AMC Networks Inc (Pre-Reincorporation) (AMCX) 2011 Q3 法說會逐字稿

Good morning, my name is Melissa and I will be your conference operator today. At this time I would like to welcome everyone to the AMC Networks third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I will now turn the conference over to Seth Zaslow, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to the AMC Networks third-quarter 2011 earnings conference call. Joining us this morning are members of our executive team -- Josh Sabin, President and Chief Executive Officer; Ed Carroll, Chief Operating Officer; and Sean Sullivan, Chief Financial Officer. Following a discussion of the Company's third-quarter 2011 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. I will now turn the call over to AMC Networks' President and CEO, Josh Sapan.

Good morning and thank you for joining us, we're glad to be with you here today. I'll provide a brief summary of our financial performance followed by an update on the business and then turn it over to Sean Sullivan for some greater financial detail.

Year-to-date the Company has grown revenues 9% and AOCF has increased 11%. In the third quarter we saw an increase of 5% in revenues and AOCF grew 15%. On the advertising front year to date we've grown revenues at our four national networks by 12%.

In the third quarter ad sales revenue was essentially flat. This was caused most significantly by the airing of one original series on AMC in the third quarter of 2011 versus two in the third quarter 2010 and that absent second series in 2011 was Mad Men.

In the fourth quarter of this year we will again air two original series -- the zombie themed series The Walking Dead and our new western series, Hell on Wheels, both of which have been extremely strong in the ratings.

Regarding scatter, we were selling somewhat closer to air than we did in the same period last year. However, our pricing is quite strong and in the recently completed up-front we were very successful in both price and volume and will begin to see those benefits in fourth quarter.

On the affiliate side, affiliate and other revenues have grown 5% year to date. In the third quarter growth was 7% including a one-time positive adjustment. Affiliate fees continue to provide us with a stable and predictable revenue stream that we can utilize to support our continued investment in programming and the long-term growth of our business.

At AMC, the largest of our four cable TV networks, our original programming strategy delivered record ratings as well as critical and industry recognition. For the 2010-11 season AMC had meaningful increases in its key demos, adults 18 to 49 and 25 to 54.

The second season premiere of the zombie series that I mentioned called The Walking Dead was the highest rated dramatic show against key adult demos in cable history in its premier night four weeks ago. It was successful in delivering more audience in the target demos than the broadcast shows X Factor and The Good Wife against which it competed and it's holding very well.

The fourth season of Breaking Bad, which premiered in July, saw rating increases in excess of 20% over season three in adults 18 to 49 and 25 to 54. AMC also made history as the first cable network ever to win the Emmy award for an outstanding drama series for four consecutive years for Mad Men.

Just this past Sunday night we launched at AMC a fifth original scripted series, a Western called Hell on Wheels. Ratings for that night were extremely strong, 4.4 million total viewers and 2.4 million viewers in our target 18 to 49 demo, making it among the top five dramatic shows on cable this year. We are very optimistic about its future; it continues this Sunday as a weekly series.

To further diversify the programming on AMC, we've also recently begun to introduce non-scripted original programming on the network. Our first nonfiction show is Talking Dead, a live talk show which premiered following The Walking Dead in mid October. That shows ratings have doubled the network's time period average, so we're very pleased with that early initiative.

Outside of AMC the strategy of investing in original programming is at work at our other national networks. At WE tv, two of the network's most successful shows are scheduled to return very shortly. Season two of Braxton Family Values returns this evening and My Fair Wedding with David Tutera returns this Sunday night for its fifth season.

At IFC the second season of Portlandia produced by Lorne Michaels and starring Fred Armisen of Saturday Night Live and the Increasingly Poor Decisions of Todd Margaret with David Cross are set to return in January of next year.

And Sundance Channel recently announced its newest original series called Rectify from the producers of AMCs Breaking Bad. Of particular note, in early October we announced a distribution agreement with Netflix. We are very pleased with the agreement and will begin to see the impact of it in our fourth-quarter results.

We believe the manner in which we structured the agreement protects the existing cable ecosystem and the premiere linear window that goes on cable while at the same time providing us with additional revenue for our increasingly desirable content in a post home video, digital syndication window.

