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Why Is Lions Gate (LGF.A) Down 14.1% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Lions Gate Entertainment (LGF.A). Shares have lost about 14.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Lions Gate due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Lionsgate Q1 Earnings Miss Estimates, Revenues Up Y/Y

Lionsgate reported first-quarter fiscal 2020 adjusted loss of 2 cents per share while the Zacks Consensus Estimate was of earnings of a cent. The company had reported earnings of 18 cents in the year-ago quarter.

Revenues increased 3.3% year over year to $963.6 million and beat the consensus mark of $949 million.

Average Revenues per User (ARPU) improved sequentially in the reported quarter, driven by an increase in MVPD ARPU and over-the-top (OTT) subscriber mix.

Quarter Details

Motion Pictures (41.3% of revenues) revenues increased 8.9% year over year to $397.8 million. The growth was driven by robust box-office collections of John Wick: Chapter 3 – Parabellum.

However, the Motion Pictures segment logged profit of $7.6 million, down 85.3% from the year-ago quarter.

Notably, Lionsgate Entertainment World indoor theme park recently opened in China.

Television Production (29% of revenues) revenues were flat year over year at $279.8 million. Segment profits totaled $25 million, up 60.3% year over year.

The Television Production division is set to launch series on Apple, ABC, Starz, AT&T’s upcoming HBO Max, Turner, OWN, NBC, and Pop.

The Media Networks segment (38.6% of revenues), formed after the acquisition of Starz, reported revenues of $372.4 million, up 4.9% year over year, driven by OTT subscriber growth. However, segment profit declined 31.5% to $60.6 million due to the ongoing investments in STARZPLAY.

Starz Networks revenues increased 3.4% year over year to $362.9 million. STARZPLAY International revenues in the fiscal first quarter were $3.1 million compared with $0.1 million in the year-ago quarter. Streaming services revenues surged 73% year over year to $6.4 million.

At the end of the quarter, Starz had 26.5 million total global subscribers, up 2.6 million year over year.

Total domestic subscribers were 24.4 million, up 500K year over year but down 300K sequentially. Starz domestic OTT subscribers grew 400K sequentially to 4.4 million.

Management stated that 23% of Starz’s domestic revenues in the quarter came from OTT subscribers compared with 14% in the year-ago quarter.

International subscribers increased 6% sequentially. STARZPLAY International was launched in 26 additional countries during the quarter and is now live in 45 countries.

Adjusted OIBDA plunged 42.4% year over year to $67.3 million in the reported quarter.

Direct operating expenses, as a percentage of revenues, increased 210 basis points (bps) on a year-over-year basis to 58.9%. Moreover, distribution and marketing expenses, as a percentage of revenues, surged 420 bps on a year-over-year basis to 26%.

However, general & administrative expenses, as a percentage of revenues, declined 120 bps on a year-over-year basis to 10.6%.

Operating loss was $3.2 million in the reported quarter against the operating income of $38.2 million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Jun 30, 2019, cash and cash equivalents were $196 million compared with $184.3 million as of Mar 31, 2019. Moreover, as of Jun 30, 2019, total film obligations and production loans amounted to $614.9 million compared with $655.7 million as of Mar 31, 2019.

Net cash flow from operating activities was $37.3 million at the end of the reported quarter, much lower than $171.8 million in the year-ago quarter.  Adjusted free cash flow was $24 million compared with the free cash flow of $150.8 million in the previous quarter.

Guidance

For fiscal 2020, Lionsgate still expects adjusted OIBDA of $650-$700 million, prior to investments related to STARZPLAY International (approaching $150 million).

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted 96.3% due to these changes.

VGM Scores

Currently, Lions Gate has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Lions Gate has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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