Q4 2019 Earnings Call
[music].
Fourth quarter 2018 earnings conference call.
At this time all participants are in the they say 90 mode.
After just speak your presentation, there will be a question answer session.
And to ask a question during the recession, you will need to press Star then the number one on your thoughts here.
Year to quite any further assistance you me press star there.
With that I would now like behind you can principal agreed to host Mr. Sad Das, though senior Vice President Investor Relations.
Please go ahead.
Thank you good morning, and welcome to the AMC networks full year in fourth quarter 2019 earnings conference call. Joining us. This morning are members of our executive team, Josh Sapin, President and Chief Executive Officer, Ed Carroll, Chief Operating Officer, and Sean Sullivan, Chief Financial Officer.
Following a discussion of the company's full year in fourth quarter 2019 result, we will open the call for questions.
If you don't have a copy of today's earnings release is available on our web site at AMC networks Dot com.
We take note of the following today's discussion may contain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Investors are cautioned that any such forward looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ.
Please refer to the company's filings with the Securities and Exchange Commission for a discussion of risks and uncertainties.
Company disclaims any obligation to update the fall forward looking statements that may be discussed during this call.
Further we will discuss non-GAAP financial information.
We believe the presentation of non-GAAP results provide you with useful supplemental information concerning the companys ongoing operations and as appropriate and your evaluation of the company's performance.
For further details please refer to the press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information, which will refer to on this call.
With that I would have liked to turn the call me to Josh well good morning, and thank you for joining us in 2019 against the backdrop of a rapidly shifting BD ecosystem.
See networks achieved the key financial targets that we articulated at the beginning of year.
Generating healthy free cash flow and maintaining a very strong balance sheet.
We continue to respond to the pressures on the pay TV bundle and linear advertising in an increasingly consolidated media world with strategies to take advantage of these changes.
They are a focus on increasing content ownership.
Expanding distribution of targeted direct to consumer services.
Development of advanced advertising and maintaining a high value of our linear channels.
The size of AMC networks, and our particular restraints and approach put us in a position to benefit from levels of success that we believe are highly achievable and sustainable.
[noise], we're off to a productive start to the year with your announcement, we made yesterday.
With one of our biggest MPPD partners that reflects a changing and increasingly holistic relationship with our distributors.
Our new long term distribution distribution agreement with dish includes the launch of our full suite of targeted asphalt services as well as a desirable agreement for the courage of our linear networks.
Disagreement comes on the heels of long term renewal, we reached last year with charter communications, which includes making all of our asphalt services available to their subscribers.
We're very pleased to their MPPD partners have embraced our subscription video on demand strategy and are launching those services as part of their platforms.
Our new multi facet agreements demonstrate that MVP. These are increasingly recognizing the value that our growing espod services bring to their own offerings, particularly as their businesses change and evolve.
Deals also underscore the continued strain vitality and the value of our linear AD supported network brands and content.
[noise]. These targeted subscription video on demand businesses are increasing area of focus for us and we believe we are well on our way to being one of if not the leading creator and distributor of highly targeted subscription AD free services here in the U.S. and across the globe.
Let's take a few minutes if I may to share. Some further thoughts on how we view this business to give you a sense of our strategy as well as to provide a couple of updates.
As the category for General Entertainment Screaming services, we would like to coal something for everyone offerings have gotten more competitive and with massive free trials and connex in the last several months, we are particularly pleased with the continued momentum for our targeted scarred offerings.
In the fourth quarter against that backdrop, we passed 2 billion paid subs in aggregate across our four targeted services.
We take this has a strong indicator that our position offering special interest services as companions to Netflix Disney plus Amazon and others will continue to grow well.
Each of our for services are highly distinct and provide deep content libraries for fans of the genres I'll remind you. If I may have what they are Acorn TV, our largest service with over a million subs is dedicated to British mysteries and dramas.
Shutter is for her and suspense fans Sundance now is for fans of true true crime drama and dogs and urban movie Channel, where you MC is dedicated to black TV and film.
By focusing on specific segments and because we're not trying to be all things to all viewers. These businesses have an economic profile that is radically different than those of large general entertainment streamers.
We are programming and marketing to a highly specific audience and we can be very selective in our content and marketing investment.
Taking advantage of efficiencies versus spending all one needs to spend in general entertainment subscription video on demand.
Well this may seem nuanced it has a profound impact on content cost on sac and on churn.
Acorn TV, our British focused service is among the industry leaders in low churn in fact, it may have the lowest churn of any service in the marketplace today.
