10-Q: Starz Reports Q2 Loss Amid Revenue Decline, Subscriber Drop

Starz Entertainment Corp. reported a significant increase in net loss and a decrease in total revenue for the quarter ended September 30, 2025, following its separation from Lionsgate.

Summary

• Starz Entertainment Corp. completed its separation from Old Lionsgate on May 6, 2025, with Old Lionsgate renamed Starz Entertainment Corp. and holding the Starz Business, while Lionsgate Studios Holding Corp. (New Lionsgate) holds the LG Studios Business.
• The company's fiscal year end was changed from March 31 to December 31, effective May 8, 2025, with a transition report due for the nine-month period ending December 31, 2025.
• Total revenue for the three months ended September 30, 2025, decreased by $26.0 million (7.5%) to $320.9 million compared to $346.9 million in the prior year period.
• Net loss from continuing operations for the three months ended September 30, 2025, increased by $22.0 million (71.9%) to $52.6 million, up from $30.6 million in the same period last year.
• Adjusted OIBDA for the three months ended September 30, 2025, was $21.8 million, a decrease of $5.4 million from $27.2 million in the prior year period.
• Total Starz Networks subscribers decreased to 19.20 million as of September 30, 2025, from 20.15 million a year prior, driven by declines in linear services and Canadian OTT/Linear subscribers.
• US OTT subscribers increased to 12.29 million from 11.62 million, while US Linear subscribers decreased to 5.17 million from 6.21 million.
• The company incurred additional expenses related to becoming an independent public company, including directors and officers insurance, director fees, and increased accounting, legal, and administrative resources.
• A legal proceeding is pending regarding the 5.5% Senior Notes Exchange Transaction, with plaintiffs seeking to declare the transaction null and void, which could have a material adverse impact if successful.

Sentiment

Score: 3

Explanation: The sentiment is negative due to significant declines in revenue, operating income, and net income, coupled with an overall decrease in subscribers for Starz Networks. The ongoing legal challenge regarding the debt exchange adds substantial uncertainty and potential financial risk. While US OTT subscribers grew, this was offset by larger declines in linear and Canadian subscribers, and increased discounting impacted revenue. The increased costs associated with operating as a standalone public company also contribute to the negative financial performance.

Positives

• Cash and cash equivalents increased to $37.0 million as of September 30, 2025, from $17.8 million as of March 31, 2025.
• US OTT subscribers showed growth, increasing to 12.29 million from 11.62 million year-over-year.
• Programming amortization decreased by $25.3 million (13.9%) for the three months ended September 30, 2025, due to fewer original series premieres.
• The company was in compliance with all applicable covenants under its new Starz Credit Agreement as of September 30, 2025.

Negatives

• Total revenue decreased by $26.0 million (7.5%) for the three months ended September 30, 2025, primarily due to declines in linear services and increased discounting on OTT services.
• Net loss from continuing operations significantly widened to $52.6 million for the three months ended September 30, 2025, from $30.6 million in the prior year.
• Operating loss more than doubled to $34.8 million for the three months ended September 30, 2025, from $17.0 million in the prior year.
• Adjusted OIBDA decreased by $5.4 million to $21.8 million for the three months ended September 30, 2025.
• Total Starz Networks subscribers decreased to 19.20 million from 20.15 million year-over-year, reflecting declines in linear and Canadian subscriber bases.
• Interest expense increased by $3.5 million (28.5%) for the three months ended September 30, 2025, primarily due to an increase in programming related obligations.
• Restructuring and other expenses increased by $6.1 million, largely due to legal and other costs incurred for transaction-related expenses.

Risks

• The substantial investment of capital required to produce, market, and distribute programming.
• Budget overruns in content production.
• Limitations imposed by credit facilities and notes.
• Unpredictability of the commercial success of programming.
• Risks related to the acquisition and integration of future acquired businesses.
• The effects of dispositions of businesses or assets, including individual series or film libraries.
• The cost of defending intellectual property.
• Technological changes and other trends affecting the entertainment industry.
• Potential adverse reactions or changes to business or employee relationships.
• The impact of global pandemics on the business.
• Weakness in the global economy and financial markets, including recession and past/future bank failures.
• Wars, terrorism, and multiple international conflicts that could cause significant economic disruption and political and social instability.
• Labor disruptions and strikes.
• A pending legal proceeding regarding the 5.5% Senior Notes Exchange Transaction, where plaintiffs seek to declare the transaction null and void, potentially leading to accelerated debt payments and a material adverse impact on financial condition.
• Arbitration claims arising from alleged violation of the federal Video Privacy Protection Act (VPPA) and analogous state laws.

Future Outlook

Management continues to strategically review its content and performance as a new standalone company. The company believes that cash flow from operations, cash on hand, availability under its $150 million senior secured revolving credit facility (undrawn), monetization of trade accounts receivable, and available programming related obligations will be adequate to meet known operational cash and debt service requirements for the next twelve months and beyond. However, the company may incur additional content impairment charges in the future as it continues its strategic review. The company also notes that circumstances related to inflation and rising interest rates could make future financing more difficult and/or expensive.