I'd now like to turn the call over to AMC Networks' Chief Financial Officer, Sean Sullivan, to take you through the financial results in some greater detail.

Thanks, Josh, and good morning. As Josh mentioned, for the third quarter total Company revenues grew 4.6% and AOCF grew 14.6% versus the prior year period. Year to date total company revenues have grown 8.8% and AOCF grew 11.1%.

Third-quarter revenue growth was driven primarily by increases in affiliate and other revenues at our national networks while AOCF growth reflected the increase in revenue as well as a 2% reduction in total operating expenses in the third quarter. This expense reduction resulted primarily from the savings realized as a result of the spin-off from Cablevision and reduced sales and marketing expenses.

At the national networks revenues for the quarter increased 3.9% or $10 million to a total of $258 million. As Josh discussed, advertising revenues were impacted by the absence of Mad Men in the third quarter of this year. Affiliate and other revenues at the national networks increased 6.9% versus the third quarter of 2010. AMC and WE tv saw mid-single-digit growth due to increases in both viewing subscribers and rate. Results in at Sundance Channel, and to a lesser extent IFC, benefited from a nonrecurring contractual adjustment.

Operating expenses decreased 5.1% or $7 million in the quarter. This overall decrease in expenses reflects a reduction in sales and marketing expense due to the reduction in the number of originals premiering on AMC in the quarter and a decrease in corporate-related expenses which were partially offset by an increase in programming costs. For the quarter National Networks' AOCF increased 16% or $17 million versus the prior year period to a total of $123 million.

Turning to the international and other segment, revenues increased 13.8% or $4 million to a total of $31 million for the quarter. The growth was driven primarily by an increase in theatrical revenue at IFC Films and to a lesser extent increases in international affiliate fees. Operating expenses increased 17.3% or $5 million primarily due to an increase in programming and marketing expenses.

Litigation expenses related to the VOOM lawsuit were approximately $500,000 in the quarter as compared to $1.6 million in the third quarter of 2010. AOCF for this segment was breakeven for the quarter, a decline of $1 million versus the prior year period.

Total Company net income from continuing operations for the quarter was $40 million or $0.56 per diluted share compared to $34 million or $0.49 per diluted share in the prior year period. This increase is a result of the growth in operating income and a decrease in income tax expense partially offset by an increase in interest. Of the 7 percentage point reduction in our tax rate for the quarter, 4 points results from being a separate taxpayer from Cablevision and 3 points are from a discrete item in the quarter.

Turning to free cash flow, the Company generated $195 million in free cash flow for the nine months ended September 2011. Capital expenditures were $7 million, cash interest $64 million and cash taxes were $8 million for the nine-month period. As of September 30 our NOL carryforward was approximately $184 million.

Turning to the balance sheet, as of September 30, AMC Networks had $2.4 billion of outstanding debt; we had cash and cash equivalents of $225 million for a net debt position of $2.15 billion. Our leverage ratio was five times based on LTM AOCF of $435 million.

In October we also prepaid $50 million of the Term Loan A debt; this payment was in addition to the $50 million prepayment that we made in August. These prepayments are consistent with our disciplined approach to managing our business, whereby we will continue to execute our strategy, invest in original programming and, as appropriate, use excess free cash flow to delever.

With that we'd like to move to the question-and-answer portion of the call. Operator?

(Operator Instructions). Michael Morris, Davenport.

One question and then a follow-up.

I'm sorry, we're having a hard time hearing you, it's kind of low.

So one question and then a follow-up. First, a recent presentation that you guys did, at the center of your strategy was to own and control content. I'm hoping you can talk a little bit more about your ownership strategy of content and how that may unfold over the next several years.

Given that I think of the five shows you kind of have in the pipeline right now for AMC, I believe only Walking Dead -- The Walking Dead is owned by you. So can you just talk about whether, as you develop new shows going forward or add new shows, whether you intend to own more or whether your agreements with partners give you more ownership? And then I have a follow-up. Thanks.

Sure, this is Josh. We do think -- just one comment, if I may, by way of background. Ownership is actually somewhat relative as opposed to a binary thing. So it is correct that in the case of The Walking Dead we own all rights.