In addition to having broad appeal domestically the genres translate quite well overseas and we believe the international market opportunity is as yet untapped and quite significant.
We're now beginning development overseas on distribution of these services on a direct basis as well as through our international MVP relationships.
And these services are beginning to yield financial benefits to our top and bottom line. They currently generate approximately $100 million in revenue on a run rate basis, and we expect them to grow rapidly.
We also expect them to have favorable margin characteristics and overtime. We expect those margins to continue to improve as these businesses grow and scale, reaching healthy levels by 2024.
We are confident now that after several years, we have the right people the right Tech and the right experience toxic to succeed in the specialized subscription video on demand category.
And well of course, the major screamers will offer tremendous video choice, we will continue to run our playbook, creating distinct and clear destinations that appeal to targeted audiences as a complement to the larger for something for everyone offerings.
Another important focus for our company is advanced advertising, we recently completed to deal with the TV measurement and analytics company called 605 to get proprietary set top box and smart TV viewership data for more than 21 million U.S. viewers.
Enabling us to know much more about where and how our our viewers are interacting with our content.
We have built integration with advanced TV platforms, including clip for May TNT, and opened ATP, which allow our AD partners to source understand and connect with our audiences in a more real time and automated way.
In addition, we've begun to iterative and build upgrades to our own stuff our own proprietary advance TV platform called mediator.
I've mentioned in the past this tool offers a direct connection for Ed partners to target specific audiences across our content.
Leveraging our capabilities to deliver the most optimized media plans.
As we continue and we continue to be very focused on ensuring we are fully monetizing all of our high quality content.
Our portfolio in AMC networks is premium and diverse ranging from high quality scripted drama unscripted material comedy and award winning natural history programming.
And our distinct brands represent the best of what's out there in the AD supported world.
We continue to have a very high concentration of discerning hard to reach audiences that advertisers find attractive.
And with the proliferation of AD free subscription services, which we understand in RIN. We are one of the very few options on basic cable that consistently delivers high quality content in very deeply engaging environments.
In addition to continue investment investment in our targeted as Faade businesses and these advanced add efforts, we will increase our focus on owning and controlling more of our own IP.
We believe that continued investment across these three areas targeted espod advanced advertising with content created creation and ownership underpinning them, we'll move our organization from what has been solely a cable channels company into a premier targeted content company.
That is now simultaneously inhabiting the traditional pay TV ecosystem.
The advanced add world as well as the emerging targeted asphalt marketplace.
And while our investment is quite modest compared to the larger players. We believe that this is the right course for AMC networks to ensure the long term viability and financial performance of our business.
Before I turn the call over to Sean If I may I'll offer a few brief comments on some of our content highlights.
We have a rich slate of new and returning series in the first months of the year.
And I'll mentioned, a few of the specifics.
We kicked off the year with a multi network event for seven worlds one planet.
Our latest natural history co pro with our BBC partners that delivered significant gains over last year's Tentpole nature series.
BBC America is the definitive home of this iconic programming on us television through our exclusive TV partnership with the BBC.
And this new series success speaks to the growing relevance and enduring interest in the Sciandra.
Are we TV channel continues its momentum as the number one network on Thursday, and Friday, among African American women and adults.
The network is broadening its slate to include the music documentary genre.
With new series that integrate with we TV is popular document soap franchise is such as love after lockup growing up hip up and marriage boot camp among others.
And just this past weekend on AMC, we had back to back debuts of the second half of the creatively very strong season 10 of the walking dead and the Emmy nominated somewhat beloved better call, Saul, which heading into its fifth season is now moving deeper into the world that break.
Bad and seems to be embraced wildly by critics and viewers. It is worth noting that both the shows returned to AMC with across the board ratings increases from their most recent episodes and that for the 2000 1920 television season.
AMC currently has the top two cable drama premieres in all key demos with the walking dead and better call Saul.
In a few weeks will premiere a new series from the expanded walking dead universe Cold World beyond.
Which focuses on the generation of survivors, who have grown up in a post Apocalypse world.
It will be the first close ended walking dead series with just 20 episodes.
Following on from that will be the latest series of fear the walking dead.
I will note that as we continue to build out the walking dead universe, we see rich opportunity to extend the franchise beyond traditional TV series of which will have three.
As we've mentioned before we're making a movie with Universal Studios featuring this featuring the celebrated cop hero. If you watch the series you'll know the name Rick Grimes and are walking dead Chief franchise, Czar, Scott Gimpel and his team our prepping the variety of specials digital short form series and other iterations, which we'll talk.
