AMC Networks Inc. (AMCX) Q2 2012 Earnings Report, Transcript and Summary

Good morning, my name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the AMC Networks 2Q 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Seth Zaslow, Senior Vice President, Investor Relations, AMC Networks. Please go ahead, sir.

Thank you. Good morning, and welcome to the AMC Networks Second Quarter 2012 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 2012 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. This can also be accessed via our website. Take note of the following. Today's discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of the future performance or results and involve risks and uncertainties that could cause actual results to differ. Please refer to the company's filings with the Securities and Exchange Commission for a discussion of risks and uncertainties. The company disclaims any obligation to update the forward-looking statements that may be discussed during this call. Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP results provides you with useful supplemental information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. Please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information, which we'll refer to on this call. I would now like to turn the call over to AMC Networks' President and CEO, Josh Sapan.

Good morning, and thanks for joining us. We delivered strong financial results in the second quarter. The company reported solid double-digit growth in both revenue and AOCF. Our growth continued to be led by the success of our original programming. Last month, the company received 36 primetime Emmy nominations, more than any other basic cable TV group. AMC received 34 nominations, the most of -- for any individual basic cable channel for a fifth year in a row. Mad Men had 17 nominations, making it the most nominated basic cable drama of all time, with a lifetime total of 85 nominations. Breaking Bad received 13 nominations, including Outstanding Drama Series and Outstanding Lead Actor in a Drama Series. The Walking Dead received 3 nominations. And the first season western, called Hell on Wheels, also received a nomination. The recently completed advertising upfront market took advantage of that critical success and of our growing ratings. In a healthy market for cable networks, AMC Networks performed well. We saw significant demand for our scripted series, and we're able to attract new, quality advertisers to our shows, further diversify our ad revenue base, add volume and increase price. At AMC, the largest of our 4 channels, the fifth season of Mad Men was the most-watched season ever for the series, which delivered double-digit increases in all key demos over the prior season. Breaking Bad premiered its fifth season in July. The highly anticipated premiere attracted the most viewers in the series' history, despite not being carried on the DISH platform. The premiere delivered almost 2 million viewers in key demo, adults 25 to 54 and adults 18 to 49, an increase of roughly 30% over the prior season. This season currently ranks as the most watched season ever for that series. It is somewhat uncommon for TV shows to experience such notable ratings, with increases so deep into their run, but that's exactly what we're seeing. We believe it is a combination of several things. First and foremost, it's about great content, having great shows. The critical success of our original programming has really fueled the growth of our business. Advertisers are responding. Affiliates are renewing under good terms, and consumers are watching in increasing numbers. In the case of Breaking Bad, even more than they did in aggregate than when they're being carried on the DISH platform last year. Our programming strategy is also translating into new revenue opportunities through the exploitation of content in different platforms and media, which we believe is accretive to our business without disturbing the existing business model. The data that we have suggests that our digital distribution policy of delayed windowing of about 9 months to a year is actually serving to increase linear viewership and in turn, support the value of the entire paid ecosystem by maintaining the value of the premiere window on our channels, which is, of course, where we first show it. Looking forward, we're particularly focused on our original programming. IFC, led by a show called Portlandia, which received 2 Emmy nominations, will continue to develop its comedy lineup. WE tv, which introduced several successful reality shows in the second quarter, such as Mary Mary, L.A. Hair and Kendra On Top, is premiering a spinoff from our very successful Braxton Family Values called Tamar & Vince in the fall. And on AMC, the second season of our western series, Hell on Wheels, premieres this Sunday night, followed by the return of the third season of The Walking Dead on October 14, just a little over 2 months from now. The ratings success for our original programming continued to drive our top line performance in the second quarter. On the advertising side, our National Networks grew revenue by 13% versus the prior year. AMC was the largest contributor to that growth due to the airing of 2 original series in the second quarter of this year, as compared to 1 series in the second quarter of last year. Our National Networks grew affiliate and other revenue by 15% over the prior year period. That growth reflected 8% growth in affiliate revenue, as well as increases in what we call our other revenue stream. On the affiliate side, we were successful in reaching a deal with AT&T that we are pleased with. And in terms of other revenue, we saw a strong growth in the quarter as a result of year-over-year increases from the digital distribution of our content, the home video sales of The Walking Dead and international programs sales of all of our content. On the international front, we continue to move ahead with a disciplined approach, and we are encouraged by the progress that we've seen to date of the rollout of channels around the globe. Before I turn the call over to Sean, I wanted to give you an update on what's happening with DISH. As we've discussed in our last earnings call, we are in litigation with DISH over the VOOM HD business, in which they were a minority partner. We're seeking over $2.5 billion in damages. Over the course of the lawsuit, we've received several favorable rulings, including that DISH will be sanctioned at trial for its improper destruction of evidence. The case is now set for trial in mid-September. We believe that as a direct result of the litigation and in an effort to try and create leverage for itself in that litigation, DISH decided to terminate carriage of our 4 National Networks. We believe that DISH is not acting in the best interest of its subscribers and is using its customers essentially as pawns in this dispute, that is really unrelated to the carriage of our 4 national channels. While there have been several recent examples of disputes between networks and TV providers, I think, of which most of you are aware, those disputes were negotiations over rates that programmers charge TV providers to carry their channels. This dispute with DISH is quite different. It is not about rate. In fact, DISH has not discussed rate with us at all. The impact on our financial results of the interruption of service will depend upon several factors: the length of time that we are off DISH's platform, which will be dictated, we believe, by the timing of the litigation, including any appeals; as well as if, when and on what terms, we reach a new carriage agreement with DISH. You should be aware that the loss of the affiliate fee and ad revenue that comes from the carriage by DISH of our National Networks and the incurrence of incremental expenses, such as third-party marketing, will have a material impact on our financial results in future periods. The DISH termination has reduced our total subscriber base by something in the range of 13%. However, the impact on our AOCF and operating income will be materially higher than that. We expect that the resolution of this matter will be significantly impacted by what occurs in the courts, and the timing around that is unclear. The trial itself is estimated to last anywhere from 4 to 6 weeks. I hope you understand that due to the ongoing nature of the litigation, we will be limited in our ability to discuss this matter in great detail when we get to the Q&A. As appropriate, we'll continue to keep you updated on further developments. With that, I'd like to turn the call over to Sean Sullivan, who will provide further detail on the financial results for the quarter.

