AMC Networks Earnings Beat Estimates, CEO Says 'The Walking Dead' Is in "Great Shape"

Josh Sapan - H 2015
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The company has added 15 million pay TV subscribers over the past year and is getting "increasing value" from its hit franchise, says CEO Josh Sapan.

AMC Networks, the cable networks company that operates The Walking Dead home AMC — as well as IFC, WE tv, BBC America and SundanceTV — reported better-than-expected third-quarter earnings on Thursday.

AMC Networks posted a profit of $87 million, or $1.35 per share, compared with $65 million in the year-ago quarter and earnings per share of 91 cents. Excluding restructuring expenses, its earnings in the year-ago period — which included a $19 million charge to write off programming assets —had reached $1.11 per share. Wall Street analysts had on average expected earnings of $1.15 per share.

Third-quarter revenue climbed 2.1 percent to $648 million, coming in slightly below Wall Street expectations. The growth was led by a 4.5 percent increase in advertising revenue to $198 million due to "higher pricing partially offset by lower delivery," meaning lower ratings, the company said. Distribution revenue increased 2.1 percent to $344 million, primarily due to "an increase in affiliate fees partially offset by a decrease in licensing revenues."

"We delivered strong financial performance in the third quarter, and we are on track to meet our 2017 full-year financial targets," CEO Josh Sapan said on the earnings call. "Our results reflect the consistent execution of our long-term strategy of investing in high-quality, immersive content that is resulting in growing demand among traditional distributors, virtual [pay TV distributors], advertisers and consumers; and, importantly, is giving us the ability to monetize the demand for our content through new revenue streams."

He added: "In an evolving media and entertainment marketplace, AMC Networks is well positioned based on our size, our pricing and our content, which includes four of the highest-rated dramas on all of basic cable, giving us the ability to continue to further invest in our content, our brands and new businesses."

On the earnings call, Sapan also answered several questions about the vitality of the Walking Dead franchise given ratings declines in recent seasons. He highlighted that the season eight premiere drew 15 million viewers, with the demo ratings about twice the size of the next-highest-rated TV shows, CBS' The Big Bang Theory and NBC's This Is Us.

"The Walking Dead remains the highest-rated program on TV for an unprecedented sixth year in a row," Sapan said. "We believe the show is creatively vibrant as ever and remains incredibly vital to an enormous and very loyal audience. But The Walking Dead for us is more than one show. The world of The Walking Dead is growing.”

He then highlighted spinoff series Fear the Walking Dead and the planned crossover between the two shows scheduled for "some time next year," as well as several gaming properties and VR apps tied to the franchise. “It really is a franchise that is embraced by a huge and growing fan base," Sapan said. "And as we further expand this franchise and we create new and different incarnations of it, we will continue to derive increasing value from it.”

Later in the call, Sapan again emphasized that the Walking Dead franchise is "in great shape" and still has a lot of life left in it.

Asked about the company's appetite for acquisitions or deals, Sapan said: "In the U.S., where we have five channels, we have the right size." 

Discussing the subscriber declines the pay TV industry in the U.S. has seen, Sapan said that the company has over the last year added "about 15 million subscribers" based on its carriage agreement. "That's, I would say, perhaps unique or radical in today's basic cable world."

"The third quarter was another difficult ratings quarter for AMC Networks' flagship AMC channel," Bernstein analyst Todd Juenger wrote in a recent report. "Season 3 of Fear the Walking Dead, which began in early June this year, saw severe year-over-year ratings declines right off the gate, and they only continued to get worse over
the course of the season." He added though: "The declines at the flagship AMC channel are being somewhat offset by increases at other networks. In this quarter, both Sundance and BBC America delivered year-over-year audience increases."

Guggenheim Securities analyst Michael Morris recently cut his rating on AMC Networks' stock from "buy" to "neutral" and reduced his price target by $13 to $60. "Our updated outlook primarily reflects increased caution toward advertising growth trends as the company navigates the maturity of The Walking Dead and increased pressure from digital video competitors," he wrote in a report. "While the company’s current valuation reflects investor caution, we believe that if The Walking Dead, which returns for season eight on October 22, remains on an audience decline trajectory consistent with previous seasons that both profit growth and multiple expansion will be challenging."

He continued: "We have previously estimated that The Walking Dead and its related programming (including series Fear the Walking Dead) will account for approximately 20 percent of total direct company operating profit during 2017. This reflects our estimates of advertising and ancillary revenue contributions, less the production cost of the programming. The estimate does not reflect any incremental affiliate revenue at risk should a decline in popularity negatively impact negotiating leverage or any cost savings from a reduction in marketing or overhead spend."

Meanwhile, Wells Fargo analyst Marci Ryvicker recently launched coverage of the stock with an "outperform" rating and $72 price target.

"AMC Networks is broadcast on steroids," she wrote. "Yes, ratings are down on some of the bigger shows (The Walking Dead most notably). But there is still no other place (outside of sports) for advertisers to capture so many adult 18-49 eyeballs — especially when most of AMC Networks' competitors (i.e. HBO, Showtime and Netflix) don't have an ad-based model. At the end of the day, AMC Networks' successful slate of hyper fan-based content should help its leading share of the ad pie expand even further."

Ryvicker also calculated that Discovery Communications' recent deal to acquire Scripps Networks Interactive values AMC Networks at $96 per share. "We're not saying anything is going to happen, but AMC Networks is the last of the pure-play cable nets without corporate governance baggage," she said.