AMC Networks Inc (Pre-Reincorporation) (AMCX) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and a welcome to the AMC Networks third-quarter 2016 earning's conference call.

(Operator Instructions)

It is now my pleasure to hand our program over to Mr. Seth Zaslow, Senior Vice President of Investor Relations.

Sir, the floor is yours.

Thank you.

Good morning and welcome to the AMC Networks third-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 third-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 www.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 then 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 risk 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.

Of particular note, as disclosed in today's earnings release, the Company has renamed the non-GAAP performance measure formerly referred to as adjusted operating cash flow, or AOCF, to adjusted operating income or AOI. The definition and components of adjusted operating income are identical to the definition and components of AOCF.

For further details, please refer to the press release and related footnotes for GAAP information and our 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.

Good morning and thank you all for joining us.

During the third quarter, AMC Networks continued to execute on our long-term strategic goals, and we're on track to deliver solid results for the full year 2016. Across the Company, we remained focused on investing and in monetizing high-quality content through traditional revenue streams, such as affiliate fees and advertising, as well as through new revenue streams resulting from our expanded ownership and control of content.

At the same time, we're aggressively managing our cost structure to maintain healthy growth and margins. We're generating strong levels of free cash that allow for a balanced capital allocation strategy. We believe these strategic priorities will best position our Company to take advantage of changing consumption patterns in TV.

We like the composition of our revenue base, which is growing nicely, up 7% year to date, and is becoming increasingly diversified. Our domestic affiliate relationships continue to provide us with desirable and predictable revenue stream. Given the particular strength of our channels and brands, we think we have an attractive, if not relatively low, wholesale price. Based on our consumer appeal, we think we are quite additive to any and every Pay TV package.

Given the multiyear nature of these agreements, and the timing of agreements now in place, we expect the distribution of our brands and channels to both traditional MVPD's and new entrants will continue to provide us with a long reliable source of growth well into the foreseeable future. This past quarter, we entered into an agreement with DirecTV Now, AT&T's soon-to-launch over-the-top streaming service.

So we now have agreements in place with the three alternative TV packages that have recently emerged: DirecTV Now from AT&T, as well as Sling and Sony View. We're having productive discussions with several other entities.

Moving to our other traditional revenue stream. Advertising continues to be a growth driver for AMC Networks. As we've said before, while our results in any given quarter can be impacted positively or negatively by the timing and performance of programming, we continue to grow this area of our business.

Year to date, our domestic advertising base is up 6% as a result of strong pricing power and demand for our shows and content. We had particularly strong demand for our content in the most recent upfront, securing healthy price increases across all of our networks. Due to the strength of our brands and our shows, we were able to elevate the quality of our advertising relationships in a quite competitive environment.

I'd like to take a moment if I may to talk about the several steps we've taken over the last several years to diversify our revenue base.

Five years ago essentially, all of our revenues were derived from either domestic affiliate bit or advertising revenue. Today, approximately 30% of our revenues come from sources other than US affiliate and advertising. So we now have an international channels business that spans over 140 countries; and, through the expansion of our studio operations, a rapidly growing licensing and distribution business, as well as several developing digital initiatives.

In terms of our digital interest, we continue to invest in and develop our in-house subscription video on-demand capabilities with our two streaming services that are named Sundancenow and Shudder. In addition, we recently entered into an agreement with RLJ Entertainment. We provided that company with a loan, and have the option to become a larger strategic partner in the company.

RLJ Entertainment, if you don't know, owns two streaming services. One called Acorn TV and the other Urban Movie Channel or UMC. In aggregate, those two services have about 400,000 subscription video on-demand subscribers. They operate in content areas that are sympathetic to what we do, and we think this business provides an interesting opportunity as we go forward.

As many of you know, several years ago we saw the landscape changing and intentionally shifted our business with the goal of becoming a more significant content producer. By establishing a studio operations through which we own, control, and distribute our own content, we saw an opportunity to enjoy the upside of delayed viewing to take advantage of sales to various platforms and to reduce our reliance on domestic advertising and affiliate revenue streams.

Today, our AMC Studios operation is an important and thriving part of our business. We currently have eight AMC Studios own scripted dramas airing on our own channels and three more in production. That's a level of output that rivals some of the more well-established TV studios. Our increasing ownership and control is meaningful to our economics in many ways.

We benefit when our content plays in a linear window; when we sell our shows into domestic subscription video-on-demand platforms like Hulu and Netflix. We benefit from licensing and merchandising and when we sell our content overseas to our own AMC Networks international channels, as well as to third parties. Over the past several years, the revenues generated from ownership and control of our content has grown at a very rapid rate.

