Ladies and gentlemen, thank you for standing by, and welcome to AMC Networks Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]. With that, I would now like to hand the conference over to your host, Mr. Seth Zaslow, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning, and welcome to the AMC Networks Full Year and Fourth 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 full year and fourth quarter 2019 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. 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'll 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. In 2019, against the backdrop of a rapidly shifting media ecosystem, AMC Networks achieved the key financial targets that we articulated at the beginning of the year, generating healthy free cash flow and maintaining a very strong balance sheet. We continue to respond to the pressures on the pay-TV bundle and linear advertising in an increasingly consolidated media world with strategies to take advantage of these changes. They are a focus on increasing content ownership, expanding distribution of targeted direct-to-consumer services, development of advanced advertising and maintaining the high-value of our linear channels. The size of AMC Networks and our particular strengths and approach put us in a position to benefit from levels of success that we believe are highly achievable and sustainable. We're off to a productive start to the year with the announcement we made yesterday, with one of our biggest MVPD partners that reflects the changing and increasingly holistic relationship with the distributors. Our new long-term distribution agreement with DISH includes the launch of our full suite of targeted SVOD services as well as a desirable agreement for the carriage of our linear networks. This agreement comes on the heels of a long-term renewal we reached last year with Charter Communications, which includes making all of our SVOD services available to their subscribers. We're very pleased that our MVPD partners have embraced our subscription video-on-demand strategy and are launching those services as part of their platforms. Our new multifaceted agreements demonstrate that MVPDs are increasingly recognizing the value that our growing SVOD services bring to their own offerings, particularly as their businesses change and evolve. These deals also underscore the continued strength, vitality and value of our linear ad-supported number of brands and content. These targeted subscription video-on-demand businesses…

Thanks, and good morning. As Josh highlighted, 2019 was a successful and productive year for the company. Despite the challenging macro environment, we met each of the financial targets we laid out at the beginning of the year. For 2019, total company revenues grew 3% to $3.1 billion, and AOI increased 1% to $944 million. Adjusted EPS was $9.27, an increase of 7% versus the prior year. And the company continued to generate strong free cash flow, delivering $377 million. So let's review the performance of our operating segments. For the full year, National Networks revenues were $2.4 billion and AOI was $904 million, a decrease of 2% as compared to the prior year for both metrics. In the fourth quarter, National Networks revenues decreased 1% to $589 million. AOI was $182 million, a decrease of 13% as compared to the prior year period. Distribution revenues increased 6% in the fourth quarter. As expected, it was a particularly robust quarter for content licensing revenues due mainly to the timing of the licensing of our scripted original programs. Results in the quarter reflected the SVOD availability of Preacher, Into the Badlands, NOS4A2 and Killing Eve, which more than offset the absence of SVOD revenues from Dietland in Q4 2018. The international distribution of The Walking Dead also contributed to this increase. As for the subscription revenue component of distribution, revenues were down in the mid-single digits as compared to the prior year period. In addition to the quarterly fluctuation based on the timing of various agreements, renewals and adjustments, we continue to see a moderation, mainly due to macro factors. As we mentioned on prior calls, the results in 2019 were also impacted by the interpretation of a contractual provision with 1 of our distribution partners. We're pleased to announce that…

[Operator Instructions]. Our first question comes from the line of Ben Swinburne from Morgan Stanley.

Josh, could you talk about the opportunity you see with these targeted SVOD services globally? I don't know if you have any research you've done on sort of the TAM or how big these genres are in your view. And also, are you able to use the linear channels from a promotional and content and brand perspective to drive these businesses? And then I just wanted to follow-up with Sean. Sean, can you just help us understand sort of the bridge around AOI and free cash flow? Last year, you guys had AOI growth. Cash from ops is actually down, which didn't sound like it was programming related, so I mean, any color there? And then just in '20, you're talking about a better free cash performance relative to AOI. I just wanted to see if you could help us understand those drivers.

