AMC Global Media Inc. (AMCX) Earnings Call Transcript & Summary

All right. Let's get started. A quick note on disclosures. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website. I'd like to welcome Chris Spade, the COO and CFO for AMC Networks. Chris, thanks really for joining us in person.

Thank you, Thomas. Thanks for having me.

So it's been a little over a year since you first joined AMC Networks as CFO and your role has recently expanded now to COO. With AMC now leaning into its differentiated targeted streaming approach, can you start off with your top priorities this year? And any opportunities on the organizational structure that you see as opportunities to best align with the growth initiatives that you have looking forward?

Sure. Sure. It's a great question. And again, thanks for having me here. Actually, the last time I was here was 2 years ago when we were just getting ready to lockdown everything for COVID. So it's nice to see that we're turning the corner and we're all able to be here in person. And I appreciate the opportunity to talk about the opportunities in front of us for AMC Networks. So relative to our organizational opportunities, we've done a lot of work the past year looking at our company and streamlining it to centralize many of our areas, focusing on the monetization engine that we have in place to optimize our linear business and also truly grow streaming to where it's our biggest revenue business in 2025. And what that means is really enabling a pivot to go to more of a tech-driven company in terms of looking at our tech stack, being able to have it power all our different targeted services consistently using the same tech stack and then also our content monetization. From our content monetization standpoint, we can invest in content that not only delivers and drives our streaming growth but also optimizes linear.

As we think about that streaming opportunity, you've recently reiterated the 20 million to 25 million streaming subscriber number by year-end 2025 across your suite of services. How should we think about the differences in global penetration opportunity, differences in ARPU, between AMC Plus and some of the more genre tailored services like Shudder or Acorn? Maybe you can talk a little bit about the market opportunity across each of those services and how you kind of put together that 20 million to 25 million number?

Right. In a lot of ways, with AMC Plus, we're just getting started because AMC Plus was launched in October of 2020. So we're really only into its second full year of business. And so from that standpoint, when you even look at what we accomplished in 2021, where we set out to end the year at 9 million streaming subscribers, we delivered our guidance and then we also, relative to our guidance for our top line and AOI, exceeded our guidance and that really has established a good foundation for further growth for AMC Plus. But as we look into the future years, we have more global growth in front of us and we're looking at it country by country and service by service, which includes AMC Plus in our portfolio of services, Acorn, Sundance, IFC Films Unlimited, Shudder, ALLBLK and then most recently, HIDIVE anime service.

Yes. On that international market expansion opportunity, I would love to hear a little bit more about your approach. I think that it seems like it's more tailored compared to the full global rollout at some of your general entertainment peers. How do you assess the attractiveness of a market? You mentioned India, I think, on the last earnings call. How should we think about incremental investments that's needed to support some of these market launches and where you see the most attractive opportunity?

It's a great question. When we look at the markets that we want to go into, we're very laser-focused on finding the right opportunities and match against our content curation. So for AMC Plus and all our targeted services, we really look market by market where we want to go. We start with a partner distribution. And from there, we can then also establish and distribute our direct-to-consumer offerings. So we're already for AMC Plus in Canada and Australia, and we're looking to be in India, New Zealand, parts of Europe in '22 into 2023. And we also are not looking to just take our services and then globalize them, we look at each market and because we have AMC Networks International businesses, which are boots on the ground, largely linear businesses right now, but they've proven to be really strong assets for us as we're looking to lean more into streaming globally because we already, in some cases, in Latin America and the European areas have local content in place. We have teams in place that have strong partnerships with the local players. And so it can act as further monetization for what we have already. And then also, we will selectively look to invest in local content and look at how our services are set up in a way that we can tailor each offering to each country in a way that makes sense for those fans.

Great. I do want to dig into that investment portion of the debate. I think I get the most questions around your investment needs and how you envision the programming kind of cadence and volume evolving over time across your services. I think we're currently in a year where you have your strongest slate of original programming ever. But you also did recently spoke about the ability to drive long-term company margins back towards the mid to high 20% range. Can you just help us frame the ramp on programming spend and explain to us what do you see as the right cadence of release both on the catalog side as well as on the new original side that might be supporting your services and how we should think about that on a multiyear basis?

