Seth Zaslow - Senior Vice President of Investor Relations Joshua W. Sapan - Chief Executive Officer and President Sean S. Sullivan - Chief Financial Officer and Executive Vice President Edward A. Carroll - Chief Operating Officer.

Bryan Goldberg - BofA Merrill Lynch, Research Division Michael Nathanson - MoffettNathanson LLC Michael C. Morris - Guggenheim Securities, LLC, Research Division Ryan Fiftal - Morgan Stanley, Research Division Vasily Karasyov - Sterne Agee & Leach Inc., Research Division Benjamin E.

Mogil - Stifel, Nicolaus & Company, Incorporated, Research Division Anthony J. DiClemente - Nomura Securities Co. Ltd., Research Division Alan S. Gould - Evercore Partners Inc., Research Division.

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the AMC Networks First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Seth Zaslow, Senior Vice President of Investor Relations. Please go ahead..

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 2014 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. Lastly, following the closing of the Chellomedia acquisition in the first quarter, the company reorganized its operating segments.

The results of AMC and Sundance Channel in Canada, as well as AMC Networks' Broadcasting & Technology are now included in the National Networks operating segment. Previously, these operations were included in the International and Other operating segment.

The reorganization had no impact on the historical consolidated financial results previously reported by the company. With that, I would now like to turn the call over to Josh..

Good morning, and thank you for joining us. I'll provide an update on the business and then turn it over to Sean Sullivan for some greater financial detail. Now we started the year off with a strong quarter and the fundamentals of our business are healthy. In the first quarter, the company reported 37% growth in revenue and 11% growth in AOCF.

These amounts include the results for Chellomedia for the last 2 months of the quarter. If one were to exclude the results for Chellomedia, our revenue growth would have been in excess of 20% and our AOCF growth would not have moved meaningfully from the 11%.

The performance of our business continues to be led significantly by the success of our original programming. At AMC, we had several shows that are working quite well, the most notable being The Walking Dead.

That show, which included its fourth season, continues to break records for basic cable TV and remains the #1 program for all of television broadcast and cable in the key adult 18 to 49 demo. For the season, viewership in key demos increased over 20% compared to the prior season.

Mad Men, one of the most critically acclaimed shows in the history of TV, returned in April for the first of its 2 remaining years. We're quite pleased with the live plus same day ratings averaging around 2 million viewers per episode season-to-date.

On what's called Live+3 or Live+7 basis, we've seen increases of up to an over 100% delivery, indicating that viewing patterns are evolving and that Mad Men continues to have extraordinary strength and vitality.

AMC's newest series, Turn, about America's first spy ring that takes place during the Revolutionary War, premiered in April to strong reviews and has been performing quite well through its now 5 episodes. We have several new series that will air later this year.

Halt & Catch Fire, a story about the rise of the PC era in the early 1980s in what was called Silicon Prairie in Texas, is coming in June to the network; and Better Call Saul, which is a spinoff of Breaking Bad, is scheduled to premiere in November. Beyond 2014, we have 2 pilots now in production.

The first is Knifeman, a story about medicine in 19th century England, which we think is an intriguing backdrop with great characters. The second is called Galyntine from Ridley Scott's, Scott Free Productions. It's a post-apocalyptic view of the world where society has been organized very differently from how we know it today.

We also have several additional projects in development, including a companion series to the Walking Dead and another series based on the graphic novel Preacher that is to be executive produced by Seth Rogen. At each of our other channels, WE tv, IFC and SundanceTV, we are pursuing the same focus on original programming.

We continue to ramp up our investment in original content, and these networks are each enjoying solid momentum. As we've said in the past, our focus is to make each of those channels better, which we believe will ultimately make our portfolio of channels stronger and our business more resilient and have better growth in the long term.

At WE tv, primetime ratings in the first quarter were up solid double digits year-over-year in the key demos for that channel within 18 to 49 and 25 to 54. WE tv's performance was led by a combination of new and returning originals, including the third seasons of Braxton Family Values and Mary Mary, both consistent top performers.

A new show called Sisters With Voices Reunited premiered in January to record ratings for the network and performed quite well throughout the show's first season.

