AMC Networks Inc. (AMCX) Q3 2014 Earnings Report, Transcript and Summary

Good morning. My name is Dorothy, and I will be your conference operator today. At this time, I would like to welcome everyone to the AMC Networks Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Seth Zaslow, Senior Vice President of Investor Relations. Mr. Zaslow, you may begin your conference.

Thank you. Good morning, and welcome to the AMC Networks Third Quarter 2014 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 third quarter 2014 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 call can also be accessed via our website. Please 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 appropriate in your evaluation of 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. With that, I would now like to turn the call over to Josh.

Good morning. Thanks, Ed, and thank you, all, for joining us today. I'm going to start by sharing a few comments on our recently announced partnership with the BBC Worldwide, and I'll conclude with a review of our business in the third quarter. I'll then turn the call over to Sean Sullivan, who will provide more financial detail. Our partnership with BBC Worldwide meets many of our core strategic business objectives, and we believe it provides a platform for our continued growth and success. The agreement is comprised of 4 main components: first, we made a $200 million investment, representing a 49.9% stake in BBC America, the U.S. TV channel owned by BBC Worldwide. The deal is structured as a joint venture. We have operational control over the network, and we'll consolidate it in our financial statements. A little background on the network. For those of you who may not know, it's in almost 80 million homes, and you may be familiar with some of their shows come including Top Gear, Orphan Black and Dr. Who, which, this past August, became the network's highest-rated series, a 50-year-old franchise that only continues to grow. What you may not know is that BBC America has had 9 consecutive quarters of ratings growth at a time when many in the industry are seeing some downward trends. It also has several of the most affluent dramas in America in terms of audience delivery and is one of the most critically acclaimed networks on basic cable. Another component of our agreement is that we will represent BBC World News in domestic ad sales and U.S. distribution. This representation agreement exists outside of the JV. BBC World News is currently in 30 million homes and it is, in our opinion, without peer in terms of news quality. We believe that there are many interesting opportunities to elevate it and to grow it here in the U.S. In addition, we now have a formal coproduction agreement with BBC Television that builds on a history of content collaboration between our 2 companies. We have worked together on several projects, which did well for us, including 2 miniseries that aired on SundanceTV, one called Top of the Lake and the other, The Honourable Woman, and have one coming soon called One Child, which will air on SundanceTV in December. So we have both a solid history and a strong track record with this group, and we look forward to future creative opportunities. The partnership will provide for all of the AMC channels. And finally, the agreement enables us to explore digital opportunities jointly with BBC Worldwide. The shows that I just mentioned are good examples of the very kind of material that plays particularly well on digital platforms. And we are intrigued by what we can do together to digitally deploy similar content across multiple platforms. So that's a very brief overview of the partnership. If we want to talk about it more in Q&A, of course, we'd be glad to. It's no surprise that the biggest trends we see occurring right now here in the U.S. are consolidation on the distribution front and the increasing proliferation of all things digital, coinciding with changing patterns of consumption in which viewers have more and more choice and are exercising more and more discretion over what they watch. Our response to those trends in putting these assets together is consistent with -- what we've done in the past, it is, said simply, the elevation of content. We think that having BBC America aligned with AMC, IFC, WE tv and SundanceTV creates a collection of channels and shows that are stronger together. I'll add that while it can be better to be bigger, in our view, what is most critical and what will make us sustainable and make us grow is having channels that really mean something to people with shows that are among their very favorite. So entering into this relationship on the right financial terms, with a partner that shares a common vision, similar creative sensibility and a similar culture, we think, is a really positive move at this time. So turning to a few of our financial and operating highlights for the third quarter. At our domestic business, revenue increased 4.3%. Ad revenue at the national networks was down 5.8% for the quarter. This decline was, as expected, as it was primarily impacted by unfavorable year-over-year comparisons due to over delivering last year with the final episodes of Breaking Bad. And despite what appears to be an overall challenged ad market for the industry, I'd like to highlight that advertising for our National Networks is up 11% for the year. We are maintaining a strong advertising position, which we anticipate will only be strengthened by the continued success of The Walking Dead in the fourth quarter. There has been a fair amount of attention paid to ongoing challenges in the ad-supported cable category in terms of viewership. I'm pleased to note that for the broadcast season, which ended in the third quarter, AMC Networks, all of them across its all portfolios of channels, is the only cable media group to have experienced double-digit annual growth in delivery among both adults 18 to 49 and 25 to 54. We think this year-over-year growth is significant and speaks to the success of our core content investment strategy. I'd also like to note that as we continue to make content investment our priority and examine our business in the context of an increasingly digital world, we are very mindful of expenses and are continually focused on refining our organization and the way we do business in order to operate as efficiently as possible. As part of this ongoing effort, we