So content remains the engine that drives the success overall of AMC Networks. It's the most important part of what we do; and, if I may, I'd like to touch on a few recent highlights. On AMC, The Walking Dead just premiered its seventh season, with a powerful episode that was watched by more than 20 million total viewers, with 17 million tuning in live. The premier was watched by 13 million adults in key demos, making it the most-watched program on TV for the fifth consecutive season. The Talking Dead after show broke records as well, attracting 9 million total viewers and 5 million in key demos.

To deliver at this level in the show's seventh season in terms audience, size, culture relevance, and what we think is creative excellence, we believe speaks to the enduring quality of the franchise. Since we own the IP, we're able to monetize this asset in various windows. While linear advertising represents one revenue stream, we also derive a significant amount of revenue from other platforms. Such as international, subscription video-on-demand, home video, and various forms of licensing and merchandising.

The stability and predictability of these revenue streams gives us confidence in our ability to effectively manage the overall profitability of the show now and, we believe, quite well into the foreseeable future. Looking at the broader performance of AMC, the channel, the quarter ended with the network having 5 of the top 10 shows on ad-supported cable for the most recent TV season. These include Fear the Walking Dead, which has found what we believe is a core audience of consistent live or near live viewers at a level that made it the number two cable original among adults 18 to 49. We're looking forward to the series return next year.

During the quarter, we were pleased with the performance of our new original series called Preacher, from Executive Producers Seth Rogen and Evan Goldberg. The show quickly established itself as a top 10 cable drama and ranks as the number two new drama launch of the year. The second season will return in 2017 with 13 episodes.

We also have an active original slate at the channel, including two new series from AMC Studios, both of which are being adapted from best-selling novels. The first is called The Son. It's a multi-generational American epic starring Pierce Brosnan. The second is called The Terror. We think it's a really gripping and suspenseful story. Set in the 1800's, it's the story of a Royal Navy expedition crew that is ice-locked and stalked by a mysterious predator.

In addition, we've recently ordered a new series called Lodge 49, what we believe is a very strong character drama from Paul Giamatti. We're looking forward to our latest international coproduction called Loaded, which we'll produce with Channel 4 and Keshet. Our last AMC international coproduction, the Night Manager, was quite well-received by both audiences and critics, notably winning two Emmy awards.

At AMC, as well as across our portfolio, we have content and brands that are very much a part of the broader pop culture conversation. They tend to draw quite a bit of attention in social media. This social relevancy we think often translates into content value and is actually a bit of a barometer in identifying what really matters to viewers in a world in which they have increasing and increasing video options.

At BBC America, the channel enjoyed strong total day growth in the quarter and was up notably 11% in total viewers year over year. The BBC America hit show Orphan Black, was recognized at the Emmy's, where Tatiana Maslany received the Emmy for best actress for a drama series. We think well-deserved for her standout performance portraying multiple characters on that show. The series ranks among Basic Cable's top 10 most social primetime programs and returns next year for its fifth and final season.

During the quarter, BBC America's natural history series called The Hunt exceeded the network's primetime average by double digits and garnered wide critical acclaim. In January, the channel will present the second installment of the groundbreaking Planet Earth series. A recently-released trailer for the series gave an early look at the show and has so far garnered more than some 45 million online views. So there seems to be a very high level of anticipation for it, and we think it's going to be quite a special TV event.

Across WE tv, IFC, and SundanceTV, we continue to create content that we think has really outsized impact when it comes to media attention, critical acclaim, and awards recognition. It is perhaps worth noting that BBC America and SundanceTV both rank as the most critically acclaimed drama networks of the broadcast season. For shows including what I just mentioned, BBC America's Orphan Black, but also Luther and SundanceTV's new series, Hap and Leonard, The A Word, and Gomorrah.

IFC's Portlandia received two Emmy this year and will premiere its seventh season in January. The channel's newest show, called Documentary Now, continues to be a critical and fan favorite, further reinforcing IFC brand as a leading comedy destination. And SundanceTV had a very strong quarter, ranking among the top three fastest-growing general entertainment networks on cable among adults 25 to 54, up some 30% year over year.

This growth was driven in the quarter by the new series Gomorrah and Cleverman, which also attracted a highly upscale audience. The Sundance series Rectify is currently in its fourth and last season. That is a show that helped solidify SundanceTV as a prime destination for uniquely high-quality drama. The universal praise that the show, the cast, and the series creator Ray McKinnon have received is, we think, quite a rare accomplishment and a real benefit for the channel.