In July, WE tv will, for the first time, enter the scripted drama arena with the premiere of a new original series called The Divide, a legal drama from Richard LaGravenese and Tony Goldwyn. At IFC, we are continuing to produce alternative comedies. That effort is led by Portlandia, which recently concluded its fourth season.

The network had another show in January called the Spoils of Babylon, executive produced by and featuring Will Ferrell along with Tobey Maguire, Kristen Wiig and Tim Robbins, and it performed quite well both in profile and in ratings. And 2 of IFC's returning originals, Comedy Bang! Bang! and Maron, both premier new seasons this very evening.

We think SundanceTV is rapidly establishing itself as a new destination for high-quality scripted content. In February, the network premiered its second wholly owned scripted original titled The Red Road to strong critical reviews and recently renewed the project for a second season in 2015.

Rectify, the channel's widely acclaimed scripted original, returns for a second season in June, along with a pair of miniseries that are set to air later this year. One is called the Honorable Woman, starring Maggie Gyllenhaal, and another is called One Child.

These projects followed Top of the Lake, Carlos and Appropriate Adult as the latest in a lineup of critically acclaimed limited series from Sundance. Moving to advertising. This area of our business continues to perform quite well, as we've seen particularly healthy demand for our original programming.

This demand has helped us further diversify our ad base by attracting new quality advertisers to our networks, as well as increasing the price of our inventory. All of this contributes to revenue growth. In the first quarter, the National Networks grew ad revenue 27% over the prior year.

On the distribution side, the National Networks grew revenue by 16% in the first quarter over the prior year period. Affiliate revenue, the largest component of that overall distribution revenue, continued to increase at a healthy pace.

Growth for the quarter was in the mid- to high-single-digits, a rate that was consistent with the range that we previously discussed with you.

The non-affiliate portion of our distribution revenue base includes a combination of newer developing revenue streams from the distribution of our shows on various ancillary platforms, such as digital and the international sale of the shows.

In the quarter, we saw a year-over-year growth principally related to the distribution of shows, including The Walking Dead from AMC and 2 of Sundance's dramas, Rectify and The Red Road.

As for our International and Other segment, we continue to view the International market as one that has the potential to provide attractive long-term growth and value. And we are, therefore, pursuing opportunities to accelerate and enhance our International presence and exposure.

Our approach has been multifaceted and includes a combination of organic investment, as well as opportunistic acquisitions, with the ultimate goal of being to reorient the company by degree and best position it for future success in an increasingly global marketplace.

As we discussed in the past, we are consistently evaluating whether to sell our original content that is developed here in the U.S. to third parties for distribution internationally or whether we should air those shows on our own networks outside the U.S., in effect, selling it to ourselves.

These decisions will be made with an eye toward balancing the economics in the near term versus the goal of creating long-term value. As we previously discussed, a couple of our shows, such as Rectify and The Red Road, both produced by SundanceTV here in the U.S., are already going to our Sundance global channels around the world.

We will continue to evaluate the movement of shows such as these based on a number of factors, including the specific series and/or territories involved and appropriately balance the fact that they place some near-term pressure on costs, with the opportunity for increased returns over the long term.

In connection with that overall strategy, an expanded footprint becomes increasingly important as we consider placing our own content on our networks. As most of you know, we closed on our acquisition of Chellomedia at the end of January.

One of the main factors that drove us to acquire Chello was the unique opportunity that it presented to significantly accelerate and enhance our presence outside of the U.S. In the roughly 100 days since we closed on that transaction, we've been focused on a number of fronts. We've reorganized the senior management structure.

We've begun to integrate our Sundance global business with Chello, aligning their strategic priorities and goals. We reoriented the oversight of our MGM Channel, which was acquired as part of the Chello acquisition, to better coordinate its activities across territories.

And we've made further changes to affiliate sales and content functions to improve efficiency. We're also opportunistically looking to increase our presence through smaller tuck-in acquisitions should they present themselves. In April, we announced the acquisition of Kinowelt TV, a leading German channel.

This was a good deal for us at an accretive multiple for an upscale film channel that further expands our presence in Europe. Going forward, we will keep our eyes out for similar smaller-sized opportunities.

