AMC Networks Inc.
Q2 2021 Earnings Call Transcript

Published: 6 Aug 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the AMC Networks' Second Quarter 2021 Earnings Conference Call. At this point, I would like now to hand the conference over to your speaker today, Mr. Nick Seibert. Please go ahead, sir.

[Nick Seibert:]

Thank you. Good morning, and welcome to the AMC Networks' Second Quarter 2021 Earnings Conference Call. Joining us this morning are Josh Sapan, President and Chief Executive Officer; Ed Carroll, Chief Operating Officer; and Chris Spade, Chief Financial Officer. Today, we will begin with prepared remarks, and then we will open the call for questions. If you do not have a copy of today's release, it is available on our website at amcnetworks.com. Before we begin, I would like to remind everyone that this call may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ. Please refer to AMC Networks' SEC filings for a discussion of risks and uncertainties. The company disclaims any obligation to update any forward-looking statements made on this call. On today's call, we will discuss certain non-GAAP financial measures. The required definitions and reconciliations can be found at the end of the earnings press release issued today. With that, I would like to turn the call over to Josh.

[Josh Sapan:]

Good morning, and thank you for joining us. On today's call, I'll discuss our continued business transformation and strong performance before I turn the call over to Ed and Chris, who will provide additional operational and financial details before we open the call to questions. We're pleased to report a second quarter with very strong financial results and continued streaming subscriber growth, supported by our popular and acclaimed content. We continue to maintain a strong financial profile with a healthy balance sheet and solid cash position. These results reflect the significant progress we are making against our 4 key financial and strategic priorities, which I will restate, if I may. They are

[Ed Carroll:]

Thanks, Josh. In the second quarter, we continued to see strong growth across our portfolio of targeted streaming services. We have an excellent lineup of content filling out the second half of the year with all 3 series in The Walking Dead Universe on the schedule. We also have an expanding slate of newly greenlit original series that will drive our business forward into 2022 and beyond. As Josh mentioned, our streaming strategy is built around a collection of targeted services that are designed to go deep and broad in specific content areas. This allows us to serve our viewers' interests and programming preferences in ways that larger mass market providers simply cannot. Any of our targeted services may be one of a handful of streaming subscriptions in the home, but we believe they also are very likely to be their favorite based on our ability to deliver a rich and curated experience. Just as an example, our Acorn TV service features about 3,000 hours of British drama and mysteries for people who love those shows, while a much larger service that is trying to offer something for everyone in a household may only have a few hundred hours in this category. Acorn TV was deliberately built and is being programmed, so if a subscriber likes one Acorn TV show, they will very likely enjoy many other shows on the service as well. And because we are focused on highly specific content areas, we are able to deliver that experience at a very reasonable and disciplined cost with higher margins than larger streaming services. In June, the top 5 titles across each of our 4 most established targeted streaming services, Acorn, Shudder, Sundance Now and ALLBLK, were all produced, coproduced or acquired at a cost in the 6 figures per episode. So out of the top 20 titles across that broad range of services, all 20 had a cost to us of less than $1 million per episode. That is a strong indication of our continuing ability to attract and retain subscribers without spending wildly on content. Moving to the individual series. Later this month on AMC+ and our AMC linear network is the premier of the 11th and final season of The Walking Dead with episodes available 1 week early on AMC+. Later this year, we will have the return of Fear the Walking Dead and The Walking Dead

[Chris Spade:]

Thank you, Ed and Josh, and good morning, everyone. Before I review and discuss our financial performance for Q2 2021, I would like to first summarize 2 nonrecurring items reflected in our quarterly results. First, we recently entered into a settlement agreement that resolved the New York litigation related to The Walking Dead, as disclosed in the Form 8-K, which we filed on July 16. The settlement agreement provides for a onetime cash payment of $200 million, which was paid in July. We recorded the unaccrued portion of the settlement payment in the amount of $143 million in our second quarter financial statements in impairment and other charges. Second, in the quarter, domestic operations' subscription revenues reflect the onetime beneficial impact of a distribution agreement renewal. Excluding this onetime benefit, year-over-year growth rates were as follows

[Operator:]

Our first question comes from Tim Nollen with Macquarie.

