A month has gone by since the last earnings report for Lions Gate Entertainment (LGF.A - Free Report) . Shares have lost about 4.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Lions Gate due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Underperformance of Certain Titles Hurt Lionsgate Q3 Results
Lionsgate Entertainment reported third-quarter fiscal 2019 adjusted earnings of 35 cents per share that beat the Zacks Consensus Estimate by a penny but decreased 27.1% from the year-ago quarter. However, the figure increased 59.1% sequentially.
Revenues declined 18.3% year over year to $933.2 million and missed the Zacks Consensus Estimate of $1.01 billion. However, the figure increased 3.6% sequentially.
Motion Pictures (38.9% of revenues) revenues plunged 32.7% year over year to $362.6 million. The segment logged profit of $43.5 million, down 19.9% from the year-ago quarter due to underperformance of certain titles. In fact, the year-over-year comparison was unfavorable due to strong performance of Wonder in the year-ago quarter.
Television Production (23.2% of revenues) revenues were down 18.7% year over year to $216.5 million as the release of a few episodes were pushed beyond fiscal 2019. Segment profits were $21.2 million compared with $27.8 million in the prior-year quarter.
However, Lionsgate is ramping up its television content slate to become the primary content provider to streaming platforms. The company recently received a series order from Apple, which is expected to launch its own streaming service. Additionally, Comcast owned NBC Universal pilot ordered a musical dramedy, Zoey's Extraordinary Playlist, last month. Notably, Comcast announced that it will launch a streaming service in early 2020.
The Media Networks segment (39.3% of total revenues), formed after the acquisition of Starz, reported revenues of $366.8 million, up 3.8% year over year driven by strong over-the-top (OTT) subscriber growth. Moreover, segment profit was $134.1 million, up 9.6% due to strong OTT revenues and cost efficiencies.
Starz revenues (98.7% of media revenues) increased 2.9% year over year to $362.1 million.
Domestic subscribers grew 1.1 million year over year and remained flat sequentially, taking the total domestic subscriber count to 25.1 million at the end of the quarter. OTT subscribers grew both sequentially and year over year, following the launch of premium programming like Power.
Additionally, the company noted that its strong content slate is reducing churn, which was down 27% year over year. Lionsgate continues to bring premium programming to Starz. Notably, a few of the upcoming programming for Starz includes Now Apocalypse and The Rook.
This apart, to attract traditional MVPD (multichannel video programming distributor) subscribers, Lionsgate is providing flexible packaging options to its partners. The company is modifying its packaging options to support its partners like traditional cable and satellite operators who are witnessing rapid change in the way users consume content. Additionally, the company is increasing its premium programming to boost user engagement.
This march, Starz will be launched in Canada via Bell Media’s linear and OTT platforms. Notably, Bell Media is a subsidiary of BCE, Inc. Prior to this, Starz was successfully launched in UK via Liberty Global’s cable platform, Virgin Media and via Amazon Prime in UK and Germany.
Moreover, the company’s STARZPLAY Arabia venture currently has more than 1 million subscribers. Lionsgate is curating local film and TV content to boost its market position in the international footprint.
Streaming services (1.3%) surged 176.5% year over year to $4.7 million.
Adjusted OIBDA declined 3.5% from the year-ago quarter to $171.4 million. However, adjusted OIBDA margin expanded 280 basis points (bps) to 18.4%.
Operating income increased 8.2% from the year-ago quarter to $86.8 million. Operating margin expanded 230 bps on a year-over-year basis to 9.3%.
Balance Sheet & Cash Flow
As of Dec 31, cash and cash equivalents were $106.2 million compared with $372.3 million as of Sep 30. Total film obligations and production loans were $441.2 million compared with $468.3 million in the prior quarter.
Net cash used in operations was $14.2 million in the reported quarter. Net cash flow from operating activities in second-quarter fiscal 2019 was $156.5 million. The decline in the figure was due to amount paid to existing Starz Entertainment LLC shareholders per the Delaware statute and heavy investments in film and television content.
Free cash flow was $273.7 million compared with $99.5 million in the prior quarter due to improvements in working capital and receivables monetization.
Lionsgate’s Hellboy is expected to be released on Apr 12, while Long Shot is anticipated to be released in May. Additionally, John Wick: Chapter 3 – Parabellum is expected to be released in May and Midway is expected to come up in November. Moreover, Lionsgate announced that murder mystery Knives Out will be released on Nov 27, 2019.
Management expects three-year CAGR of “mid-to-high single digits” in adjusted OIBDA. This includes annual start-up losses of $30-40 million in three international territories including UK, Canada and Germany.
Prints and advertising (P&A) expense in fourth-quarter fiscal 2019 is anticipated to be high due to pre-spend expenditure related to the release of Hellboy, Long Shot and John Wick: Chapter 3 – Parabellum in first-quarter fiscal 2020.
Lionsgate will pay about $800 million instalment and more than $100 million in accrued interest to existing Starz Entertainment LLC shareholders per the Delaware statute. The company will also pay an additional $59 million to end the settlement.
Leverage will likely be in the range of 3.5X to 4X by the end of fiscal 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -45.83% due to these changes.
At this time, Lions Gate has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Lions Gate has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.