have taken steps in recent months to reorient and reorganize our staffing. This is an area we continue to examine carefully and constantly calibrate. Now if I may, I'll give you a brief overview of highlights from the third quarter for each of our national channels. AMC, which was a top 10 network for the broadcast season, premiered season 4 of the Western series, Hell on Wheels. AMC has a history of doing quite well with the Westerns going back to our first scripted miniseries, some 8 or 9 years ago, called Broken Trail, and an extensive library of Western films. With Hell on Wheels, the network continues to attract a passionate group of fans of the genre. Last season, we moved the series from Sunday to Saturday, and we've been able to grow the audience on this new night, and the show's solid ratings held into its fourth season. Back in August, AMC was awarded the Emmy for Best Drama for the final season of Breaking Bad, capping a terrific run for what will likely be regarded as one of the finest shows in TV history. During the quarter, the network placed a straight-to-series order for a martial arts drama tentatively titled Badlands. This 6-hour series is expected to premiere either late next year or early the following. We like the project for its compelling modern take on a classic genre. It's backed by a talented and very successful creative team, including the duo behind the long-running network TV series, Smallville. AMC also signed on to coproduce a new dramatic sci-fi series called Humans. We were very attracted to the strong source material and the wealth of talent associated with it, which includes the producers behind the acclaimed series, The Hour and Broadchurch. The 8-hour series will air next year. I do want to note that we recently shifted a bit of our focus at AMC to be almost entirely on scripted shows. While we continue to offer some successful unscripted series, most notably, Comic Book Men and Talking Dead, the show that follows The Walking Dead, we will be very selective about moving forward with unscripted projects. Our desire is to focus on what creates the greatest engagement with viewers in a very crowded content environment as well as the best return, and that drove those considerations. Finally, I'd like to take the opportunity to recognize the return of The Walking Dead last month. The fifth season debut shattered rating records yet again, with over 17 million viewers watching live. The show continues to beat everything else on TV and is essentially our version of the NFL. We think it's particularly interesting that in a world where sports is considered the ultimate must-have and much-watched live event, this show, The Walking Dead, demonstrates the enormous potential and power of a great story well told. The consistent high-quality execution of the series by the creative team is what is behind its success, that after 5 seasons the show continues to not only perform so well, but is a story to become more and more urgent and nuanced, we think, is quite a feat. We've renewed the series for a sixth season, and we've ordered a pilot episode of The Walking Dead companion series, which is currently in development. At WE tv, the network had its best quarter ever in prime among women 25 to 54, increasing 11% and for the broadcast season, growing 16% among adults 18 to 49 and 19% among adults 25 to 54. The growth in the quarter was driven in part by the strong return of WE tv's franchise series, Braxton Family Values and Sisters With Voices Reunited. 4.5 million total viewers tuned in to watch the season premieres of these shows, which aired back-to-back in August. So WE tv continues to attract a passionate, loyal audience of African-American women on Thursday nights. And we consistently hear from this audience that they greatly value the type of programming the channel provides, and it's sort of that viewer type of connection that has helped make WE tv the #1 cable network with African-American women in prime time on Thursday nights. Last month, the third season of the network's popular series called Kendra on Top premiered to strong numbers, attracting over a million viewers, which is a 34% increase over prior season. Sundance and IFC also performed well. IFC's delivery was up 28% among adults 18 to 49 for the broadcast year. SundanceTV continued to carve out a niche of acclaimed dramas attracting quite affluent audiences with the original series, Rectify, and the BBC coproduction that I mentioned, The Honourable Woman, which starred Maggie Gyllenhaal. Finally, if I may, before I turn it over to Sean, I'd like to provide a quick update on our global business. Since acquiring what was then called Chellomedia, now AMC International about 9 months ago, we've been focused on quickly integrating and streamlining the business and implementing our plan. To that end, we have substantially reorganized our regional management teams and have put into place very strong leadership, with 3 managing directors running our international operations. We're currently in the process of launching a channel-branded AMC globally, and we're seeing great enthusiasm from it -- for it from major distributors and from viewers alike. This creates a second strong or another strong international platform, allowing us to buy and export our own content for air on the AMC Global channel, which has always been a key element of our international approach. We continue to see high demand for Sundance Channel globally and are growing distribution, especially across Central and Latin America for it. We've consolidated some smaller networks under the Sundance Channel brand in a number of markets, creating increased coherence and strength for us. As we make all of our channels stronger, we are pressing for increased affiliate fees worldwide as the channels become better and better. Overall, in just under 1 year, we think we've dramatically strengthened our international position and are on-plan economically and operational to continue to deliver additional growth. Lastly, you may have heard that we're currently involved in negotiating with DirecTV. We've had a long and excellent commercial relationship with DirecTV, and although I'm not at liberty to discuss the details, we hope to come out at a good place of resolution for both of us. I'll now turn the call over to Sean Sullivan, who will provide some greater financial detail about the quarter.