Ben, it's Ed. Actually, I'll weigh in on the opportunity, the international opportunity, against our SVOD. One of the things that is interesting and favorable about this business is we're able to develop an intimate relationship with our subscribers. We see all the data. We know what shows they watch. We know what their completion rate is of the show. We know how long it takes them to go on to the next episode. And obviously, we know what shows are our most popular and most utilized. We're then able to develop a demographic profile of those customers and look at populations in other territories. We also overlay that with rights availability, what we can co-produce, what we own. Increasingly, as we own more content, there become more efficiencies about expanding. So we look first to English-speaking territories for obvious reasons for some of our OTTs. We're looking at parts of Europe and we're also looking at Latin America. Also the overlay of our international sales force provides us a head start on getting these services on the major platforms. So that's also an important part of the strategy that you will see going forward. To your second question. With the linear channels, there's absolute crossover between the brands and the content on some of our linear channels and the OTT services. Some good examples that are top of mind, Creepshow premiered on Shudder and you will see later in the year, it will run on AMC. We think that will be successful on AMC, but also to build audience then for the Season 2 launch of Creep Show back on Shudder. We did the reverse dynamic with NOS4A2, where we premiered it on AMC and then transferred over to Shudder, and now we're building towards Season 2 as well. And other examples with content moving fluidly between UMC and WE tv abound and also between Sundance TV and Sundance Now.

And Ben, on the free - sorry. So just on the free cash flow. So as we think about '18 to '19's performance with the increased AOI, there was an investment in working capital in '19, which was really the year-over-year driver in terms of free cash flow performance '18 to '19. As we fast forward to 2020, we expect working capital turn more positive. But as I said in my remarks, CapEx, we're coming through a heavy CapEx cycle. We'll see some benefits there. We'll see better cash tax profile in 2020. And those items will more than offset the AOI discussion that we had. So we feel great, again, about the free cash flow portrait dynamic as we continue to invest in content. And as we continue to pursue, obviously, these growth initiatives. So we feel very good about the free cash profile.

Our next question comes from the line of Michael Nathanson from MoffettNathanson.

A couple for Josh and then 1 for Sean. So Josh, now they have DISH and Charter done on the renewal side. Could you give me a sense of what percentage of your footprint is coming due in the next couple of years? And given that you always say to us, well, you're a better guide or judge of subscriber trends going forward, how do we think about the inflators you guys have? So if no one really, truly knows the shape of subscriber declines, help us think about, okay, in any decline world, how do we offset those declines with inflators? So that's the subscriber questions. And then for Sean, to Ben's question, your second half cash flow this year really came down. And just - I haven't updated the model you gave us on the update. When we look at second half versus first half, was the driver working capital? Was that the main part of the decrease in free cash flow?

Sure, Michael. So this is Josh. Yes, so I think a couple of things. We did do the two renewals you mentioned, and we feel quite good about them for multiple reasons. One is, frankly, stability continuity. The second is - and we did well on that front. So we - all of our linear channels deeply penetrated as they've been. The second is the launch of these targeted SVOD services. And as you know, MVPDs that are wireline have incentives now, particularly to sell video to an increasing percentage of broadband-only subscribers. And we like to believe that we have very good relationships with these distributors, and we'll work with them in new ways to have them realize incremental revenue and margin from video, and we'll be the beneficiary. The deals were - the deals all have annual escalators in them. They're - the pace of those annual escalators, I can't tell you with certainty given what will occur into the subscriber profiles that we've been seeing of late, particularly on the satellite side, where we'll net out. So I will say what I said before. You study it more closely than I do. We're all watching trends quarter-by-quarter, and it is slightly difficult, I think, for anyone over a 12-month horizon to say satellite will be this, wireline will be this. There's a proliferation of streaming. It is a moving animal. You know the numbers today. I think, as where we stand today, there's 80 million satellite cable telco. There's 9 million virtual subscribers. That's a total of 89 million. You know the trends, that some of the virtuals are moving around in terms of entrance growth reduction. You also know the satellite trends. So when we offer our prospective view of the year, we do our best…

And Michael, to your second question on free cash flow. So yes, in 2019, first half, second half, in some respects, to a lesser degree, cash tax payments were lighter in the first half than in the second half. But at the end of the day, again, it relates to the working capital content licensing activities in the back half of the year. Production activities for our shows and our originals are impacting free cash flow. But again, as we fast forward to 2020, I think the free cash flow profile that are articulated just reflects the robustness of our model and our platform.

Our next question comes from the line of Michael Morris from Guggenheim.

Two questions. My first one, maybe for Josh or Ed, is around the role of advertising on your SVOD services. Can you just tell us right now how much ad-supported product you have out there? And as you look forward, what's the role of advertising? Or what's the contribution you would expect? Would you expect to offer different tiers of service perhaps and ad-free and ad-supported? How are you thinking about those types of things? And then secondly, Sean, within your outlook, you talked about results improving beyond the investments that you're making in 2020. Can you just talk about the key contributors to what would cause that upward inflection in 2021? And maybe sort of how you're thinking about the swing factors, whether it's on the top line or on the expense side?

