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The Starz Merger Is Still Humming Along for Lionsgate Entertainment Corp.

By Anders Bylund - Feb 8, 2018 at 9:37PM

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The Starz-based media-networks division delivered strong operating profits in spite of lower top-line sales.

Movie and TV content producer Lionsgate Entertainment (LGF-A -2.51%) (LGF-B -2.54%) reported third-quarter results Thursday evening. The Starz merger continued to pay off in the form of rich cash flows, to the point where management felt comfortable restarting a paused dividend program after seven quarters on hold.

Lionsgate's fourth-quarter results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$1.14 billion

$752 million

52%

Net income

$191 million

($30.5 million)

N/A

GAAP earnings per share (diluted)

$0.87

($0.19)

N/A

Data source: Lionsgate.

Year-over-year comparisons are complicated by the closing of Lionsgate's merger with premium cable-TV giant Starz in December 2016. This report includes a full-quarter's worth of Starz contributions: The year-ago period's impact from Starz amounted to roughly 25% of a full quarter. Throw in aspects like seasonality and timing of contract payments, and it becomes very difficult to perform any meaningful analysis at all from the GAAP point of view.

Lionsgate expected this complication and also provided pro forma results as if the two companies had merged before the start of last year's third quarter. On that basis, revenues grew 8% year over year and adjusted operating income before depreciation and amortization (OIBDA) profits -- a non-GAAP measure -- held flat, at $177.6 million.

In the discussion below, any references to the third quarter of fiscal year 2017 will refer to these adjusted OIBDA figures.

What happened with Lionsgate this quarter?

  • The motion-pictures division saw sales rising 14%, to $539 million, boosted by Julia Roberts star vehicle Wonder and by solid international screenings of earlier titles like La La Land and American Assassin.
  • TV-production revenues declined 2%, to land at $227 million. An upswing in deliveries of television programs was overpowered by a slightly larger decrease in syndication sales of Lionsgate's catalog content.
  • Media-networks revenues, built around the Starz-branded premium-cable networks, increased its sales by 7%, to stop at $393 million. These gains were driven by high audience ratings of hit series Outlander and Power.
  • Adjusted segment profits increased by $35 million in the media-networks division, decreased by $4 million in the TV-production department, and swung from a $6 million loss to a $9 million profit in the motion-pictures segment.
  • Lionsgate also delivered $347 million of free cash flows in the third quarter, up from negative $14 million in the year-ago period. Of this cash haul, $332 million was used to lower Lionsgate's long-term debt balances, which now stand at $2.37 billion.
  • The company also restarted its quarterly dividend program, which was halted in the summer of 2016. The policy will continue at the same level as before -- $0.09 per share, per quarter. It will be payable on May 1 to shareholders of record as of March 31. That works out to an annual dividend yield of approximately 1.2% at Thursday's closing prices.
  • Dividend payments should add up to $20 million in the fourth quarter.
A smiling young couple snuggles up on the couch, TV remote in hand.

Image source: Getty Images.

What management had to say

In a prepared statement, Lionsgate CEO Jon Feltheimer held up the rebooted dividend as evidence that the newfound financial strength is here to stay. "Despite a disruptive operating environment, the quarter shows our success in creating premium content that cuts through the clutter of a crowded marketplace and our ability to supply it to a diverse array of media companies," Feltheimer added.

Looking ahead

The backlog of future revenues already under contract, but still waiting for that production clapper, stood at $1.2 billion at the end of 2017. That's down from $1.3 billion at the end of the second quarter and down from $1.4 billion a year ago.

Going forward, Lionsgate is looking to exploit some of its strongest content franchises across multiple media formats and platforms. These tentpoles include Keanu Reeves in the role of John Wick and the diverse set of the Step Up dance-movie series.

The company is also forming a closer partnership with comedian Kevin Hart, including a new stand-up station on Sirius XM satellite radio. Titles like The Kingkiller Chronicles, John Wick, and Power Rangers have been expanded into video games, as well. Lionsgate also is expanding the Starz network to international markets.

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