AMC Networks Earnings Beat Estimates, CEO Says 'Walking Dead' Franchise "Will Have a Long Life"

The Walking Dead List 13 - H 2017
Gene Page/AMC

Josh Sapan says the company has become more of a studio, is happy to have a limited number of channels in an age of skinny bundles and virtual distributors, and argues that industry changes “play to our strengths.”

AMC Networks on Thursday reported better-than-expected fourth-quarter earnings amid higher distribution and advertising revenue as management touted the outlook for hit show The Walking Dead, which is currently in its seventh season and which has been a big topic of debate among Wall Street analysts.

AMC Networks shares were up 13.6 percent in early Thursday trading at $65.30 as investors cheered the upside earnings surprise.

CEO Josh Sapan on the earnings conference call discussed the outlook for the Walking Dead franchise as analysts have been discussing its financial importance and outlook amid lower recent ratings. "The show continues to have creative strength and command a large and loyal audience, which has in turn attracted ad revenue to our great benefit," he said. "The Walking Dead remains the No. 1 show on television among younger viewers by a very wide margin. Beyond advertising, The Walking Dead is illustrative of the benefits of owned franchise content.”

Concluded Sapan: "The Walking Dead is a franchise that will deliver ancillary revenues over different distribution platforms for many years to come as it does today. And we believe it will have a long life that accrues to our strategic position and financial benefit.” 

In the company's earnings report, he had similarly said: "The Walking Dead remains the No. 1 show on television by a wide margin and is a powerful example of programming that we own and distribute that commands a loyal audience, attracts advertising revenue, and has significant ancillary revenues that will benefit our business for years to come. With a rapidly expanding studio business, we now have a growing portfolio of shows that we own that provide this kind of opportunity for our business."

Asked about the studio business on the call, Sapan said: "The company is becoming and has become more of a studio,” rather than “only a channel operator.” He said that has allowed its shows to play on its own channels in the U.S. and internationally, then go to Hulu or Netflix in a later window in the U.S. and be sold to other distributors in foreign markets where the company has no channels.

AMC Networks so far has not produced shows only for other companies and has no plans to do so, but could consider such a production approach longer-term if the financial returns and strategic benefits make sense, said Sapan.

Asked about the company's channel portfolio, Sapan said its quality and pricing counts more than the number of channels at a time when some peers may have to close down weaker channels, according to analysts. "We have been of the mind for some time that quality matters, brands matter, content matters, engagement matters," said Sapan. "And you don’t get a free lunch for showing up with 22 channels." He added that his team felt that "a day of reckoning would come” for some peers. 

While the company felt SundanceTV and BBC America, in which it bought a stake, are well-defined channels, overall, he said, "we have already skinnied our offering down.” And AMC Networks channels should still get higher carriage fees, he reiterated. “Collectively, they are underpriced," said Sapan.

The cable networks company on Thursday posted a profit of $14 million for the latest quarter, or earnings per share of 20 cents, compared with $90 million in the year-ago period, or $1.23. The company in the latest quarter took non-cash impairment charges of $68 million related to AMC Networks International-DMC, its Amsterdam-based media logistics facility.

Adjusted for charges, earnings reached $92 million, or $1.30 per share, compared with $102 million, or $1.39 per share, in the fourth quarter of 2015. The decrease in adjusted earnings per share was "primarily related to the increase in adjusted operating income more than offset by an increase in miscellaneous expense." Wall Street analysts had on average expected earnings of $1.27 per share. Estimates had come down a bit after Sapan in December said that advertising was looking softer than anticipated. 

A 9.2 percent increase in quarterly operating income and 9.2 percent adjusted operating income at the company's U.S. networks, which include AMC, IFC and SundanceTV, reflected higher revenue, offset by an increase in operating expenses. "The increase in operating expenses was primarily attributable to higher programming expenses, partially offset by a decrease in marketing expenses," the company said. "Programming expenses included charges of $5 million in the current-year period related to the write-off of programming assets, as compared to charges of $16 million in the prior year period." The company didn't immediately say which show or shows the write-off was for.

U.S. advertising revenue rose 3.1 percent despite lower ratings in the quarter for the first half of season seven of The Walking Dead. U.S. distribution revenue jumped 15.6 percent.

"2016 was a successful year for our company both financially and operationally, driven by our disciplined and focused strategy of investing in high-quality content and creating brands that have strong, growing, passionate and engaged audiences," said Sapan.

He continued: "We are embracing changing viewing habits by making strategic investments in streaming services that fit well with our programming and the audiences at our network brands. As we look ahead in 2017, we see a number of attractive growth opportunities for our businesses and remain committed to delivering meaningful value to our shareholders.

Michael Morris, an analyst with Guggenheim Partners, said in a note previewing the results: "Season 7 of The Walking Dead premiered in late October, and though the show started strong, by the mid-season finale ratings were declining in excess of 20 percent on a year-over-year basis, worse than the 15 percent decline built into our estimates." 

He lowered his fourth-quarter U.S. networks advertising growth estimate for the fourth quarter to 0.5 percent from 6.0 percent "given The Walking Dead's recent ratings trends." Said Morris: "This is consistent with management commentary provided in December. We expect the show to remain in production — and popular with consumers — for the next several years, and as such we anticipate related ancillary revenue (from digital and international partners) to remain intact."

But, he warned, "Investor concern around the company's key Walking Dead franchise continues to weigh on shares. We continue to believe that market value under-appreciates the company’s ability to develop and monetize compelling programming. However, we do not see a clear path to investor realization and thus remain cautious in our target valuation multiple."

Sapan on Thursday also touted the ratings performance of the company's networks. And he said that AMC will this year air such returning series as Humans, Better Call Saul and Preacher, plus new shows like The Terror and The Son.