Starz Stock Drops on Mixed Q2: Updated

Starz shares fell more than 15% in early trading Wednesday after the premium channel reported a 2% rise in revenue, but a 10% decline in profits and weaker than expected subscriber additions in the second quarter.

Starz shares fell as much as 15% ($6.77 each) to $38 per share in early trading July 29. The stock started to gain back some of that ground in later trading, down 11.3% ($5.06 per share) to $39.71 each at 11:02 a..m. It ended the day at $40.40, down just under 10%.

For the period, Starz reported revenue of $417.7 million, a 2% increase, and adjusted operating income before depreciation and amortization (OIBDA) of $123.4 million, up 5%. But the premium channel, which has devoted an increasing amount of its resources to original programming, saw its net income dip about 10% to $63.4 million, or 59 cents per share, from $70.1 million or 62 cents per share in the prior year.

Starz ended the quarter with 23.5 million subscribers to its Starz service, down from 23.7 million in the first quarter but up about 1.5 million from the same period in 2014. Its Encore unit ended the second quarter with 33.3 million subscribers, down from 33.8 million in the first quarter and 600,000 less than the 33.9 million tallied in the second quarter of 2014.

In a statement, Starz CEO Chris Albrecht said the company was pleased with results, adding that it is on track to meet its original programming goals.

"In addition, we had a very successful quarter in terms of original programming and remain on track this year to achieve our goal of 75-80 episodes of new Starz Original series,” Albrecht said in a statement. “Both the second season of ‘Power' and the first season of ‘Outlander' delivered strong viewership, as well as industry and fan accolades. Looking ahead, the balance of the 2015 originals slate is strong with ‘Blunt Talk,' ‘Survivor's Remorse,' ‘Da Vinci's Demons,' ‘Ash vs. Evil Dead,' and ‘Flesh and Bone.' Our original programming pipeline was also fortified with a great, new addition thanks to our green light of Neil Gaiman's ‘American Gods.' We are confident that robust original programming in combination with our quality movie offerings will further strengthen our distribution and subscriber relationships."

In a note to clients, Morgan Stanley media analyst Ben Swinburne said that although the subscriber numbers were lighter than expected, the year-over-year growth at Starz was encouraging in what he called a difficult premium market. But he said Starz’ relative lack of scale helps fuel the argument for consolidation.

“… we continue to believe [year-over-year] sub growth provides evidence that Starz' original programming strategy has traction with consumers,” Swinburne wrote. “However, since affiliate fee / distribution negotiations are also driven by scale, Starz' small size likely limits the financial gains that it can extract from its original content. Ultimately this underscores how Starz could benefit from industry consolidation.”

Starz is scheduled to hold a conference call with analysts to discuss second quarter results at 1 p.m. today.