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

Michael Morris - Guggenheim Securities LLC Michael Brian Nathanson - MoffettNathanson LLC Alexia S. Quadrani - JPMorgan Securities LLC Steven Cahall - RBC Capital Markets LLC Marci L. Ryvicker - Wolfe Research LLC Todd Michael Juenger - Sanford C. Bernstein & Co. LLC Vasily Karasyov - Cannonball Research LLC.

Good morning, ladies and gentlemen. My name is Terry, and I will be your conference operator today. At this time, I would like to welcome everyone to the AMC Networks' 2018 Third Quarter 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.

Please note that today's call is being recorded. Thank you. I would now like to turn the call over to your host Mr. Seth Zaslow. 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 third 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..

Good morning and thank you all for joining us. Before we begin, I'd like to spend a few minutes talking about the announcement that we made earlier today that we have closed on our acquisition of RLJ Entertainment, the company behind the growing streaming services Acorn TV and Urban Movie Channel called UMC, among other holdings.

This acquisition represents a major step forward for AMC Networks, as we further our direct-to-consumer strategy and accelerate our interests in subscription video-on-demand services that we own and control.

Acorn, known for its high-quality British and international mysteries and dramas, is one of the largest special interest streaming services in the U.S.

Together with Urban Movie Channel, the UMC, which offers excellent content of appeal to African-American audiences, these services have consistently experienced substantial year-over-year growth rates, doubling their subscribers in the last two years alone.

In fact, they've grown from what was a combined couple of hundred thousand subscribers when we first found our way to them in 2016 to what's fast approaching 1 million subscribers today.

With this acquisition completed, our nearly 1 million subscribers from Acorn and UMC more than doubles when one includes our interest in our other direct-to-consumer services, giving us a stake in this area to a larger degree than any other basic cable programming group.

At the moment, there's obviously great attention being paid and understandably so towards some of the larger dynamics impacting the industry and the shift to direct-to-consumer platforms, including M&A, the battle for quality content and talent, and the growing footprint of the general interest subscription streaming services that offer facility, volume and price.

Against that backdrop, we were seeing an appetite for certain specialized streaming services catering to people who like quality, sophisticated content in a curated environment, and we think that certain specific offerings will have the right characteristics in terms of cost and in terms of the type of content they offer to sustain growth.

Of course, we were seeing that this market is evolving and that not everything will work. But certain offerings will work, and we think this is an area in which we are particularly well suited to grow substantially and profitably.

Our approach to tapping into this interest and building our subscription video-on-demand offerings is not dissimilar to the approach and investment we've made in our U.S. cable channels. More than a decade ago, as many of you know, we pivoted away from being a movie channel at AMC to make ourselves a destination for premium original content.

We discovered the vitality of a business built around creating high-quality shows for specific audiences and we thrived alongside larger networks that were aggressively competing for mass audiences.

As we begin to extend our business with direct-to-consumer offerings, we see a somewhat similar opportunity playing out with services that have compelling programming that is exclusive and is presented in a carefully curated way to dedicated fan bases.

We think specifically that RLJE's management team has done nothing short of a spectacular job growing that business, and we believe our acquisition of RLJE gives us important momentum in this arena. Now, I'd like to take a few minutes, if I may, to briefly touch on some of our operational highlights.

AMC Networks delivered solid financial results in the third quarter, and I'm pleased to say that we remain on track to deliver on our full-year total company outlook for 2018.

We achieved this solid performance by continuing to successfully execute on our three key strategic priorities, which we've talked about in the past and which I'll reiterate briefly here today.

They are, one, our continued focus on having great content that captures wide attention and on creating successful franchises and extending them globally; two, driving distribution by offering that great content at the most attractive wholesale rate in all of cable programming; and three, building new revenue streams in multiple ways with our multi-pronged approach to direct-to-consumer subscription services, which I just outlined, by building up our AMC Studios operation and our content licensing business, and through our international channel strategy.

I'll briefly expand on each of these priorities and highlight some of the drivers behind our performance before turning the call over to Sean Sullivan for more detail. In the area of content, we continue to have great content that connects.

Amidst the proliferation of scripted programming and larger players with admittedly big budgets, we continue to attract extraordinarily great talent, create superior shows and bring them to market in a way that gets the world to pay true attention.

And with a seemingly endless array of choices around what to watch and how to watch, viewers continue to choose our shows and our brands.

This is underscored by our having three of the top five dramas on ad-supported cable TV, including Fear the Walking Dead, which concluded a strong fourth season in the quarter and we think hit a new stride creatively, and Better Call Saul, which just completed its fourth season and remains as popular and critically lauded as ever.

