Lions Gate Entertainment (LGF) , which in June said it would acquire premium cable channel Starz (STRZA) for $4.4 billion, showed why it needs to diversify away from the risky movie business as it reported $1.3 million in net income for its first fiscal quarter, sharply lower than the $40.7 million profit it reported for the same period a year ago. Both its TV and film studio reported lower earnings.
But the $0.01 earnings per share handily beat the consensus estimate of a $0.16 per share loss. The independent film studio produced The Hunger Games hit film series.
Lions Gate's revenue easily beat Wall Street's $494.3 million consensus, registering $553.6 million, a 35% hike from the same quarter a year earlier.
The company's stock rose by 6% to $20.10 in after-hours trading. Its stock closed at $19.04 on Thursday, up by 0.7%.
Lions Gate expects to complete its stock and cash acquisition of Starz later this year. In a filing with the Securities & Exchange Commission, the studio said it outbid two other potential bidders for Starz, which generates revenue cable and satellite TV distributors for the 56 million subscribers to its channels.
"In addition to a very solid performance across all of our businesses, the most significant development in the quarter was our agreement to acquire Starz," Lions Gate chief executive Jon Feltheimer said in a statement. "Upon closing it will be the largest and most transformative in our history. The combination will acclerate the growth and diversification of both companies, deepening our portfolio of content, expanding our access to distribution, streamlining our pathways to the consumer and unlocking enormous opportunity for future growth.."
The studio's film unit reported $35.4 million operating earnings in the quarter, a decline from $61.3 million in the prior year's quarter.
The company blamed higher marketing and distribution expenses for theatrical distribution its decline in earnings. It spent heavily to promote the Mark Ruffalo, Woody Harrelson heist film Now you See Me 2, which has generated $302.8 million in worldwide ticket sales. It also released the Kevin Costner thriller Criminal, which registered $14.7million in worldwide ticket sales.
Lions Gate's most recent film release, the low-budget techno-thriller survival movie Nerve starring Emma Roberts and Dave Franco, opened to $15.5 million on its first weekend on July 27, beating industry forecasts.
The studio's TV unit, which produces the shows Orange is the New Black and Nashville, recorded $11 million in operating profits, a decline from the $18.8 million a year earlier.
The combination of the two companies would reduce Lions Gate's exposure to the risky film business from 64% of its operating income to 22% of the combined company, the company said in presentations to analysts n June. The company's more reliable subscription income would represent 60%, Lionsgate said.
"Despite its subscription model, we believe Starz increases risk to Lions Gate shareholders," Bernstein analyst Todd Juenger said in a note after the deal in which he downgraded Lions Gate to market perform. "Lions Gate's financial performance will now depend mostly on the success of one specific premium entertainment service (Starz)."
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.