Ash Vs Evil Dead Wide Strza

The stars of Ash vs. Evil Dead, which premiered on Halloween. Credit: Starz. 

Shares of Starz (NASDAQ:STRZA) are down just over 6% since last Thursday's third-quarter report, in which the upstart entertainment studio reported slowing growth in key areas. Here's a closer look at the company's Q3 performance:

MetricQ3 2015 ActualsQ3 2014 ActualsYOY Growth
Revenue  $404.1 million  $408.2 million   (1%)
Operating income  $101.8 million  $97.3 million  4.6%
Adjusted EPS  $0.56  $0.51  9.8%
Cash from operations (trailing 9 months)  $88.5 million  $107.2 million  (17.4%)

Sources: S&P Capital IQ and Starz press release. 

Commenting on the results, CEO Chris Albrecht said in a press release:

Starz' original programming is resonating with consumers, which is creating significant opportunities for us to further develop our brand with both traditional partners and new distribution platforms, ultimately creating value for shareholders. Power is our most-watched original series in the history of Starz with nearly 7 million viewers per episode. The growing audiences in the African-American community for this show and Survivor's Remorse further validate the success of our strategy in targeting underserved audiences. Outlander, Flesh and Bone, and next year's The Girlfriend Experience, are capturing the interest of more and more of the female demographic both in the United States and around the world. With the final season of Da Vinci's Demons and the worldwide premieres of Ash vs. Evil Dead and Flesh and Bone in the fourth quarter, we will wrap up our largest year of investment in Starz original series.

What went right: To hear Albrecht tell it, the story isn't what Starz earned in the third quarter, but that the studio is doing to develop a wide portfolio of original series on a budget while retaining global distribution rights for its funded programming. Ash vs. Evil Dead is a good example. The horror comedy premiered in seven international territories and the U.S. on Halloween. Operating income still improved 4.6% year over year despite the additional investment. Lower home video cost of sales (down 51.3%) and targeted cuts in selling, general, and administrative expenses (down 8.6%) helped push Starz into the black for the quarter.

What went wrong: Cash from operations declined sharply, but for all the right reasons. Programming rights payments inched up to $350.2 million from $348 million for the first nine months of 2014. Investment in film and TV programming jumped 6.6% over the same period. So long as Starz is keeping hold of rights to distribute its funded shows when and where it pleases, and on favorable terms -- which is happening -- profits and cash flow should follow.

What's next: Keep an eye on the cash flow statement and compare growth in "investments in films and television programs" to growth in revenue and operating income. When the latter begins to outpace the former, we'll know that Starz's strategy is working.

Tim Beyers still says Brice Campbell was at his best in Burn Notice. He's also a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission but didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool.

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