[Tim Nollen:]

I wonder if you could maybe hopefully, quantitatively, or at least, qualitatively, talk about the streaming subscriber additions you may have had in the quarter as compared with the linear sub declines that, I'm assuming, underlying are ongoing. And how much that may have been offset by these new bundles and apps that you're offering by various distributors?

[Josh Sapan:]

Tim, this is Josh. I'll give you a broad portrait of it, if I might. The linear side of our world in the United States in terms of subscribers is subject to macro impacts. So we're seeing some erosion. But with that said, we are very, very happy with our progress because our streaming subscribers are growing. And so taken together, those 2 things really, frankly, are excellent for our company, and put us on a good path when one looks at our entire footprint, and if you will, template of what we are up to with our streaming targeted services and our relationships with the MVPDs who are both the carriers of our linear channels, and now also, in addition to all the other digital distributors, the carriers of our streaming services. So we really like the harmony that we have, and we like the aggregate trajectory of what we're doing between linear and streaming.

[Tim Nollen:]

Great. Can I ask another question about advertising, please? I've been admiring the transitions you've been making both on the linear side in terms of doing more targeted addressable ads, and then, of course, on the streaming side. My question is about how much kind of control over pricing you're willing to give up to the machines, if you see what I mean, using real-time bidding in terms of programmatic placements versus how much do you want to maintain control over pricing in prenegotiated deals? Does that make sense?

[Ed Carroll:]

Okay. It does make perfect sense, Tim. This is Ed. And so your question goes to the key of it. It’s critical to us to manage the load and to manage the pricing. So we – even if we’re accepting advertising on a programmatic basis, we are putting out their minimums. And as you would imagine right now in a marketplace that has high demand and high pricing, that bar goes up and up. I think one of the things that we’ve done that perhaps sets us apart from other linear programmers is on our AVOD. We have maintained more control of programming with our FAST channels, more control of the selling process and more control of pricing. So I think all of that accrues to our benefit.

[Operator:]

Our next question comes from Michael Nathanson with Moffett.

[Michael Nathanson:]

Josh, I have a couple for you. Following on Tim's question, I'm interested in understanding maybe where the AMC+ subs are coming from, now that you're more broadly distributed on traditional platforms plus Apple, Amazon and Roku. Anything about kind of where they're coming from? Are they cord-cutters? Are they just super AMC fans? That's one. And then two, can you give us a sense of what percentage of your -- maybe your footprint is now covered by AMC+ agreements? And are you seeing now maybe a more accelerated pace of renewals because people are -- see the model and they want access to this new product?

[Josh Sapan:]

Sure. So I'd say on the second part of your question first, Michael, the coverage, if you want to call it, that is, of course, in the case of the United States, ubiquitous when it comes to those services of ours that are on -- apps on smart TVs, on Roku, wherever those accounts are -- on Apple and Amazon, wherever those accounts are. They're not geographically restricted by franchise areas. They're geographically defined, if you will, by where those points of access are for those digital distributors. So I'm sort of bifurcating my answer, I hope it's helpful. That's point one. Point two, we are seeing increasingly MVPDs distribute and deploy our streaming services, and they like our product. So they are electing and choosing, and actually, coming forward with a desire to carry that, which we're, of course, tremendously heartened by. And that's occurring really in a sequence that's not necessarily related to affiliation agreements. They want to carry our streaming services. And I think their business is changing, too. So our availability continues to increase and increase both in what I can call the digital distributors that are native, if you will, smart TVs and our incumbent MVPD partners. In terms of source of subs, what we're seeing, I'll just kind of give you a simple answer, is fans of our shows. And we're seeing probably the biggest -- I believe, this probably varies a bit by service, too. So for the Acorn, ALLBLK, Shudder, which Ed talked about for some length, those people are fans of the material, and frankly, less fans by degree of any one individual show. And so they like the depth of what they get on Shudder. They're Shudder fans. So while it's good, if we have Creepshow or if we have Joe Bob Briggs or we win a Peabody for La Llorona, et cetera, they are there for the depth of what's on Shudder. The same is true for ALLBLK. The same is particularly true for Acorn, where while we have good shows, and I can name them, and your eyes may blur if I say Line of Duty, Foyle's War, et cetera, et cetera, it is the depth of content. There's the biggest depth you can find of that type of material. And on AMC, AMC+, just to remember a couple of things, you get 2 services along with AMC+. So if you're a fan of the material on Sundance Now and our name shows at the risk of dizzying your mind, if you like the restaurant or you like the bureau, those 2 channels' services, if you will, Shudder and Sundance Now come along with AMC+. And then there's a sequence of shows that flow through AMC+, and they vary from Kend, which is an Irish -- wonderful Irish sort of mob drama to Gangs of New York, which broke out for us, to Kevin. So the sources are all those different sources. So I -- forgive me for not giving you a highly specific easy answer to your question, but all those sources contribute.