More about as the year progresses.
Later this week will premiere in new anthology series called dispatches from elsewhere. It's from the multi talented creator writer and star Jason Segel, who some of US may know from his long career, including the TV series, how I met your mother and the film Forgetting Sarah Marshall.
He appears with the killer ensemble cast of Sally Field Andre Benjamin Richard He grant and the new breakout Star named Eve Lindley. This intriguing immersive series is about a group.
Of four.
Strangers, who stumble upon an elaborate alternate reality game that exists exist just beyond the confines of everyday life.
Other returning series include the final season of the Buttrick claimed brockmeyer with Hank Azaria on I F.C.
The critically loaded thriller liar with Joanne frog and.
And in April our much celebrated an award winning fan.
Killing Eve, which returns for season, three storing Golden Globe, Sag and critics choice Winter Sandro and Emmy Winter Jody Comber.
Later in the year, we're looking forward to several new series, including a show called Soulmates, which isn't anthology drama with dissatisfied twist from Black Mirror writer will bridges Costarring Sandra Snook from succession. It is about a new technology that lets one five.
Find ones true genetic predetermine soulmate, it's as Johndroe bending dark comedy from executive.
Plus I'm. So forgive me, there's also a genre bending comedy from executive producer, Russia Jones that is called Kevin can FM cells that show probes. The secret life of the passage of the passive agreeable sitcom wife in what we think is in a resting new format.
And on shutter, we're in production on a second season to very popular original series creep show from walking dead executive producer, Greg Nick Taro.
And our claimed and popular series, a discovery of which is which broke subscriber records last year for both shuttering Sundance now. We'll also returned for a second season later in the year.
So thanks for listening to them. They are just a few of the shows that we're looking forward to a much much more to come.
With that I'd like to turn the call over to Sean for more detail on their financial performance.
Thanks, and good morning, as Josh highlighted 2019 was successful and productive year for the company.
Despite the challenging macro environment, we met each of the financial targets, we laid out at the beginning of the year for 2019 total company revenues grew 3% to 3.1 billion, an ally increased 1% to 944 million.
Adjusted EPS was $9.27, an increase of 7% versus the prior year.
And the company continue to generate strong free cash flow delivering $377 million.
So let's review the performance of our operating segments.
For the full year National networks revenues were $2.4 billion, an ally was 904 million a decrease of 2% as compared to the prior year for both metrics.
In the fourth quarter National networks revenues decreased 1% to 589 million.
Oh, I was 182 million a decrease of 13% as compared to the prior year period.
Distribution revenues increased 6% in the fourth quarter.
As expected it was a particularly robust quarter for content licensing revenues due mainly to the timing of the licensing of our scripted original programs results on the quarter reflected the spotty availability of preacher into the badlands knows for up to and killing Eve, which more than offset the absence of asphalt revenues from diet land in Q4.
Our 2018.
The international distribution of the walking dead also contributed to this increase.
As for the subscription revenue component of distribution revenues were down in the mid single digits as compared to the prior year period. In addition to the quarterly fluctuation based on the timing of various agreements renewals and adjustments we continue to see a moderation mainly due to macro factors.
As we mentioned on prior calls our results in 2019 were also impacted by the interpretation of a contractual provision with one of our distribution partners. We're pleased to announce that we resolved our differences with this partner in early 2020.
With respect to advertising advertising revenues in the quarter decreased 8%.
At AMC the channel results were influenced by lower delivery, primarily related to the walking dead as well as our best Christmas ever programming lineup.
At BBC America results were impacted by the absence of Doctor who.
However growth that we TV and I have see as well as increased pricing across our portfolio of networks helped to offset the unfavorable comparisons.
Moving to expenses in the fourth quarter total expenses increased 6% versus the prior year period.
Technical and operating expenses increased 6% to 306 million.
The variance principally related to the timing and mix of original programming across our networks in the quarter, we recorded $23 million and charges related to the write off of various programming assets across our portfolio of networks. This amount compares to write offs of 29 million in the fourth quarter of 2018.
As seen a expenses were $113 million in the fourth quarter, an increase of 12% versus the prior year period.
This variance primarily due to an increase in bad debt and an unfavorable comparison in stock based compensation. In addition, marketing decreased year over year.
Moving to the international and other segment for the full year revenues increased 23% or $136 million to 734 million.
The main drivers of the increase where the acquisitions of RLJ and levity.
To a lesser extent revenue also reflected an increase from our other targeted subscription streaming services shutter and Sundance now.
