Earnings Transcript for AMCX - Q4 Fiscal Year 2022

Operator: Good day, and thank you for standing by. Welcome to the AMC Networks Fourth Quarter 2022 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] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nick Seibert, Vice President, Corporate Development and Investor Relations. Please go ahead.

Nick Seibert: Thank you. Good morning, and welcome to the AMC Networks Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining us this morning are James Dolan, Interim Executive Chairman; and Patrick O’Connell, Chief Financial Officer. 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. Required definitions and reconciliations can be found in today's press release. With that, I'd like to turn the call over to Jim.

James Dolan: Good morning, and thank you for joining us. Before we start, I want to take a moment to say that after a thorough search by the Board of Directors, we were very pleased to announce earlier this week that Kristin Dolan will be taking over as CEO of AMC Networks. Based upon Kristin's considerable executive and operational experience for 30 plus years working in media and entertainment, including her prior history managing subscription based businesses, the Board concluded she is the best candidate for the role. As Founder and CEO of the Audience Measurement and that data analytics company 605. Kristin has been on the frontlines of the evolution of advanced advertising and audience targeting. She also has a strong record driving organizational change. These are areas of critical importance as we transform AMC Networks, and further monetize our high quality content during this pivotal period in our industry. Before turning the call over to Patrick, I'd like to briefly provide my perspective on the industry and the company, and how we see the business evolving. Across the board, the content industry is being disrupted by cord cutting in the traditional linear sector, or MVPDs, and also in the streaming sector, also being disrupted by changing viewership habits, a challenge ad market and rising content costs. As I've said in the past, the current mechanisms for monetizing content are not working. The content industry needs to reorganize itself. We're seeing this now with most media companies beginning to course correct to better monetize content, and improve the economics of their business. We believe large distributors and programmers will lead the way. AMC will follow. Streaming is a retail business. That's what DTC means. For now, as the industry continues to evolve, AMC Networks will focus on streamlining our organization, operating more like retailers than wholesalers, driving cash flow and maintaining our strong balance sheet. At the same time, we will continue to do what we do best, which is making great content. We believe this strategy will position AMC Networks wealth to navigate current industry dynamics and generate long-term shareholder value as an even stronger company. With that, I will now turn the call over to Patrick.

Patrick O'Connell: Thank you, Jim. As Jim highlighted, AMC Networks unique assets and capabilities positioned us well to succeed at the landscape shifts and consumer behaviors continue to evolve. We took steps in the fourth quarter to recalibrate our business. We streamline the organization to create a more nimble operating team and reduce costs to drive increased free cash flow. We are optimizing our content monetization through the array of options available to us. This includes our Linear and Genie platforms as well as opportunistic content licensing. We will further leverage our 15 FAST channels as we continue to expand our innovative advanced advertising capabilities and utilize data to enhance the value of our inventory. In addition, we are extending our partnerships with new and existing distributors with six recent renewals, including Charter, Altice and Bell Canada. We are now beginning to see movement towards new pricing and packaging models, including streaming bundles. One example is Verizon, which recently tested an AMC+ and Netflix offer as part of their Verizon’s +play offering, and we expect more to come on this front. We are staying true to our mission of super serving our passionate audiences by creating highly compelling content that breaks through in a crowded marketplace. We had a strong slate in the fourth quarter, including the series finale of The Walking Dead and the first series in our new Anne Rice, The Immortal Universe, Anne Rice's Interview With the Vampire. Last month, we followed up with our debut of the second series in that Universe, Anne Rice's Mayfair, which is starring the Emmy nominated actress Alexandra Daddario. Based on the first 30 days of viewership, Mayfair, which is now the most viewed season of any series ever on AMC+ ahead of Interview and the final season of The Walking Dead. On Linear, Mayfair is off to a strong start with ratings continuing to build as the season progresses, and is already a top 10 cable drama for the 2020 to 2023 television season and key demos. Based on a strong debut performances we've green light both interview and Mayfair for second seasons. After The Walking Dead, that world continues to resonate with advertisers and captivate viewers. The final season of The Walking Dead commanded the highest pricing the series has ever seen over the course of its 11 seasons, strong evidence of the continued power and relevance of this franchise. Also on that point, following its successful run on AMC and AMC+, the 11th season of The Walking Dead, launched on Netflix earlier this month. In the first full week it was available, Netflix consumer streamed 1.43 billion minutes of the series. It was the number one most watched acquired series in the platform and the number two series overall. We are thrilled to have two highly anticipated Walking Dead spin-off series plan for 2023, The Walking Dead

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Thomas Yeh with Morgan Stanley. Your line is open. Please go ahead.