Thanks, Josh, and good morning. Turning to the results for the second quarter. Total company revenues grew 12.2%, and AOCF grew 13.6%. Second quarter revenue and AOCF growth was driven by increases on our National Networks. At the National Networks, revenues increased 14.4% or $38 million. National Networks AOCF increased 16% or $19 million versus the prior year period to a total of $136 million. Advertising revenues increased 13.4% to a total of $130 million, primarily driven by the growth at AMC. As Josh mentioned, AMC benefited from an increase in original programming hours versus the prior year period, most notably, the airing of 2 scripted originals in the second quarter of 2012, as compared to 1 scripted original in the second quarter of 2011. Affiliate and other revenues for National Networks increased 15% to a total of $176 million versus the second quarter of 2011. Results reflected an 8% increase in affiliate revenues, as well as the benefit of ancillary revenue streams, such as digital distribution, home video , [indiscernible] and international revenues. Expenses increased 13.2% or $20 million in the quarter, principally due to increased programming and marketing costs associated with our original programming, which was partially offset by a reduction in corporate overhead related to the spinoff from Cablevision. The DISH dispute had an immaterial impact on AOCF for the second quarter, related to the impact on advertising revenue from the repositioning of AMC, WE and IFC in early June, as well as lost affiliate fees at Sundance Channel. We also incurred some expenses in connection with messaging to our viewers, such as third-party media buys and direct marketing initiatives. Turning to the International and Other segment, revenues decreased $4 million to a total of $26 million. AOCF for this segment was a deficit of $9 million, a decline of $5 million versus the prior year period. The revenue decline was a result of the decrease in revenues at IFC Films and Broadcasting & Technology, which more than offset an increase in international affiliate fees. The decline in AOCF was due to the decrease in revenues, as well as an increase in litigation expenses related to the VOOM lawsuit. The litigation costs were $2 million in the quarter, as compared to $1 million in the second quarter of 2011. Total company net income from continuing operations was $41 million or $0.57 per diluted share compared to $27 million or $0.39 per diluted share in the prior year period. This increase was a result of the growth in operating income and the absence of costs related to the redemption of debt, in connection with the spinoff from Cablevision, which was partially offset by an increase in interest expense from the increase in debt related to our spinoff. In terms of free cash flow, the company generated $159 million in free cash flow for the 6 months ended June 2012. Capital expenditures were $7 million. Cash interest was $58 million, and cash taxes were $14 million. As of June 30, our NOL carryforward was approximately $6 million, which we expect to fully utilize during the third quarter of 2012. Looking into the second half of 2012, we do not anticipate our free cash flow generation to mirror the level that we saw in the first 6 months of the year. This is primarily due to the impact of the DISH interruption in carriage and the timing of cash investment in our original programming, most notably to the scripted originals on AMC that are scheduled to air later this year, as well as in 2013. Turning to the balance sheet. As of June 30, AMC Networks had $2.3 billion of outstanding debt. We had cash and cash equivalents of $308 million for a net debt position of $2 billion. Our leverage ratio was 4.1x based on LTM AOCF of $483 million. This is down from 5.4x on June 30, 2011, when we spun off from Cablevision. In July, we also prepaid $50 million of the term loan A debt. This payment was in addition to the $50 million prepayments that we've made in March of this year and the $250 million prepayments that we made in 2011. These prepayments, totaling $200 million since the spin, are consistent with our strategy of using excess free cash flow to delever. With that, we'd like to move to the question-and-answer portion of the call. Operator, if you could please open the call for questions.

