AMC Networks Inc (Pre-Reincorporation) (AMCX) 2012 Q2 法說會逐字稿

Good morning. My name is Christy, and I will be your conference operator today. At this time I would like to welcome everyone to the AMC Networks Q2 2012 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)

I would now like to turn the call over to Seth Zaslow, Senior Vice President, Investor Relations, AMC Networks Please go ahead.

Thank you. Good morning and welcome to the AMC Networks second quarter 2012 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 2012 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 can also be accessed via our website.

Take note of the following. Today's discussion may contain statements that constitute forward-looking statements within 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 supplemental information concerning the Company's ongoing operations and is an appropriate way for you to evaluate the Company's performance. Please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information, which we will refer to on this call.

I would like to turn the call over to AMC Networks' President and CEO, Josh Sapan.

Good morning and thanks for joining us. We delivered strong financial results in the second quarter. The Company reported solid double-digit growth in both revenue and AOCF. Our growth continued to be led by the success of our original programming.

Last month the Company received 36 prime-time Emmy nominations, more than any other basic cable TV group. AMC received 34 nominations, the most for any individual basic cable challenge for a fifth year in a row. Madmen had 17 nomination, making it the most nominated basic cable drama of all time with a lifetime total of 85 nominations. Breaking Bad received 13 nomination including outstanding drama series and outstanding lead actor in a drama series. The Walking Dead received three nominations, and the first season western called Hell On Wheels also received a nomination. The recently completing advertising up front market took advantage of that critical success and of our growing ratings. In a healthy market for cable networks, AMC Networks performed well. We saw significant demand for our scripted series and were able to attract new, quality advertisers to our shows, further diversify our ad revenue base, add volume, and increase price.

At AMC, the largest of our four channels, the fifth season of Madmen was the most-watched season ever for the series. It delivered double-digit increases in all key demos over the prior season. Breaking Bad premiered its fifth season in July. The highly-anticipated premiere attracted the most viewers in the series history, despite not being carry on the DISH platform. The premiere delivered almost 2 million viewers in key demo adults 25 to 54 and adults 18 to 49, an increase of roughly 30% over the prior season. This season currently ranks as the most-watched season ever for that series.

It is somewhat uncommon for TV shows to experience such notable ratings increases so deep into their run, but that's exactly what we're seeing. We believe it is a combination of several things. First and foremost, it's about great content, having great shows. The critical success of our original programming has really fueled the growth of our business. Advertisers are responding, affiliates are renewing under good terms, and consumers are watching in increasing numbers. In the case of Breaking Bad even more than they did in aggregate when we were being carried on the DISH platform last year. Our programming strategy is also translating into new revenue opportunities through the exploitation of content in different platforms and media, which we believe is accretive to our business without disturbing the existing business model.

The data that we have suggests that our digital distribution policy of delayed windowing of about nine months to a year is actually serving to increase linear viewer ship and, in turn, support the value of the entire paid ecosystem by maintaining value of the premiere window on our channels, which is, of course, where we first show it. Looking forward, we're particularly focused on our original programming. IFC led by Portlandia which received two Emmy nominations will continue to develop its comedy lineup. WE TV, which introduced several successful reality shows in the second quarter, such as Mary Mary, LA Hair, and Kendra On Top, is premiering a spinoff from our very successful Braxton Family Values called Tamar and Vince in the Fall. And on AMC, the second season of our western series of Hell On Wheels premieres this Sunday night, followed by the return of the third season of The Walking Dead, on October 14, just a little over two months from now. The ratings success for our original programming continued to drive our top-line performance in the second quarter.

On the advertising side, our national networks grew revenue by 13% versus the prior year. AMC was the largest contributor to that growth due to the airing of two original series in the second quarter of this year as compared to one series in the second quarter of last year. Our national networks grew affiliate and other revenue by 15% over the prior year period. That growth reflected 8% growth in affiliate revenue as well as increases in what we call our other revenue stream. On the affiliate side, we were successful in reaching a deal with AT&T that we are pleased with, and, in terms of other revenue, we saw strong growth in the quarter as a result of year over year increases from the digital distribution of all our content. The home video sale of The Walking Dead and international program sales of all of our content. On the international front, we continue to move ahead with a disciplined approach, and we are encouraged by the progress that we have seen to date of the rollout of channels around the globe.

