Seth Zaslow - AMC Networks, Inc. Joshua W. Sapan - AMC Networks, Inc. Sean S. Sullivan - AMC Networks, Inc. Edward A. Carroll - AMC Networks, Inc..

Vasily Karasyov - Cannonball Research LLC John Janedis - Jefferies LLC Steven Cahall - RBC Capital Markets LLC Michael Brian Nathanson - MoffettNathanson LLC Michael Morris - Guggenheim Securities LLC Marci L. Ryvicker - Wells Fargo Securities LLC Alexia S. Quadrani - JPMorgan Securities LLC.

Good morning. My name is Tom, and I will be your conference operator today. At this time, I would like to welcome everyone to the AMC Second Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

I'll turn the call over now to Mr. Seth Zaslow, Senior Vice President of Investor Relations. You may begin your conference..

Josh Sapan, President and Chief Executive Officer; Ed Carroll, Chief Operating Officer; and Sean Sullivan, Chief Financial Officer. Following a discussion of the company's second quarter 2018 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.

For further details, please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information, which we'll refer to on this call. With that, I would now like to turn the call over to Josh..

our very attractive wholesale price, which I mentioned; our advantageous size, we have five networks, not 15 or 20; and the excellence that consumers associate with our shows and brands.

These characters are unique to us in the basic cable realm and we think make us very well positioned to be carried in existing and new configurations, including so-called skinny bundles. Importantly, we view our success in this area not just as an accomplishment for the present but as a strong indicator of vitality for the future.

Although these virtual MVPDs still represent a relatively small percentage of the U.S. pay TV universe approaching 10% or so, the trends toward consumers adopting Internet-delivered TV is growing.

We think it becomes very interesting when one considers a day when these smaller Internet bundles begin to capture a more significant share of the overall pay TV universe.

And we think our offering of fewer channels of very high-quality at a compelling price with extraordinarily strong content will serve us very well as the distribution landscape evolves, including the changing role of retransmission fees for broadcast and what happens with sports.

As we position AMC Networks for future growth, we continue to take big steps against our third strategic priority, which is diversify beyond our core U.S. cable channel business and create new revenue opportunities while we lessens our reliance on advertising.

We're diversifying in several key areas, and I'll start with the strides we are making in our direct-to-consumer ad-free subscription initiatives.

First, as many of you know, we led the industry by creating something called AMC Premiere, the industry's first, if I can use this word, in-ecosystem, ad-free subscription option that we launched with Comcast last year on their Xfinity platform.

It is growing nicely and is proving to be appealing to traditional and now to emerging MVPDs, and we recently expanded AMC Premiere's distribution with launches on YouTube TV and fuboTV.

To drive growth of that service, we've been making select series available to binge on AMC Premiere at the same time as their linear airing and we'll be continuing this approach with several upcoming new series.

Our other ad-free subscription services, Sundance Now and Shudder, are proving to be attractive offerings for consumers who like Sundance Now's curated selection of prestige TV series and documentaries and Shudder's suspense, mystery and horror-themed content.

Our focus on commercial-free direct-to-consumer services has moved us to other investments that we've discussed on prior calls including BritBox with our partners at BBC and ITV, and RLJ Entertainment which I mentioned at the beginning of this call.

We further diversified our business through what we think are smart and selective content partnerships. Our recent Levity transaction that I mentioned earlier builds on other content partnerships that have been quite productive for us.

An early example is our partnership with the BBC which has exceeded our expectations with the strong performance of our BBC America channel in the U.S. as well as many successful co-productions including McMafia and a limited series called The Night Manager.

Similarly, our partnership with the comedy studio a Funny or Die quickly led us to the original series called Brockmire, starring Hank Azaria which has received wonderful attention and has been a great addition to IFC's comedy slate.

And perhaps the most meaningful way we've reconstituted our business over the last several years is by owning and controlling more of the content that we bring to viewers which we do through AMC Studios.

The revenue that we derive from this content ownership and control which comes in the form that we commonly called content licensing, domestically and around the world, has been the fastest growing part of our business over the past few years and we expect it to be an excellent growth driver.

AMC Studios is currently producing nearly a dozen dramatic series and non-fiction shows for the AMC channel and for our other networks with syndication or subsequent sales occurring in the U.S. and around the world on multiple platforms.

And lastly, we've entered the mobile gaming space, partnering and taking a stake in a gaming company called Next Games. We've created two immersive mobile games, both have -- which have done well including the most recent called Our World.

Our World is a location-based augmented reality game that quickly became a top 10 downloaded game following its global debut last month. If I may, I'll turn to the international businesses for a moment.

