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

My name is Marlane Pereiro. I am the high yield cable and media analyst here at Bank of America. With us today, we have Patrick O'Connell from AMC Networks. Thank you for joining us.

Great to be here.

Great. So, Patrick, starting at the industry level, can you discuss any potential impact from the strikes in terms of your financials, timing of release, license content, so on and so forth?

Yes, sure. First off, it's great to be back to work. I think on the AMC side of things, we were, I think, a little bit fortunate and also the beneficiaries of some good planning. So we understood and sort of expected there'd be some type of work disruption that would arise. We were in the process of reducing our volume of produced content already. So we had a lot of stuff that was going to be on the shelf. And so we were the beneficiaries of that sort of good planning and then partly a little bit of luck that strikes didn't last as long as we feared. So from an economic standpoint, you won't see any material impact to either kind of revenue, AOI or free cash flow in the business. I know some others have been maybe a little bit more forward-leaning in terms of the impact of the strikes and hitting their EBITDA and allowing them to generate a little bit more free cash flow as production waned. We did not have that dynamic given the planning and good fortune that we had. So I wouldn't go so far as to call it a nothing burger. But it's as close to that as it can be financially. So we're set up well going into '24.

Great. And then obviously, the trajectory of linear TV, your thoughts on that? And also how you think about potentially how the Disney/Charter dispute? Was it kind of a watershed moment? What do you think in terms of like the impact there?

Yes. I think in hindsight, people will look back and see that as a seminal moment in the evolution of the media landscape. I've got to give credit to Chris Winfrey for his leadership at Charter and also Bob Iger at Disney coming to the table and cutting a deal that I think will be very much a template type structure for negotiations going forward. We, at AMC Networks have always been very much a distributor-centric programmer. So we applaud the deal. And in fact, we've been running this play ourselves for many years now. So it's good to see the industry kind of come back to something approaching economic reality. So we think this bodes well for folks like us who have not been double dipping, who have not been over-earning and who have not been kind of channel stuffing. What do I mean by that? By double dipping, I mean, taking your best content and putting under streaming service and strip mining linear. We have not done that. So we deliver kind of real value into that pay TV bundle. Likewise, we have not been over earning. We're relatively very inexpensive and sort of very cheap relative to almost any other kind of bouquet of networks. And so we over deliver to a significant degree, ratings versus our affiliate rate. So we feel really good about that. And likewise, we're a very small portfolio of well-defined brands. We don't have any derivative brands, channels that are sort of legacy channels based on a channel maybe once was a big thing, and got stretched too far and kind of over monetized in the process. So we think this type of deal structure going forward makes a lot of sense for the industry. We think there's a really nice glide path between the existing pay TV ecosystem today and something that approaches, let's just call it, kind of bundle 2.0, where you effectively had ad-supported linear -- sorry, ad-supported streaming products kind of bundled into the existing linear pay TV ecosystem. We think it makes a lot of sense for the industry broadly and we think it sets up well for AMC Networks.

And then just a final point on that. Based on our understanding of the terms of the Charter deal, ESPN's potential, new foray into streaming would be included in the bundle. And obviously, there's a lot of focus on sports. So do you -- is that also an additional benefit in terms of keeping that there in that offering?

It's always a fun part of our game to talk about sort of the future of ESPN. I think listen, ESPN it's an economic, it's a cultural, it's a ratings juggernaut, right? No doubt about it. I think it has been an enormous beneficiary of the bundle. And in some ways, it is the bundle in many respects. I think Disney is going to be very smart about kind of how they play their hand. I know they've been sort of very vocal and transparent about it ultimately going direct-to-consumer. I think that makes a ton of sense. I think from a timing perspective, I would look at it over the course of the next, I would measure it in years not kind of quarters or months. Because I think because ESPN is so central to the overall bundle, it's very much going to be a decision around what the health of the bundle is at that point in time, whether they decide to kind of go -- we used to call it over the top but now I guess we'll call it kind of direct-to-consumer. They're not going to saw off the branch they're sitting on, right? So they're going to be very, very cautious about doing that. So I think time will tell. But listen, the bundle was evolving a little bit, too, right? I think you go back to that -- to the Disney/Charter kind of template, if it winds up being the case that ad-supported streaming services are essentially the building blocks of a new bundle, then kind of irony of ironies, and this is getting to sort of rank speculation here, like maybe ESPN stays in that ecosystem or maybe the ecosystem changes around it. And so we get to a place that's kind of win-win for programmers and for distributors and frankly, a win for consumers as well. Because there's -- as you saw after the football this past weekend on Thursday night, there's still real pain points for consumers to find the content they want to consume. So the jury is still out but I think it's an interesting sort of philosophical discussion but it feels like to us the direction of travel of the industry is now positive, and we think that, we're set up well to participate in that.