In the third quarter, we also premiered a show from Executive Producer, Paul Giamatti, from AMC Studios titled Lodge 49. It's an idiosyncratic series in the spirit of the Coen Brothers film, The Big Lebowski. It became an instant critics' favorite and we've renewed it for a second season.

As part of our focus on content, we continue to nurture two key franchises – BBC America's Doctor Who and The Walking Dead.

The enormous fandom around both of these franchises was pointedly on display at last month's New York Comic Con, where thousands and thousands of fans crowded our panels and screenings, which included a worldwide simulcast premiere of Doctor Who and a surprise showing of The Walking Dead Season 9 premiere a day before its linear debut.

Days later, Doctor Who premiered on BBC America with Jodie Whittaker as the first female Doctor in what is a storied and remarkable 55-year franchise. We grew the audience nearly 50% over last year's premiere, making Doctor Who the fastest growing drama on TV this year. As you know, The Walking Dead also recently returned for season 9.

Even with declines in short-term ratings categories, which are somewhat predictable given the long life of the series, The Walking Dead remains by far the biggest show on cable. It is the number one show on cable TV among adults 18 to 49 by a factor of two with American Horror Story ranking second.

And for dramas across all of the commercial television, only This Is Us on broadcast bests The Walking Dead in ratings.

New showrunner Angela Kang working with Scott Gimple, the Chief Content Officer of The Walking Dead universe, has brought a wonderful new creative power to the show and has opened up a new world that is delighting both new and long-term viewers of the series.

While we're very well aware of the trends for linear TV performance, The Walking Dead does represent more than a TV series, it is a universe. And with that universe comes many opportunities, several of which we've already built and grown such as Fear the Walking Dead and our Talking Dead shows, as well as licensing, fan experiences, games and more.

There are more opportunities we're planning to build, because we believe it remains a very vital fundamental franchise with a rich opportunity, and we're planning to manage it and grow it for many years to come.

Moving on to distribution, if I may, our distribution profile remains uniquely strong with traditional and virtual MVPDs for two fairly simple reasons. First, we have a reputation for creating diverse content that is of consistently high quality, which makes our channels and shows very important to a wide range of viewers.

And at the same time, we offer a small, but strong group of well-defined networks at what is now the most attractive wholesale pricing in the industry among today's multi-channel cable programming providers.

This strong position has enabled us to deliver reliable stable growth in this area, as our third quarter distribution revenue results demonstrate, and it has made us uniquely tailor-made for today's smaller so-called skinny bundles.

We are the most widely available independent programmer among virtual MVPDs, because simply said, we offer the best content value at the best price. We think this position will continue to serve us very well as the distribution landscape evolves amidst increasing consumer discretion with a bias toward lower price and higher quality.

On the subject of diversification, building new revenue streams has been a key priority of ours for some time beginning with our AMC Studios business, which provides us with valuable content ownership and is behind more than a dozen shows that air across our networks in the U.S. and overseas.

Subscription video-on-demand is also becoming meaningful for us in revenue diversification. I talked just earlier about our approach to direct-to-consumer, which is becoming an increasingly important part of our plan for the future. Our AMC – specifically, our AMC Premiere offering – continues to grow nicely as we enhance and expand it.

Last month, we debuted The Walking Dead 24 hours early, exclusively for AMC Premiere subscribers, which drove our largest single day of new customer sign-ups. We'll continue to utilize AMC Premiere to tap directly into the large fan base that exists around our shows and deliver a singular experience on this platform that we own and control.

Our Shudder service remains the world's largest premium streaming service for both casual and super fans of thriller, suspense and horror content. Shudder has doubled its member numbers over the past year and it's on track to double again this year.

We're also seeing subscribers spending more and more time on the service as we grow Shudder's library, or for more original and exclusive great content and as we garner critical and fan attention. International also remains a big part of our approach to diversifying our revenue.

The expansion of the content marketplace has led to continued global demand for the AMC Studios produced content that we own and control, resulting in quite substantial content licensing revenues. We know that if a show clicks with viewers in the U.S.

or creates a lot of critical buzz, which many of our shows do, they will very likely be successful overseas, and we've seen this in particular with high demand for our shows, including The Terror and Into the Badlands. Our international channels business continues to see momentum globally and in the local markets in which they operate.

In the third quarter, our AMC Global channel grew audiences for original AMC Studios produced content, including the latest season of Fear the Walking Dead. And our local channels performed very well, with two stand-outs being our two food networks called El Gourmet and La Cocina.

They are the leading food channels in Southern Europe and Latin America, respectively, and they help us give – give us a particularly strong position in those territories.

In addition, our Shudder and Sundance Now streaming properties are fast becoming not just U.S., but international platforms with upcoming launches in Australia and New Zealand that will join several other territories, including the UK, Ireland, Austria and Germany.

