AMC Networks Inc (Pre-Reincorporation) (AMCX) 2016 Q1 法說會逐字稿

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the AMC Networks first-quarter 2016 earnings call.

(Operator Instructions)

Thank you. I will now turn the call over to Mr. Seth Zaslow, Senior Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to the AMC Networks first-quarter 2016 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 first-quarter 2016 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. 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.

Thank you all for joining us this morning. AMC Networks is off to a solid start in 2016, with healthy revenue and AOCF growth in the first quarter. And looking ahead, we remain on track to deliver a strong and successful year.

Our performance in the quarter benefited from a few notable highlights. The Walking Dead returned, continuing its reign as the biggest show on TV among adults 18 to 49 and 25 to 54. Continued demand for our brands and content drove strong year-over-year distribution revenue growth. And across our networks, from The Walking Dead and Better Call Saul on AMC, to IFC's Portlandia and BBC's Orphan Black, AMC Networks has some of the most engaging and social shows on TV, demonstrating that our content creates deep connection to viewers and sustains passionate and engaged fan bases.

We continue to place a priority across our networks on creating high-quality content, and most importantly, having shows that really matter to the people who view them, so they find them on the various platforms that they increasingly inhabit. This approach has been fundamental to our programming strategy for now about a decade, beginning with AMC?s Mad Men and then Breaking Bad, and we think it has served us quite well. We believe this approach is particularly resonant and wise now as consumer behaviors evolve, in particular, as time-shifted viewing increases.

While many of our shows do command urgent viewing, we continue to take steps to monetize delayed viewing, whether it's through cable VOD, our SVOD partners, or our own websites and apps. Against this backdrop, we believe our ability to grow strong differentiated brands and attract and sustain large engaged fan bases, combined with the relative value we offer for distributors, has prepared us particularly well for a future in which consumers will be increasingly interested in defining their own TV experience.

So turning to our networks, if I may, AMC, the channel, ranked as a top five cable network during the quarter among target audiences, thanks to its strong slate of originals. The Walking Dead remains the top-rated nonsports program on all of TV by a very wide margin for the fourth year in a row with adults 18 to 49.

We continue to see advertising pricing power for shows like The Walking Dead, which attract large, engaged, and desirable audiences. While CPMs in that show particularly have increased, its value as an ad vehicle has not been fully realized, and we think there is more pricing upside. We also continue to take advantage of the opportunity that The Walking Dead affords us to leverage its success beyond the show itself.

Since the series launch, we've been managing the franchise in what we think is a thoughtful, balanced way. We've created companion series and other original content; we've tapped into merchandising and gaming opportunities, all the while preserving the creative quality that was established in the original source material by creator Robert Kirkman, who we continue to work with. In addition, we've been able to utilize the series as a distinctly powerful promotional platform to launch new shows, which has enabled us to further advance and diversify our business.

Elsewhere on AMC, Better Call Saul recently completed its second season as one of cable's most acclaimed, highly-rated, and upscale dramas, and we're delighted that this terrific show will return next year for a third season. AMC is unveiling a robust pipeline of distinctive originals this year, with the second quarter being a particularly active period.

Last month, AMC added a fourth night of original programming on Tuesdays, giving fans another opportunity to connect and engage with the AMC brand across all platforms. We're launching this new night on the strength of two strong originals, the BBC coproduction called The Night Manager, which is an espionage drama starring Hugh Laurie, which has received tremendous buzz and near universal critical acclaim -- it's just spectacular -- and the upcoming drama Feed the Beast, from one of the finest show runners in the business, Clyde Phillips, who is perhaps best known for Dexter and Nurse Jackie. That series features an A-list cast led by David Schwimmer and Jim Sturgess.

And later this month, AMC debuts the widely anticipated new genre series called Preacher, based on a cult classic comic book. This series is an inventive combination of a supernatural and dark comedy and is a passion and we all think a brilliant project from executive producers Seth Rogen and Evan Goldberg, with Breaking Bad director Sam Catlin at the helm. And it has a wonderful cast, including Dominic Cooper. These projects, all backed by standout creative talent, are just a few of the shows on AMC's upcoming lineup.

Turning to BBC America, WE tv, SundanceTV, and IFC. Ratings were strong across these channels in the first quarter and benefited from the launch of several series.

We continue to be very pleased with the performance of BBC America. The network recorded gains in the quarter among key audiences and continues to attract a very desirable audience that is highly social and upscale.