On that front, our global business continues to build audiences for first-run original series including most recently The Terror and Fear the Walking Dead, as well as original content that we are – on our regional portfolio of channels.

We also continue to expand our global footprint in key markets, particularly in Latin America, with recent launches on platforms, including DIRECTV, Sky and Net. And turning to the advertising front, we're seeing very healthy demand for our programming.

We saw particularly strong pricing in the upfront for AMC, with high-single digit increases in CPMs which is at the top of the market. We see this as an affirmation that distinctive series that are among the top rated on ad-supported TV are an increasingly precious commodity and command very healthy price increases.

We also saw volume increases for BBC America, IFC, SundanceTV and WE tv, with demand being driven by the momentum that occurs around many of our signature shows, including IFC's Brockmire, WE tv's originals on Thursday and Friday nights, almost too many to name, and BBC America's Killing Eve and its landmark Planet Earth, natural history programming.

We view that great demand and that strong pricing for our content as affirmation that the opportunities to advertise in quality highly rated series are increasingly limited on basic cable and that we have a unique position.

We also continue to see a healthy scatter market and feel good about our position due to strong demand for our content across our entire portfolio. As the advertising world changes, we are looking to further monetize the overall consumption of content that increasingly occurs as we all know on a delayed basis.

We have a number of initiatives that we are developing that utilize data and analytics to provide advertisers with new levels of insight into viewer buying habits and help advertisers connect more with consumers, and we believe these efforts will position us quite differently over time.

The initiatives we are undertaking include working with advertisers to deliver personalized mobile offers to consumers through TV commercials and utilizing new technology to deliver targeted TV ads on smart TVs, furthering their ability to connect brands to consumers in more and more refined and specific ways that are unprecedented for basic cable channels.

Now, if I may, I'd like to close with just a few content highlights. I mentioned earlier BBC America's Killing Eve success.

I'll also note that the network received several Emmy nominations for Planet Earth, Blue Planet II and for Orphan Black's Tatiana Maslany in the best actress drama category, giving the BBC America the distinction of having two shows competing in that prestigious category.

Looking ahead, BBC America's slate includes Doctor Who which returns in the fall and, for the first time, will feature in its long history of female doctor the actress Jodie Whittaker.

Jodi's appearance a few weeks ago in front of thousands of fans at San Diego Comic-Con and on the recent cover of Entertainment Weekly are indications of the very high anticipation around her entry into the series and around the new season.

AMC, the channel, had a strong second quarter with an array of shows that further defined it as one of the strongest and well-known brands on all of television.

It is currently home to 3 of the top 10 dramas on ad-supported cable including Fear the Walking Dead which returns in the quarter for a fourth season that was creatively reworked and better than ever. It saw double-digit ratings growth in key demos, one of the few cable originals to see ratings increases over its prior season.

AMC's strong upcoming slate includes next week's highly anticipated return of the nothing short of spectacular Better Call Saul, which we've already renewed for season 5; and the debut of a wonderful new series called Lodge 49 from producer Paul Giamatti and Dan Carey, which stars Wyatt Russell.

Beyond BBC America and AMC, we are seeing ratings strength, particularly for our originals on WE tv and IFC.

Our reality-focused WE tv continues to dominate Thursday nights as the number one cable entertainment network among African-American women in key demos, and IFC was recently recognized with two Emmy nominations for the final season of Portlandia and critical acclaim for the Hank Azaria series, Brockmire.

These content successes contribute to our long and established track record of telling stories that stand out. They enable us to continue to attract the greatest talent in front of and behind the camera, and they are part of what makes our brand synonymous with quality and creative excellence.

As we look ahead, we think this strong track record, along with our size and our strong price/value proposition for distributors, meaningfully sets us apart from many of our peers and will enable us to continue to operate from a very strong competitive position to take advantage of opportunities to grow our business through diversification and to create true value for shareholders.

Now, I'd like to turn the call over to Sean Sullivan for more detail on our financial results..

Thanks and good morning. We're pleased with our results in the second quarter as total company revenues were $761 million, AOI was $233 million, and adjusted EPS was a $1.93.

As Josh highlighted during the quarter, the company acquired a controlling interest in Levity Entertainment Group, an integrated media company that owns and operates comedy venues, a talent management business and produces original content for distribution on multiple platforms including live, digital, and linear television.

As disclosed on our earnings release, Levity contributed $30 million or 4 percentage points of growth to revenue in the quarter. Levity also contributed $2 million or 1 point of growth to AOI. AMC Networks continues to generate very healthy levels of free cash flow, over $130 million in the quarter and $234 million for the six months ended June 2018.

