Yahoo Finance AMC Networks Inc. (NASDAQ:AMCX) Q3 2023 Earnings Call Transcript
AMC Networks Inc. (NASDAQ:AMCX) Q3 2023 Earnings Call Transcript November 3, 2023
AMC Networks Inc. beats earnings expectations. Reported EPS is $1.44, expectations were $1.31.
Operator: Good day, and thank you for standing by. Welcome to the AMC Networks, Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Nicholas Seibert, Vice President of Corporate Development and Investor Relations. Sir, please go ahead.
Nick Seibert: Thank you. Good morning, and welcome to the AMC Networks third 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 Network's 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.
Kristin Dolan: Thanks, Nick, and good morning, everyone. I'd like to begin today by sharing some strategic and operational highlights from the quarter that underscore our continued focus on three key areas: programming, partnerships, and profitability, which we believe are critical to the effective management of this company during a period of great change in our industry. Let's start with partnerships. As we look at AMC Networks and the current landscape around content monetization and distribution, we're arguably in a moment when the value and impact of partners has never been more important. And this applies to us, to the companies we partner with and to consumers. Our industry is undergoing a period of experimentation and innovation as consumer behaviors around content consumption continues to evolve.
These changes are giving rise to new opportunities to collaborate with companies that have been long-standing partners and even those who until recently could have been viewed as competitors. Some of our partnerships are decades old, and some are very recent, but they are all critically important to our company in terms of what we can do and where we can go. For example, this fall, we partnered with Warner Bros. Discovery to put previous seasons of seven of our original series on the Max streaming service for two months as a promotional pop-up designed to raise the visibility of shows and promote sampling. This successful experiment just concluded, and it was affirming to see titles like A Discovery of Witches, Fear the Walking Dead, Dark Winds, and Anne Rice's Interview with the Vampire, consistently occupying multiple slots on Max's daily top 10 series list.
And as we anticipated, we saw viewership and acquisition spikes for several shows on AMC+ as a result of the increased exposure on that. Partnering with another programmer in this way was a first for us, and our ability as a pure-play programmer to forge this kind of arrangement showcases many of our key strengths. We are nimble, adaptable, affordable, and very much complementary to other offerings. Given these attributes and the success we saw through working with Max, I'd say it's likely we will find imaginative new ways to work with other programmers in the future. As far as established affiliate partners, we have long-standing and uniquely strong relationships that are rooted in our deliberate strategy to attend to and continually strengthen these partnerships, which again benefit from our unique characteristics, three of which include a small number of well-defined networks that are offered at a low wholesale rate; high-quality programming, which we continue to feature on basic cable even as others have moved their marquee scripted shows to premium or streaming platforms, chipping away at the value of the traditional cable bundle.
Also, our collaboration on innovative distribution models like AMC+, which was originally launched in partnership with Comcast and DISH Network and is now carried by all major cable providers in the U.S. I have spent most of my career working as a cable operator. So these affiliate relationships are particularly important and familiar to me. As such, I'm quite excited by what Comcast and Charter are doing with Xumo, and the potential of the country's two largest cable companies with tens of millions of customer relationships across video, broadband, and phone to deliver a unified content offering to a new generation of customers. It's also worth noting these companies have large customer service organizations that can pick up the phone, roll trucks, and solve problems, an increasingly novel concept today.
We are pleased that our linear networks, streaming services, and several of our FAST channels are featured in Xumo, and we're very much looking forward to being a part of the offering and seeing where this powerful combination goes from here Moving to programming. It was great to see that WGA strikes to come to an end last month, and we are hopeful SAG-AFTRA and the studios can also come together and reach an agreement soon. As we've mentioned on previous calls, we have a robust supply of completed shows to fill our schedule well into 2024. We have also secured interim agreements with SAG to complete production on second seasons of two of our marquee shows, Anne Rice's Interview with the Vampire and The Walking Dead: Daryl Dixon. Both of these successful series are now back in production in Europe.
Our content continues to attract large and engaged fan bases, and I'll mention just a few examples. Season 1 of The Walking Dead: Daryl Dixon premiered during the quarter became the most viewed premiere in the history of AMC+, in addition to delivering strong viewership on AMC linear. Season 2 of this series will mark the return of a fan-favorite Carol played by Melissa McBride. Early next year, we will premiere the highly anticipated third new series in this growing universe, The Walking Dead: The Ones Who Live, featuring Andy Lincoln and Danai Gurira as Rick and Michonne set in Philadelphia. We just completed our annual FearFest programming event, which this year became a 2-month celebration of horror that ran across all of our linear networks and streaming services.