Last month BBC America debuted the fan favorite, Orphan Black. Now in its fourth season, the series is as strong creatively as ever. The network also introduced a new after show called After the Black to take advantage of the fan base for this series.

WE tv grew its target audiences driven by a strong lineup, particularly on Thursday and Friday nights, which included the successful launch of a new series, called Growing Up Hip Hop. SundanceTV continues to offer a collection of quality originals and coproductions. Sundance's newest original series, called Hap and Leonard, was the network?s biggest launch in its history. The series attracted strong critical notices, and along with SundanceTV's lineup of movies, helped to make first quarter the network's best quarter ever among its target audiences.

IFC continues its commitment to working with the best comedic voices in TV today, including Saturday Night Live's Seth Myers, who is behind the very funny original series called Documentary Now, which returns in August. And the network also has new development deals with Hank Azaria and Bryan Cranston. And Fred Armison and Carrie Brownstein from Portlandia debuted their sixth season in the quarter, and that show continues to be buzzed about by critics and viewers.

Turning to advertising, while the timing of our lineup impacted our first-quarter results, advertising remains an area of strong growth for us. In addition to attracting some of the most upscale viewers on television, our channel portfolio attracts viewers who enthusiastically endorse and recommend our content on social media.

And this viewer profile is particularly desirable to advertisers. We're seeing continued strong demand for our programming among the ad community, and we believe we are very well positioned across our portfolio heading into this year's upfront.

On the distribution side, we believe our five networks offer a particularly attractive relative value among multichannel programmers to distributors. While our primary focus is on delivering the best content available, we do have a continued bias to own the shows that we air, which we believe positions us well to take advantage of increased opportunities to monetize that owned content and generate incremental value for the Company. Our ancillary revenue stream has been growing significantly over the past few years, and we expect it to continue to be a growth driver into the future.

Turning to our international business, as we've discussed with you on previous calls, one of the fundamental components of our approach is to capitalize on the popularity of our original programming that is shown in the US by extending its reach into international channels that we now own and operate in more than 125 markets around the world. Examples of this approach include season 2 of Fear the Walking Dead, which recently debuted simultaneous to the US premiere. Also, AMC Studios? Hap and Leonard, The Night Manager, as well as Talking Dead, the successful after show that now also airs overseas following each episode of Fear the Walking Dead.

We believe over time, as consumers become more and more familiar with our programming and brands, that our audiences will continue to grow overseas. And we are quite confident that our strategy is the right one for international growth, especially as we bolster our programming slate and distribute our shows in new markets around the globe. With that summary, I'd like to turn the call over to Sean Sullivan, who will update you on our financial performance.

Thanks, and good morning. As Josh highlighted, our results in the first quarter were strong, and the year is off to a solid start. The Company delivered healthy revenue, AOCF, and free cash flow. We're optimistic about the outlook for the remainder of 2016, and I'll touch on that after reviewing the first-quarter results.

For the first quarter, we delivered total Company revenue growth of 6% and AOCF growth of 11%. Results in the quarter were essentially in line with our expectations, with one notable exception. Non-affiliate distribution revenue benefited from the timing of certain items. I'll touch on that in more detail as I go through my remarks.

So let's now review our operating segment performance. At the national networks, revenues increased 6%, or $36 million. National networks? AOCF increased 11%, or $28 million, versus the prior-year period, to a total of $281 million.

Advertising revenues increased 1%, to a total of $264 million. As expected, results in the quarter were impacted by the timing of our originals and the number of premiere episodes, most notably The Walking Dead and Better Call Saul at AMC, versus the prior-year period.

AMC, the channel, which saw a year-over-year decline in advertising revenue in the quarter, would have reported healthy growth had there not been a shift in the timing of episodes. Each of our other domestic networks, BBC America, IFC, Sundance, and WE tv, delivered double-digit growth in the quarter, taking advantage of a strong scatter market.

Distribution revenues at the national networks increased 11%, or $32 million, to a total of $335 million versus the first quarter of 2015. Affiliate fee growth for the quarter was in the mid-single-digit range. As we highlighted in our prior calls, we have now cycled through various rate resets we achieved in connection with several recent renewals.

Distribution revenue growth for the first quarter also reflected a strong double-digit year-over-year increase in non-affiliate revenues, due principally to revenues related to licensing of our scripted original programs, most notably The Walking Dead and Fear the Walking Dead on various ancillary platforms. The timing of revenue recognition of some of these items was the largest driver of the favorable variance in the quarter relative to our expectations.

