AMC Networks Inc.
Q2 2020 Earnings Call Transcript

Published: 4 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the AMC Networks Second Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. With that, I would now like to hand the conference over to your first speaker, Seth Zaslow. Thank you and please go ahead.

[Seth Zaslow:]

Thank you. Good morning and welcome to the AMC Networks second quarter 2020 earnings conference call. Joining us this morning are members of our executive team, Josh Sapan, President and Chief Executive Officer; Ed Carroll, Chief Operating Officer; and Sean Sullivan, Chief Financial Officer. Following a discussion of the company's second quarter 2020 results, we will open the call for questions. If you don't have a copy of today's earnings release it is available on our website at amcnetworks.com.

[Josh Sapan:]

Good morning, everyone, and thank you for joining us. This is obviously a time of great transition for our company, for our country as well as for our industry. I'll spend a few minutes talking about the industry landscape and how we are viewing our place in it and touch on several of our operational highlights before I turn the call over to our CFO, Sean Sullivan for detail on our financial results. Amidst a continuing challenge and uncertain environment, we delivered solid results in the second quarter exceeding our financial expectations for the quarter, as well as our expectations on several key metrics, which I'll expand on in a moment. We continue to maintain a strong financial profile, a solid balance sheet, and very good liquidity. We continue to generate healthy levels of free cash flow and to manage our costs carefully during this time. Overall we remain focused on our strategic priorities and are making progress on our major initiatives, which include making great content and monetizing that content across an expanding array of platforms. I'll talk about subscription video-on-demand for a moment first. These platforms include our targeted subscription video-on-demand services which are an increasing area of focus for our company. To rewind briefly, several years ago we saw that commercial free subscription video-on-demand services would be ascendant and while there would be several big players leading that charge, we believe that we could offer a premium targeted at so called niche services, that could be purchased alongside with these larger offerings. We launched several targeted SVOD services, focused on very specific genres, an approach consistent with our company's past and genetics and we probably do well which is creating highly immersive quality content more distinct audiences.

[Sean Sullivan:]

Thanks and good morning. For the second quarter total company revenue was $646 million and total company OI was $25 million. Both revenue and AOI were ahead of our expectations, primarily due to favorable domestic advertising performance and lower than expected expenses. With respect to the performance of our operating segments, at the National Networks revenue was $496 million, and AOI was $210 million. Advertising revenue in the quarter declined 15% to $187 million. Heading into the quarter we took a conservative view of demand given the uncertainty around the pandemic. Demand ended up stronger than we had anticipated, and therefore our results were meaningfully ahead of our initial expectations. On a year-over-year basis our advertising performance was impacted by the pandemic, as well as the timing of our originals , in particular the delay in the airing of the final episode of season 10 of The Walking Dead, and the premiere of World Beyond, the third series in The Walking Dead franchise. However, these factors were partially offset by improved ratings across our portfolio of networks, as well as effective inventory management. With respect to distribution, as anticipated distribution revenues decreased in the quarter. The main driver of the decline was the content licensing component of distribution revenues. This line item declined due mainly to the timing of licensing of our scripted original programs in various windows. Most notably, results in the prior year period reflect the SVOD availability of Preacher and the Terror, as well as the international distribution of Fear the Walking Dead and Lodge 49.

[Operator:]

Thank you. We have our first question come from the line of Steven Cahall from Wells Fargo. Your line is open. Please go ahead.

[Steven Cahall:]

Yes, thanks. So I think you said that Q2 demand for advertising was stronger than you thought. Does that imply was it a pretty strong scatter market, and as you're doing your upfront negotiations, I was wondering if you expect to have a lower percentage of inventory sold into the upfront that's going to hit the back half of the year. And so, should we expect that scatter pricing to be a much bigger component of ad sales as you enter the back half of the year?

[Ed Carroll:]

Hi Steven, it's Ed. So on your question on the second quarter, yes we did see the scatter market was relatively healthy in different categories, there were some categories that were on the sidelines as you would expect, but there were others that were quite aggressive in the marketplace. Generally we saw pricing hold up, it was healthy and we saw our ratings hold up and we think we did a good job of working with our advertisers to move sliding around where appropriate in partnership and to manage our inventory. So for the upfront, as Josh mentioned in his remarks, we're in conversations with all of the major agencies we're having productive conversations. It won't surprise you, Steven when I say this will be a different upfront than we experienced in the past. It's clearly slow developing. And I think the agencies are inclined, they're aware of tightening inventory concerns. They're inclined to put their money then on issue they have is not all of their clients have revealed what their budgets will be due to the uncertainty of the times. So I think that means for the upfront we're in good conversations. It will be a longer stretch. We just don't have tremendous visibility right now into what kind of volume we will close in it.

