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Edited Transcript of AMCX earnings conference call or presentation 31-Jul-19 12:30pm GMT

Q2 2019 AMC Networks Inc Earnings Call

NEW YORK Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of AMC Networks Inc earnings conference call or presentation Wednesday, July 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward A. Carroll

AMC Networks Inc. - COO

* Joshua W. Sapan

AMC Networks Inc. - President & CEO

* Sean S. Sullivan

AMC Networks Inc. - Executive VP & CFO

* Seth Zaslow

AMC Networks Inc. - SVP of IR

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Conference Call Participants

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* David Carl Joyce

Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst

* Marci Lynn Ryvicker

Wolfe Research, LLC - MD of Equity Research

* Michael Brian Nathanson

MoffettNathanson LLC - Founding Partner & Senior Research Analyst

* Michael C. Morris

Guggenheim Securities, LLC, Research Division - MD and Senior Analyst

* Todd Michael Juenger

Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst

* Vasily Karasyov

Cannonball Research, LLC - Founder

* Zilu Pan

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Jacob, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the AMC Networks' Second Quarter '19 Earnings Release Conference Call. (Operator Instructions) Thank you.

I will now turn the call over to your host, Seth Zaslow, Senior Vice President of Investor Relations. Sir, the floor is yours.

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Seth Zaslow, AMC Networks Inc. - SVP of IR [2]

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Thank you. Good morning and welcome to the AMC Networks' Second 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 second 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. This call can also be accessed via our website.

Please take note of the following. Today's discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of the future performance or results and involve risks and uncertainties that could cause actual results to differ.

Please refer to the company's filings with the Securities and Exchange Commission for a discussion of risks and uncertainties. The company disclaims any obligation to update the forward-looking statements that may be discussed during this call. Further, we will discuss non-GAAP financial information.

We believe the presentation of non-GAAP results provides you with useful supplemental information concerning the company's ongoing operations and is appropriate in your evaluation of the company's performance. 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.

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Joshua W. Sapan, AMC Networks Inc. - President & CEO [3]

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Good morning, and thank you for joining us. We delivered solid results in the second quarter, and I'm pleased to say we remain on track to meet our financial targets for the full year.

We continue to deliver on our key financial objectives, including growing adjusted operating income, generating strong free cash flow and using our capital to position the business for the long-term.

As we've discussed on prior calls, AMC Networks strategic priorities have been and continue to be creating great content, maximizing the long-term value of our traditional linear business and diversifying our revenue by developing new avenues of content monetization through our expanding studio as well as our growing direct-to-consumer interests.

Later on in the call, I'll take the opportunity to provide more dimension on our direct-to-consumer reference, including details around both our evolution and overall strategy in this area.

I'm pleased to say, we continue to make significant progress on these goals in 2019. Our content highlights include our recently announced landmark partnership with Universal Studios for the first-ever theatrical movie set in The Walking Dead Universe.

And our very strong showing when Emmy nominations were announced earlier this month, including having 2 out of 8 outstanding drama nominations for Killing Eve and Better Call Saul, in a year that had the largest group of submissions ever.

We've managed advertising in a difficult comp environment and have a strong upfront driven by high demand for our shows, with very strong increases in pricing. And we continue to grow our direct-to-consumer services adding the most D2C subs over a 6-month period that we ever have.

I'd like to begin by expanding on our content highlights, if I may. At our core, AMC Networks is a premium content company with a reputation for excellence and a long track record of creating culture-defining hits, and this year has been no exception. Our celebrated programming runs the gamut, from the phenomenally successful Killing Eve, which doubled its audience for its second season, to WE tv's unscripted original series called Love After Lockup.

It's become a cultural phenomenon, which is driving that network's year-over-year double-digit ratings increases in its key demo. The Emmy nominations I just mentioned brought us wide recognition with nominations for 4 of our 5 networks as well as our streaming service, Acorn TV.

Our first foray into high-quality short-form content, a series called State of the Union, broke through to receive 3 nominations for best short-form series as well as for actors, Rosamund Pike and Chris O'Dowd.

This recognition affirms AMC Networks as a company whose shows in all different formats ignite all of our constituents, most importantly consumers at a time that is more crowded and competitive than ever.

We're extremely proud that in an era of billion-dollar content budgets that's been informed by what some call the streaming wars, we're able to continue to stand out by incubating and developing shows that land extremely well in the broader culture.

Killing Eve, for example, is a show we commissioned internally, and is a great example of the importance of strong content development and vision in a world that is sometimes preoccupied with scale, abundance and very rapid green lighting. And it represents a clear example of what makes AMC Networks distinct in this blurring media landscape.