Before I turn the call over to Sean, I wanted to give you an update on what is happening with DISH. As we discussed in our last earnings call, we are in litigation with DISH over the Voom HD business in which they were a minority partner. We're seeking over $2.5 billion in damages. Over the course of the lawsuit, we have received several favorable rulings including that DISH will be sanctioned at trial for its improper destruction of evidence. The case is now set for trial in mid-September. We believe it is a direct result of the litigation and in an effort to try to create leverage for itself in that litigation, DISH decide to terminate carriage of our four national networks. We believe DISH is not act in the best its interest of its subscribe and using its customers essentially as pawns in this dispute that is really unrelated to the carriage of our four national channels.

While there have been several recent examples of disputes between networks and TV providers, I think of which most of you were aware, those disputes were negotiations over rates that programmers charge TV providers to carry their channels. This dispute with DISH is quite different. It is not about rate. In fact, DISH has not discussed rate with us at all. The impact on our financial results of the interruption of our service will depend upon several factors. The length of time that we are off DISH's platform, which will be dictated, we believe, by the timing of the litigation, including any appeals, as well as if, when, and on what terms we reach a new carriage agreement with DISH. You should be aware the loss of the affiliate fee and ad revenue that comes from the carriage by DISH of our national networks and the incurrence of incremental expenses such as third-party marketing will have a material impact upon our financial result in future periods. The DISH termination has reduced our total subscriber base by something in the range of 13%.

However, the impact on our AOCF and operating income will be materially higher than that. We expect that the resolution of this matter will be significantly impacted by what occurs in the courts, and the timing around that is unclear. The trial itself is estimated to last anywhere from four to six weeks. I hope you understand that, due to the ongoing nature of the litigation, we will be limited in our ability to discuss this matter in great detail when we get to the Q&A. As appropriate, we'll continue to keep you updated on further developments.

With that, I'd like to turn the call over to Sean Sullivan, who will provide further detail on the financial results for the quarter.

Thanks, Josh, and good morning. Turning to the results for the second quarter, total Company revenues grew 12.2%, and AOCF grew 13.6%. Second quarter revenue and AOCF growth was driven by increases at our national networks. At the national networks, revenues increased 14.4% or $38 million. National network AOCF increased 16% or $19 million versus the prior year period to a total of $136 million. Advertising revenues increase 13.4% to a total of $130 million, primarily driven by the growth at AMC. As Josh mentioned, AMC benefited from an increase in original programming hours versus the prior year period, most notably, the airing of two scripted originals in the second quarter of 2012 as compared to one scripted original in the second quarter of 2011.

Affiliate and other revenues of our national networks increased 15% to a total of $176 million versus the second quarter of 2011. Results reflected an 8% increase in affiliate revenues, as well as the benefit of ancillary revenue streams such as digital distribution, home video, and international revenues. Expenses increased 13.2% or $20 million in the quarter, principally due to increased programming marketing costs associated with our original programming, which was partially offset by a reduction in corporate overhead, related to the spin-off from Cablevision. The DISH dispute had an immaterial impact on AOCS for the second quarter related to the impact on advertising revenue from the repositioning of AMC, WE, and IFC in early June, as well as lost affiliate fees of Sundance Channel. We also incurred some expenses in connection with messaging to our viewers such as third-party media buys and direct marketing initiatives.

Turning to the international and other segments, revenues decreased $4 million to a total of $26 million. AOCF for the segment was a deficit of $9 million, a decline of $5 million versus the prior period. The revenue decline was the result of the decrease in revenues at IFC films and broadcasting and technology, which more than offset an increase in the international affiliate fees. The decline in AOCF was due to the decrease in revenues as well as an increase in litigation expenses relate to the Voom lawsuit. The litigation costs were $2 million in the quarter, as compared to $1 million in the second quarter of 2011.

Total Company net income from continuing operations was $41 million or $0.57 per diluted share compared to $27 million or $0.39 per diluted share in the prior year period. This increase was the result of the growth and operating income, and the absence of costs related to the redemption of debt in connection with the spin-off from Cablevision, which was partially offset by an increase in interest expense from the increase in debt related to our spin-off. In terms of free cash flow, the Company generated $159 million in free cash flow for the six months ended June 2012. Capital expenditures were $7 million. Cash interest was $58 million, and cash taxes were $14 million.

