Thank you for standing by, and welcome to the AMC Networks Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, today's conference is being recorded.

I would now like to turn the call to your host Mr. Nick Seibert, Vice President of Corporate Development and Investor Relations. Please go ahead..

Thank you. Good morning, and welcome to the AMC Networks Second Quarter 2023 Earnings Conference Call. Joining us this morning are Kristin Dolan, Chief Executive Officer, Patrick O'Connell, Chief Financial Officer, Kim Kelleher, Chief Commercial Officer and Dan McDermott, President of Entertainment and AMC Studios.

Today's press release is available on our website at amcnetworks.com. We will begin with prepared remarks, and then we'll open the call for questions. Today's call may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ. Please refer to AMC Networks' SEC filings for a discussion of risks and uncertainties. The company disclaims any obligation to update any forward-looking statements made on this call.

Today, we will discuss certain non-GAAP financial measures. The required definitions and reconciliations can be found in today's press release. With that, I'd like to turn the call over to Kristin..

From Not to Hot, WE tv is home to the top two cable originals for women on Friday nights. Later this month, the network will premiere a new series called Toya & Reginae featuring Toya Johnson-Rushing and Reginae Carter, two dynamic personalities who first appeared on Growing Up Hip Hop.

Our digital advertising business continues to grow, particularly through our expanding presence on connected TV platforms. Additionally, our leadership position in addressable targeting and new technologies like programmatic buying continues to deliver results for our partners.

Our universe of advertisers has grown exponentially over the last few years as we have opened up new platforms to our programming and made it easier to transact with us. The launch of ad-supported AMC+ will be the next step in connecting our commercial partners with the passionate fan communities we serve.

Fundamentally, we want to feature our content in as many places as we possibly can while, as I noted earlier, protecting our strong brand associations. One major area of focus on this front has been an expanding presence on connected TV platforms. We currently have 81 channel feeds live across eight major CTV and FAST platforms.

By the end of the summer, we will have approximately 100 feeds carried on 10 platforms, meaningful growth in a space that has recently become a significant focal point for all programmers. In terms of our distribution partnerships, I'm pleased to say we just launched AMC+ on Charter, making it available to Spectrum TV customers.

We have now launched AMC+ on all major MVPD platforms. Recent customer research has clearly demonstrated the power of an integrated streaming cable offering, which increases consumer satisfaction and lowers churn.

Simply put, cable customers who access streaming as an integrated part of their cable television service are happier with their cable provider and with their streaming service subscriptions. So, we're thrilled to have AMC+ available in this way across all major providers.

We're also very excited to have partnered with Comcast on their NOW TV streaming product, which recently launched with 40 live channels, including all of our linear networks, plus more than 20 integrated fast channels and Peacock Premium for a monthly price of $20.

NOW TV is just another example of our ability to innovate with our partners and offer compelling new options to consumers. Before Patrick provides a more detailed look at our financial performance, I wanted to note that as I have assessed this company over my first six months as CEO, I've been so impressed by the team here at AMC Networks.

We continue to execute against the strategy that allows us to move quickly and opportunistically through an environment that even much larger companies are finding challenging and unpredictable. Historically, AMC Networks has proven its ability to make great shows and build passionate fan communities.

Now we are combining those core competencies with a customer-first approach that will define our future today and, in the years, to come. It's clear to me that we have the programming, the platforms, the partners and the team necessary to continue to operate a very profitable business and deliver long-term shareholder value.

With that, I'll turn the call over to Patrick..

Thank you, Kristin. Our financial approach is rooted in three foundational principles that allow us to effectively operate the business as we focus on maximizing shareholder value during this dynamic and transformative period of change.

The first is ensuring that we maximize the monetization of our content across all available avenues and platforms while preserving value and brand affinity. The second is operating as efficiently as possible. This is no longer aspirational for AMC Networks or for any company in this space.

It's a core objective that applies to every dollar we spend and making sure that all of our investments made to support the business are prudent and thoughtful. And third is being highly disciplined when it comes to how we allocate our capital, including remaining opportunistic and flexible as we continue to maintain our healthy balance sheet.