I mentioned earlier, the landmark Walking Dead theatrical movie deal we announced at Comic-Con with Universal Studios a couple of weeks ago. This partnership expands The Walking Dead Universe to the big screen for the first time, underscoring the high level of interest that the universe commands and the undeniable strength and vitality of this growing franchise. Comic-Con also marked the kick-off of our promotional campaign for the highly anticipated tenth season of The Walking Dead core series, which debuts in October. Fear The Walking Dead is continuing a vibrant run in its fifth season and is the 5th highest-rated drama on ad-supported cable. And just this week we begin production on the 3rd series in The Walking Dead universe, which centers on two young female protagonists. The first generation to come of age in the zombie apocalypse era. With multiple shows, video games, merchandising and other ancillary businesses that we've created around this franchise and now a theatrical movie, The Walking Dead universe is, we believe, in its early stages of life and has many opportunities for future growth. As many of you know, The Walking Dead is just one of many shows created by AMC Studios that allows us to own the content we make and deploy. We began our studio initiative more than a decade ago when we foresaw a world where fragmentation would force changes in the existing cable model, and owning content would be critical. While we often discuss our ownership of The Walking Dead, it's important to note that we also have ownership of many other shows. In the current year, 8 of the 10 scripted series on AMC Networks are made and owned by AMC Studios. We'll likely increase that number of original series over time as we program not only for our linear channels but also for AMC Premiere and our targeted SVOD services as they continue to gain critical mass, something I'll talk more about in a moment. The company continues to build an expanding library of owned content. By year-end, among our studio assets will be nearly 500 episodes from series, including The Walking Dead, Fear the Walking Dead, Halt and Catch Fire, TURN, The Terror, NOS4A2 and Lodge 49, and a number getting close to 1000 independent films. As our series come off their exhibition windows on mainstream SVOD services, they will come back to us for the first time for future global licensing as well as utilization within our own ecosystem of SVOD services as well, of course, on our linear and global channels.

Turning to advertising. Our upfront resulted in strong year-over-year pricing increases driven by robust demand for our original content. Our upfront resulted in -- sorry, the AMC channel, which is home to 3 of the top 6 basic cable dramas, led the portfolio with double-digit price increases. We saw strong growth for our other networks as well, in some cases the highest rates of growth we've seen in a decade. There is particular advertiser interest in Killing Eve, not surprisingly, as well as our third series from The Walking Dead universe, which debuts next year. In addition, we're benefiting from the increasing popularity of the BBC's Natural History programming since we're the only way for advertisers to reach viewers of these shows in the U.S. BBC AMERICA's next nature series is called Seven Worlds, One Planet and it's in very high demand from marketers, who value the opportunity to place their brands in and adjacent to this ground-breaking content. Despite macro headwinds in live+ 3 ratings that's putting pressure industry-wide on all linear ad-supported networks, AMC Networks continues to appeal to highly desirable demos that advertisers find attractive. We control approximately 1/3 of all total drama impressions on basic cable. For marketers looking to advertise in high-quality dramas, AMC Networks and FX, now part of Disney, are the only 2 options on basic cable. So we have true category leadership, and we continue to invest wisely and prudently to protect it and to value it. Over the past several years, we've actively diversified our base of advertisers, which has helped us hedge against key advertiser and category dependencies which, of course, shift with changes in the marketplace. And the television ad market continues to evolve. In what has become an era of enhanced monetization through new data and planning tools and more targeted advertising, we've made significant investments in advanced advertising technologies, such as our proprietary targeting tool called Aurora. In what has been a multi-year effort for us, we've been building tools and staffing up as we've developed data and analytics for our proprietary tools. We've seen the number of advertisers utilizing these tools increase and we're now beginning to see results. Year-to-date, we've tripled our target -- our targeted audience ad sales. In addition to our own initiatives, we're also participating in broader industry efforts such as Project OAR, a consortium focused on bringing addressable advertising to Smart TVs. Overall, on a trend basis, our advanced advertising business is growing meaningfully. Our products enhance our value to advertisers through better targeting, data and measurement, and we believe they will improve our overall business in the mid and long term.

As to our affiliate strategy, our approach has been supported by multi-year agreements and we have renewed several so far this year. As we've discussed in the past, we believe that AMC Networks is very, very well positioned due to our price and due to the strength of our content across our entire portfolio and this attractive position will be particularly advantageous to us as this ecosystem continues to evolve.

Moving on to International. As a reminder, the cornerstone of our portfolio internationally is the AMC branded channel, which is carried globally and is complimented with strong local brands in more than 130 countries. The portfolio is led by strong performance, particularly in Iberia and Eastern Europe.

We continue to build audiences for our original AMC series, including, most recently, for Fear the Walking Dead and NOS4A2 as well as original contents that we air on our regional portfolio of channels.

In addition, we continued to expand our library of original owned content, including more than 500 hours of content that we produce annually in Southern Europe and Latin America, for our lifestyle and cooking channels in just those regions.