At our international business, we are seeing healthy revenue growth as we continue to execute on our strategy to populate our channels with an increasing amount of our original programming. A significant portion coming of it from AMC Studios. This quarter, we debuted the second half of Fear the Walking Dead simultaneously with the US, and the show has grown a very strong following around the world.

We remain focused on expanding distribution in pre-existing markets and launching in new markets, including the Middle East, where we recently launched in 21 different countries.

So in closing, I'd say we are pleased with the performance of our business and believe we're well-positioned to capitalize on the ample opportunities for great content that are available on platforms both in linear and increasingly in nonlinear around the world.

With that overview I'd like to turn the call over to our CFO, Sean Sullivan, for more detailed financial information.

Thanks and good morning.

As expected, our results in the third quarter were impacted by challenging comparisons to the prior-year period. However, we are confident in how the business is positioned; and we're optimistic about the outlook. I'll touch on Q4 in more detail after reviewing the third-quarter results.

For the quarter, total Company revenue was essentially flat, and adjusted operating income declined 12% or $22 million. We continued to generate a very healthy amount of free cash flow, $177 million in the third quarter alone. For the nine months ended September 30, total Company revenue grew 7%; and adjusted operating income increased 4%. Year to date, we've generated $373 million in free cash flow.

Moving to the performance at our operating segments, at the national networks in the third quarter, revenues increased 1% or $4 million. National networks adjusted operating income decreased 13%, or $24 million, versus the prior year period to a total of $163 million. Distribution revenues continue to be a steady source of growth increasing 8%, or $25 million to a total of $336 million, versus the third quarter of 2015. As Josh highlighted, we continue to see strong growth in our non-affiliate revenue streams as we own and control more of our content.

Non-affiliate revenues grew in excess of 20% year over year, as revenues related to the licensing of our scripted original programs, most notably Fear the Walking Dead and The Walking Dead, on various ancillary platforms more than offset the negative F spot comp, primarily related to the timing of availability on our shows, Hell on Wheels.

Going forward as Josh highlighted, we intend to expand our ownership and control of content. As a result, we expect this non-affiliate revenue stream to be a significant growth driver for us well into the future.

As for the affiliate fee component of distribution revenues, this line item over the long term continues to provide us with a reliable and quite stable source of growth. However, in a particular quarter, results can move somewhat based on the timing of various renewals and adjustments. In the third quarter, we experienced a modest slowdown in our rate of growth from what had been pacing in the mid-single-digits in the first half of the year to low-single-digits in the quarter. Looking ahead to the fourth quarter, we expect a modest acceleration in our year-over-year affiliate fee growth rate.

Moving to advertising, revenues decreased 10% in the quarter to a total of $189 million. Results were impacted by lower ratings as compared to the prior-year period, most notably at AMC and WE tv. Advertising across the rest of the portfolio of domestic networks -- BBC America, IFC, and Sundance -- was quite strong as we took advantage of a healthy scatter market. We continue to view advertising as an of growth for our Company. Year to date it's up 6%, and we expect the fourth quarter to be a good quarter for us.

Moving to expenses, total expenses increased 8%, or $28 million, versus the prior-year period. This was favorable to our expectations as we continue to focus of controlling our cost base. Technical and operating expenses increased 20%, or $44 million, compared to the prior-year period to $268 million. This increase in tech ops reflected the continued investment in programming.

As for programming write-offs, we recorded $19 million in charges in the current quarter. Primarily related to our decision not to move forward with one show, Feed the Beast at AMC, as compared to $12 million in the prior-year period.

SG&A expenses decreased 13%, or $15 million, compared to the prior year period to $103 million. This decrease was principally related to marketing costs, which reflected the timing of originals, as well as the decline in compensation costs primarily related to the Company's long-term incentive plans.

Moving to our international and other segment, revenues for the third quarter were essentially flat at $114 million. Adjusted operating income for the third quarter increased $4 million to a total of $11 million. At our international networks, we delivered healthy, organic growth as we continue to execute on our strategic priorities. Reported revenues increased $2 million over the prior year period, due to a solid increase in both distribution and advertising revenues, which more than offset a $5 million negative impact from foreign exchange.

On a constant currency basis, our International network delivered high single-digit revenue growth over the third quarter of 2015. Adjusted operating income at our international networks increased $5 million year over year on reported basis, reflecting the increase in revenues as well as a decrease in reported expenses. Foreign exchange did not have a meaningful impact on adjusted operating income at the International networks.

