Earnings Labs

AMC Networks Inc. (AMCX)

Q3 2023 Earnings Call· Fri, Nov 3, 2023

$8.54

+1.25%

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Transcript

Operator

Operator

Good day, and thank you for standing by. Welcome to the AMC Networks, Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Nicholas Seibert, Vice President of Corporate Development and Investor Relations. Sir, please go ahead.

Nick Seibert

Analyst

Thank you. Good morning, and welcome to the AMC Networks third quarter 2023 earnings conference call. Joining us this morning are Kristin Dolan, Chief Executive Officer; Patrick O’Connell, Chief Financial Officer; Kim Kelleher, Chief Commercial Officer; and Dan McDermott, President of Entertainment and AMC Studios. Today's press release is available on our website at amcnetworks.com. We will begin with prepared remarks, and then, we'll open the call for questions. Today's call may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ. Please refer to AMC Network's SEC filings for a discussion of risks and uncertainties. The company disclaims any obligation to update any forward-looking statements made on this call. Today, we will discuss certain non-GAAP financial measures. The required definitions and reconciliations can be found in today's press release. With that, I'd like to turn the call over to Kristin.

Kristin Dolan

Analyst

Thanks, Nick, and good morning, everyone. I'd like to begin today by sharing some strategic and operational highlights from the quarter that underscore our continued focus on three key areas: programming, partnerships, and profitability, which we believe are critical to the effective management of this company during a period of great change in our industry. Let's start with partnerships. As we look at AMC Networks and the current landscape around content monetization and distribution, we're arguably in a moment when the value and impact of partners has never been more important. And this applies to us, to the companies we partner with and to consumers. Our industry is undergoing a period of experimentation and innovation as consumer behaviors around content consumption continues to evolve. These changes are giving rise to new opportunities to collaborate with companies that have been long-standing partners and even those who until recently could have been viewed as competitors. Some of our partnerships are decades old, and some are very recent, but they are all critically important to our company in terms of what we can do and where we can go. For example, this fall, we partnered with Warner Bros. Discovery to put previous seasons of seven of our original series on the Max streaming service for two months as a promotional pop-up designed to raise the visibility of shows and promote sampling. This successful experiment just concluded, and it was affirming to see titles like A Discovery of Witches, Fear the Walking Dead, Dark Winds, and Anne Rice's Interview with the Vampire, consistently occupying multiple slots on Max's daily top 10 series list. And as we anticipated, we saw viewership and acquisition spikes for several shows on AMC+ as a result of the increased exposure on that. Partnering with another programmer in this way…

Patrick O'Connell

Analyst

Thank you, Kristin. I'd like to start by building on what Kristin discussed regarding partnerships, then I'll review our financial results and outlook before we open it up for Q&A. Our relationships with our affiliates are important, long-standing and mutually beneficial. We feel strongly that our tight portfolio of five well-defined networks continues to offer a strong value proposition to distributors and is well-suited to maintain broad distribution in basic or expanded basic tiers going forward. Our network supported by strong programming and highly regarded brands are accretive to the overall value of the video bundle. Our best and highest-value programming has remained on linear. And as Kristin mentioned, we are one of the only remaining sources of high-quality scripted drama in the bundle. That's reflective of our deliberate strategy to keep these affiliate relationships strong and hold our ground as the provider of a limited number of broadly appealing general entertainment brands that continue to bring value to our affiliates' video products. Our MVPD partners appreciate and are well aware of the value and performance our networks deliver. They understand that our content is compelling, our networks are high-performing, and that our wholesale rate is low. Our networks account for a small slice of total industry affiliate fees and deliver almost 2x that in audience share. That makes us a very efficient partner. Our partners also appreciate our ability to work together on new initiatives that drive real economic benefits for us and for them, such as selling our streaming services, distributing our FAST channels, collaborating on technical enhancements that improve the viewing experience, and increasing developments and value of television advertising. We expect our relationships with our affiliates, both old and new, to remain fruitful and mutually beneficial for many years to come. On to our third quarter…

Operator

Operator

[Operator Instructions] Our first question will come from Michael Morris of Guggenheim Securities. Your line is open.