Following our acquisition of RLJ Entertainment last year and our recent reorganization of our overall targeted SVOD businesses, we thought it made sense to provide detail around our SVOD strategy, including some of our economics, which are fundamentally different than those of gentle -- general entertainment SVOD services.

As a reminder, for the past several years, we've been focused on creating and growing targeted special interest SVOD services. While the mega caps compete in the general interest arena, we believe there's a very significant opportunity for us with specialty SVOD services that offer a new way to serve fans, and we believe that the market for these types of services will continue to grow.

We've spent now half a decade investing in data, platforms and programming and developing our SVOD competencies, understanding elements of sub-acquisition and learning how to efficiently attract and maintain those audiences.

Today, in addition to our AMC Premiere services, we have 4 SVOD services targeting distinct audiences, which I'll remind you of: Shudder, for horror and suspense fans; Sundance Now, which has critically acclaimed series and films; Acorn TV, which has British mysteries and dramas; and Urban Movie Channel or UMC, targeted to urban audiences.

The latter 2 services we acquired as part of our stake in RLJ Entertainment. We recently centralized these 4 services under the leadership of RLJ Entertainment executive, Miguel Penella, who's been with that company for more than a decade and launched and built Acorn TV into profitability.

I'm very pleased to say that we're seeing very healthy rates of growth, as I mentioned earlier, across these 4 services. Through mid-year 2019, we added approximately 400,000 subscribers in aggregate, and we are on target to end the year comfortably ahead of 2 million subscribers.

As these services gain sufficient scale, we've been increasingly populating them with original content, which has been resonating with subscribers and is helping drive our healthy growth rates.

Given the genetics of our SVOD services, we have the ability to target and retain subscribers, a very important point, with radically more efficiency than mainstream SVOD services that are pursuing broad, general interest audiences that often experience, as we all know, people coming in and out for an individual show or series.

While our 4 services are at different development stages, we've seen that churn and sub-acquisition costs can be managed to industry-leading levels. We believe Acorn is one of the leading streaming services when it comes to customer engagement, and that it has one of the lowest rates of churn in the industry, if not the lowest.

We anticipate crossing the 3.5 million to 4 million [queue] sub-threshold by 2022. And by 2024, we anticipate between 5 million to 7 million targeted SVOD subscribers and in excess of $0.5 billion in revenue from these 4 services.

As part of this overall D2C architecture, we developed our own integrated tech stack that allows us to understand the needs of the consumer and bring them back month after month, that's been in the work now for 5-plus years.

We've built and marketed our services so that, today, the majority of AMC Networks' D2C subs are buying directly on our own platforms, something that substantially differentiates us from many other specialty SVOD services.

This provides us with important data and a direct consumer relationship and allows us to see what's working and not working in real time.

While it does take time and investment to build this relationship with consumers, we believe that our experience and evidence to date shows that we have the expertise and the right set of assets to succeed in this arena.

Importantly, we've seen success in creating engaging services with relatively modest content and marketing investment. We believe we can achieve meaningful size relative to our content spend significantly earlier and at much lower subscriber levels than general-interest services.

Additionally, the bulk of our D2C business is currently U.S.-based. We're now beginning to launch internationally, particularly with Acorn. And we believe the overseas market opportunity is very significant for us, particularly over time.

So in closing for my part, while there are periodic pressures on specific areas of the business, we believe these macro pressures are manageable because we've planned for them for a long time. Over the past 10 years, we've taken important steps to materially prepare our business and diversify our revenue streams, from creating a studio to expanding internationally, to acquiring an ownership stake in BBC AMERICA because we believe the channel had untapped potential.

In 2011, as a point of reference, our traditional U.S. MVPD affiliate and U.S. advertising revenue represented upwards of 90% of total company revenue. Today, our diversification efforts put that level now at about 60%, with about 40% of our revenue coming from other areas of our business.

As I just detailed, our direct-to-consumer services are enjoying significant momentum as we continue to remain focused on creating sought-after premium content, which propels our entire enterprise. We believe D2C, along with owning more of our intellectual property and expanding our studio, represent significant growth areas for us.

Now if I may, I'll turn the call over to Sean Sullivan for more specific detail on our results.

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Sean S. Sullivan, AMC Networks Inc. - Executive VP & CFO [4]

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Thanks, and good morning. We're pleased with our results in the second quarter as total company revenues were $772 million, AOI was $232 million and adjusted EPS was $2.60.

The company continues to generate very healthy levels of free cash flow, $85 million in the quarter and $229 million for the 6-month ended June 2019. And we remain firmly on track to meet our total company targets for the full year. I'll touch on the outlook in more detail later on in my remarks.