At our IFC Films business, revenues decreased as compared to the third quarter of 2015. Due primarily to the absence of ancillary revenue from the theatrical film Boyhood. Adjusted operating income for the quarter increased $1 million year over year, as the decrease in revenues was more than offset by a decline in expenses.

Lastly, within the International other and Other segment, third-quarter results included a modest year-over-year increase in investment in connection with our various digital initiatives.

Moving to net income, total net income for the third quarter was $65 million, or $0.91, per diluted share as detailed in our earnings release. Included in this amount was $19 million of restructuring expense related to our ongoing focus on rightsizing our expense base. Excluding the restructuring expense, diluted EPS would've been $1.11. Excluding the impact of amortization of acquisition-related intangibles, adjusted EPS for the third quarter was $1.01 per diluted share on a GAAP basis and $1.21 per diluted share excluding the restructuring charges.

In terms of free cash flow, the Company had a particularly strong quarter. We generated $177 million in free cash flow. For the nine months ended September 2016, we generated $373 million. Program rights amortization for the nine-month period was $613 million. Program right payments were $688 million, resulting in a use of cash of $75 million. This compares to a use of cash for programming of $90 million for the prior-year period.

Turning to the balance sheet, as of September 30, AMC Networks had net debt and capital leases of $2.3 billion. A leverage ratio based on LTM adjusted operating income of $863 million was 2.6 times, down from 2.7 times at the end of the second quarter. In terms of capital allocation, our primary focus remains investment in our core business as we believe this will allow us to continue to grow adjusted operating income on a sustainable basis.

We will continue to be disciplined and opportunistic in our use of capital for repurchases and/or non-organic investments. The Company repurchased $62 million worth of stock during the quarter and an additional $15 million subsequent to the end of the quarter. This represents approximately 1.4 million shares. As of last Friday, the Company had $375 million available under its existing authorization program.

Based on current trading levels, we view our equity as an attractive investment opportunity, and expect to utilize our share repurchase program to take advantage of this. Looking forward, we remain optimistic about the outlook for the Company's performance. With regard to our quarterly performance, we anticipate continued variability as a consequence of the specific timing of our investment in content and the airing of our shows.

The National Networks in terms of advertising, despite the absence of some notable programming, namely Into the Badlands on AMC and Doctor Who on BBC America, we expect our results to improve, and anticipate growth in the fourth quarter on a year-over-year basis. Our performance is projected to be driven by the strength of our programming lineup and increased pricing for our marquee content.

With respect to distribution, in the fourth quarter we expect to deliver double-digit, year-over-year growth. We expect non-affiliate revenue stream to be a more significant driver to this growth, both on a percentage and absolute basis. In terms of affiliate revenue, we anticipate a modest acceleration in year-over-year growth from what we saw in the third quarter.

On the cost side, we expect the year-over-year growth rate and expenses of the National Networks, to remain generally consistent with the rate of growth we'd experienced in the first nine months of the year, due to the timing and mix of our originals. These factors in aggregate are expected to result in healthy adjusted operating income growth for the National Networks for the fourth quarter, subject to the current advertising market, including Scatter as well as the performance of some of our original shows.

For the full year 2016, we expect to manage to a largely consistent adjusted operating income margin at the National Networks. At our International and Other segments, assuming a constant currency, fourth-quarter revenue and adjusted operating income are expected to be relatively flat with the prior-year period on an absolute basis, as growth at our international networks is offset by timing at IFC films and continued investment in our OTT digital initiatives.

As for 2017, will have more to say our next call. We feel good about how the business is positioned and are confident in our ability to grow top-line revenue, adjusted operating income and EPS, while generating healthy levels of free cash flow. Overall, we are pleased with how the businesses are performing and are excited about how the Company is positioned as we look ahead.

So with that we'd like to move to the question and answer portion of the call.

Operator, could you please open the call to questions.

(Operator Instructions)

Michael Morris with Guggenheim Securities.

Thank you. Two questions first on advertising, Sean, you mentioned the outlook for growth in the fourth quarter. Can you help us a little more with how that compares to the -- your outlook now compares to the 6% that you have seen year-to-date? And also Walking Dead clearly will probably be a big component of that. The ratings that you have seen into the second week, is that sufficient to hit that growth outlook?

Second, Josh, you talked about becoming a more significant content producer, could you talk about what regulates the pace of growth when it comes to producing new shows? Is it financial constraints? Is it network shelf space? Is it ideas that are brought to you? How should we would think about the potential for growth to pick up there in future years? Thanks.

