Starz Entertainment Corp.

Good day and thank you for standing by. Welcome to the STARS Q4 2025 earnings call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. I would now like to hand the conference over to your speaker today, Nealey from Investor Relations.

Good afternoon. Thank you for joining us for Stars Entertainment's fiscal 2025 fourth quarter 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 Stars Networks. After our opening remarks, we'll open the call for questions. The matters discussed on the 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 forward-looking statements as a result of various factors. This includes the risk factors set forth in our most recently filed 10-Q for STARS Entertainment Corp. STARS undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. The matters discussed today will also include non-GAAP measures. The reconciliation for these and additional required information is available in the eight-day we filed this afternoon, which is available on the STARS Investor Relations website at investors.stars.com. I'll now turn the call over to Jeff.

Thank you, Nealey, and thank you, everyone, for joining us today. It's only been nine months since our separation, and I'm pleased to report that STARS delivered another strong quarter, both financially and operationally. Before I get into the highlights of the quarter, I want to give everyone an update on how we are executing in our core operations and how we are positioned for 2026 and beyond. 2025 was a very successful year, one in which we exceeded all of our financial guidance. It's a feat we're especially proud of amidst the pressures you see happening across the industry. We ended the year at an all-time high of 12.7 million OTT subscribers, growing year-over-year by 7.6%. We grew OTT subscribers in three out of four quarters, including adding 370,000 in the fourth quarter alone. This resulted in 170,000 total subscriber growth in quarter four. We grew total revenue on a sequential basis in both quarter three and quarter four. We exceeded our 200 million outlook for 2025 by 2%, delivering 204 million and grew adjusted EBITDA year over year. And we exceeded our leverage target and in the year lower than anticipated at 2.9 times versus a 3.1 times guide. The successful 2025 was aided by an exceptionally strong December quarter. Our substantial subscriber growth in the quarter was fueled by the stellar reception to our programming slate. We premiered the highly anticipated Spartacus revival to critical acclaim, and PowerBook 4 Force Season 3 delivered impressive in-season viewership growth of 57%. The momentum from Quarter 4 has continued into 2026, resulting in a strong start to the year. The success of our originals prove that our bedrock strategy is working. We deliver edgy, premium content for women and underrepresented audiences that broad-based streamers don't address. Content remains core to everything we do, and as we look at the rest of 2026, it's clear we have one of our most compelling lineups of originals. The slate includes the highly anticipated conclusion of Outlander and Power Book 3 Raising Cannon, the premiere of S.T.A.R.' 's own Fightland, the return of Blood of My Blood, and the long-awaited return of one of our biggest hits, P-Valley, from Pulitzer Prize-winning showrunner Katori Hall. These 2026 originals, our pay-one movies from Lionsgate, including films like The Housemaid and The Michael Biopic, and our robust development pipeline make it clear that STARS has never been better positioned to keep our audience engaged, entertained, and growing. Before I get into our key financial targets for 2026, I want to recap our operational milestones in 2025. We restructured our Canadian business into a licensing revenue stream, prioritizing our focus on the U.S. market. We greenlit and completed production on our first wholly owned series, Fightland, advancing our strategy of rebuilding our content library through ownership. And this morning, we announced that Sky will come on board as our co-commission partner for Fightland, further improving the already superior unit economics we get from owning the series. We've also made significant strides in de-aging our content slate this year, while still expanding our network-defining franchises, Outlander and the Power Universe. More specifically, we successfully launched the Outlander prequel, Blood of My Blood, and have greenlit a new Power Universe series. Power Origins, which has a supersized 18-episode order, is currently in production and will give fans an action-packed origin story of fan-favorite characters Ghost and Tommy as ambitious young entrepreneurs. These shifts are critical in achieving our long-term targets of increasing margins to 20%, converting 70% of adjusted OEBDA to unlevered free cash flow, and delevering to 2.5 times as quickly as possible. The changes fortify our long-term path and set us up to continue the growth we delivered in 2025 through 2026. Our outlook for 2026 is strong. We expect OTT revenue to grow. We expect to deliver low single-digit percentage adjusted OEBDA growth versus 2025. We anticipate generating between $80 million to $120 million of positive unleveraged free cash flow, converting the business to positive equity free cash flow. And we expect to end the year at approximately 2.7 times leverage, an improvement from our current 2.9 times leverage and well on our way to reaching our stated goal of 2.5 times leverage. As we stated, we've spent several quarters unwinding some of the legacy constraints of operating within a studio. We believe this has set up the business to drive strong cash flow generation going forward, with 2026 functioning as an inflection point. With the long-term growth of the business as our North Star, we are de-emphasizing the need to manage the business around quarterly subscriber levels. As a result, we will not be disclosing subscribers starting with the March 2026 quarter. We remain laser-focused on OTT revenue growth, profitability, converting adjusted EBITDA to free cash flow, and delivery. We believe this decision is in the best interest of our shareholders as it puts us on a path to achieving the targets we outlined. Before I hand the call over to Scott, I want to reiterate that we continue to believe that there's an opportunity to scale our two core demos and grow our business as a result of the increased consolidation across the media landscape. Given our track record of profitably converting our business from linear to digital and our industry-leading tech stack, we believe we are uniquely positioned to capitalize on potential M&A opportunities. We are poised to increase our scale as assets that are strategically valuable to STARS become available. Now let me hand it over to Scott to take you through the financials.

