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

Okay. So up now, we have AMC Networks and from the company, we're happy to have Patrick O’Connell, the company's Chief Financial Officer; and Nick Seibert of Corporate Development and Investor Relations. So thanks again for guys making the trip.

And with that, we're just going to do a little Q&A session, and I'll just get right into it. So I think it's safe to assume that most people in this room probably know about your assets, your companies, your channels, but maybe just go over what channels, what assets you have, how they generate revenue and just maybe a big picture recap on maybe some tailwinds and headwinds that you have in your business?

Sure. Thanks, Mike. I think the best way to think about AMC Networks is, fundamentally, we are a world-class content production and distribution business. We've been responsible for some of the greatest TV ever made, and we're still making it today, and we'll continue to make it sort of long into the future here. I think the best way to understand our business is really sort of 4 pieces. #1, we have a studio. #2, we've got a domestic networks business. #3, we've got a streaming business. #4, we have an international business. I'll go through each at a high level, and we'll talk about the revenue generation capabilities of the business and sort of kind of the trends that we're seeing. The studio was really the crown jewel of this company. We've produced, like I said, some of the best TV ever made. This is really the engine that drives our production. This studio does a lot of the production we sort of eat our own cooking, and so we program our own networks. We also do third-party production for others. So that's a key asset of the business. Next is the domestic networks. Obviously, you're familiar with AMC kind of highly curated scripted content for adults. We also own in conjunction with the BBC America, which is a joint venture there. WE, which is the channel for African-Americans and a couple of other kind of domestic channels moving quickly on the streaming side. We have AMC+, which is kind of a complementary streaming business and then a handful of other, what we call sort of targeted streaming services. So these are services targeted at a specific audience with sort of a high degree of affinity for certain types of content. So think of a horror fan, subscribing to Shudder; or an anime fans subscribing to HIDIVE; or a fan of kind of British mysteries and dramas, subscribing to Acorn, our sort of targeted streaming services. And then lastly, we have an international channels business that exists. We have a Latin American business and then 3 regions within Europe. And those are sort of think of those as kind of legacy channels. The content that we produce, some of it ourselves, some of it's in-licensed. So those are the kind of 4 buckets of the business. At a high level, the way to think about the monetization of this business is we have affiliate revenue. These are long term, call it, 3-year deals with various distributors, could be cable MSOs, could be kind of wireless companies, et cetera. So these are legacy relationships. We've had these contracts in place for at times kind of decades and we can get into sort of the details as we have to the conversation here. Second is ad revenue. So this is sort of the front end of the monetization engine for the content we exhibit on our networks. #3, is streaming revenue. So that's about a $0.5 billion business for us today out of our roughly $3 billion in revenue. So that's been growing nicely. We can talk about that further. And then lastly, licensing, which again is a business that produces sort of near-term revenue and cash flow out of the content that we've produced. And we're in the midst of obviously a sea change in sort of in media right here. And so we are -- like every other media company in the process of shifting gears, slowing the growth of streaming, frankly, deliberately and pulling forward our monetization efforts of our content, and we can get into that sort of further as well.

So well, everybody's linear business is declining. And I think everyone's streaming business is growing, some faster than others, profitability what we'll get to. And then, of course, advertising, but in advertising is dependent on the macro and what are timing of your content, I guess, right? Maybe putting advertising aside, the linear and the streaming kind the business, are those offsetting each other? Are you net-net growing? And I guess, are you indifferent? Or do you prefer streaming revenue over linear, et cetera? How do you think about that?

So I think what media is exhibiting right now is sort of a back to basics mentality. So it's really about old school kind of slicing up the rights that you have and being as efficient as you can around monetization. The media business hasn't had a revenue growth problem. It really had an earnings growth problem. And so what we're primarily focused on is growing cash flow year-over-year. I think over time -- listen, and historically, we have had subscription revenues grow. And so we define subscription revenue as affiliate revenue and streaming revenue. So streaming has sort of more than offset the decline at least on the affiliate side of the business. But I think if you take a step back and from a macro perspective, it's very clear that the future is streaming from a consumption basis -- sorry, the future of entertainment from a consumption basis is going to be on the streaming side, but the monetization is currently still stuck on the linear side. And so we're focused on calibrating the level of investment that goes into those businesses such that we can grow cash flow over time. And so we're less focused on growing subscribers per se and frankly, slightly less focused than on growing revenue, really focused on growing cash flow, which we think we have clear line of sight to.