[Steven Cahall:]

Thanks Ed, and then maybe a quick follow up for Josh or for Sean. You know, if you look at the free cash flows you generated in the first half and if we think about what that implies, kind of fully realized to your yield, it makes you wonder, if you couldn't realize a lot more value as a private company. And I know I've asked this question before, but between the public filing costs and having to deal with folks like us, just I wonder how the Board is thinking about public versus private benefits at this point?

[Sean Sullivan:]

Hey Steve, it is Sean, I'll take that. So I'm not going to comment obviously on public versus private. Maybe, just to highlight some of the things you mentioned around free cash flow, obviously very strong first half. You know obviously as we look forward to the second half, Josh talked about the resumption of some of our main production. So I still think third quarter will be healthy, in terms of free cash flow. As I look at the fourth quarter, I think we'll be in, hopefully we'll be in full swing in light of the schedule that Josh said in terms of investment and programming et cetera. So I feel very good about where 2020 looks like and I think it sets us up well for 2021. So again, I think very attractive. As you know, we're in certain times, we're launching new products. I guess we're hopeful for normalized business conditions where at a time where I think the capital allocation hopefully will resume in a more normal cadence. But obviously, we're approaching this with an abundance of caution right now. So I'll leave it at that.

[Steven Cahall:]

Thanks a lot.

[Operator:]

We have our next question comes from the line of Michael Morris from Guggenheim. Your line is open. Please go ahead.

[Michael Morris:]

Thank you. Good morning. Two questions from me, please. The first is on the pace of subscription revenue at National Networks, that down double digits, low double digits that you experienced in the quarter. Can you talk about the pricing versus the subscriber dynamic there? It seems to be a pace that's actually a bit below what we're seeing more broadly in the number of pay-TV subscribers, even if we adjust for your virtual relationships. So my question is, how is - what's going on with pricing there? Are you seeing actual declines in the pricing in your relationships? Is it a mix of where the subscribers are coming from? And what gives you confidence that you'll be at that same level next quarter, given the pay-TV subscribers continue to decline? And then secondly, I'm curious if you can provide any more detail about AMC Plus. It seems like a compelling product in light of the fact that your distribution partners are very focused on their broadband product. How - are you indifferent whether you have a relationship with a customer through a traditional sort of distribution relationship or an AMC Plus relationship? Is it beneficial? And, is it better if they come in through AMC Plus and what can we expect in terms of you promoting that product and putting content on that product going forward?

[Josh Sapan:]

Sure Mike. So I think the - in terms of the first part of your question, the components of what we're seeing in subscription is the biggest variable is the subscriber trajectories. And as you're well aware, the biggest element there is the challenges that satellite companies have had with subscribers as they don't offer a hard line broadband connection at a time when not only streaming is occurring, but people are focused on all things that have to do with speed and internet capability and security. So that is the big factor. There has been some moderation in price, in our renewals. As you know, it's a chunky business that we had a sort of steady state of the rules that come up. Chunky meaning different sized companies and the contracts go generally anywhere from three to five years. There are some elements within contracts that can have an impact on price related to certain very specific elements positioning. So that's the portrayal of what's occurring in our world. What's interesting, if I may add, though, and segue Mike to your second question, which is, for us a very encouraging sign of the future of our business, is your question about AMC Plus. The two companies that have initiated the deployment of AMC Plus or Comcast to the Xfinity platform and DISH and that opens up our world to the broadband only world, which is many more subscribers. So it's attractive to us to now have multiple product relationships with these MVPDs. They are not just offering our linear channels, they are actually the premier distributors of AMC Plus. And they have lots of motivation to succeed with it. And we are similarly motivated, so it puts us in actually a wonderfully harmonious position with these MVPDs as we go forward, but truly the changing, they have a changing nature of their video business. The nature of it for satellite is arguably more urgent than it is for wireline, but we are in lockstep harmony and in fact, really it was Comcast, a compliment to them who, with the early days of AMC Premiere, which is in a certain is the predecessor product of AMC Plus, but only in a certain sense. It was with Comcast that it was hatched. So now we find ourselves I would say in, I'll be a little exuberant and say the wonderful position of having made a certain amount of headway with the targeted SVOD services that we mentioned in the prepared remarks, some of which are being packaged up with AMC content in AMC Plus. And now our lead distributors are the companies that are looking for a way to have a video product that's meaningful to the change world and I'd like to think that we're their first big allies and doing that. And so you asked the question about our preferences. I think implicit in the question was sort of an economic preference which of course, we count the money. There's also a relationship, sort of component to all this, because as we look at 21, 22, 23, 24 25 for AMC Networks, we can see a portrait in which the pressures on linear video are offset not in substantially by the deployment of AMC Plus and streaming services that we are operating in lockstep with those MVPDs. And that is a very, very attractive picture for our future.