So, moving to the performance of our operating segments, the National Networks' Q2 revenues increased 4% to $627 million. AOI was $135 million, an increase of 1% as compared to the prior year period. Top line growth was driven by distribution revenue, which increased 6% in the quarter to $380 million.

Subscription revenues continue to provide us with a reliable and stable source of growth. In the quarter, the rate of growth accelerated as compared to Q1 to the high end of the mid-single digit range. As we've previously discussed in a particular quarter, results fluctuate based on the timing of various agreements, renewals and adjustments.

Looking ahead, we continue to expect subscription revenue growth for the full year to be in the mid-single digits. As for the content licensing component of distribution revenue, this line item continues to be a significant contributor to top line growth.

In the second quarter, year-over-year growth was slightly slower than we anticipated due to the timing of the licensing of our scripted original programs and various windows.

The growth in the quarter was driven by the availability of Preacher, The Terror and Dietland from AMC Studios which more than offset the absence of revenues from TURN and The Son in the prior year period. Moving to advertising, for the second quarter, advertising revenues increased 1% to a total of $247 million.

We experienced a strong sequential improvement in advertising due to the timing of our originals, most notably The Walking Dead and Fear the Walking Dead at AMC.

We also saw increased pricing, strong growth in our digital platforms, as well as growth at WE tv, IFC and Sundance, all of which helped to offset lower delivery in the absence of Better Call Saul at AMC and Doctor Who at BBC America. As Josh mentioned, Better Call Saul returns this Monday on AMC and Doctor Who returns to BBC America in the fall.

Moving to expenses, total expenses increased 5% or $20 million versus the prior year period. Technical and operating expenses increased 7% to $285 million. The variance is principally related to our continued investment in original programming across all of our networks.

In the quarter, we recorded $4 million in charges related to the write-off of various programming assets which compares to write-offs of $1 million in the second quarter of 2017. SG&A expenses were $124 million in the second quarter, an increase of 3% versus the prior year period.

The variance is primarily related to a decrease in marketing costs due to the timing of originals, most notably Better Call Saul offset by an increase in G&A cost. Moving to our International and Other segment, in the second quarter on a reported basis, International and Other revenues increased 32% to $147 million.

Adjusted operating income was $5 million, an increase of $4 million versus the prior year. These results include the impact of two months of activity related to the acquisition of Levity. Adjusting for Levity, revenue grew 6% to $117 million, and AOI was $3 million.

The increase in reported revenue primarily reflected $30 million related to Levity, as well as increases at IFC Films and our subscription streaming services. At our international networks, the favorable impact of foreign currency translation was essentially offset by the absence of DMC, which was sold in July 2017.

The increase in adjusted operating income primarily reflected $2 million from Levity, as well as the absence of DMC. Moving to EPS for the second quarter, EPS on a GAAP basis was $1.82 compared to $1.54 in the prior-year period. On an adjusted basis, EPS was $1.93 compared to $1.88 in the prior year.

The year-over-year increase principally reflected a decrease in income tax expense and a reduction in outstanding shares as a result of our stock repurchase program, partially offset by an unfavorable variance in miscellaneous net. GAAP EPS also reflected the absence of an impairment charge taken in the second quarter of 2017.

In terms of free cash flow, the company had a strong quarter. We generated $131 million for the three months ended June 2018. For the six months, we generated $234 million in free cash.

Through six months, tax payments were $60 million, cash interest was $72 million, capital expenditures were $37 million, and distributions to non-controlling interest were $7 million. Program rights amortization for the six-month period was $469 million, and program right payments were $471 million, resulting in a use of cash of $2 million.

This compares to a use of cash for programming of $25 million for the prior-year period. Turning to the balance sheet, as of June 30, AMC Networks had net debt and capital leases of $2.8 billion. Our leverage ratio based on LTM AOI of $908 million was three times.

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 AOI on a sustainable basis. We'll continue to be disciplined and opportunistic in our use of capital for both repurchases and nonorganic investments.

With respect to share repurchases, in June, the company announced that the board of directors authorized an increase to the share repurchase program to $1.5 billion. During the second quarter, the company repurchased $159 million of stock. This represents approximately 3 million shares.

As of last Friday, the company had $600 million available under its existing authorization program. Program to-date, we've repurchased approximately 23% of our outstanding shares.

We expect that our level of repurchase activity in any one quarter will continue to depend on several variables including our view of the stock price and other potential uses of capital. As a result, we expect the pace of our repurchases to continue to vary from quarter to quarter.