With respect to advertising, we grew advertising in the third quarter with ratings softness offset by increased pricing. As we discussed in our last call, we continue to evolve our advertising product offerings, which includes ramping up initiatives around addressable advertising.

And we're also using new data-driven products to help advertisers better target audiences with more efficiency and more granularity. As we've noted before, the rise of high-end serialized programming has largely occurred on platforms that don't have ads.

So, our ability to showcase this kind of content in an ad-support environment has allowed and will continue to allow our networks to attract a healthy base of advertisers, as we increasingly become one of the very limited places to offer ads with super great premium scripted content.

In closing, if I may, I'd like to identify just a few of the upcoming shows that may be worthy of your attention.

At the AMC channel, following the tremendous reception by audiences of The Night Manager, and as part of our ongoing relationship with the best-selling author John le Carré and the company run by his sons called The Ink Factory, we are preparing to debut our next high-profile project, a mini-series based on the absolutely extraordinary le Carré novel called Little Drummer Girl.

This three-night TV event will debut later this month, and it has just an absolutely spectacular cast, including Emmy and Golden Globe winner Alexander Skarsgård, Oscar-nominated actor Michael Shannon and a wonderful up-and-coming woman – young woman who is BAFTA nominated. Her name is Florence – Florence Pugh.

Looking to next year, the next installment of our natural history franchise, which has included Planet Earth II and Blue Planet II is called Dynasties. It follows five of the world's most iconic, but endangered animals as they face mounting environmental pressures.

We'll be presenting it as a TV event across our four scripted entertainment networks early next year. At BBC America, we're also looking forward to the second season of the acclaimed and popular hit Killing Eve, which is currently in production across Europe.

AMC's supernatural horror series NOS4A2 is also in production with Zachary Quinto and rising star Ashleigh Cummings cast in the lead roles.

And lastly, IFC's second season of Documentary Now! from Lorne Michaels, Fred Armisen, Seth Meyers and Bill Hader has a slew of A-list guest stars, including Cate Blanchett, Owen Wilson and Michael Keaton, and it will air early next year. Now, I'd like to turn the call over to Sean for greater detail on our financial results..

Thanks, Josh, and good morning. We're pleased with our results in the third quarter with total company revenue growth of 8%, AOI growth of 5% and adjusted EPS growth of 28% to $2.15. For the nine months, total company revenue grew 6% and AOI increased 2%. Adjusted EPS grew 19% to $6.76.

AMC Networks continues to generate very healthy levels of free cash flow, $167 million in the quarter and over $400 million for the nine months ended September 2018. Moving to the performance of our operating segments, at the National Networks, Q3 revenues increased 3% to $560 million.

AOI was $210 million, an increase of 5% as compared to the prior year period. Top line growth was driven by distribution revenue, which increased 5% in the quarter to $361 million. Subscription revenues continue to provide us with a reliable and stable source of growth with the third quarter at 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, in the third quarter, year-over-year growth was in the low single-digits due principally to the timing of the licensing of our scripted original programs in various windows.

Results in the quarter reflect the SVOD availability of The Walking Dead, as well as the international distribution of Fear the Walking Dead, Lodge 49 and Dietland, which offset the absence of revenues from TURN and Halt and Catch Fire in the prior year period.

Moving to advertising, for the third quarter, advertising revenues increased 1% to a total of $200 million. Strong pricing led to growth at IFC, Sundance and WE tv, which more than offset a decline at AMC mainly due to lower delivery. Moving to expenses, total expenses increased 2% or $8 million versus the prior year period.

Technical and operating expenses increased 2% to $257 million. The variance principally resulted from our continued investment in original programming across all of our networks. In the quarter, we recorded $11 million in charges related to the write-off of a programming asset. This compares to write-offs of $8 million in the third quarter of 2017.

SG&A expenses were $107 million in the third quarter, an increase of 4% versus the prior year period. The variance principally related to an increase in marketing costs due to the timing of originals, most notably Better Call Saul, and an increase in G&A costs.

Moving to our International and Other segment, in the third quarter on a reported basis, International and Other revenues increased 35% to $152 million. Adjusted operating income was $8 million, essentially flat with the prior year. These results include the impact of the acquisition of Levity.

Adjusting for Levity, revenue was $113 million and AOI was $5 million. Additionally, the increase in revenue from our subscription streaming services was offset by the unfavorable impact of foreign currency translation.

Adjusted operating income primarily reflected $2 million from Levity, offset by an increase in expenses at our international networks. Moving to EPS, for the third quarter, EPS on a GAAP basis was $1.93 compared to $1.35 for the prior year period. On an adjusted basis, EPS was $2.15 compared to $1.68 in the prior year.

