AMC Networks Inc. (AMCX) Q2 2020 Earnings Report, Transcript and Summary

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

Thank you. Good morning and welcome to the AMC Networks second quarter 2020 earnings conference call. Joining us this morning are members of our executive team, Josh Sapan, President and Chief Executive Officer; Ed Carroll, Chief Operating Officer; and Sean Sullivan, Chief Financial Officer. Following a discussion of the company's second quarter 2020 results, we will open the call for questions. If you don't have a copy of today's earnings release it is available on our website at amcnetworks.com. 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, everyone, and thank you for joining us. This is obviously a time of great transition for our company, for our country as well as for our industry. I'll spend a few minutes talking about the industry landscape and how we are viewing our place in it and touch on several of our operational highlights before I turn the call over to our CFO, Sean Sullivan for detail on our financial results. Amidst a continuing challenge and uncertain environment, we delivered solid results in the second quarter exceeding our financial expectations for the quarter, as well as our expectations on several key metrics, which I'll expand on in a moment. We continue to maintain a strong financial profile, a solid balance sheet, and very good liquidity. We continue to generate healthy levels of free cash flow and to manage our costs carefully during this time. Overall we remain focused on our strategic priorities and are making progress on our major initiatives, which include making great content and monetizing that content across an expanding array of platforms. I'll talk about subscription video-on-demand for a moment first. These platforms include our targeted subscription video-on-demand services which are an increasing area of focus for our company. To rewind briefly, several years ago we saw that commercial free subscription video-on-demand services would be ascendant and while there would be several big players leading that charge, we believe that we could offer a premium targeted at so called niche services, that could be purchased alongside with these larger offerings. We launched several targeted SVOD services, focused on very specific genres, an approach consistent with our company's past and genetics and we probably do well which is creating highly immersive quality content more distinct audiences. It is an approach that also fits with our company's financial structure and our size. I'll remind you briefly of what our SVOD services are. Acorn features British and international mysteries and dramas, Shudder is our horror focused service. Sundance Now has documentaries to crime and more and UMC is focused on black TV and film. We've made particular progress during this COVID period with strong growth across each of these services during the period from March to June. Shudder in particular has had very strong growth and the second quarter was the biggest in its history in terms of trials, paid subscribers and amount of time spent on the service by consumers. As we mentioned in our prior call, we remain on track to end the year in the 3.5 million to 4 million subscribers range and we are now confident we will be at the higher end of that range. We have also begun to tap the overseas market. We launched Acorn in the second quarter [indiscernible] and more overseas launches are up coming. When looking at this business, it is important to keep in mind that the scale and scope of AMC Networks is much different than other companies. We don’t need tens of millions of subscribers for it to be a meaningful contributor to our business and the overall economics are very attractive particularly as compared to the something for everyone large SVOD services which as we all know programmed for each of every member of the household, everything from children's programming to glamorous, reality as they compete in the shared battle in the so called streaming wars. I'll note that it was an 80% of our SVOD subs also subscribed to at least one other general entertainment SVOD service. An important point that this underscores that we are not competitive with the large services, we are compatible with them. Our services have loyal audiences and buy them alongside the major SVOD services and they were less likely to churn out because they are passionate about the kind of content that we're offering. In terms of content, we are increasingly developing and buying content with a mind toward [indiscernible] across all of our platforms and how we window it across SVOD and linear. I will note that while we are moderating our content sales to third parties by degree as we utilize our content on our targeted SVOD services we are still selling selected to the third parties overseas and domestically. If I may, I'll move on to the subject of advertising. You'll see that our advertizing revenue numbers for the second quarter on a relative basis are strong. We are particularly seeing demand from digital and at home centric businesses that don’t require people to gather in this COVID period. There are other businesses that are challenged by the current environment and are advertizing less or some not at all. We do believe this dynamic will even out somewhat when we eventually return to more normal patterns of consumer behavior. Underlying all of this is the fact that AMC Networks holds now a thoroughly unique position on basic cable. We have a premium and diverse portfolio and we are the only place on basic cable that consistently delivers high-quality dramas and deeply engaging environments. We have a high concentration of horror to reach audiences who advertisers find very attractive who of course cannot reach a large ad free screening platforms. In terms of the upfront, we are having active conversations across the board with all of the major agencies holding companies. Importantly, we have expanded our digital presence with partnerships with Xandr, OpenAP, and 605. The interest in linear