It's the question at the moment in terms of how high is high in the content investment space across all the streaming services. But for us, our strategy truly is different. We don't -- we're not on a path where we want to, every year, just keep spending and spending and spending on content. So for 2022, we have our best content slate ever across all our services. And we really like the cadence of the volume in 2022. With streaming services, it's really important that you have a regular refresh rate. And what that means is you want to really offer new original content every 3 to 5 weeks. So with the volume of shows that we have in 2022, we have that cadence and we like the volume play that's in place there. So after '22, you're not really going to see a big content ramp for us. We feel that, that's the sweet spot of where we need to be. The other dynamic that's happening in 2022 is we have 3 season finales, which the season finale times tend to be more expensive episodic cost. So we will use those shows to launch our new shows. So we'll launch off the back of our known and celebrated shows that everyone is highly aware of. But as we look to the future, some of those costs will go away because the finalities aren't there anymore. And then we can either drop that to the bottom line or we can repurpose it in a way that we can do other shows.

Right.

And so when you think what that means relative to the future is the level of investment that we're spending. We're at a place that 2022 is still an investment year for us. As we pivot ahead to the future, that level of spending is where we need to be. Our revenue mix will continue to get reconstituted and streaming revenue from what we can see will be our biggest revenue stream by 2025. And so that's how we see the power of being able to be at 20 -- in the mid- to high 20% margin. And again, it goes back to our content investment. So at our purest sense, we're a content distributor and we have a heavy and important content curation process. That's one of our strengths. And so we look to make our investment in a way that we can monetize against optimizing our linear platforms and also growing significantly our streaming subscribers and streaming revenue.

Yes. On the content side, I mean, as we enter into a phase where the company is operating with one of the strongest original programming lineup this year, how do you plan on using this as an opportunity to attract and retain subscribers? Is there a lot of blocking and tackling and marketing approach? Does that change? How should we think about the opportunity there and how you tackle acquiring the subscribers?

Yes. Well, we're very excited because today, we launched that we have the Isle of the Dead coming out. So that's a perfect example of how we're looking to extend our Walking Dead franchise. And we have a lot of a fan base that is there for the Walking Dead content. And so a lot of the question we also get asked is what happens after the flagship Walking Dead does have its finality. So this is another example of an extension with Isle of the Dead. 2 key characters, Maggie and Negan that will be a strong performer in 2023. And from the standpoint of other franchise extensions, we're also looking where we can extend other content. The other thing is we will launch new shows. So from the standpoint, we have the Anne Rice IP that we've recently acquired. So we have Interview with the Vampire and Mayfair, which is coming out long term. Other well-known love stories that will really resonate with our fans.

Does the competitive landscape change your view on how you surface new content versus prior years? Whether it's in how you approach marketing or even what you decide to greenlight? And franchise longevity is obviously something that you care a lot about in terms of maintaining the Walking Dead universe. How should we think about thoughtful extensions and maintaining the consumer interest in the franchises that you're developing?

Sure. I mean from a performance marketing standpoint, we really -- it's a fluid process and we look at our content approach, also how long the show has been out there. If it's a newer show, you need more promotion. If it's a well-known show, more performance marketing. So we're constantly looking and iterating at what we need to do there. From the standpoint of our own investments that we're making, we really look at the strategy as investing in a few key things to drive the future. One is that it's really important is our priority. We invest in our talent across our company. It's our people that make everything happen. 2, is our content and marketing, which is the lifeblood of what we're doing. And so that's where the curation that you're talking about comes in and is very important. And it's not really about the competitive dynamics there and the development pipeline, what we see is that we have relationships built and we have certain development pipelines and scripts are coming in, talent relationships, et cetera, that feed the pipeline. So from that standpoint, we can curate our content and have it work in the best way it can for us. Really for us, it's about coming up now with content that super-serves our audiences that resonates and plays well across linear and streaming dynamics. And then even in the franchise space, we already know that we have a certain fan base that's there for that type of content, but we also really want to look for new fans and add to the audience. So it's also not just about franchise expansion, but we do that and we do it well and then look for the new content that maybe will bring in new subscribers.