[Operator Instructions] Your first question comes from Bryan Goldberg of Bank of America Merrill Lynch.

Just a couple on DISH and one on ratings and advertising. So thanks for the quantification on DISH's impact on your sub base. That's -- it's definitely easier for us to quantify the affiliate fee impact from this. But how should we think about the advertising at risk? What kind of ratings impact is DISH having at AMC and WE right now? I mean, did the subs over- or under-index in terms of your viewership?

Bryan, this is Josh. So I think you're broadly familiar with the economics of our business. Within the channels, about 60% of our revenue or so comes from the affiliate side and about 40% from the advertising side. And we mentioned the 13% piece of the universe. So the indexing on DISH is different for each channel. But I think, as a broad measure, if you take that percentage, you'll get a sense of the economic magnitude.

Okay. And then, I guess, with regards to the legal bills. Per the Cablevision 10-Q, it looks like you guys will have met the agreed upon threshold for footing the VOOM legal bills sometime in the September quarter. So -- and I know you guys are going to start sharing with Cablevision at that point. So can you just help us think about what a peak quarter of legal spending has been for VOOM so we can try to properly flow that through the P&L?

Yes. Bryan, this is Josh. I mean, it's actually quite hard to determine what a peak quarter of spending is. The lawsuit has been going on for a few years. There's various times when we've been in greater levels of activity and preparation. The trial is upcoming mid-September, so we will have particular expenditures and witness preparation, et cetera, going on now. But calendar-izing it exactly and trying to identify exact costs is very difficult, so it's really so hard to project. I couldn't come up with a number, I'm sorry. Except to say, it's sort of fluid, it's moving. There's some obvious things that will influence it, particularly the trial.

