AMC Networks Inc.
Q1 2020 Earnings Call Transcript

Published: 5 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the AMC Networks First Quarter 2020 Earnings Call. I would now like to hand the conference over to your speaker, Mr. Seth Zaslow, Senior Vice President of Investor Relations. And your lines are now live.

[Seth Zaslow:]

Thank you. Good morning and welcome to the AMC Networks first quarter 2020 earnings conference call. Joining us this morning are members of our executive team

[Josh Sapan:]

Good morning, everyone, and thank you for joining us. We hope that you, your families and your colleagues are safe and healthy. I'll take a few minutes to give a brief overview of how we are managing our business operations during this challenging period and touch on key operational metrics before turning the call over to Sean Sullivan for more detail on our financial results. Certainly, the end of the first quarter brought unprecedented challenges to our business. In what has been a tough and unique operating environment, we have generated significant levels of free cash flow and we remain well capitalized with a strong balance sheet and strong liquidity. Our company's key areas of focus, which we've detailed on previous calls, remain

[Sean Sullivan:]

Thanks and good morning. I want to begin with a few comments on our financial profile and the steps we've been taking to ensure that we weather the impact of COVID-19 in the near to mid-term. Then I'll review the results for the first quarter and conclude with some comments on the impact of the pandemic on our businesses on a prospective basis. Let me start with our liquidity profile. Our strong balance sheet and financial flexibility position us well to withstand the current environment. As of the end of the quarter, we had access to over $1.2 billion in cash. We had $700 million of cash in our balance sheet, and a $500 million undrawn revolving credit facility. In addition we don't have any significant debt maturities in either 2020 or 2021. We have very manageable payments on our term loan of $56 million and $75 million in 2020 and 2021 respectively. We also continue to generate very healthy and consistent levels of free cash flow.

[Seth Zaslow:]

Operator, at this point, I think we're ready to open the line for questions.

[Operator:]

Your first question is from the line of Ben Swinburne with Morgan Stanley.

[Ben Swinburne:]

Good morning. Josh, could you talk a little bit about what you're seeing on the SVOD side in terms of engagements? Obviously, there's a lot of additional streaming happening right now. But I'm just curious if you could give us some sense of magnitude? Also, a little bit more about maybe the ARPU trends in the business. And I think you mentioned leaning to maybe it was Sean. Can you help us dimensionalize that? Are you ramping your investment in these businesses at this point? Or given the macro environment, are you being a little more careful? And then for anyone on the call, I just was curious on the subscription revenues down high-single-digits in the first quarter. Was that impacted either positively or negatively by lapping the contractual disputes you guys called out last year? Because we thought that would have created a more favorable or a favorable comparison maybe it did, but I just thought I'd ask if that impacted the year-over-year growth rate at all? Thanks.

[Josh Sapan:]

Hi, Ben, thanks for the question. Yeah, I'll start with the second one first if I may. The subscription revenues in the first quarter were substantially a result of macro factors. The -- as you're well aware, there have been subscriber declines, particularly in the satellite section of our business, that's not been bolstered by high-speed data where even in the first quarter the packaging of that proved to be attractive and with the pandemic impact even more impactful. So there are macro factors related to people connecting or disconnecting or in some cases taking different tiers. And then there are, of course, individual players in that arena both not only the MVPDs but virtual MVPDs. So, all that went into the impact on AMC Networks. We did -- we've had renewals that are pretty consistent across the board and we're pleased with the renewals. They've been largely as we've expected and they have maintained our distribution in good shape across the board. And we actually have expanded our relationships with our MVPDs in certain regards. I'll turn, if I may, to the first part of your question and answer it. I'll begin the answer and then turn it over to Ed, if I may, who make -- who can offer some greater detail. As we said in the prepared remarks, we met a milestone that we identified both for ourselves and I think shared with everyone on the call. We met it a couple of years early. That's nice news. Of course, because we've been pursuing the targeted subscription approach, which is quite different than going for big share and this is not meant to be disparaging and burning lots of cash. Along the way, we've been balancing investment with performance and subscribers and mindful of what we think total market opportunity is and pace of achieving that market opportunity. It has been pleasing to see us surpass what we thought was a milestone that had some ambition. And diagnosing whether that's early take up or whether that is a greater market opportunity than we might have anticipated is something that we'll have to wait at least some amount of time to see in the rearview mirror, but the trajectory is very good. You asked about engagement. And I'll top line it and then ask Ed to comment, which is we - and it's a critical thing you ask because people aren't buying blindly or taking trials blindly. They're actually using the stuff and spending more time on it. So, if I may I'll ask Ed to comment on the engagement on our targeted SVOD services?