Thanks, Josh, and good morning. Summarizing the financial results for the third quarter. Total company revenues grew 31.4%, and AOCF grew 3.2%. As a reminder, these amounts include the results for Chellomedia from the acquisition date of January 31. Turning to our reporting segments. Revenues of the National Networks increased 4.3% or $16 million. National Networks AOCF decreased 14.5% or $22 million versus the prior year period to a total of $129 million. Distribution revenues of the National Networks increased 10.5% or $25 million to a total of $259 million versus the third quarter of 2013. The third quarter results reflect the impact of several items. Affiliate fee growth rate for the quarter was in the mid- to high-single digits, consistent with the range that we previously articulated. Our results this quarter reflected a strong double-digit, year-over-year increase in nonaffiliate revenues due to increases in revenue related to the licensing of our scripted original programs, most notably, The Walking Dead and Hell on Wheels on digital platforms as well as international sales of Halt and Catch Fire, and Rectify. Advertising revenues decreased 5.8% to a total of $138 million. As expected, advertising in AMC was down year over year due to a decline in the number of episodes of scripted originals airing in the quarter versus the prior year, including the absence of Breaking Bad, which aired its final episode in last year's third quarter. The decline in AMC was partially offset by solid year-over-year advertising growth at each of our other national networks. Operating expenses in the quarter increased 16.5% or $38 million versus the prior year period. Technical and operating expenses increased $42 million over the prior year period or 29.4% to $185 million in the third quarter. Program rights expense amortization increased $24 million, $6 million of which represents a year-over-year increase in programming write-offs, primarily resulting from AMC's decision to shift its focus away from unscripted content. The remainder of the increase in programming expense amortization reflected our continued investment in original programming across all of our networks. Scripted originals represented the largest portion of this investment, as the mix in the third quarter shifted more towards wholly-owned content. In particular, we aired 3 wholly-owned shows, Halt and Catch Fire in AMC, The Divide on WE tv and Rectify on SundanceTV in the quarter as compared to 1 wholly owned show in the third quarter of 2013. SG&A expenses were $89 million in the third quarter, a decrease of $3 million or 3% versus the prior year period. Marketing costs primarily drove this decrease since there were less premieres of scripted originals on AMC as compared to the prior year period. With respect to the International and Other segment, revenues for the third quarter increased $109 million to $123 million. AOCF was $13 million, an increase of $27 million versus the prior year. The increase in revenues primarily reflected the consolidation of the Chellomedia business, which contributed approximately $100 million in the quarter as well as an increase of our IFC Films business, which benefited from the theatrical performance of Boyhood. As for AOCF. The year-over-year increase was related to several factors, most significantly, Chello, which contributed approximately $20 million of AOCF in the quarter. In addition, we realized a favorable comparison of approximately $3 million in professional fees as well as improved results at IFC Films due to the increase in revenue. Total company net income from continuing operations for the third quarter was $54 million or $0.74 per diluted share compared to $58 million or $0.80 per diluted share in the prior year period. Adjusted EPS for the quarter of 2014 was $0.83 per diluted share, excluding the impact of amortization of acquisition-related intangibles. EPS and adjusted EPS for the third quarter of 2014 included $6 million in restructuring charges related to the elimination of certain positions across the company; $12 million miscellaneous expense primarily related to the unrealized foreign currency transaction losses; and a benefit from an effective tax rate of 20% due to an audit settlement and the reevaluation of certain tax reserves. In terms of free cash flow, the company reported $237 million in free cash flow for the 9 months ended September 2014. For the 9 months, cash interest was $99 million, tax payments were $76 million and capital expenditures were $24 million. Programming rights amortization for the 9-month period was $458 million, and program right payments were $510 million, resulting in a use of cash of $52 million year-to-date. This compares to a use of cash for programming of $45 million for the prior year period. Turning to the balance sheet. As of September 30, AMC Networks had $2.8 billion of outstanding debt with cash and cash equivalents of $297 million for a net debt position of $2.5 billion. Our leverage ratio was 4.2x, including a full 12 months of Chellomedia. As we've previously disclosed, on October 23, we made a payment of $160 million in connection with the BBC America transaction and expect to make the second and final payment of an additional $40 million in the second quarter of 2015. The payments totaling $200 million will be funded with cash on hand. There is no debt at the BBC A entity. As a result of the transaction, we expect the leverage ratio for AMC Networks to increase only slightly, approximately 15 basis points. Over time, we expect to delever through a combination of AOCF growth and free cash flow generation. With regard to our year-over-year performance in any given quarter, we anticipate continued variability as a consequence of the specific timing of our investments in content and the airing of our shows. As Josh noted, our performance in the third quarter was driven by these factors. Looking to the fourth quarter, we expect our results to improve and anticipate delivering our strongest quarter of the year. Advertising, which continues to be a growth driver for the company and will benefit from the return of The Walking Dead, is forecasted to grow double digits at our National Networks. On the cost side, we expect National Networks' expenses to be relatively flat on a year-over-year basis, as content investment increases are essentially offsetting favorable program write-off comparisons. To be clear, my comments regarding both advertising expenses do not include any impact from BBC America. With regard to BBC A, we will recognize approximately 2 months of activity in the fourth quarter, and it will be reported as part of our National Networks segment. As for AOCF in the fourth quarter, results from operations in the channel will be burdened by professional fees that we've incurred in connection with the deal. At our International and Other segment, we expect to see a modest, sequential decline in revenue in the fourth quarter as compared to the third quarter, due to the theatrical performance of Boyhood. And finally, in terms of capital allocation, our primary focus remains on investing in our core business. We believe this strategy will allow us to continue to grow AOCF on a sustainable basis and will generate the greatest return for our shareholders over the long term. So with that, we'd like to move to the question-and-answer portion of the call. Operator, please open the call for questions.