[Michael Nathanson:]

Okay. And Josh, can I just ask one follow-up. One of the questions we've been struggling with is just content discovery and -- do you have the ability and do you have the data to basically go back and retarget your subscription base and send them e-mails and content updates? Or does that exist at the distributor level and they control that -- the ability to kind of retarget and reupdate customers on what's coming?

[Josh Sapan:]

Yes. It’s a great question, Michael. It’s – the answer is that we do have the ability. The ability is more advanced when we have a subscriber who subscribes directly versus through a digital distributor or an MVPD distributor. So there’s sort of 2 flavors of the specificity of our data. And flavor 1 is it’s through a distributor. And flavor 2, where we have all the data, is that they subscribe directly. But in any case, yes, it’s part of our daily fabric of business.

[Operator:]

Our next question comes from Thomas Yeh with Morgan Stanley.

[Thomas Yeh:]

Josh, following up a bit on Michael's first question about sources of subscriber growth. I think you've spoken in the past about a smoother path on growth for the targeted OTT services given the nature of the product is less focused on new original launches. Is that still true? Or are you seeing incrementally the engagement or gross acquisition activity on the platform skew more towards the original releases than before? Any color on what you see driving the cadence of gross acquisition activity would be helpful. And for Ed or Chris, given the mix of different OTT services in your portfolio, can you help us think about the broader trend or outlook on streaming ARPU? Is that an area where we expect variability on a quarter-to-quarter basis? And how do you think about the impact from mix going forward?

[Josh Sapan:]

Sure. Thomas, I'm actually glad you asked this because it really is central to what makes us different. We don't have, as you know, news, sports, kids, reality. We do have on each of these services, essentially a definable editorial genre. And that is -- and we said what they were, so I won't bore you again with the recitation. But even AMC+, which one can think of a slightly more general interest, is really dramas, dramas, dramas. And therefore, the people who come to these services come to them for the nature of the material more than they do for any one show. With that said, it's undeniable that when a particularly appealing show drops or returns, it can elevate the bump, and it can elevate acquisitions because someone might be a particular fan of The Walking Dead, for instance, or when it comes later, of Better Call Saul or Killing Eve or other shows, or even, Kevin. People can have their favorites. But what is in our genetics and what is in what we've developed from the start and will continue is a depth of material around a genre that provides, I think it's fair to say, more than they can get anywhere else on the planet of that material. And therefore, our subscribers are more likely to be looking for the genre than the one show and to retire after the one show finishes.

[Ed Carroll:]

And Thomas, it's Ed. On the broader trend lines on our SVOD businesses, I would say we feel very good about the progress against our plan. The engagement levels are high -- at an all-time high when we look at total number of streams and completion rates. The targeted SVODs, we've mentioned this before, they are run rate profitable, and the model continues to grow more efficient as we scale. And the services are not only a destination, but they tend to form community around the content, which Josh was alluding to. And that's helpful because it keeps both our subscriber acquisition cost in a healthy range, and it helps us to manage churn. I want to point out something specific about AMC+ and its content model. We right now are feeling great about our development pipeline. But what is evolving a bit in the world, there are so many really skilled television writers that have worked in our writers' rooms or have worked in other writers' rooms coming to us with their story ideas. Some of them are now finding less opportunity on other platforms that are pursuing big movie stars, big movie directors and writers with an emphasis on limited series at a high cost per episode. That is not the AMC or AMC+ model. We are -- we think pretty adept at finding new talent and telling stories in different ways. So when Josh says, in his remarks, the word character-driven, we mean the arc of our kind of storytelling. One obvious example in Breaking Bad, Walter White starts out as one kind of a person, and he ends up a very different dude. But that's a common thread in the stories we tell, and we like to show character development over multiple seasons, and obviously, TV writers like that, too. And our audience research says that memorable characters are a hallmark of AMC storytelling. So there is an element to this that controls cost for us because if you find those stories and you tell them well rather than chase the star-studded shiny object, that's our model. It's also a reason we're enthusiastic about the pipeline, but we think that our subscribers understand that. They understand the way we tell a story. They understand the way we develop arcs of a multiple season, and that adds to the stickiness of our subscribers.