This year's event was curated by our horror brand, Shudder, one of the strongest horror brands in the world, and Halloween was one of the biggest acquisition days in Shudder's history. The combination of FearFest and Shudder is a great example of the clear synergy between our targeted services and our linear networks, and demonstrates our ability to utilize our content across multiple platforms to serve our passionate fans the programming they love wherever and whenever they want it while maintaining the thoughtful curation that has become one of our core strengths in a crowded and confusing content environment. WE tv launched a great new series for the latter part called Toya & Reginae, which saw linear viewership almost double over the course of the first season in its key demo and continues to perform remarkably well on our All Black streaming service.
In terms of advertising, we continue to make great strides in expanding our revenue growth opportunities. During the quarter and ahead of schedule, we launched an ad-supported version of AMC+, which allows us to offer additional flexibility to subscribers and also offer advanced advertising across our entire distribution ecosystem. This is incredibly important as we continue to forge relationships with advertisers that span both linear and digital platforms with the same high level of relevance and targeting in both distribution channels. Having an ad-supported version of AMC+ will also make it much easier for us to participate in innovative bundles that we believe will increasingly form the future of content distribution in the streaming space.
Last month, we started offering our advertising clients the ability to buy programmatically on our linear networks, a major technological lead for the entire industry, and we already have several national brands across a wide range of categories taking advantage of this new capability. Programmatic buying offers enhanced targeting, greater efficiency, and has been the preferred way to transact on digital platforms for years, but until now has never been possible for national linear television commercials. Our rollout of programmatic on linear follows our introduction of addressable advertising across our networks a couple of years ago, another first for the industry that significantly increases the value and relevance of our linear ad inventory.
We remain laser-focused on managing our business responsibly with a focus on costs, efficiency, profitability, and moving quickly into areas where we see competitive advantages. At the same time, we continue to be nimble, opportunistic, and flexible in leveraging our core strengths and seizing every opportunity to put our content and brands everywhere viewers are. Now, I'd like to turn the call over to Patrick for a review of our financial results.
Patrick O'Connell: Thank you, Kristin. I'd like to start by building on what Kristin discussed regarding partnerships, then I'll review our financial results and outlook before we open it up for Q&A. Our relationships with our affiliates are important, long-standing and mutually beneficial. We feel strongly that our tight portfolio of five well-defined networks continues to offer a strong value proposition to distributors and is well-suited to maintain broad distribution in basic or expanded basic tiers going forward. Our network supported by strong programming and highly regarded brands are accretive to the overall value of the video bundle. Our best and highest-value programming has remained on linear. And as Kristin mentioned, we are one of the only remaining sources of high-quality scripted drama in the bundle.
That's reflective of our deliberate strategy to keep these affiliate relationships strong and hold our ground as the provider of a limited number of broadly appealing general entertainment brands that continue to bring value to our affiliates' video products. Our MVPD partners appreciate and are well aware of the value and performance our networks deliver. They understand that our content is compelling, our networks are high-performing, and that our wholesale rate is low. Our networks account for a small slice of total industry affiliate fees and deliver almost 2x that in audience share. That makes us a very efficient partner. Our partners also appreciate our ability to work together on new initiatives that drive real economic benefits for us and for them, such as selling our streaming services, distributing our FAST channels, collaborating on technical enhancements that improve the viewing experience, and increasing developments and value of television advertising.
We expect our relationships with our affiliates, both old and new, to remain fruitful and mutually beneficial for many years to come. On to our third quarter consolidated financial performance. Consolidated revenue decreased 7% from the prior year to $637 million. Consolidated adjusted operating income decreased 9% to $177 million, representing a margin of 28%, which reflects our continued focus on operating efficiency, and is consistent with the margin we delivered in the third quarter of last year. Adjusted earnings per share was $1.85. We delivered $99 million of free cash flow in the quarter, which sets us up nicely to achieve our previously stated free cash flow objectives for 2023. Notwithstanding that, we continue to operate in a difficult environment as we navigate industry-wide challenges, impacting both the ad market and traditional pay TV ecosystem.