On other shows where we take a license we can have participation in the exploitation of other sets of rights. So it's probably worth looking at it as a relative issue as opposed to a completely binary one.

With that said, we do think that it is ideal for us to own more than we have in the past because the benefits and rewards of ownership with a reasonable degree of success are very good for us; they provide the opportunity to realize and enjoy full digital revenues, they provide the opportunity for us to realize international revenues, home video and transactional digital as well as (inaudible).

So the answer is we will own more in the future than we have in the past; we will, however, be somewhat disciplined by whether the show that we're looking at has the appropriate risk profile. So on Walking Dead we made the determination to go all-in in no small part because it was a zombie themed show and we thought that from a risk profile it made a lot of sense that a high likelihood of doing well in what we might call ancillary distribution, home video, digital, international and that worked out.

On the nonfiction side, which applies today more to IFC, WE tv and Sundance than it does to AMC, where the shows are much, much less expensive than they are for scripted, we will on a great percentage going forward be the owner or significant owner of the show. And on AMC we'll have that bias and the bias will be somewhat disciplined, I hope, by whether we think the editorial or the nature of the show is one that will succeed in those ancillary markets.

Okay, great. That's very helpful. And just I think kind of following up on that with respect to costs; you noted the higher mix of -- or the inclusion of some non-scripted programming on AMC which is lower cost. Can you just talk a little bit about how we should think about the programming costs going forward?

And one thing I'm trying to think of in particular is as you add more content, whether it's your original or whether it's this -- original scripted or this non-scripted -- does that -- are you actually replacing perhaps more expensive syndicated content in some places with lower cost non-scripted? Thanks.

The non-scripted is substantially less expensive than scripted and that is a significant part of our motivation in beginning to put some of it on the air. We -- the mix in terms of our overall expense base on AMC between scripted originals, originals that are nonfiction and movies is -- I think the way to think about it is first of all that the scripted originals are of course the most expensive.

If we can succeed with the nonfiction shows they can either replace some of the scripted shows that -- when they're finished or potentially they can replace some of the movies as we go forward. So we'll have to determine how successful we are with non-scripted and see how much of it we ultimately think is appropriate for the schedule. But the goal that we're driving at probably obviously is to have a mix of overall content expense that delivers audience and is moderated by its components.

Great, thanks for the answers, guys.

Bryan Goldberg, Bank of America-Merrill Lynch.

Two quick questions. First, on the advertising market, thanks for the color around scatter. Last you updated us it sounded as if advertisers were striking a more cautious tone given the macro uncertainty. I'm just wondering, has there been any change in your dialog with advertisers given the market as well as the performance of your originals in the fourth quarter? And have you seen any changes with cancellation activity?

We haven't seen any changes in cancellation, they're in line with historical patterns, which that's a good piece of news. I think the fact that we're selling closing to air is an indication that there's some more tentativeness in the market than there had been. Our pricing remains strong in scatter and, as we mentioned in our prepared remarks, our upfront for AMC was extremely strong in price and volume.

So I do think that we're seeing some more tentativeness. At the moment it's being reflected, I think, in simply the horizon that people are buying and the degree of visibility that we have about our future as opposed to anything today related to price or volume.

Okay, thanks. And with regards to fourth quarter, can you just help us think about just some of the puts and takes? I mean in addition to the new up-front kicking in, how many episodes of scripted originals, I guess really on AMC, will be on air in the quarter between Walking Dead and Hell on Wheels?

I know Walking Dead is going to be taking a hiatus later this month. And (multiple speakers) -- I'm sorry, and I guess with Walking Dead, how should we think about the CPM differential? I mean how does a show like that typically price out relative to one of your high-profile original scripted series?

On CPMs, the most premium CPMs are in our scripted originals. I think advertisers evaluate and conclude that they are premiere ad vehicles and they're better at selling their products than other opportunities on our air. So they command a very significant CPM.

On Talking Dead, it's early days for us, it's really our first initiative in nonfiction. And I think it's probably generally correct to say that the CPMs in nonfiction will not be as high as the CPMs in scripted. It's unlikely to do so, that's true for the entire television landscape. But if they deliver a good audience, and Talking Dead did, as I mentioned two times time period average when the plays after The Walking Dead, it's very economically successful for us.

