Starz Q3 2026 Earnings Call - VITRIA TECHNOLOGY INC

Financial Performance:

• Total revenue reached $322 million in Q3 2026, marking the company's strongest quarter of the year, driven by year-over-year growth in OTT and distribution segments.
• OTT revenue was $227 million, up 1.7% year-over-year and 2.4% sequentially; on a pro forma basis excluding the Canada licensing shift, growth would have been 3.2%.
• Adjusted OIBDA was $44 million, exceeding guidance and showing significant year-over-year improvement.
• Unlevered free cash flow was positive $19 million for the quarter and $85 million year-to-date, with full-year 2026 targets reaffirmed at $100–$120 million.
• Equity free cash flow was positive $13 million for the quarter and $48 million year-to-date.
• Net debt stood at $601 million with an adjusted OIBDA leverage ratio of 2.8 times; the company expects to reach 2.7 times by year-end and targets 2.5 times or lower in the back half of 2027.
• Cash content spend was $174 million for the quarter, with full-year expectations below $600 million; amortization is converging with cash spend.
• Linear and other revenue was $96 million, supported by international licensing deals like the Sky Commission on Fightland.

Guidance and Future Outlook:

• Full-year 2026 adjusted OIBDA growth guidance reaffirmed at mid-single digits.
• Long-term goals include achieving a 20% adjusted OIBDA margin and reducing leverage to 2.5x or lower by the back half of 2027.
• Future growth expected from increased content ownership, international licensing of owned IP, and industry consolidation/bundling.
• Anticipated significant acceleration in annual free cash flow in 2029 following the end of universal termination payments in 2028.
• 2027 slate expected to drive subscriber growth and engagement with major titles including P-Valley (returning Q4), Power Origins, and the Black Rodeo series.

Business Segments and Product Lines:

• P-Valley is returning in Q4 with the highest-performing teaser in over two and a half years, expected to boost acquisition and engagement.
• Power Origins, an 18-episode prequel, is scheduled to debut, expanding the Power Universe.
• Fightland (first-owned original) continues to build momentum, with Season 2 in development and successful international revenue generation via co-commissions.
• Blood of My Blood reinforced the Outlander universe's appeal; Michael (biopic) became the best-performing pay-one title in Starz history.
• Acquisitions like SWAT Exiles are adding proven franchise programming and attracting net new customer demographics.
• Content strategy has shifted toward a consistent, year-round slate to reduce churn and maximize long-term subscriber value.

Market and Competitive Landscape:

• The company is well-positioned for industry consolidation, viewing itself as a complementary, "platform-agnostic" service ideal for bundling.
• Successful bundling initiatives reported with Peacock, Crunchyroll, and Amazon Prime Video (Super Bundle), with retention improvements exceeding 20% for bundled users.
• Bundling is identified as revenue-accretive compared to standalone sales.
• Traditional linear distribution faces secular headwinds, partially offset by strategic pivots to owned content licensing.
• The market is trending toward aggregation, favoring Starz's focused programming and wholesale distribution model.

Risks and Challenges:

• Industry-wide consolidation and the potential for "bot" activity (MUSE/Agentic AI) impacting subscription management, though currently mitigated by strong content engagement.
• Continued secular pressure on traditional cable/linear households.
• The need to balance pricing increases with subscriber retention in a competitive streaming environment.
• Execution risks associated with the ramp-up of owned content production and international distribution logistics.
• Potential volatility in the market regarding AI adoption and its impact on consumer viewing habits.

Management Commentary and Tone:

• Management expressed high confidence, stating the business is "ahead of plan" and "ahead of where we expected to be" nine months into 2026.
• Tone is strategic and disciplined, emphasizing long-term revenue growth (24-month models) over short-term subscriber chase.
• CEO Jeffrey Hirsch highlighted the "portfolio approach" to content as key to retaining long-tenured subscribers, who are at all-time highs in both number and share.
• CFO Scott McDonald emphasized the "simple financial story" of growing OTT revenue, expanding margins, and reducing leverage.
• Management indicated they are "very bullish" on the economic benefits of owning content, citing improved cost control and international monetization.

Analyst Questions and Answers:

• Fightland Performance: Confirmed strong performance and long-term connectivity; ownership strategy validated by international revenue and cost efficiencies (approx. $3M/hour savings vs. prior parent).
• Bundling Strategy: Early results with Peacock and Crunchyroll are positive; Amazon Super Bundle showed strong retention and accretive revenue.
• P-Valley Outlook: Expected to drive strong Q4 and early 2027 acquisition; teaser was the best in years.
• Subscriber Metrics: Shift away from quarterly sub reporting to long-term revenue focus has resulted in historic lows in churn and rising ARPU.
• AI and Bots: Starz is insulated due to 70% wholesale distribution; no material churn impact from recent "bot" sell-offs; AI being utilized for scheduling, discovery, and production cost reduction.
• AVOD Strategy: Exploring building an AVOD business to diversify revenue beyond SVOD, contingent on industrial logic and avoiding over-leverage.
• Verizon Deal: Renewal secured with no material impact on 2026/2027 guidance; marks the end of legacy pricing structures.
• M&A/Consolidation: Open to acquisitions that diversify into AVOD or fit strategic growth, but highly selective; AMC's AllBlack was not pursued as it overlaps too closely with existing SVOD focus.

Other Key Points:

• Refinanced high-interest working capital facilities into a $100 million increase in lower-cost credit facilities, improving annual free cash flow by ~$4 million via lower interest.
• International licensing revenue is expected to grow "lumpily" but significantly as the owned content library expands in 2027–2028.
• The company is leveraging AI tools for content discovery and production efficiency (e.g., AI-generated overhead shots) to maintain cost competitiveness.
• Long-tenured subscribers (1+ years) are a critical metric, with retention and engagement at record levels.
• The upcoming Hunger Games movie is noted as a potential future hit for the pay-one strategy.