Makes sense. Many of your targeted streaming services do have distinct brands and programming strategies. Can you speak about some of the opportunities to drive greater operating leverage across your services, either with sharing technology cost or how you approach subscriber acquisition? I think that there's been an increased focus certainly on streaming profitability and what the streaming profit pools look like over a longer period of time across the industry as the competitive spending continue. So maybe talk a little bit about the opportunity for scale benefits, even if you're kind of operating from a relatively smaller size?

Yes. I think it's where we're coming from a position of strength because the -- as I said, AMC Plus was more recently launched. But prior to that, our other targeted services were launched several years before that. So we already had a tech stack from those services that worked well. So we were able to launch AMC Plus off the back of that tech stack. And then now we are going through a process that we're pretty much done with having the whole tech stack be consistent. So then you look at our most recent acquisition, which is HIDIVE through the purchase of Sentai, our latest streaming service, which is anime-focused, we're able to bring that in and add it and make it consistent to our tech stack to really have the power of efficiency under the hood of what's driving everything. And then we can also pretty quickly pivot to where we're looking at our tech road map and we can prioritize in certain features and functionality, we don't then have to go and implement it in many different places. We can just do it across the board.

Yes. I wanted to dig into that HIDIVE and Sentai acquisition. It taps into a, obviously, it's dedicated anime fan-base that seems very consistent with your approach to developing targeted audiences around a particular genre. Can you help us think about the goals around integration? And in particular, what AMC will be able to do differently that HIDIVE might not have been able to do on a stand-alone basis?

We're very pleased with the addition of HIDIVE. It was a great tuck-in for us in terms of looking at adding another vertical to our space. And when we acquired Sentai and started to look at HIDIVE as a streaming service, we realized that what Sentai was doing was really mainly focusing on the licensing aspect of the business. So as that IP that's licensed starts to expire, we're going to not renew it. And that IP will come back to HIDIVE. So we feel that we'll be able to meaningfully grow the subscriber base there. We're also looking to add to the IP there, and we're developing and investing in new anime content. And there's also many opportunities with merchandising and conventions in that space. The other thing that's interesting is it's a similar demo and audience in some ways to our AMC Plus audience. So there may be ways to make the 2 align more as well. But right now, they're 2 different offerings.

Okay. Yes, that makes a lot of sense. Maybe shifting a little bit towards the linear piece of your business, which continues to be a strong free cash flow generator and a meaningful portion of your revenues. I mean you recently reached a new distribution agreement with Comcast, which reflects a continued partnership, I think, on both the traditional carriage component as well as supporting your streaming distribution strategy. How do you think about the value of linear networks as the first window versus the second window for your content? Any lessons from kind of bringing content into the linear ecosystem from streaming, like Discovery of Witches and how you think about approaching that over a longer period of time?

Well, again, it goes back to our whole content monetization approach. So we do have a number of shows that play well in both the linear and the streaming space. And right now, with our windowing strategy, if we look at what we did with the Walking Dead most recent season, we launched the Walking Dead day and date on both linear and streaming and then that night, if you wanted to see the next episode, go to AMC Plus and it's there. So from the standpoint of how we work with our affiliate partnerships, Comcast being one of them, Comcast actually helped us launch AMC Plus. So it is important that we have the power of the whole ecosystem working for us. Linear serves to drive to streaming and then streaming as it gets bigger and bigger and bigger, our revenue becomes reconstituted. But we're -- we have great affiliate harmony with our distributors because the streaming product offering is complementary to the linear offering. And so there's a better value proposition there. And so the recent Comcast deal is an example, it was a win-win for both of us and created even more value for both of us.

Yes, makes sense. You've also really been a leading innovator on the addressable advertising side for Linear TV. Can you talk about the progress you've been making there and how investors should think about this opportunity? What it could mean for Linear ad trends? I know you talked about stable ad trends for this year. Is there a view that the addressable component of it is driving some benefit?