Great. And then moving on to the business more specifically, how do you prioritize investments across various distribution channels such as cable, streaming, licensing?

So AMC always took, I think a very disciplined and strategic approach to streaming. It wasn't kind of subs at all costs. Notwithstanding that fact, I think the company did kind of step on the gas for, call it, 18 months kind of a little bit post pandemic and really ramped up the investment and chased some subs for a very short period of time. But I think, by and large our streaming services are -- not by and large -- our streaming services are sort of highly economic. And so we take a very much an old media back-to-basics approach, which is each of these services has to stand on its own 2 feet. I would distinguish AMC+ a little bit from the other more targeted services like Shudder or Acorn, which are great businesses, have attractive economics. AMC+ is maybe unique amongst sort of the other kind of broader streaming landscape in that, it's not, I'll call it, larded down to a lot of very expensive super-premium exclusive content, right? You get -- when you get AMC+, you get everything that's on the AMC linear channel. You also get Shudder, the horror content on that service, some stuff from Sundance from IFC, et cetera. So there's exclusive programming on there but it's moderated from an economic standpoint. So that there's something new, there's something different, there's something special about it, but it's not so burdened financially that it's not a moneymaker for us. And we really think about the streaming business on the AMC+ side is just another avenue to monetize the content that we produce. So that programming that is -- that world class programming we're known for on the AMC networks, that does double duty on AMC+. And so it's an efficient model. And so we look at it very much like we would look at any other stream of revenue, affiliate, licensing, et cetera. So we like the way that sets up.

Great. And then full year revenue is expected to be around $2.7 billion instead of $2.8 billion previously. You cited softness in content licensing revenues and a challenging ad market. So we know the ad market has been challenging. However, as we kind of go through 4Q into '24, do you see any drivers of potential upside on the ad side of the equation?

Listen, on the -- I'll start with the secular -- the cyclical side. '24 will be an Olympic year. It will be a political year. Generally, in political years, you get a little bit of pricing tailwind as some of that spend tends to be a crowding-out effect. So we hope to be the beneficiary of that in the scatter market in particular. I would say beyond that, it's tough to be sort of an economic sort of prognosticate here. The U.S. consumer seems to be still has plenty of gas in the tank amazingly. So we hope that continues. But I think if you're looking at it kind of eyes wide open, there's no doubt that -- it's hard to make the case that there's not a secular shift in the advertising side away from TV. Let's just call it what it is. And so what we're doing to address that is, one, to make our advertising more relevant and more valuable to our partners. And so we're doing that with some of technology we've developed in-house, AMC Audience+, which allows more targeted advertising. We've also got some other kind of really innovative stuff that we've announced recently. I'll move past that quickly because I want to get to the rest of your questions here. But yes, I think that's -- our goal is to make the advertising kind of more valuable and more accessible with some of the other technology tools that we've developed. So that's how we're sort of counterpunching what -- against what we see is probably continued tough environment in the advertising space.

Great. And then the softness in content licensing. Can you talk about the dynamics, whether it be domestic or international markets, pricing? What is really driving that softness? And how does it kind of resolve itself going forward?

Yes. Listen, there's always a good market for world-class premium content that is axiomatic. But the reality is amongst our kind of media peers, everyone is pulling the same lever at the same time, right? So people are solving for near-term revenue and in particular, cash flow. People are managing balance sheets, et cetera. And so in today's market, you probably want to be a buyer rather than a seller of content. And so we've seen some softness as a result. I'd also note we're on both sides of that market. So whilst we have been a little bit disappointed in sort of, I would say, kind of the rates that is on offer for some of our content in the market. We've been disciplined about not doing deals we don't think are economic. We've also been opportunistic in taking advantage of that market. So we recently acquired a really neat show called Nautilus from Disney. It wasn't going to work for them. We think it could work really well for us. It's based on the kind of a Jules Verne tale. So it's kind of kind of a fantastical universe. So we think it fits within our brand to kind of license. So we're really excited about it. So there's 2 ways to play that market. And so we're playing both sides.

Great. And you've talked about content -- cash content spend on a go-forward basis of around $1 billion. So can you just, one, remind us how that compares to what you've spent historically on content and how you have determined that's kind of the right go-forward level? And what could potentially shift that up or down?