Michael Morris

Analyst

Thank you, guys. Good morning. Two, if I could. First, maybe for Kristin. I'd love to hear some more detail on how the programming -- the programmatic linear advertising works specifically. How does it sort of fit with your direct sales organization? And what kind of mechanics does it take to deliver targeted advertising to a linear audience? How -- what other partners do you have to work with? And I guess, how does that work exactly? That's my first question. And then second, maybe for Patrick. You talked about softness in licensing revenue impacting the full-year guide. There seems to be a very strong appetite for licensed content, especially during the strike right now. So maybe you can help us understand how much of that has to do with like timing availability? And how much of that has to do with end-market demand? Thanks.

Kristin Dolan

Analyst

Great. Thanks Michael. You're making my day by asking about this particular topic because it's very near and dear to my heart, maximizing the capacity that we have on all of our advertising. And my history recently in data and analytics like this is a super enthusiastic area for me. I'm going to let Kim Kelleher speak to programmatic linear, just on the technicalities of it, but also coupling that with addressable, and national addressable is really kind of a 1-2 punch. So Kim, do you want to get into the specifics a little bit?

Kim Kelleher

Analyst

Sure. Thanks Michael. We're really excited about this, as Kristin just said. So in simplest terms, what we've done is we've enabled biddable programmatic buying capabilities within our linear inventory, which was mentioned as an industry first. This is something we've been working on for a long time. This means digital advertisers can now purchase our national linear inventory programmatically using the traditional buying platforms that they use today to buy all of their digital. So what this opens up is a lot of incremental audience and reach, and it maximizes the value of our yield on our linear inventory. So it brings accessibility to a longer tail of advertisers than we have traditionally worked with. So this is also the first time our advertisers can manage reach and frequency within the same campaign in linear using an automated buying platform, like The Trade Desk or whoever their preferred partner is. So this is really exciting when you couple it with the advanced advertising efforts we've taken to make all of our inventory highly targetable. So this really kind of rounds out the offering, and just making it much more seamless and efficient to buy from us.

Kristin Dolan

Analyst

Yes. And just in summary, like you can -- an advertiser can come to us either with a segment that they define or when we help them define, and then, they can buy across all of our opportunities in a consolidated way and also through our Audience Plus platform get attribution that really helps them understand what worked, what didn't, and they're buying across every single scenario of advertising offering that we have, whether it's linear or digital. So it's super exciting, and I think there's a lot of upside here.

Patrick O'Connell

Analyst

Mike, it's Patrick on the content licensing question. The short answer to the question is more of an end-market issue for us and a pricing issue for us. So I'll unpack that a little bit here. So first off, I'd separate the international and domestic markets. I think the international market remains kind of more robust than the domestic side, at least for us. And as we go to market and look to sort of pull forward the monetization of our content, we're at the same time, disciplined from a price perspective. So obviously, we were able to get a bunch of additional programming, kind of on the Covered via the unwind of the Disney-Hulu deal. We opted to use that on the pop-up on Max, opportunistic, really put our content out there, hopefully driving people back into our own ecosystem. We're benefiting this year, honestly, from a higher volume of content put in the Covered since we had held back in prior years and kept that for exclusive use on our own platforms. That's obviously no longer the case. But the reality is, is that when we're in market, we value our content highly. And so while there's always an appetite for the content, it's not always at a price that we think it's worth. And so we're opting to sort of keep some powder dry. It doesn't mean that the timing isn't necessarily, but we are sort of guardians of our programming and the value thereof.

Michael Morris

Analyst

Thank you both for the details. Appreciate it.

Operator

Operator

Thank you. And one moment please for our next question. Our next question will come from David Joyce of Seaport Research Partners. Your line is open.

David Joyce

Analyst

Thank you. I wanted to follow on the programmatic question there. I was just wondering how, I guess, ubiquitous is this ability. How are we moving towards industry standards across the various networks and platforms in order to make this efficient for the ad buyers? And how does this work with you opening up some of your newer services like AMC+ to advertising? Are you -- is it pretty seamless to be selling across platforms, and if you could tie that in also to how things went in the upfront this year? Were these part of all of those negotiations, as I presume they probably were? Thanks.

