Starz Earnings Boosted by Revolution Studios Sale, Subs Drop

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Premium TV company Starz on Thursday reported second-quarter earnings that exceeded Wall Street expectations and grew over the year-ago period thanks in part to a payment related to the sale of Revolution Studios. Total subscriber figures dropped amid a decline at Encore, but Starz subscription figures rose.

Analysts in first reactions lauded the fact that the earnings report provided some upside to their expectations. And management highlighted that the company's original programming push continues to gain traction.

The company, led by CEO Chris Albrecht, posted quarterly earnings of $69 million, compared with $66 million in the year-ago period.

The latest figure was boosted by a $10.7 million one-time payment reported under the section "other income or expense." "In June 2014, Starz received a distribution of $10.7 million from Revolution Studios Holding Company, an equity investee in which Starz holds a 15 percent ownership interest, related to the sale of all of its assets," the company explained. "Starz accounts for its investment in Revolution using the equity method and previously reduced its investment to zero in 2006. Accordingly, the $10.7 million was treated as other income during the three and six months ended June 30, 2014."

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Revolution founder Joe Roth in June agreed to sell the studio to New York investment firm Fortress Investment Group in a $230 million deal.

The one-time income brought Starz's overall "other income" for the second quarter to $11.0 million. In the year-ago period, the firm had posted an expense, or loss, of $500,000 in that part of its earnings report.

Wall Street had on average expected $57.2 million in second-quarter earnings for Starz. The firm's quarterly operating profit, which excludes the one-time gain, fell from $116.2 million to $104.8 million. Adjusted operating income before depreciation and amortization (OIBDA) fell from $129.6 million to $117.4 million. Revenue dropped from $517.5 million to $410.1 million.

At the end of the second quarter, the company had total subscriptions of 55.9 million, compared with 56.3 million as of the end of the first quarter and 56.9 million as of the end of the second quarter of 2013. "Subscriptions were negatively impacted at certain distributors by reduced promotional activity and/or programming package changes," Starz said.

The Starz-branded services ended June with 22.0 million subscribers, compared with 21.9 million at the end of the first quarter and 21.8 million at the end of the comparable year-ago quarter. Encore ended June with 33.9 million subs, compared with 34.4 million at the end of March and 35.1 million in the year-ago period.

"Our business performed well in the second quarter as we executed on our long-term strategy to build the Starz brand and create compelling original programming," said Albrecht. "We are pleased with the Starz original programming schedule, which is gaining meaningful traction with audiences and our distributors. Da Vinci's Demons, which concluded its second season, has been renewed for a third season. Power was also renewed and is performing well across all distribution platforms, with continued momentum and significant audience growth, while we are particularly excited about the eagerly-anticipated series premiere of Outlander on August 9."

At the company's Starz Networks unit, adjusted operating income before depreciation and amortization increased due to higher revenue and lower programming and advertising costs as a result of the company's premiering one original series compared to two during the year-ago period. 

At the Starz Distribution unit, adjusted OIBDA swung to a loss of $3.8 million "primarily as a result of fewer significant new release titles from The Weinstein Company," the company said. "Cash paid for investment in films and television programs increased $14.7 million to $40.9 million due to timing of payments for certain previously released Weinstein titles."

Sterne Agee analyst Vasily Karasyov in a first note on the earnings report said: "We expect the stock to react positively today to better-than-consensus operating income before depreciation and amortization and an increase in Starz subscribers." He also lauded better-than-expected Starz Networks profitability.

Summarized Karasyov: "Starz subscribers are slightly up year-over-year and quarter-over-quarter. Although we don't believe this to be the right metric to focus on, it seemed to spook the Street last quarter."

And Stifel Nicolaus analyst Benjamin Mogil said that Starz's results "were well ahead of our and consensus expectations."

Email: Georg.Szalai@THR.com
Twitter: @georgszalai

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