So moving to the performance of our operating segments. At the National Networks, Q2 revenues decreased 4% to $605 million. AOI was $236 million, an increase of 1% as compared to the prior year period. Advertising revenue in the quarter decreased 11%. As we highlighted on our last call, results were influenced by the timing of our originals, in particular, fewer episodes of The Walking Dead and Fear the Walking Dead as compared to the prior year period.

However, a number of factors helped to offset the unfavorable comparison, including growth at each of our other 4 networks, BBC AMERICA, IFC, Sundance and WE tv, as well as increased pricing across our portfolio of networks.

With respect to distribution, distribution revenue increased 1%. As for the subscription revenue component, revenues were essentially flat with 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 our last call.

In addition, our second quarter results were impacted by the interpretation of a contractual provision with one of our distribution partners.

We're in discussions with this partner and are hopeful that we'll resolve all our differences in the near future.

As for the content licensing component of distribution revenue, this line item continues to contribute to our topline growth. The growth in the quarter was driven primarily by the availability of Fear the Walking Dead, The Terror, and Lodge 49, which more than offset the absence of revenues from Dietland and Dirk Gently in the prior year period.

Moving to expenses. Total expenses decreased 6% or $25.4 million versus the prior year period. Technical and operating expenses decreased 6% to $269 million. The variance is principally related to the timing and mix of originals across our portfolio of networks.

In the quarter, we recorded $10 million in charges related to the write-off of various programming assets. This compares to write-offs of $4 million in the second quarter of 2018.

SG&A expenses were $113 million in the second quarter, a decrease of 9% versus the prior year period. The variance primarily related to a decrease in marketing costs due to the timing of originals.

Moving to our international and other segment. In the second quarter, international and other revenues grew 22% to $180 million. The increase primarily reflected revenue from the acquisitions of RLJE and Levity. AOI was $12 million, an increase of $6 million versus the prior year. The increase was primarily attributable to an increase at our international networks as well as at the acquisition of RLJE.

Moving to EPS. In the second quarter, EPS on a GAAP basis was $2.25 compared to $1.82 in the prior year period. On an adjusted basis, EPS was $2.60 compared to $1.93 in the prior year. The year-over-year increase principally reflected a decrease in income tax expense as well as a favorable variance in miscellaneous net. GAAP EPS also reflected restructuring and other related charges of $17 million taken in the quarter.

The decrease in the book tax rate for the quarter reflected a benefit from the release of a valuation allowance relating to foreign NOL carryforwards, the restructuring and other charges related to our direct-to-consumer businesses. In the second quarter, in connection with the RLJE acquisition, we announced a reorganization of the management structure for our D2C businesses. The reorg placed our subscription streaming services, Acorn TV, Shudder, UMC and Sundance Now, under a common management team.

We also implemented changes to our strategy resulting in the write-off of certain programming assets. We believe that this new structure and strategy will allow us to more effectively and efficiently operate our SVOD services.

As Josh mentioned, we're seeing very encouraging performance from this area of our business. Given this recent performance and our outlook for these services, we foresee achieving run rate profitability for all of our services in the aggregate within the next 18 months.

Moving to free cash flow. The company had another strong quarter, generating $85 million, resulting in a 6-month total of $229 million in free cash. Through 6 months, tax payments were $78 million, cash interest was $77 million, capital expenditures were $49 million and distribution to non-controlling interests were $10 million.

Program rights amortization for the 6-month period was $469 million, and program rights payments were $444 million, resulting in a source of cash of $25 million. This compares to a use of cash for programming of $2 million for the prior year period.

Turning to the balance sheet. As of June 30, AMC Networks had net debt and capital leases of $2.5 billion. Our leverage ratio, based on LTM AOI of $955 million, was 2.6x.

In terms of capital allocation, our primary focus remains investment in our core business. We continue to be disciplined and opportunistic in our use of capital for both repurchases and nonorganic investments.

With respect to share repurchases, during the second quarter, the company repurchased $57 million of stock. This represents approximately 1.1 million shares. Subsequent to the end of the quarter, the company has repurchased an additional $6 million or approximately 115,000 shares. As of last Friday, the company had $495 million available under its existing authorization program.

So program to date, we've repurchased approximately 25% of our outstanding shares. We expect to continue to be opportunistic with our share repurchase activity.

Looking ahead, there are no changes to the full year outlook as we remain confident in our ability to achieve the target that we communicated at the beginning of the year. We continue to expect to grow total company full year revenue in the low- to mid-single digits and total company full year adjusted operating income in the low single digits.

Based on our performance through the first half of the year and the trends that we're seeing in our various businesses, we remain confident in our ability to achieve our full year revenue target. However, given what we've seen year-to-date, the expectations for our revenue streams continue to shift a bit. We continue to see an improvement in the outlook for domestic advertising revenue as well as a moderation of our expectations for domestic subscription revenue growth.

