Hey, my name is Marlane Pereiro. I am the High-Yield Cable 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, you know, starting at the industry level, you know, can you discuss any potential impact from the strikes, in terms of your financials, timing of release, you know, licensed content, so on and so forth?
Yeah, sure. First off, it's great to be back to work. You know, I think on the AMC side of things, we were, you know, 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 gonna be on the shelf, and so we were the beneficiaries of that sort of part good planning and then partly a little bit of luck. The strikes didn't last as long as we feared. So from an economic standpoint, you won't see any material impact to either, you know, 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, you know, 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 2024.
Great. And then, you know, obviously, the trajectory of linear TV, you know, your thoughts on that, and also how you think about potentially how the Disney-Charter dispute, you know, was it, you know, kind of a watershed moment? You know, what do you think in terms of, like, the impact there?
Yeah, 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, you know, Bob Iger at Disney, coming to the table and cutting a deal that I think will be very much a template-type structure, you know, for negotiations going forward. You know, we at AMC Networks have always been very much a distributor-centric programmer, so we applaud the deal, and in fact, we've been, you know, running this play ourselves for many years now, so it's good to see the industry kinda 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 overearning, and who have not been, you know, kind of channel stuffing. What do I mean by that? By double-dipping, I mean taking your best content and putting it on your streaming service and strip mining linear. We have not done that. So we deliver kinda real value into that pay TV bundle. You know, likewise, we have not been overearning. We're relatively, you know, 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, you know, 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, you know, channels that are sort of, you know, legacy channels based on, you know, a channel that maybe once was a big thing and it 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, you know, let's just call it kinda Bundle 2.0, where you effectively had ad-supported linear... Sorry, ad-supported streaming products kinda 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, you know, just a final point on that. You know, based on our understanding of the terms of the Charter deal, you know, ESPN's, you know, potential new foray into streaming would be included in the bundle, and obviously, there's a lot of focus on sports. So, you know, is that also, you know, an additional benefit in terms of keeping that there in that offering?
Yeah, it's always a fun parlor game to talk about sort of the future of ESPN. I think, listen, you know, ESPN's, you know, it's an economic, it's a cultural, it's a, 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, in many respects. I think Disney's gonna be very smart about, you know, kinda how they play their hand. You know, 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, you know, I would look at it over the course of the next—I would measure it in years, not, not kinda quarters or months, because I think because ESPN is so central to the overall bundle, it's very much gonna be a decision around what the health of the bundle is at that point in time, whether they decide to, you know, kind of go, we used to call it over-the-top, but now I guess we'll call it kinda direct to consumer. They're not gonna saw off the branch they're sitting on, right? So they're gonna be very, very cautious about, about doing that. So I think, I think time will tell. But listen, the bundle was evolving a little bit too, right?
You know, I think you go back to that, to the Disney-Charter kinda template, if it winds up being the case that ad-supported streaming services, you know, are essentially the building blocks of a new bundle, then kind of irony of ironies, and this is getting into sort of ranked 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, you know, kind of win-win for programmers and for distributors, and frankly, a win for consumers as well, because there's, as you saw, you know, after the football this past weekend on Thursday night, there's still real pain points for consumers to find the content they wanna consume.
So, the jury's 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. Thank you. And then, you know, moving on to the business more specifically, you know, 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, you know, kinda subs at all costs. You know, notwithstanding that fact, I think the company did, you know, kinda step on the gas for, call it 18 months, you know, kind of a little bit post-pandemic, and chased some subs for a very short period of time. But I think by and large, you know, our streaming services are, or sorry, 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, you know, each of these services has to stand on its own two 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. You know, AMC+ is maybe unique amongst sort of the other kinda broader streaming landscape in that it's not, I'll call it, larded down 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, etcetera. 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, you know, the streaming business on the AMC+ side as just another avenue to monetize the content that we produce. So that programming that is, you know, that world-class programming we're known for on 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, etcetera. So, we like the way that sets up.
