AMC Networks Inc. (NASDAQ:AMCX) Q4 2022 Earnings Call Transcript

AMC Networks Inc. (NASDAQ:AMCX) Q4 2022 Earnings Call Transcript February 17, 2023

Operator: Good day, and thank you for standing by. Welcome to the AMC Networks Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Nick Seibert, Vice President, Corporate Development and Investor Relations. Please go ahead.

Nick Seibert: Thank you. Good morning, and welcome to the AMC Networks Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining us this morning are James Dolan, Interim Executive Chairman; and Patrick O’Connell, Chief Financial Officer. Today’s press release is available on our website at amcnetworks.com. We will begin with prepared remarks, and then we’ll open the call for questions. Today’s call may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ. Please refer to AMC Networks’ SEC filings for a discussion of risks and uncertainties.

The company disclaims any obligation to update any forward-looking statements made on this call. Today, we will discuss certain non-GAAP financial measures. Required definitions and reconciliations can be found in today’s press release. With that, I’d like to turn the call over to Jim.

James Dolan: Good morning, and thank you for joining us. Before we start, I want to take a moment to say that after a thorough search by the Board of Directors, we were very pleased to announce earlier this week that Kristin Dolan will be taking over as CEO of AMC Networks. Based upon Kristin’s considerable executive and operational experience for 30 plus years working in media and entertainment, including her prior history managing subscription based businesses, the Board concluded she is the best candidate for the role. As Founder and CEO of the Audience Measurement and that data analytics company 605. Kristin has been on the frontlines of the evolution of advanced advertising and audience targeting. She also has a strong record driving organizational change.

These are areas of critical importance as we transform AMC Networks, and further monetize our high quality content during this pivotal period in our industry. Before turning the call over to Patrick, I’d like to briefly provide my perspective on the industry and the company, and how we see the business evolving. Across the board, the content industry is being disrupted by cord cutting in the traditional linear sector, or MVPDs, and also in the streaming sector, also being disrupted by changing viewership habits, a challenge ad market and rising content costs. As I’ve said in the past, the current mechanisms for monetizing content are not working. The content industry needs to reorganize itself. We’re seeing this now with most media companies beginning to course correct to better monetize content, and improve the economics of their business.

We believe large distributors and programmers will lead the way. AMC will follow. Streaming is a retail business. That’s what DTC means. For now, as the industry continues to evolve, AMC Networks will focus on streamlining our organization, operating more like retailers than wholesalers, driving cash flow and maintaining our strong balance sheet. At the same time, we will continue to do what we do best, which is making great content. We believe this strategy will position AMC Networks wealth to navigate current industry dynamics and generate long-term shareholder value as an even stronger company. With that, I will now turn the call over to Patrick.

Patrick O’Connell: Thank you, Jim. As Jim highlighted, AMC Networks unique assets and capabilities positioned us well to succeed at the landscape shifts and consumer behaviors continue to evolve. We took steps in the fourth quarter to recalibrate our business. We streamline the organization to create a more nimble operating team and reduce costs to drive increased free cash flow. We are optimizing our content monetization through the array of options available to us. This includes our Linear and Genie platforms as well as opportunistic content licensing. We will further leverage our 15 FAST channels as we continue to expand our innovative advanced advertising capabilities and utilize data to enhance the value of our inventory.

In addition, we are extending our partnerships with new and existing distributors with six recent renewals, including Charter, Altice and Bell Canada. We are now beginning to see movement towards new pricing and packaging models, including streaming bundles. One example is Verizon, which recently tested an AMC+ and Netflix offer as part of their Verizon’s +play offering, and we expect more to come on this front. We are staying true to our mission of super serving our passionate audiences by creating highly compelling content that breaks through in a crowded marketplace. We had a strong slate in the fourth quarter, including the series finale of The Walking Dead and the first series in our new Anne Rice, The Immortal Universe, Anne Rice’s Interview With the Vampire.

Last month, we followed up with our debut of the second series in that Universe, Anne Rice’s Mayfair, which is starring the Emmy nominated actress Alexandra Daddario. Based on the first 30 days of viewership, Mayfair, which is now the most viewed season of any series ever on AMC+ ahead of Interview and the final season of The Walking Dead. On Linear, Mayfair is off to a strong start with ratings continuing to build as the season progresses, and is already a top 10 cable drama for the 2020 to 2023 television season and key demos. Based on a strong debut performances we’ve green light both interview and Mayfair for second seasons. After The Walking Dead, that world continues to resonate with advertisers and captivate viewers. The final season of The Walking Dead commanded the highest pricing the series has ever seen over the course of its 11 seasons, strong evidence of the continued power and relevance of this franchise.