With respect to domestic content licensing revenue, we now anticipate the rate of growth to be relatively consistent with the prior year. So overall, the revenue streams have shifted a little bit but our expectations in the aggregate have not changed.

As for the cadence of our performance during the year, we anticipate continued quarterly variability as a consequence of the specific timing of our investments in content and the airing of our shows.

In the third quarter, at the National Networks, we expect revenue growth versus the prior year period. We anticipate this growth will be led by an increase in content licensing revenue.

As for expenses at the National Networks, we anticipate a year-over-year increase due mainly to the timing and mix of originals airing on our networks.

At our international and other segment, our reported results will continue to reflect the impact of RLJE, and we expect the impact of that business would be similar in the third quarter to what we saw in the second quarter both in terms of revenue and AOI.

Excluding RLJE, we expect the other businesses in the segment to deliver, in aggregate, healthy growth in both revenue and AOI.

So in conclusion, overall, we feel very good about our performance in the first half of the year and how the business is positioned for the remainder of 2019.

So with that, we'd like to move to the question-and-answer portion of the call. Operator, if you could please open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Michael Nathanson.

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Michael Brian Nathanson, MoffettNathanson LLC - Founding Partner & Senior Research Analyst [2]

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I have one for Sean and one for Josh. Sean, let me just start with you for a sec. Could you just help us with the more details on the affiliate revenue line. What was the change in subscribers this quarter? And then what's the impact of that contract dispute? And how -- can you scale that for us? And then I have one for Josh.

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Joshua W. Sapan, AMC Networks Inc. - President & CEO [3]

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Michael, it's Josh. I'll just give you, if I may, some response to your first question. There's -- just to say that we have an MVPD who we have -- are in conversations with about contractual interpretation. This happens periodically in the nature of life and contracts that go over several years. As the business changes, we think it's one thing, they think it's another. We are currently actively engaged in conversations with them about it. I can't report how those conversations will conclude. They're dynamic and active as we speak.

The second piece of what was responsible for this, I guess it's a few million dollars in a quarter, change in perspective is subscriber growth among the MVPD universe, as you know perhaps better than I, in this -- in the quarter trended down a bit. So that, of course, as we're paid on individual units of subscribers, affects us. So those are the 2 things you asked about, and those -- that's the state of the union on that.

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Michael Brian Nathanson, MoffettNathanson LLC - Founding Partner & Senior Research Analyst [4]

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Okay. Okay and, Josh, can I ask you about the film partnership. I'm trying to understand the economic interest on your side. So is this -- are you guys producing the show, 100% taking the risk? So could you give me a sense of what's the actually economic relationship here? And how could that film actually, then, maybe help other parts of the larger AMC franchise? So a little bit more on the film details for us.

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Joshua W. Sapan, AMC Networks Inc. - President & CEO [5]

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Sure, so let me just offer, if I may -- just provide context, if I may. I just think, first, if you don't mind, Michael, I'll say that it's a really excellent vital sign from our point of view and my point of view that the opportunity to bring the franchise to the big screen is now partnered with a preeminent studio that has -- obviously, the track record of Universal speaks for itself.

And so I just would note that, that is an affirmation of those experts at the highest level in the belief that The Walking Dead, on a worldwide basis, will be something that people will go to pay dollars to in the silver screen.

And I just -- as it relates to The Walking Dead, and -- which we now have 3 television series on, games, merchandising, that is a meaningful piece of activity. And I will say that there was interest fairly widely among studios to do that, it was not unique, singular, and therefore, it is a representation and an affirmation of strength of franchise. If you don't mind that comment, I think it's important. I'm not at liberty to go into details on the nature of the deal for us. It's sort of privileged information. So what I would say is, it's very nice to have a movie for all the reasons we've said. I'm sorry I'm going to have to stop short of getting into the who owns what and who gets what fees. It is privileged information.

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Operator [6]

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Our next question comes from Marci Ryvicker with Wolfe Research.

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Marci Lynn Ryvicker, Wolfe Research, LLC - MD of Equity Research [7]

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I have 2. When you talk about sub-trends trending down, can you give us what they're down this quarter versus last year relative to last quarter versus last year? That the first question. Then the second question, the subs on your SVOD and OTT services, what percent are domestic versus international today? And for all the targets that you gave, are you including international as well?

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Joshua W. Sapan, AMC Networks Inc. - President & CEO [8]

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Sure, Marci. I'll just, if I may, just on the subscriber counts, I think you receive, I mean it, reports. Everyone reports on subscribers as part of their filings. So we're subject to what the world is doing. Every company, I think, recently reported, all the big ones: AT&T, DIRECTV, Charter, Comcast, et cetera. So that's a -- that little look at the data would reveal exactly what's happening in the universe. And while we don't track precisely with that, I think you'll see that we're significantly affected by that trend, and I think that would give you a pretty clear picture of what that looks like.