The year-over-year increase in both GAAP and adjusted EPS principally reflected the increase in AOI, a favorable variance in miscellaneous net primarily related to a gain in our investment in RLJE, and a reduction in outstanding shares as a result of our stock repurchase program. In terms of free cash flow, the company had a strong quarter.

We generated $167 million for the three months ended September 2018.For the nine months, we generated $402 million in free cash. Through nine months, tax payments were $96 million, cash interest was $97 million, capital expenditures were $61 million, and distributions to non-controlling interests were $9 million.

Program rights amortization for the nine-month period was $684 million and program rights payments were $671 million, resulting in a source of cash of $13 million. This compares to a use of cash for programming of $53 million for the prior year period.

Turning to the balance sheet, as of September 30, AMC Networks had net debt and capital leases of $2.6 billion. Our leverage ratio based on LTM AOI of $919 million was 2.8 times. In terms of capital allocation, our primary focus remains investment in our core business.

We will continue to be disciplined and opportunistic in our use of capital for both repurchases and non-organic investments. During the third quarter, the company repurchased $25 million of stock. This represents approximately 419,000 shares. As of last Friday, the company had $575 million available under its existing authorization program.

And program-to-date, we've repurchased approximately 23% of our outstanding shares. We continue to expect that our level of repurchase activity in any one quarter will 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 results year-to-date and remain confident in our ability to achieve our full-year targets. For full-year 2018, excluding RLJE's contribution, there is no change to our outlook.

We continue to expect to achieve total company revenue growth in the mid-single digit range and total company AOI growth in the low single-digits.

With respect to the fourth quarter, at the National Networks, we expect advertising revenue to be subject to the performance and mix of our original shows as well as the current advertising market, including scatter.

With regard to distribution revenue, we expect a decline in content licensing revenue due to the timing of availability of our content in ancillary windows to more than offset growth in subscription revenue. As I mentioned earlier in my remarks, we continue to expect subscription revenue growth for the full-year to be in the mid-single digits.

As for AOI at the National Networks, we anticipate modest growth mainly as a result of a decline in expenses. As a reminder, our program write-offs in the fourth quarter of 2017 were unusually high and should result in a favorable variance this year.

At our International and Other segment, we expect the impact of Levity to be similar to what we saw in the second and third quarters both in terms of revenue and AOI. Our fourth quarter results will also include three months of activity related to RLJE. In terms of revenue, we expect our RLJE to generate approximately $25 million in the quarter.

As for AOI, we don't expect RLJE to have a meaningful impact as the results of the ongoing business are expected to be offset by deal-related expenses.

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

So, as for 2019, we'll have more to say on our next call. So, overall, we're pleased with our performance through the first nine months of the year and our 2018 outlook. 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..

Okay. Okay, and we have our first question from Michael Morris..

Thank you. Good morning, guys. First, if I could just ask about your outlook for fourth quarter advertising.

We saw similar sort of challenges on the rating side last year, and I'm wondering if you could give us a little bit of context maybe based on what you're seeing now, if you're expecting an advertising trend in the fourth quarter at National Networks similar to what you saw in the fourth quarter of 2017.

And then, I have one question about your over-the-top distribution effort..

Hey, Michael. It's Ed. So, on ad sales for fourth quarter, obviously, The Walking Dead is going to be a major component of our results. I would say I think we've done a good job of managing the decline in audience in Walking Dead.

As Josh pointed out, even in season 9, it's easily the biggest show on cable TV and really on all of television except for one scripted drama on broadcast. So, we've moderated the impact of audience erosion effectively, I think, through inventory management, Michael, and driving higher pricing.

The show has that unique quality, which is strong appeal to 18 to 49 and particularly males 18 to 49, which is hard to find, very difficult to find in the television landscape.

In terms of the performance in fourth quarter, I would say that we anticipate a bump this Sunday, as we wrap up the story arc for now for one of the series major characters, and then we anticipate a decline of that higher plateau in the subsequent weeks. So, hopefully, that gives you some insight..

Again, just to try to put a little bit of fine point on it, is there anything else, as we look at it on a year-over-year comparison for how this impacted your ad trend last year, is that a good frame of reference for how we should be thinking about the ad revenue trend for the fourth quarter of 2018?.

Yeah. Look, I think the best frame of reference for 2018 is we're pretty close to how we envisioned the year would perform. Sean gave you the overall guidance for the company. And so, we're right in the range we thought we'd be. We've experienced audience erosion, as you know, this year on AMC.

That's been partially offset by advertising growth on all of our other networks..

Okay, that's helpful. And then, just with respect to your relationship with Amazon, it looks like Sundance Now and Shudder are no longer being offered on Amazon channels, and I was wondering if you could just help.

Is that – do that have to do with a fee dispute? It seems like the partnership – I guess maybe I'm just a little confused why they wouldn't want to carry you – so whether that's a fee dispute.