Great. And then, you know, full-year revenue, you know, 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.
Mm-hmm.
So we know the ad market has been challenging. However, you know, as we kind of go through 4Q into 2024, you know, do you see any drivers of potential upside on the ad side of the equation?
Listen, on the, I guess I'll start with the secular, the cyclical side. You know, 2024, it'll be an Olympic year, it'll be a political year. Generally, in political years, you get a little bit of pricing tailwind, you know, as some of that spend, you know, there tends to be a crowding out effect. So we hope to be the beneficiary of that, you know, in the scatter market in particular. I would say, you know, beyond that, it's tough to be, you know, tough to be sort of an economic sort of prognosticator here. You know, the U.S. consumer seems to be, you know, still has plenty of gas in the tank, amazingly, so we hope that continues.
You know, but I think if you're looking at it, you know, kind of eyes wide open, you know, there's no doubt that it's hard to make the case that there's not a secular shift in the advertising side, you know, 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, you know, more relevant, and more valuable to our partners, and so we're doing that with some of the technology we've developed in-house, AMC Audience+ , which allows more targeted advertising. We've also got some other, you know, 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 yeah, I think that's, you know, 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 against what we see as, you know, probably continued tough environment in the advertising space.
Great. And then, you know, the softness in content licensing, you know, can you talk about the dynamics, you know, whether it be domestic or international markets, pricing? You know, what is really, you know, driving that softness, and how does it, you know, kind of resolve itself going forward?
Yeah. Listen, there's always a good market for, you know, world-class premium content. That is axiomatic. You know, but the reality is, you know, among our kinda media peers, everyone is pulling the same lever at the same time, right? So people are solving for, you know, near-term revenue, and in particular, cash flow. People are managing balance sheets, etcetera. And so, you know, in today's market, you know, you'd probably wanna 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, you know, whilst we have been, you know, a little bit disappointed in sort of, I would say, kind of the, you know, the rate that is, you know, on offer for some of our content in the market, we've been disciplined about, you know, not doing deals we don't think are economic. We've also been opportunistic in taking advantage of that market. So, you know, we recently, you know, acquired a really, really neat show, you know, called Nautilus from Disney. It wasn't gonna 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 you know kind of a fantastical universe.
So we think it fits within our, you know, our brand to kind of license. So we're really excited about it. So there's two ways to play that market, and so we're playing both sides.
Great. You've talked about, you know, cash content spent on a go-forward basis of around $1 billion.
Mm-hmm.
So can you just, you know, remind us how that compares to, you know, what you've spent historically on content? And how you have determined, you know, that's kind of the right go-forward, you know, level, and what could potentially shift that up or down?
Yeah. So, you know, pre-pandemic, AMC Networks was 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'll be closer to $1.1 billion this year, 2023, and we've been, you know, clear that that'll float down closer to $1 billion, into 2024. So, you know, we're still spending, you know, 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 do—we are opportunistic there.
But we produce for ourselves, and, and what that means is, is that we, we own the vast majority of our, of our, our slate on AMC and across many of our other channels. And so we have ownership economics there. And so, you know, one of the ways you asked about how we could modulate programming spend going forward, you know, we could choose to not take ownership economics of some of those shows. We could choose to co-produce, we could choose to, you know, license in shows, as a way to kind of drive near-term margin and cash flow, you know, while we, you know, kind of wait for a, a more opportune moment to, you know, kind of take bigger swings.
But, you know, we've, I think, modulated it 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. You know, obviously, partnerships are, you know, kind of an area of focus for AMC Networks. So can you talk about, you know, the opportunities with, you know, virtual MVPDs, traditional MVPDs? You know, for example, you know, can you discuss, like, AMC+ and Xumo, that launch-
Mm-hmm
... you know, kind of, you know, just more holistically, you know, your stance on that?