As of June 30, our NOL carry-forward was approximately $6 million, which we expect to fully utilize during the third quarter of 2012. Looking into the second half of 2012, we do not anticipate our cash free flow generation to mirror the level that we saw in the first six months of the year. This is primarily due to impact of the DISH interruption in carriage and the timing of cash investment in our original programming, most notably for the scripted originals on AMC that are scheduled to air later this year as well as in 2013.

Turning to the balance sheet, as of June 30, AMC Networks had $2.3 billion of outstanding debt. We had cash and cash equivalents of $308 million for a net debt position of $2 billion. Our leverage ratio was 4.1 times, based on LTM AOCF of $483 million. This is down from 5.4 times on June 30, 2011, when we spun off from Cablevision. In July, 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 March of this year and the two $50 million prepayments that we made in 2011. These prepayments totaling $200 million since the spin are consistent with our strategy of using excess free cash flow to delever.

With that, we would like to move to the question-and-answer portion of the call. Operator, if you could please open the call for questions.

Thank you.

(Operator Instructions)

Bryan Goldberg, Bank of America Merrill Lynch.

Just a couple on DISH and one on ratings and advertising. So thanks for the quantification on DISH's impact on your sub base. That's definitely easier for us to quantify the affiliate fee impact from this, but how should we think about the advertising at risk? What kind of ratings impact is DISH having at AMC and WE right now? Do the subs over or under index in terms of your viewer ship?

Bryan, this is Josh. So, I think you're broadly familiar with the economics of our business. Within the channels, about 60% of our revenue or so comes from the affiliate side and about 40% on the advertising side, and we mentioned the 13% piece of the universe. So the indexing on DISH is different for each channel, but I think as a broad measure, if you take that percentage, you'll get a sense of the economic magnitude.

Okay. And then, I guess, with regards to the legal bills, per the Cablevision 10Q, looks like you guys will have met the agreed-upon threshold for footing the Voom legal bills some time in the September quarter. So, -- and I know you will start sharing with Cablevision at that point. Can you just help us think about what a peak quarter of legal spending has been for Voom so we can try to properly flow that through the P&L?

Bryan, this is Josh again. It's actually quite hard to determine what a peak quarter of spending is. The lawsuit has been going on for a few years. There's various times when we have been at greater levels of activity and preparation. The trial is up coming mid-September, so we will have particular expenditures and witness preparation, etc going on now. But calendaring it exactly and trying to identify exact costs is very difficult so it's really so hard to project. I couldn't come up with a number, I'm sorry, except to say it's sort of fluid. It's moving to some obvious things that will influence it, particularly the trial.

Okay, thanks. And then I guess, if you could just help us out with sort of current advertising trends in the third quarter. I mean, everyone else has been impact by the Olympics. I'm just wondering, how are your current scatter trends shaping up right now?

Yes, sure. You know, in general I think a few things to say -- we continue to see a very strong response to our original programming, which has been a consistent theme and, of course, a good one. Third quarter is a little lighter than second quarter and, of course, being off the DISH platform has a significant impact on our universe. So I think those are three sort of major thing that are affect of current scatter.

Yes, thanks a lot.

Michael Morris, Davenport & Company.

Two questions -- the first is on other revenue. Can you give us a bit more granularity on what is driving the other revenue? I think it's obviously been strong in the past couple of quarters, primarily Walking Dead driven, and digital and international sales. 2Q, can you help us with what programs are driving that, what channels it's going out through and what the sustainability is for that level?

Sure, Mike, this is Sean. So, in the second quarter, we saw very good sell-through for a lot of our original programs available on multiple platforms in the second quarter. A big part of the other revenue is driven from Madmen, The Walking Dead, both in terms of EST, DVD and otherwise. I think that, that -- I think you will see that as a consistent theme. I think as we go forward, as you all know, the other revenue line is somewhat lumpy and will be variable, depending on the premiere of the subsequent season of the show. So, as we look forward to Q3, we've announced the premiere date of The Walking Dead on October 14 so that will be available on Netflix two weeks prior so that's a Q3 event, for example. Hell On Wheels is premiering this Sunday. I believe that is already available on Netflix so, given our restrained policy in terms of the digital platforms we participate in, it's somewhat tied to the premieres of the show.

Okay and so to be clear, this quarter's results reflect a higher mix of revenue from programs that you don't own? You mentioned Madmen. Is that a growing revenue stream for you at this point?