At IFC Films, our distribution business, we continued to build our library of content, now with over 600 movies, and we think we have a very good slate of films for 2014, including notably a film by Richard Linklater called Boyhood that stars Ethan Hawke, Patricia Arquette and a young actor who goes literally from being age 6 to 18 before our eyes during the 12 years that the director made the film.

In the quarter, we also maintained our development activities with regard to Internet delivery of video. We think this is an important new area to stay focused on and believe that it could lead to some attractive opportunities for us in the future.

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

Thanks, Josh, and good morning. Before turning to the results for the first quarter, as Seth mentioned, following the closing of the Chellomedia acquisition, we reassessed how the company's various operations are being evaluated and managed.

As a result of this analysis, we made the determination that some of our operations, namely AMC and Sundance Channel in Canada, as well as Broadcasting & Technology, the company's technical services business, should be moved to our National Networks segment from our International and Other segment.

The reorganization resulted in the shift of approximately $60 million of revenue and approximately $20 million of AOCF on an annual basis between the 2 segments. There's no impact on the historical consolidated financial results previously reported by the company. As for the first quarter, total company revenues grew 37.3% and AOCF grew 11.3%.

At the National Networks, revenues increased 20.7% or $77 million. National Networks' AOCF increased 8% or $13 million versus the prior year period to a total of $178 million. Advertising revenues increased 26.8% to a total of $208 million.

While we experienced year-over-year advertising growth in all of our National Networks, AMC was the primary contributor. AMC benefited from the performance of its original programming, most notably The Walking Dead and its companion show, the Talking Dead.

Looking to the second quarter of 2014, we don't expect to see year-over-year growth rate in advertising revenue similar to what we've reported in the first quarter due to the relative size of the audience of the originals airing in the second quarter in AMC versus the second quarter of 2013.

Distribution revenues of the National Networks increased 15.9% or $33 million to a total of $241 million versus the first quarter of 2013. As Josh discussed, first quarter results reflected the aggregate impact of several items. With respect to affiliate fees, reported revenue growth was in the mid- to high-single-digits.

The year-over-year growth rate was favorably impacted by the fact that we did not recognize revenue in the first quarter of 2013 with respect to one affiliate agreement that had expired. Adjusting for this item, our affiliate revenue growth was slightly lower but still within the mid- to high-single-digit range.

As some of you may recall, we subsequently renewed this agreement in the second quarter of 2013, and as a result, the benefit that we received in the first quarter growth rate will be offset in the second quarter.

First quarter results reflected a strong double-digit year-over-year increase in non-affiliate revenues due to increases in revenue related to scripted original programs, most notably the international and home-video distribution of The Walking Dead, as well as the SVOD availability of Rectify and the international distribution of The Red Road.

Moving to expenses. Expenses in the quarter increased 30.8% or $64 million versus the prior year period, principally due to increased programming and marketing costs.

The increase in programming expense was primarily associated with our continued investment in original programming across all 4 of our national networks, the increase in marketing expense related to the timing of our original programming. Turning for International and Other segment. Revenues for the first quarter increased $66 million to $77 million.

AOCF for the first quarter was a deficit of $11 million, an improvement of $4 million versus the prior year period. Financial results in the first quarter reflected the consolidation of the Chellomedia business as of January 31. In terms of revenue, Chello contributed $61 million.

As for AOCF, Chello's contribution was essentially offset by the acquisition-related cost of $14 million dollars. Total company net income from continuing operations for the first quarter was $72 million or $0.99 per diluted share compared to $62 million or $0.85 per diluted share in the prior year period.

The increase principally reflected the increase in AOCF, as well as a decrease in intangible amortization. As you may have noted in the press release, following the Chellomedia acquisition, we have presented an adjusted EPS metric. This amount excludes the impact of amortization of acquisition-related intangible assets, including Chellomedia.

Adjusted EPS for the first quarter of 2014 was $1.04 per diluted share. In terms of free cash flow, the company reported $68 million in free cash flow for the 3 months ended March 2014. For the first quarter, total tax payments were $3 million, cash interest was $36 million and capital expenditures were $6 million. Turning to the balance sheet.

As of March 31, AMC Networks had $2.8 billion of outstanding debt. We had cash and cash equivalents of $159 million for a net debt position of $2.6 billion. This amount reflects the impact of the $1 billion used to fund the Chellomedia acquisition. Our leverage ratio was 4.9x based on the reported LTM AOCF of $541 million.