Okay. And then I guess if you could just help us out with sort of current advertising trends in the third quarter. I mean, everyone else has been impacted by the Olympics. I'm just wondering how are your current scatter trends shaping up right now.

Yes, sure. In general, I think a few things to say. We continue to see a very strong response to our original programming, which has been a consistent theme. And of course, a good one. The third quarter is a little lighter than second quarter. And of course, being off the DISH platform has a significant impact on our universe. So I think those are the 3 sort of major things that are affecting current scatter.

Your next question comes from Michael Morris of Davenport & company.

Two questions. The first one is on other revenue. Can you give us a bit more granularity on what's driving the other revenue? I think it's obviously been strong in the past couple of quarters, I think, primarily Walking Dead-driven, and digital in international sales. 2Q, can you help us with what programs are driving that? What channel that's going out through and what's the sustainability of it for that level?

Sure, Mike. This is Sean. So in the second quarter, we saw very good sell-through for a lot of our original programs available on multiple platforms. In the second quarter, a big part of the other revenue was driven from Mad Men, The Walking Dead, both in terms of VST, DVD and otherwise. So I think that, that -- I think you'll see that as a consistent theme. I think as we go forward, as you all know, the other revenue line is somewhat lumpy and will be variable, depending on the premiere of the subsequent season of the show. So as we look forward to Q3, we've announced the premiere date of The Walking Dead on October 14. So that will be available on Netflix 2 weeks prior, so that's a Q3 event. For example, Hell on Wheels is premiering this Sunday. I believe that's already available on Netflix. So given our restraint policy in terms of the digital platforms we participate in, it's somewhat tied to the premieres of the show.

Okay. And so to be clear, this quarter's results reflect the higher mix of revenue from programs that you don't own? You mentioned Mad Men. Is that a growing revenue stream for you at this point?

Well, I think that given the success of our shows, I think all of the revenue streams from those shows, whether we own, participate or license, we're seeing incremental benefit from all of those. I don't think it's fair to say in the quarter that the majority of the revenue we've had was from Mad Men, for example. I think the success of Breaking Bad, the success of The Walking Dead is equally participating to the strength we saw on the quarter on the other revenue line.

Okay, great. And then just with respect to the situation with DISH right now, are you seeing -- we're 5 or 6 weeks in from when your larger networks came off the air. Are you seeing anything underlying in terms of consumer behavior, whether it's feedback you're receiving from consumers or anything having to do with the mix of subscribers between DISH and your other distribution partners? Anything you can point to with respect to changes in the consumer behaviors as a result of DISH stopping carriage?

Sure, this is Josh again. I think the thing we're seeing most pointedly is a response to us and perhaps, to other alternatives to DISH. People who are interested in our shows are making their voices heard. They're quite aware, and increasingly so, of the absence of Sundance, IFC, WE tv and AMC from the DISH platform. So that's the most significant trend that we're seeing.

They're making their voices heard. And can you be more specific in what way? Or what do they do?

Oh, sure. I mean, on social media, it's a very active subject, if you go check it out. We've received very significant responses to us at our offices about the absence of our channels from DISH. So there's a fair amount of consumer activity in standard ways that people are communicating today.

Your next question comes from Alexia Quadrani of JPMorgan.

This is Caroline Anastasi for Alexia. I just have 2 questions. First, can you comment on how the upfront went and what kind of pricing and volume you saw there?

Sure. The upfront was very good for us, as we mentioned, driven particularly by our originals. Very strong demand, and we saw it happily in both volume and price. So it was a very good upfront on both fronts.

Okay. And just a follow-up. You announced a while back that you greenlight 2 new shows. Can you give us any more color on progress and timing of those shows? I know with Breaking Bad in its last season and The Killing canceled, do you plan to keep your slate at AMC at 5 original programs?

