The Starz Buyout Is Paying Off for Lions Gate Entertainment Corp.

Video entertainment producer Lions Gate Entertainment (NYSE: LGF-A) (NYSE: LGF-B) reported earnings Thursday night, covering the second quarter of fiscal year 2018. The TV and cinema studio delivered positive GAAP earnings in a seasonally slow period, and the recently acquired Starz network earned its keep with solid operating profits.

Lions Gate's third-quarter results: The raw numbers

Adjusted OIBDA, or operating income before adjusted depreciation and amortization, is a non-GAAP metric that hews close to how Lions Gate's management operates and evaluates its segments. The figure backs out many line items related to acquisitions, restructuring, and share-based compensation.

What happened with Lions Gate this quarter?

Year-over-year comparisons are thrown off by the acquisition of premium cable broadcaster Starz, which closed in December 2016. Lions Gate also provides pro forma figures combining the year-ago results from Lionsgate and Starz into a single hypothetical business, as if the companies had merged earlier. On that basis, second-quarter sales fell 10% while adjusted OIBDA profits rose 66% year over year.

Media networks, a segment organized around the new Starz operations, delivered 7% year-over-year revenue growth and contributed 87% of Lions Gate's total segment profits. It was the only operating division to report higher pro forma sales, driven by strong licensing sales of crime drama Power and time-travel fantasy Outlander.

The motion picture division released fewer second-quarter titles this year, resulting in a 24% revenue drop.

TV production sales came in 5% lower, mostly due to Netflix taking delivery of the latest season of Orange Is the New Black in the first quarter this year. In 2016, that delivery fell in the second quarter.

What management had to say

"Starz continued to report strong overall subscriber gains, with its direct to consumer offering leading the way," said Lions Gate CEO Jon Feltheimer in a prepared statement. "Our ability to leverage our strengths, mitigate risk and focus on segments where we can continue to win puts us on a strong, profitable growth path."

Looking ahead

This fiscal year is rolling along largely as planned. The most important factoid of this second-quarter report was the fact that the Starz integration is proceeding rather smoothly, just like it was doing three months ago.

The Starz-branded premium cable segment is punching above its weight when it comes to generating profits, and the two halves of the new Lions Gate are cutting costs by combining their infrastructure platforms and partner relationships. Pro forma operating costs fell 10.4% year over year, slightly faster than the top-line revenue drops.

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Anders Bylund owns shares of Netflix. The Motley Fool owns shares of and recommends Lions Gate Entertainment (Class A and B), and Netflix. The Motley Fool has a disclosure policy.