Josh Sapan - President, Chief Executive Officer Ed Carroll - Chief Operating Officer Sean Sullivan - Chief Financial Officer Seth Zaslow - Senior Vice President of Investor Relations

Ladies and gentlemen, thank you for standing by and welcome to the AMC Networks, Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. I would now like to hand the conference over to your host, Mr. Seth Zaslow, Senior Vice President of Investor Relations. Thank you. Please go ahead.

Thank you. Good morning and welcome to the AMC Networks third quarter 2019 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 2019 results, we will open the call for questions. If you don’t have a copy of todays earnings release, it is available on our website at www.amcnetworks.com. 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. For further details, please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information, which we will refer to on this call. With that, I would now like to turn the call over to Josh.

Good morning and thank you for joining us. AMC Networks delivered solid results in the third quarter and we remain on track to meet our financial targets for the full year. We continue to deliver on our key financial objectives, including growing adjusted operating income, generating strong free cash flow and using our capital to position the business for the long term. AMC Networks is well on its way to strategically transforming itself from a cable channels company into a premier content company with a suite of focused and targeted video entertainment products that are delivered to viewers on an ever expanding array of platforms. These include our linear TV channels carried by traditional and new virtual MVPD’s, our targeted direct-to-consumer streaming services, our digital platforms on social media, and anywhere else that viewers consume content today and will in the future. As we said previously, the underlying strategic priorities fueling this transformation have and continue to be creating, owning and producing great content and valuable intellectual property and maximizing monetization of that content. Developing and growing new targeted direct-to-consumer content offerings and brands, maximizing the long term value of our core networks and brands by partnering with distributors and advertisers, by growing and extending our loyal audiences and diversifying our revenue by developing new avenues of content monetization. These are the key pillars on our road map to continued success, and we are executing on each of them in a very dynamic and obviously competitive environment. There are two prevailing and related media trends that are captivating our attention today. The first relates to pressures around the cable ecosystem, as a result of what many refer to as cord-cutting and associated changing consumer behavior. The second relates to the so called Streaming Wars as large companies would access to…

Thanks Josh and good morning. Before I review the results for the quarter and the outlook for the remainder of the year, I want to begin with a few additional comments on our broader strategy of transitioning from a predominantly portfolio of linear cable networks into a premier content company with new multiple distribution growth opportunities. There are three fundamental elements that will drive success in this new phase. First element is that our success is rooted in our content quality and the strength of our owned IP. Our quality content is our greatest asset and we will prudently scale our investment with a continued focus on total return. Our additional investments will yield increased IP that will continue to expand our brand. We will increasingly invest in owned renewal content that serves both our core networks, our portfolio SVOD services. We’re excited that our SVOD services have grown to scale where increasingly first window content makes economic sense. As part of our IT strategy we will be increasing our rights portfolios from projects we believe in. As evidenced by recent library deals in the market, the value of high quality content library continues to grow and will be prudently and selectively reserving rights for our own services and libraries. As Josh mentioned, we will no longer look to pursue wide ranging output agreements for our shows as we have in the past, instead we will look to maximize asset value for the long term on a project-by-project basis. This means that we may air our content on linear and sell SVOD, air on SVOD without linier, air on linier and our SVOD services together or potentially develop project directly for third parties. As always, we are return driven and we will continue to pursue content investment with the highest…

[Operator Instructions]. Your first question comes from the line of Michael Morris with Guggenheim Securities. You may ask your question.

Thank you. Good morning guys; a couple from me. First, when you distribute your SVOD services through these NVPD partnerships that you are talking about, is there a revenue share in there? Can you talk at all about sort of the economics of what those agreements look like versus somebody just directly taking the service? Also, can you share what the decline rate was for, your domestic NVPDs subscribers during the quarter and how that trended? And then finally on intercompany eliminations they grew in the quarter, was that related to sales or content from the National Networks to the other segment? And how do you expect that to trend for the balance of the year? Thanks.

Hey Mike, it's Josh. Our direct-to-consumer services are sold through conventional, we do it directly, where we take all of the money and do it through third parties, and they take a piece of the action and so as we engage with NVPDs to become distributors, they will have a financial reward in their success in deploying those services. I'll take a moment Mike just to point out if I might, the benefits to us apart from distribution of those services, meaning more touch points and more places for people to get them. Because it actually does touch on the second part of your question, which is it expands to state the obvious, our relationship with NVPD partners. They are carrying a linear basic channels, we get rate increases from them on that, and then they essentially have, if you want to call it a reward or an opportunity to make money, as they sell what is essentially called a-la-cart services and so their net-out or net-money out to AMC Networks from their point of view starts to decline. Our relationship broadens with them and we become on a net basis less expensive. In addition to that, as they on the cable side have more broadband-only subs, they have a targeted asset and services to deploy to broadband only subs, putting them in the position of being video providers to broadband only. So if you’re a wire-line MVPD, AMC Networks now becomes a multi-dimensional supplier of content. You actually pay less money if you succeed in achieving rates of penetration on the SVOD services, and you have something to offer to broadband only subscribers that actually [Audio Gap] basically and economic benefit your relationship. So it's really a better, holistic approach. It is, dare I say it, you know a somewhat challenged environment between programmers and distributors; it is a win-win. In terms of the general trends of subscribers, you are very well aware of MVPD reporting in the quarter. We are of course subject to all those things. We are carried by every major distributor in the United States of America and other places. So if they experienced declines, we generally experience declines that are by degree – may vary of course by company depending upon our positioning, but we are subject to those effects, which is part of our relationship in this ecosystem.