For the full year ally increased $31 million to 50 million.
This increase was principally related to the acquisitions I mentioned as well as improved performance at AMC networks International.
In the fourth quarter International and other revenues grew 7% to $201 million increase primarily elected growth at our targeted subscription streaming services as well as liberty.
Oh I was 15 million increase an increase of 6 million versus the prior year, primarily attributable again to improve performance from our targeted subscription streaming services.
Moving to EPS for the full year EPS on a GAAP basis was $6.67 compared to $7.57 in the prior year on an adjusted basis EPS was $9 in 27 cents compared to $8.69 in 2018.
Year over year change in adjusted EPS reflected the increase in ally lower tax expense as well as a reduction in outstanding shares as result of our stock repurchase program, partially offset by a decrease in miscellaneous net.
GAAP EPS also reflected the increase in impairment and related charges.
For the fourth quarter EPS on a GAAP basis was a loss of 15 cents on adjusted basis EPS was a dollar and 69 cents.
The year over year change in adjusted EPS reflected a decrease in operating income and higher tax expense, partially offset by an increase and miscellaneous net.
GAAP EPS also reflected 107 million an impairment and related charges recorded our international networks, partially offset by a reduction in restructuring and other related charges.
As disclosed in our earnings release, the impairment charges, primarily reflected the partial write down of goodwill associated with AMC networks International.
In terms of free cash flow. The company continues to deliver healthy amounts of cash we generated $377 million and free cash flow for the full year.
For the 12 months cash interest was 152 million tax payments were 140 million capital expenditures were 92 million and distributions to Noncontrolling interest were $16 million.
Program rights amortization for the 12 month period was 975 million and program rights payments were 970 million, resulting in a source of cash of $5 million. This compares to use of cash for programming 18 million for the prior year period.
Turning to the balance sheet, we continue to maintain a very strong balance sheet and have the financial wherewithal to carry out the strategy Josh discussed.
The four key tenets of our capital allocation policy remain unchanged. They are first invest organically in our core business and new businesses on projects that will produce attractive returns for our shareholders.
As we continue invest in content and reposition for a direct to consumer focused landscape.
Gaining increasing confidence in this strategy, we believe the highest return for our capital as to fund the content that is core to driving our platforms to drive holistic value out of our distribute district distribution relationships and to build the assets necessary to best position us in the evolving market.
Second maintaining leverage as appropriate for the business outlook as of December 30, Onest AMC networks had net debt in finance leases of 2.3 billion, our leverage ratio based on LTM ally of 944 million was 2.5 times.
As previously disclosed earlier this month, we announced our intention to redeem 200 million of our outstanding foreign three quarter.
Notes due 2022.
We will continue to look to opportunistically manage our upcoming debt maturities and reduce our interest expense.
Third make disciplined and opportunistic opportunistic acquisitions and advance our strategic plan.
And fourth return capital to shareholders over the past three and half years, we've returned over $1 billion to our share repurchase program, having repurchased approximately 26% of our outstanding shares as of last Friday, the company at $489 million available under its existing authorization program.
Return of capital remains a priority to date, we have returned significant capital to shareholders and we will continue to be opportunistic with pacing that we'll continue to vary from quarter to quarter and year to year.
So looking ahead to 2020 as John discussed, we expect 2020 to be a pivotal year on our continued evolution.
We expect total company full year revenues to be down modestly.
We anticipate our results reflect continued strong growth from our targeted Svod services.
This growth is expected to be offset by continued pressure on our traditional linear business and content licensing unfavorability due to shows that were written to conclusion in 2019, including into the Badlands, the Sun and procedure.
As for the total company full year adjusted operating income as Josh as Josh outlined we're accelerating investment in several areas of our business that we anticipate will position us for long term growth.
These areas primarily include content creation targeted as far as well as advertising related initiatives.
The implementation of these initiatives in several instances will impact our financial performance in 2020.
For instance, our decision to retain select Svod rights to our programming impacts the amortization timing and results in the acceleration of incremental expense into 2020.
In addition, we're likely to incur expenses in 2020 related to the development of new growth opportunities such as the international expansion of our targeted streaming services.
As we have in the past we will at the same time continue to aggressively manage our overall cost based.
We expect to the net impact of these items will result in a decrease in total company full year ally in the mid to high single digits.
As for free cash flow, we expect to continue to deliver healthy levels of cash and project full year 2020 free cash flow to be at or above 2019 levels. Most notably we expect a decrease in capex taxes and interest to offset the allied decline.