I'm happy to report that we are seeing meaningful progress on all of the above fronts, which is evident in this quarter's results, most notably in the $148 million of free cash flow we reported this quarter.

As Kristin mentioned, we were opportunistic in working with Hulu to reach an advantageous agreement to unwind our output deal as part of Disney's shifting content strategy. Many significant titles were returned to us, and future cash payments were accelerated and paid in the second quarter.

This gives us the opportunity to make these popular and critically acclaimed shows available to viewers on our own platforms and potentially license them to other platforms as well.

The first manifestation of this the viewers will see is the availability of all seven seasons of Fear The Walking Dead on AMC+ as we prepare to bring viewers the final six episodes this fall.

We are very glad to be able to give new and existing fans of this record-setting franchise, the ability to catch up on our own platform as we head to the finale. Moving to the financial impact from Hulu.

The return of rights resulted in approximately $90 million benefit to our second quarter free cash flow, netting out receipts that we expected to occur later this year, and which were contemplated in our prior free cash flow guidance results in a net benefit of approximately $50 million to our full year free cash flow.

Regarding the P&L, we recognized licensing revenue upon delivery and cash receipts come in over time. The vast majority of revenue related to this agreement was recognized prior to the second quarter. In the quarter, we recognized approximately $20 million in revenue that we previously anticipated would occur in 2024.

The impact to AOI is negligible as the pull forward of revenue was largely offset by accelerated amortization. More broadly, our content licensing and other revenue is largely made up of two distinct components. First is the licensing of content rights from AMC Studios, IFC and RLJE films.

Second is production revenue, which is more transactional in nature, where we produce the series for someone else and earn a fee for our work. Historically, that comes from our 25/7media business, and more recently, the opportunistic production of Silo for Apple where deliveries occurred in Q1.

As has been widely reported, the days of the so-called streaming wars were marked by an expanding number of platforms, competing for scale in both content and subscribers with requisite increases in content budgets and spending. While we are benefiting this year from robust content licensing revenues, we are seeing production budgets contract.

Waning demand for new content and a handful of serious cancellations impacted 25/7 Media's second quarter results. As such, we recognized a $25 million impairment charge in the second quarter. As a reminder, 25/7 Media is included in our International and Other segment. Moving on to our second quarter consolidated financial performance.

Consolidated revenue decreased 8% from the prior year to $679 million. Consolidated adjusted operating income decreased 10% to $177 million, representing a margin of 26%, which reflects our strong focus on operating efficiency and is consistent with the margin we delivered in the second quarter of last year. Adjusted earnings per share was $2.02.

In our Domestic operations segment, second quarter revenue decreased 6% to $582 million. Subscription revenue decreased 4% to $334 million for the quarter. Streaming revenue was $137 million, representing 13% growth year-over-year. We've updated our streaming subscriber definition to remove estimated subscriber conversions at period end.

This definitional change resulted in a removal of approximately 300,000 estimated conversions from our subscriber count for the quarter. Subscriber figures and growth rates referenced on this call and in our release reflect this new definition.

We ended the second quarter with 11 million streaming subscribers, representing growth of 6% compared to 10.3 million subscribers a year ago.

On a sequential basis, compared to Q1 2023 subscribers of $11.2 million, this represents a decline of 2% as we maintain our focus on higher-value subscribers and allow promotional subscribers who do not convert to our typical retail pricing to roll off. Moving to domestic affiliate revenue. Affiliate revenue declined 12.7% for the quarter.

Affiliate revenue performance was driven by declines in the basic subscriber universe and the 3% impact from the strategic nonrenewal with Fubo and was partially offset by contractual rate increases. Content licensing revenue grew 12% for the quarter to $81 million.

The increase in content licensing revenue was driven by the timing and the availability of deliveries, including the pull forward of Hulu revenue I discussed earlier. Second quarter domestic advertising revenue decreased 17% to $167 million.