On the question of how many, we'll have two -- as you know, as we mentioned, we'll have two original series on AMC in the fourth quarter. As you know, we'll take a hiatus on Walking Dead, it will come back next year. So we'll have significantly more than we had in the prior quarter.

Okay, thank you.

Anthony DiClemente, Barclays.

Just a question for Sean. I think that on a trailing 12-month basis your leverage is about 5.0 times. Do you guys -- have you guys talked about a target leverage ratio moving forward?

We have not. We're obviously four months into the spin -- four to five months into the spin from Cablevision. I think this management team is obviously very focused on executing the strategy. We'll continue to delever as appropriate. I think in 12 to 18 months time we'll have a better sense of what the optimal leverage is for the Company.

Okay. And another related question on forward targets. You reported the affiliate fee growth -- affiliate fee and other growth of 6.9%. I'm just wondering can you tell us how much of that 6.9% growth was attributable to digital deals, i.e. Netflix.

Zero. As Josh I think said in his prepared remarks, the Netflix agreement that we executed in October, you won't start to see the benefit of those until the fourth quarter.

Okay, okay. So then how should we think about the forward run rate for affiliate fees including and excluding those -- the future Netflix revenue stream? I think you had talked about a 4% number as a run rate moving forward.

The 4% number is historically what we've experienced. If you exclude the one-time item in the third quarter that's likely a similar vein. And I don't think that's dissimilar to what we expect to experience going forward. But I'm not necessarily prepared to sit here and give you guidance on Netflix, other revenue streams, etc., since that is still evolving.

Okay, thanks. And then up my final question has to do with the sequential decrease that you show in terms of subscribers as measured by Nielsen. It's not something that's unique to AMC, but I just thought can you comment on what's going on with the Nielsen measurements of network subscribers ticking down subsequently? Do you look at it as a one-time reset or do those numbers have integrity? Just would be interested to get your thoughts on trends there. Thank you.

Best I can offer is it appears to be a one-time reset based upon the way they sample and count. That's pretty much what our take on it is.

Okay. All right, thank you.

Ben Swinburne, Morgan Stanley.

It's Ryan Fiftal on for Ben. A couple of questions for Sean on the expense side. First on SG&A, if I look at trying to back out stock comp expense, it looks like sequentially you guys were down about nearly $20 million sequentially on SG&A. So any help on how much of that was marketing and how much of that was G&A declines. And on the G&A side if we're at a run rate or maybe if you guys are still staffing up your corporate functions? And then secondly -- I'll just ask the second one and take the answer on (multiple speakers).

Sure. As I said on the prior call, I'm still comfortable with the $14 million to $18 million. We are still staffing up. We still do have a transition service arrangement with Cablevision. There's certainly a number of functional areas that have yet to be transitioned that we need to staff.

So in terms of the G&A aspect of that separation, that's the color I'd offer there. As we talked about, there's probably $5 million or so of cost associated with selling and marketing as it relates to the one less original this year. So those are kind of the two things I'd say relative to that trend.

Okay, great, thanks. And then on the program and cost side, I think we'll get this in the Q, but if you can give us some color on where cash spend was on programming year to date and your thoughts on the seasonality there and how we're pacing for the year? Thank you.

Yes, I think year to date as a percentage of revenue I think you'll see that our cash spend on programming is still relatively consistent with our historical trend. Certainly as we have staffed up -- or excuse me, staffed up -- we've evolved to five originals on AMC you're certainly going to see that increase in cash. So from a nine-month period I think it's a consistent run rate from the six months if you just roll it out another three months.

Okay, great. Thanks, guys.

Vasily Karasyov, Susquehanna Financial.

One question on advertising revenue. If I'm looking at the right data here, Nielsen data, it looks like your audience was up in the quarter 7%. So my question is, were you surprised that the advertising revenue in the quarter was flat year on year? And then I have one more.

We were not surprised. It was in line with our expectations. As I mentioned, the absence of one show had a reasonably significant against our numbers affect on growth rate. So we were not surprised by it.