Kim Kelleher

Analyst

David, it's Kim Kelleher. Great question. So let's say, I'm going to take it piece by piece very quickly. It's -- so this has been a work in progress for a long time. This started with addressable efforts that we announced two years ago with on addressability in partnership with Comcast, Charter, and Cox. Fast forward to today, we are opening up inventory that we'll be able to add to this footprint, partner by partner. Initially, though, we are working through Canoe, and have started with Comcast inventory. Obviously, Canoe also works with Charter and Cox. So we anticipate expanding upon this. What we do is we couple this inventory with our growing CTV inventory coming from our 17 FAST channels that are currently across nine platforms, soon to be across 12 platforms by the end of this year, which is giving us a huge expanse of inventory that can be transacted on digitally. So once you put all of this together, you're able to do highly targeted. And with the progress the industry has made on managing reach and frequency and brand safety within those environments, you've got a very compelling opportunity that we're excited to be leading.

David Joyce

Analyst

Thanks. And if I could add a second topic. With some of the content comparisons causing some challenges, how can we -- and obviously, given some of the strike impacts, how should we think about some of your key content properties, timing-wise, across some of your main networks over the next few quarters to think about how advertising trends may be playing out? Thanks.

Dan McDermott

Analyst

Hi David, this is Dan. Thanks for the question. We're in great shape. We have a robust slate of content that is already finished and/or being finished right now, as Kristin said, with Interview with the Vampire and the second season of Daryl Dixon that will take us well into 2024. So we don't expect any impact from the lingering SAG after-strike, which we also hope is going to be resolved in the coming days anyway. So -- and there's no material impact to AOI or free cash flow from the strikes.

Patrick O'Connell

Analyst

And David, it's Patrick, just one sort of final footnote there from a 2023 perspective, you'll recognize that we're cycling fairly difficult comps from a programming perspective. So I would expect that the advertising number in Q4 will reflect that.

David Joyce

Analyst

Great. Thank you.

Operator

Operator

Thank you. And one moment please for our next question. Next question will come from the line of Michael Nathanson of MoffettNathanson. Your line is open.

Luke Landis

Analyst

Hi. This is Luke Landis on for Michael. I wanted to ask, in your current bundled deals with linear distributors, is there any way to allocate the breakdown to streaming versus linear channels? And how you expect that to shift in the years ahead?

Kristin Dolan

Analyst

It's Kristin. At this point, I think we look at our relationships holistically. And as we noted, we've included AMC+ with every single partner, traditional as well as a lot of the newer players into the space like Amazon, Apple, Roku, YouTube. So I think this will evolve over time how it gets sort of bifurcated and trifurcated. But just to restate, our goal is always to offer the most flexibility that allows our partners to be successful and to get our content in front of as many people opportunistically in any way that they would like to consume it. So utilizing our content across brands, across platforms, across technologies, and then both in ad-supported and non-ad-supported ways, but it's not specifically broken out yet in a way that we can articulate publicly.

Luke Landis

Analyst

Thank you.

Operator

Operator

Thank you. Again one moment please for our next question. Our next question will come from Brett Feldman of Goldman Sachs. Your line is open.

Brett Feldman

Analyst

Great. Thanks. Two, if you don't mind. First, on free cash flow and the outlook for growing free cash flow. I was hoping you could give us some insights into how you think the cash flow equation is going to evolve, meaning, right now, you guys are really doing a terrific job on the cost side of it, and that's clearly supporting a strong cash flow profile. How much longer do you think that cost programs can support growth in free cash flow? And how are you thinking about the path to long-term revenue growth? I think, most people would agree it is sort of essential to sustaining cash flow growth over the long term. And then the second is you've really been at the forefront of bundling your streaming services in with other streamers, and you've had some good early success there. There's been this constant conversation about when are we going to see more of that happening broadly across the category. I'm curious what your insights are there. As you've done this, what have you found has worked? And do you see some emerging catalysts that are likely to create more of a bundling initiatives and natural facilitators? Sort of an open-ended question, but I think you guys have the unique advantage on this. Thank you.