However, as we outlined in the press release, our pro forma leverage ratio declined to 4.3x, including a full 12 months of Chellomedia.

Consistent with our previously communicated expectations, the 4.3x leverage increased roughly 1 turn from the end of 2013, and we do expect to deleverage through a combination of AOCF growth and free cash flow generation.

In terms of capital allocation, we remain focused on investing in our core business as we think this will generate the greatest return for our shareholders over the long term. Accordingly, we will continue to increase our investment in programming across all of our channels.

As a consequence of this increased investment and the specific timing of our shows, we expect there will be variability in the year-over-year AOCF comparisons, particularly in the second and third quarters of this year.

Specifically, in the second quarter, there will be fewer Mad Men episodes than last year, and we will premiere 2 wholly owned shows on AMC, Turn and Halt & Catch Fire. In the third quarter, last year, we had Breaking Bad; and in 2014, we will premiere a wholly owned show, The Divide, on WE tv.

In the fourth quarter, The Walking Dead returns and we also premiere Better Call Saul. Over the long term, we believe that our strategy and disciplined approach to programming investment will allow us to continue growing AOCF as we take advantage of the various opportunities we have to monetize our content.

So in closing, 2014 is off to a strong start for AMC Networks, and we look forward to continued success in the remainder of the year. With that, we'd like to move to the question-and-answer portion of the call.

Operator?.

[Operator Instructions] Your first question comes from Bryan Goldberg of Bank of America..

I've got 2, one on Chello and then one on advertising.

So with Chello, now that you've had some time to be more hands-on with the assets, are the areas of opportunity with respect to revenue and cost still consistent with what you thought going into the deal? And then could you outline for us how we should think about the timing of these opportunities, how they might materialize for the company, what's more immediate versus longer term? And then I've got a follow-up..

Sure, Bryan, it's Josh. Yes, I think that we think about it as we did 100 days ago. We think that they were run well, the assets, and carefully, by Liberty, and that's an asset. And so we'll continue to be careful as the channels are many and small. The opportunities remain as we saw them.

And if I were to attempt to prioritize, I think I'd say that they are first in expanding distribution footprint in territories where there is opportunity for the expansion of distribution footprint.

Latin America, particularly, has -- is significantly under-distributed if you look at the entire territory as it relates to the Chello assets, and we think that there's significant opportunity in Latin America and additional opportunity in Western and Eastern Europe. So I think I'd say that distribution of existing channels is first and foremost.

I think there is an advertising opportunity that probably is behind it but will take longer to recognize, as we need to improve the strength and content profile of the channels. And that, of course, puts -- creates some invitation for increased costs.

So we'll balance the investment with a profile of return, which we see occurring first on the distribution side and then later on the advertising side..

That's helpful. And I guess I wanted to just ask about your comment about evolving viewing patterns.

Given the increased time shifting of the big L+7 uplift from Mad Men, can you just refresh us how you're able to benefit from that pickup with advertisers currently and what plans you might have in place to try to better monetize that time shift of your audience?.

Sure, it's a rich question, Bryan. It contains both opportunities and challenges in terms of the macro environment for monetization of advertising. The sort of -- the challenges are obvious, which is that people can move through commercials on a fast-forward basis on a number of incarnations of delayed viewing, and that affects us and everybody else.

The benefits are that the exposure of the content to a wider population is also possible through all of the avenues of delayed viewing and so that creates the potential in combination with SVOD off-season for creating the opportunity for people to find these shows, get acquainted with them, like them, and then if there's enough urgency, watch them on a realtime basis.

So I think we are in this technological and content system and we're subject to some of the same forces.

If I can answer sort of broadly, I think we've enjoyed a fair amount of benefit from it largely because it has created the opportunity in later seasons for TV shows to be found by audiences that didn't find them in early seasons, to be introduced to them and then to watch them in linear, and we sell advertising and those things.

And I think we've seen a contrary pattern to most TV shows which is, we've seen big uplifts in seasons 2, 3, 4 and 5 on a number of our TV shows. So I think it's some challenging, some good.