[Operator Instructions] And your first question comes from the line of Todd Juenger with Sanford Bernstein. Todd Juenger - Sanford C. Bernstein & Co., LLC., Research Division: I wonder if I might engage with you a little bit on the dance as we think about next year. Really in terms on the investment side. I mean I know that you guys know some parameters on what your budgets will be. I know you're reluctant to share all that many specifics of it with us, but can you help us think about the rate of program investment growth, giving all the ins and outs, is it going to be about the same as this year? Growing faster than this year? Decelerating this year? Anything you can say on that regard? Then I have a follow-up.

Thanks, Todd. Yes, I certainly don't want to look forward and provide guidance for '15. I think that, as it relates to the programming slate, I would really encourage you to look at, I think, what we've already announced, what hasn't been announced, et cetera. That would probably be your best indication or understanding of the content investment certainly as it relates to the National Networks. And you obviously have the history in the indications I provided for you in the fourth quarter. Todd Juenger - Sanford C. Bernstein & Co., LLC., Research Division: Okay. Fair enough. Then just a quick follow-up. On the advertising side, again, thanks for the look-forward into Q4. What I would ask you here is when you think about -- we tend to focus so much on AMC Network. But you've got the other networks. I'm not even talking about BBC, yet. But IFC, WE, Sundance, all seem to be growing nicely in terms of audiences. Any help you can give us in terms of when you think about the sensitivity of your advertising revenue and what that adds to your growth in addition to how we think about sort of the big signature programming on the main flagship?