Michael, it's Ed, I will address your ad sales question and turn it over to Josh. As Sean mentioned in his comments, domestic ad sales revenue is up 6% across all our channels year to date. I think for the fourth quarter, we anticipate returning to growth, likely in line with the year-to=date advertising growth rate. And you just mentioned the factors largely contributing to that, The Walking Dead. It's off to a strong start.

It's actually a bit ahead of our estimates in terms of its premier rating which was the highest premier the show has had in about five years. And we also have the results of a very strong upfront. We've mentioned previously that AMC enjoyed double-digit pricing in the upfront, so we have that in the fourth quarter.

We do have an unfavorable comp which is Into the Badlands, moves out of fourth quarter into the first half of next year. But again we think for the fourth quarter, we would be in line with the growth rates that we've seen for the Company year-to-date.

Mike, I'll try to answer that my second question if I may. I think perhaps the best way to think about content and pace of growth, which you asked about, is first and foremost economic. And the way to look at that is to look at the pockets of our revenue opportunity. And you know what they are.

The most stable and the least variable against content, is domestic affiliate revenue and now increasingly against content we have our international channels business. And then the more variable ones are [F spot] but it has a reliable quality but it's somewhat more variable and advertising, which is the most variable. So our general point of view has been to do as much as we can as long as, to use the term, the ROIs, there on any one given show, against those revenue opportunities.

And so we've spent a lot of time trying to put in place stability for the ones that can be stable and long-term conditions for the ones that have a little bit less stability, that allows us, with confidence and with an appropriate risk profile, to do more. So that's been the general approach that we've taken. The unstated thing in this speech is that, of course it matters how much a show costs.

And so we have to be mindful of what our -- what the absolute expense is for the show but if we can have ESPOD revenue, and advertising revenue, and international revenue, and international ESPOD revenue via contributor, then we can do that much more and it defines the amount. The only thing I'd then layer on are the [vagueries] if you want to call it that, of creative and quality. And we have to do things that are good.

So we're not the business of pumping things through a system if they're not good. It actually doesn't work. One can follow that lead at times. We have found that there's more danger in it than there is reward and therefore, that we should keep our eye on the ball of quality and integrity. I hope that answers your question. It's a general statement of how we operate. And I hope it satisfies what you're looking for.

Yes. If I could put a finer point on it. Understanding the creative limitations that you want to have good product, structurally as you look at your business, your assets, and what the environment holds; is that a type of business where you could have two incremental shows, say in the coming year, as you pointed out and maybe that grows to three or four over time? Or is it the type of thing where two is a way to think about the opportunity just given whether it's competition or your assets either on the network side or on the studio side?

We mentioned in the prepared remarks, The Son and The Terrors. That's two new for the AMC channel, which will be studio shows. Then there are coproductions, which of course cost less money. And then there's the material that we do for SundanceTV, BBC America, WE tv and IFC and that adds to the mix.

So I think it's really AMC is -- the focus of your question I would perhaps suggest you look at it across our entire portfolio of channels because, and what the nature of the mix is, because it really does define, Mike, how many we want to and can make. And it really is -- if drama cost $3 million and a reality show costs $500,000, but a half-hour comedy costs $900,000 or $1 million, and we have and ESPOD deal for it that brings our net effective cost down to $400,000, it informs and defines what we want to do. So it really does need to be looked at by content type with those various revenue opportunities.

Great. Thanks, Josh.

Anthony DiClemente with Nomura.

Thanks for taking my questions. I have a few. I think first, maybe this is for Ed. In terms of the third quarter advertising result, your internal estimates for the ratings in the 3Q weren't conservative enough given the downside in ad revenue versus your previous expectations, so the way it impacts the 4Q and the forward outlook is what should give investors confidence that you've improved the internal forecasting in the organization as it pertains to your fourth-quarter expectation now for growth?

And then for Josh, just a couple. You talked about being a part of DirecTV Now. You're not part of Hulu Live, I don't think, I could be wrong but they've been a partner of yours, good partner on the ESPOD side. What are the constraints there? Is about price? Are you close with Hulu Live? And finally any high-level thoughts you have about AT&T Time Warner and what that tells you about what's going on in the broader media landscape? I think people would love to hear. Thanks so much.

Estimating, it's more of an art than a science. I think our estimating has been pretty good, by and large. Third-quarter was a bit of an unusual quarter, in that we saw a higher concentration of audiences to news networks then we had seen in the past or even would've anticipated. And then of course you get into the practical reality that when you have a show and its season one is coming back to season two, it has less of a track record.