Aside from that, the entire industry on the technology side and the disabling fast-forward side and dynamic ad insertion and whether C3 remains the term of art is undertaking a number of initiatives that will hopefully allow more revenue to flow from video consumption that may not flow today.

But those things are macro, and they will be approached by not only us but many others. So I hope that answers your question. That's the way we see it..

Your next question comes from Michael Nathanson of MoffetNathanson..

I have one for Sean and, I guess, one for Josh. Sean, can you just help us for a second, you guys reclassified the Canadian channels and the distribution business into National Networks.

Did that reclassification help or hurt the reported revenue growth for the quarter?.

No, it's not that meaningful. As I said in my prepared remarks, Michael, it was $60 million on an annualized basis. So effectively, 25% of that moved from International over to National from a revenue perspective..

Meaning those businesses grow, in aggregate, slower than the overall growth of that line item, right?.

Yes, slightly..

Okay.

And on the cost side, same question, anything unusual from those businesses year-over-year on the cost side?.

No, nothing unusual. Again, to remind you, it's the AMC and Sundance Channel in Canada, which are good channels, and it's the Broadcasting & Technology, which largely is supporting the uplink of our 4 national networks. We do have third-party business. So -- but there is nothing unusual that you should expect..

Okay. And then let me turn this to both you guys.

Given the cost growth this quarter and the lumpiness surrounding the launches of all your new programming and marketing of that programming, how should we just think -- I mean, maybe you want to do it on a full year basis, but just into next quarter, what's kind of the range of expense growth we should be thinking about, maybe in the short term from second quarter, because 30% to 31% was a little above what we thought, and we understand its lumpiness.

But could you give us any kind of range for the next quarter on expected cost growth in the second quarter?.

Yes, Michael, I think that on a sequential basis, if you look Q4 to Q1, I don't think you saw a significant increase, right? I think there was some uplift in terms of cost. Certainly, year-over-year, we saw a meaningful increase.

I think as you look at the programming amortization in the past Qs, the Q that we'll file later today, we've been spending 30% plus incremental investment across the channel. So I'm not going to give you forward-looking guidance, but I think we have certainly been gesturing the fact that we're spending more money. We're spending more money on WE.

We're spending it on IFC, and we're spending it on Sundance. And obviously, the mix of the shows, if you're looking at amort versus cash, and this is somewhat to my comments in my remarks is, to the extent we have more wholly owned shows versus licensed, that will impact the ultimate expense realization in the P&L versus historical periods.

So hopefully, that's helpful color but that's how we think about it..

Your next question comes from Michael Morris of Guggenheim Securities..

Just a couple more on cost. First of all, if you look at National Networks' cost in the first quarter, was there anything in there that you would consider nonrecurring or a little lumpier, whether it's content write-down or something like that? And then second of all, just trying to get a bit of a handle on margins and how you're thinking of it.

I know you guys say it will be lumpy from quarter to quarter. We understand that. If you look at the AOCF margin, it's been declining relatively steadily over the past several years. And of course, this quarter is down from the prior year.

When you think about the investment, we understand the investment, but do you get to a floor in terms of that AOCF margin in your mind? Again, I know you don't like to give guidance, but are we getting to a floor where you think that these investments are going to start ramping the revenue higher than this cost growth, or any color you can give on that would be helpful..

Sure, Mike. So on your first question, we did -- as you know, we didn't greenlight Line of Sight, so there is several million dollars in the first quarter associated with the pilot that we expensed as a result of not greenlighting that show. So that's one that we didn't specifically highlight, only given its relative size in terms of dollars.

In terms of your margin question, we don't necessarily -- again, we're not going to give guidance, we're not going to give a floor. I think the helpful color is this is a multi-year evolution for each of the channels. So AMC being more mature is obviously, we don't break it out this way, has a very healthy margin.

As we're investing in WE, IFC and Sundance, it obviously is going to take several years to recapture and capture the investments as related to the shows that we're investing in.

So to the extent you're seeing margin pressure in the near term and historically in the near term, it has a result of us significantly investing in the shows on those 3 channels. So it's really incumbent upon us to recapture that through the 3 main revenue drivers that we have to ultimately get there. So that's the color.