The decline in advertising revenue is primarily due to lower linear ratings, softness in the ad market and fewer episodes of original programming, partly offset by digital and advanced advertising revenue growth. Our ad-supported networks and digital ad platforms continue to experience a similar environment as our peers.

For the second quarter of 2023, scatter and direct response remained soft given the economic climate with our advertising partners remain conservative with their spending. Domestic operations adjusted operating income decreased 12% to $185 million for the second quarter with a margin of 32%.

The decrease in AOI was largely attributable to lower affiliate and advertising revenues and was partly offset by lower SG&A resulting from cost control and significant marketing efficiencies. Moving to International and other. For the second quarter, revenue decreased 21% to $99 million.

The decrease in revenue was largely attributable to a 54% decrease in content licensing and other revenue to $22 million, the result of series cancellations at 25/7 Media I discussed earlier. Our AMC Networks International business remains healthy with subscription revenue up $57 million, representing growth of 1% in the second quarter.

Advertising revenue decreased 6% to $20 million, which is largely driven by the closure of certain unprofitable channels last year. International and Other segment AOI of $19 million was consistent with the prior year.

AOI margin improved to 19% compared to 15% in the prior year as the year-over-year decrease in revenues was largely comprised of lower-margin production revenues. Moving to cash flow and the balance sheet.

Consolidated free cash flow for the second quarter was $148 million and is primarily driven by the accelerated return of rights payments, partly offset by $32 million of cash payments related to our previously announced restructuring initiatives.

We ended the second quarter with net debt and finance leases of approximately $2 billion and a consolidated net leverage ratio of 2.7x. We have substantial financial flexibility and total liquidity of approximately $1.3 billion, including $893 million of cash on the balance sheet and our undrawn $400 million revolving credit facility.

We continue to remain focused on our 2024 and 2025 maturities, and we'll be opportunistic in addressing them. Regarding capital allocation, our philosophy remains disciplined and opportunistic.

First, we look to support the business with a particular focus towards creating compelling content that resonates with our audiences, while balancing overall profitability and cash flow generation. Second, we remain focused on the balance sheet and addressing the maturities I just mentioned.

Strategic M&A and returning capital to shareholders remain further down our priority list. Moving to our outlook. Our expectations around AMC Networks free cash flow potential over time have not changed.

That said, today, we are increasing our outlook for 2023 free cash flow to reflect the acceleration of $50 million in cash payments related to the return of rights from Hulu. We now expect free cash flow to be in the range of $120 million to $140 million for the full year.

Excluding the impact of approximately $115 million of onetime cash restructuring payments, our free cash flow outlook would be in the range of $235 million to $255 million. We continue to expect cash content investment to be approximately $1.1 billion for 2023.

Thereafter, we anticipate our cash content investment will be in the $1 billion area going forward, which we expect to provide more than enough content to drive a strong programming slate and support our business. We are reiterating our outlook for 2023 adjusted operating income as we realize the benefits of our strategic cost measures.

We expect the consolidated AOI for the full year will be in the range of $650 million to $675 million. We are updating our revenue guidance to further reflect current market trends. Most notably, the broad-based reduction in content investment dollars across the industry, which we expect to impact our full year content licensing and other revenues.

This was most recently evidenced by the handful of series cancellations at 25/7 Media that I discussed earlier. In addition, the domestic advertising marketplace is tougher than we previously anticipated, and we expect these market conditions to pertest throughout the remainder of the year.

As such, we now expect full year consolidated net revenues to be approximately $2.8 billion.

In closing, 2023 will be a very significant year for AMC Networks as we navigate the challenges that are being felt across our industry while remaining focused on the unique advantages and strengths that have driven this company forward and the foundational principles I mentioned earlier.

Effectively monetizing our content, operating efficiently and being disciplined regarding capital allocation. We are encouraged by the progress we have made to date on all of these fronts, and particularly in our ability to drive efficiencies and free cash flow as we focus on maximizing shareholder value during a period of change and transformation.