So, looking ahead, we're pleased with our year-to-date results and remain confident in our ability to achieve full year targets that we communicated at the beginning of the year. Given the impact of the Levity transaction, we're revising our outlook for the full year as follows.

We now expect total company full year revenue growth to be in the mid-single digits, up from our prior range of low-single digit growth. With respect to total company full year AOI, we continue to expect to deliver low single-digit growth with Levity contributing approximately 1 percentage point of that growth.

As for the cadence of our performance, we anticipate continued variability as a consequence of the specific timing or investments in content and the airing of our shows.

With respect to the third quarter, at the National Networks, we anticipate our performance being fairly similar to what we saw in the second quarter both in terms of revenue and AOI growth. We expect continued healthy growth in distribution revenue.

We anticipate this growth will be fairly even in terms of year-over-year percentage growth for both subscription and content licensing revenue. With respect to National Networks' advertising revenue, we anticipate a modest sequential decline due to the timing and mix of the airing of our originals.

As for expenses at the National Networks, we anticipate and growing at a rate similar to what we saw in the second quarter. At our International and Other segment, we expect the impact of Levity to be similar in the third quarter to what we saw in the second quarter, both in terms of revenue and AOI.

Excluding Levity, we expect revenue to grow at a rate that is generally in line with the organic rate of growth we experienced in the first half of the year, and we expect AOI, excluding Levity, to be essentially flat as compared to the prior year period in terms of absolute dollars.

So overall, we feel good, very good about how the business is positioned and we're excited about the various opportunities for growth that are ahead of us. So with that, we'd like to move to the question-and-answer portion of the call. Operator, if you could please open the call to questions..

Thank you. Your first question comes from the line of Vasily Karasyov of Cannonball Research. Your line is open..

Good morning, everyone. I think my question is for Ed. Ed, can you please tell us how the upfront went for you this year, how the scatter is going? And also, you made several – and I think Josh referred to those data-driven advertising initiatives and announcements over the past several months.

Can you please also tell us how that is, A, working out and what is your vision? Because I don't think you're completely 100% doing the same what some of your peers are doing. Thank you..

Great. So, I'd say, generally, on the upfront, it was fast as any in recent memory, and I think a contributing factor to that was an eagerness among advertisers to get their money down next to quality content or inside of it. And of course, we like that because we have 4 of the top 12 highest-rated drama series on basic cable TV.

That contributed to high pricing and we think AMC was among the leaders there with high-single digit increases. But we saw healthy demand and healthy volume across all of our networks, shows like Killing Eve on BBCA and its Planet Earth series, big contributors to that. So, we felt good about the upfront, scatter continues to be strong for us.

And it's probably worth noting to your latter question leading up to the upfront, we ran a number of successful campaigns in the area of advanced audience targeting, including one with a pharmaceutical company and one with a soft drink company, and we were able to access likely users and impact the sponsors' campaign results positively.

So in this upfront, we were able to set up similar deals. We did that with the major auto with a quick service restaurant and with a theatrical movie company among others. So we're finding that our proprietary advanced data platform is effective for us particularly in increasing volume among our highest CPM advertisers.

You mentioned the other announcements that we have. In addition to our own platform, we're doing an interesting test with a company called Sorenson. You may have heard about this. We announced it last week. It gives us the ability to target smart TVs and deliver customized messages.

We can do that regardless of whether the signal is coming in via cable or satellite or the telco. We're testing that product now with a number of advertisers, and we like it. So generally, we feel good about the upfront, and we are continuing to evolve our own proprietary analytics platforms..

Thank you very much.

And the scatter pricing is up high-single digits so far?.

Scatter pricing continues to be strong particularly in categories such as movies and quick service restaurants..

Thank you so much..

Your next question comes from the line of John Janedis of Jefferies. Your line is open..

Thank you. Good morning. I was hoping you could talk more about your programming strategy mix, meaning a lot of your peers are focusing investment in a handful of key brands. You've talked about some of the rating success away from AMC.

So looking out a few years, how different do you think your portfolio will look in terms of revenue concentration? And do you think your number of hours of originals will be able – or be stable going forward, or is there incremental investment we should be thinking about?.

Sure. John, this is Josh. I guess I'd say a couple of things. I hope I'm not patting ourselves on the back. I think that we have five brands that are quite well-established, well-supported, well-funded, well-resourced with shows that the constituents and fans, viewers of those channels know.

As you're well aware, the industry over the past several years, our peers has tended to migrate to a greater number of channels, 10, 15, 20. We chose not to do that at the time that it was occurring.

