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

So hello, everybody. Full disclosure, this is, I think, one of the few sessions that will be webcast today. So for Q&A later, just so everyone knows. And presenting now is AMC Networks. For those of you who don't know, it's a leading cable network and online streaming company. And from the company, we're happy to have here Patrick O'Connell, Executive Vice President and Chief Financial Officer; and Nick Siebert, Corporate Development and Investor Relations. So thank you both for making the trip up again. I think 2 years in a row, maybe 3, I forget. But with that, why don't we just kind of get right into it.

And of course, we're going to get into the 2024 guidance that you just provided. But before we do that, I would love to dig into just the business a little bit. Can we just talk about the assets that you own, how you generate revenue and maybe the tailwinds and headwinds that are embedded in your business right now?

Yes, sure. Great. And it's great to be here. It's always fun to come to sunny Florida in February. So listen, AMC Networks is, at its core, a content company. That is the beating heart of the company and at the center sits our studio. Our studio produces, acquires and our company curates world-class programming both here domestically and internationally. We have produced and curated some of the best TV content the world has ever seen. This goes back decades. We have a legacy of doing this, stretching back to iconic shows like Mad Men, Better Call Saul, Breaking Bad, more currently, The Walking Dead universe, the Anne Rice universe, and so we've done this over a very long period of time. We continue to have enormous amounts of success. In fact, in the current sort of year, AMC Networks accounts for 5 of the top 20 scripted cable TV shows, and we have three of the top six new scripted cable TV shows. So we have a long track record of producing just world-class content that resonates with audiences. Downstream of that studio, we have a variety of monetization engines, starting with our domestic linear business and streaming and international business, which I get to in just a second. First, on the domestic streaming business, we've got 5 domestic channels. So this is AMC+, the mothership, IFC, Sundance, BBCA, America and WE tv. These are unique assets in that they have unique brands, and they serve unique audiences. And most importantly, on the domestic linear side of the business, it's important to understand that collectively, these 5 networks generate an audience share that is twice their affiliate fee share. So we deliver real value to our distributors and real value to viewers. Said differently, our wholesale rate on the domestic linear channels is very, very low. This gives us a lot of both strategic and financial flexibility when it comes to playing in the new kind of streaming universe, and we'll talk about that later on here. Second part of the business on the domestic side is our streaming business. We're similarly situated in that regard where we have very distinct brands that super-serve unique audiences. So we have AMC+, which I'll talk to separately here in a minute. We also have brands like Shudder, which serve horror content, Acorn, which serves sort of the Anglophile universe. All Black has urban and black content. HIDIVE is our anime streaming service. We've taken a unique approach to the streaming side of the business. We have not starved our linear channels to serve our streaming businesses. I'll talk about AMC+ in this regard because it's important to understand. A streaming subscriber to AMC+ gets all of the unique and great content that exists on the linear network, plus they get some exclusive content around Shudder and IFC and Sundance. This puts us in a very good position vis-à-vis our distributors because we haven't degraded the value of the content that's in the existing pay-TV ecosystem, and it gives us a lot of flexibility to move content around between -- into other streaming platforms, whether it be Amazon channels or direct-to-consumer or what have you. So we've taken a differentiated approach with respect to how we program AMC+. Likewise, on the targeted services, and I'll use Acorn as an example here, these target high-affinity audiences with robust but cost-effective programming yields, low churn and attractive economics. So Acorn as a service is a great business. It's a profitable business. And so we look to invest additional capital kind of prudently in that regard. But again, very different from streaming businesses you may have sort of seen or heard about elsewhere. Lastly, let me turn to our International segment. We have a fantastic portfolio of channels situated across Europe and South America. We've got particular strength in Spain, Hungary, a couple of other countries. These are incumbent channels with sort of strong local programming as well as international program that we bring to the fore. In many instances, we also have local sports programming. So for the domestic audience, you can think of these as sort of like kind of legacy channels that cut across general entertainment, sort of cooking, sports, et cetera. I will also call out -- you asked about sort of the trends in the business here. I think just to take a step back for a second, what we're seeing, I'll talk kind of domestically here at the outset, is that we're in the beginning of, I'll call it, the great rebundling, which I think really sets up well for AMC. It sets up well because we over-deliver audience vis-à-vis our current affiliate share. And so that's allowed us to continue to produce and generate meaningful kind of audience share and profitability in the linear business, and it's going to translate as the streaming business, we think, rebundles. The Disney-Charter deal is something of a template for the streaming model going forward. I think both companies were forward leaning in terms of constructing that deal. Effectively, what has been put forth in that paradigm is ad-supported linear networks are being added to the pay-TV ecosystem, which we think, again, sets up well for AMC. And what is happening is the relative value between what a consumer can have on just the pay-TV side is increasing as the cable bill that you pay not just includes a suite of linear cable networks, but it's now going to include -- if you're a Charter customer, it's going to include Disney+ ad-supported. Over time, I think it will include most other ad-supported streaming networks. So that's adding value into the pay-TV ecosystem. That is juxtaposed against a consumer going out and creating a bundle, a self-, sort of, selected bundle of streaming products, which is becoming much more expensive. On average, streaming prices have increased probably across the board, roughly 25% over the last 12 to 18 months. And the amount of programming spend that is going into the streaming products has been commensurately reduced as companies are driving towards making sure those businesses are profitable. So from a customer perspective, the relative value between a pay-TV package and a self-created bundle of steaming services is now beginning to shift. It's going to take some time for that to fully play out over the course of 18 to 24 months of affiliate cycle renewals. But we think the tide is turning. And in the interim, what we're doing at AMC is ensuring that we're derisking our financial profile in light of the fact that the business model was shifting in this way. Notwithstanding the fact that we think we're net winners in this regard. We think it's also prudent to generate significant free cash flow. So from '22 to '23, we doubled free cash flow. We told the market we'd grow free cash flow into 2024. We're going to do that and more. We beat guidance for our free cash flow in 2023, and we've given guidance over the next 2 years for '24 and '25 that we'll generate $0.5 billion of cumulative free cash flow, roughly equally split between '24 and '25. There's no hard and fast rule there, but that's going to be roughly split. So we're excited about the future. We've got a fantastic slate of content kind of rolling out in 2024, and we're sort of excited to see how that universe unfolds here.