Sure. Todd, it's Josh. I think that we focus on AMC mostly when we're describing financial impact to the business because it has disproportionate weight in terms of its size. So I think it's fair and appropriate and hopefully, helpful to sort of drill down most on AMC. As you point out, and it's a nice thing for us, obviously, we have not only grown ad revenue, as we've just described, but we've also grown distribution on each of those channels not insubstantially over the past, recent periods of time, so that WE tv today, round numbers, Nielsen numbers, 85 million; IFC, 70 million; and Sundance, approaching 60. So certainly, what we saw in the past with AMC was the tremendous leverage opportunity of great content. And we believe that now that we have moved each of those channels to -- and it's really important -- I would not call it a gating item, but there's just more sanity and more financial sanity in investing in shows on a platform, of course, that has 85 million than when it had 40. So we think we've moved them now to a real position of opportunity. So we hope we're sensibly investing so as not to get ahead of ourselves and drown the investment, but also, we want to take every advantage of every opportunity and build the audience. So I would say, long answer to your question, I hope it answers it, we think there's a lot of opportunity there. The trends have been growing in each case of those 3 channels in the right direction. Happily, I'll say, by the way, BBC America has been defying the trend, if there is a trend, which is slightly down for cable channels of late. And as I mentioned, it's had 9 consecutive quarters of growth, purely on the backs of its spectacular performance. So we think there's a fair amount of leverage or upside in all that. As we mine it, we hope we'll mine it carefully and not miss opportunity but also not overspend. So we'll report on it, and we can do it in whatever form's appropriate in greater detail. We just don't want to spend too much time on things that are not of the greatest current financial impact.

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

I have 1 for Josh and 1 for Sean. So for Josh, firstly. Sean mentioned that one of your new shows, Halt, was sold internationally. So I wonder, philosophically, how do you determine when to keep a show on your new networks from Chello or when you sell to third parties? That's the first question.

Mike, this is Ed. So we calibrate our original shows, and we look at the networks that we have acquired with Chello. As Josh makes in the remarks, we are currently undergoing a rebranding of MGM to AMC. That's the process that began last week, and it's actually rolling out territory by territory. So we look at Halt and Catch Fire. We look at the quality of the show. We look at its projections for success. And we look, not insignificantly, at the appropriateness of this for the AMC brand as we were in this process of rebranding MGM to AMC. And so we like it for that purpose. And so we acquired it at market rate to put on the AMC Global channel. And so we'll do that evaluation on a show-by-show basis, and we'll look at things like audience projection and brand and price and make those determinations.

Okay. But you also sold it to a third-party, right, because you wouldn't have it in revenue recognition if it wasn't a third-party sale?

Michael, can you say that again? It's hard to hear you.

Yes. The fact that you said that it was in revenues, assumed that -- I assumed that it was sold to a third party. Was that not the case with Halt?

Halt and Catch Fire was part of a distribution deal that we did with a company called E1. So E1 had those rights to sell to the world, and to the specific territories that were of interest to us, we negotiated with E1 for the placement of that show on our channels.

So Michael, so the complication of all that is we sold it to someone else who then sold it to us, to say it simply. And so that's how we -- the revenue was ultimately recognized. It sounds a little odd because someone had the distribution rights and we then became the buyer.

In some territories, not all.

Right. In some territories, not all, as if it weren't complicated enough.

Right.

Okay. A quick one for Sean. Josh mentioned the restructuring of some of your back-office functions. Is there going to be a charge due to restructurings in the fourth quarter or even in the third quarter?

Yes. So Michael, it's part of a plan, obviously, as it meets the requirements of the restructuring classification. It's an ongoing plan, and there will be expenses that will be incurred in the fourth quarter and potentially beyond that.

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

I've got 2, 1 on the BBC and 1 on the programming strategy. With the BBC, thanks for the color earlier. I guess thinking about more near-to-medium term opportunities you see from the JV, having been closed now for a few weeks, how are you thinking about revenue opportunities? How would you task your ad sales force to drive results at this channel? And then on the cost side, are there material saving opportunities? Or has the channel been underinvested in from your point of view? And then finally, just on the original programming slate. You talked, I think, you alluded a little bit to the digital opportunities you see and what more can you tell us about what's possible with their content? What are the full digital rights that you have available to you?