We chose to focus on brands we felt that had meaning and we supported them with content and original content that, at times, we were questioned about whether we were overspending on them.

What we thought – I hope this is not too much information – is that we were on the path of being in a media world in which there are people who are going to have to have choices and strength was not going to be – brand strength was not going to be an option; it was going to be an imperative. So, we went for brand strength and strong programming.

We didn't expand to 15 or 20 channels. We think it was the right move. Now, in order to support those economics, and you heard it in our prepared remarks, we reordered and organized essentially our internal economic system of content manufacturing, and we chose rather than to be renters to be owners.

So in order – so as a way of monetizing and supporting that increased investment in those limited brands, we had multiple paths of monetization for shows that we invested in and own. Now, that's reflected today in our financials as we now sell those shows around the globe into what we call subsequent to all-platform windows.

As we go forward, we think that we're pretty well set up with the five channels that we have. And I would – if I may, I'll point just to a piece of evidence in that which is that in this emerging distribution landscape of these virtual MVPDs, the sort of acid test is are you on or are you not.

And we are carried more widely than any other independent programmer for all of our channels. So the acid test is they want the stuff at the price that we have it because they know, they're smart, it's well supported, it's going to be attractive to consumers and it's a good expenditure of their money to grow subs.

So as we go forward, just to fully answer your question, we think we have largely the right plot. Of course, we can't foresee the future. We think – I'll make an adjacent comment that it's very smart to be in the subscription video-on-demand business and we've made significant headways into that.

We're now developing, I wouldn't call it yet scale, but I would call it moving toward meaningful scale.

And so we think we have largely the right puzzle, but we're ever aware that the world changes and we may need to adjust and adapt some of that through M&A, we announced it today first thing is this RLJ Entertainment announcement and that's the plan..

Josh, maybe on a related topic. Thank you for that. With RLJ, to your point, you're going to have a lot of DTC brands.

So, can you talk about to what extent they may be complementary in any form and maybe do niche brands have less churn given the engagements of the viewer? And I'm just trying to better understand how you think about the benefits of targeted platforms in an environment where scale seems to be taking an increasing amount of mind share and wallet..

Yeah. It's a really rich question. I hope I don't answer at too much length because you hit on probably the most central issue or a central issue in the DTC business which is churn. And the churn in general on DTC services is dramatically higher.

And unlike what one sees in the general cable landscape where if you were to generalize, you would call it at 4%. That's a gross generalization.

The churn on DTC services, and it differs if they're sold to a third party like Amazon or truly direct to consumer, but if you looked at an average, they're dramatically higher both, by the way, for the general interest big scale services and for the niche ones.

So now for five years, we've had both our tech stacks on these channels that we've organized operating, and we've increasingly been hiring people who are adept and, I hope, the best at managing customer relationships data analytics and average subscriber life. It's a bit of science, of course.

So – and the content arenas have different, almost inherent churn in them that are often demographically sensitive. If that sounds like a lot of words, what it means is that older people tend to churn a whole lot less than young people who move in and out with a flip of a thumb.

So we're managing all that, and I hope that we've got an increased capacity, capability and wisdom about it as these multiple entrants with our partners, BBC, ITV, our own activity, Comcast Xfinity, the AMC Premiere and RLJ Entertainment and we collect all that wisdom obviously and operate with it.

So as we go forward, we will undertake course corrections on the tech stack, on product, on subscriber life and engagement and we'll make – and most importantly on content.

So, I probably have given you unsatisfying answer except to say that all those variables will be aggressively managed, and we think we have the right tentacles and the right pieces in place, and we also think we have the right set of economic investment to do this responsibly within our financial framework..

Great. Thanks a lot..

Your next question comes from the line of Steven Cahall of Royal Bank of Canada. Your line is open..

Thank you. Just two questions, maybe first just a clarification. So, when we think about the adjusted OI guidance to low-single digit now including Levity with about a point of growth, kind of left to ourselves, we might think that that means that you've taken guidance down by a point with the fill-in coming from (40:19).

Can you just clarify if that's what we're meant to imply or (40:23) yourselves some room there and you've just got this extra point from (40:26)? And then second, Andrew Lincoln's departure was confirmed I think at Comic-Con.

I was just wondering what kind of planning you put in place, probably knowing that an event like this was going to come at some point. And so, how should we think about the future of that franchise as it makes a fairly meaningful shift here from a talent perspective? Thank you..

Hey, Steven. It's Ed. I'll answer your talent question and then turn it over to Sean, if you don't mind.