Michael, it's Ed. On advertising and our SVOD services, we do not feature any now. With AMC Premiere, part of the thinking was to give our viewers a choice working inside the ecosystem with our distributors of how they'd like to experience the AMC content. They could get it in the ad-supported environment or they could get it in a more binge-friendly ad-free environment. And there's some interesting things we can do with our distributors, and we - I think we'll do some interesting things with them in 2020. On the OTT, the target OTT, we don't feature advertising now. We don't have immediate plans to. Theoretically, that could be an opportunity because we have an upscale audience that's highly targeted, but we do not have any plans at present to look that way.

And Michael, to the beyond 2020 question, again, I think as I articulated, 2020 has some unfavorable programming timing and investments. Obviously, we're developing a number of growth initiatives, including the targeted SVOD that we've been talking about this morning, including international expansion of those. So my expectation on improved performance is really a result of the uptake in excess of those initiatives that we're executing in 2020.

And Sean, if I could just ask you one more. You talked about the resolution of the difference with a distribution partner in early 2020 that impacted you in '19. Could you quantify at all sort of how much that may have impacted your 2019 subscription revenue? And how we should think about whether that gives you a little bit of a favorable benefit in the coming year?

Yes, Michael. Again, as you know, we don't go into specific program agreements or distribution agreements. So I think all I would say is, a, we're pleased we resolved it. We did it in 2020. And the articulation of the guide for the full year 2020 is reflective of that resolution.

Our next question comes from the line of Todd Juenger from Sanford Bernstein.

If I could first, if you don't mind, take another shot at what Ben was, I think, trying to get at in the very first question in the Q&A. Let me try it this way. Ed, if you still want to engage on this. So thinking about the TAM for some of these niche SVOD services, as you described them. If we could just focus on the U.S. even. I guess what I'm trying to wrap my head around is niche, by definition and as you've said, means targeted sort of a very particular audience. You talked about 1 million subscribers already or more than that for Acorn. How many potential households do you think there are in the U.S. for a service like Acorn? To help us understand whether a million is a lot of that potential market or a little bit of that potential. But I'd love your thoughts on that for really all the services, Acorn, Shudder, UMC, Sundance, if you don't mind. And then, Sean, if you just - hopefully quick second question and I truly apologize if this was in your guidance and I missed it while I was taking notes. But the content licensing side of the National Networks, especially with the evolving SVOD strategy, that's the hardest, at least for me, to try and gauge in terms of growth. And now, especially, as you're changing it. Did you make any comments - or can you just help us - should we think of that as a growing item generally for next year? Will that maybe go down as you rethink your willingness to license some things, just plus minus? Any help you give us to narrow it. I would appreciate it.

Todd, it's Ed. So on the targeted SVODs, I think the best guidance I can give you is, we've said we're looking out to year 2024. We expect 5 million to 7 million OTT subscribers, and we expect upwards of $500 million in revenue. I don't think I'll break out individually by OTT service, except I think what's interesting since the last time we all talked is the marketplace has been dominated of late by the new entries in the free subscription samples and the partnerships with mobile phone services and such. And so that's a lot of noise, and that's a lot of subscribers. But we are continuing on our plan, and we are on the pace that we have talked about in the last two calls. So we think we're on to something because we have such an intimate relationship with those subscribers. And for us, managing churn and keeping our subscribers as we grow them is the name of the game. And in doing so, those services then can become profitable at much, much fewer subs and will run at a healthy margin. I hope that's helpful.

Yes. So again, I did try to at least give some qualitative comments to content licensing. Again, as you know, the cadence of writing a show to conclusion, it becoming available on a domestic SVOD service. That is going to create content licensing unfavorability in 2020. I think I guided you to that for the full year. I also gave you some context as it relates to the first quarter. I will also reiterate again; we're doing this on a select basis. So this isn't a formal or firm policy. So I think we're looking at each show, each opportunity in determining the best way to monetize it, whether it's on our platform or by monetizing it, both domestic and abroad, internationally. So we have shows that write to conclusion in '19, and we have a bunch of new shows that Josh walked through, whether it's Soulmates, whether it's Kevin Can (expletive) Himself, whether it's Dispatches. So obviously, we have a number of new shows as we maintain our content investment, and those are premiering. So given the windowing of our historical behavior, there is an unfavorability and timing impact occurring.

Our next question comes from the line of Vasily Karasyov from Cannonball Research.