Moving to expenses, total expenses increased 3%, or $8 million, versus the prior-year period and were essentially in line with the comments we provided on our last call. Technical and operating expenses increased 5%, or $9 million, compared to the prior-year period, to $206 million, reflecting the continued investment in programming. It should be noted that no charges were recorded related to the write-off of programming in the current quarter, versus $10 million in the prior-year period.

SG&A expenses were flat year over year at $118 million in both the first quarter of 2016 and 2015. Marketing costs decreased modestly due to the timing of original programming premieres.

Moving to our International and Other segment, revenues for the first quarter increased $3 million, to $109 million. AOCF for the first quarter decreased $1 million, to a total of $5 million. Results for this segment were essentially in line with the expectations we outlined on our last earnings call in late February. The increase in revenues reflected an increase of our international networks, partially offset by a decrease at IFC Films.

In the quarter, there was a $5-million negative impact on revenue from foreign exchange. As for AOCF, the results in the first quarter reflected the increase in revenue, offset by increased expenses, primarily at our international networks, related to programming as we execute on the strategy Josh articulated. Foreign exchange did not have a meaningful impact on AOCF.

Total Company net income from continuing operations for the first quarter was $113 million, or $1.55 per diluted share. As detailed in our earnings release, included in this amount was $48 million of charges related to the refinancing of a portion of our debt. Excluding refinancing charges, diluted EPS would have been $1.99.

These amounts compare to net income from continuing operations of $121 million, or $1.66 per diluted share, in the prior-year period. Excluding the impact of amortization of acquisition-related intangibles, adjusted EPS for the first quarter was $1.64 per diluted share on a GAAP basis, and $2.08 per diluted share excluding the charges related to the refinancing.

In terms of free cash flow, the Company had a particularly strong quarter. We generated $146 million in free cash flow for the three months ended March 2016, primarily due to a positive change in working capital. For the first quarter of 2016, cash interest was $46 million, tax payments were $6 million, distributions to noncontrolling interest primarily related to BBC America were $9 million, and capital expenditures were $12 million.

Program rights amortization for the three-month period was $171 million, and program right payments were $192 million, resulting in a use of cash of $21 million. This compares to a use of cash for programming of $8 million for the prior-year period.

Turning to the balance sheet, the Company made a mandatory payment of $37 million on its credit facility in the first quarter. We're required to make similar quarterly payments throughout 2016 as per our credit agreement. In March, we also took advantage of the interest rate environment to refinance a portion of our debt and strengthen our liquidity position by issuing $1 billion in 5% notes that mature in 2024. As of March 31, AMC Networks had a net debt position of $2.4 billion.

Our leverage ratio based on LTM AOCF of $866 million was 2.7 times. When adjusted for consolidated entities that are less than 100% owned, such as BBC America, this ratio increases slightly, only 10 basis points. In terms of capital allocation, our primary focus remains invested in our core business as we believe this will allow us to continue to grow AOCF on a sustainable basis.

In March, the Company announced that the Board of Directors authorized a program to repurchase up to $500 million of common stock. Due primarily to the timing of the authorization late in the first quarter, we have not yet made any repurchases under the program.

Adding a share repurchase program provides us with a flexible and opportunistic capital allocation strategy, which we believe is a prudent approach. We will continue to be disciplined in our use of capital for repurchases and/or non-organic investments, as well as investment in our core business, the focus being on long-term value generation.

Looking ahead, we anticipate continued variability in any given quarter as a consequence of the specific timing of our investment in content and the airing of our shows. With respect to the second quarter, at the national networks, the timing and amount of our original programming lineup is quite favorable in comparison to the prior year.

As a result, we expect a significant sequential increase in the advertising growth rate. We anticipate that the second quarter will be our strongest quarter of the year in terms of year-over-year growth in advertising revenue.

With respect to distribution, we expect affiliate growth to be generally consistent with the rate of growth we experienced in the first quarter of the year. With regard to non-affiliate revenue, we expect continued strong double-digit growth in our non-affiliate revenue stream due to the amount and timing of content.

On the cost side, we expect expense growth to reflect the increase in original programming at the national networks. These factors in aggregate are expected to result in solid year-over-year AOCF growth at the national networks for the second quarter.