We're certainly conscious of the margin, we're very focused on AOCF growth, but I think what you're seeing is the impact of those investments on those 3 channels..

Would you mind, just 2 clarifications.

The size of a pilot, how big is that compared to just a normal episode? And then also if we look at the margin compression, would you say most of that was from the incremental channels that you're investing in relative to AMC, or was it at AMC as well?.

Michael, on the size of the pilot, they range depending on the show and obviously, the period. But a rule of thumb might be 1.5x the pattern budget or series budget for a pilot would be a normal range..

And again, Mike, not much to add, other than, yes, I think that AMC margin has been relatively stable. And, yes, the pressure is coming from the other 3 channels..

Your next question comes from Ben Swinburne of Morgan Stanley..

It's Ryan Fiftal on for Ben. Two, if I may, one for Sean and one for Josh. Sean, just one quick follow-up again on the OpEx side.

Obviously, we should see OpEx increasing based on the total volume of original programming that you guys are clearly ramping, but I'm wondering if you're also seeing any inflation on the cash cost that you're paying per episode of original programming, say, versus a couple of years ago..

Yes, I mean, I think that the marketplace for original scripted series is a competitive market, and that does cause some pressure on pricing. But really, the biggest indicator of what we pay on the so-called series or pattern budget has to do with the series, if it's special effects heavy, if it's time period heavy.

And then one of the things that you see is, as series are successful over the long term, the cost of those series, the cost of talent and cast tends to ramp up. And it's possible that a series can become less profitable over the long term, particularly when they are owned -- when they're licensed by a studio.

Obviously, if we own them, then we're in a position to capitalize long term over exploiting ancillary revenues..

Sure, that make sense. And, Josh, advertising growth was clearly strong in the quarter. I realize your ad trends probably had less correlation with the overall market than some others since it's pretty show-specific.

But I'm just curious what you're seeing as far as demand in the scatter market? And then as we approach the upfront, curious if there's any change to how you are thinking about balancing your upfront sales versus holding back inventory for scatter..

The scatter market is fine. It's stable. It moves along, so I think pretty good shape is, I think, the report. The upfront has not yet begun, so we really are in the prelims.

And I think the best way to characterize our experience, without really having any real activity of significance yet having occurred, is to say that our products are being really well received, I think, not only AMC but the original shows on IFC, WE and Sundance are increasingly better known by name.

I think that's enhancing the perception of the brands. And when you speak to buyers and planners, they know exactly what you're talking about. They have appetite. They think that -- I hope they think -- I think they do, that we're above the crowd and that we will do well, and certainly relatively well. So I think we're positioned pretty well..

Your next question comes from Vasily Karasyov of Sterne Agee..

Sean, I have a couple of for you, I think. The incremental margin at National Networks this quarter was, I think, 21% or so.

I understand your point about investing, but is that the kind of incremental margin we should expect? And then at what point that elevated spending on programming on smaller networks will stop, and when will you actually move to the harvesting stage, I guess, of the elevated programming? And then I have one more..

Yes. Vasily, I'm not sure there's much more to say in terms of what profile you should expect in terms of incremental contribution, incremental margin. I think that this quarter is not abnormal.

As we said, we are investing significantly in the scripted dramas on WE and Sundance, with Sundance having now its second with Red Road and Rectify coming back. So sorry to frustrate you, but I think that's effectively -- that's the color that I can provide..

No, I'm not frustrated. And then another one, if you don't mind. So you mentioned that you will -- about -- when you were talking about deleveraging, you said that you see investing in your business as the priority.

I was wondering if you're saying that after having considered maybe buyback in the future, or do you feel you're not at that phase where you could even consider that? So I was wondering if that was -- if you considered all different uses of cash?.

Yes, I think we consider all of it. We talk about all of it. There is no real change in strategy. As we've said, we're investing for the long term here. We will do opportunistic and disciplined M&A, Chello, Kinowelt, as we said in the prepared remarks, where [ph] possible.

At some point in the future, to the extent we see -- we don't see opportunities to drive incremental long-term growth, we'll reassess. But today, as we sit here, there's really no change in strategy..

I don't think we answered the second part of your question. You asked about the other 3 networks and the horizon for them. And I'll just add some additional comment, I hope, helpful. Just to remind you that we added advertising to IFC 24-plus months ago; to Sundance, last year.