And you might not like the next question because it's revenue sub-related. But I'm just curious here, do you -- and I don't know if you think about it this way, but one linear sub equates or one OTT sub equates to a linear from a cash flow perspective, what was that?

Yes. So the economics of linear and streaming are quite different. But if you want to try to make them sort of examine them side by side. We look at the economics of a subscriber in terms of one, what is the rate that I'm getting, right? So what is the revenue generation there? Obviously, on the linear side, you're getting a lower wholesale rate, but that comes with benefits. That comes with the benefit of the Comcasts and distributors of the world are servicing that subscriber on that having to sort of pay to acquire that subscriber. So those economics look very good. If you look at it through to the lens of our streaming business, which is how much your LTV to CAC kind of ratios, right? So we expect that business to have a long and glorious and profitable sort of decline over the next handful of years and maybe even decades. So we really like that business. The economics on the streaming side, I would point at sort of 3 different types of streaming subscribers we have. So on one hand -- on one end of the spectrum, we've got what I call sort of pure retail which means I own the customer relationship. I own their credit card, they pay me directly. Those are really valuable because they allow me to get information and data so I can program my networks more efficiently. I can see what they watch, when they watch, what they like, what they don't like, et cetera. So those are valuable, but they're expensive to acquire and then more expensive to maintain, but there's still value in having them. The next bucket of streaming subscribers I have are what I call is our partner subscriber. So I distribute through Apple or Amazon or other platforms. I pay them for distribution, but it's at a higher retail rate, right? So my rack rate for AMC+ we're talking about here is kind of [ $899 ]. They'll take a distribution fee. That's worth it to me because it's still highly accretive from a price standpoint versus the wholesale rates I'm getting on the linear side. And then we have what sort of an emerging group of what I call sort of bundled subscribers. We talked about this a little bit on our earnings call. So these are kind of subscribers that come to us via potential bundle of streaming services or a bundle of my streaming service plus a communication service. So it could be -- the example we used on the earnings call was Verizon choosing to package us with a wireless product or a broadband product. So as a consumer, you come to Verizon, you take X, Y, Z product of Verizon, you take AMCs for 6, 12 months, and you get Netflix for free. So that bundled service, that's an attractive proposition to me. It allows me to get a lot of good distribution into the market. Verizon gets to earn a margin on their distribution. The consumer gets something that makes sense for them, which is maybe less confusion around where to watch the show they want to watch because that's been the pain point for consumers on the streaming side is they don't know where to watch the show they want to watch. They want to have sort of one place to go to watch content, and that helps solve their problems, that help solve the distributors' problems, and it's a good business for me as well. So there's 3 different buckets of streaming subs.

And maybe the ad market, and actually, I forgot to look this up before [indiscernible], but what your ad revenues are a percentage of total, roughly, what is that number, give or take?

Call it like 1/3 of our revenues-ish, right. So it's a meaningful piece of our revenue.

Can you talk about maybe the ad market in general right now? I guess it's not feeling good, but it seems to be a recurring theme we are hearing at this conference.

It's better than it was in Q4. So Q4 was a bit choppy for sure. It was -- we were no different than anyone else. National was weak, scatter was weak. That didn't feel great. Q1, I think the market, the tone in the market has improved. We are seeing healthier scatter. We are seeing fewer cancellations of sort of previously committed spend. So it -- the tone is better. It's not sort of materially better, but it feels like we're on stronger footing.

Yes. And can you actually talk about what content rights you actually own? And how have you been monetizing that?

So important to understand that at our core, we are a content production business. Going into 2023, we're going to own on AMC, the majority of our schedule. So we -- so for those shows, most of those shows, we're going to own worldwide rights. I have ownership economics of those shows. I can choose or the company can choose to sort of toggle between owned content, where I monetize all of it myself versus licensing content, and which could come at a cheaper cost. In terms of what else we own besides the programs that everyone is, I'm sure, very familiar with, The Walking Dead, Anne Rice, we're kind of leaning into heavily here going forward. But we've got shows like Rectify, Dark Winds, the Son, Into the Badlands. So like hundreds and hundreds of shows that are sort of serialized that are in my library that I can monetize or mine for additional kind of IP spin-offs, et cetera.