And Mike, your last question, the inter-segment eliminations. As you see from the release, consistent through the nine months in terms of revenue and AOI and I’d expect that trend to continue for the full year ‘19 versus ‘18.

Great! Thank you both.

Your next question comes from the line of Ben Swinburne with Morgan Stanley. You may ask your question.

Thanks, good morning. Maybe for Seam or Josh, either. I'd be interested if we stepped back and think about – I don’t know if you would describe this as a new strategy, but certainly sort of the evolving strategy. How do we think about the level of programming investment into the business in totality? It sort of sounded like you guys are leaning into your SVOD opportunity, which makes sense, but maybe put that in context in the overall sort of expense space in P&L. And sort of the same question on the licensing side. You know I know you guys don’t want to talk about the Hulu arrangement or details of any one deal, but it sort of sounds like you're going to be moving more things on platform. How do we think about sort of the puts and takes around licensing revenue against the SVOD opportunity. If you can help us sort of put all that into a sort of a high level view of how the business trends in your mind over the next couple of years.

Sure Ben. This is Josh and Sean may have things to add. I think we are balancing, perhaps to state the obvious, the opportunities that we see for content monetization on what is now an increasing series of opportunities for us to receive money. It used to be just going back in history, get affiliate fees, sell ads. Then it was get affiliate fees, sell ads, sell to third parties; and then it was, get affiliate fees, sell ads, sell to third parties and sell frankly to ourselves if you want to call it that internationally with a global footprint of linear channels, and now we've added an additional opportunity, which is sell to our own SVOD services in addition to all those other places. So what we described in our prepared remarks I hope was cogent, because what it said and what I’m saying now is that there is not a one play pattern for all and I will get to the specifics of sort of quantity, and if it does become simply an evaluation of where are there returns, where is there a return on an investment. So a simple example is Creep Show. It’s a show we might not have done before. We did it because we have the shutter service and our spectrum of rights were specific; we think smart, wise and specific to what our today and future opportunity is with Creep Show, so that’s just one example. The aggregate if you want to sort of just go a little bit higher in your view, which is what you suggested, is that we’ll increase our overall investment by a degree where there’s a return. And the return will be calibrated against all those immediate opportunities and it will lead us and guide us to make content that monetizes well against those multiple opportunities. In the prepared remarks the reason that I went through – I hope what was not excruciating detail on the three different examples is that it comes in different flavors and we need to be nimble, flexible, smart, strategic and disciplined and financial, to make sure that we’re doing the smart and the right thing. I believe we are – we take each piece of activity under with great care and make certain that it works. In the macro I think that will lead us to have more opportunities for monetization and to be able to build the business, because we have more platforms and more places to sell and we will admittedly have sort of more complicated if you will, monetization and play patterns. I hope that’s responsive to what you said – what your question was.

Yes. No, definitely and maybe this is – just going back to this charter agreement lastly, can you help us think about you know how charter distributes this and then these are SVOD services, so I imagine they are delivered in an IP stream over the top. So not all their video customers could get these and any sense for how they distributed and who sets the pricing for these services? Are they going to be sold at the same retail price that you sell them at or any more color as you guys pushed this model forward with what seems like a pretty interesting new relationship – side of the relationship with charter?

Yeah. You know I don’t – I really – I’m going to hesitate to speak for charter because I’ll misstep in an explanation of exactly what they’ll do. So what I’ll say is that you know I believe and hope that they entered into this with vigor and with enthusiasm and that the pricing will be essentially the same as it is available everywhere else, and that charter will deploy – I think their experts at it, they’ll deployed wisely and with acumen. If you look at the spectrum platform today, you’ll see that they seem to know what they are doing with video quite well, and so I think we’ll see charter deploy and they may actually undergo a series of different deployments as time goes on, it’s up to them, but I do think there’s no one wiser about what to do with video opportunities and margin opportunities through their multiple products than them, and I’d like to think we enjoy a very good and harmonious relationship with them and that we’ll work together to make sure that those deployments, that they execute are rich and opportune, and I mean it. That’s not just our words. I think they’ll be incredibly smart about where margin opportunities are and will in part be led by them.