Patrick O'Connell

Analyst

Hi Brett, it's Patrick. I'll start on the free cash flow question. Listen, we've been taking steps over the course of the last three to four quarters, frankly, to set ourselves up in this way. And so we'll have essentially doubled run rate free cash flow from '22 into '23, and we feel quite good about continuing to grow that into '24. Obviously, the biggest lever we've had to pull there is on the programming side. And so we've set up the '23, '24, and we're looking towards '25 slates in order to ensure that, that run rate continues. Obviously, there are revenue challenges in the business. We expect those to continue into 2024, particularly on the traditional side of the business. One of the ways we've been able to grow free cash flow is not just on expense management, which, to your point, is finite. But I would also point at our efficiency on the marketing front. And so that's been one lever that we've pulled this year that's been particularly effective for us. And obviously, we've moderated the growth in our streaming subscribers, and that's decelerated to a degree, but it's been offset by significant increases in the efficiency of that marketing spend. So we're being much more tactical in spending against CPAs where we see value. And so I think to the extent we continue to do that. And frankly, as the ecosystem evolves towards bundles and we can have more sort of innovative and imaginative kind of revenue streams, as Kristin alluded to, I think from that, obviously, AOI and free cash flow growth will continue.

Kristin Dolan

Analyst

On the bundling side, Brett, I would just say there's real opportunity here around pricing and packaging. We are, as we've stated before, a pure-play programmer. So we have, I think, more flexibility to experiment. We have long-standing relationships in the industry, so it's kind of fun to get together and brainstorm and think about opportunities and put them in the marketplace. And then sort of -- as part of an answer to both of your questions, our goal here is really to get to be sort of a lean-mean distribution machine to create great content and get it out everywhere we possibly can. And that's our ability to be innovative, our ability to move quickly, our ability to partner and engage with people on all different types of ideas and then culminate that with really intense utilization of data and technology to really understand the opportunities, articulate and attribute what the results were and then kind of roll those forward into expansion of the opportunities around bundling, around technological distribution, around ad-supported capabilities, are all, again, bright future spots that we see. In addition to the efficiencies that we're finding in the organization in just getting smarter and more nimble and faster in everything that we do. So we've made a lot of progress there. I think we have more opportunities to do so in ways that benefit the company without cutting bone.

Brett Feldman

Analyst

Thank you.

Operator

Operator

Thank you. And one moment please for our next question. Our next question will come from Thomas Yeh of Morgan Stanley. Your line is open.

Thomas Yeh

Analyst

Thanks so much. I wanted to ask more about the Max experiment, especially in the contrast to the comments about the lower industry appetite for licensing. It seems like it was more promotional than economic in nature. Wondering if there is any opportunity to monetize that more directly in the future. And do you think the value lies more in driving attention to your own services as opposed to kind of a direct licensing?

Kristin Dolan

Analyst

I'd say it's a combination of both. I mean, we did see, obviously, as we said, we're thrilled with the volume of viewership of our titles on Max, including things that were not current. So we've got a lot of exposure for our brands. We then saw uptick again in utilization on AMC+ of the current seasons of shows like Dark Winds, and some of the other shows that we put on Max. And then we're -- the experiment just ended a couple of days ago. So we're now working with Warner Bros. on results from them to see how we can again sort of parlay this forward and think about ways that we can opportunistically continue to expand the visibility of our content and partner with others to help kind of serve the customer best and bundles. Everything old is new again when you talk about bundles. And whether it's a triple play of telecommunications offerings or a neatly packaged set of programming offering as it benefits the consumer, and we want to play in that space.

Thomas Yeh

Analyst

Great. Makes sense. And then recognizing it's still early days on the ad tier launch, the OTT subscriptions, I noticed, it stabilized in the quarter. I'm wondering if there was a contribution or a mix shift from that. And it sounds like you see this as a potential tool to find more ways to bundle. Is the expectation that the mix of subscribers shifts more towards an emphasis on AVOD as an opportunity over time? Thank you.

Patrick O'Connell

Analyst

Hi Thomas, it's Patrick. Yes, thanks for recognizing the kind of the sequential growth there. As I referenced before, it's really early days on the ad tier. So it's tough to draw any kind of lessons from that yet. That being said, I think, I would point to the efficiency and kind of marketing spend and cadence of content, et cetera, on the subscriber growth -- on the subscriber side. Q4, we'll see what that looks like. It's still too early, I think, to attribute much on the ad-supported tier, but I'll let Kim comment as well.