And I don't know if you ever disclosed this or if you do the -- have you ever had a third party come in and try and value your library for you?

So I think it's -- I think about it sort of -- in sort of 3 ways. One, sort of from an accounting lens, you can look at sort of the value of the content we have on our balance sheet. So on a net basis, call it 2-ish kind of billion dollars. That's just capital the company has deployed, content that's been developed, net of the amortization that's already been taken. So that's sort of a starting point from an accounting perspective. I think that undervalues the concept, but you could start there. Then I'd move to sort of more of an economic perspective of the value of that content, which is that content produces. Obviously, I monetize it sort of with my owned and operated platforms, linear streaming. But then I license it to other folks. So licensing revenue for us has been a $0.5 billion business for the last handful of years. And so there's that recurring revenue stream off of the continuous production, which has been about $1 billion a year, plus or minus, over the last handful of years. So you've got that stream of revenue, so you can value that at sort of whatever multiple you think is appropriate. And then I think beyond that, there is real strategic value to the studio that we have. This is one of 10 or a dozen studios in the world that can reach out and touch any actor, writer, director, et cetera, have just a remarkable track record of curating amazing content. And so that has real strategic -- that has value to us sort of from an ongoing economic perspective, but it has -- but tends to strategic value to others in the future. It could be other studios. It could be another media company, it could be a technology company. It could be a broadcast company. And AMC happens to be, and Jim Dolan, our Chairman, alluded to this on our most recent earnings call. We happen to be sort of small and kind of bite-size enough that could have real strategic kind of value and be potentially actionable for folks going forward here if we do see another wave of consolidation.

And I wanted to talk about -- because you mentioned at your content licensing line item. You said about $0.5 billion. And so what's in there? And maybe can you point out some of the bigger items that you saw in this past, the fourth quarter of '22?

So that is, for the most part, what it says, content licensing revenue. There's also some third-party production revenue in there. So in the fourth quarter, we pointed out that we had $126 million of third-party production revenue that came from a single show that we did for Apple. The show was called Wall. So that $126 million was in the content licensing revenue for 2022. It will be less than half of that in '23. So there can be some noise as content licensing is notoriously kind of episodic. And so it depends on the timing of deliveries, obviously. So most of that revenue is licensing revenue for content I produce for my own platforms. Then selling on in a second window or international rights or some other slice of rights that I'm not monetizing myself, but it's content that I own and I've produced that I'm sort of licensing to a third party and a smaller piece of it is third-party production revenue that's going to others.

And just to be clear, when you said less than half in '23, you were talking about...

The $126 million of the production revenue...

The content you are creating for third parties?

Yes.

Who owns the rights to Wall?

That is being sold to third party.

Got it. Okay. And then I think there was also some pull forward -- well, you pulled Walking Dead into the...

Early delivery of certain Walking Dead titles and that was -- we had the episodes early. We worked with our licensing partners, and it just made sense for everyone to kind of get those episodes out early. So that's a...

Could you quantify that on the call? Or I forget now -- okay?

It's less than the wall impact in the fourth quarter.

And just I think Walking Dead is on Netflix, you are talking about Netflix here? Yes?

Yes.

And when does that deal with Netflix expire?

We'll get the rights to the 2 Walking Dead shows back...

A couple of years -- a few years as kind of what we're [indiscernible].

Got it. Got it. Got it. Okay. Can we talk about maybe the international business, how that differs? Or just is it the same stuff at the end of the day versus domestic? Can you talk about that?

Yes. So the -- so the international business is, it's a reasonably small piece of the business. It's reasonably sort of independent and autonomous. These are legacy channels. It's not just an AMC channel in different markets. Most of these channels are programmed with kind of local content, including sports rights in many cases, especially in sort of Southern Europe and Eastern Europe. So these are channels that have decades of legacy in these markets. And so they tend to be sort of robust kind of cash flow generators. We do utilize some of our AMC content on these channels, but not -- it's not just AMC International. I want to make sure people understand that. In terms of the contours of the business and how they differ from a traditional U.S. cable network, think of them as skewing much more heavily towards affiliate fees rather than advertising. So the revenue is more than half kind of affiliate revenue. Advertising is a smaller piece of the pie.