At our International and Other segment, we expect revenue to be relatively flat year over year on an absolute basis. We expect a modest decline in AOCF, again, on an absolute basis, due to the timing of various expense items, most notably our investment in OTT digital initiatives. For the full year 2016, we're optimistic about the outlook for the Company's performance. As we discussed on our last call, we continue to expect both advertising and distribution revenue to be growth drivers for the full year at our national networks, and anticipate managing this segment to a margin that is largely consistent with 2015.

At our International and Other segment, assuming a constant currency, we continue to expect to see revenue growth as we execute on our strategy of further developing and expanding our international footprint. AOCF in the International and Other segment will be impacted by our investment in emerging OTT digital initiatives and continued investment in original programming.

So overall, we feel good about how the business is positioned as we look ahead for the remainder of the year. 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.

[Brandon] Goldberg, Bank of America Merrill Lynch.

Thank you. Can you hear me?

Yes. We can hear you, Bryan.

Good. Thanks. So I had two questions, one on The Walking Dead and then a follow-up on Hulu. First, on The Walking Dead, there's been a lot of focus on the Nielsen ratings for the franchise, and I was just wondering, at this point in the show's lifecycle and in terms of its ability to drive growth for the Company into 2017, how should we think about or frame the type of pricing power you have with advertisers with a show of this size?

And when you sell ad units in the upfront market, how are you balancing ratings guarantees for season seven in light of the Nielsen C3 headwinds we saw in season six? And then I have a follow-up on Hulu.

Sure, Bryan. This is Josh. I'll answer on Walking Dead, if I may, broadly, and then try and comment on 2017. As we mentioned in the prepared remarks, generally, we really do look at it as franchise management.

And so we -- it is, of course, a TV series, but we now have Fear the Walking Dead, which premiered as the number-one cable premier in history, so it's a related show. And we have an after show, which is beneficial, and we're selling The Walking Dead around the globe.

So our horizon for The Walking Dead is very long. We look at it over -- in really five-year chunks going forward, and with an eye toward, if I can use the word delicately, delicately managing all of the creative aspects -- its exposure, consumption, the creative group that we have attending to it, and the like. So that's the broad perspective. I think you probably have a sense of it.

The performance last season was good in 18 to 49, and particularly in 25 to 54, very good. So we think that we are -- it is a very, just to say it bluntly, a great advertising vehicle. If you have a product you want to sell, a spot in The Walking Dead sells stuff. It is really that simple.

And some of that has been reflected in unit pricing that we've already seen, and we think, in today's market, as we go forward, if you have something to sell, you'll want to be in The Walking Dead. Frankly, we hear it. It has some unique qualities, both volume, scale, and deep depth of engagement. So we think it'll be a good vehicle for the upfront. We think it'll be a good vehicle next year, and it'll be very attractive and valuable for our business.

Okay. Thank you. And then, on Hulu, there's been a lot of news flow around it this week, and I was just curious to hear your thoughts on the new digital video service that they are working on, the live feed and SVOD-like hybrid. Do you see a service like this as incremental or cannibalistic to your current subscription and advertising model? Is this a type of packaging that could fit your distribution strategy in addition to your output deal with Hulu?

Yes. So good question. That really is a good question because we do have a relationship with Hulu already, as you know and you just mentioned. So we're proximate to their operations and their executives. And we think that they are doing, frankly, a superb job and have grown terrifically over the past couple of years.

We have embraced multichannel video over the top offerings from -- to date, from Sony and from DISH in the form of Sling, and we're very happy participants in them. We think that they are, in fact, additive to our distribution in the United States and that our channels, as we mentioned in our prepared remarks, we really believe it, are very, very, very strong among key target audiences that OTT services want, notably younger people 18 to 49, and to some degree 25 to 54, so we think we're in an easy and happy marriage.

And further, Bryan, we think we're really well priced. If you look at comparative pricing for channel offerings from us and our siblings, we think that we come up really top of the charts in terms of price value.

So when there are new OTT entrants, which Hulu is in its description, we look at it with fondness and think that it will add a competitive frame, a consumer option, and that the strength of our channels and brands will be elevated, as by degree, the system, or as it's commonly called, ecosystem, has different options in it, that the AMC networks will rise up in terms of their price, value, and attention. So that's a long way of saying we look at it fondly.

That's really helpful. Thank you very much.

Michael Morris, Guggenheim Securities.

