AMCX - NASDAQ

Thank you for standing by, and welcome to the AMC Networks Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, today's conference is being recorded. I would now like to turn the call to your host Mr. Nick Seibert, Vice President of Corporate Development and Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to the AMC Networks Second Quarter 2023 Earnings Conference Call. Joining us this morning are Kristin Dolan, Chief Executive Officer, Patrick O'Connell, Chief Financial Officer, Kim Kelleher, Chief Commercial Officer and Dan McDermott, President of Entertainment and AMC Studios. Today's press release is available on our website at amcnetworks.com. We will begin with prepared remarks, and then we'll open the call for questions. Today's call may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ. Please refer to AMC Networks' SEC filings for a discussion of risks and uncertainties. The company disclaims any obligation to update any forward-looking statements made on this call. Today, we will discuss certain non-GAAP financial measures. The required definitions and reconciliations can be found in today's press release. With that, I'd like to turn the call over to Kristin.

[Operator Instructions] Our first question comes from the line of Michael Morris of Guggenheim Securities.

I have two topics, one on content licensing, and one on acquisition -- customer acquisition. So first on the content licensing. Now Patrick, you referenced the reduced demand for content in the streaming market broadly, as industry's rationalizing, is this dynamic impacting both your new and first run content that goes to services in the same way that it impacts sort of off net or non-exclusive content or both of those being impacted the same way? And on your decision, on the early rights return. Does licensing of rights play a part like strategically, how much does licensing of rights play a part in your revenue future, as opposed to using your content exclusively to drive your own streaming services. And then if I could just add one more. Kristin, you mentioned, on a Premier is more about when someone engages with a piece of content on a streaming service as opposed to when it's actually released. It's a competitive streaming market. How are you thinking about customer acquisition going forward, the amount that you need to spend in any tweaks to your strategy? Thank you.

Thanks, Mike. It's Patrick. I'll take the first two here. On the licensing market dynamics. I think it's fair to say that there's always a strong bid in the market for premium content. We've seen incredible demand for our content. I do -- I would highlight particularly strong appetite internationally. I think this year we are benefiting from higher volumes as well. The last few years we've kind of eaten more of our cooking and used it internally on our existing services. We've unleashed kind of more content into the market, so we're seeing the benefit of that increased kind of volume. But I would also say that buyers are being maybe a bit more kind of tactical. And so strategically we're signing more smaller deals rather than sort of fewer larger deals in order to maximize price in the market. And that's the approach we've taken. On the second question, in terms of the strategic import of licensing going forward, I think it'll continue to be, quite important. You know, the mantra here is we're trying to kind of pull forward the monetization of content licensing is one of the ways we're doing that. And obviously, we're going to use a handful of the titles that we've since recaptured from the Hulu deal on our own services, but we'll be opportunistic in using those in service of our license revenues going forward.

Michael, on the sub acquisition question, premier, just being a premier, that's something we've done. We've been doing a lot more research using our data and aggregating information around who is watching what and where? And we definitely see that, people are leaning into content that they may not have watched the first time around. And that's sort of part of what we love about our strategy with scripted dramas and with high quality content, is that you can basically engage with this content at any point in time when it works for you. And the level of engagement continues to be really solid. So getting some of this content back from Hulu, some of the great series like Killing Eve or Brockmeyer, we feel like we can reintroduce them to whole legions of fans multi-generationally and introduce people in for the first time. So, A lot of franchise work, B significant utilization of data and I've been really pleased over the last quarter with our subscriber acquisition efforts that, we're spending less but we're spending smarter and that's proving out really well in both our levels of engagement and also subscriber acquisition and retention.

Our next question comes from the line of Robert Fishman of MoffettNathanson.

This is Luke Landis on for Robert Fisherman. Thanks for taking our question. We'd love to get your take on with the pressures we're seeing in advertising, how much of that do you think is secular versus cyclical?

I'll grab that one. Luke, this is Kim Kelleher. I would say a combination of things are challenging right now. Broadly, our ad supported networks, as Patrick and Kristen referenced our experiencing the same environment as everyone else in this space. It's a soft scatter market. Marketers are being relatively conservative with their spending. We are seeing some modest improvements in scatter, but overall, we expect, as Patrick said, the landscape to continue to be challenging through the remainder of this year. That said, in our upfront conversations, we are very pleased, as Kristen mentioned, with the results of our up-fronts and the strength of our pricing around our key products like AMC BBC, America, we TV, and then the huge reception we received to AMC Plus's, newly launched ad supported tier coming in October. So, to address your question specifically, I would say we are feeling that the marketplace should improve as we get into 2024.

Our next question comes from the line of Doug Creutz of Cowen.