Yes. So pre-pandemic AMC Networks were spending about $1 billion a year cash on programming expense. That ramped up pretty significantly kind of post pandemic. Obviously, there was a lull in 2020. But that peaked at about $1.35 billion, it will be closer to $1.1 billion this year 2023. And we've been clear that, that will float down closer to $1 billion into 2024. So we're still spending very healthy amounts on the programming side. I would also note that we produce a lot of our own content, right? So we have a studio. We do produce some third-party content for others, not a lot these days but we are opportunistic there. But we produce for ourselves. And what that means is that we own the vast majority of our slate on AMC and across many of our other channels. And so we have ownership economics there. And so one of the ways you asked about how we could modulate programming spend going forward. We could choose to not take ownership economics on some of their shows. We could choose to co-produce, we could choose to license in shows as a way to kind of drive near-term margin and cash flow while we kind of wait for a more opportune moment to kind of take bigger swings. But we've, I think, modulated in the right way, and we can continue to kind of monitor the market, and there are sort of further levers to pull if we need to.

Great. Obviously, partnerships are kind of an area of focus for AMC Network. So can you talk about the opportunities with virtual MVPDs, traditional MVPDs? For example, can you discuss like AMC+ and Xumo, that launch kind of just more holistically, your stance on that?

Sure. Yes, we think for those of you that don't know Xumo is a joint venture between Charter and Comcast. Think of it as a TV OS. It's built on the X1 platform developed by Comcast. So it's world-class technology. They are both leaning into that product heavily. And so we're super excited to have them do that. MVPDs, as I said earlier, we've very much been as part of our strategy, partner friendly in terms of how we approach the market there. We think it makes all the sense in the world for the large MVPDs like Charter and Comcast to be leaning into video distribution. Obviously, it's become a little bit less economical for them over time, but they are natural bundlers of these products, whether it be mobile, whether it be programming, et cetera, there's real value in that for them and there's value in it for consumers. So we think Xumo could be a really -- a really nice kind of tailwind to the pay-TV industry. It will be also interesting to see if other MSOs or MVPDs kind of pick up that product and they kind of push it further. Obviously, I think they've got designs for it internationally as well. So we think Xumo is a great product. We think it could be fantastic for consumers. One of the complaints about streaming is you can't get anyone on the phone, right? Well, Charter and Comcast, they can roll trucks, they can pick up the phone, they can do all those things. And so running a scale streaming business is tough. The consumer element is not easy, and it's oftentimes not cheap. And so having a partner in some of these large MSOs could be really valuable. So we're sort of active participants, and we are leaning into it with them.

Great. And then free cash flow on what I would call a normalized basis, which excludes the onetime Hulu benefit and any restructuring payments is going to be roughly in the range of [ $185 million ] to [ $205 million ]. Cost savings have been a component of driving some of that free cash flow. So can you talk about your cost saving initiatives and any room to drive further cost savings if need be or if you wanted to?

Yes. So we've been continuously driving costs out of the business. Obviously, as folks in this room, I assume, will be aware, we've run into some revenue headwinds, took down revenue guidance in the last quarter but have made up for that in sort of efficiency, essentially. And we look across our expense base, obviously, the largest expense is programming, second largest to that is marketing and then we've got people, technology, et cetera. So everything is on the table. We took some tough medicine at the end of last year. That obviously comes at the cost of some onetime restructuring, et cetera, but we've continuously kind of cinched the belt a little bit. We did what we said we were going to do on the programming side. And so we've been able to hold serve on our AOI guide for the year. Still feel good about it as a way to combat some of the top line weaknesses we do see in the market.

Great. And then you've kind of touched on the next question, Patrick, which is, we've seen how the cost savings have been a contributor to free cash flow? So then on the revenue side, on the growth side, what will -- what do you think will drive some of that growth over the interim?

So obviously, the secular advertising and affiliate markets remain challenged. We see that continuing into 2024. But what we do see are green shoots around the rebundling of programming. And so we are in conversations with, I'll say just about everyone on this front from obviously, traditional distributors to a lot of our kind of programming peers to stitch together bundles that make sense for us, for them, for consumers as well. And so -- we did a really kind of interesting pop-up test with MAX this past fall. AMC, at one point, supported, I think it was 5 at the top kind of 10 shows on that platform. So we feel really good about how our content resonates when it is in front of a large audience like that. So I think you'll see more of that. And I think we see line of sight towards some of these bundles kind of emerging maybe even sort of beyond the -- what I called sort of the ad-supported SVOD businesses being the building blocks of a new bundle, kind of bundle 2.0. We think there could be other innovative ways to partner with some of our sort of programming neighbors, so to speak, to create bundles that drive value across the ecosystem.

Great. Are there any assets that you consider noncore to the business that you would consider selling if need be?

At this time, we love all our children, right? So no, there's no plan a foot to sell specific assets. Obviously, we're economic about it. So if people come to us with kind of serious offers, we'll -- we take our fiduciary duties seriously, we'll consider all comers. But at this point, there's nothing made on the horizon that we see. We've got a lot of interesting assets. I think some of them are underappreciated by the market. And if the time comes, we may look to monetize some of them but there's nothing imminent right now.