In terms of the subscription video-on-demand, the out-year look does include international, which we have not yet mined that. Significantly, as I mentioned, we have much more experienced with domestic performance. We have some experience with international just beginning. So it does include both pieces of the business as we take a forward year look.

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Edward A. Carroll, AMC Networks Inc. - COO [9]

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Marci, this is Ed. I would say, on the subscriber additions that we mentioned today, the 400,000 subscriber uptick, that's substantially all U.S. We've really just began operations for Acorn in Mexico and Australia, for example. We have a little bit of Sundance Now and Shudder in the U.K. and Germany. But by enlarge, those subs, almost all U.S.-centric at this point. It's very early days for international expansion.

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Operator [10]

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We have a question from Michael Morris with Guggenheim Securities.

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Michael C. Morris, Guggenheim Securities, LLC, Research Division - MD and Senior Analyst [11]

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Two questions or two topics, if I could. First, Josh, you mentioned the series that come back to AMC as they come off mainstream SVOD. Can you talk a little bit more about your decision process about what to do with those series? How you weigh maybe reselling them externally versus keeping them internally? And what does economics look like? And then second, on those your specialty SVOD services and the targets you just gave us, is that revenue solely subscription revenue? And can you talk a little bit about the content that you need to build those to where you want to be and what the margins of those businesses could kind of look like over time compared to your existing businesses?

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Joshua W. Sapan, AMC Networks Inc. - President & CEO [12]

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Sure. So Michael, the series that come back will present us with decisions which I would actually characterize as opportunities, happily. We'll be in the privileged position of being able to make a determination series by series about where and in what manner we can deploy them to optimize value. It's something that's very much in the news in our industry today. Our opportunities will be, of course, to sell them to third-parties and evaluate on a worldwide basis what that economic opportunity is. And as our subscription services grow, we'll also evaluate utilizing them themselves, including on AMC Premiere and on the 4 services that we mentioned.

Just to complicate the answer, Michael. They -- those answers may overlap. We could make a decision because it's our decision that -- and this is simply hypothetical, in certain geographies, they're sold to others for a discrete period of time where we might not develop our own services. And in other areas, we take them for ourselves. And the market does work that way. So we will make determinations on a series by series basis, balancing the value that we can drive on our own services versus the money that we can yield from third-party services.

And there is also, although, it's not much talked about in the SVOD world, there is a subject of exclusivity and non-exclusivity. And so we will have that to make a determination about as well. The good news is, and it really is nice news, is a number of these series, as you well know, have significantly established constituencies, reputations, histories and awards. And we have many humans, and frankly, generations that have been underexposed.

And so, I think, we're going to see that because we have, in our genetics, a fair amount of quality and prestige and recognition, I do think that they're going to be of extraordinary value to us as we make a determination about exactly how to deploy them.

As to your second question, our services are commercial-free. There are no ads in them today. There are no ads contemplated for them for the future. So everything we talked about really does presume and assume and is commercial-free subscription around passionate targeted groups. The whole subject of AVOD is a separate subject, which we are in and we can discuss in a different conversation. But what we're doing is these services are all commercial free, and the plan is for them to be commercial free.

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Sean S. Sullivan, AMC Networks Inc. - Executive VP & CFO [13]

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If I can. Mike, as it relates to your content question for -- well, for example, for Acorn, many of its most popular programs are produced or coproduced by Acorn and against reasonable economics. So some of the breakout shows like Manhunt and Queens of Mystery, Acorn is a producer or a coproducer.

And so we think that will continue because they are targeting using data and analytics to target a very specific audience. And they have immediate -- as you would imagine, they have immediate feedback on what shows, what streams are most successful.

What is interesting, though, is that we are beginning, for appropriate AMC Networks content, to also give that a window on our targeted SVOD. So for example, NOS4A2, which we just renewed to Season 2, and that's our vampire story on AMC. That will have its premiere SVOD window on Shudder, for example. And you begin to see early seasons of the Braxton's from WE tv on UMC. And then I'll also mention Greg Nicotero, who's a producer on The Walking Dead. He is executive producer of a horror series called Creep Show, which will make its premiere on Shudder. So you begin to see us benefiting from a symbiotic relationship between the linear networks and the targeted SVODs as they continue to gain mass on the platforms.

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Michael C. Morris, Guggenheim Securities, LLC, Research Division - MD and Senior Analyst [14]

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And so just on that, despite the fact that the new platforms are single revenue stream versus dual that you have on your existing business, do you still think that the margin profile could look similar because of the sort of content sharing benefit you could get? Or is it fundamentally different from a profitability perspective?

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Edward A. Carroll, AMC Networks Inc. - COO [15]

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No. I think everything you just said is close to the way we think about it.

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Operator [16]

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Our next question comes from Alexia Quadrani with JP Morgan.