And then, bigger picture, how do you think about the importance of these relationships with sort of third-party aggregators with respect to your over-the-top strategy? Thanks..

Well, the relationship with Amazon is very important as it is with all distribution aggregators. We also have a vibrant and rapidly growing direct-to-consumer business, both through Shudder and Sundance Now. For Amazon, generally as you know, we do business with them all around the world. They are a great partner.

It is a commercial relationship, and sometimes we experience bumps in the road over deal points. To your question as it relates to Shudder and Sundance Now, I would say we are all but done on the major deal points. We have resumed our normal relationship with Amazon on the platform..

Great. Thank you..

And Michael, I guess I'll just add – oh, I'm sorry. I was going to add one comment on overall relationships with over-the-top distributors and MVPDs, and that is that the world is changing very rapidly.

And we see – of course, you see services that began their life as direct-to-consumer now being carried by traditional MVPDs, and those MVPDs being responsible for a very substantial amount of their transactions. So, that is a new bit of a trend.

Of course, you see premium cable channels, HBO, SHOWTIME, et cetera, being offered direct-to-consumer, and then we have our growing spectrum of direct-to-consumer services that are being offered now three ways.

They're being offered direct-to-consumer, as Ed said; they're being offered through the likes of Amazon, a cherished partner, who brings them to many people; and now we're seeing them being offered through conventional MVPDs.

So, there is an evolution going on in which the historical genetics of it – it's this and not that and not that – are changing. We think that represents great interest and opportunity for us. We mentioned today, of course, the acquisition of RLJE and the near 1 million subscribers.

We think that's just a beginning, as the exclusive content on these services, commercial-free, is a brand-new opportunity for AMC Networks and represents diversification for us that is different from our ad-supported channels, and that marries perfectly with our growing studio business.

As those direct-to-consumer services reach scale, our studio can begin to sensibly, economically produce for them. As they are distributed internationally, that scale increases.

And so, we wouldn't suggest that we're becoming Netflix, but we do believe that we have a very rich and interesting opportunity and our, by scale, smaller business than that, which has many boutique characteristics that we think suggest sustainable growth, sensible financial profiles with profit, and an awful lot of endurance, and when attached to our basic cable channel business and to our studio business, represents a very important and very appealing new dimension of the AMC Networks business..

Great. Thank you, Josh. Appreciate it..

Okay. And we have another question from Michael Nathanson..

Thanks.

Josh, can you hear me?.

Yeah – yes..

Okay, cool. I have two for you. The first is just broadly on the idea of your bundle to basic cable distributors, there is no doubt that the price is very cheap relative to the quality of your shows.

But I just wonder with the decline of The Walking Dead and what I assume was a really big stick you had to drive pricing, is there a risk longer term that you've lost some of your pricing power, because you don't have that – you still have a big show, but it's not that must-have show? So, I wonder how do you think, what evidence can you refute, maybe as The Walking Dead diminishes in scale, that won't hurt you when it comes to your relationships vis-à-vis distributors..

Sure. Michael, I hope it's okay to answer slightly expansively. You know better than I do that there's about in excess of now $10 billion in the U.S. ecosystem for retransmission consent. So, the prices for broadcast channels are above $2, approaching $3.

And you're more of an authority on wholesale pricing than I am, but we certainly look at all the data. And we are the lowest priced and best value collection of channels – that are five channels – in an era when we see other, our peers, indicating that they would like to have a more lean offering.

So, we think our price is radically lower than our value. If one were to take out incumbency, which is part of our world, and historical pricing, frankly – I don't want to make a promise about it – I just think that we would be priced on a fair market basis at a factor that's well, well, well in excess of what our wholesale pricing is.

We frankly are – our price is arrived at by our history – and our history is long and it didn't use to have rich original programming on it. So, we've spent a long time trying to get close to fair pricing. And in my view, we're nowhere near fair pricing.

I give you that speech, because when you focus on The Walking Dead, the biggest show on basic cable, the second biggest on all of broadcast TV, and you pair it with two other shows that are three of the top five on basic cable, I don't think quite honestly that we have an issue at all.

I think that as consumers exert more discretion and as their voices are experienced more directly through social media and other things by MVPDs, those MVPDs will need to be in service of consumers.

There are many more places to go buy bunches of channels, and we think we have frankly the best bunch of channels for the best price and that that evidence is in stark relief on virtual MVPDs, where we don't have broadcast channels and sports, they are making elective decisions to carry our channels in a preferred circumstance, their entirely elective decisions, because they want to gain subscribers.

That's evidence of appeal for price and value. So, my long answer to your short question is, I think that we're underpriced. I think that The Walking Dead is of course a component of what we do and an important component of what we do and a strength of what we do, but not the only component.