Sure, Brian. This is Josh. So I think a couple of things, if I may. First, I think we've closed the deal 8 or 9 days ago. So it is fairly new, obviously. And we are -- and we signed and closed right at the same time. So we are right now, as you might imagine, very busy integrating literally by the hour. So I just treat that as a caveat, which is there's a bit for us to learn, even though we've had a relationship with the organization for some time. We think that -- on all the points you said, I'll try and touch on them that, first, we think they're programming is extraordinarily strong. We think that BBC is really a world-class producer and I hope that's not adjectival, that is recognized by the world. And it's recognized by the performance of the shows here in the U.S. on BBC A, and it's recognized by the performance of those shows on digital outlet, where they exist today, including Netflix, Hulu, et cetera. So we do think that there's upside, and this is in response to what you said, as BBC America becomes part of a group of channels. There will be additional promotion, cross-promotion. There'll be additional marketing leverage, and we think that we can be an aid to that channel in getting, frankly, fair audience for the quality that's already there. And it really is not only there in profile, it's there in depth. There's a lot of it that's spectacular. So we think we can be helpful there. That will, presumably, translate to some benefit in ad sales. If we can be helpful in audience, of course, there's a path to incremental monetization. It's a straight line. And I'm hopeful that we can -- inasmuch as bits of scale help here and there, that we can be helpful to their overall ad sales effort, as they've been operating as an independent channel and we operate as a group. And we've certainly seen some benefits for ourselves as a group in terms of being, frankly, just better able to serve the market and beat the market. In terms of cost, if you ask that, I wouldn't anticipate huge cost opportunities. I think we may find with them some along the way as we integrate the channel into ours. But I'd be careful not to overstate what opportunity that represents. But we'll find, I think, some along the way with care. And I think, perhaps, the most interesting but not absolutely yet fully articulated, longer-term opportunity is, to use a broad word, on the digital front. And I say that because their library of content is spectacular. Their current production of their slate coming out of the U.K., both what they do in-house and with independents is really extraordinary. What the channel has done at its own hand, the group there, Orphan Black, it speaks for itself. And so there is really a -- it is a reservoir of content greatness that both has history and library and current activity in a number of different genres from 2 sides of the ocean. So -- and if you probe a little bit to what's playing on Hulu Plus, Netflix and Amazon, you will find somewhat -- I wouldn't say surprising, but a fair amount of BBC content. And so it works well when it's gotten to on an on-demand basis, very well. So we think that, that opportunity is undermined and underexploited for the BBC and for us, and we have to determine exactly how we go about that. But we're both very interested in doing it. I hope that answers your question.

That was very helpful. And while we're talking about programming, I want ask about 2 of your other channels. I think you recently decided to not renew The Divide, and you've -- I think you opted out of a few development projects for AMC. And now you're out of the reality business at AMC. So how should we think about the programming playbook next year at the AMC flagship channel? Is there an opportunity to program another night of the week with scripted fare? What are the puts and takes in your view? And then just with The Divide at WE tv, are you still intending to develop scripted fare for this channel? Or has the strategy shifted? Any thoughts will be helpful.

Right, Brian, this is Ed. So you've asked a number of questions. On the days of the week, as Josh mentioned, we expanded with Hell on Wheels to Saturday night. So we have Saturday night and Sunday night, and there is a strong possibility we will introduce a third day of the week of original content on AMC at some point in 2015. Unscripted, it's -- we will continue with Comic Book Men And with Talking Dead that have been successful for us. There's not too many examples of cable networks that are top-of-class in more than 1 category at a time, and we really wanted to continue to put our main focus on high-quality scripted. And so -- and that's where we think there's the most revenue opportunity, both in the short term and from ancillary-level marketplaces. So that's where we'll focus the majority of our energy. And finally, on WE tv, WE will be predominantly an unscripted network. The shows on WE have been building lately. We've been increasing the volume, and we've seen double-digit audience growth in ratings on many of their shows, strength not only on Thursday night, but most recently, Friday night has become a mainstay for us as well. And as you alluded to, we had a scripted series premiere called The Divide this year, and it achieved critical success. It was a bit short of our rating projection, so we decided not to do a season 2 on it. So I think we will stay in scripted on WE because it has benefit, particularly to some advertisers. And so we have a scripted show called South of Hell, which is more of a genre, supernatural-themed series. And that is licensed not owned and that is in production now. And that will be our one scripted series that we anticipate on WE in 2015.