You're about exactly halfway to your revenue guide for the year, and you're quite a bit over halfway to your NOI guide, which obviously suggests your margins are going to be lower in the second half. Is that just a function of higher programming costs in the second half, or is there anything else going on?

Thanks for the question, Doug. It's Patrick. On the revenue guide, I would unpack it in the following way. Obviously, we are seeing some softness in the ad market which we referenced. We are impacted by the cancellations at 25/7 as well, that's offset partly by kind of some of the revenue acceleration that we saw with Hulu. Those are the larger kind of contributors to the $2.8 billion guide on revenue. Fortunately given the nature of those two kinds of revenue streams, collectively, they have relatively low impact on AOI, kind of given the margin structure of that revenue. So we benefit in that regard. We are obviously seeing a little bit, a touch of further softness on the affiliate side. And obviously, streaming is decelerating slightly, but we are getting the benefit of improved customer acquisition costs, as Kristin mentioned. So we are able to manage the business for improved margin on that side going forward. So hopefully that gives you a sense for kind of how we are managing the revenue and AOI together.

Yes. I guess I was just curious as far as your margin based on your guide seem like they are going to be lower in the second half, and that that implies higher costs. So just wondering if those are higher programming costs or something else?

Doug, we are managing this business for margin. So we held margin constant year-over-year. The margin last year on a whole was 24%. At the midpoint of the guidance right now, we would be at 24% as well. So there is obviously sort of lumpiness kind of quarter-to-quarter. So I'm not going to comment on the specific kind of cadence of cost at this point. But we feel good about kind of where we are going to land.

[Operator Instructions] Our next question comes from the line of Thomas Yeh of Morgan Stanley.

Thanks so much. I wanted to ask about just the strategic path forward for streaming. There seems to be a clear focus on streamlining and a priority towards higher quality subscribers. Does that change your view on the global opportunity in international market launches? And on the ad tier, any expectations on pricing yet and if the goal is TAM expansion or maybe driving accretive ARPU? And then a second one, I wanted to follow-up on the content licensing side in particular in light of the success of SILO on Apple TV and the recent renewal. What are your thoughts on leveraging your expertise on high-quality content to lean into producing more for third-party players or are the challenges at 25/7 media, an indication that maybe that's not the path you want to go down? Thank you so much.

Sure. Hey, Thomas. It's Kristen. On the streaming economics, we have said it before, we really have a different sort of economic structure with our services that are more targeted towards specific genres and specific types of subscribers. So distinct audience is, we don't try to be something for everyone. Our pricing is lower, and I think, our overall goal is to just make sure that we can serve avid fans with significant valuable content. So high quality subscribers equal lower churn, less price sensitivity, if they are pleased with the product. And the majority of our top titles on our targeted services are produced at less than a $1 million an episode. So we feel like we have a pretty sort of structured way to approach what we're doing and we can move with intention very specifically to preserve what we think is a very quality products at a reasonable price point. So on ad supported, I'll let Kim speak to that, and then I think Dan can speak a little bit more to the actual content.

Hi, Thomas, it's Kim. We are really excited about the ad supported tier, and importantly our advertising and marketing partners are as well. We're seeing a lot of demand and interest, as I mentioned in the upfront. So this is driving a lot of exciting conversations. That said, it is early days to be making predictions and address specifics. We launch -- we start rolling through it when we start launching in October. And we are going to have more news to share on the specifics pricing, et cetera, as we get closer to that consumer launch. So more to come on this front.

Hey Thomas, this is Dan. Speaking to your question about licensing and silo. Specifically, AMC Studios is focused primarily on producing for our five linear and seven streaming platforms. However, we will be opportunistic when the circumstances arise, and specifically in the case of silo, that was a show that was developed by AMC studios for AMC. We realized at a certain point that it wasn't a good fit for AMC, so we pivoted, and shopped it to outside platforms and received enthusiastic interest from Apple, and subsequently closed a co-production gift for Apple TV. So that worked out great for us. We're pleased with how Silos performed. It's the most watched new drama on Apple TV on that platform. As we know, they've ordered a second season. We're currently paused in production due to the strike, but we're on our way. We continue to be a meaningful co-producer with Apple on that. However, while the renewal's beneficial for us, we adjusted the deal structure for season two so that we're not internally financing that production. We're just not sure it makes as much sense for us to tie up all that capital. So for season two, we're a meaningful co-producer, but the impact on our financials won't be as great. And going forward, we'll continue to look for strategic opportunities when it makes sense for us to produce for outside platforms.

Do you see that as a ramping source of potential allocation of resources over time?

I wouldn't say it's ramping. I'd say we're going to be strategic about it and when the opportunities arise.

Thank you. That does conclude our Q&A portion of the call today. I'd like to turn the call back over to Nick Seibert for any closing remarks.

Thank you everyone for joining us today. Have a good day. Thanks. This concludes the call.