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Zilu Pan, JP Morgan Chase & Co, Research Division - Research Analyst [17]

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This is Zilu Pan on for Alexia. And just going back to the SVOD services. How do you think about launching these services directly yourself versus partnering with an aggregation kind of like Amazon or Apple which might serve as a larger funnel to acquire subscribers?

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Joshua W. Sapan, AMC Networks Inc. - President & CEO [18]

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Sure.

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Edward A. Carroll, AMC Networks Inc. - COO [19]

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So yes, this is Ed. So we think both are good. We are partnered on some of the larger platforms. But as Josh mentioned, at this point, the majority of our subscribers are direct-to-consumer, well, for our platform, which we have been working to develop for a number of years. That gives us more immediate feedback. That gives us much more data about who our subscribers are, what shows they're watching, what percentage of episodes they watch to completion, where they go after finishing one series, what series they go to next, you get that with D2C.

We also have analytics against those subscribers, that make it very, very efficient for us to keep subscribers. As Josh and Sean were alluding to, a very, very critical component is managing your churn. And so if you control the platform, you just have a larger window in -- to managing churn rates, to subscriber preference and to reaching out with your marketing message at maximum efficiency.

Having said that, Amazon is a good partner. Apple is a good partner. We think we'll continue to be -- both on our own platform and on some of our partner platforms.

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Zilu Pan, JP Morgan Chase & Co, Research Division - Research Analyst [20]

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That's great. And as a follow-up on, I think it was recently announced another show will be simulcast on ABC and Sundance. Do you see more of that going forward? Obviously, Killing Eve saw a great success being simulcast on 2 channels. So how do you maintain the distinct brand of each channel at this time?

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Edward A. Carroll, AMC Networks Inc. - COO [21]

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Yes. The simulcast is not something we do a lot of. We are quite pleased, creatively, with Killing Eve, and we thought it was a unique opportunity to give the show wider exposure, which seemed to work. And interestingly, the ratings on BBC AMERICA held fast, continue to be strong, and we think new people on AMC were able to sample the show, and it's nice that the show got Emmy recognition as well.

So we'll use it occasionally for big events such as the Planet Earth franchise. We have done a simulcast through a roadblock and in that way not only gotten more attention to what we think is extraordinary programming, but where our advertisers are concerned, we're also able to give them more value in a world where people are looking for big events and special events. And that's the thinking behind it.

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Operator [22]

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We have a question from Todd Juenger with Sanford Bernstein.

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Todd Michael Juenger, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [23]

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Can I talk a little bit with you guys, if you don't mind, about the content licensing sort of line? So Sean, just quickly, I think, in the past couple quarters, you had been saying that fiscal year '19 would be higher than 2018 in growth rate. I think this morning, it would be similar to 2018. So I don't know of how big that change is, but just wondered what has sort of changed and led to that, if you could share that with us? And then broader, maybe Sean or Josh. Going forward with these SVOD services and talking about your own content playing a role on them, how do you reconcile that with your content licensing business revenue opportunities there? It seems like that's a trade-off you'll have to contemplate. And even specifically, how does that relate to the output deals that are in place and -- when you think about output deals going forward? The question is there -- how does that come together? And does that change your philosophy on content licensing and partners over time and the financial impact?

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Sean S. Sullivan, AMC Networks Inc. - Executive VP & CFO [24]

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Thanks, Todd. Yes, on the first one, you've got it right in terms of our outlook for the year on content licensing. Again, we continue to believe, for 2019, it's an area of growth. It's moderated a bit. A lot of that is related to timing, frankly. But as you know, that's not only the exploitation of the show on domestic and international SVOD, there's gaming, there's licensing and merchandising, there's home video, EST, et cetera. So there's a lot of components that we don't have perfect visibility to. But -- so some of those other areas have moderated a bit. But overall, it's really a timing effect.

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Joshua W. Sapan, AMC Networks Inc. - President & CEO [25]

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Yes, Todd. On the subject of what we do with content, and I'll add -- I'll ask Ed to chime in if has something to add, if I may. The development of our SVOD services, which is now several years into activity, represents an opportunity for us. And I think you'll understand the trade-offs instantly, you've been a student of the subject.

Our services, as we described, are quite different in their cost composition and then the general entertainment or whole house services that are now competing with one another for share and spending at very heady levels, obviously. So what we'll do is we will take a look at every show that we have. Frankly, what its economics are and what its applicability is. And we'll factor that also increasingly into our development thinking, as these services begin to scale. There are some projects which will be naturally attractive to the services we have because of their nature, their editorial nature and also because of their cost. There'll be other services -- there'll be other shows that, I'll call them bigger or if I may, much, much bigger, that we may find appropriate to simply exploit on a worldwide basis or an international basis with third-party services as we make a determination of where the greatest return is.