[Michael Morris:]

Thank you, Josh.

[Operator:]

We have our next question comes from the line of Michael Nathanson from MN Research. Your line is open. Please go ahead.

[Michael Nathanson:]

Yes. Thanks. Hey, Josh, I have two. When answering Mike's question about the rate and subscriber volumes, you used a phrase called elements of positioning. Could you just help me understand what does that mean? That's a new phrase I certainly wrote down. And then on AVOD, there's been a slow , some of your competitors are buying AVOD platforms themselves. How are you thinking about going into that business? Do you need a larger platform? And how are you approaching the advertising and sales component of that? Are you holding on to your inventory? Are you letting on your other platforms sell the inventory for you at this point?

[Josh Sapan:]

Sure. So you can take the first one…

[Sean Sullivan:]

Maybe I'll answer the AVOD question and then turn it over to you got - on the distribution question if that's all right.

[Josh Sapan:]

Okay.

[Sean Sullivan:]

So on the AVOD, as you know, we're on we're on Pluto and we're on DISH and Sling. It is early days, but we are very much viewing that as an opportunity to monetize our rich library of content. So we have shows there ranging from scripted like Into the Badlands. We have the Walking Dead early seasons in English and Spanish language, and we have thousands of hours from our WeTV library of shows like Bridezillas. I won't go into the specifics of each of those deals, but I will say we feel very favorably about those deals in terms of control of the saleability of our inventory. So again, we have a rich library of content. This is a growing way for us to monetize it. And I don't think we feel like we have to own a platform. I think we have a strategic advantage to have our strong content on growing platforms throughout the industry, and we're in meaningful talks with everyone that you would anticipate towards that end.

[Michael Nathanson:]

And can I just followup though, are you seeing the benefits of those relationships hitting your P&L now, is that is that part of the strategy in advertising or a better growth advertising from AVOD coming through?

[Sean Sullivan:]

Well, we do see it rolling into our revenue now, but it is early days. We're building impressions. We will see it increasingly going forward.

[Michael Nathanson:]

Okay.

[Josh Sapan:]

Hey, Michael.

[Michael Nathanson:]

Yes, Josh.

[Josh Sapan:]

I made too much ado if you will out of something that's really very, very minor. Just to restate it, the most significant impact on distribution revenue or subscriber counts, and that's what you're seeing reflected in our reporting. The in passing comment I made had to do with, as you may be aware, some of our channels have historically been carried on tiers as opposed to on fully distributed basic cable. If that - if a channel like IFC that's not carried universally on basic cable but has secure distribution, if that tier saw a slight erosion in numbers, it could impact the overall tank in a particular period of time. It's pretty minor. But if you're looking at our – if you look at the sort of the math of it, which you'll be better at than me, a small minor tick in tier penetration could ultimately influence the numbers of it.

[Michael Nathanson:]

Okay, thanks Josh. That's what I needed, thank you.

[Operator:]

We have our next question come from the line of Kutgun Maral from RBC Capital Markets. Your line is open. Please go ahead.

[Kutgun Maral:]

Great, thanks for taking the questions. Two if I could. First, if you don't mind me trying to dig in a little bit more on subscription revenue, I appreciate that it might be two quarters too early to ask this. But when we think about 2021 given accelerating Pay TV subscriber declines and some moderation pricing that you said you're seeing, should we expect subscription revenue declines next year to accelerate or is there anything you could share with us in terms of the still renewal pipeline or nuanced expectations on pricing that could prove to be an offset? And then I have a follow up Thanks.