This is Ed. So we announced that we greenlight 2 pilots on AMC. Those pilots are now in preproduction. We have, as you mentioned, 5 ongoing series on AMC. We think that's the right number at this time, but we continue to invest and develop new original series. And it's possible that, at some point, we can increase the number of original series. But for the moment, we think 5 is the right amount.

Your next question comes from Richard Greenfield of BTIG.

Charlie Ergen is clearly negotiating in public. He says this is all about the rate and that the current price that their channels are being offered. To him, it's a great position for him to, in his words, never carry AMC Networks again. I just thought in light of his comments, could you give us any view on whether DISH or Ergen himself has reached out to you or come to New York to try to reach an agreement to figure out carriage because he makes it sound like he's really got no interest in discussing a carriage deal with you at all. And then also, just if we could just get behind the 13%, how are you actually getting to that 13%? I think on the core AMC Networks, it's substantially less than 13%, while some of the smaller networks, it's more than that. But can you just give us the actual math on what you're doing to get to 13%?

Right. So Rich, we did mention in our prepared remarks that this is, of course, the subject of litigation, and so we're somewhat limited in our ability to respond. But what I would say is, it's our belief that this is clearly -- the behavior on DISH's part is driven by the litigation, and the litigation is informing everything that is going on. And as we've mentioned, we have not had any discussions about rate. So we think it's a litigation-driven event. In terms of the 13%, that is an aggregate impact of sort of the universe impact of the 4 channels. They tend to vary differently in how much each of them is affected, when you take in the way that Nielsen does its sampling. And the most notable thing to say is that Sundance was carried on a different level of service on the DISH platform than the other 3, so it had a more -- a less significant impact in terms of total subscriber volume.

And just a follow-up, to be clear. You mentioned, it hasn't had a conversation about rate. That doesn't mean that there hasn't been a conversation. Is that fair?

No, Rich, really forgive me for answering. As I mentioned in the prepared remarks, we are several weeks away from the courtroom. It is a subject of litigation. So we're somewhat restrained in what we say on it.

Your next question comes from Vasily Karasyov of Susquehanna.

First, a quick housekeeping question. Are there any other scheduled court dates on the public court docket calendar prior to the September 18 start of the trial? And then I have a couple of on the business side.

This is Jamie Gallagher, General Counsel. No, there are no other scheduled court dates prior to the start of the trial.

Okay. Then, Sean, can you talk, please, about the covenants, the debt covenants, and how much wiggle room you have in case this DISH situation extends and you see a decrease in your cash flow-generating capability? I'm going to have one for Josh.

Sure. I mean, as I've said in the prepared remarks, we're at 4.1x on our leverage covenant today. The covenant is actually 6.1x. As you probably know, it steps down at the end of the year. And I believe through 2014, the situation with DISH is not something that, let's say, wasn't contemplated a year ago when we spun. So we feel very comfortable with the covenants we have, with the headroom we have and are confident we've got plenty of headroom under it to withstand a prolonged carriage dispute.

And Josh, for you, I have a question about owning versus licensing content. There's a lot of debate on, I think, some points are lost in that debate. Can you maybe go into a little more detail about what the difference is for you, given how complicated participations and different kind of revenue streams are in the licensing situation versus ownership? How much of a difference does it really make for you in terms of owning a successful show or licensing it on terms that you usually license?

Right. It's a really good question. It's a rich one, then I'll try and make my answer reasonably restrained because I could go on at length. But I think the basic principles are that it's probably better looked at on a spectrum basis than a binary basis. Meaning, if you license, it doesn't mean you don't participate in ancillary revenue streams. You can participate at 10, 30, 50, 70, and you can have participations at different levels in different revenue streams. So it really depends upon the deal and the arrangement with who you get the show from. I think our general point of view is that we would prefer to own where it makes economic sense because we have seen a strong response to our content, particularly the scripted content, ancillary opportunities, international, digital, SVOD, et cetera, and we like being in a position to take fuller advantage of them. So the real conclusion is, that each show and each deal is its own show and deal. And the aggregate cost of that show and its strength in ancillaries, its cost and its performance on the channel make for the best arrangement for us. And just to factor one other thing in this which will make it seem terribly vague is, of course, degrees of risks. Certain shows are less and more risky. So that all goes into the pot when you make a decision and a deal about how much to own. And I'm sorry that answer doesn't have a particular conclusion. If I try to summarize it, I would say, we'd like to own where possible, when it makes economic sense. And if the material is right, we'll do deals that are licensing deals, if the material is right and we think the deal is right.

