Starz Entertainment Corp. Common Shares 2026 Q2 Earnings Call

Please go ahead. Thank you for joining us for Starz Entertainment second quarter 2026 earnings call.

We'll begin with opening remarks from our President and CEO, Jeffrey Hirsch, followed by remarks from our CFO, Scott McDonald. Also joining us on the call today is Allison Hoffman, President of Starz Networks. After our opening remarks, we'll open the call for questions. The matters discussed on this call include forward-looking statements, including those regarding expected future performance. Such statements are subject to a number of risks and uncertainties. Actual results could differ materially and adversely from those described in the forward-looking statements as a result of various factors. This includes the risk factors set forth in our most recently filed 10-KT for Starz Entertainment Corp. Starz undertakes no obligation to update these forward-looking statements due to new information or any future events unless required by law.

The matters discussed today will also include non-GAAP financial measures and key performance indicators. These non-GAAP measures include Adjusted OIBDA, unlevered free cash flow, equity free cash flow, and net debt. The reconciliation for these to the most directly comparable U.S. GAAP measures and additional required information is available in the 8-K we filed this morning, which is available on the Starz Investor Relations website at investors.starz.com. This non-GAAP financial information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. I'll turn the call over to Jeff.

Thank you, Nilay, and thank you all for joining us this morning. We delivered another strong quarter and entered the back half of 2026 with significant momentum across the business. We just completed a strong weekend with the penultimate episode of "Raising Kanan" Season 5 and the premiere of our first-owned original, "Fightland." "Raising Kanan" delivered the strongest episode of the season. Most notably, Season 5 has grown its audience from the first season five years ago, a rare achievement in today's television landscape. I'm happy to report that "Fightland" premiered as Starz second-best-rated new IP launch of all time. Its opening weekend demonstrates significant audience overlap with the Power Universe, which will expand audience engagement and reduce subscriber churn. Now turning to the quarter.

Our excellent second quarter results were driven by the finale of "Outlander," the premiere of "Raising Kanan" Season 5, and "The Housemaid." The content portfolio in the quarter generated the second-highest audience engagement quarter of all time. This marks the fourth consecutive quarter of engagement growth since we separated. Consumer demand for our content, coupled with the results of our rate increase, delivered significant sequential OTT revenue growth. Perhaps more importantly, we returned to year-over-year OTT revenue growth in the quarter. Total revenue also increased sequentially in the quarter, despite a difficult comparison to the first quarter. We expect this revenue trend to continue, putting us on a solid path toward achieving our outlook of positive annual OTT revenue growth in 2026.

The strength of the quarter, our improved visibility into the second half of the year, and the early performance of "Fightland" increase our confidence that 2026 is shaping up to be a more significant inflection year for Starz than we initially anticipated. As a result, we are now raising our Adjusted OIBDA growth forecast and our unlevered free cash flow guidance, which Scott will get into in more detail. We also continue to see a clear and accelerating path toward our leverage target and our 20% margin target, supported by improved OTT economics, greater scale in owned content, and continued operating discipline. Looking ahead, our content slate supports the momentum we are seeing across the business and positions us well for our updated outlook.

We have the highly anticipated return of "P-Valley," the continued expansion of the "Outlander" universe through "Blood of My Blood" Season 2, and the upcoming Michael biopic following its impressive theatrical run. Further out, we continue to build our own content pipeline beyond "Fightland" with the Untitled Black Rodeo Drama starting production this month and several other Starz-owned projects in development. During the quarter, we also made significant strides in the distribution side of the business. We have secured a long-term renewal with one of our largest distribution partners while expanding our fully distributed portfolio with two new partners. First, we launched a new partnership with Peacock during the quarter, making Starz available as an add-on subscription to the platform for the first time. This partnership allows us to market Starz to an additional 48 million subscribers, creating a new opportunity for customer acquisition and revenue growth.

Second, we recently announced a new bundle with Crunchyroll on Prime Video, further demonstrating our ability to reach highly engaged audiences through targeted partnerships. Together, these relationships expand our distribution footprint, increase awareness of the Starz brand, and support our growth strategy while allowing us to reach large audiences without incremental platform investment. As our core business continues to strengthen and progress toward our goals of 20% Adjusted OIBDA margin, delevering, and increasing unlevered free cash flow conversion, we have the flexibility to be selective as we evaluate strategic initiatives. Our priority remains executing against our operating plan. We will only pursue M&A where it accelerates our strategy and creates value beyond what we could achieve organically. The progress we are reporting today is not being driven by a single title, a single partnership, or a single quarter.

It is the direct result of disciplined execution against the priorities we use to manage the business, growing OTT revenue, expanding profitability, improving free cash conversion, and reducing leverage. We have built a stronger business with a deeper and more balanced content slate, and we continue to create value through ownership, partnerships, and disciplined capital allocation. With that, I will turn it over to Scott to take you through the financial details and our updated outlook.

Thank you, Jeff. Good morning, everyone. I'm pleased to report that the second quarter was another strong quarter during which we delivered on or ahead of our expectations. Our financial story is simple, growing OTT revenue, expanding Adjusted OIBDA, generating meaningful free cash flow, and reducing leverage. Based on our second quarter performance, we are updating our full-year guidance across several of these metrics, which I will walk through during my remarks. Total revenue in the second quarter was $308 million. OTT revenue was $221 million, growing year-over-year for the first time since the fourth quarter of 2024, giving us strong momentum entering the back half of the year. On a comparative basis, the year-over-year growth in OTT revenue was negatively impacted by $3 million of OTT revenue related to our Canadian operations reflected in Q2 2025.

On a pro forma basis, excluding this $3 million, OTT revenue would have increased by 1.4% this quarter. As a reminder, we transitioned our Canadian operations from a distribution partnership with Bell to a content licensing model at the end of 2025. ARPU continued to improve in Q2 as the April price increase flowed through the base. We expect further ARPU expansion in the second half of 2026 as additional promotional cohorts convert to retail rates. Importantly, the revenue improvement we are seeing this quarter is coming through both better pricing and increased subscribers, not one at the expense of the other, which is exactly the balance we set out to strike. Linear and other revenue was $87 million, reflecting the continued secular pressure on traditional video households we've discussed on prior calls. Adjusted OIBDA was $60 million for the quarter, ahead of our expectations.

From a quarterly cadence perspective, we expect Q3 Adjusted OIBDA to be in the mid-30s. This will be our lowest quarter of the year due to higher programming amortization from the airing of "Raising Kanan," Season 5, "Fightland," Season 1, and "Blood of My Blood," Season 2, all during Q3. We expect Q4 to finish the year strongly in the mid-60s. Accordingly, we are raising our 2026 Adjusted OIBDA growth guidance from low single digits to mid-single digits, we remain confident in achieving our 20% Adjusted OIBDA margin target in the back half of 2027. Unlevered free cash flow was negative $15 million in the second quarter and positive $66 million year to date. Equity free cash flow was negative $33 million in the quarter and positive $35 million year to date.

As noted last quarter, we expected free cash flow to be negative in Q2 given the timing of content payments. While that timing dynamic did play out, our free cash flow still came in ahead of our expectations. The free cash flow inflection we've guided to all year is materializing, and we are raising our unlevered free cash flow outlook to the mid to upper end of our previously provided $80 million-$120 million range. Conversion of Adjusted OIBDA to unlevered free cash flow remains on track against our 70% target. Cash content spend was $182 million for the quarter. Now that we have exited the Universal Pay 2 agreement, we expect to report full-year cash content spend below $600 million on our cash flow statement and see continued improvement in the convergence of cash content spend and programming amortization this year.