[Josh Sapan:]

Sure. It's - let me do my best to sort of give you a comprehensive answer. We've I think shared with you the renewals that we've done overtime. There is apparently - we're pretty careful about managing the timing of these renewals. Each one, in a certain sense is an event you read about them with us and distributors, you read about them with other distributors. And they tend to have generally not surprisingly, there is a bid and ask. And sometimes those bids and the asks hit the public arena, because with subscribers decelerating their sort of - there has been tension in the system now, not just this year, but for the past several years. So as we look forward, we will have a regular cadence of renewals. They're likely as they always are to have degrees of drama as they are through us and others associated with them. It's very hard for me to give you a clear answer about how they will roll out year after year after year. What I would say is that we have been pleased with all the deals we've done. We do have and I think almost inarguably the best value in terms of content placement on a basic cable dial against their wholesale price. That third party information is available. You can look it up and Kutgun and you can look up data reports on consumer perception of value. And what you will see pretty unequivocally is that our price is extraordinarily attractive and our content is not only highly viewed, that perhaps that's important, but it is equally important because it's highly valued, people hear about it a lot. They are not indifferent to whether the show comes and goes. So we've been of the view that this will be a sustaining and important element of our future for a long time. And I'll put aside conversations about retransmission consent and other issues and just say that we are money for the value, and value of the money forgive me. And that is widely acknowledged and recognized. And I think over time, it will be increasingly valued and recognized as some of the extraneous elements of the commercial relationships, frankly have less hold they did if they're not central to actual business performance. And then I would add to that, what I mentioned earlier, if I may, which is that as we in concert with these MVPDs are launching now SVOD products that I think I can say are distributors centric. We are a bit of friend of the farmer, because we are not at odds with them, rather we are operating in concert with them. And so I think that that will further strengthen our relationship with them. And they've said it as we identify multiple ways that they can benefit and profit from video.

[Kutgun Maral:]

That's very helpful. Thank you so much. And if I could just on SVOD, you're clearly seeing continued subscriber and momentum there. That said, there seems to be an under appreciation of the path to breakeven or profitability thereafter. And so, understanding that you may not want to provide a financial update every quarter, can you help frame how you're thinking about their economics over the next few years for your SVOD services? And if we could expect these services to be maybe profitable exiting this year or through the international rollouts pandemic and program acquisitions like Mad Men shift that timeframe a little bit? Thank you.

[Ed Carroll:]

Well, this is Ed. To reiterate, we said on the last call that we would end 2020, between 3.5 million and 4 million subscribers. We've said on this call that we're comfortable with that range and actually feel we will end the year at the higher end of it. So you are right in your assumption that we don't expect we would update the financials before year-end. I would guide you to in the past, we've said by year-end 2024 we anticipated 500 million run rate and 5 million to 7 million targeted SVOD subscribers. We think we're significantly ahead of that pace. So we feel good about the progress. We feel good about the economics. We continue to make content investments that we view as appropriate and strategic, and to share that content among our platforms, our SVOD networks and our linear networks. I just want to mention of note returning on our SVOD platforms anticipated next year will be A Discovery of Witches and Creepshow. So subscribers keep growing. Our churn rates are favorable and improving, and our economics will reflect that.

[Kutgun Maral:]

Thank you both.

[Operator:]

We have our next question come from the line of Brett Feldman from Goldman Sachs. Your line is open. Please go ahead.

[Brett Feldman:]

Thank you for taking the question. I'd like to stick with the conversation around SVOD. You've talked about this is a growing skill set for the company, it's repeatable, you can leverage some of the investments you've made. How are you thinking about broadening out the portfolio to include new targeted services and what are the key criteria you think through to determine when that makes sense? So, for example, do you see an opportunity to increasingly target your existing SVOD subscriber base with new SVOD services or are you thinking more about trying to reach consumers you haven't reached before? And is it increasingly important that you leverage either content or technology investment that you've already made because we've seen you do a version of that now with AMC Plus? Thanks.

[Josh Sapan:]