All right. A quick follow-up then, if I may. I think the spectrum comment is really helpful. Is it riskier for you to own a show in an unproven property like Rubicon? Is the downside in terms of write-down larger on fully-owned shows?

In general, if a show fails, owning will be more costly than licensing, if one presumes that somebody was -- somebody else was coming in for, say, 30% or 40% of the cost of the show, yes.

Your next question comes from Chris Merwin of Barclays.

So on margin, Josh, you posted a modest expansion during the year. And what was really driving that? Was it the impact of higher margins from digital distribution dollars or cost savings on the SG&A line? I think the increase that we've seen in cash spend on programming would suggest that you're going to have slightly faster amortization in the coming quarters. So just was curious what drove the improvement this quarter.

No, I think, Chris, you've got it right. I think, the other revenue line, I think the savings in SG&A. So we saw very strong margins in the first half of the year. As we've said in past calls, you're going to see some variability in the margin as a result of the significance of the premieres of our original programming, as well as our incremental, in terms of absolute dollars, investment in that across all of our networks. So I think we've, historically, generated a fairly consistent AOCF margin. I think you'll see some variability to that as we go forward.

Okay, great. And just a follow-up on that. You decided not to renew The Killing for another season, but it doesn't look like you took a write-down there. Is it fair to assume that, that's fully amortized at this point?

No, it's not fair to assume. I mean, that's a licensed show. It's a 26-episode closed-loop series. We think that, that show was a good show. It just didn't make sense to renew. We had not taken a write-down. There is some unamortized cost, given that we just recently made the decision not to renew. We're now evaluating the usefulness of that asset and its ability to be continued to use across not only our linear platform, but with other platforms we have rights to exhibit it on.

Your next question comes from Alan Gould of Evercore Partners.

I've got 2 questions, 1 for Josh, 1 for Sean. Sean, the SG&A was down about $10 million during the quarter, which was a little surprise given you had 2 new -- 2 original series versus 1. Was that all marketing cost? And Josh, on a bigger-picture basis, we seem to be -- DISH's side, we seem to be having more disputes between the affiliates and the programmers. Obviously, the Viacom, DirecTV, as well as your AT&T deal going down to the wire, although you seem quite pleased with the results. Can you just talk about what's going on, on the affiliate program or -- negotiations?

Yes. Just to answer the one -- the selling call-offs. I think that what we've seen and we saw against the 1 year into the spin now, we've seen a reduced corporate overhead as a result of that. Marketing is up. If you look at, on a sequential basis, Q1 to Q2, we spent a fair amount of dollars in the first quarter related to the premiere of Mad Men Season 5 and some other shows, like The Pitch. So again, some of that SG&A is going to move based on the timing of premiere of the new shows as we ramp up.

Sure. On the sort of larger question, I'm not sure that there's an absolute answer to it. There is, no question, a trend toward increased tension between MVPDs and programmers that is caused by, I think, increased cost on the MVPD side and video margin pressure. And on the programmers' side, an increased competitive framework, one against the other, and the sort of need are imperative to invest in more content in order to compete effectively. And so it's driving a fair amount of tension. Exactly where it goes, I think, is hard to know. I would point out one, I think, encouraging note as it relates to, if you want to call it, harmony, which is I do think that there's a greater recognition of the benefit and health of the paid, as it's often called, ecosystem that everyone lives in, with somewhere north of 90 million homes in the United States paying for a bundle of TV, video. And the policies on behalf of the programmers that allow what is commonly now called authentication or TV affiliate rights to be captured within that paid system, which, I think, is a recent trend that's picking up steam. It's something that we are participating in. And I think it signals against the backdrop of these sort of flareups. It does signal a recognition of the value of the system and actually, a fundamental piece of cooperation that's occurring. It's actually pretty profound, I think. So I think that, that's a very good sign.