So, yes, to catch everyone up at Comic-Con, which is a huge festival in San Diego where hundreds of thousands of fans attend to see their favorite shows and movies to be dimensionalized, Andrew Lincoln said that his character would be leaving The Walking Dead series. Now, he did not say why or how.

And he did say that his relationship with Sheriff Rick Grimes is far from over, which certainly on social media has added rounds and rounds of fan intrigue. So we believe that anticipation is building and will continue to build for the next season of The Walking Dead.

We also think we're in great hands with the show runners who happen to be Angela Kang and Scott Gimple, and we believe there's plenty of runway for great storytelling here for obvious reasons. So I'm not going to be more specific than that, but we think it will be a special season of The Walking Dead..

And, Steve, just to your original question, the intention was to reaffirm the AOI guidance and give you some parameters as to the impact of the Levity for 2018..

Thank you..

Your next question comes from the line of Michael Nathanson of MoffettNathanson. Your line is open..

Thanks. Josh, I have two for you, one on M&A and then one on strategy.

So in M&A, what you're saying to us about having fewer channels and looking at your acquisition strategy of late, is it fair to assume that you guys have little interest in adding more U.S.-based channels? And then in light of that, can you talk a bit about the chiller deal you did (42:37) several years ago? Has that asset lived up to what you thought, and would you do that again in hindsight?.

Yeah. Sure. Thanks, Michael. So, I think I wouldn't, if I may, probably never say never. It's probably unwise. But as we sort of all mentioned, both in prepared remarks and in (43:00) the strategy that has been guiding us, we've been content-focused and getting deeply penetrated with our distribution.

In as much as that's true, and you see where we've deployed our resources domestically and the deals we've done, it's been in content areas and it's been in direct-to-consumer enterprises. That's what our priorities are. So that's an answer to your first question, if I may. That's what our focus is.

On the Chiller side, we're very pleased to have that asset. When we set up our plot for the future or our strategy for the future, back when today, a little below of a $3 billion in run rate revenue back then, it was closer to $1 billion. Back then, we didn't have a studio.

Back then, we had what we had, and we identified a few things as critical to achieve. One was to become global, not U.S.-based. The second was to get deeper into content, so we owned underlying rights and we're not renters. And the third was to responsibly, smartly, sanely and definitely get into direct-to-consumer.

That first piece of going global is essential today. It is not functional, I believe, for a content and distribution media company even if you can call us smaller in comparison to the recent M&A that's creating larger and larger companies to not have international footprint.

That's meaningful, and we take advantage of it today, so that Fear the Walking Dead appears on those channels. We converted what was a ubiquitous, not quite but almost worldwide channel called MGM to AMC. When we have the worldwide premiere of Fear the Walking Dead, we get a big shake, rattle and roll across the world and it's quite effective for us.

It makes our ability to invest in that content when it comes across our desk that much more clear and certain so that when we go make The Terror, we do it with an eye toward being a brilliant show, I don't know if you've seen it, for the U.S.

and a brilliant show for overseas and a brilliant show for subscription video-on-demand and in anthologies, so The Terror is going to come back with a new sort of piece of anthology horror for another season, so International Channels is central to that. Economically, it's lived up almost exactly to our expectations.

So, yes, it's a key part of it and we would absolutely do it again, and we're expanding the distribution. I just mentioned, new launches are occurring. The world is different in every country from a pay television point of view. It's not like the U.S. where there's sort of one pattern.

In some areas, wireless was early and cable was late; in some areas, free-to-air sucks up 70% and 80% of overall consumption; in other areas, pay TV is emerging. So, we're obviously focused on the areas where pay TV is emerging with launches in the Middle East, in Latin America and in the African content.

So, we think we have a lot of upside as we continue to take that footprint and expand it..

Josh, can I just ask you – that's great. Thank you for that. But a question I have for you is following your answer to John about churn and how to think about going niche versus broad. When you look at Netflix and their success, one of the things they now say is, it's about personalization.

And they've gotten churn down by having enough content for all of us any single month.

So, is there any way that looking at Netflix's success you would at some point rethink the strategy of creating separate DTC products versus putting it all into one massive service to personalize our content and give us enough choice any month to keep churn down? So, how do you think about that?.

Yeah. Look, it's a great question. There is no question that there are very strong – what Netflix has done which you point out has been wonderful and brilliant and the customization and personalization which arrives at your home and the scale they've created is enviable and they've done a brilliant job. Nothing short of it.

We have taken a separate path and have gone more targeted where the individual absolute collection and name of shows support a brand. It has its own effect and appeal for certain constituencies.

It's not Netflix where one thing is sort of atomized or segregated so it's different things for different people in the household, and there's much mere creation in it. And there's more brand resonance in it arguably for someone who's passionate about horror.