[Ed Carroll:]

Sure, Josh. Yes, look we're encouraged by the level of engagement that we see. As you know in the SVOD format, when people sign up, we're able to immediately discern what show or what series they go to first, what their completion rate is, how quickly they go on to the next episode, what their total minutes streamed is in an average week or month. So we're seeing all of those levels, all those engagement levels in a very high place. So that's extremely encouraging. When we pull back and look at the model, we certainly think we've pulled – we pulled forward some subs due to the isolation. But based on the engagement levels that we're tracking we anticipate that churn rate will not increase too much as the year goes on. And we think we have significantly left the model forward for all of our SVOD services or cumulative subs and revenue.

[Ben Swinburne:]

Thank you, guys. Appreciate it.

[Operator:]

Your next question is from the line of Bryan Goldberg with Bank of America.

[Bryan Goldberg:]

Thanks. I just had a couple. Maybe I could follow up on the SVOD traction you're getting. I'm curious, are there any changes in your outlook with respect to keeping streaming rights for exclusive use on your own platforms? And are there any changes in the profit profile of your SVOD services, given the pull forward or the acceleration of subs, sorry? And then on the advertising side, I was wondering if you've seen any kind of changes or stabilization on the demand side in the last week or two now that certain parts of the country are starting to reopen? And then I guess, Sean you mentioned, the outlook for advertising will be down 30% in the second quarter. I was wondering how much of this is driven by content timing versus your assumption on organic demand position? Thanks.

[Ed Carroll:]

Hey, Bryan, it's Ed. So let's see. On the SVOD, we – as I mentioned, we've accelerated our subscriber growth. We use content for Acorn for Shudder, much of it co-produced or originally produced or licensed for those services. Then we have content such as Nosferatu, where we're able to utilize on several of our platforms AMC and Shudder for example. And so we think that approach will continue. We think it's economically responsible and we're obviously seeing results in the market as a result of it. In terms of advertising, I would say it's a little too early. We're in conversations, obviously week-to-week and day-to-day. So I wouldn't yet draw any patterns other than to say we're working very closely with our partners. I think the network has been as flexible as it can be in terms of continuing to cultivate those good relationships. The reward for that has been much of the money that has moved away from second quarter, we've been able to keep on the networks in the second half of the year. So that's a good development. And we're now beginning to have even upfront conversations with some of the marketers. We look at this upfront. We think it will happen on a more staggered basis than the upfronts perhaps that we're used to. In individual conversations, I think there is optimism that when the economy reopens, marketers will want to spend and not lose market share. But I think it's just too early for us to make any more specific characterizations.

[Sean Sullivan:]

And then Bryan to your last question, as I highlighted the shift of The Walking Dead

[Bryan Goldberg:]

Okay. Thank you very much.

[Operator:]

Your next question is from the line of Michael Nathanson with MoffettNathanson.

[Michael Nathanson:]

Thanks. I have one for Josh, maybe one for Ed or Sean. So Josh, question I have for you is, how do you even think about starting production? I know you have operations in Georgia, which is becoming open. So what is your best guess? And how do you even begin thinking about starting production given how disjointed the states are in allowing different types of openings? So that's one for you. And the second one would be is, do you guys have any type of content obligations when it comes to distributors the number of live originals that maybe impact your affiliate fee payments? Or anything around obligations you have to distributors for original content? Thanks.