Management Comments

• Management continues to strategically review its content and performance as a new standalone company.
• Management believes the assumptions underlying our financial statements, including the assumptions regarding the allocation of general and administrative expenses from Old Lionsgate, are reasonable.
• Management does not presently believe that the resolution of the Video Privacy Protection Act (VPPA) arbitration claims will have a material adverse effect on the Company's financial position, results of operations or cash flows.

Industry Context

The entertainment industry is undergoing significant technological changes, with a continued shift towards OTT streaming services. Starz's performance reflects this trend, with an increase in US OTT subscribers but a decline in traditional linear subscribers. The strategic content review and restructuring of international operations indicate a focus on optimizing content investment and streamlining the business in a competitive and evolving market. The company's increased expenses post-separation highlight the challenges of operating as an independent entity in a capital-intensive industry.

Corporate Governance

Legal Proceedings

• A complaint was filed on August 27, 2024, by purported holders of 5.5% Senior Notes (prior to the Separation) in New York State court, asserting claims for breach of contractual provisions and implied covenant of good faith and fair dealing in connection with the Exchange Transaction and Supplemental Indenture No. 10.
• Plaintiffs seek a declaration that Supplemental Indenture No. 10 and the associated exchange transaction are null and void.
• Another purported holder intervened as a plaintiff on October 11, 2024, asserting nearly identical claims and adding additional theories and parties.
• Starz filed motions to dismiss the original and amended complaints, with oral arguments held on September 22, 2025, and a ruling pending.
• If plaintiffs are successful, they may issue a notice of default to the trustee of the 5.5% Senior Notes and seek accelerated payments, which could have a material adverse impact on Starz's business, operations, and financial conditions.
• The Company is party to certain arbitration claims arising from alleged violation of the federal Video Privacy Protection Act (VPPA) and analogous state laws relating to the Company's alleged use of a third-party pixel on its subscription video service website. Management does not believe these will have a material adverse effect.

Related Party Transactions

• The Separation involved the distribution of New Lionsgate common shares and Starz Entertainment Corp. common shares to pre-transaction shareholders of Old Lionsgate.
• The Exchange Notes, initially issued by a Starz entity, became obligations solely of New Lionsgate upon completion of the Separation.
• Starz entered into a new credit agreement with Starz Capital Holdings LLC (a Starz entity) and JPMorgan Chase Bank, N.A., as administrative agent.
• The company continues to distribute New Lionsgate programming under original series programming license agreements, multiyear theatrical film output licensing agreements, and library programming agreements.
• Certain corporate general and administrative functions previously provided by Old Lionsgate are now provided by New Lionsgate under a Transition Services Agreement.
• The company transferred its operations in India and Southeast Asia to New Lionsgate effective April 1, 2025, with no gain or loss recorded due to common control.

Stakeholder Impact

• Shareholders: Experienced a significant net loss per common share and a decrease in total equity. The pending legal proceeding regarding the 5.5% Senior Notes Exchange Transaction introduces significant uncertainty and potential for accelerated debt payments, which could negatively impact shareholder value.
• Creditors: The company's debt structure changed significantly post-separation, with new Term Loan A and revolving credit facilities. The legal challenge to the 5.5% Senior Notes exchange could affect the terms and timing of debt repayments.
• Employees: The international restructuring involved shutting down LIONSGATE+ in several territories, potentially impacting employees in those regions. The company also incurred share-based compensation expenses and a cash payment in lieu of share issuance for restricted share units.
• Customers (Subscribers): Experienced a decline in total Starz Networks subscribers, particularly in linear services and Canada, suggesting potential dissatisfaction or competitive pressures. Increased discounting on OTT services might benefit some customers but impact revenue.
• Management: Faced with the challenges of operating as a standalone public company, including increased general and administrative expenses and the ongoing strategic review of content and performance.

Next Steps

• File a Transition Report on Form 10-K for the nine-month transition period from April 1, 2025, to December 31, 2025.
• Continue to strategically review content and performance as a standalone company, which may lead to additional content impairment charges.
• Monitor cash flow, liquidity, availability, capital base, content spending, capital expenditures, debt service, and leverage ratios with the long-term goal of maintaining creditworthiness.
• Potentially acquire businesses or assets complementary to the business, financed through cash flow, credit facilities, and/or equity or debt financing.
• Defend against the pending legal proceeding regarding the 5.5% Senior Notes Exchange Transaction, with a ruling pending from oral arguments held on September 22, 2025.
• Continue to evaluate the implications of the One Big Beautiful Bill Act (OBBBA) and other tax law changes on current and deferred tax positions.

Key Dates

Recommendation

The filing reveals a concerning trend of declining revenue, significantly widening net losses, and a shrinking overall subscriber base for Starz Networks. While US OTT subscribers showed some growth, this was insufficient to offset the substantial declines in linear services and international operations. The company is incurring increased costs as a standalone entity, and the pending legal challenge regarding the 5.5% Senior Notes Exchange Transaction introduces a material financial risk that could lead to accelerated debt payments. These factors collectively point to significant operational and financial headwinds, making the stock a 'sell' for a seasoned investor.

Keywords

Starz Entertainment, SEC 10-Q, Quarterly Report, Streaming Services, OTT, Linear TV, Subscription Video, Media Networks, Lionsgate Separation, Financial Results, Subscriber Growth, Debt, Content Strategy, Legal Proceedings