’s the natural evolution of technology in the business, we’ve talked about this bunch of satellite came in and telcos came in. Now, you have the digital distributors coming in and for us, as we continue to move to that in harness and capture that transition, it is a more profitable sub for us.
Yes. Rich, interesting, if you look at three years, three years ago, we had zero digital revenue. Right now, we’ll be ending the year over 30%; and three years ago, about 40% of our revenue was a la carte and right now, at 60%. And obviously, the over-the-top and a la carte area are certainly higher margin business for us. Again, we want to do the right thing for our partners and we want to do the right thing for our customers.
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