We have – we do podcasts that are horror podcasts, we're going to have – we have Shudder seminars with filmmakers offsite where they all come and collect with each other and talk about the next horror master. And we do those in Upstate New York and you get these fans and they're – frankly they're not only rabid, they're actually wildly intelligent.

So, over time, we ask ourselves the question what's smarter to do, and frankly, I'm not sure we have the answer. What we have now is we have a very strong and growing footprint into D-to-C and we have, as I mentioned, we're working and managing the tech stacks, the products, and the lifecycle of subscribers.

We could over time take different moves with the now many subscribers we have across those different services and choose to do different things with programming given all of the considerations that we have related to our incumbent position and to our relationship with the MVPDs who we cherish. So we'll take all that into account..

Thanks, Josh..

Your next question comes from the line of Michael Morris of Guggenheim Partners. Your line is open..

Thank you. Good morning. Two topics.

First, when we look at AMC Studios and the potential for expansion there, what is the greatest kind of gating factor to growing beyond a dozen series that you have right now? And maybe along those lines, over the last year, we've seen a greater number of commitments from platforms to show runners for multiyear agreements.

And does that impact your strategy or your ability to source material? And then secondly, Sean, just on the – your comments about the ad outlook for next quarter, can you expand a little bit on the timing and mix of programming? Is it just number of episodes? When we look at the slate, clearly you have Better Call Saul coming, which we think you'll give some strength in the quarter, can you maybe expand just on what else is driving that outlook? Thanks..

Hey, Michael. Yeah. So, Josh, I'll answer, if I may, one of your questions; I may ask Ed to answer the second. Just on the question of – you asked about commitments to show runners.

The way that we pursue creative development is with – I'd like to believe the utmost regard for creative people who we work with, and we create relationships with them that are long lasting, Vince Gilligan and Peter Gould through Better Call Saul. It began with Breaking Bad and many, many others. Those are the ones that are easy to name.

So we think that having a relationship in which the work of these people who are deeply concerned about their work is treated as precious and is treated as the core of what we do will and does resonate with them, and they find AMC Networks to be a home that is not only commercially sensible, but is also creatively truly supportive.

So, we think we've accomplished that, and we think we've accomplished it and it's in evidence in the manner in which we have ongoing relationships with creative people. We also really cherish working with new voices. And so we seek to discover them through our own development process.

And we've had extraordinary success bringing some people who were not well known, frankly, to the attention of the television or cultural-consuming public.

And I'd like to think that we've had probably among the highest batting averages of taking a piece of intellectual property or an idea or a story and turning it not only into a successful TV show in a limited sense, but into something successful that is actually reverberating in the cultural conversation, so to speak. I was struck. It was interesting.

There was a question asked earlier about a character on a TV show, Andy Lincoln. And I was – we've been asked previously about Don Draper. We've been asked about Walter White.

We've been asked – I wonder – we're smaller in scale than some, but I don't think there are many earnings calls where it's actually relevant where the shows have been significant enough and the characters developed relevant enough that you're actually talking about an individual character and his fate in a season of a TV show.

I mentioned that just as an anecdote because I think that comes from – people understand when you respect what they do deeply. It's not a fake, and part of it is a check, but it's not all a check. And I'd like to think that AMC has that reputation and that we are the beneficiaries of it..

Michael, it's Seth. For your other question, Sean mentioned for the third quarter, we expect a modest sequential decline of the second quarter, and that is really off the programming mixes. And moving around in a number of episodes, we're about midway through Preacher and Dietland, so we know now what that delivery is versus our estimates.

And then, we have the season 4 premieres actually next week of Better Call Saul and Fear the Walking Dead. So, those are really all the factors..

I didn't address – I'm sorry. You mentioned gating factor on studio growth, and it's something we think about a lot. We have developed – as it relates to your question on gating factor. We've mentioned dozens of series being shot now around the globe at any one point in time.

And the success of the system we've developed which – in which the pattern has been essentially that it goes to us collectively, our outlets first and then elsewhere later. There's obviously some degree of limits on how much we want to put through our system because of economic parameters.

We have been asked at times to produce for others, for third parties and we – because of creative resource wherewithal and we're very complemented by that, and we may explore that.

We'll take a look at whether that's a smart business for us to enter into, whether the resource time and work has enough economic return, and enough stability and upside for us to move into that world..

Great. Thank you..

Your next question comes from the line of Marci Ryvicker of Wells Fargo. Your line is open..