They've grown their, what we call UE, their distribution size, rather significantly each. So we're now no longer at 40 million and 50 million subs, we're at 70 million and 80 million subs. And so we really do see a fair amount of opportunity with the growth in each of the platforms and the response that we've had to the content.

On Sundance, for instance, since the advent of advertising, we've aired -- we mentioned the 2 series, Rectify and The Red Road, in that rough time frame, and they've both, I think, been extremely well received. Rectify is coming back for a second season shortly, and we're very encouraged by it.

It really was -- it's on all these lists and all that stuff. We've done those limited series. We mentioned them. Some of them preceded advertising, and each has been extremely successful.

So it's hard to provide a horizon for when it so-called stops, if you want to call it that, because we do think that they are underexploited as economic assets and that the blocking and tackling and the early stages of what to do to enjoy that exploitation is being done as we speak. We're putting on lots of subs.

We're getting people to watch more, and they're developing profile and the individual shows are getting well-known. In our evaluation and experience, that is so-called the playbook.

And where we get to own the shows, which we do in those instances, on the series I just mentioned, we get to sell them into ancillaries, we get to export them to international channels. It's a pretty good puzzle. And it, of course -- not everything works, but we've had a reasonably good success ratio, so we're fairly encouraged.

So we're going to proceed accordingly and realize the economic value that we think is within them..

Your next question comes from Ben Mogil of Stifel..

So 2, one for Josh and one for Sean. So, Josh, when you look at, for example, Turn, and you've mentioned a little bit some of the difference between live ratings and the C+3 and C+7 ratings on Mad Men.

Can you give us some sense of what you're seeing on Turn? Are you seeing sort of a similar relationship or trajectory? And sort of as an adjunct to that, when you look at new shows, beyond pilots that sort of never make it past that stage, when you look at new shows in terms of deciding whether to greenlight them for the second or third year, besides -- when you sort of get in those rating zones that are not massive breakout hits, but you're not quite sure either, how do you guys think about if you go forward or not?.

Ben, it's Ed. So on the first question on Turn, we're seeing Live same day on Turn of about 1.5 million households and the critical acclaim has been strong. So we like what we're seeing so far. The relationship on Turn on Live+7, it's not as extreme. We have more people -- a higher percentage of people watching the show Live same day or Live+3.

So it does get a little bump on Live+7, but not as extreme. We're exploiting most of the audience within a shorter time frame, which is generally a positive thing, a positive trend. Generally, about season 2 and season 3 for the shows, it's hard to point to one formula. It very much is a feel thing. We look at the creator [ph] for the show.

We look at if it's accomplishing where it's going. We look at the show runner and the story arc, and do we feel we have a compelling story to tell again in sequential seasons. And then, of course, we look at the numbers and we calibrate the enthusiasm, which translates to demand from advertisers.

So all of that goes into the mix and the assessment, and sort of the new variable is some of these shows, as Josh mentioned earlier, then get exposure on an SVOD platform, and that can help build audience to the sequential season. So that's all in the mix..

Is Turn being sold to Netflix already domestically?.

No, no, Turn is not -- won't be on Netflix for a while. Generally, the shows air on AMC and then a little less than a year later they're on the Netflix platform..

No, I understand that, but have you actually done a deal with Netflix.

I know it hasn't aired yet, but have you actually sold it or presold it to Netflix yet?.

Turn will appear on the Netflix platform..

Okay, great. And then, Sean, just one for you. So it looks like in the 2 months that you owned Chello in the quarter, you sort of basically highlighted $14 million of costs that were sort of why EBITDA was what it was.

As you kind of look forward, is that $14 million of cost kind of all onetime transition costs and sort of call it a low-20s margin, which you sort of did last, the 10 months you would have done in the quarter adjusted for that? Is that kind of a decent framework for us to start to ballpark?.

Yes, that's -- the margin profile is a decent ballpark. Two, just to clarify, Ben, the $14 million is our transaction cost. So as we go forward, as I think Josh and Ed have talked about, as we further integrate Sundance Global with the Chello platform, we will obviously incur certain integration costs that will be nonrecurring.