Also on that point, following its successful run on AMC and AMC+, the 11th season of The Walking Dead, launched on Netflix earlier this month. In the first full week it was available, Netflix consumer streamed 1.43 billion minutes of the series. It was the number one most watched acquired series in the platform and the number two series overall. We are thrilled to have two highly anticipated Walking Dead spin-off series plan for 2023, The Walking Dead: Dead City and the Walking Dead: Darryl Dixon, and a third production — and a third in production right now, and slated for 2024, starring Andy Lincoln and Danai Gurira who viewers know as Rick and Michonne. Next month, we will premiere Lucky Hank starring Bob Odenkirk in his follow up series, the Better Call Saul on AMC and AMC+, and later this year, we will have the second season of the popular and critically acclaimed Dark Winds.

This is just a sampling of the new content we will be bringing viewers on AMC, AMC+ and across our other linear networks in streaming services. BBC America is currently featuring its latest Natural History tentpole series in the BBC, and the remarkable, Sir David Attenborough Frozen Planet II. Next year, we will have Planet Earth III as we extend our leadership position in bringing viewers the very best franchise titles in this very popular programming category. This spring, BBC America, Acorn TV and AMC+ will bring viewers the third season of the British crime drama Happy Valley. A season that just includes in the UK, and became must watch appointment television in that country. Acorn TV will also premiere a new season of the hit series Harry Wild, starring Jane Seymour later this year, in addition to a full slate of it’s popular International dramas and mysteries.

We also continue to see remarkable strength and interest in the franchise sets on our WE TV reality network. All three series in the love after lockup universe attract large and dedicated audiences, as does our growing up Hip Hop franchise, which is slated to expand to include a new series later this year. Before I view our 2022 financial performance and 2023 outlook, I’d like to summarize a few of the one time items that are reflected in the ’22 results. First, in the fourth quarter, we realized restructuring and other charges of $449 million, comprised of $404 million of strategic programming write offs, and $45 million of organizational restructuring costs. While the majority of the restructuring and other charges are non cash, we accrued for the cash portion in the fourth quarter, including $73 million of strategic programming write offs and $41 million of severance and employee related costs, which will contribute to a cash outflow of approximately $115 million in 2023.

Second, we took a separate goodwill impairment charge related to AMC Networks International. Moving on to our full year 2022 financial performance. Consolidated revenue increased 1% to $3.1 billion. Consolidated adjusted operating income was $738 million, representing a margin of 24%. Adjusted earnings per share was $9.21, and we generated free cash flow of $103 million in 2022. For the fourth quarter of 2022, consolidated revenue increased 20% to $965 million. Adjusted operating income grew 34% to $137 million and adjusted earnings per share was $2.52. In our domestic operations segment, full year and fourth quarter revenue grew 4% to $2.7 billion and 26% to $861 million, respectively. We ended the year with 11.8 million paid streaming subscribers, representing year-over-year growth of 31%.

Subscription revenue grew 6% for the full year and 7% in the fourth quarter. Full year streaming revenue was $502 million, representing 35% growth year-over-year. Fourth quarter streaming revenue grew 41%. Affiliate revenue declined 5.8% for the full year, and 7.5% for the fourth quarter. Affiliate revenue performance was driven by declines in the basic subscriber universe, partially offset by contractual rate increases. Content licensing revenue grew 18% for the full year, and 152% for the fourth quarter. The increase in content licensing revenue was driven by the timing and availability of deliveries, including Wool, which is a series produced by AMC studios for Apple TV. Deliveries of Wool represented approximately $126 million of content licensing revenue for us in the fourth quarter of 2022.

While we typically produce content for ourselves, we are partial to ownership economics, Wool is an example of how we utilize our assets across the company, including our studio opportunistically. It’s worth noting that generally production for third parties have lower margins as compared to the rest of our business. Typically, third-party production margins are in the 10% area. Also in the fourth quarter, we delivered certain titles in The Walking Dead Universe that we had previously planned to deliver in 2023. The early delivery of these titles contributed to our fourth quarter licensing revenue growth. Full year domestic operations advertising revenue decreased 7% to $788 million. Fourth quarter advertising revenue declined 12% to $206 million.