Okay, thank you.

Your next question comes from the line of Todd Juenger with Sanford Bernstein. You may ask your question.

Hi, thanks. Good morning. You seem anxious and we’re all anxious to hear so much more about your SVOD services, so let me ask a couple of things about that. Can you tell – what more can you tell us in terms of the current state of the businesses other than just subs. Would you be willing to share ARPU, SAC, Churn, net profitability or net cash flow. Any other things would be remarkably helpful and interesting. And then if we extend that to your five year view of your $500 million revenue, I think you said $7 million subs. I can do that math. I think that’s a $6 ARPU. Can you at least tell us what sort of margin profile you think that business would have at that state; that’s the big one? Quick Sean, just one other quick one if you don’t mind; I feel like I always have to ask about the balance sheet. You’ve got I think $700 million in cash sitting there, it keeps growing. Just wondered what that is sitting there for and your thoughts on why you would have that there and what we could expect to see happen to that over the nearer term. Thanks.

Hey Todd, its Ed. On S5 we’re always anxious to talk about it, so yes, thanks for the question. As Josh mentioned in his remarks, we’re pleased with the progress in those services and in fact we’re running a bit ahead of the targets that we set out in our last earnings call. I guess I would guide you to the statement was made previously, that we’ll achieve runaway profitability in the aggregate by year end 2020, and also the significant growth, Acorn passed the 1 million subscriber mark, and what’s interesting as all of the SVOD services evolve is the program mix and with the way we’re managing churn. We believe that Acorn, while I won’t get more specific, is among the lowest churn rates in the industry and we think that’s the key with these services, because we are serving a passionate audience group and we can manage churn and we can produce original content and acquire content that makes the services invaluable to those subscribers. And so we are sort of playing on a different playing field if you will than the bigger mainstream. There’s two theories I’ll site on Acorn that have just been workhorses. One is Doc Martin, which is a mystery series which is now in its ninth season and Murdoch Myseteries is in its thirteenth season and those are among the highest achieving Acorn among viewership and loyalty and completion rates. That gives us the ability then to co-produce original content as Jeff’s mentioned with Creep Show and Shudder has experienced its fastest growing quarter to-date, largely because of the investment in Creep Show. So mixing the acquired in the core production with the new original content, managing churn and super serving our audiences we think is the key to our healthy growth rate.

And Todd, just to tackle the balance sheet question again, I think we have a great capital structure and we have a great interest rate profile, maturity profile for our debt. As we said, our leverage is at 2.5x down sequentially from the second quarter and cash is obviously a reserve for incremental organic investments; M&A to the extent we find something sound and disciplined and obviously return to capital as I said continues to be a priority.

Okay, good enough. Thank you both.

Thank you.

Your next question comes from the line of Steven Cahall with Wells Fargo. You may ask a question.

Thank you. Maybe just first one on Acorn to follow-up. Are you contemplating doing any sort of exclusive originals or maybe you can just talk a little bit about what you think the incremental investment is in content at Acorn, and I think AT&T this week talked about having exclusive rights to Doctor Who. So maybe you could just comment on what you need to fill out at Acorn to kind of get to your longer term subscriber objectives. And then maybe just to keep on this theme that we all seem to be asking about direct-to-consumer. It seems like the movement of that third Walking Dead series to your own platform is maybe one of the first times you’ve pulled back on one of your tent poles of owned content. So can we just talk a little bit about what the long term direct-to-consumer strategy is domestically and you know would you see yourself pulling back more of your sort of flagship shows like The Walking Dead from domestic licensing right? Thanks.

Right, Steven I think it’s the Mix. The last part of your question I’ll addressed first with the Walking Dead series 3. We have done a very lucrative and important deal with Amazon to exploit the international rights. We also exploit The Walking Dead Series 3 Will on some of our AMC services around the world. Then when we look to the U.S. we have a different strategy. We have two platforms which would likely be strong vessels for Series 3. They are AMC Premier and Shudder and of course the big premiere on linear. So all of those things we think are the best ways, the strongest ways to monetize that series. We may come to a different conclusion on other series. We like the idea of approaching the marketplace on a series-by-series approach, very much being mindful of what the economic opportunities are and what audiences we’re trying to serve and of course we do want to build out for the long term the strength of our platforms and have the benefit of recurring subscriber fees. On Acorn it will continue to be a mix of acquired content, coproduced content and original content, and as the size of the footprint has continued to grow, the investment budget for original series has grown as well and we think that that trend will continue.

Thanks.

Your next question comes from the line of Marci Ryvicker with Wolfe Research. You may ask your question.