[Josh Sapan:]

Thanks, Michael. We do not have any content obligations. It's different than the sports arena, particularly I think of our business where professional events are so central to value. The businesses that we're in do not have any contractual obligations of any sort actually. People have known what we've done for a long time, and they I think has found us reliable in putting forward or exceeding what their expectations have been in terms of both form format and individual quality of shows. So I think that they have found not that there aren't always testing us around negotiations, but the AMC Networks has perhaps even over-delivered against affiliate expectations in the quality of our five channels, and what they put on across AMC BBC America, Sundrance, IFC and WE tv. So that has never been an issue – and is not in our contractual relationships. I'll turn the specific question, if you don't mind on timing, reopening, virtual writers room, safety precautions and the influence of states over to Ed if I may.

[Ed Carroll:]

Sure. Thanks, Josh. So as Josh alluded to earlier, we've made some adjustments already as a result of the impact of the virus. We moved the killing eve from your up a couple of weeks. That was perhaps opportunistic to – and the audience seemed to welcome it. You're probably aware we moved the Walking Dead World Beyond that's the third franchise back into fourth quarter. So we're finishing post on that. That will be set to go. We have a new show, which is quite a bit anticipated called Soulmates. It's an anthology series from some of the writers of Black Mirror. That will be airing in the second half of the year. And we anticipate having Fear some episodes of Fear Season 6 in the second half of the year as well for the Walking Dead. As far as the Walking Dead goes, you're correct it shoots in Georgia. As Josh mentioned, writers rooms are open and we will monitor week-to-week if not day-to-day, the production schedule. We just don't have any information that we can pass along at this time other than we're monitoring it very closely.

[Michael Nathanson:]

Thanks. Can I just ask one follow-up? In your answer to Bryan's question about the negative 30 you're implying that some money moved from the second quarter as originals move, right? So 30 – down 30 may not be the organic number? It seemed like there's some shifts of money out to quality. Is that a correct interpretation of what you said to Bryan?

[Ed Carroll:]

Yeah. I mean I think we've said a few things. We had some timing shifts in our programming. That's certainly a factor. And as well, there was a demand issue with certain categories wanting to pullback or move their money to later in the year.

[Michael Nathanson:]

Okay. And that's with upfront guarantees they moved it back. Okay. Thank you.

[Operator:]

Next question is from the line of John Janedis with Wolfe Research.

[John Janedis:]

Hi. Good morning, guys. Thank you. Two questions for me. One is how are you thinking about your business longer-term post-COVID? Are there longer-term structural changes that you're thinking about either on the distribution programming geographic or expense front? And maybe a follow up on advertising, you talked about the online sales portal. With some of the delays around production and the upfront how are you thinking about your fourth quarter in terms of the programming and then selling against it?

[Josh Sapan:]

