Starz Q3 2026 Earnings Call - VITRIA TECHNOLOGY INC

Explicit Guidance:

• Adjusted EBITDA Growth: Reaffirmed mid-single-digit growth for full-year 2026; full-year adjusted EBITDA guidance remains unchanged based on Q3 performance.
• Margins: Target of 20% adjusted EBITDA margin anticipated to be achieved during the back half of 2027.
• Free Cash Flow (FCF): 2026 unlevered free cash flow target reaffirmed at $100 million to $120 million; equity-free cash flow expected to materially increase in 2029 as universal termination payments cease in 2028.
• Cash Content Spend: Full-year 2026 cash content spend expected to remain below $600 million; convergence of cash content spend and programming amortization expected to improve within 2026.
• Leverage: Adjusted leverage expected to end 2026 at approximately 2.7 times; target of 2.5 times or lower to be achieved during the back half of 2027.

Business-Segment Outlook:

• OTT Revenue: Full-year 2026 revenue growth projected to be driven by OTT and distribution; pro forma OTT revenue growth for Q3 was 3.2% (adjusted for Canadian licensing change); long-tenured subscribers (1+ years) reached all-time highs in volume and share.
• Content Slate & Performance:
  • Q4 2026: P-Valley Season 3 debut (Dec 4) expected to drive subscriber acquisition and engagement; teaser performance is the strongest in over 2.5 years.
  • 2027 Slate: Debut of Power Origins (18-episode Power prequel) and Untitled Black Rodeo series; P-Valley air dates expected to extend into early 2027.
  • Library Growth: By 2027, STARS will own 50% of its slate; by 2028, ownership share to increase further.
• Revenue Mix: "Linear and Other" revenue expected to grow as ownership of original content (Fightland, Black Rodeo) increases, generating international distribution revenue (e.g., Sky co-commission); this line item is expected to become increasingly meaningful and consistent by 2028.
• Subscriber Economics: Shift in strategy to prioritize 24-month revenue growth and Lifetime Value (LTV) over quarterly subscriber counts; ARPU climbing, churn at historic lows.

Market and Competitive Outlook:

• Bundling & Distribution: Anticipated "new wave" of bundling and add-on partnerships continuing through 2027; bundles expected to be accretive to revenue and drive retention rates north of 20% compared to a la carte.
• Industry Trends: STARS positioned to benefit from industry consolidation and the return to "packaging" models (e.g., multi-service bundles like Amazon Prime Video Super Bundle); viewed as a natural fit for aggregated offerings due to platform-agnostic, complementary nature.
• Strategic Positioning: No intent to own the entire consumer ecosystem; growth driven by traditional distribution, strategic partnerships, and new bundles.

Macro / Industry Outlook:

• AI Adoption: AI tools expected to be utilized for network scheduling, content acquisition efficiency, and reducing production costs (e.g., post-production overhead); early focus on "fast follower" status in production AI and enhancing customer discovery on retail apps and partner platforms (Amazon, Roku).
• Consumer Behavior: Confidence that high-quality, consistent year-round programming mitigates risks from AI-driven subscription management tools ("Muse" and agentic AI).
• Fraud Management: Continued monitoring of bot activity (e.g., during February C-Dance panic sell-off); currently no observed material impact on churn.

Strategic Initiatives:

• Content Ownership: Accelerating shift toward owning original content to control costs and capture international economic value; Fightland and Black Rodeo cited as primary examples of this strategy.
• AVOD Expansion: Exploring opportunities to build an ad-supported video on demand (AVOD) business at scale to diversify revenue beyond SVOD; potential to launch in 2027–2028 subject to industrial logic and leverage constraints.
• Production Efficiency: Average cost per episode for owned content (Fightland) estimated at ~$3 million/hour lower than prior year under previous ownership structure.
• M&A/Capital Allocation: High bar for strategic transactions; must accelerate strategy and create more value than organic growth. No interest in assets solely replicating the existing SVOD model (e.g., AMC's "All Black" service); focus remains on revenue diversification.
• Financing: Refinanced $67 million of higher-cost programming notes into lower-cost term loan A debt in 2026, expected to improve annual free cash flow by ~$4 million via reduced interest expense.

Risks and Headwinds to Outlook:

• Distribution Volatility: International distribution revenue expected to be "lumpy" as owned content library matures and windows open.
• Market Shifts: Risk of AI-driven tools managing/disconnecting subscriptions; mitigated by strong content slate.
• Execution Risk: Future value realization (especially 2029 FCF step-up) contingent on maintaining core business performance without over-leveraging for new initiatives.
• Content Gaps: Historical churn issues previously linked to gaps in content scheduling; now mitigated by consistent slate, but execution risk remains if gaps recur.

Management Tone on the Future:

• Confidence Level: High confidence and "bullish" sentiment regarding the business trajectory; management states they are "ahead of where we expected to be" nine months into 2026.
• Strategic Pivot: Strong validation of the shift from a "legacy" content acquisition model to an "own-and-monetize" model; expressed as "just beginning to scratch the surface" of financial potential.
• Prior Guidance vs. Current: Reaffirming full-year 2026 guidance; previously raised adjusted EBITDA and FCF guidance in prior quarters, now stabilizing at the top end of expectations to support Q4 marketing spend for P-Valley.