Thank you, Jeff, and good afternoon, everyone. I'll briefly discuss the fourth quarter's financial results, provide an update on our balance sheet, and discuss our outlook for 2026. It was a strong fourth quarter and calendar year for STARS, as Jeff outlined. We were able to reach the key milestones we outlined on our previous calls for both the quarter and the year. and we positioned the post-separation business to drive a significant increase in pre-cash flow generation from 2025 to 2026, while further bringing down our leverage. Let me start the breakdown of the quarter with an update on our subscribers. Please note that our financials for the fourth quarter reflect the transition of our Canadian operations to a content licensing relationship, and hence, I will focus my discussion on subscriber trends on STARS' U.S. business. Starz added 370,000 domestic OTT subscribers in the quarter, reaching an all-time high of 12.7 million customers. Additionally, total U.S. subscribers grew 170,000 in the period to 17.6 million, as growth in OTT was partially offset by a decline in linear customers. The increase in subscribers in the seasonally strong fourth quarter was driven by demand for our scripted originals, including Force and Spartacus. Moving on to revenue, total revenue in the quarter was $323 million, up 60 basis points on a sequential basis. Sequential revenue growth was driven by an increase in distribution revenue, primarily from revenue recognized in the quarter related to the transition of our Canadian operations to a content licensing relationship, and is reflected in the linear and other revenue line item on our income statement. This growth in distribution revenue was partially offset by a decline in linear and OTT revenue, which stemmed from ongoing traditional linear declines and heavy holiday seasonal promotions, including lower churn multi-month plans. Adjusted OIBDA for the quarter was $56 million, up over 100% sequentially due to lower programming amortization, lower advertising marking, and higher revenue. We ended the calendar year with $204 million of Adjusted OIBDA, exceeding our $200 million outlook. Looking at the balance sheet, we ended the quarter with net debt of $589 million, roughly flat with Q3 levels. Total gross debt was flat at $625 million and includes $325 million of our 5.5% senior unsecured notes as well as $300 million of our term loan A. Cash was $36 million and our $150 million revolver remained undrawn at the end of the period. Leverage at the end of 2025 was 2.9 times better than our previous guidance of exiting the year at 3.1 times. Looking forward, as Jeff noted in his prepared remarks, 2026 is going to be a year with significant focus on driving increased free cash flow. More specifically, in 2026, we expect unlevered free cash flow to range between $80 million to $120 million, and we expect to generate positive equity free cash flow for the year. This represents approximately an $80 million to $120 million improvement year over year in both measures. The improvement in cash flow stems from lower cash content spend in 2026 versus 2025, which drives a closer alignment of cash content spend with the programming amortization expense reflected on our income statement. Finally, as we complete the transition in the first few months of 2026 from being part of a studio business and bringing our content payment timing in better alignment with industry norms, with improved free cash flow, and another year of at least $200 million of adjusted OIBDA, we expect our leverage to continue to decline year over year and exit the year at approximately 2.7 times. Now I'd like to turn the call back over to Neelay for Q&A.

Operator, could we open up the call for Q&A?

Yes, thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. One moment for questions. And our first question comes from Brent Penter with Raymond James and Associates. You may proceed.

Hey, good afternoon, everyone. Thanks for taking the questions. And first and foremost, appreciate the 50 cent hold music there. So good to see the $200 million target exceeded in 25 and then expected to grow in 26. Can you just walk us through some of the moving pieces? You talked about OTT revenue up. How should we think about total revenue? And then with that 20% margin target out there exiting 2028, what kind of progress In 26, does the guidance contemplate?

