Starz's Profit Dives 65% as Original Content Spending Spikes

Entertainment network Starz (STRZA) posted fourth-quarter earnings results on Feb. 25 that included a minor decline in subscribers along with a huge drop in profits.

Here's how the headline results stacked up against the prior year:

Data source: Starz's financial filings.

What happened this quarter?
Sales were flat as slightly lower subscription revenue offset gains in Starz' distribution segment. At the same time, investors saw the negative financial impact of significantly higher content spending. Here are the key highlights of the quarter:

• Starz subscribers rose by 0.5 million to reach a record 23.6 million while Encore subscribers fell by 1.6 million. Overall, subscriptions were down 2% to 55.8 million. By comparison, rival Netflix (NFLX -0.51%) gained 5.6 million subscribers in Q4 (1.6 million of which came from the U.S. market) to reach 75 million members worldwide.
• Like its streaming competitor, Starz's profit was held down as spending on original programming spiked higher. Adjusted earnings declined by 58% thanks to the offering of new episodes from expensive shows including Blunt Talk and Ash vs. Evil Dead.
• Starz's original content portfolio improved to 76 shows, just below management's target of between 80 and 90 exclusive series.
• Management spent $98 million on share buybacks over the last four months, a big acceleration over the prior quarter's pace. Starz also announced a new $400 million stock repurchase authorization.

What management had to say
"In 2015, Starz demonstrated the strength of its core subscription business and made meaningful progress on the strategy of building a strong slate of original programming focused on targeting diverse and underserved audiences," CEO Chris Albrecht said. "We expanded distribution of our content, with the recent successful launch of Starz on Amazon (AMZN -1.14%)," he continued.

Original series, Black Sails. Image source: Starz.

Noting the broad-based success of Ash vs. Evil Dead along with a well-received third season of Black Sails, Albrecht suggested that the company sees no reason to ratchet down its content plans to preserve short-term profitability. "These are very exciting times for Starz with an outstanding 2016 original programming slate," he said.

Looking forward
Getting that growing portfolio of content onto more devices will be a key focus for management this year. To that end, Starz is putting the finishing touches on a stand-alone app that, like Netflix's, will allow customers to view its programming outside of the traditional broadcast TV ecosystem.

The move onto Amazon's Prime Instant Video service is an early example of that strategy at work. Netflix made access breadth a priority early on by securing deals with video game consoles first, and now its app is available on just about any device that comes with, or connects to, a screen. Starz hopes that it can achieve a similar level of accessibility as soon as possible.

Meanwhile, investors can expect the company to continue investing heavily in original content, which will depress earnings and cash flow, as we saw this quarter. Faster subscriber growth should eventually follow that product improvement, though -- especially if Starz succeeds in making its service available on a wider array of platforms.