[Chris Spade:]

Thomas, this is Chris. Thanks for the question. Your question about the ARPU, I think, is an important one. I think when you look at our OTT services, we really like the economic model that our targeted mix of services brings – and all – it is very important to look at the ARPU, and we feel strongly that we’re in a good position. But we also focus very heavily on the lifetime value of the subscriber, and we also like our positioning for that.

[Operator:]

Our next question comes from Michael Morris with Guggenheim.

[Michael Morris:]

I have two. First, maybe for Josh or Ed. Can you share any more detail on the international growth road map for the streaming services? You started talking specifically about the opportunity in Canada, but indicated that there is more geographic market. So I know things become more complicated, whether it's with distribution partners, rights, language, translation, things like that. I'd just love to hear how you see that sort of playing out over the next year? And then second, maybe for Chris, the decision to not adjust guidance given first half ran well ahead of your full year guide. It sounds like business trends are very strong. So maybe could you share some more detail on the top line headwinds that you're sort of expecting in the second half that would get you down from mid- to high single-digit revenue to low single digit? And also the timing of the costs that will pressure AOI relative to the first half?

[Ed Carroll:]

Michael, it's Ed. On the International piece, you are correct. We are focusing on International, and that means we have been into it on rights, on expanding our basket of rights for quite some time, but also working with local distributors. We mentioned that we'll be launching Acorn in Spain, and we have local distributors there carrying the content. So we think those relationships will be an advantage to us internationally as they have been domestically. Acorn and Sundance Now have been available outside the U.S. for a little more than a year. Shudder a bit longer than that. That's been mainly in the U.K., Canada and Australia. It represents about 10% of their subscribers, and Acorn is now rolling out not only in Spain but parts of Latin America. So we will continue to emphasize that going forward, and we will continue to work closely with our local distributors around the world to do that.

[Chris Spade:]

Mike -- go ahead.

[Michael Morris:]

Sorry, I just -- if I could ask a quick follow-up on that, Ed? Is there a situation where a lot of this has been self-distribution, and these partnerships offer sort of like incremental opportunity as you push? Or are you -- is it sort of steady state that the opportunity for partnership with those local partners has already been out there, if that makes sense?

[Ed Carroll:]

I think we look at it not dissimilar to the U.S., where it will be a mix of our own D2C and working closely with partners, and they'll probably vary a bit territory to territory depending on the lay of the land.

[Chris Spade:]

Mike, it's Chris, also for your second question about our guidance positioning for this quarter. We like where we are. We like our financial results to date. We feel very confident in terms of where we are with reinforcing our guidance. As you know, with cash flow, we did adjust for The Walking Dead settlement. But we're at a place where we started our guidance in the beginning of the year, we felt we had visibility to it, and we still feel very confident about that today.

[Michael Morris:]

Is it -- if I look at the top line going from kind of 6% in the first half of the year to a low single in the back half, it sounds like streaming is strong. Can you share any more detail on whether it's sort of on the licensing side or the ad side or the core -- like the linear stream -- sorry, linear affiliate side that you think is going to be more pressured than any of the other revenue streams?

[Chris Spade:]

Yes. No, it’s a good question. I can’t really get into details about what we’re seeing individually. But relative to where we are, as we know on the expense side, we are heavily weighted on the expense side. Relative to the rest of the year, we haven’t really seen any experience with COVID, with the Delta variant. But relative to where things go from here, we don’t really know what that looks like. So from the standpoint of just being conservative, we’re considering everything. And I’ll leave it at that.

[Operator:]

Our next question comes from Steven Cahall with Wells Fargo.