Well, I think that given success of our shows, I think all the revenue stream from those shows, whether we own, participate, or license, we're seeing incremental benefit from all of those. I don't think it's fair to say in the quarter that the majority of the revenue we've had was from Madmen, for example. I think the success of Breaking Bad, the success of The Walking Dead, is equally participating to the strength we saw in the quarter in the other revenue line.

Okay, great. Just with respect to the situation with DISH right now, are you seeing -- we're five or six week in from when your larger networks came off the air. Are you seeing anything underlying in terms of consumer behavior, whether it's feedback you're receiving from consumers or anything having to do with the mix of subscribers between DISH and your other distribution partners? Anything you can point to with respect to changes -- in the consumer behaviors or result of DISH stopping carriage. Thanks.

Sure, this is Josh again. You know, I think the thing we're seeing most pointedly is a response to us and perhaps to other alternatives to DISH. People who are interested in our shows are making their voices heard. They're quite aware and increasingly so of the absence of Sundance, IFC, WE TV, and AMC, from the DISH platform. So that's the most significant trend we're seeing.

Making their voices heard in -- can you be a little more specific in what way? What are they doing?

Oh, sure. On social media, it's a very active subject. If you go check it out, we've received very significant responses to us at our offices about the absence of our channels from DISH. So there is a fair amount of consumer activity in the standard ways that people are communicating today.

Great, thank you.

Alexia Quadrani, JPMorgan.

This is Caroline Anastasi on for Alexia. I just have a few questions. First, can you comment on how the up front went and what kind of pricing and volume you saw there?

Sure. The up front was very good for us, as we mentioned, driven particularly by our originals. Very strong demand, and we saw it happily in both volume and price. It was a very good up front on both fronts.

Okay, and just a follow-up -- you announced awhile back that you green-lit two new shows. Can you give us any more color on progress and timing of those shows? I know with Breaking Bad in its last season and The Killing canceled, do you plan to keep your slate at AMC at five original programs?

This is Ed. So we announced that we green-lighted two pilots on AMC. Those pilots are now in preproduction. We have, as you mentioned, five ongoing series on AMC. We think that's the right number at this time, but we continue to -- we continue to invest and develop new, original series. And it's possible that at some point we could increase the number of original series. But for the moment, we think five is the right amount.

Okay. Thank you.

Richard Greenfield, BTIG.

You know, Charlie Ergen is clearly negotiating public. He said this is all about the rate and that the current price that -- you know, that the channels are being offered to him at. It's a great decision for him to, in his words never carry AMC's networks again. I just thought, in light of his comments, could you give us any view on whether DISH or Ergen himself has reached or come to New York to try to reach an agreement to figure out carriage? Because he makes it sound like he's got no interest in discussing a carriage deal with you all. And then also, if we could get behind the 13%, how are you actually getting to that 13%? I think on the core AMC Network, it's substantially less than 13% while some of the smaller networks, it's more than that. But can you give us the actual math on what you're doing to get to 13%? Thanks.

Right, so, Rich, you know, we did mention, you know, prepared remarks that this is, of course, the subject of litigation, and so we're somewhat limited in our ability to respond. But what I would say is it's our belief that this is clearly [in all the] behavior on DISH's part. It's driven by litigation and the litigation is informing everything that is going on. And, as we mentioned, we have not had any discussions about rates so we think it's a litigation-driven event. In terms of the 13%, that is an aggregate impact of sort of the universe impact of the four channels. They tend to vary differently in how much each of them is affected when you take in the way that NEILSEN does its sampling. And the most notable thing to say is that Sundance was carried on a different level of service on the DISH platform than the other three so it had a more -- a less significant impact in terms of total subscriber volume.

And just to follow-up to be clear -- you mentioned it hasn't had a conversation about rate. That doesn't mean that there hasn't be a conversation. Is that fair?

Rich, really, forgive me for answering, as I mentioned in the prepared remarks, we are several week from the courtroom, it is the subject of litigation, so we're somewhat restrain in what we can respond to.

Okay, thank you.

Vasily Karasyov, Susquehanna.

First, a quick housekeeping question -- are there any other scheduled court dates on the public court docket calendar prior to September 18 start of the trial? And then I have a couple on the business side.

Hi, this is Jamie Gallagher, General Counsel. No there are no other scheduled court dates prior to the start of the trial.