Hey, Brent, how are you? I look forward to seeing you on Monday. I'll take the second question in terms of the margin. So we're well on our way to executing against that 20% margin coming out of calendar 28. You'll see a slight improvement in 26, but the lion's share of the improvement really comes in 27 and 28 when you start to see the STARS originals really become a lion's share of our programming slate. And there's a lot of, you know, de-aging of the content there, ownership of the content. We announced offsetting some of the costs by bringing Sky in on Fightland as a co-commission partner. So when you take all of the de-aging of the content, Star Zone content, creating that incremental revenue stream by selling it internationally, you really start to see us move significantly toward that 20% margin in 27 and 28. Scott, do you want to take that?

I would just say on the OTG revenue, we feel really good about growth next year. When you look at our slate, it's probably one of the best we've ever had. It's very consistently placed throughout the year. So we feel really good about that as well as our focus on our pricing strategy.

Okay. Got it. And then thanks for the commentary on industry consolidation and Sounds like you all are ready to capitalize if there's an opportunity. So I guess what kind of assets would you be interested in? And then how should we think about the constraints in terms of your ability to buy something? Is there a leverage level you want to go above or an equity valuation that you would want to be at before doing any kind of deal? Or just can you help frame those constraints?

Yeah, great question. I'm not going to comment on our conversations to date, but what I will say, and we've said this repeatedly, we have two very valuable core demos that make us really complementary and important in the ecosystem. And there's a lot of, I would say, linear networks out there that have great brands that kind of complement our two core demos, but are really marooned on the linear side of the business without any kind of tech capability involved. or desire from their larger corporate parent to try to transition them and reconnect them with their consumers that have moved to the digital side. And so those are kind of the characteristics that we look at to make sure that we continue to lean into what we do on an SVOD side, much more on an ad-supported side. And again, we continue to drive leverage down. Scott and I continue to focus on getting leverage down to that two and a half times. And so That's where we would like to operate. So any kind of deal that we do, we'd have to stick within that kind of leverage constraint to keep it around. We don't really want to operate a business that's four or five, six or times levered. And so we'll be very cautious about what kind of deal we do when it comes to leverage.

Okay, got it. And then putting M&A aside, given that free cash flow is starting to inflect How do you rank order your other capital allocation priorities? Obviously, delevering has been the top goal so far, but as you start to get closer to that two-and-a-half goal, what are your other capital allocation goals, and at what point, given where the valuation is, do you start to consider shareholder returns?

I think, you know, we look at this as it's going to be a good problem to have as we move forward. You know, we, as I noted, you know, we expect free cash flow to improve. We're coming in the range 80, on lever basis, 80 to 120 million. That's a significant improvement over the year. You'll start to, you know, have cash that we'll start to build, which will give us an opportunity to lever, further invest in the business. And at that point, you know, we would be in a position to make the decision to start returning some of the of that cash to shareholders.

Okay, great.

Thanks, everyone.

Thank you.

Apri, could we get the next question, please?

Our next question comes from Thomas Yeh with Morgan Stanley. You may proceed.

Thanks. On the OTT subscriber momentum into this year, I think you mentioned 1Q is pacing pretty healthy. Can you just talk about the retention patterns that you're seeing for the subscribers that might have come in for Spartacus, or it came back for PowerBook 4, Season 3. Is the slate structured to run that retention through, or is there something more to do there still?

I think there's really two components to that. One is the slate's really set up to have a great connected year throughout the year. We have some of our biggest shows throughout the year, you know, Canaan, P-Valley, Fightland. That's a real long, good run across the year against one of our demos. We've got Outlander finale, Blood of My Blood coming in. We have a couple acquisitions to fill the gaps there. So we have a great complete slate, you know, again, surrounded by great movies from the Lionsgate pay one and the Universal pay two. That plus, you know, we really deployed what we've seen in our data. We really deployed longer-term offers, so annual offers, which we see really has, you know, when people, you know, roll from that 12-month offer to retail offer, The take rate up to retail is significantly higher, and so you see a lot more spike in ARPU at the end of those offers. And they're also great for, you know, long-term churn. And so the combination of a great slate and longer-term offers really lead us to push churn down over the next, you know, 12 to 18 months.

Okay, that's helpful. Anything on the distribution partnership side that is kicking in as well, or any update on progress there in terms of the bundled partnerships that you've taken on?

You know, Thomas, this is Allison. I would say, you know, we continue to be at the forefront of bundling. This is really a focus for us. We've set up the business to be a complementary or an add-on partner to a broad-based streamer, to targeted streamers, and so that's a real focus for us. I think that, you know, we're excited to expand our bundling relationships, and we're excited to see expansion in our distribution relationships, and we think that even with the disruption in the industry that those will come. And just to comment on, you know, particularly the bundling piece, you know, our data is showing that it is very good for business. The bundles that we have in place are expanding our TAM. They're driving net new additions to the business, the revenue accretive, and then, you know, also ultimately are driving better retention for the business. So bundling and distribution are a big focus for us, and we're excited about the year to come.