During this period of market evolution, driven by shifting consumer preferences, we have been pleased with our ability to continue to manage expenses while remaining flexible and collaborative as the industry works through this period of transition. I'll quickly touch on our segment financials. Domestic operations revenues decreased 8% to $541 million for the third quarter. This was driven by an 18% decrease in advertising revenues and a 13% decrease in affiliate revenues, partly offset by streaming and licensing revenue growth of 9% and 7%, respectively. Advertising revenues in the third quarter continues to be impacted by lower linear ratings, a difficult ad environment, and fewer episodes of original programming, which is the anticipated result of the rightsizing we have done to date in terms of programming investment.
Digital growth remains a partial offset to these headwinds. That said, we continue to experience a similar advertising environment as our peers as scatter and direct response remain challenging given the economic climate as our advertising partners remain conservative with their spending. Affiliate revenue performance in the quarter was driven by continued declines in the basic subscriber universe, and the 3% impact from the strategic nonrenewal of Fubo. We ended the quarter with 11.1 million streaming subscribers, up from 10.7 million in the prior year period and 11 million in the second quarter. We are pleased that our focus on higher-quality subscribers is working despite significantly reduced promotional activity. In the third quarter, we grew subscribers 4% year-over-year and 1% sequentially.
Domestic operations adjusted operating income decreased 10% to $185 million, with a margin of 34%. The decrease in AOI was largely attributable to lower revenues and was partially offset by lower SG&A expense, the result of continued cost controls across the company. Looking at our International and Other segment, for the third quarter, revenue and adjusted operating income each decreased 2% to $98 million and $13 million, respectively. Moving to the balance sheet. We ended the third quarter with net debt and finance leases of approximately $1.9 billion, and a consolidated net leverage ratio of 2.7x. We have substantial financial flexibility and total liquidity in excess of $1.35 billion, including $955 million of cash in the balance sheet, and our undrawn $400 million revolving credit facility.
As noted in our earnings release this morning, we are redeeming our 2024 Senior Notes at par with formal notice to holders going out today. Regarding capital allocation, our philosophy remains disciplined and opportunistic. First, we look to support the business with a particular focus, creating compelling content that resonates with our audience, while balancing overall profitability and cash flow generation. Second, we remain focused on the balance sheet and addressing upcoming maturities. Lastly, strategic M&A and returning capital to shareholders remain further down our priority list. On to our outlook for the year. In terms of our revenue outlook, given the industry pressures I discussed earlier in my remarks, we are now expecting consolidated net revenue to be closer to $2.7 billion for the full year 2023, down from our prior expectation of approximately $2.8 billion.
Our decision to reduce our full year revenue outlook reflects softness we are seeing in content licensing revenues as well as the continuation of a difficult advertising environment. Despite these headwinds, we are reiterating our 2023 adjusted operating income outlook and expect AOI to be in the range of $650 million to $675 million, reflecting continued and better than previously anticipated cost discipline. We are also reiterating our expectation of 2023 free cash flow in the range of $120 million to $140 million. Note that our free cash flow guidance contemplates $115 million of one-time cash restructuring payments. Excluding these restructuring payments, our free cash flow would be in the range of $235 million to $255 million. We also continue to expect to grow free cash flow going forward.
Recall that this year, our free cash flow will reflect the $50 million tailwind from the Hulu transaction we discussed last quarter. So to be clear, our expectation of free cash flow growth going forward is growth off of the base range of $185 million to $205 million. We continue to expect cash content investment to be approximately $1.1 billion for 2023, and expect cash content investment to be in the area of $1 billion thereafter. Before I close, I would like to again note that our financial approach is rooted in three foundational principles to ensure maximum flexibility going forward. The first is ensuring that we maximize the monetization of our content across all available avenues and platforms while preserving brand affinity. Kristin highlighted some of the ways we have recently done this, including our pop-up with Max and the launch of an ad-supported version of AMC+.
The second is operating as efficiently as possible. This is a must for all content companies, and we remain focused on managing a lean and adaptable business on this front. We are pleased with our performance since we began implementing changes around this time last year. The third is being highly disciplined when it comes to capital allocation, including remaining opportunistic and flexible as we continue to maintain our healthy balance sheet. This includes being responsible with our content investments and reducing our quantum of gross debt, which we are doing today through the notice of redemption on our 2024 Senior Notes. We live and breathe these financial principles throughout the organization, which allows us to manage this business profitably and sustainably while retaining flexibility to move quickly as we leverage our core strengths and seize new opportunities.
Operator, please open the line for questions.
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