Okay, thank you. Then, Sean, can you talk, please, about the covenants -- debt covenants and how much wiggle room you have in case this DISH situation extends and you see a decrease in your cash flow generating ability? And then I have one for Josh.

Sure. I mean, you know, as I said in the prepared remarks, we're at 4.1 times on our leverage covenant today. The covenant is actually 6.5 times. As you probably know, it steps down at end of the year, and I believe through 2014, we -- the situation with DISH is not something that necessarily wasn't contemplated a year ago when we spun. So we feel very comfortable with the covenants we have, with the head room we have, and are confident we have plenty of head room under it to withstand a prolonged carriage dispute.

Thank you. And Josh, for you, a question about owning versus licensing content. There's a lot of debate, and I think some points are lost in the debate. Can you maybe go into a little more detail about what the difference is for you, given how complicated participations and different kind of revenue streams are in the licensing situation versus ownership? How much of a difference does it really make for you in terms of owning a successful show or licensing it on terms that you usually license?

Right. It's a really good question. It's a rich one, and I'll try to make my answer reasonably restrained, because I could go on at length. But I think the basic principles are that it's probably better looked at on a spectrum basis than a binary basis, meaning, if you license, it doesn't mean you don't participate in ancillary revenue streams. You can participate at 10%, 30%, 50%, 70%, and you can have participations at different levels in different revenue streams. So it really depends upon the deal and the arrangement with who you get the show from. I think our general point of view is that we would prefer to own where it makes economic sense. Because we have seen a strong response to our content, particularly the scripted content, from ancillary opportunities, international, digital, SBOT, etc, and we like being in a position to take fuller advantage of them. So the real conclusion is that each show and each deal is its own show and deal. And the aggregate cost of that show and its strength in ancillaries, its cost, and its performance on the channel make for the best arrangement for us.

And just to factor one other thing in this, which will make it seem terribly vague, is, of course, degrees of risk. Certain shows are less and more risky. So that all goes into the pot when you make a decision and a deal about how much to own. I'm sorry that answer doesn't have a particular conclusion. If I try to summarize it, we would like to own when possible when it makes economic sense. And, if the material is right, we'll do deals that are licensing deals, if the material is right, and we think the deal is right.

All right, thank you. A follow-up, if I may. I think the spectrum comment is really helpful. Is it riskier for you to own a show and an unproven property like Rubicon? Is the downside in terms of write down larger on fully owned shows?

In general, if a show fails, owning will be more costly than licensing if one presumes somebody else was coming in for, say, 30% or 40% of the cost of the show, yes.

All right, thank you, Josh.

Chris Merwin, Barclays.

So on margins you actually posted some modest expansion during the year. And what was really driving that? Was it the impact of higher margins from digital distribution dollars or cost savings on the SG&A line? I think the increase that we've seen in cash bin on programming would suggest that you have faster amortization in the coming quarter. So just was curious what drove the improvement this quarter.

Chris, you got it right. I think that the other revenue line and the savings in SG&A -- so we saw very strong margins in the first half of the year. As we've said in past calls, you are going to see some variability in the margins as a result of the significance of the premieres of our original programming, as well as, our incremental, in terms of absolute dollars investment in that across all of our networks. So, you know, I think we have historically generated a fairly consistent AOCF margin. I think you will see some variability to that as we go forward.

Okay and then just a follow-up on that -- you decided not to renew The Killing for another season, but it doesn't look like you took a write down there. So, is it fair to assume that, that's fully amortized at this point?

No, it's not fair to assume. That's a licensed show. It's a 26-episode closed-loop series. We think that, that show was a good show, just didn't make sense to renew. We have not taken a write down. There is some unamortized cost, given that we just recently made the decision not to renew. We're now evaluating the usefulness of that asset and its ability to be continued to use across not only our linear platform but whatever other platforms we have rights to exhibit it on.

Got it, thanks.

Alan Gould, Evercore Partners.

Got two question, one for Josh and one for Sean. Sean, the SG&A was down about $10 million during the quarter, which was a little surprise given you had two new -- two original series versus one. Was that all marketing costs? And, Josh, on a bigger picture basis, we seem to be -- DISH aside, we seem to be having more disputes between the affiliates and the programmers. Obviously the Viacom/DirecTV, as well as your AT&T deal going down to the wire, although you seem please with the results. Can you just talk about what is going on the affiliate program negotiations?