Thanks. Sean, when you talked about the fourth quarter in advertising, you mentioned the tough comps, we get it; but you also mentioned the overall ad environment and scatter. So anything you can say about how you’re feeling about Scatter; what you’re seeing. And then secondly, when do you anniversary this contract dispute with your distribution partner and how is this impacting your financials? Have you been dropped from this or is it just that you haven’t gotten a rate increase yet? Thanks.

Thanks Marci. So to your first question, I think the ad market continues to be strong, the Scatter market is strong, pricing is strong, continues to be a strong demand for our show, so that’s how I would characterize the advertising marketplace. As it relates to the dispute, we do as we said, enjoy a continued relationship, we enjoy a continuing carriage. I believe first time we mentioned this was on the second quarter conference call, so I think that would probably inform when the impact began and I think in my proactive remarks, absent that I tried to give you a little bit of the contours of what subscription revenue would have been if not for this contractual dispute.

Okay, and then one follow-up on Acorn. Is this just domestic at this point or is there a mix of international that you could give us?

It’s overwhelmingly domestic at this point. We have begun expansion opportunities in some places in Latin America and Europe, but those are early days, very early days.

Okay, and do you have an actual sub number, just because being over $1 million. If you’re closer to $1 million it means you sort of have to double in the next couple of months to hit your over $2 million.

Well, the $2 million subscriber number that we gave is the aggregate of the four SVOD services; so that’s Acorn, UMC, Shudder and Sundance now with the target that we spoke about on our previous earnings call.

Thank you.

Thank you.

Your next question comes from the line of Alexia Quadrani with JP Morgan. You may ask your question.

Thank you. Just two quick questions if I may. Firstly, is there any more color you can give us on the third Walking Dead series and physically how you balance leveraging the success of that franchise without potentially adding to the fatigue? And then just following up on your comments of not selling or exchanging services domestically going forward. Is the economics of selling internationally now becoming more favorable to help you ease the financial burden that has caused more limited sales domestically?

The international streaming services, the economics are meaningful; they always have been meaningful and that continues to be. Amazon is an important partner. We have other places that we’ve sold our content and again AMC International is also an important place for our content to be exploited. So I’d say it continues to be meaningful revenue for us international. On The Walking Dead, the Series 3 of introducing a new cast and the story pivots, because this is really the first generation that came of age during the zombie apocalypse. So they are now young adults, they are asking different questions, they are challenging the way the world has been organized, and they are – as the story will unfold, they are in pursuit perhaps of the underlying mystery as to what created the apocalypse in the first place and how might it be eventually resolved. I think that’s probably all I’ll say about that, lest I get an SD [ph] call from our show runner. But that series is scheduled to premiere in the second quarter. And the other thing I would say about it, one of the exciting things for the network is, when you combine The Walking Dead and Fear the Walking Dead, and now what we anticipate to be 10 episodes of the Walking Dead Series 3, we will have 40 Sundays of original zombie related – zombie world premieres on AMC in 2020, which gives us the more active consistency that has not happened before, and we think our fans and we know advertisers will be excited about.

Thank you.

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

All right; your last question comes from the line of David Joyce with Evercore ISI. You may ask your question.

Thanks. Just a couple of things. Following on one of the other questions, could you help us understand what the different windows are between some of the BBC programming that you’re sharing with Discovery and Warner Media? Doctor Who was mentioned, but also if you could mention the nature programming. Secondly, I just wanted to see where we are on the addressable advertising evolution. You know what Aurora is doing to your ad growth. Thank you.

Right. So David on Doctor Who, all the new Doctor Who’s come to BBC America. I think what you may be hearing about on other streaming services are his library content. It will be the exclusive domestic premieres and we will have that new doctor coming to us I believe in the first quarter and this is the second season that features the new doctor, Jodie Whittaker, and all that is exclusively available on BBC America. The question about natural history, BBC America also is the home for the overwhelming majority of the natural history sort of Planet Earth premieres. There are a number of individual ones that that may premiere in other places, but for the overwhelming majority, we are the exclusive home on linear television and VOD.

And on the Aurora contribution to ad revenue growth?

Oh! It continues to be a major growth area for us. Again, Aurora gives us the ability to target advertisers, to target audience segments. So for example we are able to price on heavy consumers of soft drinks or people who suffer from certain kinds of allergies, so we work with the pharmaceuticals and we’re working with financial services and we’re able to target those audiences. That had double – we experienced double digit growth in that area in ‘19 and it not only helps us to drive pricing. We obviously charged a premium for that, but it enables us to drive volume among blue chip advertisers. And we think our platform which we refer to as agility is among the most capable among our peers and in the ad sales industry, and so it continues to be an area of robust growth for us.

Great! Thank you very much.

Alright, at this point I’d like to thank everyone for joining us on today’s call and for your interest in AMC Networks. Operator, you can now conclude the call.

Thank you, and that concludes AMC Networks, third quarter 2019 earnings conference call. You may all disconnect.