Your next question comes from Ben Mogil of Stifel Nicolaus.

So Josh, going back to some of Ergen's comments yesterday on the DISH call. One of the things he comments was that he thinks that your channels, other than AMC, don't particularly rate very well on his system. If that, in fact, is the case, we actually sort of view the ad impact as being much more tempered in the third quarter because of the carrier situation, particularly because I believe in the past you've mentioned that you did have some sort of ratings carve-out as you talked to advertisers about that. Can you talk a little bit about that dynamic?

Sure. As I think -- as I mentioned, we think this situation is informed very substantially by litigation. So I'll just leave it at that, which is to say that we think litigation defines the circumstance. And in response to your second question, I would say that, no, we do not think that we will see any mitigation of ad impact on our other channels, actually, perhaps the opposite in some cases and because they perform, according to our experiences, reasonably well on the platform. So that's our experience of the universe and the circumstance.

If we go back to the affiliate revenue in the quarters, if we look at the third quarter, you've got on Netflix The Walking Dead and Hell on Wheels, which are 2 shows that you own, as opposed to, say, Breaking Bad and Mad Men, which are shows that you sort of have some participation, on the play in the second quarter. So stripping out the DISH situation, should we sort of assume that digital revenues in general in the third quarter should be stronger than the second quarter?

Yes, I think that it will be meaningfully more favorable in the third versus the second because of Hell on Wheels, because of The Walking Dead, and again, that will be a 3Q event this year versus last year. I think The Walking Dead was a fourth quarter event, with Netflix specifically. Sequentially, the digital revenue will be more favorable in the third quarter.

Okay. And then lastly, on the litigation costs, I think you said it was $2 million in the quarter. Should we assume that it's going to be up significantly in the third quarter, just given that there's activity around the court case?

I think it's reasonable to say that as we head to trial, there'll be a fair amount of activity in preparation for that and during that time.

Okay. And will you once again sort of strip that number out when giving us the financials or giving us commentary on the call?

Yes, I certainly plan to, today.

Your next question comes from Ben Swinburne of Morgan Stanley.

Josh, can I just go back to your spectrum discussion and tie it back to the quarter? Were there changes in your participation levels for some of the shows you don't own that benefited the quarter? I think you said every participation is -- or every deal and show, even within the deal, is sort of a new set of terms, potentially. I'm just wondering if we can think about maybe -- I guess it would be probably Breaking Bad, but even in the case of Mad Men. As you renew those, do you tend to take your participations up as a result of the success of the show? And does that play into the second quarter?

Ben, this is Ed. I think what Josh meant is that every deal we do is a discrete deal onto itself. So if we are owning a show like The Walking Dead or if we're in partnership with Sony on Breaking Bad, those are discrete deals. And generally, as we renew those deals, the structure of the partnership does not change.

Right. And Ben, to your specific question about the second quarter, as I said, I think, in an earlier question, we did benefit from some revenues related to Mad Men coming back, as well as people catching up from prior seasons, as well as Breaking Bad, now that, that's out for Season 5.

Great. And then within -- the other just 2 things you've listed in others, Sean, you said, I think, The Walking Dead DVD, and then international program sales. Was the international programs sales Walking Dead as well?

Correct.

Got it. Okay. Then, my last question, going back to Rich's question on the 13%. Since you obviously carry pretty different -- I'm assuming pretty different fees across your domestic networks, is it fair to say then that AMC Network and maybe even WE are carried on more than 13% of DISH's subs because the other networks are on less? Just trying -- from a revenue perspective, thinking about how that number translates.