Looking beyond 2020, we expect our results to improve as we position AMC networks for long term success and an evolving landscape.
As for the cadence of our performance during the year, we anticipate continued variability quarterly as a consequence of the specific timing of our investments and the airing of our shows.
With respect to the first quarter, we expect total company revenue to be down in the mid single digits versus the prior year period.
We expect healthy revenue growth our initial another segment led by increases at our targeted asphalt services.
At the National Network segment, we expect our results reflect a continuation of the trends, we're seeing both in subscription and advertising revenues.
Advertising results in particular will be impacted by the timing of our programming most notably a two week shift and the airing of the walking dead somewhat offset by the hearing a better call Saul on AMC and Doctor who on BBC America.
As for content licensing revenue, we expect the decline in the quarter due to the timing of availability of our content and ancillary windows.
As for total company expenses, we expect an increase in the high single digit range as compare to the prior year period, due most notably to the timing of programming and marketing.
As the year progresses, we expect the timing of expenses to turn more favorable and therefore ally performance to improve.
So so in conclusion overall, we're pleased with our performance in 2019 and believe we're positioning the business for long term success moving forward.
So with that we'd like to move to the question and answer portion of the call. Operator, if you could please open the call to questions.
Thank you at this time, you would like to take any questions from me conference today and as a reminder, if you wish to ask a question you will need to press Star then the number one on your telephone keypad to read.
You mean press the pound or cash.
Please standby will be composite Kenny roster.
Our first question comes from the line of Ben Swinburne Morgan Stanley. Your line is open. Please go ahead.
Thanks, Good morning.
Josh could you talk about the opportunity you see with these targeted outside services globally I don't know if you have.
In any research you've done on sort of the Tam or or how big the genres are.
In your view and also are you are you able to use the linear channels from a promotional and content and brand perspective.
Drive these businesses and then I just wanted to follow with Sean Sean can just help us understand sort of bridge around AOL and free cash flow last year, you guys had allied growth.
Cash from ops is actually down which didn't sound like it was program unrelated to anything any color. There and then just in 20, you're talking about a better free cash performance relative to AOL I just want to see if you could help us understand those drivers thanks to both of you.
Hey, Ben its add actually.
I'll weigh in on the on the opportunity the international opportunity against our S. Vod one of the things that is interesting and favorable about this business is we're able to develop an intimate relationship with our subscribers.
We see all the data we know what shows they watch we know what their completion rate is of the show we know how long it takes them to go onto the next episode and obviously, we know what shows our most popular and most utilized we then able to develop.
A demographic profile of those customers and look at populations in other territories. We also overlay that with rights availability, what we can coproduce, what we own increasingly as we own more content there become more efficiencies about expanding so we look first to English.
During territories for obvious reasons for some of our OTI Ts, we're looking at parts of Europe and we're also looking at Latin America also the overlay of our international Salesforce provides us a head start on on getting these services on the major platforms. So thats also unimportant part.
Of the strategy that that you will see going forward to your second question with their linear channels. There is absolute crossover between the brands and the content on some of our linear channels and the OTI services. Some good examples that are top of mind creep show premiered on.
On shutter and you will see later in the year. It will run on AMC, we think that will be successful on AMC, but also to build the audience than for this season to launch of creep show back on shutter, we did the reverse dynamic with Nosferatu, where we premiered it on AMC and then.
The transferred over to shutter and now we're building toward season, two as well and other examples with content moving fluently between U.M.C. and we TV abound and also between Sundancetv and Sundance now.
Got it Ben on the free sorry, so just on the free cash flow. So as we think about 18 to 19 is performance with the increased they apply there was a investment in working capital and 19, which was really the year over year driver in terms of free cash flow from performance 18 to 19 as we fast forward to 2000.
20, we expect working capital turned more positive, but as I said in my remarks.
Capex were coming through a heavy capex cycle, we'll see some benefits there, we'll see better cash tax profile in 2020 in those items will more than offset.
Ally discussion that we had so we feel great again about the free cash flow portrait dynamic.
As we continue to invest in content as we continue to to pursue obviously these gross growth initiatives. So we feel very good about the free cash flow profile.
Thank you guys.
Our next question comes from the line of Michael Nadesan from Moffett Davidson. Your line is open. Please go ahead.
Thanks, a couple of for Josh and then one for shot so Josh you're now they have addition charter Don on on the renewal side could give me a sense of what percentage of footprints coming due the next couple of years and given that you always say to US roll. Your better you are better guide does your judge of subscriber trends going forward.