Thomas Yeh: Thank you so much. Jim, I wanted to dig into your comment about operating more like retailers versus wholesalers going forward. What do you see as the major incremental steps that AMC needs to take to move towards that direction? Do you guys have kind of been in the streaming market for some time, is it a different marketing approach or partnerships or something else? And then Patrick, on the $1.1 billion of programming, spend cash. Can you talk a little bit about as kind of the write-down flow through and you refocused the spending? How we look to the general mix of focus around high-end scripted original programming relative to targeted programming and got the balance of that looks like over time? Thank you so much both.

James Dolan: Got a long set of questions. Okay. Well, look the AMC has been a wholesaler, right, as most of the programming companies have been. And the in wholesaling, somebody else takes care of the customer, somebody else watches the customer and somebody else actually ends-up pricing to the customer. When you go to DTC all those things become your responsibility and for an organization to move from wholesaler to retailer is to really significantly change its focus. Things they are paying attention to, things like the customer journey and churn, they are all part of becoming a good retailer. The pricing is becomes very important and where you apply your manpower, you don't -- it is not affiliate relations, not that you're stopping affiliate relations, but affiliate relations is a much smaller task now, compared to understanding the customer and serving them well. And that is a cultural change for AMC, as it will be for a lot of other companies.

Thomas Yeh: Okay. Thanks, Jim. Thanks for the question.

Patrick O'Connell: Thomas, on programming spend listen, I think it's important to contextualize our reduction in programming spend, DTC are historical levels. Between 2017 and 2019, AMC spent on average of about a billion dollars in cash and credit share. And during this period, we obviously had amazingly powerful programming that you all sort of know when low. It was really only during 2021 and 2022 where programming bumped up to the $1.35 billion level. And so we're just taking cash spending down to $1.1 billion this year. That's obviously a meaningful reduction of about $250 million roughly 20%. This still leaves us with plenty of firepower to continue our historical programming cadence. And I would say on that front they cover this full. We've got an amazing set of shows, I mentioned in my in the comments at the top of the call here. I think it's also worth noting that, the numbers I'm giving you obviously sort of cash numbers, right. This is distinct from programming amortization that runs through our P&L which obviously has a little bit of a lag to it versus cash given that it's attempting to match earned revenue with expenses. It's an equally valid metric. It just has to do with differences in timing. We are very much focused on cash here, as you've heard from me before. I think the punchline here is that, we're trying to strike the right balance between continued investment in the business and generating sufficient sort of profits and cash flow in the near-term. In terms of where the cuts are coming from, specifically, we took a harder look at all of our platforms and are trying to maintain as much programming efficiency as possible across all of them. But we took a look at shows this were -- which when we took a look at our covered. We have to kind of pull out things that weren't maybe as on brand or on strategy as some others, and this happened both across linear and streaming and across channels as well. So it was really, we looked across the entire portfolio. We also reduce, some of our, spend on the international side as well. In terms of skew linear versus streaming, I would say, we've given the fact that we've got some of these smaller streaming platforms that we can still invest capital into and grow nicely. We protected those to a degree. So we'd like those businesses will continue to invest there for growth, profitable growth. And we liked our programming level at AMC and AMC+. It's fair to say that maybe a slight skew towards ensuring that the monetization of the programming is front and center, and so maybe a tinge less exclusive programming on AMC+, as we recalibrate the business for profitability. But that being said, all we're trying to do is be as thoughtful as possible about the winning of the content and really kind of sweating the assets that we have. And that's kind of the game plan.

Thomas Yeh: It's very helpful. Thank you both.

Operator: Thank you. [Operator Instructions] And one moment for our next question. And our next question comes from a line of Robert Fishman with MoffettNathanson. Your line is open. Please go ahead.

Robert Fishman : Hi. Good morning. Jim, can you help us think about how you see the future of this company? There's obviously been a lot of press reports about possible M&A scenarios over the past couple of years. Do you prefer to see AMC Networks as a standalone entity in a few years or rather combined with another strategic partner? And I have a follow-up. Thank you

James Dolan : That -- well, look, I think that our first concern is always going to be creating value for our shareholders. So what form that comes in is, it could be stay the course, it could be an M&A a strategic transaction, that the very honestly we're much open to all those ideas. But right now, we have the company that we have and we're trying to guide it through as if it was -- it's going to remain a standalone that the -- but that doesn't mean that we won't consider M&A and see if we can improve the shareholder value that way. So I think that kind of answers it.