I think, Ben, AMC, WE and IFC were generally carried on the same tier within the DISH platform, which is less than their full subscriber base. And as I think we disclosed in the earnings release, Sundance was even at a lower tier. So that's kind of how the 13% shapes out.

Your next question comes from Amy Yong of Macquarie.

So DISH is saying that they're not seeing any churn impact from their decision to end carriage. But DirecTV is also saying the same thing, that they're not seeing any subs come from DISH. So how do you handicap that comment, in particular DTV? But also, can you just help us think through the impact of AT&T's agreement for 3Q affiliate fee growth? I guess, directionally, where does that go from what we saw in 2Q?

Sure. This is Josh. I think the AT&T deal, as we mentioned, we were pleased with. AT&T represents, obviously, a reasonably small portion of our total subscriber base, so I don't think we'll see anything dramatic in our numbers from AT&T. But we were pleased, and we hope that they were pleased with the outcome of it. We do think it was mutually beneficial. And so over the term -- the longer term and midterm and near term, it will have a beneficial effect on our performance. And that's also true of Suddenlink, we think it was directionally positive, and that's sort of underpinning what we'd do, we think, reflective of the strength of what we're up to and what we're investing in, in original programming. In terms of the dynamics of what's occurring on MVPDs, I think I'm going to restrain myself and not comment on what others are saying. They're saying what they're saying. The dynamics of what's occurring between and among various MVPDs, at any period of time, in any season, I think, is driven by a number of things. There are people more expert than me. But I think the amounts of marketing, incentives, loss of programming and all other things have an influence in it in the near term, in the midterm and in the long term. So I think the dynamics of it sort of need to be looked at rather carefully to be understood against the backdrop of all that, as well as seasonality and the entire macro universe of what's happening. I'm sure you're aware of what's happening in the last quarter in aggregate for the entire sort of paid universe and then we'll see what happens in the third quarter. So there's a lot at play, and I think it needs to be looked at comprehensively.

Your final question comes from Tuna Amobi of S&P Capital IQ.

I guess a lot of questions on the DISH situation. Wanted to see what contingency plans -- I know that Josh has alluded to that in the last call. If you can help us understand what you might do to kind of mitigate this situation. It sounds like it's going to -- from what Charlie was saying yesterday, it's going to go on for a while. So I'm wondering if you can see any kind of countervailing actions down the road.

Sure, so as we've mentioned, we think -- I'm sorry to repeat myself so regularly. We do think, first and foremost, and I think it's important to reflect on that, it's a litigation-driven event. There's a court case coming up that's set for mid-September. That case is likely to go for the 6 weeks, and I think the situation is fluid. And the court will do what it does and rule as it does. And that is, we think, a potentially very significant influence on this events. I think that as we go forward, we'll evaluate how all that plays out in the court and what everyone's response to it is. In the event that we're off for an extended period of time, we've obviously thought about that. We think we're in good shape, and well prepared for it, and so we have a plan of action as you might imagine that we'll undertake, and we think it's a pretty good plan.

Okay. Fair enough. Separately, on -- when you look at what Lionsgate has done with ANGER MANAGEMENT, I'm wondering if you see something in your model, maybe just down the road, this kind of accelerated production and syndication model. Is that something that you might be exploring or to willing explore? Does the economics of that, you think, kind of make sense?

Well, I think the Lionsgate ANGER MANAGEMENT transaction was unique. If you look throughout the television landscape, I think you would see a 90-episode order midway during Season 1 as a unique event. It's not something that we think we would likely replicate. We sort of like the pattern we're in, generally of a pilot Season 1, evaluating performance and then deciding what to do going forward.

All right. Thank you, everyone, for joining us on today's call and for your interest in AMC Networks. This concludes our call.

Thank you. This does conclude today's conference call. You may now disconnect.