Your next question comes from the line of Michael Morris with Guggenheim Securities.

A couple of questions. First, with respect to the BBC agreement, can you talk about the content ownership? If you think about the programs that are currently on the network and how you kind of think about the strategy going forward, how much of the higher-profile content is owned versus licensed? And similar to how you are planning to own more of your content on your core networks going forward, is that something that you would expect on that network? Or is there a structural reason that wouldn't happen? And that my second question is on VOD, and we talk a lot about Netflix, we talk about VOD. But I'm curious about VOD availability of your shows with your distribution partners through the traditional TV ecosystem. Are you seeing, especially for a program like The Walking Dead, are you seeing growth in consumption on those VOD platforms? And how -- where are we in the process of monetizing that on the advertising side?

Sure. So Michael, I think -- I hope I'm going to explain this properly. The BBC does really a few things. I hope I'm going to say it right. So they do -- the channel currently does both. There is owned and licensed. And I guess there's variations a little bit in those terms that are, perhaps, not black and white because they can engage in coproductions and have with various entities in which they are co-owners. So it's not quite clear whether it's a -- owned or licensed and what rights you then have as you go on. It really is a hybrid. So the channel to date has engaged in all forms and flavors of ownership and license. And to state the obvious, the entity that they are most proximate to and will be most proximate to as are contract-by-contract is the BBC itself, which we think is, frankly, the best producing entity to be proximate to in all forms and flavors. So if we compare it to the AMC or AMC's conversation of owned or licensed and the various different ways that operates, I think the clearest way to explain it is to say they'll do it all. The channel will do it all. And what that means is it has cost implications, of course. And then it has revenue implications as if you're a participant, you share more significantly in related or ancillary revenues, which are predominantly digital. So I hope that answers that question.

So on the VOD front, yes, VOD becomes an important component of the ad revenue effort. If you watch either as taped on your DVR or VOD on your cable system, if you watch a program within 3 days, the network receives full commercial credit from our advertisers for that. And increasingly, that becomes part of the dialogue, frankly, with our MVPDs about fast-forward disabled on the VOD platform, which we believe is in the mutual interest of both the programmer and our MVPD affiliates. After day 4, the VOD environment is characterized by a discrete sales effort, and there tends to be lower demand and fewer spots. So that's what the landscape looks like at present.

Have you seen any change? I ask from my own personal experience. You see a pretty consistent ad load beyond the 3 days on the VOD, even though the content still seems to be incredibly high quality. So I guess, what's -- do you have any feel for what the path looks like to better monetize that?

Yes. I think we want to create urgency in our programs, and we want people to watch ideally live, same day and within 3 days. And then you get into issues of insertion, and you get into issues of scheduling with your advertisers, it just becomes more work, frankly, to monetize from day 4 and beyond. But when you have a show that has the size audience of The Walking Dead, for example, it becomes important. So we monitor it closely.

Your next question comes from the line of Anthony DiClemente from Nomura.

Seems like this quarter, there's been quite a bit of conversation about distributor disputes. I guess, Charlie Ergen at DISH had some pointed commentary earlier this week. And you guys mentioned your conversations ongoing with DirecTV. But if you kind of just look at subscribers from the standpoint of the consumer, video sub trends more broadly, and I don't formally cover cable, but it seems like a lot of the cable operators are missing estimates on video subscribers this quarter. So I just wonder if we could just broadly -- Josh, I'd love to get your view. Do you worry we're seeing an inflection in video subscriber churn at this point? And how are you preparing AMC for that if we are, indeed, seeing that? And I guess the follow-up to that would be digital seems like the right -- your quality content, and then the ability to license it on a digital platform is definitely one of the answers. You've leaned heavily towards SVOD, and I guess my question on that would be, can you give us an update on other forms of digital revenue like your authenticated AMC app? Is there a possibility you could pull that out of the TV Everywhere ecosystem and offer that subscription standalone over the top? Or do you think that your digital strategy will remain kind of heavily leaning towards SVOD licensing? Sorry for the long question.

