AMC Networks Stock Drops Sharply Despite Strong Earnings

'Into the Badlands' debuted on AMC in November.

Higher content spending and a programming write-off affected the bottom line though as CEO Josh Sapan says AMC is increasingly "a legitimate broadcast replacement" for ad buyers.

AMC Networks, the company behind such cable networks as The Walking Dead home AMC, IFC and Sundance Channel, on Thursday reported better-than-expected fourth-quarter earnings as original series boosted U.S. revenue. But operating expenses also rose amid higher spending on originals, and the company took a programming write-off.

On Thursday's earnings conference call, president and CEO Josh Sapan said the company was focusing on original “shows that matter” and has started to own and control more of its shows to get the full financial benefit, including of ancillary revenue streams. This positions the company “well for all the current trends affecting programmers in what continues to be a rapidly developing landscape,” he said.

"Increasingly, the ratings of AMC's original programming [are] making it a legitimate broadcast replacement for ad buyers, especially amongst younger, more desirable viewers," and also thanks to their appealing upscale audiences, Sapan also argued. He said the company will push that second issue during this year’s upfront advertising season.

AMC Networks reported earnings from continuing operations of $90 million, compared with $77.6 million in the year-ago period. Earnings per share reached $1.23, compared with $1.06. Wall Street had on average forecast earnings of $85.9 million, or $1.18.

Adjusted operating cash flow, another profitability metric, rose 1.8 percent to $197 million. At the U.S. networks unit, adjusted operating cash flow dropped 0.9 percent though amid higher programming and marketing expenses. Analysts have highlighted that such costs for the company would be elevated amid spending on new originals.

AMC Networks also disclosed that quarterly programming expenses included a charge of $16 million "related to the write-off of programming assets," which it didn't detail beyond saying it was for shows across its channels, as compared to a charge of $28 million in the year-ago period. In the final quarter of 2014, the company had taken a $52 million programming-related charge.

The stock dropped sharply in early Thursday trading, mirroring the reactions of many other sector stocks after their financial updates this earnings season. It closed at $66.32, down 6.37 percent.

Sanford C. Bernstein analyst Todd Juenger, who has been bearish on many entertainment stocks, said in a first reaction: "The main debate on AMC Networks' stock into 2016 will be the stability of Walking Dead and to what extent new original series will offset Walking Dead declines — and at what cost. This earnings report won't enlighten that debate, other than to remind investors of the high cost of premium scripted original content."

Fourth-quarter revenue increased 11.4 percent to $679 million driven by 12.5 percent growth at the company's U.S. networks. U.S. advertising revenue rose 13.4 percent, while distribution revenue grew 11.6 percent.

AMC had new martial-arts drama series Into the Badlands premiere in November. Hit show The Walking Dead has seen somewhat weaker ratings, while spinoff Fear the Walking Dead ended its first run in early October, meaning early in the fourth quarter. Juenger recently lowered his U.S. advertising revenue revenue growth forecast for the fourth quarter from 21 percent to 18 percent "to reflect a higher decline in The Walking Dead viewership, offset somewhat by the finale of Fear the Walking Dead and the modestly successful new show Into the Badlands."

The company's international and other unit posted a narrowed quarterly loss despite foreign-exchange headwinds and higher expenses as revenue rose for IFC Films and the company's international networks.

Amid cord-cutting concerns among investors, AMC Networks' disclosures on U.S. subscriber data for its networks, based on Nielsen data, also was in focus. AMC was down by 200,000 subs from the end of the third quarter to the end of the fourth quarter, while IFC and Sundance each dropped 500,000 subs. WEtv and BBC America had unchanged subscriber counts. Stifel, Nicolaus analyst Benjamin Mogil said the data for AMC in particular was "likely to be viewed neutral/positive."

U.S. networks margins should remain stable this year, while international networks will see growth, management said Thursday. The company forecast mid- to high-single-digit percentage growth in affiliate fees. Sapan said that included various factors, such as subscriber trends and pay TV consolidation. Discussing first-quarter trends, the company said U.S. advertising revenue would be impacted by the timing of originals, mostly at AMC, while expenses would see modest growth for the same reason. 

Asked about “skinny” pay TV bundles and whether AMC Networks could leave out its smaller channels from such bundles, Sapan said the experience to date seems different from many predictions. “There is a presumption that this is occurring when in fact it’s not,” he said. “Shows that support brand and price will determine” what channels move around, he added. If the company has brands that are important for people, it will be in a good position, he said, concluding: “We are very fairly priced, if not underpriced.” Sapan has said before that AMC Networks deserves higher affiliate fee payments due to the popularity of its core networks and their shows.

Said Sapan: "2015 was a successful year for our company. Our strategy of creating compelling original, high-quality programming continues to deliver strong financial results, including double-digit increases in revenue and adjusted operating cash flow. We premiered three new AMC original series — Fear the Walking Dead, Better Call Saul and Into the Badlands — all of which broke ratings records. We received widespread critical praise and industry honors for our television and film content. We continued to build and expand our international business into key markets across Europe and Latin America."

On the earnings call, Sapan argued the company and flagship AMC were in a good position despite somewhat weaker Walking Dead ratings and industry fears among investors. “AMC is poised to continue that strong momentum,” he said. First, the exec lauded the ratings for the current second part of the sixth season of Walking Dead, emphasizing that it remains the top show among people 18-49 across all TV in the U.S. Sapan also touted the upcoming return of Fear the Walking Dead, the return of Turn for its third season, comic book-based show Preacher and others.

Discussing BBC America, which AMC Networks started managing about a year ago in a joint venture with BBC Worldwide, Sapan said the company was “quite pleased” with it and highlighted a “strong year” in 2015. Among shows, he touted the upcoming new-look Top Gear, saying hosts Chris Evans and Matt LeBlanc could help the show “to a new and even broader U.S. audience.”

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