Lions Gate Entertainment Corp  (NYSE:LGF-A) (NYSE:LGF-B)
Q2 2020 Earnings Call
Nov. 07, 2019, 5:30 p.m. ET

Contents:

  • Prepared Remarks
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    Image source: The Motley Fool.

  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen thank you very much for standing by and welcome to the Lionsgate Entertainment 2Q '20 Earnings Conference Call. [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.

James Milton Marsh -- Lions Gate Entertainment Corp.

Good afternoon. Thank you for joining us for the Lionsgate Fiscal '20 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. From Starz we have President and 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 Lionsgate's most recent annual report on Form 10-K as amended in 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 it over to Jon. Jon?

Jon Feltheimer -- Chief Executive Officer and Director

Thank you James and good afternoon everyone. To 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 and 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 and our biggest sequential gain ever.

With the release of the final 5 episodes of Power in January and the return of the hit series Outlander in February we're primed to achieve 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 the number one premium pay 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's official after show Power Confidential ranks as the #3 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 toward a year-round offering of Power- inspired programming kicking off production last month on Power Book II: Ghost starring Mary J. Blige; and Power show runner 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 6 months of the current fiscal year than we did in all of fiscal '19. Upcoming new series like the gritty crime drama Hightown from Jerry Bruckheimer Television which features Latinx star Monica Raymund; stylish thriller Dangerous Liaisons; high-state drama Heels set in the world of small town professional wrestling; and the 2 new comedy series Run the World from Dear White People's Yvette Lee Bowser a provocative comedy about 4 African-American girlfriends; and Shining Vale a horror-comedy from award-winning writer and producer Sharon Horgan all reflect 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 a la carte subscribers with better unit economics. This year for the first time more than half of Starz revenue comes from a la carte customers as we continue to achieve success with our traditional MVPD partners and new digital distributors alike. 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 tenet of accelerating growth together. Rather than watching our traditional business ratchet down with each new unwinding of the television bundle we're embracing the realities of the evolving marketplace collaborating 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 at 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 PLAY is already live in nearly 50 countries and continues to scale its platform.

During the quarter we added distribution partnerships with Vodafone in India and 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 alike. Coming off our biggest growth quarter ever we remain on target for our fiscal '20 goal of 4 million international subscribers. Our speed to market great content and 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 STARZ PLAY app a critical and proven driver of domestic OTT growth is now live in 5 countries with more to follow in the coming weeks. This 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+ and ESPN+ on our Starz-owned platforms.

These are the kind of partnerships I referred to earlier that demonstrate how Starz is complementary 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 reenvisioned 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 2 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 boosted the value of the first 2 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. We add strain 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 kind 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 looked 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 the highly anticipated release of Rian Johnson's critically acclaimed whodunit Knives Out; and Jay Roach's 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 seen critical and commercial success for the biopic Judy with Rene Zellweger earning rave reviews for her riveting port trail of singer Judy Garland. As we look forward with 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 now showing reliable productivity and feeding our robust content pipeline as we build toward the steady-state. Today I want to announce that we are greenlighting The Valetto be produced by and starring Ohania Derbes a storyteller with a voice that reaches all audiences. Our fourth film with Ohania 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 strength 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 Feig 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 combined 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.

A high-concept drama Zoey's Extraordinary Playlist coming out of our partnership with Universal Music Group and one of the centerpieces of NBC's 2020 slate carries the somewhat high risk associated with the broadcast model but 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 2 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 for Mad Men winner of 16 Emmys and 5 Golden Globes during its eight year run later this month. And we're thrilled to be back in business with series starring 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 '21 with segment profit up over 50% on increasing margins. I talked about the strength of Starz' position 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 Derbez Family Vacation; and relationships with the leading creative voices in the Latinx community. Pantaya has already grown to 550000 paid subscribers with 700000 projected by fiscal year-end. 80% of these are direct consumers on our own app. Pantaya continues to efficiently mine the Lionsgate and Pantaleon libraries 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. Lionsgate has a massive portfolio of bold original premium content; an 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 disciplined growth with our focus on continued deleveraging of our balance sheet.

Now I'd like to turn things over to Jimmy.

James W. Barge -- Chief Financial Officer

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 400000 from the prior year quarter.

Now looking at sequential growth from the fiscal first quarter. Excluding STARZ PLAY International Starz domestic segment profit was up 35%. Global subscribers were up 500000 driven largely by OTT and the strong early results of our international rollout. Domestic subscribers were up 300000 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 a 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 '20 outlook. As you can see our core business continues to perform well. Recall we previously discussed our core business before STARZ PLAY international investment generating $650 million to $700 million of adjusted OIBDA in fiscal '20 and projected Starz international investment of $150 million. That guidance remains on track excluding the impact of an upcoming carriage renewal. As you can imagine we are 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 5.5x including STARZ PLAY international or 4.6x excluding STARZ PLAY international representing improvement over last quarter of 0.3x and 0.4x 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 Starz and to delever more quickly than we otherwise would organically.