And I think it's really important to look at the numbers, the prices to get a sense of what's fair, because I think it will become fairer over time..

Okay. And Josh, just one quick one on the virtual MVPD side, there's been some concern that maybe some of the earliest platforms, the DIRECTV NOWs and Slings, are starting to show a real slowdown in growth.

Are you seeing any evidence in your numbers in the aggregate that the virtual platforms are slowing down?.

Really, I mean it when I say you know the numbers better than I do..

Right..

I think there's about $7 billion in aggregate between the Internet-delivered television offerings of incumbents, meaning what was DIRECTV NOW is AT&T and Sling, the two biggest ones, Sony Vue early entrant, and then the smaller entrants that have not come from incumbents.

The data to-date is that their growth has offset substantially, but not at all of the decline in video from MVPDs. You read the reports in the most recent quarter of video subscribers from the companies that reported. I guess I wouldn't offer an authoritative comment on the horizon.

I would say that there has been – I don't know if it's fair to say reasonable stability. I think the aggregate video subs over the past three to four years when the word cord-cutting has moved into common nomenclature has been about 5 million on a base of what was somewhere around 100 million.

So, there's 4 million to 5 million subs less in the overall system with 7 million of them becoming virtual MVPDs. So, there'll be a bunch of dynamics moving around in all of that.

At the risk of making a commercial for ourselves, I would say that we think we'll be an integral part of all of those offerings and we like to believe, and I think it's true, a preferred part of those offerings, because they will increasingly, the retailers, have sensitivity to price and margin over time, price and margin.

And they will increasingly look at the actual check they're remitting to AMC Networks versus other companies, and they will act on the size of that check, because they will have margin pressures.

And I think if I'm in that job and I'm managing ultimately a business, I want subscribers and I want margin, and I think I'm the first – I think I'd turn to AMC Networks first, not only, but first. So, we'll see all sorts of dynamic shift around within them. I think we'll be in a very strong position against all those dynamics..

Okay, Josh. Thanks..

Okay. The next question comes from Alexia Quadrani..

Thank you. My question is on the – on your marketing spend. When Walking Dead first came out and when you – some of your other big hits first came out, it was a much less cluttered marketing place or marketplace.

I guess do you have to sort of rethink how you do your advertising or how you get attention to these high-quality shows, given it is so much more cluttered today, whether it's different means of marketing or maybe spending more on marketing?.

Hey, Alexia. So, it's a great question. Certainly, the marketplace is a bit more complicated than it was even a few years ago and all marketers grapple with that. So, we – I think we have developed fairly sophisticated analytics and we are always adjusting the mix. One thing you do get today is faster feedback on which tactics are performing.

And so, you have your hands on the dial and you can adjust more quickly, and that's what we try and do. The reach on our channels is significant. We sort of start there with marketing.

And we have over time built up a huge database of fans and viewers, and so the old 80/20 rule, but those are often the most passionate people and you want to get early and interesting messages to those folks, because that can seed word-of-mouth.

And then, we get into conventional tactics, not only on our air, but on other basic cable and local broadcast where it makes sense, and of course, on social media. So, we cover it all and we think that we're able to get increasing rating points or impressions and still moderate cost. So, that's pretty much our approach..

And then, just a quick follow-up on The Walking Dead ratings. Is there any color you can give us in terms of how you sort of presented the – how you thought the ratings would sort of pan out and how you present it to advertisers in the upfront (00:43:56).

I'm just trying to get a sense of are they coming in roughly where you sort of put your upfront guarantees..

As I mentioned before, The Walking Dead is – continues as a very, very important component of many advertisers buy, because it has unique appeal to males and to male 18 to 49 and to male 18 to 34, and it remains – and hopefully, we'll see that again on Sunday – it remains that water cooler show, where passionate fans really want to watch it and know what happens and talk about it.

So, I think advertisers are very happy with it. We continue to have strong demand that continues to drive healthy pricing..

All right, thank you very much..

Okay. The next question comes from Steven Cahall..

Thank you. Maybe first just to follow up on Alexia's question, I think earlier related to The Walking Dead, you mentioned inventory management. I was just wondering if you could elaborate a little more.

Is that something around how you're recognizing deficiency units or any change to the ad load or maybe just some elaboration on that would be great?.

No, I – Steven, I would say first off, there is some variability. There has been over all of the seasons, variability on the run times of individual episodes of the show. And that's part of the AMC formula is to attempt to give wider discretion within some guardrails to our showrunners.

And so, in service of the story, there is sometimes variability on run times. So, there can be – from week-to-week, there can be instances where we have longer run times versus shorter run times.

But generally, when I talk about inventory management, I'm talking about maximizing your highest CPM advertisers and being able to fill out the show with the advertisers from which we enjoy the highest CPM. And so, you are always looking to adjust the mix of advertisers to maximize the impressions..