The longer track record series have the better you can be on your estimates and on your internal projections. So I think all those things contribute. I think we feel good about the start we're off in fourth quarter. I mentioned the success of The Walking Dead getting off to a strong start. And we feel good about where estimates are and the process by which we arrived at them.

Anthony it's Josh. On the alternative package landscape, just to set it, in the US there are three major entrants that offer anywhere between what are referred to as skinny and full bundles. To date two operating or three; Sony View, you are aware of its scale, size, and price; Sling, from Dish, I'm sure you're aware also that it's components, genetics, and price it's been emerging a bit; and DirecTV Now are the three that are operating today.

We are participants in all three. We think that they're are good additions to the world. Their ownership is different and therefore the meaning of it is different. Sony is owned by Sony. And the other two by conventional distributors. I'll make a statement if I may because I think it's important.

We really do think that AMC Networks wholesale price, and you can read third-party data and judge it for yourself, is relatively extremely low for the value that we put on the screen that people see and that they vote when they appraise or vote with their desire and appreciation. So we think that we really have, if I can use in [adjectival] world, I'll say killer shows and killer brands. And we're priced very well below what alternative packages are that come from our sibling-type companies.

We think that makes us an unusually attractive decision for anyone who is setting up a new bundle because they are frankly relatively paying less and they're getting an awful lot more. I would say that 5 of the top 10 shows on cable TV sort of speaks for itself in suggesting that there's a fair amount of desire and awareness, not to mention all the other symptoms, like awards and stuff that goes along with that. So we think we're very well set up and that's why we've been positioned quite well.

There are, as you know, packages being designed or talked about in some stage of formation and there are the likely ones, the maybe ones, the ones that are happening, the ones that have been announced, and nothing yet out of the gate. So if I may, I'll just leave it, say that we are in conversations with all of them. We like to think that we have good relationships with all of them.

But most importantly, we think that we have a value proposition that will actually work for their businesses and drive their businesses as they compete with other retail offerings of aggregated channels and that will put us in a position to win. I don't know how to say it more simply.

Thank you.

On your AT&T question, perhaps wiser people have opined on this. What it -- perhaps if you listen to the executives who made the decision, I think what they've said is perhaps what we, or I think about it, which is that it seems to be an acknowledgment. That brands and content that are important, that are if I could use the word preeminent or even gold standard, matter a lot in the world and that if you want to succeed as a distributor and you have an electronic signal that is going out onto a big screen, a little screen, a mobile screen, a thick screen or whatever new screens emerge; it is really nice to have and important to have the shows and the brands that people care about the most.

And that there is probably a lot of endurance, stability, and a potential competitive advantage in that. At the risk of patting ourselves on the back, I think that we have some of that material. We think it is basically a confirmation that what we've been in pursuit of, I hope not wildly, with some discipline, is the right thing to pursue. And that's what I would take away from at least the Time Warner part, which is who and what we are like in terms of nature of that transaction or proposed transaction.

Okay, thanks.

Michael Nathanson, Moffett Nathanson.

Thanks, I have a couple for Sean and one for Josh. Sean, can I talk to about restructuring charges? I was surprised see that international restructuring was bigger than US. So what are you doing internationally in terms of taking out costs? And then could you somehow size for us what the benefits would be from these actions that you've taken and do you expect more into next quarter?

Just a point of clarification, so any corporate employees that were impacted through this restructuring and the organizational change that occurred would've flown through the international and other segments. I think we look at efficiencies and opportunity across the entire business both domestic and abroad, but the significant component of that is really related to the domestic business.

Again as it relates to sizing, the opportunity, you understand that what our posture is relative to forward-looking information and guidance all I could say is that again, we're focused on it. I think continuous improvement, finding continuous efficiencies, is something that we'll continue to do. It is likely you'll see as part of that program restructuring charges that will continue, certainly in the fourth quarter.

Okay and then taking that answer to Josh, longer-term though as a rule of thumb, do you have a philosophy about managing to a larger consistent margin and that you'll manage that or at some point that definition will fluctuate and maybe manage to a top-line goal? If you could give a sense of what's driving your spending and your target decisions?

I think we managed the business for the reward of those who own the shares. And we do what we think is really going to deliver value. To them in the near, mid- and long-term. If could just say the most broad statement which I think is true. We try and make decisions and take actions that really work and as you know it's an imperfect science to do that.

Costs are a big part of that and you just asked Sean about activities we've undertaken to make sure that our costs are as efficient and aligned continually as they can be. And we do look forward to a broadly stable margin as we manage this business. That is in our minds eye and we think that we've set ourselves up to be able to do that through a few important principles.