based data improved advertising continues to grow among our client base. Data continues to lead our efforts on the addressable advertising front and we are participating in too much anticipated addressable linear pilot programs. The first core project allows participating programmers to deliver addressable advertising on linear TV and we are the first media company to partner with a consortium of Comcast, Charter and Cox Communications for a pilot program called OnAddressability. We are also working with several AVOD partners and populating some of the larger AVOD services with our own branded channels. We've successfully debuted streaming channels on Pluto and Sling and received strong revenue results from this activity. We are on pace to deliver more partnerships in the AVOD arena to the end of the year and into 2021 and we think that's an excellent vital sign for the future of AMC advertizing overall. On the distribution side, as many of you know we released several of our MVPD agreements within the past year and we're pleased with those agreements. Some of our distribution partners are having challenges on the video side of the business as you are also quite well aware. We all understand the subscriber trajectories which are particularly rough in the satellite category which operates without a broadband connection. I'll note that it is the business of our MVPD agreements partners evolved our relationships with these partners is also evolving and reconstituting. An example of this is a new product called AMC Plus. It is the next generation of our MVPD centric AMC Premier product. It includes content from across our entertainment networks along with several of our targeted SVOD services that I mentioned earlier and we recently launched it with Comcast and DISH. If I may, I'll turn to content. We recently had very nice acknowledgement in the Emmy nominations announced last Tuesday with 18 nominations among our key shows, including two of the 8 nominations for outstanding drama series Better Call Saul and Killing Eve that represents fully a quarter or 25% of the outstanding drama nominations. AMC Networks is the only basic cable player to be recognized in this category demonstrating a continued ability to stand out in a crowded landscape with compelling stories that drive the cultural conversation. In terms of production, our ability to resume the safest possible way is something we're obviously very focused on and we're closely monitoring in the U.S. and overseas. The most immediate productions to currently planning forward includes the second half of season six of Fear the Walking Dead which shoots in Texas. We're looking at late August for that. A new series called Kevin Can F*** Himself which is slated to start shooting in Boston end of September and September 11 [ph] and season 11 of the Walking Dead which is to resume production in Georgia in mid October. We will continue to monitor and adjust accordingly as different states and regions overseas experience different local circumstances as it relates to the pandemic. I'd like to take a moment if I may to talk about the Walking Dead Universe. We'll be airing the season 10 finale of the Walking Dead Sunday, October 4, following by the same night the debut of the third series in the Walking Universe called World Beyond which follows the first generation raised in the post apocalyptic world. Then series of Walking Dead returns the following week for the first half of its sixth season. I'll note that the Walking Dead core series continues to out deliver every other show on basic cable and see demos despite a diminishing audience. This is a franchise that is expanding and is thriving. And as with any long running franchise whether it is Start Track or Law and Order, we continue to manage the various elements of it very closely including the cadence of when and where we have shows and how we manage that excitement consumer interest and of course associated net economics. I mentioned earlier the recent growth in our streaming services and I think it is worth mentioning our targeted SVOD services are now beginning to punch through with notable catch including Acorn's British drama Deadwater Fell with David Tennant, and Sundance Now's highly acclaimed French thriller series called The Bureau. A few other upcoming content highlights. The first season of a new series called Soulmates which we think is spectacular is an anthology drama of [indiscernible] about finding your true specific genetic soul mate, which we are able to complete before the pandemic in March. It will premier this fall. I mentioned earlier a new AM series called Kevin Can F*** Himself from executive producers Rashida Jones and Will McCormack and it is quite unique in the now single camera drama with standard multicam sitcom. We also have a new very timely series called 61st Street that is set to shoot early next year in Chicago. It is a provocative courtroom drama about a corrupt criminal justice system and it comes to us from executive producer, Michael B. Jordan. Before I turn the call over the Sean, I'll mention a couple of highlights from our International business. AMC Networks International continues to exhibit against some challenges in the environment, strong audience performance across its regional portfolios. Our business is adapting overall to viewer consumption patterns by introducing all fronts [ph] including a product called AMC Select, which offers thousands of titles in programming from across our portfolio all on-demand. That launched in Spain and will soon launch in LATAM and Central Europe. It represents of course a conversion to a model with people are increasingly consuming our material. And finally, as we continue to expand our distributor relationships with partnering with leading Spanish pay TV operator Movistar Plus and doing a new series called La Fortuna which is a six-part treasure thriller starring Oscar winner Stanley Tucci. It will air on AMC globally and in the U.S. next year. With that, I'll turn the call over to Sean for more detail on our financial results.