The decline of advertising revenue is primarily due to lower linear ratings, and softness in the ad market, as well as fewer episodes of original programming, partly offset by digital and advanced advertising revenue growth. Broadly speaking, our ad supported networks and digital platforms are experiencing the same environment as others in our space. The scatter markets have been soft as the climate of economic uncertainty has resulted in our advertising partners being more conservative with their spending. Domestic operations adjusted operating income was $789 million for the full year 2022. AOI performance for the full year was largely attributable to lower advertising and affiliate revenues, increased programming investments and increased SG&A expense.

For the fourth quarter, AOI increased 27% to $154 million. The increase in fourth quarter AOI was largely attributable to an increase in content licensing revenue, and a decrease in subscriber acquisition marketing, which was partly offset by an increase in programming investments. Moving to international and other. Revenue decreased 14% to $443 million for the full year 2022 or 7% on a constant currency basis. Fourth quarter revenue was $108 million, a decrease of 12% or a decrease of 4% on a constant currency basis. Full year international and other revenues reflect lower distribution revenues due to the timing of production at 25/7 Media, lower advertising revenues due to the impact of the planned wind-down of two channels in the UK and software ratings in the UK.

Fourth quarter revenues reflected similar trends with the exception of content licensing revenues, which increased in the fourth quarter due to the timing of productions at 25/7 Media. International and other AOI decreased 17% to $69 million for the full year 2022 or a decrease of 15% on a constant currency basis. For the fourth quarter AOI was $13 million representing growth of 8% or 4%, excluding the beneficial impact of FX translation. Full year and fourth quarter AOI performance was driven by revenue performance, lower technical and operating expenses, and lower SG&A expenses. Consolidated free cash flow for 2022 was $103 million and reflected the beneficial timing of certain production related payments, a reduction in marketing spend, the timing of tax credit payments and lower cash taxes.

We ended 2022 with net debt and finance leases of approximately $1.9 billion and a consolidated net leverage ratio of 2.6 times. We have substantial financial flexibility and total liquidity of $1.43 billion, including $930 million of cash on the balance sheet and our undrawn $500 million revolving credit facility. We continue to monitor the markets and will be opportunistic in addressing or upcoming maturities. There were no repurchases of AMC Networks common stock in 2022. Our capital allocation philosophy is both disciplined and opportunistic. First, we will look to support the business with a particular focus towards creating compelling content that resonates with our audiences while balancing overall profitability and cash flow generation.

Second, we remain focused on the balance sheet and addressing or upcoming maturities. Further down our priority list at the moment is the pursuit of strategic M&A and returning capital to shareholders. Moving toward outlook for 2023. Starting with the top line, we expect 2023 consolidated net revenue to be approximately $2.9 billion, largely due to the industry wide dynamics Jim mentioned. Regarding streaming revenue, we expect growth for the full year at a moderated pace as compared to 2022 driven by lower gross additions due to a reduction in subscriber acquisition marketing. Streaming is important part of our future and represents a meaningful opportunity for us. We will continue to focus on delivering highly curated content to our passionate and engaged audiences.

But as we are focused on optimizing monetization across our entire business, we are no longer providing streaming subscriber targets at this time. Regarding affiliate revenue, we anticipate that existing cord cutting trends will continue and our year over year comparison will be incrementally impacted by strategic non-renewal with a virtual MVPD that occurred at the end of 2022. On content licensing, we anticipated decrease in licensing revenues as our year over year comparison is affected by the 2022 deliveries of War and certain Walking Dead universe titles, which we partly offset by new international licensing revenues. Moving to advertising, we expect 2022 trends to continue through 2023 including lower linear ratings and a soft overall ad market, partially offset by digital and advanced advertising revenue growth.

We have a strong content slate for 2023. And we are optimistic about our upfront strategy. In terms of adjusted operating income, we are beginning to realize the benefits of our strategic cost measures, including material year-over-year reductions in programming, marketing, staff and other costs. As such for the full year of 2023, we anticipate that consolidated AOI will be in the range of $650 million to $675 million. Beginning with the first quarter of 2023, we’ll be adjusting our free cash flow definition to exclude distributions to non-controlling interests which are discretionary in nature. This will better reflect the earnings power of the business in our reporting, and will more closely align our definition with those of our peers. Additionally, we will provide supplemental cash flow schedules that will include details regarding onetime items that may affect comparability.