Now I'd like to turn the call over to James for Q&A.

James Milton Marsh -- Lions Gate Entertainment Corp.

Great. Thanks Jimmy. Carl we can open it up for Q&A.

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from the line of Alexia Quadrani with JPMorgan.

Anna Jeanne Lizzul -- JP Morgan Chase & Co -- Analyst

Hi, this is Anna (ph) 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 fleet. And is it still a transition year or should we expect some continued momentum into the second half? Thanks.

Joseph Drake -- Chairman of Motion Picture Group

Yes. This is Joe. I do expect momentum into the second half of the year. We've -- 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. Midway this weekend to a very targeted audience. Knives Out is a movie that is I believe today 98 on rotten tomatoes and incredibly well received came on tracking today very strong. Bombshell's a movie that can compete. It's really found -- it looks like it's really found its intended audience as well as something that can compete in the award 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.

James W. Barge -- Chief Financial Officer

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 the second half relative to the first. And in particular I would just note given the cycle of the restates that there's more limited G&A spend which of course would put more profitability into 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.

Operator

Operator: And next we'll go to the line of Steven Cahall with Wells Fargo. Please go ahead. go ahead.

Steven Lee Cahall -- Wells Fargo Securities -- Analyst

Yeah. 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 in the conversion side? And again you 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?

James W. Barge -- Chief Financial Officer

Sure. Thanks Steven. Look let's just put the rest of the covenant discussion. The -- 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 OK? And in fact this year we expect to pay down debt this year regardless of the outcome of any carriage renewal or capital raise OK? We are exploring a number of initiatives to help it actually accelerate deleveraging including the capital raise working capital improvements and likewise a tight rein on all of our cost. Now with respect to your free cash flow question as you know we've always over-indexed relative to conversion of adjusted OIBDA to free cash flow. It was 42% in the quarter. You'll remember in '18 and '19 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.

Operator

Operator: And next we'll go to the line of Ben Swinburne with Morgan Stanley. Please go ahead.

Benjamin Daniel Swinburne -- Morgan Stanley -- Analyst

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 a marketing push? Any channels you'd want to highlight within OTT that worked particularly well? And maybe any color on churn or gross adds? 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 happening with AT&T and the overall ecosystem. I don't know what color you can share. Thanks

Jeffrey A. Hirsch -- Chief Executive Officer

Thanks Ben. Thanks for recognizing the quarter. We had our strongest -- one of our strongest piece of content on the air with Power premiere on 8.25 in the quarter, 11 million -- multi-platform households watch the service and it's a great driver of growth for us. I think over the last -- in 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 how it's 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 pre-trial to paid as well. And so we feel like not only that we have a great piece of content complemented 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. And we're excited to have as Jon said in his remarks, we've got the back 5 of Power coming back on January 5. We've got Outlander coming right behind that. We have a new show after that called High Town that Jon talked about that I think is 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 it's kind of what you've seen and what everybody's talking about. We can continue to see erosion in the traditional bundle and as more and more services are launched I think you'll see that kind of continue.

Benjamin Daniel Swinburne -- Morgan Stanley -- Analyst

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'm sure you don't 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?

James W. Barge -- Chief Financial Officer

Yes. We've seen about a 50% growth year-to-date. And we've said that we're 6 million by the end of fiscal. We think that number is conservative.

Benjamin Daniel Swinburne -- Morgan Stanley -- Analyst

Yes, OK. Thank you.

Operator

Operator: And next we'll go to the line of Alan Gould with Loop Capital. Please go ahead.

Alan Steven Gould -- Loop Capital -- Analyst

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?

James W. Barge -- Chief Financial Officer

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 is the international launch. It's -- Superna and our team have really done an amazing job. As we've mentioned we're almost 50 countries and honestly couldn't happen without the Lionsgate library without the fact that we are making available in the U.K. and in India the feature films in a pay-television window. That we work together original series from Lionsgate. 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 STARZ PLAY International. And there's just tremendous synergy that we're just starting to tap about 20 shows in development Lionsgate television for Starz. So I think it's a shame that it does look like that the -- from a valuation perspective it does look like 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 Jeff and his team have to all of the assets the marketing when we're marketing a Motion Picture when we're selling something at-home entertainment we just did something super interesting with Roku where we made 100 games available for a 1-week period of time. I think we've got 18000. We did a promotion against Starz. I think we've got 18000 free trials going. So the fact of the matter is that there's a tremendous synergy 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 our teams work together as closely as we do it at our company.

Alan Steven Gould -- Loop Capital -- Analyst

Can I just follow-up with 1 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 programmers and Comcast. Now I also have always thought that historically pay-TV services the traditional distributors we're making some good money on. So I'm just wondering what's changed? And why it's so difficult now?