I would think about the Inflators you guys have so if no one.
Really truly knows the shape of subscriber declines help us think about okay in any decline world how do we offset declines with scintillator. So that's that's subscriber questions and then for Sean to Ben's question. Your second half Cashel. This year really really came down and just I haven't updated the Molly gave US was updates we look at second half versus.
First half was it was the driver working capital was that the main part of the decrease in free cash flow. So thanks.
Sure Michael So this is Josh.
Yes, So I think a couple of things we did do the two renewals you mentioned and we feel quite good about them.
For multiple reasons.
One.
Is.
Frank stability continuity.
The second is and we did well on that front. So we did all of our linear channels.
Deeply penetrated as they've been the second is the launch of these targeted asphalt services and as you know.
In the Cds that are wire line have incentives now, particularly to sell video to an increasing percentage of broadband only subscribers and we.
I'd like to believe that were very good relationships with these distributors and we'll work with them in new ways to have them realize incremental revenue and margin from video and will be the beneficiary.
The deals were.
The deals all have annual escalators in them.
There the pace of those annual escalators I can't tell you with certainty given what will occur in the subscriber profiles that we've been seeing of late particularly on the satellite side, where will that out. So I will say, what I've said before you study it more closely than I do.
We're all watching trends quarter by quarter end. It is slightly difficult I think for anyone over a 12 month horizon to say.
Satellite will be this wireline will be this there's a proliferation of streaming it is a moving animal you know the numbers today I think as where we stand today there is 80 million.
Satellite cable telco is 9 million virtual.
Subscribers. That's a total of 89, you know the trends that some of the virtual as we're moving around in terms of entrance growth reduction.
You also know the satellite trends so when we offer our proves effective view of the year, we do our best calculation.
On.
What's going to happen to those sub.
Those subs and of course, we updated with great regularity I can't give you a better answer the net except to say rate escalators and an expectation of erosion in the subscriber universe, but I would say one macro thing if you don't mind macro micro and that is that.
AMC networks is I believe.
Among the if not the best material to carry on basic cable understanding that there is some pressure on the environment and I'll say that the cause and I hope, it's not boastful when last Sunday night, we premiered to shows to season high results the walking dead.
Breaking bad and then we have seven worlds on with our partners and the BBC and all three of those things have upward momentum and our wholesale rate. If you look is on a comparative basis and I don't want to knock anyone but to the sort of bloated in some cases wholesale rates that come from some companies that are.
Our constructed differently, we are something that every retailer that sells video wants to have because the price is highly attractive for the value and we work with them intimately to build that value and now to build it further on the Espod side. So I did a hope I answered.
At least reasonably your question specifically on what's going to happen the year I do want to say that I think that the manner in which we've constructed the business and the manner in which we're investment investing is smart prudent and wise and clear eyed and clear minded against developing a return in the United States.
Okay and elsewhere underpinned by this cash of content that is incredibly attractive on basic cable the way, it's organized particularly our partnership with BBC is smartly done because we now increasingly on it and put it in our own little library. If you can imagine that for use where we want to deploy it.
Leader and we have a very responsible and smart plan for growth.
Thanks, Josh.
And Michael to your your second question on free cash flow. So yes, the in 2019.
First half second half in some respects to a lesser degree cash tax payments.
Were lighter in the first half than in the second half, but the end of the day again it relates to the working capital content licensing activities in the back half of the year production activities for our shows in our originals are impacting free cash flow, but as you again as we fast forward to 2020 I think the.
Free cash flow profile that articulate articulated just reflects the robustness of our model and our platform.
Okay. Thanks, Sean.
Our next question comes from the line of a Michael Morris from Guggenheim. Your line is open. Please go ahead.
Thank you good morning, two questions. My first one maybe for Josh add is around the role of advertising on your as Faade services can you just tell us right now.
How much AD supported product you have out there and as you look forward, what's the role of advertising or what's the contribution you would expect would you expect to offer.
Different tiers of service, perhaps an AD free and AD supported.
How are you thinking about those types of things and then secondly, Sean.
With that within your outlook, you talked about results improving beyond the investments that you're making in 2020 can you just talked about the key contributors to what would cause that upward inflection in 2021, and you sort of how you're thinking about the swing factors, whether it's on the topline or on the expense side. Thank you.
Hey, Michael its add on on advertising and our.
As far as services, we do not feature any now with AMC Premier part of the thinking was to give our view is a choice working inside the ecosystem with our distributors of how they'd like to experienced AMC content. They could get it in the AD supported environment, where they could get it in a more binge friendly ad free.