So for us, there will not to be a playbook that's hard and fast. It will be a developing playbook based upon the size, scale and net economics of our SVOD services. The nature of the content, where the greatest return is, and it will not be binary or the same plot show after show. I know there's much discussion in the more mainstream SVOD world about all of that and rights coming back. We live and play in a different arena, and we will follow a pattern that has sensible economics in each instance that balances strategic opportunity and growth against economics.

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Operator [26]

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Our next question comes from David Joyce from Evercore ISI.

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David Carl Joyce, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [27]

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Just had a little bit more question on the Aurora addressable advertising efforts. I was just wondering, is that starting to enter the discussions in the upfronts? And has that impacted the pricing there? And to date, since you've had some -- seen strong growth in that, is it bringing incremental advertisers into the environment? If you could just provide some more color there.

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Sean S. Sullivan, AMC Networks Inc. - Executive VP & CFO [28]

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David. Yes, I think very much Aurora is part of our upfront conversations, and very much it helps with the pricing or the CPM part of that conversation. And I think, really that has been its strength more than bringing new advertisers in, it's bringing bigger commitments at higher pricing. And so, particularly in the auto category, in the movie studios category, in the pharmaceuticals category, we're seeing receptivity to the Aurora tool and its ability to create efficiencies for client marketers and to hyper-target their prospects.

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Operator [29]

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Our final question comes from Vasily Karasyov with Cannonball Research.

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Vasily Karasyov, Cannonball Research, LLC - Founder [30]

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I think my question is for Josh and Ed. Josh, you touched on AVOD. So my question is, I think it's 2 parts, maybe a little more. So first of all, are you surprised by the growth in AVOD usage in the U.S.? And I'm not only talking about Hulu, I'm also talking about Pluto TV. I think Viacom has been disclosing a lot of growth metrics after they closed the acquisition, especially given the quality of content that was available on it before Viacom started putting on all their content. So -- and what does it tell you about that being a competition for your linear networks? And also what would you say to an argument that your D2C offerings internationally, maybe there is an argument to be made that an ad-supported tier, at least, is a way to get subscribers given how pay-TV evolved internationally historically, where people showed more propensity to watch commercials and free-to-add television and pay-TV ARPU was lowered per capita given lower per capita GDP and income, and so on. So would appreciate your thoughts on this, guys.

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Joshua W. Sapan, AMC Networks Inc. - President & CEO [31]

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Sure. Thanks. I think we're not surprised we are participants in AVOD. We license our content to AVOD services. So we've been tracking them for some time and partnering with them for some time. And so we're active participants in AVOD services and understand what the trends have been.

I think that it's an attractive platform and an attractive medium. So I wouldn't say that we're surprised. I think on the question of their relationship to SVOD, we get into some interesting and rich territory because they have been, as you know, at least in the U.S., discrete entities. Crackle was around for a while. It didn't call itself AVOD, but it really was an AVOD service run by a movie studio. There was just a transaction surrounding that, so it has different people running it. And Pluto and Tubi are around and others.

And so the one -- and so there are interesting models to consider, and I don't know that the jury has determined what the final resolution to the optimal model will be because Hulu is the one that perhaps emulates some music services where you pay for this and then you pay for it without commercials. That's sort of the variation -- a variation that is particular to Hulu that's been relatively successful. As you mentioned, the other AVOD services don't have a premium option in them in the video world, but we see premium options, in some cases, and the audio world that work quite well.

Just to expand on this, perhaps more than you even want to hear, is it's really curious to think about what occurs in the world of video. You know that there are video platforms that were inhabited with advertising like YouTube that then launched commercial-free variants. And it's worth looking at how they performed because I think it's telling. I guess, my conclusion about all this is the jury has not made a determination in any geography, necessarily, about whether a commercial-free opportunity to create, as it's called, traffic is the best entry point to an upsell for a commercial-free variant. We have probably more experience in the video world with AMC and AMC Premiere than almost anybody else in the U.S. except Hulu, and we understand a fair amount of that from our experience with AMC Premiere. The rest of the AVOD services have been dedicated AVOD as destiny, AVOD with no commercial-free buy up, if you want to call it that.

So that's an incomplete, perhaps, answer to your question about where the future lies. But I think you correctly point out that sensitivity about price in different geographies or different demographies in the U.S. may provide a big clue to where to really focus on that, where people are more concerned about the specific dollars coming out of their wallet, in which case, AVOD may be, a, a better final destiny or, b, a better point of entrée to an upsell.

But the evidence to date, I would say, is really quite mixed in its flavors and doesn't necessarily say a pattern is the right one.

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Seth Zaslow, AMC Networks Inc. - SVP of IR [32]

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

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Operator [33]

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Thank you, sir. That now concludes the call, everyone. You may now disconnect.