Thank you. Good morning, guys. Two questions. First, Josh, in your prepared remarks, you talked about the strength of your programming beyond the live window and perhaps beyond the C3 window.

So my question there is, over the next year or two, where do you expect to make the most incremental progress monetizing that demand from where you are now? Is it in the ad market? Is it renegotiating with your traditional distributors? Is it going outside of the traditional ecosystem?

And then my second question, you have an app on the Apple TV now, at least that I've seen. I'm not sure if it's on other services as well. But I know great look and feel, similar to what we see from other networks. How do you think about potentially making it available at a retail price on a non-authenticated basis, both in terms of the potential demand and also what it would mean for your existing relationships? Thanks.

Sure. So in terms of the -- where upside is for us, you mentioned three different categories of opportunity, and that they're each different in both scope and in calendar. You saw our numbers this quarter, and they indicated that, to use just lay words, sale of shows out into other markets had a very good trajectory. We think that will continue.

And our system is, if you don't mind a holistic system, meaning we make shows, we put them on our domestic channels, we look to see if they belong on our international channels, we premier them simultaneously, and then we sell them as a studio would in the US in what used to be called syndication windows, now commonly called SVOD, and we do the same thing internationally. That segment of opportunity is very, very robust at the moment, and so we think that there's continued opportunity as we become both an increasingly higher-volume producer and a very, very high-quality producer because it is the type of material that those outlets want and value. So we've met with success, and we think we'll continue to meet with success.

On the distributor front, which you also mentioned as a category, there is -- timing matters a lot and the cadence matters a lot, to answer that question accurately. We, as you, I think, know, we've lapped some deals that we did that had substantial increases, and so our rate of growth that was last year extremely high relative to the rest of the market has now come into more order and in line with something more standard because we lapped those resets.

We have a light year this year in terms of renewals, and that number will be very influenced by the size of the platform that we do a deal with and when. So it's a hard question to answer, except I would answer it broadly by saying, and you can evaluate this for yourself, if you look at the aggregate or average wholesale prices for the collection of channels offered by us and other multichannel video distributors, programmers, you'll see that our price, I think, is on the lower end, that our channels are fewer, and that they are relatively each -- if you gauge them each, because some others have, as you know, 10 and 20 offerings -- they are each strong, identifiable, and very fairly price.

Over the long term, therefore, we think we have opportunity for both pricing power and upside revenue. It's very influenced by when any one deal comes up.

And the last category, there's a tortuously long answer, but you asked so I'll try to help with the answer. On the ad front, we do think there's incremental opportunity. If you look at consumption of our material in three versus seven days, most of it is consumed in three days. There's some opportunity on some material that goes longer, and then there are other platforms that are not being counted accurately, and that certainly provides upside if one makes the assumption that it will eventually be counted.

On the last question you asked, thank you for the compliment. I think we're all collectively proud of what it looks like on Apple, and I think, as you know, today, our regime in the US is to offer our shows at relatively high price individually on transactional platforms like Apple, to then work with our MVPDs and to work vigorously to protect value on our MVPDs by putting what is probably the longest window in place between MVPD exhibition and SVOD availability. And so anything that we do in the future or might do would be guided by those principles.

Thank you, Josh.

Anthony DiClemente, Nomura.

Hi. Good morning, and thanks for taking my questions. I have two. The first one is for Sean. Sean, I'm sorry because the script is on a little bit of a delay here, so can you just clarify what you said on the 2Q? Because I think you said strong sequential growth in advertising, and just, does that mean that 2Q advertising within national networks will be higher in terms of dollars than it was in 1Q? Because, if that's true, given the seasonal weakness of the 2Q, that implies really substantial year-over-year growth expectation. So is that what you meant by sequential? And then I have a follow-up.

Yes. No, Anthony, I was referring specifically to the percentages, not the absolute dollars.

So you're saying that percentage growth rate will be higher in the 2Q than it was in the first quarter, not that ad revenue will grow sequentially. Do I have it right now?

That is correct. Yes.

Okay. Okay. Sorry. Maybe it's just because I'm covering a lot of these Internet companies --

No worries.

-- which talk more about sequential growth. So I also just want to ask, I think it's interesting in terms of the timing of when a lot of the new AMC shows and franchises are launching relative to the timing of the upfront.

Right? So you have a lot of these new shows that are being launched right now just as negotiations are getting going. So how does -- how do you, Ed, the ad sales team to go about bundling or not bundling some of the newer franchises with the existing established inventory of content? And so to what extent are you selling them on an a la carte basis versus on a bundle basis? I'd just be interested to hear how you are approaching that. Thanks.