So when I highlight the $14 million, it's purely transactional related. They aren't integration related..

Your next question comes from Anthony DiClemente of Nomura..

A couple of questions. First for Sean, at risk of frustrating you, just another question on the cost side.

A lot of conversation about cost growth, and maybe if I could just ask, I think for your licensed shows like Mad Men, the amortization of those expenses are more straight-lined, whereas I think what you're trying to communicate is that for the wholly owned new shows that the amortization is heavier in the earlier periods.

So I guess, am I right on that, first? And then secondly, for AMC specifically, isn't this cost situation just a little bit of a perfect storm of sorts where you're still taking licensing from prior periods this year in addition to the heavier front-loaded expenses from the newer wholly owned shows, which would imply that there is a point at some point in the future where when the license expenses are to fall off that you'd see some sort of an unwinding effect just in terms of the way the waterfall works? Is that kind of on the right track?.

Yes, I think, Anthony, you understand it completely..

All right. That's helpful.

And then I have maybe a bigger one for Josh, which is a follow-up to an earlier question, which was talking about -- how long of a lease do you give new originals in this day and age? I think maybe the answer, you'd be prone to talk about the accretive uplift of viewership from SVOD, and when you have kind of the off-season viewership, it gives viewers the chance to see the show, generate more interest, incubate the show and then feeds them back to linear, and I get all that.

But what I'm wondering is, have we, in this arena, and you, Josh, and you guys get a lot of credit from being so early on this concept, but I'm wondering if we've experienced the prisoners' dilemma of sorts where the accretive uplift of that SVOD viewership or discovery, let's call it, on the Netflix was only beneficial to the earlier guys like yourself on that strategy.

Now given kind of like everybody is doing it or many more programmers are also using SVOD in that vein and the SVOD providers themselves, of course, going down the road of originals to a much greater degree competitively, is the accretive uplift or benefit from the latter season SVOD build starting to dissipate a little bit, do you think?.

Yes. So I think actually a good question, and I think it's, on a full trend basis, hard to know where we are when we're in the middle of whatever we're in.

We absolutely have seen and were earlier to the benefits of quality, open-ended scripted dramas being introduced off-season, if you want to call it that, or during season, both on cable VOD, on DVRs and on SVOD, not only SVOD, to audiences that didn't see them in linear and seeing what were historically inverted patterns of sequential season viewership, which is to say they went up and up and up as opposed to down and down and down, which is conventional.

So if I were to -- my best answer is I don't think it's over because I think that there's an inherent human logic in it, which is to say that if -- I'll say it idiomatically, if a friend tells you about some -- a show to watch and you haven't seen it in Season 1, you may check it out, if you like the friend's opinion and/or if you read a review, you may check it out.

That's not over. That is something that I think will continue. We don't rely on that occurring in every show, every time, no matter what. We cancel shows when they're not good. We cancel them after one season. We cancel them after 2 seasons. We cancel them after 3 seasons. We cancel them -- we don't do -- we don't go to series if we don't like the pilot.

Not everything works. You've seen that both in our pattern of behavior and you've seen it in our economics. Where we think, based on data and based on judgment, that we think that a show has life -- and I would add the data part is very important.

We examine all the data, including minute-by-minute viewership, including metadata, including what we get from SVOD, what we see on DVRs. If we think that there's life that is not exploited, that is monetize-able through the 3 ways that we monetize, then we make a judgment that says we should give it more opportunity to enjoy that life.

But we monitor it carefully, I think, and I think we're appropriately unforgiving about underperformance. And when there's underperformance, we kill it. And that's I think what's in our pattern, and that's what we'll do going forward..

Your final question comes from Alan Gould of Evercore..

Seth, could you tell us how much the cash program payments and the amortization was on the cash flow statement for the first quarter? And also, I understand the accounting differences, but is there a significant cash difference, in general, for your original shows versus licensed shows and new original shows versus new licensed shows?.

So, Alan, this is Sean. On the first question, the amortization for the quarter was about $150 million, and the net change in programming rights and obligations was $185 million. So about $35 million of working capital in excess of amort for the quarter, which you'll see in the Q.

And in terms of the licensed versus an owned, I don't think there's a material difference in terms of the cash outflows, whether it's licensed or owned..

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

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