Sure. John this is Josh. Long term the trends that we have been seeing are either remaining in place or accelerating. And we have been preparing for them for years meaning that their pressure on United States and to some – in some places international pay-TV subscribers are not new. We -- and both pressures in terms of counts and also willingness to pay high wholesale rates. So in response to that, we have been careful about maintaining a portfolio of five channels of having them priced appropriately and of delivering high-value to a U.S. environment on a worldwide environment. That has certain pressures on the price side because that translates into retail and margin. And also the trend is -- has some pressures on growth or lack of growth. So that's number one. Number two, our content I'd like to say has been quite desirable to consumers. And so it has been our plan and activity to make it available in environments outside of the conventional pay-TV universes in the U.S. and outside of the country that take a couple of different forms and flavors. And it includes the sale of content which we continue to do to third-parties where there's a good deal. And as Ed pointed out in what is a somewhat nuanced answer to the earlier question we utilized some of the shows on linear and we utilize it on these targeted SVOD services. Those have grown as we mentioned above our expectations and that is a way to reach consumers and to realize additional revenues which we've now had in place for several years. And they've grown as I mentioned above our expectations. And we're reaching consumers directly and we're reaching consumers through retailers some of whom are our conventional MVPD partners who are moving into the business of selling their high-speed data customers packages of these commercial-free channels that bear our names and bear new names Shudder Sundrance Now Acorn. So that is a -- for us an excellent trend. In multiple ways, it makes our content receive yet another route of monetization that's in harmony with the relationship and not at friction with the distributors with whom we have long-standing relationships and frankly we're reliant on. So longer term, we intend to pursue exactly that, good content and multiple means of monetization. I will add that -- and Sean said in his prepared remarks that we are mindful of the reward from the existing pay-TV universe and we are going to be careful and surgical about our management of costs associated with that revenue opportunity because of its pressures. And we have organized and reorganized the company now 3 times over the past several years and we'll continue to alter the manner in which we are organized so that we can optimize those new distribution opportunities and optimize and be highly efficient in our advertising opportunities increasingly using data to guide us. So we're ever more specific and delivering more valuable to advertisers. And that material -- that data is now available and will manage costs with excruciating care so that they are in line with the rewards that are available and never ahead of it. I think you asked a question about online sales port. If you don't mind we have an online sales port where we think it's actually quite progressive. I'm going to ask Ed to comment on the specifics of it because it does represent a new way of doing business. It's rather encouraging for us.

[Ed Carroll:]

Right. I would say generally John, we go into this upfront. And as I've mentioned those conversations are happening. The factors that are very much in discussion, we have an ad tech technology that allows for unique targeting of the market segment for advertisers that continues to be something that's of high interest. We have increasing digital impressions and you may have noticed the launch of some of our content on Pluto the announcement against that this week. So we'll be selling impressions now not only on PVE and on VOD, but it will be part of our overall digital approach to the marketplace. And then we have the high-quality scripted series on basic cable which is the audience profile and the level of engagement is unique to basic cable. And so, all those things are factors as we enter these conversations.

[John Janedis:]

Yes. Thanks a lot guys.

[Operator:]

Your next question is from the line of Steven Cahall with Wells Fargo.

[Steven Cahall:]

Thanks. Maybe just a follow up first on the upfront question. Is it your expectation that you'll have less inventory committed this year and that a lot of your peers were as well, just as marketers sort of sit out and see what the fall looks like? And do you think that starts to transition the industry into something more like a calendar upfront, or just more of reliance on scatter going forward? Does it kind of change the industry because of COVID-19? And then, I've got a big picture follow-up.

[Ed Carroll:]

Hey, Steven, it's Ed. You know what, I think it's too early on the question. It's a thoughtful question. I think we have to look at what the third quarter looks like. We have to look at how the different categories of advertisers. How their appetite resumes in terms of their spending. And we have to get further into the conversations that we're now having on a sort of a marketer by marketer basis before, I think, we'd be comfortable commenting on if we think there'll be any lasting or global shifts.

[Steven Cahall:]

Okay. And then, just a big picture one for Josh and Sean. You've got access to about as much liquidity as your market cap and you generate a lot of free cash flow. And the shares are at an all-time low and while that might not be deserved, the Board has to be thinking about whether or not you're going to get fair market value in the public market. So, how do you just think about the opportunity of the company being private, especially, as you're making this big direct-to-consumer transition and just those different private versus public market valuations?

[Sean Sullivan:]

Yes, Steve, this is Sean. Again, it's a great question. We have obviously a lot of confidence in the balance sheet, a lot of confidence in the strategic plan and the free cash flow nature of the business. We're, obviously, a controlled company by the Dolan family. And obviously, Josh and I don't speak for them. So I think that that's a question that, obviously, we think there's a dislocation in terms of what we believe the enterprise value to be, versus what the market is valuing, given the nature of our content and given the five channels and some of the targeted SVODs and the real growth in the SVOD and the number of subscribers we have. So, as you saw at the beginning of the quarter, we bought $100 million of shares back as part of our capital allocation policy. That obviously shows confidence, not only in the management and in the controlling shareholder in the plan that we have and where we're going. So we expect, overtime, we'll be recognized and the value will be recognized for the investments we're making in the monetization and the key attributes of the business. But beyond that, obviously, really can't comment on the capital structure, public versus private, et cetera.