And they include: diversification of top-line which we've undertaken and achieved by a degree and I think we will see more of; through predictability in the revenue streams; and through some real discipline on cost as well. And the discipline on cost comes in the form not just in super efficiency or the best we can arrive at in operating expenses but also on the content side, which is where our most significant costs are.

That if you look at us in the areas we operate in, I think I would say that we're probably more careful ultimately and that we have net effective lower cost because of coproductions than some of our peers. Certainly on the subscription side of the people who trade in drama. I think we can say with pride that our costs on an individual show basis, even before you do net effective exposure after taking in fixed revenue that's coming in on the absolute cost side, we're, I'd like to say, on the very efficient if not lower side.

Okay thanks, Josh. Thanks, Sean.

Vasily Karasyov with CLSA.

Thank you. I have a couple of questions about your comments on advertising revenue growth and I think that since all of you spoke about it I'm not sure who will get it. So Ed, I think you said that the advertising revenue growth in Q4 will be in line with the nine months, with the growth for nine months so far this year.

So that would imply that for the full year you will have lower growth rate then for the first nine months, do I understand this correctly is that what you're trying to tell us?

No. That's not the way I would do the math. What we've said is that year-to-date our advertising growth rate is about 6%. And we would point you to that as an indicator of how we see the fourth quarter.

Okay. And then if you look at out to 2017, you said that, I think Sean said, that he expects growth and revenue and adjusted operating income, I guess we'll call it now, so given that we probably don't expect a minus 10% a year, would we be too optimistic to expect an acceleration in advertising revenue next year?

I don't think we'll get specific I would just point you to some of the factors that exist. We've said as a result of the upfront that we saw high single-digit, upfront pricing growth on most of our networks and in fact low double-digit growth on AMC. And you know as well as our schedule we haven't announced a formal schedule for 2017 yet, but Josh mentioned some new shows that come on the schedule that project to be fairly large in scale. The Terror for one, The Son for another.

And then we have, Humans and Into the Badlands, which return in 2017, which were off the schedule in 2016. Obviously, Feed the Beast, won't be back but most of our other shows will. So at this point, those are the data points I think that we would point you towards.

All right. Thank you very much.

Todd Juenger with Sanford Bernstein.

I'll keep it to one maybe rather more philosophical and I hope strategically important question for Josh. Would love to hear your thinking on how you see the interplay now between linear viewing and delayed viewing? And what I want to set up is, it wasn't that long ago when I think you held a view and I think evidence suggested that they could be very complementary.

In a sense that you especially had a very good product that was serialized in nature where people might not discover it until they found it on the ESPOD window and maybe that they would try that back to watch it more for new episodes that came in the linear window. I've often heard this described sometimes as the Breaking Bad effect.

I think you believe in that dynamic and I think it's actually informed some decisions you've made to stick with shows that you believed in overtime. My question is, I don't believe we've seen evidence of that phenomenon for quite some time if the evidence would be finding examples of shows that have built audience sequentially as they progressed through season so correct me if I'm wrong but I can't think of any good examples of that so, what does that mean?

Do you still believe that, that dynamic can happen? Or have we moved to a world where viewers are either choosing stuff linearly or just watching them delayed and that's probably the increasing part of it and then what does that mean for how you think about your business? Thanks for indulging that long question.

Please Todd its a really good one. I will give you my best attempt at an answer, which is I do think that it was truer five years ago when there were fewer dramas on. That there was a higher likelihood that an ESPOD opportunity between linear seasons would expose a show beyond it's first linear exposure, expand sampling so to speak, get people interested, and have them come back for a subsequent season on linear.

I think that, that was much truer five years ago and I think that the reason it has decreased as a likelihood, although if I may answer and say it's not impossible, and I'll point to a couple of examples where I think it's true, is because of the proliferation of dramas. There are many more dramas around. We all know that in some cases it's hard to even keep up with what's out there if you are student of it.

So I think it was truer in 2011 or 2012 than is in 2016 and 2017. With that said, I do think that, that phenomenon can occur. My best attempt at answering it would be to say it probably requires a higher level of fandom or interest or attachment in order to have an interim ESPOD exposure increase linear.

And I'll point to the recent premiere of The Walking Dead, which may be an anomaly a bit because the episode was so unique in its editorial construction, cliffhanger and stuff. But I would say there we saw a big bump and that's in season seven so that's quite a phenomenon. And I'd ask you the question because I think it's hard to put the science into a place where you end up with a definitive answer did ESPOD, interim, or anything like that help? My answer would probably be on that show, yes it probably kept it alive and dynamic and it became in a certain sense a 12-month experience for people.