Sure. Yeah, we think, for those of you that don't know, Xumo is a joint venture between Charter and Comcast. You know, it's, think of it as a tvOS. 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, you know, to have them do that. MVPDs, as I said earlier, you know, 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 we think Xumo could be, you know, a really nice kind of tailwind to the pay TV industry. It will be also interesting to see, you know, if other MSOs or MVPDs kind of pick up that, you know, that product, and they kind of push it further. Obviously, I think they've got designs for it internationally as well. So we think, you know, we think Xumo is a great product. We think it could be fantastic for consumers.
You know, one of the complaints about streaming is you can't get anyone on the phone, right? Well, Charter and Comcast, you know, they can roll trucks, they can pick up the phone, they can do all those things. And so running a scaled streaming business is tough. You know, 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, you know, we're leaning into it with them.
Great. And then, you know, free cash flow on what I would call a normalized basis, which excludes the one-time Hulu benefit and any restructuring payments, is gonna be roughly in the range of $185 million-$205 million.
Mm-hmm.
Cost savings have been, you know, a component of, you know, driving some of that free cash flow.
Mm-hmm.
So can you talk about your cost-saving initiatives and any, you know, room to drive further cost savings, if need be, or if you wanted to?
Yeah. So we've been continuously, you know, driving costs out of the business. Obviously, you know, as folks in this room, I assume, will be aware, you know, we've run into some revenue headwinds. You know, took down revenue guidance in the last quarter, but have made up for that, you know, in sort of efficiency, essentially. And we look across, you know, our expense base. Obviously, the largest expense is programming. You know, second largest to that is marketing, and then we've got, you know, people, technology, you know, et cetera. So, you know, everything's on the table. We took some tough medicine at the end of last year. You know, that obviously comes at the cost of, you know, some one-time restructuring, et cetera.
you know, but we've continuously, you know, kind of, kind of cinched the belt a little bit. you know, we did what we said we were gonna do on the programming side, and so we've been able to, to hold serve on, on our AOI guide for the year. still feel good about it, you know, as a way to combat, you know, some of the, some of the top-line weaknesses we do see in the market.
Great. And then, you know, you've kind of touched on the next question, Patrick, which is, you know, we've, we've seen how the cost savings have been a contributor to free cash flow. So then, you know, on the revenue side, on the growth side, you know, what will, what do you think will drive, you know, some of that, you know, growth, you know, over the interim?
Mm-hmm. So, you know, obviously, you know, the secular advertising and affiliate markets remain challenged. You know, we see that, you know, continuing into 2024. But what we do see are, you know, green shoots around the rebundling of programming, and so we are in conversations with, I'll say, just about everyone on this front, you know, from obviously traditional distributors to a lot of our kind of programming peers, to stitch together bundles that make, you know, sense for us, for them, for consumers as well. And so, you know, we did a really kind of interesting pop-up test with Max, this past fall. AMC at one point sported, I think it was five of the top 10 shows, you know, on that platform.
So we feel really good about how our content resonates when it, you know, 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, you know, some of these bundles kind of emerging, maybe even sort of beyond the, you know, the, what I called sort of the ad-supported SVOD businesses being the building blocks of a new bundle, kind of bundle 2.0. You know, we think there could be other innovative ways to partner with some of our, our sort of programming neighbors, so to speak, to create bundles that, you know, drive value across the ecosystem.
Great. You know, are there any assets that you consider non-core 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 afoot to, you know, to sell specific assets. You know, obviously, you know, we're economic about it, so if people come to us with, you know, kind of serious offers, we'll consider all comers, but at this point, there's nothing major on the horizon that, you know, that we see. You know, we've got a lot of interesting assets. I think some of them are underappreciated, you know, by the market. And if the time comes, you know, we may look to monetize some of them, but there's nothing imminent right now.
Great. You know, net leverage right now is, you know, I think about 2.7 times. You know, what is the right leverage profile for this business in your view?