Okay, great. And then last one for me. You've talked about a timeline to get to 60% plus slate ownership. If we just think about the opportunities there, is it fair to assume that we should think about the international sales as concurrent with that ramp and then, you know, ancillaries maybe start to build thereafter?

I think that's spot on. I mean, we've got, you know, we've announced four originals that we have in some stage of production. All fours we've just brought in plan B. a production agency to help produce that show, and we're super excited about that. Kingmaker, Masquerade, their rooms have just finished, and we're just, you know, getting the materials into a place. We're out looking for production partners there as well to see, you know, where we're going to shoot those shows and at what cost. And, again, as you saw with the Sky announcement this morning, we have somewhat of a first-look deal with Sky where they continue to look at our slate and be excited about it, and I expect that partnership to build and grow. Also, Flightland was Lionsgate, who's our international sales partner today, took Fightland out to Content London last night to very, very great reviews. So outside of the sky markets, Lionsgate will sell that for us. So I expect that only the unit economics of Fightland to only continue to get better.

Okay, I appreciate it. Thank you.

Could we get the next question, please?

Thank you. Our next question goes from David Joyce with C4 Research Partners. You may proceed.

Thank you. A couple things. Last year you had a few volatile quarters of cash flows in and out and margins up and down tied to some of the final content arrangements of Lionsgate. How should we think about the cadence this year of both EBITDA and free cash flow? And on the free cash flow side, is it going to be moving around based on spending for originals? That's the first question. Thanks.

Okay. Thanks, David. That's a good question. When, you know, you think about our, you know, P&L, it has been very up and down. A lot of that was driven by the transition from, you know, being part of a bigger studio, same thing with the related cash. You know, we worked, you know, over the last few months to bring that into better alignment. You know, we worked with our teams as to better coordinate you know, sync up when we're spending the dollars on the production and getting that more in alignment when they are much more in line with industry standards. You know, when you're part of a bigger organization, the cash management is just totally different. You know, it's not necessarily based on just what STARS needs are. So we feel like we're getting that into a really good place now as we move into 26. There's a little bit of work to do here in the first part of the year, but we feel like we're on a really good glide path to improve our spend. And, you know, we see content spend coming in under about $650 million next year. From a P&L cadence, you'll see very consistent over the year, especially the first three quarters. The fourth quarter in 26 will be a more positive quarter, but the first three will be very consistent, won't be as choppy as you've seen in the past.

Okay, thanks. And on My other question, I see you've got $41 million in production loans now. How many projects is that for? Is that just Fightland or is that a couple others? And how many originals do you think will be in production by the time you're exiting 2026?

That is just for Fightland, that particular production loan. We look – it's very – Cost effective, cost of capital. So we like to use those. They help us line up our cash flows with those shows. You know, as we green light the new shows coming up here, we would expect to have production loans for those shows. It will take a time to, you know, as those will build up over time. But, you know, at some point, you know, the show will be completed and you'll repay the loan. So it should be in a fairly consistent balance after we get through the end of this year. Thank you.

David, operator, could we get the next question, please?

Thank you. Our next question comes from Vikram Tassavolta with Baird. You may proceed.

Yeah, hey, thanks for taking the questions. I wanted to follow up on the co-commission deal with Sky. Can you talk more about why they were the right partner? And from a higher level, you know, when you look at the content plate that you have planned, how would you characterize the demand environment for your programming internationally?

Hey, Jeff, thanks for the question. We think that we've seen in the past when we were in the international business before that the U.K. market is an incredible market for all of our shows. And over time, that has actually expanded into France as well. And so we think there's a real big appetite for our content in some of the biggest international markets. We've had a great relationship with Sky. We've licensed Amadeus from them. We've licensed Sweet Pea from them. And so we have an ongoing relationship with them. I think they're very interested. and what we have in production, and I think there's others that will be as well. And so I think the slate that we've designed, we've obviously designed it with international revenue in mind, and I expect that to continue to grow as we get more ownership back onto the network and on our own library.

Okay, that's helpful. And then you referenced the pricing strategy a few times in your previous answers. Can you just elaborate more on your plot to be there? Do you think there's one way for you to raise price on your subscriptions over time, and how do you plan to manage the cadence of that going forward?