Thanks and good morning. For the second quarter total company revenue was $646 million and total company OI was $25 million. Both revenue and AOI were ahead of our expectations, primarily due to favorable domestic advertising performance and lower than expected expenses. With respect to the performance of our operating segments, at the National Networks revenue was $496 million, and AOI was $210 million. Advertising revenue in the quarter declined 15% to $187 million. Heading into the quarter we took a conservative view of demand given the uncertainty around the pandemic. Demand ended up stronger than we had anticipated, and therefore our results were meaningfully ahead of our initial expectations. On a year-over-year basis our advertising performance was impacted by the pandemic, as well as the timing of our originals [ph], in particular the delay in the airing of the final episode of season 10 of The Walking Dead, and the premiere of World Beyond, the third series in The Walking Dead franchise. However, these factors were partially offset by improved ratings across our portfolio of networks, as well as effective inventory management. With respect to distribution, as anticipated distribution revenues decreased in the quarter. The main driver of the decline was the content licensing component of distribution revenues. This line item declined due mainly to the timing of licensing of our scripted original programs in various windows. Most notably, results in the prior year period reflect the SVOD availability of Preacher and the Terror, as well as the international distribution of Fear the Walking Dead and Lodge 49. As for subscription revenues, subscription revenues were down in the low double-digits, as compared to the prior year period. In addition to the normal quarterly fluctuations, we continue to see a moderation, mainly due to declines in total Pay TV subscribers. Despite these macro trends, we believe that our networks offer an attractive price value relationship to our distribution partners. Moving to expenses, in the second quarter total expenses decreased $82 million or 22% versus the prior year period. As I mentioned, expenses were lower than we expected. Subsequent to our first quarter earnings call, we shifted the timing of the airing of some of our originals, notably Fear the Walking Dead, Nosferatu, and one of our new shows called Soulmates. Moving the premiere of these shows resulted in lower program amortization [ph] and marketing expenses in the second quarter. Looking ahead at our results on a year-over-year basis, technical and operating expenses decreased 25% to $203 million. The variance primarily related to the suspension of production activities and subsequent delays in the creation and availability of content, which resulted in a reduction in programming amortization. SG&A expenses were $95 million in the second quarter, a decrease of 16% versus the prior year period. The variance primarily related to lower marketing costs as well as a reduction in variable expenses associated with lower advertising sales and travel and entertainment. Moving to the International and Other segment, in the quarter International and Other revenues $161 million, a decrease of $19 million versus the prior year. Results primarily reflected increased revenue from our targeted SVOD services, offset by a decline at Levity due to the impacts of the pandemic and to a lesser extent, our International networks. AOI was $15 million, an increase of $3 million versus the prior year. The increase was primarily attributable to an increase in our targeted SVOD services and International networks offset by a decrease in Levity. Moving to EPS, for the second quarter EPS on a GAAP basis was $0.28, compared to $2.25 in the prior year period. On an adjusted basis EPS was $2.39, compared to $2.60 in the prior year. The year-over-year variance in both GAAP and adjusted EPS primarily reflected the decrease in AOI, as well as an increase in the book tax rate, partially offset by a favorable variance and miscellaneous net as the current period reflected unrealized gains on equity investments of $15 million dollars. GAAP EPS also reflected impairment charges of $130 million as disclosed in our earnings release as a result of the continuing impact of the pandemic, management assessed value of the goodwill and long lived assets recorded on our books and determined it was appropriate to record a partial write down due to lower growth expectations over the long-term at AMC Networks International primarily related to our UK and LATAM territories. In terms of free cash flow, as expected the company had a strong quarter, and continues to deliver very healthy amounts of cash. We generated $210 million in free cash flow for the three months ended June 2020, resulting in a six-month total of $392 million in free cash. Through six months cash interest was $68 million, tax payments were $30 million, capital expenditures were $22 million, and distributions to non-controlling interest were $11 million Program rights amortization month for the six-month period was $415 million and the program rights payments were $387 million, resulting in a source of cash of $28 million. This compares to a source of cash from programming a $25 million in the prior year period. Turning to the balance sheet our financial profile remains strong and we continued to take steps to ensure that we're well positioned to weather the impact of the pandemic on our company. In terms of capital allocation, the four key tenets of our capital allocation policy remain unchanged. They are first, invest organically in our core business and new businesses on projects that will produce attractive return for our shareholders. We continue to believe that the highest return for our capital is to invest in content and reposition our company for a more streaming focused landscape. As Josh discussed, our targeted SVOD services have been forming performing quite well and we're looking to lean into this area of our business, to improve our long-term positioning. Our second tenet is to maintain leverages as appropriate for the business outlook. As of June 30, AMC Networks had net debt and finance leases of $2.1 