AMC Networks Predicts 30 Percent U.S. Ad Revenue Drop in Second Quarter Due to Pandemic

The Walking Dead Season 10 Episode 4 - Still 1 - Publicity -H 2019
Courtesy of AMC

The company, led by CEO Josh Sapan and the home of 'The Walking Dead,' raised its streaming subscriber forecast and discussed the latest timing plans for new original 'The Walking Dead: World Beyond.'

AMC Networks, the cable networks company that operates AMC, IFC, WE tv, BBC America and SundanceTV, on Tuesday reported lower first-quarter earnings, saying U.S. advertising revenue fell nearly 11 percent in the period, which was affected by the novel coronavirus pandemic in its final weeks, with the second quarter set to see a 30 percent drop.

The company, led by CEO Josh Sapan, said about the pandemic's impact: "Beginning in mid-March, the company experienced adverse advertising sales impacts and suspended content production, which has led to delays in the creation and availability of some of its television programming." But it said its "portfolio of networks saw a significant increase in viewership as of mid-March in connection with national social distancing measures put in place in response to COVID-19."

It also said it now expects 3.5 million to 4.0 million paid subscribers in aggregate for its four niche streaming services by the end of 2020, "a full two years ahead of the company’s original target of year-end 2022." Management said on the call that the streamers have seen "strong" growth over the past six to eight weeks.

Sapan on the call said advertising has been particularly hard hit in such categories as travel, auto, restaurants and movies, but said the firm overall has “relatively less exposure” than entertainment peers. 

Management predicted second-quarter U.S. ad revenue would be down about 30 percent given demand problems amid the virus crisis and the fact that it forced the season 10 finale of The Walking Dead to be pushed back along with the debut of new spin-off series World Beyond. Management said though that it has been working closely with marketers to find ad solutions for them and expects that at least part of the ad commitments originally made for the second quarter will be pushed to later in the year. 

CFO Sean Sullivan said ad revenue in the U.S. has been the part of the company's business that has seen the "most immediate and significant" impact, adding that while viewership has been up, "monetizing these ratings has proven to be a challenge."

AMC Networks recently opened up an online destination for its advertising business, hoping to connect with clients there now that face-to-face meetings are off-limits for the time being. The virtual hub, dubbed Upfront Connect, helps brands communicate with AMC's sales force, screen AMC Networks content and explore ad and branded content opportunities. The Content Room, the company's recently launched branded-content studio, is offering all creative and production capabilities for free to any brand that signs on during this time.

Sapan added in the earnings report about the virus crisis: “In what has been a unique operating environment, AMC Networks continues to generate significant levels of free cash flow and remains well capitalized, with a strong balance sheet and strong liquidity. We continue to make significant progress on our digital initiatives, including strong subscriber growth across our Acorn TV, Shudder, Sundance Now and UMC [Urban Movie Channel] SVOD services, as well as Acorn TV launching in the U.K. Our portfolio of networks is delivering increased viewership in recent weeks, including a strong debut of the third season of Killing Eve and strong performance for the most recent and exceptional season of Better Call Saul."

He concluded: "Our continued investment in key areas – creating strong content and valuable IP, growing our targeted SVOD services, and maximizing the value of our linear channels – is enabling us to navigate this challenging time and will continue to serve us well when this environment stabilizes and as we look beyond this immediate period to the remainder of 2020 and ahead to 2021.”

The first-quarter U.S. ad drop to $213 million wasn't driven by the virus pandemic, but mainly timing and ratings trends. The company cited "lower delivery, as well as the timing of the airing of original programming partially offset by higher pricing."

Earlier this year, management had said that first-quarter revenue would be be down in the mid-single digits versus the prior-year period, with "healthy" growth in the international and other segments, led by increases at the company's streaming services, offset by the domestic networks segment. "Advertising results in particular will be impacted by the timing of our programming, most notably a two-week shift in the airing of The Walking Dead, somewhat offset by the airing of Better Call Saul on AMC and Doctor Who on BBC America," CFO Sean Sullivan said at the time.

The company in late March withdrew its earnings guidance amid the coronavirus pandemic, saying: "At this time, we cannot predict the duration of and degree to which supply and demand for our products and services, including advertising, will be affected. This makes it challenging for management to estimate the future performance of our businesses, particularly over the near to medium term."

The company on Tuesday also provided an update on its liquidity position, something Wall Street has been paying closer attention to amid the pandemic, noting that it had $704 million in cash and cash equivalents on its balance sheet as of March 31, down from its mention of $816 million as of its March update. It also reiterated it continued to have access to a $500 million revolving credit facility, which it has not yet tapped. It also said it had "no significant debt maturities in 2020 or 2021," mentioning payments of $56 million and $75 million due for the two years, respectively. 

AMC Networks' first-quarter revenue fell 6.4 percent to $734 million, driven by an 8.0 percent decline at its National Networks unit, while it had "essentially flat" revenue at its "international and other." Operating income dropped 29.4 percent to $173 million, while adjusted operating income was down 24.1 percent.

Quarterly earnings of $69 million, or $1.22 per share, compared with $143 million, or $2.48 a share, in the first quarter of 2019.

Sullivan was asked about the weak stock price, saying the management team has "a lot of confidence in the balance sheet and strategy," but added that there was indeed a "dislocation" between the firm's enterprise and its market and market. But he said people had to ask the controlling Dolan family about any potential thought about taking the company private. Said Sullivan: "We expect over time we will be recognized and the [stock] value will be recognized.”

Sapan and his team on the call also highlighted that the company was "actively planning" for the time when production and business normalize, providing a latest timing update on a Walking Dead spin-off the firm previously said would  get pushed to later in the year. 

Said COO Ed Carroll: "We moved The Walking Dead: World Beyond … back into [the] fourth quarter, so we are finishing post[-production] on that. That will be set to go. We have a new show, which is quite a bit anticipated called Soulmates, … that will be airing in the second half of the year. And we anticipate having some episodes of Fear [the Walking Dead] season 6 in the second half of the year as well.”

The Walking Dead is shooting in Georgia, and “we will monitor week to week, if not days to day” the production schedule, he added.

Explained Sapan: “We have had to postpone production and post-production work on a number of shows, resulting in some scheduling shifts between now and the end of the year, which we are also managing through.” He added that the Better Call Saul and The Walking Dead writing teams are working on season 11 and the final season of the shows, respectively, in virtual writers’ rooms, concluding: "So that work continues.” 

In early market trading, AMC Networks shares were up 3.6 percent.