Can you give us an idea of what -- excluding the impact of Mad Men, what the underlying growth was?

I think we've highlighted what the growth was for the quarter without Mad Men, so I'm not sure I understand the question.

Okay, thank you. And then another question I had is about the (inaudible) revenue. When you're moving closer to renegotiating your affiliate deals, how do you build the argument in your negotiations with MSOs? Do you look at the audience increases or (inaudible) and then match it against a percentage of their programming budget? Can you just give us an idea of what your framework of thinking -- what affiliate fees you (multiple speakers)?

Our discussions, and we think they have merit, are that our rates, particularly for AMC, are based on the historical performance of the channel because most of the agreements -- the affiliation agreements are multi-year. And that they were set at a time that AMC was not as programmatically strong as it is today.

And that is manifest in a couple of different areas, aggregate audience is one, notable shows that have very high viewer engagement and attention is at least as significant a factor.

So the conversations that we have surround the fairness of our wholesale rate which was often set two, three, four years ago and whether or not AMC, particularly WE tv to some degree as well, is justified in a rate increase more significant than some of the patterns that we've established in the past we actually think it is -- anyway that's the nature of the conversation that we have.

And are the MSOs generally receptive to this kind of argument?

I think in truth they acknowledge rather widely that, particularly AMC, is not the channel that it was two years ago, three years ago and four years ago. And I think the evidence of that in the form of our original shows Mad Men, Breaking Bad, The Killing, Walking Dead now Hell on Wheels is rather abundant and they acknowledge it.

I think they are subject to price increases from other programming lines and they have their own margin pressures. So they're situationally somewhat resistant and that's the nature of the conversations that we have.

All right, thank you very much.

Ben Mogil, Stifel Nicolaus.

First of all, just on the advertising number, with it being flat, and I obviously understand the issue with fewer series at AMC. Was IFC the increase of -- or the addition of IFC as an advertiser in the year, was it basically a non-event?

To date this is -- we just added advertising to IFC in January. So it is not a significant event in terms over year-over-year performance or its early days. Our view of it is that over time, as we saw with AMC and WE and it, frankly, was a not insignificant period of time, we were able to build audience and take advantage of 10 minutes of sale of advertising. So these are the early days of IFC, it was not a significant event yet

On the ad commentary side, and I know some of the other broadcasting peers have given some more sense of what spot looks like year over year, what spot compared to the upfront for this quarter looks like compared to last quarter. Can you give us -- are you sort of tracking mid-teens, high-teens? Can you give us some direction on what you're seeing on both spot year over year as well as spot compared to up-front?

Right, so as we mentioned, pricing is strong in scatter and that's a good sign. Both it's strong versus previous scatter and versus up-front. As we mentioned, the lead time for the horizon of sale is somewhat shorter than it's been historically.

Okay, fair enough, thank you. And then the last question, because I know the Q hasn't come out yet, but when you look at the sort of full-year expectations, how much do you expect that programming amortization will be exceeded by programming investments for the full year of '11? Just even a ball park figure.

As we sit here I'm not sure I'm prepared to give you the guidance for the fourth quarter. I think the Q will be filed later today and we'll certainly -- we can give additional color after a full year is finished up.

Okay, that's great. Thank you very much.

David Joyce, Miller Tabak.

I was just wondering if you could provide some more color on the relative importance of advertising. Granted we know that IFC just started advertising earlier this year but year over year. what is the proportionate change for the other networks, AMC and WE in particular and how would that split looked internationally?

I'm sorry, forgive me, I'm not sure I caught your question. The international question was --?

Does international just affiliate fees at this point or are you getting any advertising?

Yes, our international revenue is entirely affiliate fees so advertising does not enter into the mix on the international side at this point.

And then on AMC and WE, what is the relative split between affiliate and advertising this year versus last year?

It has been roughly consistent. I mean it moves up and down a few points but you will see that it is in the range of 50% broadly for both channels. It can move a little bit over time but that gives you a rough -- a very rough sense of what it looks like.

Okay, great. Thank you.

Jaison Blair, Telsey Advisory.

I wanted to ask you if you could walk us through the timeline, the target amounts for introducing advertising at IFC and how we should think about what the contribution margin might be there.