James W. Barge -- Chief Financial Officer

Okay. As always we're not going to comment on our carriage renewals. And as Jon talked about in his prepared remarks and you allude to we have completed 2 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 mutually beneficial in growth and making money together. And we think that we'll continue to do that with all of our partners. Again our data suggests that the content that we have with Power and Outlander and the shows that are coming that are in the same demos as those 2 shows plus all of the 4000 titles movies we have are a great value to consumers. And we think both our consumers and our distributors will continue to see that value.

Alan Steven Gould -- Loop Capital -- Analyst

Thanks, Jeff.

Operator

Operator: And next we'll go to the line of David Joyce with Evercore ISI. Please go ahead.

David Carl Joyce -- Evercore ISI Institutional -- Analyst

Thank you. Thinking about the television production business historically you've been in the 10 or low double-digit kind of margin range. And you've -- with people are looking for greater margins you said you really don't want to see margins just 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 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?

James W. Barge -- Chief Financial Officer

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 it sort of 3 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 120% to 140% immediate profit or getting almost all of it 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 there is enough budget to do anything we want. As we said we have 80 projects in development right now a 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.

Operator

Operator: And next we'll go to the line of David Creutz with Cowen. Please go ahead. Excuse me, Doug Creutz, I apologize.

Douglas Lippl Creutz -- Cowen and Company -- Analyst

First of all just regarding Jimmy's verbiage around the guidance you said remains on track excluding the impact of upcoming carriage renewal. 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 are you guys preparing to put plans into place to try to protect as many potential sub loss as possible by getting them back to other distribution channels?

Jeffrey A. Hirsch -- Chief Executive Officer

Well the comments that I made with regards to guidance is it's excluding whatever the impact would be from renewals at this stage. As we've said it's just too early to be speaking to that or trying to frame it for you.

Jon Feltheimer -- Chief Executive Officer and Director

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 for our 2 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 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.

Douglas Lippl Creutz -- Cowen and Company -- Analyst

Okay. Thank you.

Operator

Operator: And next we'll go to the line of Todd Juenger with Sanford Bernstein.

Todd Michael Juenger -- Sanford C. Bernstein -- Analyst

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 a 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 leaving 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 leaves Starz from additional distributors is it usually because they cut the cord entirely and Starz was 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 can share it. And then if you don't mind one more then I'll shut up. For whoever wants it this is 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 that many 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.?

Jeffrey A. Hirsch -- Chief Executive Officer

Great question. It's Jeff. Let me try to unpack a little bit of that in the 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 at 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 cord 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 we're 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 product suite they have.

James W. Barge -- Chief Financial Officer

And Todd relative to your question of library. I mean absolutely there's significant revenue there $500 million plus on an annual run-rate and very good margins.

Operator

And next we'll go to the line of Rich Greenfield with LightShed. Please go ahead.

Richard Scott Greenfield -- BTIG LLC Research Division -- Analyst

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?

Jeffrey A. Hirsch -- Chief Executive Officer

Rich it's Jeff. Great question. I think first and foremost we think there's a lot of opportunity 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 renegotiating our pay one deals that 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 still grow there. But as you do mention there's a natural evolution of technology in the business. We've talked about this. A bunch of satellites came in and telcos came in. Now you have that digital distributors coming in. And for us as we continue to move to that and harness and capture that transition it is a more profitable sub for us.

James W. Barge -- Chief Financial Officer

Yes Rich. Interestingly if you look at 3 years 3 years ago we had 0 digital revenue. Right now we'll be ending the year over 30%. And 3 years ago about 40% of our revenue was a la carte and right now it's 60%. And obviously the over-the-top and a la carte area certainly a 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.

Operator

And gentlemen we have no lines in queue at this time. Please continue.

James Milton Marsh -- Lions Gate Entertainment Corp.

I have one closing statement here. This is James Marsh. Just please refer to our Press Releases and Events tab under our Investor Relations section of the company's website for a discussion of certain non-GAAP forward-looking measures discussed on this call. Thank you very much.

Jon Feltheimer -- Chief Executive Officer and Director

Thank you everybody.

Operator

And that does conclude our teleconference call for this evening. Again thank you very much for your participation and for using the AT&T teleconferencing service. You may now disconnect.

Duration: 44 minutes

Call participants:

James Milton Marsh -- Lions Gate Entertainment Corp.

Jon Feltheimer -- Chief Executive Officer and Director

James W. Barge -- Chief Financial Officer

Anna Jeanne Lizzul -- JP Morgan Chase & Co -- Analyst

Joseph Drake -- Chairman of Motion Picture Group

Steven Lee Cahall -- Wells Fargo Securities -- Analyst

Benjamin Daniel Swinburne -- Morgan Stanley -- Analyst

Jeffrey A. Hirsch -- Chief Executive Officer

Alan Steven Gould -- Loop Capital -- Analyst

David Carl Joyce -- Evercore ISI Institutional -- Analyst

Douglas Lippl Creutz -- Cowen and Company -- Analyst

Todd Michael Juenger -- Sanford C. Bernstein -- Analyst

Richard Scott Greenfield -- BTIG LLC Research Division -- Analyst

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