Okay environment and there are some interesting things, we can do with our distributors and and we I think we will be do some interesting things with him in 2020 on the the Otcs you're talking about TT. We don't feature advertising now we don't have immediate plans to.
Theoretically that could be an opportunity because.
We have an upscale audience, that's highly targeted but we do not have any plans at present to.
Look that way.
And Michael to the beyond 2020 question again, I think as I articulated 2020 has some unfavorable programming timing and investments.
Obviously, we're developing a number of growth initiatives, including the targeted escalade that we've been talking about this morning, including international expansion of those so.
Our expectation on improved performances is really a result of the uptake and success of those initiatives that we're executing in 2020.
Thank you and Sean if I could just ask you one more you talked about the resolution of the difference.
With the distribution partner in early 2020 that impacted due in 19 could you quantify at all.
Sort of how much that may have impacted your 2019 subscription revenue and how we should think about whether that gives you a little bit of a favorable benefit in and the coming here.
Yes, Michael again, as you know, we're not going to specific program agreements.
Or distribution agreements. So I think all I would say is a we're pleased we resolve that we did it in 2020.
In the articulation of the guide for the full year 2020 is reflective of that resolution.
Okay. Thank you.
Our next question comes from the line of Todd Juenger from Sanford Bernstein. Your line is open. Please go ahead.
Okay.
Hi, good morning, Thanks for taking the questions. If I could first if you don't mind.
Take other shot at what Ben was I think trying to get at in the very first question in the queue anyway.
Let me, let me try it this way.
Ed if you still an engaged on this so thinking about the Tam for some of these niche Svod services. He described them. If we could just focus on the U.S. even.
I guess when trying to wrap my head around is knish by definition and as you've said means targeted sort of a very particular audience.
You talked about a million subscribers already or more than that for acorn.
How many potential households, do you think there are in the us for a service like Acorn.
To help us understand whether a million is a lot of that potential market are a little bit at a potential I'd love your thoughts on that for really all the services Acorn shutter UN see Sundance.
If you don't mind and then Sean if you just.
Hopefully quick.
Second question.
I truly apologize if this was in your guidance Tonight and I missed it well is taking notes, but the content licensing side of the national networks.
Especially with evolving Svod strategy, that's the hardest at least for me to try and.
Gauge in terms of growth.
And now, especially as you're changing it did you make any comments or you can you just help us should we think it that is a growing item generally for next year would that may be down as you rethink your willingness to license some things just plus minus any help you could you just to narrow it I'd appreciate it. Thanks.
Hey, Todd its AD sense, so on the targeted at five.
I think they're the best guidance I can give you is we've said looking out to two year 2024, we expect five to 7 million RTT subscribers and we expect upwards of 500 million in revenue I don't think I'll break it out individually.
They buy OTI service, except I think what's interesting since the last time, we all talked is the the marketplace has been dominated of late bought by the new by the new entries.
And the free subscription samples.
And the partnerships with.
With that mobile phone services, and such and so that's a lot of noise and that's a lot of subscribers.
But we are continuing on our plan and we are on the pace that we have talked about in the in the last two fall. So we we think we're onto something because we have such an intimate relationship with those subscribers and for us managing churn and keeping our subscribers as we grow them.
Is it the name of the game and in doing so those services then.
Can become profitable at much much fewer subs and will run at a healthy margin I hope thats helpful.
I appreciate it thanks for that kind of help go ahead John.
Yes, sorry, Todd So again I did try to at least give some qualitative comments to content licensing again.
As you know the cadence of.
The writing a showed a conclusion it becoming available and ended up domestic Espod service.
That is going to create content licensing unfavorability in 2020, I think I guided you do that for the full year. I also gave you some con text as it relates to the first quarter.
I will also reiterate again, we're doing this on a select basis. So this isn't a formal our from policy. So I think we're looking at the each show each opportunity and determining the best way to monetize it whether it's on our platform or by monetizing it both domestic and abroad internationally.
So we have shows it right to conclusion in 19, and we have a bunch of new shows the Josh walk through whether its soulmates, whether it's Kevin can EPAM sell whether its dispatches. So obviously have a number of new shows as we maintain our content investment and those are premiering so given the windowing of our historical behavior. There is an.
On favorability on timing impact occurring.
Thanks, Tom Sean I do apologize for the bit of redundancy, but I'm glad crystal clear on that thank you.
Our next question comes from the line is as of the tobacco from Ken Ball Research. Your line is open. Please go ahead.