This is Ed. So it is a mix. In terms of the sale of our original series, some of those series we sell individually. Obviously, that tends to be the best way to drive pricing.

As Josh alluded to before, in this marketplace, AMC delivers a disproportionate amount of the 18 to 49 impressions, which are very, very highly valued by advertisers. So selling individual units not packaged across a broader schedule for some of our shows is the best way to do it.

For others, we offer a package. We offer a package for advertisers depending on what they're looking for. In their advertising upfronts or in their scatter buy, what demos they want to reach, what duration their flight will be, so we actually model it both ways.

Okay. Great. And maybe just one really quick follow- up on the buyback. You have the $500 million authorization but didn't buy back any stock in the quarter. Have you bought back any stock in the 2Q so far? Sorry if you mentioned that. Will you -- how should we think about the pacing of when that buyback actually gets going, Sean?

No, Anthony, good question. So as I said, we implemented the program late in the first quarter. We have not effected any repurchases in Q1. As you know, it is an opportunistic program that we will execute on with no set time horizon, so I wouldn't necessarily read too much into the lack of activity to date.

Okay. Thank you very much.

[Michael] Fiftal, Morgan Stanley.

Good morning. It's Ryan Fiftal, actually. So Josh and Ed, I was wondering if I could get some of your thoughts on The Night Manager. The show is excellent and it did very well in the UK, but the ratings so far the US have been comparably modest, and the press reports are it was not an inexpensive show to make. So I'm wondering what your thoughts are on the performance so far and whether there are any takeaways for how you think about investing your programming dollars.

Sure. So this is Josh. First of all, I'd say the show is superb. And I think that actually matters a lot, meaning that the qualitative judgment that we saw evidenced by third parties, meaning critics, does matter for its future, and we'll see exactly how, but we have seen, in certain instances, TV shows develop momentum that were not necessarily discovered rapidly when they premiered on linear TV.

We did premier it on AMC on a Tuesday night. That's a new night, and so that creates a bit of a lift in terms of -- meaning, what we have to achieve in terms of getting audience to it. There is a greater objective in that for us, obviously, but it probably influenced the rating inevitably versus a Sunday night, obviously. And when we'd done Saul, we did it in a two-step, so it had a different sequence in terms of premier.

And just on price, I would say that we are very comfortable and pleased with the relationship that we made with the BBC financially and otherwise, and I'll leave it at pleased, and just to say that we cooperated very nicely, we are very pleased with the outcome. I think the proportion of it was sensible for us. We hope the BBC was happy. We think they are, but I would probably dispute or refute what was implied in your question about expense.

And so I think what we have is -- and it'll be interesting to see -- and by the way, it skewed a little older, so there's also, if you looked at persons two plus, what you'll see is they were relatively abundant. And the demo number, or the VIP as we like to call it, of younger viewers was a little lighter than some of our other properties.

So there's a bunch of stuff in the mix. There's a spectacular TV show that I think may find momentum via exposure, and I think that there's a new night it premiered, and there is a demo component that was a little bit older, meaning persons two plus relative to 25 to 54, than we've seen in the past, so we'll play it out. And then, of course, there's the entire environment of television, which is, of course, moving around, too.

So I don't want to express overconfidence in it. I would say we're pleased with its performance and terribly pleased with its critical acceptance and its persons two plus, and we'll see if the evolution of it and the manner in which we can push it and help direct it -- and by the way, it?s -- but it is essentially spectacular -- can be more rewarding for us over time.

But I will tell you that we have seen time and again, when something is -- sorry to be -- I'm a big fan of it, so you'll hear this -- when something insanely good -- it doesn't necessarily read insanely good day one. Sometimes day 33, it reads insanely good. And I am an enthusiast for it. You will hear that. But it's not just me. I think the world, dispassionately or passionately, has declared that as well. So that's the view of it.

Yes. That makes sense. To that point, it seems like a show that should do very well in the ancillary markets. With your co-pro, do you participate at all in the ancillaries?

We do in some of them, and we don't in others. I'm not going to go into one individual deal, but in some of them we do.

Okay. Thank you.

Todd Juenger, Sanford Bernstein.