Well, that's just took care all of my Q&A. So that's a wrap. Well, anyway, so at least for the very -- well, the near term, linear is in a decline, streaming is growing. Net-net, revenues are declining, at least for the near term, again. What does your margin profile look in that kind of scenario?

Yes. So in 2023, we actually increased margins for the first time since 2017. So margins in 2023 were 25%. We feel confident in our ability to maintain healthy margins into next year. We're forecasting margins in the 23% to 24% range. Margins, I think, are a function of ultimately the value that you're adding as a business, right? And so because we are adding value into the existing pay-TV bundle, we're going to add value from a distribution standpoint and from a customer standpoint into the emerging streaming bundles. We feel good about maintaining healthy margins in this business going forward. We obviously have lots of levers to pull in terms of modulating non-programming spend and if need be, kind of programming over time, but currently, we're kind of fully investing in an amazing slate of content. We're investing at the same rate we did pre-pandemic. There's always levers to pull if the situation requires. But we feel good about maintaining a very healthy margin profile into the future.

So given that it's probably 95% credit folks here maybe at the conference and in this room for sure, I wanted to talk about maybe some of the underlying assets and asset values if you can share some of those, might be tough to get that out of you. But your studio asset, it's probably very underappreciated in the marketplace. So let's talk about that. And I think ultimately, what I want to try and get at is what content do you actually own because you clearly lease a lot of content. But what do you actually own?

Yes. So AMC owns The Walking Dead. We own the Anne Rice universe, but that's not the only thing we own. We own over 7,500 TV episodes domestically. We own over 1,500 movies domestically. We own, internationally, tens of thousands of episodes of television. So I'm not sure the asset is sort of wholly -- kind of wholly underappreciated. The studio gives us a remarkable platform with which to not just program our own networks, but have optionality around driving programming elsewhere. We had incubated a project internally a few years ago that ultimately didn't wind up being a great fit for our networks. We'll end up selling it to Apple and made a nice margin on that project. So the studio gives us not just a fantastic sort of flow stream of licensing revenue, but allows us to sort of, in opportunistic ways, produce for others if it makes economic sense.

If we were to look at your financial filings, 10-Ks, 10-Qs, are we able to find what you -- the book value of the studio is anywhere?

Not specifically, but I would point people towards the gross asset value of the programming that's on our books, which is billions of dollars.

Yes. Well you hit, I guess, the Apple deal with the Silo. Good show, by the way, I did watch it -- studio here. Okay. Let's actually get into some of your financial guidance that you just gave. And I don't know if you want to just take it over or I can ask each one.