With that, operator, please open the line for questions. .

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

I have two topics, one on content licensing, and one on acquisition -- customer acquisition. So first on the content licensing.

Now Patrick, you referenced the reduced demand for content in the streaming market broadly, as industry's rationalizing, is this dynamic impacting both your new and first run content that goes to services in the same way that it impacts sort of off net or non-exclusive content or both of those being impacted the same way? And on your decision, on the early rights return.

Does licensing of rights play a part like strategically, how much does licensing of rights play a part in your revenue future, as opposed to using your content exclusively to drive your own streaming services. And then if I could just add one more.

Kristin, you mentioned, on a Premier is more about when someone engages with a piece of content on a streaming service as opposed to when it's actually released. It's a competitive streaming market. How are you thinking about customer acquisition going forward, the amount that you need to spend in any tweaks to your strategy? Thank you. .

Thanks, Mike. It's Patrick. I'll take the first two here. On the licensing market dynamics. I think it's fair to say that there's always a strong bid in the market for premium content. We've seen incredible demand for our content. I do -- I would highlight particularly strong appetite internationally.

I think this year we are benefiting from higher volumes as well. The last few years we've kind of eaten more of our cooking and used it internally on our existing services. We've unleashed kind of more content into the market, so we're seeing the benefit of that increased kind of volume.

But I would also say that buyers are being maybe a bit more kind of tactical. And so strategically we're signing more smaller deals rather than sort of fewer larger deals in order to maximize price in the market. And that's the approach we've taken.

On the second question, in terms of the strategic import of licensing going forward, I think it'll continue to be, quite important. You know, the mantra here is we're trying to kind of pull forward the monetization of content licensing is one of the ways we're doing that.

And obviously, we're going to use a handful of the titles that we've since recaptured from the Hulu deal on our own services, but we'll be opportunistic in using those in service of our license revenues going forward. .

Michael, on the sub acquisition question, premier, just being a premier, that's something we've done. We've been doing a lot more research using our data and aggregating information around who is watching what and where? And we definitely see that, people are leaning into content that they may not have watched the first time around.

And that's sort of part of what we love about our strategy with scripted dramas and with high quality content, is that you can basically engage with this content at any point in time when it works for you. And the level of engagement continues to be really solid.

So getting some of this content back from Hulu, some of the great series like Killing Eve or Brockmeyer, we feel like we can reintroduce them to whole legions of fans multi-generationally and introduce people in for the first time.

So, A lot of franchise work, B significant utilization of data and I've been really pleased over the last quarter with our subscriber acquisition efforts that, we're spending less but we're spending smarter and that's proving out really well in both our levels of engagement and also subscriber acquisition and retention. .

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

This is Luke Landis on for Robert Fisherman. Thanks for taking our question.

We'd love to get your take on with the pressures we're seeing in advertising, how much of that do you think is secular versus cyclical?.

I'll grab that one. Luke, this is Kim Kelleher. I would say a combination of things are challenging right now. Broadly, our ad supported networks, as Patrick and Kristen referenced our experiencing the same environment as everyone else in this space. It's a soft scatter market. Marketers are being relatively conservative with their spending.

We are seeing some modest improvements in scatter, but overall, we expect, as Patrick said, the landscape to continue to be challenging through the remainder of this year.

That said, in our upfront conversations, we are very pleased, as Kristen mentioned, with the results of our up-fronts and the strength of our pricing around our key products like AMC BBC, America, we TV, and then the huge reception we received to AMC Plus's, newly launched ad supported tier coming in October.

So, to address your question specifically, I would say we are feeling that the marketplace should improve as we get into 2024. .

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

You're about exactly halfway to your revenue guide for the year, and you're quite a bit over halfway to your NOI guide, which obviously suggests your margins are going to be lower in the second half.

Is that just a function of higher programming costs in the second half, or is there anything else going on?.