Can we talk about content spend? I think you're -- and you alluded to it earlier, it seems like a general theme across the entire industry as of late. I think you're reducing it a little bit. Can you explain that a little bit more?

Sure. So what we're really trying to do is balance investment into the business with near-term profitability. So I think it helps to sort of contextualize our content spend, go back to the 5 years prior to the pandemic, AMC Networks spent about $1 billion in cash programming expense per year. And I'm using cash as distinct from amortization that hits the P&L. I think that's the right kind of way to look at, especially these days. So during the 2 years of the pandemic, that increased dramatically. And in 2022, it was $1.35 billion. We're going to take that $1.35 billion down to $1.1 billion in 2023. And we can float it down further to kind of $1 billion-ish in '24 going forward. And so -- the idea there is, again, we need to sort of lean into existing IP that we have. And so we've got 2 more Walking Dead shows coming in. So we're going to sweat those assets as hard as possible. That makes a ton of sense. Invest behind proven franchises. We're going to build new franchises. We've had tremendous commercial and critical success with the 2 Anne Rice series that we've launched in the last couple of quarters. We're going to lean further into that and build that IP. But it really is this balance between investing in the business, having the content that we're known for, but also being able to maintain real kind of margin and generate significant free cash flow kind of this year and going forward.

And can we review, I guess, the cost saving initiatives that you announced, I forget what quarter last year, but what you're thinking about cost -- upfront cost to achieve that, the timing of those? And then what annual savings you think you get from it?

Yes. So we took 2 restructuring charges in the fourth quarter. The first around program and the second round, just kind of people. And so cash cost to achieve those are going to be about $115 million, $115 million in 2023. About $40 million of that is going to be severance around people, the balance is going to be around the production spend. You can assume for simplicity's sake that the run rate cost savings are for the people are close to the -- the run rate cost savings are close to the onetime cost to achieve roughly. And that savings is baked into the guide we gave on AOI for '23. So that was $650 million to $675 million in 2023. So that's all kind of baked into the cake there.

Good transition to guidance, I guess, because you just brought some of it up. So if you want to go over what your guidance for 2023 is. You just mentioned AOI, but if you want to talk about revenues or free cash flow?

Yes, you want to hit revenue and I'll do that.

Yes. So we said about $2.9 billion of revenue. I think we touched on kind of the advertising revenue and also some of the components of content licensing revenue and that year-over-year change. I will note that content licensing revenue for '23 is back half weighted as it was last year as well. In terms of affiliate revenue, I think it's going to kind of look like what we're seeing in terms of basic subscriber declines, plus a couple of points, and that's related to a strategic nonrenewal that occurred at the end of '22. And yes, I think we covered ad affiliate. Streaming revenue, it's going to grow, but it's not going to grow as fast as it did last year. So there's a deceleration there. And part of that's less kind of content and the rest of that is a significant cutback in subscriber acquisition marketing. So it's going to drive fewer gross ads year-over-year.

And on free cash flow, probably the most important number we're guiding to $185 million to $205 million of free cash flow for '23. We think we can grow that going forward. Important to note that, that number is before the onetime cost to achieve both the programming kind of reset as well as the people cost.

So let's talk about the balance sheet and maybe let's start with -- I think you made some announcements recently about a tender offer, which is -- requires the financing of some sort. So why don't I just let you talk and I will just stop speculating on that.

Yes. Let me just talk sort of holistically about how we think about the capitalization of the business. Obviously, this is an industry that's in -- appear to transition, moving from more of a wholesale model to a retail model. I think that points to being conservative financially. So we're looking to sort of reduce the sort of the financial risk in the system. And so that, to us, means, #1, maintaining a strong balance sheet, maintaining robust liquidity. And when it comes to refinancing, we're going to be focused on the near-term maturities. So you saw the tender offer was focused on the 24s and 25s. We did not put our 29s in there. And in terms of kind of where we're looking to have the business capitalize, we don't have a specific leverage target, but in terms of maintaining access to the market, being a BB corporate credit, I think, has a lot of value. So we will look to maintain that. And we recognize that that's going to entail some gross deleveraging over time. And so as it relates to the tender offer that's in the market today, it's obviously sort of contingent upon our financing. We will be back with news when it's appropriate on that front, but you can assume we could potentially put some cash into that refinancing to effectuate some gross deleverage here on the front end. We don't have to but we could. The other note I'd make on the cash is that at the end of 2022, we had $950 million roughly on the balance sheet. Folks should assume that we've got in excess of $500 million of excess cash on the balance sheet, so we can deploy that kind of prudently whether it's in this transaction or whether it's on a go-forward basis.