You can step through it, yes.

But what was your revenue guidance and there's some noise with year-over-year if you can explain that?

Sure. So revenue in 2023 was $2.7 billion. Guidance for '24 is $2.4 billion. So it's a $300 million delta there. Half of that $300 million is inorganic. So we announced that we sold 25/7 Media at the end of this past year. It was about $90 million in revenue associated with that that's going away. We also had about $56 million of revenue from the Silo project you mentioned, the show for Apple. That was in 2023 that was, like I said, a one-off. So think of $150 million of that $300 million delta being inorganic. So $150 million is a result of declining affiliate and advertising and to a lesser extent, content licensing revenue being offset by streaming growth. So that's the top line revenue guide composition.

And why do you say Silo is a one-off? Why don't you do more of that? You haven't done it historically, and that's why it's a one-off, but...

We always have the option to do that. It's not necessarily baked into our guidance. But to the extent that we've got projects internally that may or may not make sense for us or if something else comes to the fore, we could obviously lean further into that business. There was a time where third-party production was kind of really attractive when there was more of a feeding frenzy for content in Hollywood as before -- kind of chasing projects in service of streaming growth. That's less the case right now. And so the margins on that business and the risk profile in that business can be -- can vary based on the deal structure at hand. And so we're not going to underwrite us doing anything over the next 12 months. But if something comes up, we would obviously, for the right sort of economic and risk profile, welcome it.

And how do you balance -- because I'm interested again in thinking about your studio and your licensing dollars, how do you balance licensing that content of yours versus keeping it all to yourselves to really grow your streaming businesses?

The sine qua non of any programming network is exclusive content, obviously. And so having the studio allows us to produce for ourselves, potentially produce for other people, as we've discussed. So we're always going to have exclusive content on AMC+. We're always going to have that also live on the AMC network and frankly, across all of our channels. I would say we are executing a classical media playbook here, where we essentially take the first window domestic kind of rights. We sort of eat our own cooking in that regard. We program for our own networks. And then we look to potentially have that content live elsewhere. And we think that's the lesson that a lot of media companies have learned over the last kind of year or 2 here is that having a walled garden where you keep everything exclusive on your own platform isn't -- doesn't optimize the economics necessarily. And so we had done, I think, a lot less of that than others over the last few years. And so we had the benefit of kind of releasing some of that content into the wild onto other platforms in the last 12 to 18 months, and that's the play that we'll continue to run.

And I'm intrigued a little with your -- the streaming revenue guidance that you gave, right? That's a growing business. So can you talk about that? And obviously, there's volume and rates built into that. So can you discuss how each of those -- how do you think about each of those and how they play out?

Sure. So it's a combination of both is the answer. We're going to take pricing on a couple of the products that the pricing will be modest. But what we're really looking to do on the streaming side is grow via volume more than anything else. And here, I think it's important for people to understand that going back to that low wholesale rate that our partners, Comcast, Charter enjoy and that customers enjoy on the linear side gives us a lot of flexibility to take that streaming product and market it across other platforms. And so we think there's a lot of value there. And we think over time, we think the value is going to come more in us driving volume than rate, even though we'll take rate on occasion as the -- on a case-by-case basis.

All right. So we did a good job with kind of building up the top line there. Now what about your adjusted operating income line? Your guidance there, I think, is $550 million to $575 million. Can you talk about -- and I guess that's -- didn't break down the margin, but probably similar, right, similar margins to last year.

A little bit lower than last year, yes.

A little bit more than last year. Can you talk about how that -- I mean you're giving us guidance for year 1, but how does that play out even longer term? And are you able to take additional costs out of the system if the top line continues to stay the same or go down a little bit?

Yes. So the AOI guidance of $550 million to $575 million implies margins in the 22% to 23% range. So we think we can maintain healthy margins. As you mentioned, we've got a lot of cost levers that we can play with. We look to protect programming at all costs, obviously, to continue to invest in the business and generate the -- kind of the program that we have in the past. If you think about the AOI for 2024, the $150 million in revenue, the organic revenue or inorganic revenue slide from '23 to '24, about $100 million of that is flowing down to the bottom line. So we've offset 30%, 40% of the revenue declines with additional cost savings, et cetera. The other nuance I'd point out is, notwithstanding the fact that cash programming expenses are declining year-over-year from '23 to '24, the amortization is going to be somewhat flat. So there's a larger impact on the AOI than there is on the free cash flow. So while free cash is actually growing, ultimately, AOI took a little bit of a hit because of that dynamic and it has to do with the accounting decay curve. So I won't get into the details there, but it's worth noting. So we believe we can maintain healthy margins going forward. And so we've got levers to pull, like I said, both on non-programming and programming costs going forward.