Great. Net leverage right now is, I think, about 2.7x, what is the right leverage profile for this business in your view?

So we take a sort of a holistic look at it from a kind of a broad capital allocation standpoint. And right now, we're producing kind of run rate, $200 million of free cash flow. We'll end the year with about $600 million or approaching $600 million of cash on the balance sheet. You'll be aware that we've essentially [ defeased ] the '24s. That will close here in the coming weeks. And so you set up $600 million of cash on the balance sheet, $200 million of run rate free cash flow. We think that will continue into 2024. We've been clear on that as well. And so you should assume that we will be kind of focused on the '25s, as everyone would expect, we'll be sort of prudent, but also opportunistic in addressing those. And from a broad capital allocation perspective, folks should assume that all, if not virtually all of the free cash flow is going to go against the balance sheet. We need to sort of delever from a gross debt standpoint. And so that's our focus.

Great. And those kind of led into my next questions. So obviously, you've announced the redemption of $400 million due in '24. You do have the '25s, you also have debt due in '29. So from a balance sheet strategy, so to speak, is that something you think about addressing incrementally, maybe more holistically. For example, you've taken the '24s out of the equation, you [ have ] the '25s and the '29s. Are you thinking about that, if there's any thoughts or anything you can share? .

Yes, we've got a little bit less than 2 years until the '25s come due, right? The credit facility also matures Q1 of '26. So you could see sort of a trade on the horizon to sort of address those 2 holistically. Beyond that, tough to say. But we'll be prudent and opportunistic in monitoring the markets and kind of looking to raise capital at the appropriate time.

Great. And I'm not sure if -- could you remind us what your secured capacity is? Is that something...

Yes. That's definitely public. We did do an amendment earlier this year to our credit facility that gave us $1.2 billion of secured capacity. It was kind of previously defined on a ratio basis. So we just locked in the $1.2 billion. So we've got a lot of dry powder, so to speak, on the shelf if we need to use it.

Great. I do have additional questions, but also wanted to open up in case anyone had additional -- any other questions for Patrick? No. I shall continue. Can you just remind us quickly like what your minimum cash balances that you like to maintain?

We could run this business with, I'll call it, several hundred million dollars of cash. Obviously, that we've got international businesses. We have -- we do production, so there's working capital needs there. We have some joint ventures. So it's more complicated than maybe it appears from the outside. But you should assume that we would like to run the business with at least a couple of hundred million dollars of cash.

Okay. Great. And then we've kind of touched on this, but -- and talked about potential opportunities. But from a challenges, and I think we kind of all know them. But from your perspective, what do you think the biggest challenges are as we kind of move into '24?

If I look at it -- I mean, this isn't just -- this isn't an AMC challenge, it's an industry challenge. But I think the pall on the industry will lift once people see pay TV kind of, I'll call it, cord cutting, dissipate to a degree. And if you just think about what's happening here, I'll go back to Disney/Charter, what's effectively happening here is that there's value being put back into the traditional bundle, call it, right, kind of the ad-supported Disney+ kind of being in there. If that's a template, there's more value in sort of, we'll call it, kind of the bundle or bundle 2.0, and there's going to be less value on the streaming side for consumers, right? Because there's less programming going in there and the prices have increased fairly dramatically even in the last couple of quarters. So from a relative value standpoint, if you're a consumer taking the existing kind of pay TV bundle if it sort of gets sort of supplemented with additional ad-supported streaming services and you've got a UI that wraps around it that makes it accessible, relative to just sort of stacking, 8 different streaming products together and maybe still not getting everything because there is some content that's behind the pay TV, pay wall, so to speak. If that relative value equation continues to kind of shift. And I think we'll need another affiliate cycle to kind of fully see that, so call it 18 to 24 months maybe. I think that's what investors should be focused on in terms of kind of calling up kind of a pivot in the business.

Great. Well, that's all I have. So unless there's anyone else.

Can you talk a little bit about AVOD [indiscernible]?

Sure, yes. So the question is CTV/AVOD, how are we in that business, do we like it? We think these are great businesses for kind of incremental monetization. Obviously, consumers are voting with their feet. And so they continue -- we think consumption continues to rise pretty substantially. We've got fantastic growth in our businesses. I think currently, we're on -- we've got kind of 90 channels across 9 or 10 kind of CTV/AVOD platforms today. That will grow by the end of the year. So it's fantastic kind of high-margin incremental revenue for us. We don't program specifically for those channels, obviously, but it's a way to kind of offset a lot of declines we see on the traditional advertising side.

Wonderful. Thank you so much, Patrick. Pleasure having you.

Thanks, Marlane.