Starz Entertainment Corp. Common Shares 2026 Q3 Earnings Call

Thank you for joining us for Starz Entertainment's third quarter 2026 earnings call. We will begin with opening remarks from our President and CEO, Jeffrey Hirsch, followed by remarks from our CFO, Scott MacDonald. Also joining us on the call today is Alison Hoffman, President of Starz Networks. After our opening remarks, we will 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 US GAAP measures and additional required information is available in the 8-K we filed this afternoon, 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 the US GAAP. I will now turn the call over to Jeff.

Thank you, Nilay, and thank you all for joining us today. I am pleased to report that Starz delivered another strong quarter. We are executing against our four key priorities of growing OTT revenue, adjusted OIBDA, and free cash flow while reducing leverage. The business is performing ahead of plan despite a tough operating environment for many in the industry. For the second consecutive quarter, OTT revenue grew year-over-year, and total revenue also returned to year-over-year growth, reflecting our improving financial performance. We generated meaningful free cash flow and accelerated our progress toward our leverage target. Over the last four months, we secured multiple new distribution agreements, including a new agreement with Verizon Fios, underscoring the value Starz provides to our distribution partners. Our content portfolio continues to drive strong performance.

Raising Kanan" concluded its final season at an all-time audience high, while our first owned original, "Fightland," continued to build on a successful premiere. "Blood of My Blood" reinforced the enduring appeal of the "Outlander" universe, while acquired series, "S.W.A.T. Exiles," added proven franchise programming to our lineup. Most notably, Lionsgate's "Michael" became the best-performing Pay-One title in Starz history. We programmed Starz deliberately, using our portfolio approach to sustain engagement year-round while maintaining disciplined investment. A consistent offering of compelling titles builds deeper engagement, which supports retention and a more durable revenue base. We saw that connection again in the third quarter as long-tenured subscribers on the app, those who have been with us for a year or more, reached all-time highs in both number and share. Turning to our outlook. Last quarter, we raised our adjusted OIBDA growth forecast and unlevered free cash flow guidance.

Based on our performance through the third quarter, we are reaffirming our full-year outlook for mid-single-digit adjusted OIBDA growth and our unlevered free cash flow guidance. Looking ahead, we remain confident in achieving a 20% adjusted OIBDA margin and leverage of 2.5 times or lower in the back half of 2027. Our upcoming slate reinforces that confidence. "P-Valley" returns in the fourth quarter, and its teaser was our best-performing teaser in more than 2.5 years, signaling strong audience interest ahead of the new season. We expect the series to drive both subscriber growth and engagement as we close out 2026 and enter 2027. Next year, we will debut several major titles, including the 18-episode first season of "Power: Origins," the fifth installment of the "Power" universe, and our second owned original, the untitled Black Rodeo series, now in production.

We are just beginning to unlock the financial potential of these owned titles. Owning more of our own content gives us greater control over costs and allows us to retain more of the long-term value of successful IP. We are already seeing the benefits. Our Bell Canada licensing agreement established a new international revenue stream, while the Sky co-commission on "Fightland" generated international revenue and improved the economics of the series. As our own library grows, we expect to capture more of the economic value created by our content. We also believe Starz is well-positioned to benefit as the industry moves toward greater consolidation and bundling. We anticipated this shift years ago and built Starz as a complementary platform-agnostic service with focused programming for a distinct audience.

That makes us a natural fit within aggregated offerings and allows us to complement larger entertainment services without competing for the same broad audiences. Starz does not need to own the entire consumer ecosystem to grow. Traditional distribution, add-on subscriptions, strategic partnerships, and new bundles give us multiple ways to reach our audiences wherever they choose to watch. Our priority remains driving the success of the core business. We have set a high bar for any strategic transaction. It must accelerate our strategy and create greater value than we believe Starz can create on its own. We are delivering against our plan, creating new revenue streams through ownership and positioning Starz to benefit from the industry's continued evolution. Overall, we remain focused on creating long-term shareholder value. We entered 2026 expecting an inflection in the business. Nine months in, we are ahead of where we expected to be.

With that, I will turn it over to Scott to take you through the financial results and our outlook.

Thank you, Jeff, and good afternoon, everyone. I am pleased to report that the third quarter was another strong quarter during which we delivered on or ahead of our expectations. Our financial story remains the same, growing OTT revenue, expanding adjusted OIBDA, generating meaningful free cash flow, and reducing leverage. Once again, based on our third quarter performance, the business remains on track to deliver on all of these key metrics in 2026. Total revenue for the third quarter was $322 million, our strongest quarter of 2026, driven by strong OTT and distribution revenue growth. OTT revenue was $227 million, up 1.7% year-over-year and up 2.4% sequentially. On a pro forma basis, adjusting for the strategic change in our Canadian operations to a content licensing arrangement in Q4 2025, OTT revenue growth for the quarter would have been 3.2%.

The strength in OTT revenue we are seeing is driven by annual subscribers renewing at higher promotional pricing, as well as the continued impact of the April 2026 price hike. Linear and other revenue was $96 million for the quarter, as continued secular pressure on traditional video households was partially offset by increased distribution revenue from the beginning of our strategy to own more of our own content, including "Fightland." Specifically, distribution revenue will continue to grow as we own more of our content in 2027 and beyond. Adjusted OIBDA was $44 million for the quarter, ahead of our expectations and up significantly year-over-year. Our Q3 performance exceeded our guidance from our last call, allowing us to shift a portion of our marketing investment into the fourth quarter to further support the return of "P-Valley," which we believe will enhance the show's subscriber acquisition and engagement.

Accordingly, we are reiterating our 2026 adjusted OIBDA growth to be in the mid-single digits range, and we remain confident in achieving our 20% adjusted OIBDA margin target during the back half of 2027. Unlevered free cash flow was positive $19 million in the third quarter and is positive $85 million year to date. Equity free cash flow was positive $13 million in the quarter and is positive $48 million year to date. We remain confident in achieving our 2026 unlevered free cash flow target of $100 million-$120 million. Cash content spend was $174 million for the quarter. We continue to expect full year 2026 cash content spend to be below $600 million and see continued improvement in the convergence of cash content spend and programming amortization this year.

Additionally, as we discussed last quarter, we continue to expect to materially increase annual free cash flow in 2029 as our Universal termination payments end in 2028. Net debt was $601 million as of September 30, 2026, and our adjusted OIBDA leverage ratio was 2.8 times. Our revolver remains undrawn, and we continue to maintain significant liquidity and financial flexibility. As discussed last quarter, we closed on a $100 million increase to our credit facilities, comprised of a $67 million increase to our Term Loan A and a $33 million increase to our revolver. We utilized the $67 million increase in the Term Loan A to fully repay the remaining balance of our programming notes, which were working capital facilities that carried significantly higher interest rates than our credit facilities.

As noted on our last call, by refinancing these obligations into lower cost corporate debt, we expect to improve annual free cash flow by approximately $4 million through lower cash interest expense while also simplifying our capital structure. Even after incorporating this additional $67 million of term debt, we achieved 2.8 times leverage at the end of the third quarter, and we still expect to end 2026 with leverage of approximately 2.7 times. Importantly, we expect to achieve our leverage target of 2.5 times or lower during the back half of 2027. Our financial story is simple: growing OTT revenue, expanding margins, growing free cash flow, and reducing leverage. We're confident in our trajectory, and we look forward to continuing to demonstrate our progress. Now I'll turn the call back over to Nilay for Q&A.