billion. Our leverage ratio based on LTM AOI of $867 million was 2.4 times. Despite the impact of the pandemic on our business, we continue to have significant liquidity. Third, make disciplined and opportunistic acquisitions to advance our strategic plan and fourth, return capital to shareholders. Given the uncertainty related to the pandemic, we took a fairly conservative approach to repurchases in the quarter, repurchasing 688,000 shares for $17 million. As of last Friday, we had $386 million available under our existing authorization program. We will continue to be opportunistic with the pacing of our repurchase activity, and you should expect it to vary quarter-to-quarter. Looking ahead, as we previously discussed, the ultimate impact of the COVID-19 pandemic on our operation remains quite fluid, and it makes it unusually challenging for management to estimate the future performance of our businesses. As a result, the focus of our perspective comments will be on the third quarter. With respect to the third quarter, we anticipate continued variability, as a consequence of both the pandemic as well as the specific timing of our investments in content and the airing of our shows. At the National Networks in terms of advertising, while the advertising market looks to be improving, our results in the third quarter are expected to be impacted by timing of our original programming lineup, including a delay in the airing of Fear the Walking Dead. As a result, we anticipate third quarter advertising revenue to be down in the mid-to-high teens year-over-year. As for distribution revenue of the National Networks, we anticipate that our results in the third quarter will be relatively consistent with what we saw in the second quarter of the year, with respect to both subscription, and content licensing revenue. With respect to subscription revenue, we expect the macro trends in pay TV subscribers to continue to be the main driver of our performance. In terms of content licensing revenues, our performance will be impacted by the timing of the availability and monetization of content in ancillary windows. For instance, in the third quarter, we no longer expect to recognize revenue from the domestic SVOD distribution of season 10 of The Walking Dead, as well as the international distribution of season six of Fear the Walking Dead. As for expenses, we expect national networks expenses to be down in the low-to-mid teens on a percent basis, year-over-year. The suspension of production activities and subsequent delays in the creation and availability of content will have the most notable impact. We expect a reduction in programming amortization as a result of the shift in timing of airing of our originals such as Fear the Walking Dead and Soulmates. In addition, we expect reduced variable expenses associated with lower marketing and advertising sales, as well as travel and entertainment. At our International and Other segment we like three businesses in particular to be impacted. As Joss discussed, our targeted SVOD services we're seeing a significant increase in activity, both in terms of usage, and subscriber acquisitions. At Levity, the comedy venue remained closed and the production activities are suspended. So we're not expecting any meaningful revenue contributions from this business in the third quarter. However, we expect that a reduction in expenses will substantially offset the decrease in revenue, resulting in only a modest AOI impact. As for International Networks, we continue to expect an adverse impact in advertising revenue, primarily related to the pandemic. In terms of free cash flow, we remain confident in our full year outlook. We continue to project full year 2020 free cash to be above 2019 levels as we expect a benefit from the deferral of programming spend, as well as a reduction in cash taxes to more than offset a decline in AOI. So in conclusion, overall, we feel confident about our ability to weather the pandemic, given our strong balance sheet and our healthy free cash flow. Our focus remains on positioning the business to get through this period of uncertainty, while also taking advantage of pockets of opportunity that we see to further our long-term strategic initiatives and positioning. So with that, we'd like to move to the question and answer portion of the call. Operator, please open the call for questions.

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

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

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

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

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

Thanks a lot.

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

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

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

Thank you, Josh.

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

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

Sure. So you can take the first one…

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

Okay.

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

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

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

Okay.

Hey, Michael.

Yes, Josh.

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

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

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

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

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

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

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

Thank you both.

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

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

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

That was great color. Thank you so much.

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

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

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

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

Yes, it is perfect. Thanks Sean.

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

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