Hi. Good morning, everybody. I've got a question of the longer variety, and then a short one I'll save for a follow-up. The longer variety question simply is just an exploration of your appetite in future years to continue adding original programming, new franchises, at the rate you have in a couple of years.

A little bit of context around that to help you -- to cater your answer is, if you could just juxtapose Q1 of this year to Q2 of this year, I think it's really informative. In Q1, with a relative comparable balance of shows year over year, a very strong advertising market. On the advertising side, you delivered a small positive growth number. Next quarter, we're talking about a sequential growth, as we've already heard about, with a lot of new programming hours but a much bigger number -- a much bigger cost and risk.

As we think about 2017, 2018, 2019, there are more nights of the week; there are more networks you have. Should we think about an appetite to continue pursuing something that looks like Q2 or something that looks more like Q1? And I'll save the follow-up for after. Thanks.

Sure. Hey, Todd; it's Josh. So I think the best way to think about it is a little bit holistically, if I may, because when we do shows now, there's a few key variables. Variable one is what is absolute cost, meaning net cost after -- what does it really cost to make it?

And the second is, do we have a partner? Are we sharing in it? And those are big factors because it yields a net effective net cost to us.

And then, there are revenue opportunities that we went through in my torturously long answer to an earlier question, which is, in part it influences over time our affiliate fee rate, but not very directly. There's not a clear and hard line. It does -- there is a clear and hard line with domestic ad revenue.

And then there is an increasingly flexible line for ancillaries and international, which means that as if we own it and/or participate, and as Ed's answer indicated, it can be both or bits of both when we make a deal. It doesn't have to be one or the other. We can own 50% and finance X.

That line of opportunity, which really has us functioning in what is conventionally called studio, has been increasingly rich. And so when you add up all those columns, any one show either has a good or bad profile depending upon how they add up. But I would indicate that that last opportunity of international and syndication has been increasingly rewarding for us. So I would say that we will make decisions for 2017, 2018, and 2019 that are based upon how we see those deals coming in and how much strength we see in the revenue opportunity lines and simply be guided by business. There's not an answer of yes more, or less more.

Okay. I'm going to ditch the planned follow-up and go with a different follow-up and just continue this conversation, if you don't mind. Do you think -- so you're now on four nights on the AMC Network of originals if Tuesday sticks. In your mind, is there some limit to five nights or six nights or seven nights?

And then you have other networks as well that still have nights could [added] of original. Just how much weight of original episodes and hours do you feel the audience can absorb, if that's a way to put it, across your networks? Thanks.

So Todd, I think I'm going to once again just say that, obviously, we look at margin of our business, overall margin, and that's a guiding principle that is the ultimate financial statement. I don't need to tell you about return and performance. Inside that is, you make a show and you make 10 episodes or 13 or six, and they cost you X, and the money comes in.

I would say that our bias is to own, and our bias is to do more, as long as it's economically reasonable. And I think there are good reasons behind that. It's not just that we are in love with TV shows.

We do think, increasingly, as all the technology proliferates and all that stuff, people will find their way to what they want, and leased and commodified material will probably get mildly depressed in value, and that proprietary and owned material will, in general, have more value. Of course, it's got to be good.

So if we can own and if we can increase volume of owned or partially owned with rational economics, we have a bias to do it. I really can't give you an answer to escalation over the next 36 months because it's based on an assessment of market and our ability to monetize and what the returns will be and what our overall margin profile -- how it will be affected by that investment. But if we can, I think our Company will be better served by doing more with disciplined economics.

All right. I appreciate that very much, Josh. Thank you.

Sure.

Vasily Karasyov, CLSA

Thank you. Vasily Karasyov. Good morning, everyone.

Ed, I think my question is for you. Can you please it dumb it down for me what Josh was saying that The Walking Dead has pricing power? Does it mean that you can command price increases above what the scatter price increases year on year are? And then can you just do a back-of-the-envelope analysis on how a show that has 15% decline on ratings can see overall advertising revenue growing?

Right. So in terms of pricing power on The Walking Dead and on AMC generally, we go into this upfront, and we look at what AMC is bringing to the table, which is a disproportionate amount of 18 to 49 impressions. We also model out what we anticipate our competitors will bring to the table. And so we think we're in a very good position.

And so we look at it two ways. Of course, on a monthly and quarterly basis, we look at driving our scatter pricing, or our CPMs, higher. Right now, what's in front of us is the upfront, and we anticipate real pricing increases for The Walking Dead -- significant pricing increases for The Walking Dead. Does that get to the root of your question?