Sure. I think probably the history of AMC and WE tv I think perhaps provide the best picture of what may happen with IFC. There's of course a lot of unknowns for IFC but we are at it. On WE tv and AMC, we added advertising several years ago. The ramp up period was a couple of years to get going and to introduce those products to the ad community and to make them familiar with them and to ask them to evaluate them as being worthwhile, so that took some time.

What we then did is we actually took, in those cases, some of the incremental revenue that started to be realized from advertising and some portion of it went into new content investment and some of it fell to the bottom line. But a significant part of it in the early days did -- was invested in new and original programming.

So I think -- and IFC we will evaluate it as we go forward, but the approach is in general to increase audience, increase the top-line and to invest some of that in content. The up-front that was just completed is essentially IFC's first up-front and that's sort of early days for IFC.

Do you think about each -- when you're thinking about content investment, is each channel it's on entity or would you take some of the success at AMC and apply that in terms of programming spend at your other networks?

Yes, I think each channel is its own entity because the nature of the content that we invest in is quite different. So on AMC we chose to, for a whole series of reasons, to focus on a -- at least for the first -- we were five years into it -- for the first five years a limited number of what we hoped would be high-profile original scripted dramas. And we pursued that approach.

On WE tv, if you're not familiar with it, we -- our approach has been to focus on a more significant number of nonfiction or so-called reality shows that have been around a theme of family and have been targeting women 18 to 49 and 25 to 54.

So it's quite a different, it yields quite a different economic profile because the nonfiction shows on WE tv might cost 20% or 25% of what an hour costs on AMC, they have a different life, they have different longevity, they're in a certain sense potentially more perishable and replaceable, we tend to move them in and out more, some last quite a long time.

On IFC, if you look at what we've done to date, we mentioned two shows that I think are worthy just of examining because they give some cue to where we'll go, they're both in a certain sense hybrid. They're scripted but not dramatic scripted, their comedic, they're targeted to young men and they have some of the qualities of nonfiction or improvisation and some qualities of scripted yet they're substantially less expensive than what we've been doing on AMC.

So I hope that answer is satisfying to you. It doesn't quite paint a portrait of exactly where we're going. We're going to identify what's successful, we have a game plan in mind that we're in hot pursuit of. And we have audience expectations that we hope we'll meet. But we will adjust as we go forward.

And in terms of target hours for originals, AMC -- with Hell on Wheels you seem to be there in terms of scripted dramas, but there's an opportunity to build out nonfiction?

I think that's true. We wouldn't foreclose the notion of doing more scripted dramas on AMC if they had the right -- if they were the right shows that we believed either because we've made deals before hand or could operate with a high level of confidence that the economic profile of them would deliver an incremental return.

And that evaluation would take the form of a projection or expectation, either contractual or judgmental, about how it would do in the digital world, how it would do in international revenue, what home video revenues would be and then of course what the ad revenues on our channel would be. So that's the sort of mix of economics that go into that evaluation.

Operator, we'd like to take one last question, please.

Marla Backer, Hudson Square.

I have a question on the Emmys, which you did very well on the Emmys.

Marla, I'm sorry, we can't hear you. Could you speak up maybe?

My question is on the Emmy awards where you did very well on the Emmy awards. And I'm wondering to what extent do you think that helps when you speak to advertisers and to affiliates in terms of improving your economics? Or is it really just a fallacy that we here in the investment community think that the Emmys can actually translate into higher revenue for you over time?

I think that they do help. I think that they create the obvious which is some degree of prestige. And I think that prestige -- I think actually does translate into higher priced units because on a CPM basis, I should say higher CPMs, because I think that they work harder.

I don't think they're the Holy Grail for us. However, I think the evidence of that is The Walking Dead which is, of course, only in its second season which has not won the slew of awards that Mad Men or Breaking Bad has, but which has an extremely high audience and very desirable audience because it tends to skew young.

Thank you. I will now turn the call back over to Seth Zaslow for closing remarks.

Thank you, everyone, for joining us on today's call and for your interest in AMC Networks. This concludes our call.

Thank you for participating in today's conference. You may now disconnect.