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AMC Networks on Thursday reported its third-quarter earnings, which were dragged down by restructuring costs. Results also were affected by lower ratings for the second season of Fear the Walking Dead and included a $19 million charge to write off programming assets.
The cable networks company, led by CEO Josh Sapan, posted a profit of $65 million for the latest quarter, or earnings per share of 91 cents, compared with $73 million in the year-ago period, or 99 cents. Excluding restructuring expenses of $19 million, third-quarter earnings per share reached $1.11.
The company this summer offered voluntary buyouts to staff to help it manage costs.
Wall Street analysts had on average expected earnings of $1.02 per share. Stock in AMC Networks rose $2.24 to close at $51.64 on Thursday, before falling back by 3.3 percent to $49.90 in after-hour trading. “Investor concern around the company’s key Walking Dead franchise continues to weigh on shares despite a strong start to the new season,” Michael Morris, an analyst with Guggenheim Partners, said in an investors note issued after AMC Networks released its latest financial results.
During the latest quarter, the increase in operating expenses was primarily attributable to higher programming expenses partially offset by a decrease in marketing expenses and compensation related costs. Programming expenses included a charge of $19 million in the current year period related to the write-off of “programming assets,” believed to be driven by canceled David Schwimmer drama Feed the Beast, as compared to a charge of $12 million in the prior-year period.
Third-quarter revenue increased 0.4 percent, or $2 million, to $635 million as weaker ratings, as highlighted by analysts in their earnings previews, meant no major boost. The year-ago results had been boosted by higher revenue thanks to then-new original Fear the Walking Dead and the acquisition of a stake in BBC America.
At the company’s U.S. networks, advertising revenue decreased 9.9 percent to $189 million. “The decrease in advertising revenues primarily reflected declines at AMC principally related to lower ratings,” the firm said.
On that theme, Sapan during a morning analyst call talked about a so-called Breaking Bad effect, where the AMC drama saw a spike in audience growth after catch-up viewing on Netflix drove viewers back to AMC for new episodes. He said delayed viewing of dramas on SVODs that drives up linear channel ratings for new seasons does impact decisions on series renewals, but argued that phenomenon had become rare in an age of abundance.
“It was truer five years ago, when there were fewer dramas on [TV], where there was a higher likelihood that an SVOD opportunity between seasons would expose a show beyond its first linear exposure, and expand sampling and get people interested and coming back for subsequent seasons on linear,” Sapan told analysts.
The exec pointed to the recent seventh-season premiere of The Walking Dead, which matched an all-time audience high and accompanied the zombie drama becoming available on Netflix for catch-up viewing. “There we saw a big bump, and that’s season seven. Did SVOD influence or anything like that help? On that show, yes, it probably kept it alive and dynamic and it becomes a 12-month experience for viewers,” he said.
But The Walking Dead could be an anomaly, Sapan added, given a zealous fan base, and he wants to see comparable fandom on other series before making a final decision on whether to renew. “It means if one is going to look for that [delayed viewing] effect, then the material has to have a higher level of enthusiasm and attachment and be among people’s heavy favorites, not further down their list,” he said.
Content also was on Sapan’s mind when he touted the value of his popular series for alternative digital platforms like PlayStation Vue, Sling and DirecTV Now, all of which AMC Networks has licensed content to. “That makes us an unusually attractive decision for anyone who’s setting up a new bundle, because they’re paying less and getting an awful lot more,” he told analysts.
Telecom giant AT&T’s $84.5 billion deal for Time Warner only confirmed for Sapan his content strategy at AMC Networks: “It seems to be an acknowledgement that brands and content that are important and even gold standard matter a lot in the world, and if you want to succeed as a distributor … it is really nice to have shows and brands that people care about most.”
Guggenheim Securities analyst Michael Morris recently reduced his earnings per share estimate for AMC Networks to 98 cents from $1.10, “primarily reflecting a reduction in our domestic advertising forecast (now minus 6 percent versus our prior flat) and the inclusion of a $22 million content write-down for Feed the Beast,” which AMC canceled in September after one season.
In a first reaction after the earnings report, Stifel, Nicolaus analyst Benjamin Mogil said U.S. revenue was “lower than expected on minus 10 percent advertising, below expectations, while affiliate/other revenues were in line. The variance on advertising was partially offset by lower expenses.”
AMC Networks recently finalized a $65 million investment in RLJ Entertainment, the entertainment company distributing content mainly in North America, the U.K. and Australia whose chairman is BET founder Robert Johnson
“We think this business provides some interesting opportunities as we go forward,” Sapan told analysts about the RLJ Entertainment deal.
Etan Vlessing contributed to this report.
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