Okay. And I think you mentioned this earlier, but I just want you be able to reiterate it for the audience, your free cash flow guidance this year and then your 2-year cumulative?

Yes. So our run rate free cash flow at the end of 2023 was about $230 million. That was in excess of the guide of $185 million to $205 million. So we feel really good about kind of where the business is running in that regard. We have line of sight to grow that $231 million into 2024. And we think we feel very good about generating the $0.5 billion of free cash flow over the next 2 years. That's '24 and '25, $0.5 billion whether it's 50-50 or 60-40 kind of TBD, but we do have line of sight into that. So we feel good about that guidance.

And my next question was, what are you going to do with that free cash flow, but I think this is all going to tie into the balance sheet. So why don't we just go right there. Your leverage is less than 3x. You dealt with your 2024 maturities. You still have 2025. So how do we think about you dealing with those and even the timing of dealing with those? What do you see there?

Yes. So we think we're set up really well, right? We've got about $575 million of cash on the balance sheet as of the end of the year. Free cash flow already this year is looking healthy. We've got ample liquidity in the $400 million revolver that's currently undrawn. And we're going to produce $0.5 billion of free cash flow over the next 2 years. So we think we're in a good position. I think we've been clear with the market that our intent is to address the near-term maturities. So we de-fees-ed the 2024s at the end of last year. That was kind of well [ thought about for ] the market. I think we've been equally clear that we're going to focus on the short end of the curve there, too. So the 2025s are clearly in sight. And I'll say that we'll be kind of opportunistic and aggressive in addressing them. I would also kind of telegraph for the market that it's highly likely that we'd continue to derisk the business financially. So reduce gross debt over time as the business model evolves here. So of that $575 million of cash on the balance sheet, there's a couple of hundred million dollars we need just kind of for ordinary course. And so we've got a lot of excess cash that we would likely look to use in service of reducing gross debt.

And it actually just dawned on me your International business, is there money that's kind of trapped overseas that you can or cannot bring over or it's small rounding?

We've repatriated a lot of cash over the last 18 months. And so that minimum cash balance of $200 million to $300 million that I mentioned accounts for JVs and International cash and everything else. So it's anything above $250 million, I'm using round numbers here, is sort of excess cash in our minds and can be used in service of delevering the balance sheet.

And I also don't have this in my notes, and I apologize if I get this one wrong, I might be getting confused with another media company. But did you just buy back some of your 2025s?

At Q4, we nibbled, so we bought back $25 million of notional at a slight discount to market. The intent there was obviously to sort of signal our intent to address the '25s, also capture some discount that existed and earn a little bit of a return along the way.

And should we expect you to continue to nibble here and there?

You should expect us to be very opportunistic in addressing the '25 maturities. And we've got -- our credit facility comes due in Q1 of '26 as well. So we're focused on both.

Got it. So you do have a lot of cash. You have a revolver. But what else? What other debt capacity do you have? And of course, I want to focus on your secured debt capacity. So what can you do today and is -- I suspect that if you do that at some point, then there would likely be some new restrictive covenants involved maybe. Again, I'm not trying to foreshadow anything there but.

So at the -- about a year ago this time, we undertook an amendment to our existing credit facility that locked in $1.2 billion of secured debt capacity. So if we were to go to market on a secured basis, we've got that $1.2 billion. It's not ratio capacity. It's literally fixed dollar capacity. So we've got that $1.2 billion against, obviously, the $800 million of -- or $775 million of existing kind of '25 maturities. So obviously, it will be up to us to negotiate with the market in terms of kind of what remains after any financing, but we feel kind of well placed to have those conversations at this point, plenty of capacity.

And the '25s are the only bonds that you have bought back in the open market, correct?

Correct. Right. We haven't touched the '29s and not to say that we never would, but we're very much focused on the front end, less so the back end.

Okay. If there's any questions in the audience, if we can get a microphone around and hopefully, there's a few out here to keep us going another couple of minutes, so please don't be shy. I'll just get -- one second, please.

Could you just talk -- we're spending a lot of time talking about near term. Could you just -- where do you see the universe in 5 years? Because obviously, as I'm sure you're well aware, The Street is obviously incredibly skeptical of a lot of this. Just spend a minute talking about how you see things evolving.