Well, if I might ask a follow-up.

Sure.

As Josh would say, we're proximate to the answer here.

Yes. (laughter)

So does it mean that you did not 100% monetize The Walking Dead's audience?

No (multiple speakers) --

Does it mean that the declines were not eating into your inventory?

No, it doesn't mean that. It means that we believe that we can command a higher unit price in this upfront than we were able to command in last year's upfront. And we've enjoyed that in recent quarters in the scatter.

Okay. Thank you very much.

Tim Nollen, Macquarie.

Thanks. I wanted to catch up on the comments you've been making about the viewership after live or even C3. It seems like your programming lends itself well to catch-up viewing.

Correct me if I'm wrong, but I saw some numbers that The Walking Dead final episode had something like a 35% increase in viewers up to day seven after live, and I think that doesn't even count the streaming. So if you could comment a bit more on how you expect you can price for this type of advertising coming up in the upfronts as a follow-on to the last question.

And then secondly, could you please comment a bit more on your international investments? What are you putting money into in programming? And I think you mentioned an OTT services internationally as well.

And just to double check, I think you said you expect operating margin to be flat year over year in international. Is that in dollar terms, please? Thanks.

So Tim, so you've asked a number of things there. I think in pricing strategy, between linear and VOD, TVE catch-up, I won't break it out.

I will say that we go into this upfront and we model the number of impressions that we believe we'll get in so-called live same day, and the number of impressions that we believe we'll get in plus three and plus seven. And in some cases, we are selling packages of linear and digital together, and then we also have a digital sales force that is going out to other buying groups (technical difficulty) to monetize it as such.

You asked a question about international. I think it was the programs that we are investing in overseas. And if investing it means we are carrying them on our AMC Global, I would tell you that Fear the Walking Dead and Into the Badlands are prominent series on AMC Global, as well as Halt and Catch Fire, and The Night Manager in many regions as well. And those have all met with strong degrees of success from territory to territory.

And then, Tim, I think you also touched on OTT. That is not an international activity directly. We have some developmental activities here in the US with, A, some investments in OTT video services, and then our own activities in which we are experimenting with subscription services that bear names different than our channels that are in niche areas of content, and we have an interest in being familiar with consumers purchasing directly and developing that facility in our Company.

And then, Tim, I think the last part of your question was about the International and Other segment. I think what I articulated in the comments was a modest decline in the second quarter as it relates to AOCF on an absolute dollar basis due to timing, and these investments that Josh was referring to as it relates to OTT. And I did make some comments about the revenue growth in that segment for the full year, but no specific guide as it relates to margin or AOCF.

Okay. Thanks.

Andrea, just in the interest of time, can we make this the last question, please?

Yes, sir. Ben Mogil, Stifel.

Hi. Good morning, and thanks for taking my question. So Josh, we've seen Netflix in particular when doing its own originals, buy out all the participations and residuals at the beginning of the production so that they've got the most amount of flexibility in terms of windowing and how to window or how not to window for their own larger strategic goal.

As you look at AMC wanting to own more -- wanting to own more shows, wanting to do more shows, and obviously, you've got your own strategic agenda, do you see an environment where you and some of the original programmers begin to buy more rights out early so that you've got more flexibility around windowing without having to worry if you're maximizing your talent obligations?

I think that -- it's touching on a couple of different issues. Buying rights for territories and/or ancillaries, if I can just segregate the issues. Issue number one, we do -- we are interested in getting flexibility because we now have an international footprint. And we are a seller to domestic and international ancillary markets.

So the answer is, yes, we have that interest, but we're not fundamentalists about it. We will make deals, depending upon what the material is and whether we think it's unique and spectacular, and we'll do coproduction deals. So while we own The Walking Dead and Fear the Walking Dead, just to say it, we license from studios Preacher, and we look forward to a robust and happy activity on Preacher. And we coproduce with the BBC, which is a whole different set of engagements.

So the talent issue and participants is subsidiary to that, and because we've been flexible and making deals for rights related to territories and ancillaries, we're happy to work with whatever recipe and agenda makes talent happy and gets the deal done. We don't want to do it only one way and scoop up everything all the time, including everybody's participations. We'll be flexible, and we'll make, we hope, the right arrangement at the right time.

That's great. Thank you very much, Josh.

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

Thank you, ladies and gentlemen. This does conclude today's conference. You may now disconnect.