Yes. Thanks for your question. How about this? Yes, to everything you said. But really that's meant to be lighthearted. We set out and it was some number of years ago, and it was their premise was that there would be reasonably widespread adoption of subscription commercial free services. And so we launched our first one actually many years ago. And we were in the early days of streaming with something that was the predecessor of Sundance Now, it became Sundance Now, which is prospering today and then we added that the horror one, which is actually doing extraordinarily well now. In fact, it could be perhaps described as a super niche if you'll allow that terminology. And - but in principle, just to describe what we did is it really does begin with defining an audience appetite, the audience segment and serving it, because they're making independent decisions about whether they like it or not. What is uniquely attractive about targeted subscription services, which is somewhat less true of something for everyone big SVOD services is they're slightly less individually show dependent. So I do believe that you'll hear anecdotally conversations among particularly younger people say, well, my favorite show is off that subscription service, so I'm going to quit and I'll be subscribed when it comes back on. I'm moving on and through the services. The subscribers to the British service Acorn or to Shudder have less of that dialogue going on. They actually identify with and are interested in the steady flow of material there, which is not to say we don't have hits by degree, but they're not generally as they don't create as much absolute individual show or sees dependency per subscription. That is a genetic quality that I think is extraordinarily beneficial economically in the subscription world, because it means you're not running high rates of churn. It means your sack cost is – or subscriber life is better. And that you're frankly not as dependent on bidding for the next show and writing a bigger, fatter, more miraculous check in order to command the attention of the world. And so, if you speak to these people who subscribed to Shudder, it's quite a little experience. They'll speak with extraordinary passion about certain things that I have a whole lot less familiarity with and I know the geography reasonably well. So in answer to your question, we really go to the consumer first and the data that comes from how big the market opportunity is, what the price sensitivity is, what the availability of content that's preexisting and/or that we can manufacture. And then do you last question, I hope I'm answering it. We do think that, and Ed just mentioned it in his last answer, we can selectively manufacture or produce shows that really work well on linear, like Nosferatu and are extremely successful on, for instance, I'm talking about Shudder a lot, the Shudder service, and/or Creepshow, which is there a bit of a mini hit if you want to call it that on Shudder and also does well on linear. By the way I can bore you with examples, of a French series called The Bureau, believe it or not, which is among a certain constituency, frankly, its own goddamn Game of Thrones, because I happen to be proximate to that group of people. I've spent the last several days providing access and they are helping people in my demo get their way to The Bureau. So it's a smaller group, but they're really quite passionate about it. So we can move content through the cycle of linear and SVOD and we can have ultimately more attractive net economics in the way that we operate.

[Brett Feldman:]

That was great color. Thank you so much.

[Ed Carroll:]

Myra, why don’t we take one last question, please?

[Operator:]

Okay. So we have our next question comes from the line of John Hodulik from UBS. Your line is open. Please go ahead.

[John Hodulik:]

Great, thank you. Josh, you talked about leaning into the D2C business and moderating sales to third parties of content. Can you put some numbers around that? I mean, I appreciate the third quarter commentary about the content spend, but are those the kinds of declines we can expect going forward? And then maybe for Sean, just putting a finer point on the free cash flow commentary, obviously you're above where you were last year already year-to-date. Are you guys just being conservative and not changing the guidance or is the ramp in content spend in production and what you're seeing on the advertising side, giving you pause in terms of potentially being sort of flattish free cash flow on the second half? Thanks.

[Sean Sullivan:]

Yes, John, I will take that. Sorry about that guys, technology problems. So, let me take the second one first. So on free cash flow, John, I think I made the comment in one of the earlier questions about having meaningful free cash flow in the third quarter. I'm taking a more cautious and conservative approach to the fourth quarter only because of the production cycle that Josh articulated. Again, that's our best information today in light of the pandemic it's hard to know. So, I think yes again, I'm just being cautious for the year. We've obviously withdrawn guidance. I'm trying to be as helpful as I can at least in the upcoming quarter and certainly as it relates to free cash flow, I've got it for the year. So again, when we return to normal business conditions, I'll certainly update that. As it relates to your first question on content licensing, I wouldn't read into the decline. But I think what you're seeing in the financial results is really a result of the shift in the timing of production and the shift in timing of delivery, whether it be international or whether it be to domestic SVOD platforms. As you know, a lot of the revenue recognition is tied at least internationally to the current premier of the current season and on the domestic platform, it's often tied to the premiere of the subsequent season of the show. So we're going to see quarter-to-quarter lumpiness in light of the delays and the shows that have transitioned. I think we've addressed a few of them in the comments today you're seeing a shift and I don't think we've taken, and I think we've said this on prior calls, we're not taking a binary view, either not selling it or selling it. I think it really depends on the specific show. There are a bunch of shows that are returning that will continue to be exploited and exhibited and monetized on both international and domestic platforms. I think World Beyond was one example of one where we have held back the rights to. So it's not necessarily an overarching or either we're not selling any more to those platforms. It's really show by show. And it really is business dependent on the traction we're seeing on all the new products, whether it be AMC Plus or otherwise in terms of our ability to monetize our content. So I wouldn't read into the quarter-to-quarter variability of content licensing because it really, at least in the current period is more a result of the timing and delays in production. Now hopefully that's helpful.

[John Hodulik:]

Yes, it is perfect. Thanks Sean.

[Seth Zaslow:]

Well, thank you everyone for joining us on today's call and for your interest in AMC Networks. Operator, you can now conclude the call.

[Operator:]

Thank you, ladies and gentlemen, this concludes today's conference call. Thank you all for participating and you may now disconnect. Have a great day.