I have 1 for Sean and 1 for Josh. Sean, for years, we had the [comment] that was very helpful for us, the broadly stable margin in the National Networks segment. So I understand in the new world that changes. I wonder if: a, this is true? And b, would you be able to give us a similarly useful guidance or outlook for how margins will evolve as you go through this transition? And then I have one for Josh.

Yes, Vasily. Thanks. So as you look at 2019 versus 2018 at the National Networks, I think we delivered a pretty stable margin at 38%. Prospectively, I didn't offer that guide. I do think that my comments speak for themselves about areas of investment, areas of growth, areas of opportunity, but at the same time, managing aggressively the cost base. So I'm not going to give you a hard and fast guide that we're going to have either consistent or a broadly stable margin, but I think we're being very prudent and disciplined around the investment for our National Networks, our linear channel business, in light of the macro factors and what we can control and what's occurring to us. So I think that, hopefully, our past behavior and activities and financial results speak for themselves.

All right. And Josh, I would like to ask you to elaborate on this view out there that the industry is going through effectively unbundling. You have multiple direct-to-consumer services and so on, but eventually, it will have every bundling to occur. So since you offered in the past very insightful views on the future of the industry, I was wondering if, a, you agree with that? And b, who do you think will be that entity that will rebundle services? And what does that mean for you, for your initiatives in linear and direct-to-consumer services?

Sure. I'll give you my best perspective on it, Vasily. It is, first of all, in motion. And so I think that there have been some occurrences that have probably surprised many. So I think prognosticating with clarity or certainty, I should say, with certainty is a risky business. With that, I think what I'd say is a few things. And unfortunately, it won't all sound like 1 big simple home run. There's erosion, obviously, in the pay-TV side of the existing ecosystem. It's occurring with much greater speed, for obvious reasons, on the satellite side than on the wireline side because of presumably the attachment of broadband to the wireline side. I think the numbers today are there's around 80 million in the U.S. that are cable satellite telco. I think there's 9 million that are so-called virtual MVPDs. So there's been erosion in those numbers. I think I stated them before. That's the state of the union. There's price pressure on that part of the business on what we used to call the basic cable bundle. By the way, there's oodles of price pressure on what we used to call premium cable, HBO, Showtime, Starz, as the streaming services have caused, I think, MVPDs to revisit some of the fixed deals they've done on that segment. But the price pressure, I'll just take this segment by itself, on the basic cable part of video will continue. We think that AMC Networks is a winner in that arena against that trend because, frankly, of price/value. And so if something costs $4 or $10 or $12 and has a gazillion channels and we cost a fraction of that and have several hit shows that people are watching a lot of, that we're a great buy, and therefore, we are an…

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

I've just got a couple. Thanks for the updates on the international direct-to-consumer plans. I was wondering if you could help us think about this year. Which markets make the most sense to go into first? And how much localization do you think is going to be needed for those rollouts as we think about the building blocks that need to come together for a successful launch? And then, I guess, more specifically, for Sean. On the guidance, you talked about $100 million run rate revenues on direct-to-consumer exiting 2019. Could you frame for us the latest thoughts on the path to breakeven in direct-to-consumer? And how much dilution might be occurring in this year's AOI outlook from DTC? And then 1 housekeeping. I think you called out an accelerated amortization policy for your own content, where you control the SVOD rights in 2020. And I was just wondering, could you clarify, are you accelerating because you're taking those rights in-house for play out on your own SVOD services? Or are you accelerating to a different assumption for the value of that window to third-parties? Is it a bit of both? Any color would be appreciated.

Bryan, it's Ed. On your SVOD question. I identified earlier parts of Europe and Latin America as the priorities for expansion of some of our SVOD services. I would say localization is not a year 1 priority. But I would also point out because of the local regional content, much of it lifestyle, that we produce in Iberia, in Latin America and in the U.K., we do have a head start. We have a number of co-productions in the U.S. and original productions in the U.S. that we think travel well. And then we also can supplement that with the content that we control in territories where we already do business on the linear side.

So Bryan, just to your few items there. Again, I think that we've talked about the revenue run rate. I think in the past, we've talked about both our expectation in terms of targeting profitability as well as even outer years in terms of run rate, in terms of subscribers and revenue. So there's no change to that. In terms of the amortization, just to be clear, we're not changing a policy. It's really as a result of how we do our ultimates and the revenue and expense recognition where when we selectively hold back rights and not monetize to a domestic SVOD platform, it does have the corresponding effect of accelerating amort into a current period. That's all I was saying. It wasn't highlighting a change in policy per se.

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

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