Sure. Yes, just -- to answer the one, the selling cost, I think what we have seen, we saw one year into the spin now, we have seen a reduced corporate overhead as a result of that. Marketing is up. If you look on a sequential basis, Q1 to Q2, we spent a fair amount of dollars in the first quarter related to the premiere of Madmen season five and shows like The Pitch. So, again, some of that SG&A is going to move, based on the timing or premiere of the new shows as we ramp up.

Okay.

Sure. On the sort of larger question, I'm not sure there's an absolute answer to it. There's no question a trend toward increased tension between MVPDs and programmers that is caused by -- I think increased cost on the MVPD side and video margin pressure. And on the programmer's side, an increased competitive framework, one against the other, and the sort of need or imperative to invest in more content in order to compete effectively and so it's driving a fair amount of tension. Exactly where it goes, I think is hard to know. I would point out, one I think encouraging note as it relates to if you want to call it harmony, which I do think there is a greater recognition of the benefit and help of the paid -- as it's often called -- ecosystem that everyone lives in, with somewhere north of 90 million homes in the United States paying for a bundle of TV, video. And policies on behalf of the programmers that allow what is commonly now called authentication of TV rights to be captured within that paid system, which I think is a recent trend. It's picking up steam. It's something that we are participating in, and I think it signal against the back drop of these flare-ups. It does signal a recognition of the value of the system and actually a fundamental piece of cooperation that's occurring that's actually pretty profound, I think. So I think that, that's a very good sign.

Okay. Thank you.

Ben Mogil, Stifel Nicolaus.

Josh, going back to some of Ergen's comments yesterday on the DISH call, one of the things he commented was that he thinks that your channels, other than AMC, don't particularly rate very well on his system. If that in fact is the case, should we actually sort of view the ad impact as being much more temperate in the third quarter because if the carriage system? Particularly because I believe in the past you have mentioned that you did have some sort of ratings carve out as you talk to advertisers about that. Can you talk a little bit about that dynamic?

Sure, I think -- as I've mentioned, we think this situation is informed very substantially by litigation. So, I'll just leave it at that, which is to say that we think litigation defines the circumstances. And, in response to your second question, I would say that, no, we do not think that we will see any mitigation of ad impact on our other channels actually, perhaps, the opposite in some cases, and because they perform according to our experiences reasonably well on the platform. So that is our experience of the universe and the circumstance.

If we go back to the affiliate revenue in the quarter, if we look at the third quarter, you've got on Netflix Walking Dead and Hell On Wheels, which are two shows that you own. As opposed to say Breaking Bad and Madmen which are shows that you sort of have some participation on the play in the second quarter. So, stripping out the DISH situation, should we assume that digital revenues in general in the third quarter should be stronger than in the second quarter?

Yes, I think it will be meaningfully more favorable in the third versus the second because of Hell On Wheels, because of The Walking Dead and, again, that will be a 3Q event this year versus last year where I think The Walking Dead was a fourth quarter event with Netflix specifically. (multiple speakers) Sequentially, the digital revenue will be more favorable in the third quarter.

Okay. Thank you. And then, lastly, on the litigation cost, I think you said it was $2 million in the quarter. Should we assume that it's going to be up significantly in the third quarter just given that there's heightened activity around the court case?

Yes, I think it's reasonable to say that, as we head to trial, we'll -- there will be a fair amount of activity in preparation for that and during that time.

And will you once again strip that number out when giving us the financials or giving us the commentary on the call?

Yes. I certainly plan to as of today.

Okay. Great. I think that's it for me. Thanks, guys.

Ben Swinburne, Morgan Stanley.

Thanks. Good morning. Josh, can I go back to your spectrum discussion and tie it back to the quarter? Were there change in your participation levels for some of the shows you don't own that benefited the quarter? I think you said every participation or every deal and show even within the deal is sort of a new set of terms potentially. And I'm just wondering if we can think about maybe, I guess would be probably Breaking Bad, but even in the case of Madmen, as you renew those, do you tend to take your participations up as a result of the success of the shows, and did that play into the second quarter?

Ben, this is Ed. I think what Josh meant is every deal we do is a discreet deal onto itself. So if we are owning a show like The Walking Dead or if we're in partnership with Sony on Breaking Bad, those are discrete deals, and, generally, as we review those deals, the structure of the partnership does not change.