Robert Fishman : Yes. Thank you. And for Patrick, you guys talked about these recent MVPD renewals. I'm just wondering in the context of shifting to this retailer mentality, how should we think about the impact of these renewals on future affiliate fee revenue growth and given the accelerated level of cord cutting? Can we expect pricing to offset any of the cord cutting, or are there other revenues as part of the negotiations with these renewals that can offset traditional affiliate fee decline?

Patrick O'Connell: Thanks, Robert. Look, we have very long standing relationship with our affiliate partners. They've been profitable partnerships for both parties for decades now. As I mentioned earlier, we continue to invest heavily in premium content. We think we punch way above our weight, not just in terms of the relevance of the content itself, but frankly, the value for money that our content delivers to our distributors. So obviously, you've taken note of the fact that, we've had half a dozen renewals here. We feel really good about these relationships. These relationships continue to expand and grow as many of the larger distributors are now distributing our AMC+ apps, other apps on their platforms. We think this is a win, win for us, for them, for consumers. So, there's obviously additional advertising relationship's with some of the larger ones as well. And so we're leaning kind of heavily into that. So, we see these relationships as critically important, we continue to invest in content to support our viewers, and in the technology to support the delivery of our products, vis-à-vis these distributors, in whichever form or fashion consumers would like.

James Dolan: Let me add – let me just add into that, the MVPDs particularly the cable companies right, are also in obviously in a state of turmoil there. There is cord cutting, and maybe even more important than cord cutting is changing in viewership habits. These companies you know the likes of Comcast, Charter and Cox et cetera. They've been in this business a long time. And they are adept the – at creating products for their customers, et cetera. Our goal with them should be and is the – to work with them as they create, new platforms and new environments for their consumers. We anticipate that, particularly due to our long relationship, and our support to them that – that we will do those things together, that they – and that should accrue well to AMC as a company.

Robert Fishman: Great. Thank you very much both of you.

Operator: Thank you. [Operator Instructions] And our next question. One moment, please. Our next question is from Brett Feldman with Goldman Sachs. Your line is open. Please go ahead.

Brett Feldman: Yeah. Thanks for take the question. It was interesting to hear you talk about thinking more about being a retailer, if we think about retail business models. They tend to have higher cost structures and wholesale business models. But they also typically get higher pricing in a retail channel than they get in their wholesale channel. A question we get a lot from investors, they say it seemed like in your traditional linear wholesale model, you had a lot of pricing power. And so as you think about being more retail focus, with your content distribution in future. How are you thinking about the pricing power that you're going to have in that kind of model to make sure that to the extent your costs are higher your pricing is higher as well? Thank you.

James Dolan: Brett, I think that's part you know that, that is part of the overall strategy of the company. But the – what we're saying right now is that, those pricing models and those monetization models don't work. I mean, look essentially – you go back to two, two and a half years, there was a lot of optimism about streaming, and the thought process was at that time that a streaming customer was worth $400 or $500 per customer and that was based on the idea that there were a lot like cable customers, right, because they're going to be with you a long time. The fact is, is that – the model for the consumer is very different. When the cable business, right, if you wanted to – if you wanted to cancel your subscription, I mean, you really had to work at it. And the same thing honestly was true with signing up a lot of times, but now in the streaming model, it's one click of your mouse, that the -- so that's the that's the new environment and the pricing structures that you know -- that the industry has had, but I don't really reflect that reality. They don't reflect the reality that a customer can sign up, bins your product for a month and then review. And so what does that make that customer worth? Certainly not $500, that they -- so, if there needs to be an adjustment what AMC is doing is essentially maintaining its revenue streams, make stabilizing itself, not doing that kind of investment that values streaming customers of $500, but rather laying back, watching the marketplace, working with retailers like MVPDs, and waiting for our opportunity to take our great content and put it into a vehicle that truly monetizes it. That might take a little while.

Brett Feldman: Thank you.

Operator: Thank you. And one moment for our next question. Our next question comes from the line of Douglas Creutz with Cowen. Your line is open. Please go ahead.

Douglas Creutz: Thanks. This is a bit of a follow up to your last answer. You know, everybody decided to invest in streaming very heavily, others more so than you and it hasn't worked as you sort of identified your cutting costs and to reflect that, but obviously, if you can't grow revenue, then it's still going to be pressure on your business. So, do you think your ability to grow revenue is something that's completely in your hands or is it going to take some changes to the market structure to make it a more healthy environment? And if so, what are they?