Got it. How to answer or how to ask some of these questions I want answers to. Maybe talk about what your first lean capacity is? Because I'm assuming just looking at trading levels that's probably what you're focused on in terms of the debt raise.

Yes. So we've got just under $1 billion of secured capacity right now. We could in conjunction with our bank group maybe tweaked it up a nudge, but call it $1 billion-ish billion-plus of secured capacity. That's likely the market we look to finance in the near term, I would say. Obviously sort of attractive from a callability repricing perspective. So we like that market. It opens up a new market for us, frankly, too. We haven't been in the institutional kind of term loan market to date. So we like those aspects as well.

Okay. Any questions from the audience? I'm hoping there are. So don't be shy.

[indiscernible] does it make sense to buy offerings [indiscernible].

So the question is on Lionsgate Starz, does the potential kind of combination between AMC and Starz makes sense. Listen, I would say look to Jim Dolan's comments on the earnings call, which is everything is on the table. We're going to look to do what's best for shareholders from an industrial logic perspective. Do I think a combination of those 2 businesses could make sense? Yes, would there be synergies? Yes. Would it allow us to cross-market kind of products? Yes. Are there complementary audiences in some respects in terms of where the Starz audience sits in some of the assets that we have? Yes. So I think that could make sense. Obviously, they're undertaking their own transaction, which I can't sort of comment on. But having -- I'm unfamiliar with those assets. And so we'll have to see if the transaction to separate them is sort of effectuated and then kind of take it from there. But I would also say kind of more broadly that AMC is and I think I said this before, it will be a unique size and have sort of some unique characteristics that could be valuable to a handful of other strategic suitors or kind of parties as well. So.

Any other questions? I mean I'll have a couple more here, and we'll end early, I guess. Are you guys doing anything with FAST platforms at all? And then I think there was a quick mention of a headwind this year from [ AVOD ] and FuboTV. What happened there? Is that just they decided to go more like, I think, sports and less what you do, I think.

Sure. So I'll talk about the talk about the FAST channels. This is for folks that aren't familiar with the business. We consider these sort of digital businesses. So fast and AVOD essentially free ad-supported TV. So we really like this space. We've got I think it's up to sort of kind of 15 channels across 7 different platforms right now. We don't own the platform ourselves. We don't own a Pluto or something else where our content is sort of tied to it. So we play across everything. And so this is -- allows us to sort of monetize effectively library or deep library content, and it really plays to our strength as someone that's got real digital and advanced advertising shops. So we like those businesses. You'll see us continue to roll out kind of more of them. They also have the added benefit in certain cases on the CTV side of us being able to use those FAST channels to sell a subscription. So literally, you can just click through if you're on like Samsung or VIZIO, what have you and buy a subscription to one of our steaming products, if you like, kind of the teaser or barker on the FAST channel. So that's an efficient acquisition vehicle for us. The other element of sort of FAST AVOD is addressable advertising, which is -- this is advertising that we work with our traditional distribution partners, Comcast, Charter, Cox, et cetera. They help us enable this on their platforms. And so this enables us to increase the value of our inventory to our advertising partners. They can target trucking tenders or parents at home with small children, et cetera. And it's a yield management game for us. So we like that as well. That's on digital advertising. You mentioned sort of Fubo. This was the strategic nonrenewal that Nick mentioned a couple of minutes ago. I would say Fubo is obviously, a very sort of -- I think it's a unique case, and I don't think there's a read across between Fubo and our other affiliate relationships. It was a very small business. It's, I think, these days, very focused on sports streaming. And so as an entertainment sort of property didn't make sense for them to continue to carry us. We've had sort of a long and profitable relationship with them as an investor. And obviously, they carried us for a period of time. But given the strategic direction that they were taking didn't make sense to renew, but that is a different kettle of fish than our sort of, what I would say, regular way affiliate relationships.

Any questions? Otherwise, we'll wrap up early. So Patrick and Nick, thanks very much for making the trip again, and join the meeting.

Great. Thanks, Mike.

Thank you.