Great, thanks. And then, maybe just a follow-up for – around the studio side of things. So, you've talked a lot about the ability to invest more in original content and investing in the business is your number one priority.

How do you think about growing AMC Studios and do you think about growing it inorganically at any point in the shape of the business, if you had more in-house studio capability? Thanks..

Well, we do – we have, as you know, an active development group, and I think AMC is in the advantageous position of seeing all the good stuff and seeing it early in the cycle. There's about five places that you go first, you can guess who they are, if you have a concept for a high-quality television series.

And that's largely because those entities, those platforms, those networks have demonstrated that they know how to handle those shows and that the creative folks and the actors will get the attention and you'll build buzz and the shows will enjoy a long and prosperous shelf life. So – but we have finite capacity on the channels with some flexibility.

So, in terms of your question about studio, as we develop, we do contemplate developing not just for the channels, but for other platforms. And so, when we talk about growing Sundance Now and Shudder and the news today about Acorn, and even on AMC Premiere, we look at those as places where we're able to increase the capacity of the studio.

And if we do that successfully in the U.S. and we pick the right shows, then we would continue to enjoy revenues coming from the international marketplace as well..

Thank you..

We'll take our next question Terry..

Okay. Next question comes from Marci Ryvicker..

Thanks. Can you – we talk a lot about the pay-TV ecosystem and virtual MVPDs. Can you speak specifically on your overall subscriber trends? I think AMC was one of the only, if not the only company, who saw subscriber gains for a while.

Has anything changed for you?.

Sure. This is – Marci, this is Josh. Nothing has changed for us in terms of our fundamental strength. I should at least acknowledge that each affiliation agreement that we have, of course, describes rate, term and positioning. And by positioning – forgive the word, it's used in many different ways – it means how many people get our service.

So, we've been careful, as you might imagine, and focused on getting that number to increase.

So, when we do – when we've done renewals – and you've seen our growth trajectory of late, which led the industry, it's in part because we were able to cooperate with our MVPD partners, agree on rate, agree on term, agree on everything else, and reach agreement that moved them to distribute our channels more widely.

Those are individually sort of affiliate-dependent, and the trajectory of that growth is dependent upon each contractual relationship. So, as we go forward and as we have the natural course of renewals coming up, we will attend to that. So, I can't make a prediction about specifically for AMC what that trend will look like for us.

So, we certainly have our mind's eye on increasing our distribution, which we did successfully, and you saw it in evidence in the numbers. We'll keep focusing on it and we have headroom, but it doesn't mean that we'll necessarily keep the past pace that we had, because those are individually contractually dependent.

I'll just add the one point, which is I think, again, that conventional MVPDs, it's not lost on them that they're paying a fair, if not preferred, rate for channels that are not fungible eyeballs rolling in and out of television and they don't know where they're watching them.

They are truly more dedicated fans watching our shows, who wait for them to come. They're not – they're less dial-flipping and they're more focused.

And by the way, that matters to MVPDs, because they are interested, first priority, in maintaining subscribers and second priority among their other priorities which are becoming more complicated, in local ad sales.

So, they're not insensitive to ratings, but they're very focused on the sort of stickiness or the contribution of channels to maintaining their video subscriptions, and of course, margin. So, I think we'll be in a generally preferred position in terms of their fundamental business considerations..

Great. Thank you..

Okay. Next question comes from Todd Juenger..

Hi. Good morning, everybody. Josh, if I could just pick up super quick on that one, and then I've got a short question that might have a long answer. Just on the distribution, so the last couple of quarters – or maybe Sean – you had disclosed in the press release, I think, a plus 2% growth in total subs. There was no statement in this press release.

So, I just wonder if you're willing to tell us that number this quarter and anything that's changing there would be great. And then, Josh, my short question and we'll see, but I'm super curious, you've got now a stable of something like four, what I might humbly call, niche-oriented or targeted direct streaming services.

Who are these customers? Are these – what do they look like? Are they people who subscribe to lots and lots and lots of medias, entertainment sources, or do they have cable, do they have Netflix? Or are they super interested in a very specific thing and they're very choiceful and – struggling to understand how these niche services relate in a world of these very broad value offerings that also exist.

Thanks a lot..

Yeah. So, Todd, this is Sean. Again, I'll just point you to Josh's comments. I think more specifically, as you know, we had a – I think a significant renewal and incremental penetration in sub addition in the third quarter of 2017.

So, as we go forward, as Josh says, the incremental sub and the trend will be dependent in some respects on the market obviously, as well as any future renewals. And as you know, we don't talk specifically about the timing and when those happen. So, we'll continue to address it as we go forward..