So we take a sort of a holistic, you know, look at it from a, from a broad, you know, capital allocation standpoint. You know, right now, you know, we're producing kind of run rate $200 million of free cash flow. You know, we'll end the year with about $600 million or approaching $600 million of cash on the balance sheet. You know, you'll be aware that, you know, we've essentially defeased the 2024s. You know, that'll 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. You know, we think that'll continue into 2024. We've been clear on that, you know, as well.
And so, you know, you should assume that we will be, you know, kind of focused on the 25s, as everyone would expect. We'll be, you know, we'll be sort of prudent, but also opportunistic in addressing those. And from a broad capital allocation perspective, you know, folks should assume that, you know, all, if not virtually all of the free cash flow is gonna go against, you know, the balance sheet. You know, we need to, we need to sort of de-lever from a gross, you know, 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 the $400 million due in 2024.
Mm-hmm.
You do have the 25s. You also have, you know, debt due in 29.
Mm-hmm.
So, you know, from a balance sheet strategy, so to speak, is that something you, you know, think about addressing, you know, incrementally, you know, maybe more holistically? You know, for example, you've taken the 2024s out of the equation. You have the 2025s and the 2029s.
Mm-hmm.
How are you thinking about that, if there's any thoughts or anything you can share?
Yeah, we've got a little bit less than two years until the 25s come due, right? The credit facility also, you know, matures, Q1 of 2026. You know, so you could see sort of a trade on the horizon to sort of address, you know, those two holistically. You know, beyond that, tough to say. But we'll be, we'll be prudent and opportunistic in monitoring the markets and, you know, kind of looking to raise, you know, capital at the appropriate time.
Could you remind us what your secured capacity is? Is that something-
Yes. That's definitely public. You know, 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, you know, a lot of dry powder, so to speak, on the shelf if we need to use it.
Great.
Mm-hmm.
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-
Okay.
If that's okay with you.
Yep. Fire away.
you know, can you just remind us quickly, like, what your minimum cash balance is that you like to maintain?
We could run this business with, you know, I'll call it several hundred million of dollar cash. You know, obviously, that we've got, you know, international businesses. We have, you know, we do production, so there's, you know, 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, you know, we would, you know, like to run the business with at least a couple of hundred million of dollar of cash.
Okay, great.
Mm-hmm.
Then, you know, we've kind of touched on this, but, you know, and talked about potential opportunities, but, you know, from a challenges, and I, 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 2024?
As I look at, I mean, this isn't just, this isn't an AMC challenge, this is an industry challenge. But, you know, I think, I think the pall on the industry will, you know, lift once people see pay TV, kind of, I'll call it cord-cutting, you know, dissipate to a degree. And if, and if, 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? You know, 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, 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 quarters. So from a relative value standpoint, if you're a consumer, you know, taking the existing kind of pay TV bundle, if it sort of gets supplemented with additional ad-supported streaming services, and you've got a UI that wraps around it, that makes it accessible-
Mm-hmm.
You know, relative to sort of stacking, you know, eight different streaming products together and, you know, maybe still not getting everything because there is some, you know, content that's behind the pay TV paywall, 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, you know, 18-24 months maybe. I think that's what investors should be focused on in terms of, you know, kind of calling up kind of a pivot in the business.
Great. Well, that's all I have. So unless there's anyone else?
Yep. Can you talk a little bit about AVOD and, sort of your launch and how that's been going? Sure, yeah. So the question is, CTV, AVOD, you know, you know, how are we in that business? We like it. We think these are great businesses, you know, for kind of incremental monetization. You know, obviously, consumers are voting with their feet, and so they continue the... The consumption continues to rise pretty substantially. We've got fantastic growth in our businesses. I think currently we've got kind of, you know, 90 channels across, you know, nine or 10 kind of CTV/AVOD platforms today. That'll 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, you know, a lot of declines we see on the, you know, the traditional advertising side.
Wonderful.
Great.
Thank you so much, Patrick.
Okay.
Pleasure having you.
Thanks, Marlene.