No, please -- I think that there's clearly, first of all, some pressure in the system, so to speak, which is creating some friction between programmers and MVPDs. And while I think we actually, of course, have fundamentally mutual and frankly, almost exactly shared interests, the friction is coming to the fore as the pressure in the system, in a certain sense, exaggerates. And I wouldn't call it on the edges, but it exaggerates the points of conflict on price and possibly, positioning, probably more often on price. So the pressure, I think, creates the sort of visible symptoms that you do see more than you used to. I think the video sub trends have been -- I guess, they've been, in some cases, a little bit disappointing. I don't know if that's appropriate to characterize them as significant or modest, but they've been occasional. The -- I will answer at least with more clarity about how we think of ourselves in that world, which is -- and all the things you talked about, SVOD and where content goes and where our path is. And what I would say is that our view for some time, it's not this month or 6 months ago or 1 year ago, has been that the consumer will be faced with increasing choice by the day, whether you go home to a paid subscription in your home and you have 4 channels hooked up to an MVPD, and they're doing, by the way, increasingly great jobs at making that stuff work better and making the interfaces better and making TV E work better. If you go home, you do have the opportunity to watch in your home, on any device you want. That can be a phone with a bigger screen, it can be a tablet, it can be what you've put on any now 2 different forms of DVRs, or centralize one in the cloud or individual ones in a box. And you have this increased option of what to do on VOD, which we just talked about in terms of how it's monetized. But you sure have a whole lot more options when you go home. And then of course, you have more options that are proliferating in today's digital world, and that includes all the stuff you know about and all the boxes that crazy people like me have sitting, one on top of another in front of their television set that deliver increasing numbers of SVOD services and opportunities to buy transactionally. So it's a little hard to say, I think, where it all goes, and under what form it goes, and we do know that DISH is about to initiate something that is video-over-the-Internet. And we sort of see all the various entities moving to experiment and/or do different things. Our general point of view has been that in that environment, no matter what form it takes and which -- and at what pace it takes that form, there seems to be a trend toward content that is fairly constant. And that is, that people will have greater and greater, no kidding, choice. They will watch with a little bit more premeditation. They will watch with a little bit more, "Yes, I really like this stuff." And they'll watch with decreasing levels of sort of, "Yes, I just ran into that stuff so I watched it, indifference." If that's all true, and we think it is, then what creates the best, strongest and most sustainable position -- if you say you had a long question, I got a long answer. What creates the most sustainable position is to have the content that people favor the most, no kidding, that they will miss the most if it's not there. And that when they create intention, they say, "I'm going to go get this thing. I'm going to download it. I'm going to put it over here. I want to press that button", they know what they're after. We all know when we go home, unless you flip the TV on and just wander around like it was 25 years ago, you're making choices increasingly about what to watch. So we have been, and I hope it's evident in our content, manufacturing the content that works for that environment. We think that is the right thing to do for the MVPD world that's paid and increasingly better and more fluid. And we also think it's right to do today. We're syndicating, 9 to 12 months later, for, largely, the SVOD world. And we've also had pretty good success in transactional stuff in digital. So that's our answer to it. We're pretty clear-minded that the type of material that we've been focusing on will be the most resilient and will have the most growth opportunity and happily, is also even the most transportable overseas to various different forms of consumption because they're undergoing the same trend there. So that's my long answer to your long question. I hope it answers it adequately.

Your final question comes from the line of Vasily Karasyov with Sterne Agee. Vasily Karasyov - Sterne Agee & Leach Inc., Research Division: Just to clarify, you said it will be the strongest quarter for National Networks. Is that in terms of AOCF? And then did you mention PPA from BBC America joint venture, what we should assume going forward? And then I have a quick follow-up on distribution revenue.

Yes. So the comment about the fourth quarter was about growth. In terms of your PPA question on BBC A, we have not talked about that. Obviously, we file -- we'll have the preliminary purchase price allocation, but no, we haven't made any proactive comments in that regard. Vasily Karasyov - Sterne Agee & Leach Inc., Research Division: Okay. And then if I look at the National Network distribution revenue, it looks like it's been run rating around $245 million this year at quarter end. It's difficult for us to see especially this -- the ancillary revenue. So is there anything that would change that run rate materially in Q4?

I think, Vasily, we continue to say mid- to high-single digits on the quarter affiliate fee rates. So to the extent we say something different than that, then I'll leave you there.

Well, thank you, everyone, for joining us on today's call. Operator, you can conclude the call now.

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