[Steven Cahall:]

Maybe one kind of a housekeeping one and then a bigger picture question. Maybe first, Chris, you talked about the SAC expense running much heavier in the second half of the year. How do you all just think about sizing the SAC budget? How do you think about like the profitability of a future subscriber? You've talked a lot about content efficiency. So just wondering how you feel about sort of SAC efficiency as well? And how big that expense could be? And then a bigger picture question. You are cycling through the end of some pretty big series with The Walking Dead and Better Call Saul. So I think over the next 12 or 18 months, we'll start to see those sunset, which probably frees up a lot of programming budget, but it just kind of throws the whole economic model into a period of transition. So how do you think about reprogramming? How do you think about reengaging with advertisers? And also, what do you expect in terms of long-term licensing for those shows? Do you want to pull those back to AMC+ at one point?

[Ed Carroll:]

Steve, it's Ed. On the first question relating to SAC costs, I would say it's all about subscriber lifetime value. That's the key component when we look at the size and the timing of our marketing investments. It's worth -- I mean, again, I will say our model is different. It's just different -- our approach to the marketplace is different than the other folks. So we are targeting what I would call controlled growth from subscribers that stick. We're not spending wildly to cast too wide a net because we have a profile of the subscribers that we are trying to attract, those who, as Josh was talking about before, are inclined towards the content on Acorn, inclined with the content on ALLBLK on Shudder. That's important to us. So think of us more as a specialty realtor, if you will, than Walmart. And our cost structure reflects that when it comes to our content spend and our marketing spend. And we think the reward for that, and we're seeing it, is favorable churn rates on our targeted services.

[Josh Sapan:]

Yes. Steve, on the sort of bigger picture question, I hope these comments will be helpful. I'd first point out, if I might, that, that question, of course, applies to AMC. It doesn't apply to Shudder, ALLBLK or Acorn. And those things are not a substantial part of our growth trajectory. So I just wanted to just differentiate where the -- where what you've mentioned applies and doesn't apply. And the same is true, of course, for our linear channels. They apply essentially to basically one channel. Within that arena, a few things that might be helpful to note because, of course, as you might imagine, we think about this an awful lot. As Ed mentioned in his prepared remarks, at our hand, we are ending The Walking Dead flagship series. And we are continuing 3 other series in The Walking Dead Universe. That's not accidental, and it's not happening to us. We are doing it. And we're doing it for reasons of vitality, freshness, new ideas, longevity and cost. You'll note in TV, and forgive me, I don't mean to make this a lecture, that when someone has a franchise like Law & Order, they may retire the mothership, and as per you, may become ascendant. And that's about, I believe, vitality. It's about freshness. It's about intrigue. And it's also about there, I say, cost, cost. And so just take that into account. But The Walking Dead franchise is, this is going to sound silly, alive and well while it's dying. Meaning, the walkers are dying, but it's extremely alive and well. And we are making determinations about which shows will continue. And we're incredibly enthusiastic about World Beyond, about Fear and about Daryl and Carol, who are two -- this is inside baseball, two of the most cherished characters that people flip out for. So we feel like the best time is before us for The Walking Dead, not to mention movies that will be in our future. As it relates to other shows that we are choosing to end, Killing Eve, we have every opportunity should we choose it to determine that there's a future for it in franchise manner. And so we have creative discussions underway about whether the nasty agencies that are controlling assassins are good throughlines or the assassins themselves are good throughlines. But if -- in the world of franchises, we are in control of the franchise. And on Breaking Bad and Better Call Saul, we have a partner who have -- will have a studio, who will have a lot to say about that. I will just say that we have very, very strong relationships with Vince Gilligan, the writer and creator of the material and the key actors. That's a specific response to your question about shows that are on each of which have their performance trajectory. The new shows that Ed mentioned -- and you never know until it's there, but we have an interest in no fewer than 15 Anne Rice novels. And we have a writer's room open. First of those, they have huge constituencies. Apart from their popularity, we think it's a spectacular rich world, The Vampire Chronicles, which is why we went deep in it. So we are very enthusiastic about it. And as Ed mentioned, and then I'll stop the long speech, we really do think that AMC has a history of discovering new writing talent, of nurturing them and of bringing new stories to people that they love. And when we retired Mad Men, initially, and Breaking Bad, we had similar considerations. And I think we found ourselves then in a strong position, and I think we're in an extremely strong position now.

[Operator:]

I'm not showing any further questions at this time. I'd like to turn the call back over to our hosts for any closing remarks.

[Nick Seibert:]

Thank you. This concludes the call. Have a good day.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.