Yes. I'm proud to say that we're a leader in the addressable ad space. We have a very entrepreneurial spirit in our commercial revenue team and frankly, within the company. And so we've been pioneering in the addressable ad space and we were the first to come out with the inaugural addressable ad campaign for Volkswagen at the end of 2020. Most recently, we have announced that in 2022, we're going to for each original hour that we have for AMC and WE tv, offer 3 national addressable ad spots. And I'm pleased to say that Amazon has signed on as our partner to take advantage of that capability. And that means that it will be available in Comcast, Charter, Cox, and Vizio footprints and will reach over 35 million homes. In addition, we're not just innovating in the national addressable space, but also in programmatic linear where we've now developed in-house technology in conjunction with Project OAR, which is an initiative led by Vizio that we've brought digital buyers to linear addressable. So we're expanding our buyer base there. We're also through the AVOD FAST channel space, adding more inventory to sell. So it's about maximizing our yield and adding inventory in a way that really creates new opportunity for us.

Yes. On that AVOD FAST channel opportunity, it does seem like that has been driving incremental opportunity for advertising monetization. How should we think about the right balance between supply and catalog content to these channels versus building maybe the exclusive [ valley ] on your own streaming services? How do we think about that balance?

Well, I think it goes back to our windowing strategy. So AVOD FAST, our strategy there is that we have our deeper library product that's non-exclusive there. So it's, in a lot of cases, free offerings that we monetize in a way that delivers that revenue that otherwise would not maybe be there. And it is all about our windowing strategy in the sense that we can put our library product on there in a way that maximizes our ad revenue, maybe serves as a barker channel, in some cases, for some of our franchise content. And then on our streaming services, our strategy there is that we really look to the content curation for the new original series with a refresh rate of about 3 to 5 weeks.

On the traditional content licensing as you think about that windowing and moving content around, you flagged that there will be continued pressure as you shift your focus increasingly towards prioritizing and monetizing your streaming initiatives. How should we think about the appetite for non-exclusive windows and maybe third-party syndication still making sense in some scenario?

Yes. For our licensing revenue guide that we recently just put out, we did note that in 2022, our licensing revenue will grow a little bit just because of the licensing deals that have been there in place for a while. As we grow out of that, we do expect that licensing revenue will decline over time. But because of the way we do our licensing deal, we don't have any big long -- output deals with big partners that all of a sudden, a lot of revenue expires. It's more on a show-by-show basis that the licensing deals are put in place. So over the next few years, depending on what the content is and the original series are, we can decide to either license it or not. For a big original content shows that we're getting all the rights for now, Interview with the Vampire is a good idea. We're not going to be out there licensing it because we will use it as an exclusive draw to our streaming services. Having said that, if there are markets that we're not in or if there's a show specifically that we feel that maybe we have enough volume and we can take advantage of a licensing opportunity and it won't negatively impact our streaming services, then we will certainly move ahead to maximize and monetize our content value.

Yes. On that content ownership point, it remains a pretty attractive component of the story, I think given the demand environment and AMC Studios has clearly been ramping its production slate to support streaming. Does the appetite to produce versus acquire or license new content differ really based on your streaming services? And how should we think about the evolution of that ownership component of creating and vertically integrating and being able to own that asset over time and monetize it through streaming?

It's a great question. I mean clearly, any place where we can own a hit show and own all the rights, we would want to do that. But because of the way the content curation pipeline works and the talent relationships and the way the projects come in, it's important to have a really strong development pipeline. So we're not just looking at all shows that we could own all rights to. If we feel and believe in a show, we're going to partner with somebody and make the show, it's a good fit. But wherever we can, ideally, we do want to own all the rights and the exclusive use on the streaming services ultimately will be what will really drive our future business. And so that's where we do own all those rights. We don't want to then take it and license it and hurt our prospects of the streaming revenue.

Makes sense. I wanted to touch on the international segment briefly. That's really outperformed expectations and it delivered really solid profitability in 2021. Can you talk about the international network footprint and how it evolves as your streaming goals expand more internationally? And how should we think about that dynamic over time outside of the U.S?