And then, Todd, on the subject, which is a fascinating one to me, of who they are and what do they buy and – because the sort of binary logic, if one looked at it remotely, would be why would you buy that if you've got lots of other video options coming in the home, which would be a sort of intuitive reflexive observation about, why do you need that if you have that? And the – I think the phenomenon is perhaps best described fundamentally by people's appeal – the appeal and desire for video coming from multiple sources and their willingness to pay for video coming from multiple sources.

And so, it's an overarching answer, Todd, but I don't – I mean it to try and illuminate the conversation, which is, in the early days of premium pay television, it was hard to – and actually, I worked in it. Unfortunately, I've been kicking around that long. It was hard to believe that people would buy SHOWTIME along with HBO.

It struck one as intuitively redundant. It of course turned out not to be the case, and it ushered in an evolution of the nature of those services, which began with movie studio exclusivity and then morphed into original content exclusivity is probably the most important component of sustainability.

So, what we're now seeing is a sort of complexity of that, which is mid-90 million conventional pay-TV subscribers in the U.S. You know the number better than I, 50 million – 60 million Netflix subscribers, right. So, they obviously – there's overlap in that big number, and there are 20 million Hulu and there are Amazon coming with Amazon Prime.

So, that's a lot of people getting a lot of stuff. And then Facebook, we read is focusing on stories or video, and YouTube, which is experiencing tremendous utilization in many households with younger skew, launches a premium-oriented service.

I say all that because I think it helps explain the appetite that people have for both time spent, which is increasing overall, and their wallets. And so, I think that the – my best lay explanation would be a $6 or so retail.

If you're a fan of British mysteries and you're in that demo and you have – it appeals to you, it's not going to be 100 million American households, but it's fast approaching 1 million. And that's a disclosed number; I'm not giving away trade secrets from RLJE. So, I think that people identify quality and they are willing to pay for it.

And of course, there's demographic differences in people's ability and capability to pay for it, and we'll see all of that influence it.

But I think the fundamental thing that's occurring is the time spent on screens is way up and that the desire for things that truly appeal to you, that you identify with and you value as opposed to you're indifferent to and are fungible and interchangeable, is pretty strong.

And that you'll do that and spend $6 or $7 very happily versus $6 or $7 spent on something else.

And by the way, just an asterisk and then I'll stop, is we see movies now opening, which again if one were to have taken a sort of logical this or that, it's not quite easy intuitively to rationalize why there'd be such health in recent box office, while the home video – and I don't mean DVDs – opportunities through multiple screens are so rich and yet people are running out to the movie theater.

So, riddle that one. So, I think the answer is highly appealing stuff at great value has its audience and will find its audience. And so, we are focusing, as we mentioned, on, you call them niches, we call them fan areas that people have a strong attachment to..

Great. Operator, I think we have time for one more question, please..

Okay. Next question comes from Vasily..

Vasily, are you there?.

Hello. Can you hear me? Yes, I am..

Okay, great..

Vasily Karasyov from Cannonball Research. Josh, a question on international. Thank you for the update and the prepared remarks. I was a little surprised that you highlighted a lifestyle networks strength in Latin America and Southern Europe.

I wonder if the fact that Discovery is putting so much of new Scripps Lifestyle content on the air everywhere around the world changes the way you're thinking about your strength and weaknesses in the coming years here. So, if you could comment on that, it would be great. Thank you very much..

Sure. Thanks for the question, Vasily. The two – I mentioned the two food networks respectively in Southern Europe and Latin America, El Gourmet and La Cocina, and they're very strong. They are incumbent and they've been around for a very long time. So, they're very well distributed. They have food stars on them, if I may call them that.

They've built into the fabric of the – sort of the television landscape and also the culinary landscape. If you go to Argentina, they're a thing, as you might imagine. I was there. They're just a thing. And so, there of course will be competitive forces, and I think Discovery and Scripps will be a competitive force. It is helpful to be incumbent.

It's helpful to have a long history that is specific to the region with food stars that are specific to the region, with formats that are specific to the region. And I think that when we purchased Chello, we did it with a mind toward realizing two things.

One was transporting our owned content to a global channel, and so we turned the MGM Channel into AMC and we've implemented that approach, and also getting the benefit of deeply embedded incumbent cultural networks. We also have Paprika in Central Europe that really have a lot of attachment. They're not so simple to unseat.

Some formats are food, and I'm no authority in it, but some of them are very reliant on the manner in which they've manifest in the region, and it makes them fairly well established and not so simple to unseat, no matter what someone does..

Thank you..

Great. Well, at this point, I think we're going to conclude the call. Thank you everyone for joining and for your interest in AMC Networks. Operator, you can now conclude the call..

Ladies and gentlemen, this concludes today's conference. You all may now disconnect..