Thanks. I have, first, a clarification on just the last question that you responded about Preacher and Dietland. And it sounded like maybe delivery or what you delivered was less than what you expected. So, I just want you to clarify that. And then secondly, we don't know RLJ Entertainment and Levity all that well.

So, are these in relatively good shape or are you expecting to make improvements where there might be some incremental investments along the line?.

Hey, Marci. Right, so, Preacher and Dietland, pretty close to our models. I'll just say, very, very happy with the critical reception of Dietland and its premier. And it is bringing in a different audience that historically comes to AMC.

Our normal SKU is male and this is bringing new viewers to AMC who haven't been here as much for some of our fan boy centric shows. So, we like what it's doing for us..

On RLJE, the answer is in very good shape. They have done – that management team has been nothing short of superb. They took what was a company that was fundamentally in a different business.

They were distributing DVDs and owned some IP, and they definitely converted to streaming early, early, early on and they did it with fairly limited resources on a relative basis. So, we and I stand in admiration of frankly their capabilities. I think now under the new AMC relationship, their resources are not as constrained.

And so, they certainly have the ability now to drive subscriber growth without being as intended to capital structure and the impact on capital structure as opposed to operational capability and market opportunity that they see.

So, I would say, not only good shape, great shape but now better home and potentially more supportive home and better resourced home. On Levity, really, same answer.

The management team of Levity in their core business has been operating as producers for a couple of decades with really a rather remarkable track record of consistency because it's not often that you see 20-plus years through a few partners sustaining a very good business. But similarly I think now, I'd like to believe – and we know them well.

We spend a lot of time with each of these groups not only on their businesses but personally, as you might imagine. And we think that those guys have and those people, I should say, have great creative capability. They have high integrity.

They're entrepreneurial, and we now bring to what their plans were, which were to expand in physical comedy presence, in IP ownership, in formats, in television production for multiple avenues. We bring a good ally, home and supporter, and we think that of Funny or Die as well. Funny or Die, I'll just include them in the list.

I think I'd use the word brilliant, creative impact that's striking, if you just take a look at what they've brought to the planet. The sort of hit ratio is stunning, and we, I think, are already contributing, I'd like to believe, to their health. And Brockmire came here, and that channel sort of did a takeover on our IFC channel one night a week.

I think that energized our IFC channel. And we have many other ideas as the world goes forward of what to do with RLJE, with Levity, and with Funny or Die.

And I really say I'm – we're thrilled and pleased that we can be in business with those people because it expands our aperture and our capabilities beyond the 2,000 or so people that are formal employees of AMC Networks here and overseas..

Great. Thank you..

Operator, why don't we take one last question, please?.

Sure. Thank you. Your next question comes from the line of Alexia Quadrani of JPMorgan. Your line is open..

Thank you. Just two quick questions. I guess, Josh, I think you mentioned in your opening remarks you talked about your partnerships are investing in mobile gaming. I'm just curious how big of a priority or an interest is that for the company in general.

And then just to follow up on the sub growth in the quarter, in your guide for the back half the year, do you assume the positive sub growth will continue?.

Yeah. So on mobile gaming, I think we mentioned it because, A, it's important; B, we did it. It's an achievement. And we think it's reflective also of the direction that we want to go in. We are developing IP all the time. And some of it is quiet, studied and for adults.

Some of it is some mix, The Terror, I think is a mix of extraordinary drama mixed with sort of something that was supernatural which will actually be thematic and reappear in the next incarnation of The Terror. And some of it is younger skewing and of distinct appeal to people who spend time on platforms other than television including games.

And so Walking Dead, Fear the Walking Dead, Preacher, Into the Badlands, Doctor Who, Stan Versus Evil (sic) [Stan Against Evil] (60:51), et cetera, are all things that as soon as you utter them at Comic-Con you've got to shut the door to keep the people out.

So, we think it's smart and we don't have all rights in each instance, but we think that there's a rich opportunity for us to be mining particularly as we go forward, the IP that we're developing and putting first on television and to think of ourselves not only – we went from cable channel group to content company, to IP owner and developer, and gaming is a natural extension of that.

In terms of sub growth, I think a couple of things to say. I wouldn't put a number on exactly how we're going to do in any one quarter. What I would say is that we're very well penetrated as I mentioned on these virtual MVPDs. They're growing.

If you look at their growth rates on a trend basis, it's rather surprising; on a percentage basis, how well they're growing. They're nearly offsetting the erosion on the traditional MVPDs. We're particularly well-positioned on them, so that will affect a bit what our profile looks like over time..

Thank you..

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

This concludes today's conference call. Thank you for your participation. You may now disconnect..