Kim Kelleher

Analyst

Thomas, I would just add to the second part of your question. I think it's very important for us to have this ad-supported tier now because it allows us to participate in future bundling partnerships with parity across a non-ad-supported tier or an ad-free tier and an ad tier. So making it seamless for the consumer and giving them that choice regardless of the tier they decide to come in.

Thomas Yeh

Analyst

Makes sense. Thank you so much.

Operator

Operator

[Operator Instructions] We have Steve Cahall of Wells Fargo. Your line is open.

Steve Cahall

Analyst

Thank you. So, Kristin, you talked a lot on this call about the importance of partnerships. And I know the Max relationship has come up a lot. And this seems to be a bigger theme that we're seeing with more content heading on to bigger platforms to maximize its value and reach. So the question I wanted to ask you. You seem to hold nothing sacrosanct within the business in terms of how to best position it going forward. How important is AMC+ to the long-term strategy of AMC? It seems like the linear network is still a great place to premiere content and engage with subscribers. But AMC+ is competing against some of these bigger platforms that you're finding partnerships with. So how do you just think about the strategic nature of that asset going forward? And then Patrick, I might be doing the math wrong here, but I think your AOI guide implies a very small Q4 for AOI versus the last three quarters. Can you just talk about if there's any content amortization timing shift in there? Is it a conservative guide or something else? Thank you.

Kristin Dolan

Analyst

Great. Thanks Steve. On the AMC+ front, it's a critical piece of what we do because it's -- again, we've always coupled it with the linear network. We haven't, particularly, in the last year, put things on AMC+ that we wouldn't put on the linear network. So we see it more as an extension of our linear offering that is available to people who consume television in a different way. That's why we're so excited, a, about the Xumo launch and our partnerships with the virtual MVPDs and the traditional MVPDs that include AMC+. But also this is -- it's interesting just to have products that appeal to different segments of the audience depending on their age and their habits. But each of them contain what we've been sort of working on for 40 years, which has curated amazing scripted dramas. And the great thing for us, again, as Patrick mentioned, is we're reasonably priced across all of our products, and what we deliver is general entertainment. So we believe, by being good partners and having great content, we can hold a good position in a sort of expanded basic traditional family cable type of package, whether it's something that is traditional linear or in the more advanced kind of future-looking bundles. It's still a bundle, it's just delivered over IP. So it's a critical piece. But again, I think you have to think about it as a different transmission form of what we've always done really well.

Patrick O'Connell

Analyst

Hi Steve, it's Patrick. On the Q4 question, I think you answered your own question. So your instincts are correct. There will be a substantial amount of amortization hits the P&L. And if I could sort of qualify the nature of the guide, I would say I expect us to be within the range. It's not necessarily conservative. But, yes, as you look at -- kind of last year, we had a similar dynamic in terms of the Q4 margin being kind of materially lower than the balance of the year. So there's nothing more than that in there.

Steve Cahall

Analyst

Great. Maybe just to follow on with that, Patrick. I think the domestic margin year-to-date is about four percentage points higher than last year with less revenue. I know you all have done a lot on cost. Do you think you can continue to expand margin at domestics over the longer term? Thanks.

Patrick O'Connell

Analyst

I'm not sure expanding margin over time is going to be as easy, but we're going to give it our all. But expanding margins could be challenging, I think.

Kristin Dolan

Analyst

But I would add, we still see some significant opportunities to streamline our expenses, particularly around technology and distribution. And that's sort of -- that's not unique to us. The marketplace is evolving. The capabilities are evolving. There's opportunities for different cloud vendors and different distribution capabilities that really can allow us to be more efficient in the actual mechanics of delivery on a go-forward basis, and we're looking at that really closely.

Patrick O'Connell

Analyst

Yes. Steve, actually, one more point on the margin there that I'd point to would be, we're focused on free cash flow. And so, obviously, sort of amortization has a big impact on our P&L from an AOI perspective. As we go forward, we're more focused on free cash flow than AOI. So we're not managing the business for margin. We're managing it for free cash flow right now.

Steve Cahall

Analyst

Very clear. Thank you.

Operator

Operator

Thank you. I'm seeing no further questions in the queue. This will conclude today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day, and enjoy your weekend.