Yes, really. So at a high -- so the question is where do I see the universe evolving and sort of like where does growth come from ultimately, I think, is kind of the subtext there. So the industry is in an acute state of transition, obviously, right? And so we're transitioning from a traditional linear model to a streaming model. It feels like those two models are converging in the context of that Disney-Charter deal that I discussed earlier. If you think about it from AMC's perspective, the advantage we have is our low wholesale rate. I've sort of like kind of pounded on that already today. But what we see the opportunity is longer term over the course of, call it, an affiliate renewal cycle of kind of 2 or 3 years is the opportunity to drive a lot of volume right? So I think at a high level, the number of households that have left the traditional pay-TV ecosystem. It's tens of millions, 40 million, whatever the number is. We've recaptured a small portion of those vis-à-vis our existing streaming offerings, but only a small fraction. So that is white space over time for AMC as the industry rebundles, and we think that sets up well given the fact that we add such tremendous value to the existing linear bundle. And likewise, that's going to translate the same way on the streaming bundles. We don't have dozens and dozens of channels that are -- have sub-brands and we have channels that are -- sort of have real brands, real audiences, defined content. And so those will continue to live for a long time in the existing linear ecosystem and eventually in the streaming ecosystem as well.

And if I could just follow up one more point. You talked a lot about recovering the subs. How do you feel about the economics 5 years from now?

Well, I think that because we have the low wholesale rate, it gives us a lot of flexibility, right? We've got -- we're happy to have kind of retail customers pay us $8.99 if they so choose. But we stand in good stead with our existing distributors because of that low wholesale rate. So we're not constrained to cut deals that -- or rates that are in and around that same level. So we think that is an advantage we have vis-à-vis a lot of other incumbent media companies, which have kind of over-earned in the bundle, so to speak, and are going to be potentially in a position of having to give up a lot of rate in order to get that volume back.

And while the microphone maybe moves around, I'll maybe add to this line of topic of looking a bit longer term and I think your controlling shareholder has hinted at this on some conference calls. But you compete against just massive companies, large media companies, technology companies, do you need -- do these assets need to be part of a larger company as well in order to compete much longer term?

We compete today. I think we compete well. I think we win in many regards, kind of given how well our content kind of resonates culturally, the economic returns, we're still able to get on it and the pathway forward we have in order to ensure its continued kind of cultural and frankly, economic relevance. As to the controlling family, I think they've been sort of fairly clear that they are -- you take their fiduciary duties seriously and are very much focused on shareholder value. It's very easy to paint scenarios where there's strong industrial logic to further consolidation in media, that's not lost on anyone. And I think they'll take kind of prudent decisions in that regard as opportunities arise.

Questions from the audience, any more? Down here.

Just sort of on the same theme of looking longer, the '29s or 66 bid, they had been up in the mid-70s, obviously, maybe the -- kind of hinting that there might be a secured deal knocking back down again. What about looking at those in terms of wouldn't you get a lot of value to start buying some of those back as well? And is that something you consider?

I think there would potentially be value in doing so, yes. But I think in the larger context, we are dealing with an operating environment that's under a substantial amount of flux as the business model shifts from kind of linear to streaming and rebundling and everything else. So in our minds, derisking, delevering focused on the short end, the short duration bonds kind of is the prudent path there. But I never say never, depending on where the '29s trade, obviously, there's -- there could be compelling economics. But at this point, I think the preponderance of our focus is on the near-term maturities.

And I think we may wrap it up, but I do have one final question, just dawned on me and you may not be able to help, so just start with that.

Yes. Just quickly on the equity raises, any incremental plans there and opportunities in the marketplace for you to raise capital preferred-wise or equity-wise?

We'll look at sort of any and all opportunities. But at this point, I have nothing more to add on that.

Have you released viewership from the new Walking Dead this past weekend?

I don't think that's yet public. I've seen numbers. We're very happy with its performance and look forward to those numbers kind of getting out there. But the engagement has been extraordinarily high. The response has been amazing. For those of you that don't know, we have sort of kind of brought back 2 beloved characters and have a new sort of a fascinating storyline for old and new fans alike. So we're looking forward to the continuation of that franchise.

Well, I used to watch it. I stopped watching it. I got a little zombied out for a while, but I'm going to come back to this one, so anyway.

There you go. You're in good company. Thank you.

Thank you very much.