Yeah, so as we've said and we'll continue to say, we're a complementary service. We've always wanted to be underpriced, way underpriced of the broad-based streamers out there, and so as they continue to raise rate, it gives us room to raise rate. you've seen the broad-based streamers raise anywhere from $1 to $3 over the last couple years. So it's created a lot of room for us to have some pricing power against the broad-based streamers, and we'll continue to look at that, you know, right time, right place, right slate, to determine whether that's right for our consumers. So we'll watch the industry, watch the broad-based streamers, and we'll make decisions based on where we think that's right to drop that in.

Okay, great. Thank you. Thanks, Vikram. Operator, could we get the next question, please?

Thank you. Our next question comes from David Karnofsky with J.P. Morgan. You may proceed.

Hi, Doug Wardlaw. I'm for David. I just wanted to get an idea of how you guys think about relying on spin-offs or reliable shows like Power and Outlander versus new originals. Obviously, each piece of content kind of plays a large part on what subgroup looks like in the quarter, so I guess long-term, How do you weigh starting a new show versus a spinoff of a short thing? Thanks.

Thanks for the question. I mean, franchising here at STARS is a real kind of power of ours. I think, you know, as you know, we've successfully franchised power into three successful spinoffs and one currently in production. And these are really reliable drivers of engagement, drivers of acquisition for the business. Same with Outlander. We're so proud that Outlander has been on the air since 2014 and still drives a huge engaged fan base, and we successfully launched Blood of My Blood last season. But what they also provide is a real platform or lead-in for new shows. And so what you'll see is you'll see us using these reliable franchises to launch new IP and establish new IPs with audiences so that we can bring thread audiences from one show to the next as we're marketing and expanding our CAM with new audiences. So I think it's a real – you know, thank you for the question. I think it's a real part of our programming strategy, and it's something that we think a lot about in terms of how we make investments and how we schedule.

Great. Thank you. Thanks, Doug. Alfred, could we get the next question, please?

Thank you. And the last question will come from Matthew Harrigan with Benchmark. You may proceed.

Thank you. I should probably apologize for belaboring you with this one, but what's your reaction to CDANs that cause a lot of volatility in the markets? Are there benefits? I guess speaking more broadly, do you see more benefits from you on the AI side as far as development? And I guess secondly, how's the development process differing from when you were under the Lionsgate's wing? I mean, what parameters are you emphasizing that are maybe a little bit different in terms of moving faster or adapting to your demographic even more precisely? Thanks.

Hey, Jeff. Thanks for the question. I think on the first one, you know, look, AI is going to be a very powerful tool. to enhance the business. I think there's three or four areas that we're using it today. Obviously, with content and reducing costs, we used it with Spartacus for some of the large scenes in Spartacus, I think, very successfully. On the boring side, I think you can do a lot of internal training with AI that you would have to do and waste hours of employees. Again, for us, with a large-scale D2C business that has over 10 years of acquisition data retention data, pricing data, that coupled with, you know, all of the content we have and how to schedule that content to best align around lifetime value and customer churn and marrying all those key KPIs together with, you know, hundreds of millions of data sets. I think the AI tools can really help us be efficient and continue to drive profitability for our business. I do believe it will be an additional tool for the industry. And I don't, you know, again, this is a This is a lot still more art than it is science, and I think the creative process will continue to be that way. And we're excited to use it as a tool, but, you know, I think the business has really grown on the success of the uniqueness of our originals, and I think that's hard to replicate. And so we're excited about that. From a second question, you know, look, Lionsgate is a tremendous producer of television. We've had a great nine-year run with Kevin and team. and I think that will continue based on the power universe that we're still locked on the hip on, and so I don't expect that relationship to change. I think as we go out and start to rebuild our own library again, and it gives us the ability to control front-end costs a little better with direct line to the producing partner that way, it also allows us to really get that incremental revenue stream from international that we weren't getting as part of being owned by a studio, and so Those are probably the two biggest components that we have, you know, a little more control with our team and a little more revenue on the other side. But, again, we're still pretty much locked at the hip with Lionsgate on a lot of our big shows. As I said, you know, they're our sales agent for internationally. They're over in London today, and I think, you know, Packer continues to do a great job maximizing revenue for us there. So I expect that relationship to continue for a long time, and, you know, we're excited about that.

Thanks, Jeff. It'll be interesting to see what your stock does now. Thanks.

Thank you. I would now like to turn the call back over to Neely for any closing remarks.

Thank you, Operator, and thank you, everyone. Please refer to the News and Events tab under the Investor Relations section of our website for discussion of certain non-GAF forward-looking measures discussed on this call. Thanks, everyone.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.