Thanks for the question, Doug. It's Patrick. On the revenue guide, I would unpack it in the following way. Obviously, we are seeing some softness in the ad market which we referenced. We are impacted by the cancellations at 25/7 as well, that's offset partly by kind of some of the revenue acceleration that we saw with Hulu.

Those are the larger kind of contributors to the $2.8 billion guide on revenue. Fortunately given the nature of those two kinds of revenue streams, collectively, they have relatively low impact on AOI, kind of given the margin structure of that revenue. So we benefit in that regard.

We are obviously seeing a little bit, a touch of further softness on the affiliate side. And obviously, streaming is decelerating slightly, but we are getting the benefit of improved customer acquisition costs, as Kristin mentioned. So we are able to manage the business for improved margin on that side going forward.

So hopefully that gives you a sense for kind of how we are managing the revenue and AOI together..

Yes. I guess I was just curious as far as your margin based on your guide seem like they are going to be lower in the second half, and that that implies higher costs.

So just wondering if those are higher programming costs or something else?.

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

But we feel good about kind of where we are going to land..

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

Thanks so much. I wanted to ask about just the strategic path forward for streaming. There seems to be a clear focus on streamlining and a priority towards higher quality subscribers.

Does that change your view on the global opportunity in international market launches? And on the ad tier, any expectations on pricing yet and if the goal is TAM expansion or maybe driving accretive ARPU? And then a second one, I wanted to follow-up on the content licensing side in particular in light of the success of SILO on Apple TV and the recent renewal.

What are your thoughts on leveraging your expertise on high-quality content to lean into producing more for third-party players or are the challenges at 25/7 media, an indication that maybe that's not the path you want to go down? Thank you so much..

Sure. Hey, Thomas. It's Kristen. On the streaming economics, we have said it before, we really have a different sort of economic structure with our services that are more targeted towards specific genres and specific types of subscribers. So distinct audience is, we don't try to be something for everyone.

Our pricing is lower, and I think, our overall goal is to just make sure that we can serve avid fans with significant valuable content. So high quality subscribers equal lower churn, less price sensitivity, if they are pleased with the product.

And the majority of our top titles on our targeted services are produced at less than a $1 million an episode. So we feel like we have a pretty sort of structured way to approach what we're doing and we can move with intention very specifically to preserve what we think is a very quality products at a reasonable price point.

So on ad supported, I'll let Kim speak to that, and then I think Dan can speak a little bit more to the actual content. .

Hi, Thomas, it's Kim. We are really excited about the ad supported tier, and importantly our advertising and marketing partners are as well. We're seeing a lot of demand and interest, as I mentioned in the upfront. So this is driving a lot of exciting conversations. That said, it is early days to be making predictions and address specifics.

We launch -- we start rolling through it when we start launching in October. And we are going to have more news to share on the specifics pricing, et cetera, as we get closer to that consumer launch. So more to come on this front. .

Hey Thomas, this is Dan. Speaking to your question about licensing and silo. Specifically, AMC Studios is focused primarily on producing for our five linear and seven streaming platforms. However, we will be opportunistic when the circumstances arise, and specifically in the case of silo, that was a show that was developed by AMC studios for AMC.

We realized at a certain point that it wasn't a good fit for AMC, so we pivoted, and shopped it to outside platforms and received enthusiastic interest from Apple, and subsequently closed a co-production gift for Apple TV. So that worked out great for us. We're pleased with how Silos performed.

It's the most watched new drama on Apple TV on that platform. As we know, they've ordered a second season. We're currently paused in production due to the strike, but we're on our way. We continue to be a meaningful co-producer with Apple on that.

However, while the renewal's beneficial for us, we adjusted the deal structure for season two so that we're not internally financing that production. We're just not sure it makes as much sense for us to tie up all that capital. So for season two, we're a meaningful co-producer, but the impact on our financials won't be as great.

And going forward, we'll continue to look for strategic opportunities when it makes sense for us to produce for outside platforms. .

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

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

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

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

Thank you. Ladies and gentlemen, this does conclude today's conference. You may all disconnect. Have a great day..