[Steven Cahall:]

Thank you.

[Seth Zaslow:]

Operator, why don't we take one question, please.

[Operator:]

Okay. Your last question is from the line of Michael Morris with Guggenheim.

[Michael Morris:]

Thank you. Good morning. I have a couple of digital-related questions, if I could. The first one has to do really with thinking about a DTC product for your core networks. And I know that you just addressed this in John's question a bit. But at this point, it seems like your distribution partners are raising their price to consumers at a faster rate, than they're raising their payments to you on a per subscriber basis. So I understand your interest in sort of protecting the ecosystem overall. But, given that dynamic, does that change your thought process going forward about making your highly demanded content available à la carte directly to consumers. So what do you think on that? And then my second question is around your advertising video-on-demand. When you make that content available like The Walking Dead on Pluto, how do you make sure that that doesn't dilute the value to your subscription distribution partners? And is that a revenue license fee? Or is it an ad share relationship? How does that work for you guys? Thanks.

[Josh Sapan:]

Sure, Mike, this is Josh. On the first question, we're very pleased with the harmony that we have with our distributors. We're pleased with the growth trajectory of our targeted SVOD services. We're pleased with the degree of content sharing. I think a few examples were identified by Ed that are really illustrative of how we've been able to be efficient and economical and potent by acquiring and/or producing material that finds its way on two multiple platforms. So, we think that the approach that we're taking now and the evidence of the growth in D2C subs, I won't mention as a trend because it's probably COVID-related, but we've seen an uptick in ratings during the last period of time. And a great regard for our channels by our MVPD partners in the United States. So we think that our general plan is sensible and balanced and careful and appropriate. And so, we are pursuing it for this period of time. And we like it. And we have renewed all of our MVPD agreements. And the terms we think have been reasonably good for them and for us, so we like our approach. I'm going to turn the AVOD question which is a good and interesting one over to Ed, who can share with you perhaps some detail on it. I certainly understand exactly why you asked it.

[Ed Carroll:]

Hi, Michael. So, the answer to your question really has to do with windowing and windowing specifically of our library content. So for example, you mentioned the Walking Dead. So the Walking Dead will be early seasons only. So, on the linear network on AMC we now would utilize early seasons of the Walking Dead only for stunting such as a weekend marathon. So arguably that content is underutilized. We also provided the Spanish language series of the Walking Dead for Pluto again not something that we’re going to air on AMC linear. So that’s one specific, but significant example. And then full series that have run their course on the network. So for example you’ll see Into the Badlands. That series will be available on AVOD or you might see a classic unscripted series such as Bridezillas from WE tv that would be available on AVOD. So, that's really our approach. What we're doing is, we are working with the platforms to create another window, an additional window to bring in incremental revenue off of our library content.

[Michael Morris:]

That's great. Is that a licensing relationship? Or is it an ad share relationship?

[Ed Carroll:]

It could be, but we probably won't go into the terms with any individual platform.

[Michael Morris:]

Okay. And just one last one if I could before I let you go. Can you share how many subscribers you had across your four targeted OTT services either currently or at the end of the quarter? Any updated number there?

[Ed Carroll:]

So, you're talking about our SVOD services? I think, as we've said, we believe we will end the year in the range of 3.5 million to four million, but we're not in the practice of giving quarterly updates. But we're comfortable with that projection and it represents a significant increase in projections that we've shared in the past.

[Michael Morris:]

Okay. Thank you, very much.

[Seth Zaslow:]

Okay. Well, at this point, I'd like to thank everyone for joining us on today's call and for your interest in AMC Networks. We hope you all stay safe and healthy and we look forward to speaking with you again next quarter. Operator, you can now conclude the call.

[Operator:]

This concludes today's conference call. Thank you for your participation. You may now disconnect.