The international businesses that we have through AMC Networks International, largely across Europe and Latin America right now are mainly linear businesses, but they've actually proven to be great boots on the ground where we have local relationships. We've developed local content. We have IP that we can use for streaming in certain cases. And we've learned a lot from just being present in those countries that we're in. So it's been a great additional value-add for us to have launch pads and provide further insight as we look to launch globally. So that's really where the countries that we're launching in. We recently launched in Canada and Australia, India and New Zealand, Spain and parts of Europe will come in the end of '22 into '23. And so 2022 is really a strong investment year for us. But it's a combination of learning from the intelligence we already have with our international businesses, learning from our partners that already have international distribution. And then once we do that, we then selectively can look at where we want to also have our direct-to-consumer services in terms of our distribution platform.

Before we wrap on time, if there are any questions in the audience, feel free to raise your hand and we can bring a microphone in. But in the meantime, I wanted to talk about Levity and how it transformed into 25/7 Media. The pandemic caused disruptions to production as well as previously owned comedy venues, I think at Levity were sold off. How should we think about the role of 25/7 Media today in driving the opportunity ahead for AMC?

Well, 25/7 Media is just really another offshoot of our production capability. So we have certain production elements there that we deliver. A lot of reality shows that are successful that are put in place. And so from that standpoint, it's right in our sweet spot of being a studio. And from that standpoint, we'll look to deliver more value there.

Great. Any questions?

Chris, this is like a long tail of streaming services. We had Roku present this morning and there was like 9,000 apps on Roku. I'm just wondering if you see rolling up streaming services, maybe not as a core part of your strategy, but if you can build expertise there in terms of targeting different niches through acquisitions? Is that something you guys think is interesting long term?

Well, certainly, what we've learned from bringing a few different streaming verticals together and how we build the tech stack, we certainly have strength there. So it is an interesting opportunity for us. But right now, based on what we want to do with the streaming opportunities in front of us with AMC Plus, how we're building out our road map, that's really our priority. But what I can tell you is I've been with the company a little over a year now. And when I first joined, one of the things we did was we centralized all of our tech operations, streaming tech, in-house tech, everything so that we truly could see all in one place, the power of our tech investment and then prioritize and iterate it as we need to, based on opportunities in front of us. And because our tech is not siloed, it's a game changer in a lot of ways. And so we're excited about that. And it's also not just about the streaming, but it's one of the things that led us to be a leader in the addressable ad space that we've looked at all of our capabilities altogether and then have been really able to, as a team, prioritize and really lean into where we see the best return on investment.

Maybe just squeeze one last one in. AMC as a whole company remains a very healthy free cash flow generative business. As we think about the investment phase, as you mentioned, reaching some more stability beyond this year, what are your cash flow priorities and any attractive opportunities that you see in terms of capital allocation?

Sure. It's a great question. I mean, relative to the guide we have for the AOI back to what we talked about the content investment. So our content investment, we think, will be about the same as it is in '22 going forward. And then that's really where the power of our free cash flow will start to grow back because in 2022, our guide is $100 million of free cash flow. As we reconstitute our revenue mix on the top line and our investment stays roughly the same and maybe even optimize a little further because we don't have season finales, we'll be able to have more cash drop to the bottom line. And from that standpoint, we really see it getting back to levels that were pre-COVID for us and that's why we feel confident in the mid-20% to high 20% margin. The other thing I just can't emphasize enough is that we're different in the sense that we are targeted and that we're not trying to be everything to everybody. We're trying to be everything to someone. So from the standpoint of what we're trying to do, it sometimes feels like we get painted with a broad brush of we're just in the category and we are trying to be everything to everybody. And that's not our game plan. And I can't stress that enough that we play around the edges and we really work hard to super serve our fans to have the best quality subscriber that we can have with a strong eye toward lifetime value revenue of a subscriber and profitability.

Great. Well, thank you so much for your time. Appreciate it.

Thank you. Pleasure.