For 2023, we expect to generate reported free cash flow using our updated definition in the range of $70 million to $90 million, which no longer reflects the inclusion of approximately $35 million of expected distributions to non-controlling interests in 2023. The $70 million to $90 million range represents free cash flow on a reported basis and includes the negative impact of approximately $115 million of onetime cash costs associated with our restructuring plan. Our 2023 reported free cash flow guidance implies $185 million to $205 million of free cash flow excluding these onetime items, which represents the level of cash flow that we feel we can maintain and grow over time. However, due to the timing and cadence of productions, we anticipate net cash outflows during the first half of 2023 and expect to generate the majority of our full year free cash flow closer to your end, similar to the pattern in 2022.

In terms of our content investment strategy, we continue to focus on making efficient and highly curated content decisions, as we super serve our distinct audiences. 2022 represented our peak content investment year, we continue to refine and improve our approach towards content investments, something over which we have a high degree of control. For 2023, we expect cash content investment to be approximately $1.1 billion as compared to $1.35 billion in 2022. Looking up past 2023, we anticipate that our cash content investment will be in the $1 billion area consistent with our historic pre-pandemic levels. 2023 will be a key year for AMC Networks, as we execute our differentiated strategy of being everything to someone, rather than offering something for everyone.

We are thrilled to be nurturing and growing our newest franchise the Anne Rice Immortal Universe, while extending and expanding our most storied franchise The Walking Dead Universe. We are streamlining our organization and optimizing our monetization on meaningfully growing our free cash flow year-over-year. With that operator, please open the line for questions.

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Q&A Session

Operator: Thank you. And our first question comes from the line of Thomas Yeh with Morgan Stanley. Your line is open. Please go ahead.

Thomas Yeh: Thank you so much. Jim, I wanted to dig into your comment about operating more like retailers versus wholesalers going forward. What do you see as the major incremental steps that AMC needs to take to move towards that direction? Do you guys have kind of been in the streaming market for some time, is it a different marketing approach or partnerships or something else? And then Patrick, on the $1.1 billion of programming, spend cash. Can you talk a little bit about as kind of the write-down flow through and you refocused the spending? How we look to the general mix of focus around high-end scripted original programming relative to targeted programming and got the balance of that looks like over time? Thank you so much both.

James Dolan: Got a long set of questions. Okay. Well, look the AMC has been a wholesaler, right, as most of the programming companies have been. And the in wholesaling, somebody else takes care of the customer, somebody else watches the customer and somebody else actually ends-up pricing to the customer. When you go to DTC all those things become your responsibility and for an organization to move from wholesaler to retailer is to really significantly change its focus. Things they are paying attention to, things like the customer journey and churn, they are all part of becoming a good retailer. The pricing is becomes very important and where you apply your manpower, you don’t — it is not affiliate relations, not that you’re stopping affiliate relations, but affiliate relations is a much smaller task now, compared to understanding the customer and serving them well. And that is a cultural change for AMC, as it will be for a lot of other companies.

Thomas Yeh: Okay. Thanks, Jim. Thanks for the question.

Patrick O’Connell: Thomas, on programming spend listen, I think it’s important to contextualize our reduction in programming spend, DTC are historical levels. Between 2017 and 2019, AMC spent on average of about a billion dollars in cash and credit share. And during this period, we obviously had amazingly powerful programming that you all sort of know when low. It was really only during 2021 and 2022 where programming bumped up to the $1.35 billion level. And so we’re just taking cash spending down to $1.1 billion this year. That’s obviously a meaningful reduction of about $250 million roughly 20%. This still leaves us with plenty of firepower to continue our historical programming cadence. And I would say on that front they cover this full.

We’ve got an amazing set of shows, I mentioned in my in the comments at the top of the call here. I think it’s also worth noting that, the numbers I’m giving you obviously sort of cash numbers, right. This is distinct from programming amortization that runs through our P&L which obviously has a little bit of a lag to it versus cash given that it’s attempting to match earned revenue with expenses. It’s an equally valid metric. It just has to do with differences in timing. We are very much focused on cash here, as you’ve heard from me before. I think the punchline here is that, we’re trying to strike the right balance between continued investment in the business and generating sufficient sort of profits and cash flow in the near-term. In terms of where the cuts are coming from, specifically, we took a harder look at all of our platforms and are trying to maintain as much programming efficiency as possible across all of them.