I think we'll see more when we deal with Doctor Who, which has extraordinary social media activity, extraordinary social media activity. So we'll see what that means for a show by the way parenthetically that is in, if you look at the long horizon it's in it's 50th season. I do think that the phenomenon of social media and the degree of interest, if you don't mind -- you asked for philosophy and man you got it -- (laughter), is that it can happen.

It's less likely and its more difficult but we'll see what happens with other shows when and if they return. It was curious to see The Night Manager, you mentioned it. It saw an awful lot of interest and attachment, it saw a good linear ratings not explosive linear ratings. If that found its way back in the world we would see what might happen to it. If it found its way back into the world but I think it's rarer today and a little less likely today than it was then. How's that Todd for best I can offer?

That's fair enough and we could talk about this all day, it has huge implications I think, for decisions you make to renew and continue shows and even shows that you pursue. So if you have any final parting thoughts on how that affects things that would be great in other words I will save the rest of the time and yield it to my other analysts. Thanks.

I will just say one less thing in that yes, we keep it in my completely. Yes it's very important. If it means anything it perhaps means a couple of things, at least to me, it means if one is going to look for that effect that the material has to have a higher level of attachment and enthusiasm and be among people's heavy favorites not on their list, a little further down their list.

And the second thing is that, that has implications on cost, which we talked about. You've seen the coproductions that we're doing. Part of that makes an [net] effective average cost per episode across our spectrum actually come down. We have to be more selective where we have expectations of growth and we have to be mindful of what we spend on each episode across our portfolio and across our total episodes.

Thank you.

Ben Mogil with Stifel

Thanks for taking my question. Josh, I think at one of the competitors conferences you talked a little bit about some changes or some thoughts around changes in terms of programming, more anthologies, more limited series where there wasn't necessarily the need to catch up show or year over year and almost following up on Todd's question.

When you're looking now at committing to either produced shows, or licensed shows, are thinking about the world more from the perspective of more limited series? If maybe not a full 13 or even 10 episode pickup but more like 8? I think that's what you are doing for Loaded? I am curious on your thoughts around given the competitive environment how you are changing, how you think about pickups?

Sure. I do think that for the reasons that I identified in my last comments to Todd, if I haven't exhausted everybody, there are more shows out there. It can be difficult to find them because the options are increased and therefore the expectation of people coming back season after season, I think have to change.

Not that they should be eliminated but they should be more selective in the nature of the material and the type of material that's likely to succeed at that. And I do think that, that does open up an opportunity. If it's the case and I think you could just see it, that people are reluctant to make commitments that go on personally for a long time.

And they may say, oh gee, I've packed that up, I don't think I can go for five seasons on that one. That if something is urgent and if it's in an anthology meaning there's a theme in it that's familiar and the story finishes out and it emerges anew next season with something that's familiar but a new story, that is for this moment quite attractive to us.

And we are in pursuit of a number of those things right now and in fact it's in our calendar for 2017. So I do think anthologies make a tremendous amount of sense for today.

That's great, thank you very much.

Operator, we have time for one last question please.

Ryan Fiftal with Morgan Stanley.

Thank you, I have two relatively quick ones. First on affiliate revenue this quarter. Sean I think you alluded to some quarterly noise but was any of that driven by consolidation downstream pressuring rates? My second one on SG&A declines, I think you called out lower marketing expenses is that purely from the timing of premieres or is there any belt-tightening or efficiencies that you are achieving there? Thanks.

On the affiliate one, that very modest or minor decline I would point to, whatever it was, is we have contracts in place that often go for quite a long time as we mentioned. The contracts describe the manner in which we engage with MVPD's. Those contracts when things happen in the world, people look at the contracts and say how does that affect me, and there can be some, I would call them in this case, minor differences in interpretation.

So in that circumstance it was one of those things. We think we're well along the way toward agreeing and ironing it out but that's really what was behind that.

And then Ryan, on your question on SG&A, the marketing is purely timing of originals across the five channels. So in no way is it belt-tightening in marketing. There's no question in this evolving world, we're trying to reach audiences differently but I don't believe we're certainly not spending less money. So that's really a timing of originals across the five channels.

Okay. Thank you.

All right. Thank you everyone for joining us on today's call. And for your interest in AMC Networks. Operator you can now conclude the call.

Ladies and gentlemen thank you for joining AMC Networks third-quarter 2016 earnings conference call. We appreciate your participation today. Please enjoy the rest of your day.