Got it.

Ben, to your specific question about the second quarter, as I said, I think in an earlier question, we did benefit from some revenues related to the Madmen coming back as well as people catching from prior seasons, as well as Breaking Bad now that, that is out for season 5.

Great. And then within the other two things you listed in other, Sean, I think you said The Walking Dead DVD and then international program sales. Was the international program sales Walking Dead as well?

Correct.

Got it. And then my last question, going back to Rich's question on the 13%, since you obviously carry pretty different -- I'm assuming pretty different fees across your domestic networks, is it fair to say then that AMC network and maybe even WE are carried on more than 13% of DISH's subs because the other networks are on less? Just trying, from a revenue perspective, thinking about how that number translates.

Yes, think, Ben, AMC, WE, and IFC were generally carried on the same tier within the DISH platform, which is less than their full subscriber base. And, as I think we disclosed in the earnings release, Sundance was even at a lower tier so that is kind of how the 13% shakes out.

Okay, I think that's it. Thanks a lot.

Amy Yong, Macquarie.

DISH is saying that they're not seeing any churn impact from their decision to end carriage but DirecTV is also saying the same thing, they're not really seeing any subs come from DISH. How do you handicap that comment in particular DTV? Then also can you help us think through the impact of AT&T's agreement for Q3 affiliate fee growth? Directionally, where does that go from what we saw in Q2?

Sure. This is Josh. The AT&T deal, as we mentioned, we were pleased with. AT&T represents, obviously, a reasonably small portion of our total subscriber base, so I don't think we will see anything dramatic in our numbers from AT&T, but we were pleased, and we hope that they were pleased with the outcome of it. We do think it was mutually-beneficial and so, over the term, the longer term, our midterm and near-term, it will have a beneficial effect on our performance. And that is also true of sudden -- it was directionally positive and that sort of underpinning what we do. We think reflective of the strength of what we're up to and what we're investing in original programming.

In terms of the dynamics of what occurring MVPDs, I think I am going to restrain myself and not comment on what others are saying. They're saying what they're saying. The dynamics of what is occurring between and among various MVPDs at any time, any season, is driven by a number of things. There are people more expert than me, but I think amounts of marketing incentives, loss of programming, and all other things have an influence in it in the near-term, in the midterm, and in the long-term. So I think the dynamics sort of need to be looked at rather carefully to be understood against the back drop of all that as well as seasonality and the entire macro universe of much what is happening. I'm sure you are aware of what has happened in the last quarter in aggregate for the entire sort of paid universe. And then we'll see what happens in the third quarter. So there's a lot of play, and I think it needs to be looked at comprehensively.

Okay, thanks.

Operator, let's take one last question, please.

Tuna Amobi, S&P Capital IQ

A lot of question on the DISH situation. I wanted to see what contingency plans -- I know that Josh allude to that in the last call. If you can help us understand what you might do to mitigate this situation. It sounds like it's going to, from what Charlie was saying yesterday, it's going to go on for awhile. So I'm wondering if you can see any countervailing actions down the road.

As we mentioned, we think -- I'm sorry to repeat myself so regularly. We think, first and foremost, and I think it's important to reflect on that, it's a litigation-driven event. There's a court case coming up that's set for mid-September. That case is likely to go four to six weeks, and I think the situation is fluid. The court will do what it does and rule as it does, and that is we think a potentially very significant influence on these evens. I think that, as we go forward, we'll evaluate how all of that plays out in the court and what everyone's response to it is. In the event that we're off for an extended period of time, we have obviously thought about that. We think we're in good shape and well prepared for it, and so we have a plan of action, as you might imagine, that we'll undertake. And we think it's a pretty good plan.

Okay. Fair enough. Separately on -- when you look at what Lions Gate has done with Anger Management, I'm wondering if you see something in your model, maybe just down the road this kind of accelerated production in syndication model-- is that something you might be exploring or willing to explore the economics of that, you think, make sense?

I think the Lions Gate Anger Management transaction was unique. If you look throughout the television landscape, I think you would see a 90-episode order midway during season 1 as a unique event. It's not something that we think we would likely replicate. We sort of like the pattern we're in, generally, of a pilot, season 1, evaluating performance, and then deciding what to do going forward.

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

Thank you. This does conclude today's conference call. You may now disconnect.