James Dolan: Well, that's an interesting question. I mean, in some ways, I do think it's in our hands, right, because we have great content. We have a product that the customer wants, right. So from that point of view, you do get to sort of guide your destiny, but on the other side, I mean, I really think that what we're going to -- we have to look for is, is a sea change across the industry. That is something that AMC is not going to be at the forefront of because we're just playing, we're not big enough. We can't drive that kind of change. But the marketplace will evolve and what we need to do as a company is we need to be really in tune with it. We have to watch what the customers are doing, how they're behaving with their subscriptions, what kind of content they like, et cetera, but we, as I said, we're not going to lead the way. I think the rest of the industry, like the larger players in the industry will have a much greater impact than we do that they will continue to watch them, will continue to watch the customers will get much more adept at things like the research and understanding viewership patterns and all that, so we can keep customizing and making our products into a product that consumers will want and will watch the pricing. But I do think that pricing, right, is going to change. How it's going to change exactly? I take a pass on being that prescient, but I do think we're going to see change.

Douglas Creutz: Great. Thank you.

Operator: Thank you. One moment for our next question. Next question comes from the line of David Karnovsky with JPMorgan. Your line is open. Please go ahead.

David Karnovsky: Hi. Thank you. Just on the kind of overall shift towards driving more cash flow. I mean, wondering if there's been consideration towards changing the mix of content toward lower price programming like non-scripted still drives a large audience or doing less originals. And then Patrick wants you to just follow on your ad commentary. We've heard from some of your peers about a stabilizing or improving market. Want to see if there's an update or maybe you could say what's assumed in your guide for the year with advertising.

James Dolan: Well, on the content piece, basically what we did in the last few months is we took and hung on to some of our best programming, the content that performs really well. And I mean that's what we're good at. So no, I don't think that we're going to change that strategy. We're just going to try and keep it more efficient and work on the monetization models.

Patrick O'Connell: Yes. Hey, on the ad market, I don't have much incremental to add, other than what you've already heard from others, which is obviously, it’s got -- it was very, very weak in the fourth quarter. You saw that in our numbers. Over the last couple of weeks, we have seen the market start to sort of kind of firm-up a little bit. We're not prognosticating sort of into the future in terms of what the back half of this year looks like, et cetera. So implicit in our guidance is just continued status quo. So, not much to add there, but that's what's embedded in our guidance.

Operator: Thank you. [Operator instructions] Our next question comes from the line of John Hodulik with UBS. Your line is open. Please go ahead.

John Hodulik: Great. Thank you. Maybe just keeping with the DTC theme, Jim, you talked about your meeting a sea change for things to really improve on the -- from a streaming economic standpoint. I mean, I guess you guys have already adjusted, but just what's your view on the just consolidation of the industry from here, maybe involving AMC, maybe not? But just how do you see -- do you think we're at the cusp of in sort of another wave of consolidation sort of driven by what's happening in streaming, given the sort of changes in strategy we've seen from a number of the carriers? And then, is there any chance -- we often hear about sort of bundling streaming services, has there been any real initiative that you've seen that could sort of bring some of these services together outside of consolidation or anything else you could tell us about? What do you mean in terms of that sea change to change the economics of this business?

James Dolan: On consolidation, I think you have to watch the customer, the consumer. It would be difficult right at this moment to -- I don't think you'll see the industry pursue a strong consolidation movement, because the industry doesn't yet know how to monetize the content that the once they, you know, once they reorganize themselves, the et cetera and start to get, you know, a better handle on that and a better strategy with that then, you know, then you could see consolidation the -- because it'll be consolidation around building stronger products and stronger offerings to the customers and building business. Right now, I owe -- in my -- it's just my opinion, I don't see anybody who has the answer to this, yet. The -- and you know, without that answer, I don't get the rationale for pursuing a consolidation strategy.

Patrick O'Connell: And on the streaming bundles question, listen there's been obviously a lot of chatter recently in the market on this topic. And I think for good reason, you know, obviously, if done properly it's a win, win, win for programmers for distributors, and most importantly, for consumers. We like the idea of bundled streaming services. You know, we're -- you know, we see some movement towards that. Obviously, you saw in our release, we've had some interesting beta tests with Verizon around a bundle of, AMC+ with Netflix. We think that holds promise. We're holding multiple conversations with other potential aggregators in the market, along these same lines. We think you have to be successful there. Obviously, you need to have a high degree of complementarity, if that's the word. We really want to make sure that, as a programmer, you're adding something to the bundle. And we think in our case, given how well-defined our brands are, given a reputation for the premium programming that we have and given our attractive price point with -- we're very attractive partner in this regard. So the early tests have been positive and we're leaning in and we're – hope to report more in the coming quarters.

John Hodulik: Got it. Thanks, guys.

Operator: Thank you. And this does conclude today's question and answer session for today's conference. Ladies and gentlemen, this also does conclude today's conference. Thank you for participating you may all disconnect. Everyone have a great day.