Good morning, I have one for Sean and one for Josh.
Sean for years, we had the comment that was very helpful for us the broadly stable margin International network segment, So I understand and the new world that changes I Wonder if a this is true and be would you be able to give us a similarly useful.
No guidance on outlook for how margins will will evolve as it goes through this transition and then I have one for Josh.
Absolutely. Thanks so.
As you look at 2019 versus 2018 at the National networks, I think we delivered a pretty stable margin at 38%.
Prospectively.
I didn't offer that guide I do think that my comments speak for themselves about areas of investment areas of growth areas of opportunity, but at the same time.
Managing aggressively the cost base, so not going to give you a hard and fast guide that we're going to have either consistent or a broadly stable margin, but I think we're being very prudent and disciplined around the investment for our national networks are linear channel business in light of the macro factors.
And what we can control and what's occurring to us so I think that hopefully our past behavior and activities and financial results speak for themselves.
Alright, and Josh I would like to ask it to elaborate on this view out that the industry is going through effectively on bundling you have multiple direct to consumer services and so on but eventually it will have the every bundling will occur so.
So you offered in the past very insightful views on the future of industry. I was wondering if you agree with that and be who do think will be that entity that will be bundle services and what that means for you.
For your initiatives and linear and.
Direct to consumer services. Thank you.
Sure.
Give you I'll give you my best perspective on it.
The silly.
It is first of all in motion and so I think that.
There has been some occurrences.
That have probably surprised many so I think prognosticating with clarity or certainty I should say with certainty is a risky business with that I think.
What I'd say is a few things and unfortunately, it won't all sound like one big simple home run.
There's erosion, obviously in the pay TV side of the existing ecosystem it's occurring.
As much greater speed for obvious reasons on the satellite side than on the wireline side because of presumably the attachment to broadband to.
Wireline side I think the numbers today are there is around 80 million in the us that or cable satellite and telco I think there's 9 billion that are so called virtual MVP. These so there has been erosion in those numbers I think I see them before thats the state of the Union.
There's price pressure on that part of the business on what we used to call. The basic cable bundle by the way there's little under price pressure on what we used to call premium cable.
Hello Showtime stars.
As the streaming services have caused I think MVP. These to revisit some of the fixed feels they've done on that segment, but the price pressure I'll just take this segment by itself on the basic cable part of video.
We will continue we think that AMC networks is a winner.
In that arena against that trend, because frankly of price slash value and so if something costs.
Four bucks or 10 Bucks or 12 Bucks and has a gazillion channels and we cost a fraction of that and have several hit shows that people are watching a lot of that were great by and therefore, we are essential part and the smartest economical part.
That piece of business, so that I do think in truth, though goes through some sort of erosion.
For the multiple reasons that we've described and were frankly forecasting that.
The the.
Super rapid proliferation and adoption of streaming services I think took some by surprise some of the events in the last.
Several months the stats one reads about you'll have them better than me 24 million Disney plus 33 million free trials on Apple because of device sales or rather breathtaking.
Now some of them are essentially free trials, but nonetheless, there a phenomenon of the combination of tech and content.
And.
So that is out there my own personal view is that there is likely to be some packaging occurring as we go forward. The initial early experiments of packaging and low if you were them have been rather small and they've been on the sidelines I'm not for sure they've worked that well.
To date.
And the major sort of.
Tech stores, if you want to call them or channel providers have not yet seen to package my own personal view is that the first packaging will see will likely come from content providers.
Who will package what they do in their own umbrella in a certain since Disney plus you could call a package.
Because if you actually look at the interface, you'll see for well or five well known brand names all under one sort of roof. So I think the early packaging occurs.
On the programmers as opposed to from what we commonly consider the retailers in as much as these direct to consumer services are using retailers and there's been a separate question I'm sorry, I'm in a bore you with too much information Theres a division of whatever it is of direct to consumer services not info.
Being direct to consumer, but being sold by other retailers Amazon.
Now mvps at all.
From an AMC networks point of view, our view is that we need to have great material, that's extremely well priced and supersticky on basic cable and we need to own the right. So we can navigate and move where they go and we can make these decisions selectively.
And with control about what we sell off and what we deploy on our own and where we deploy it because the landscape is going to move and we will see opportunities and we don't want to peanut position to not controller on faith on the asphalt side, you heard talk about the manner increasingly in which we are windowing.
The same content and leveraging it and scaling it and we have some decisions to make when shows come back now from our licensing to third parties like halt and catch fire and rectified you may not know those shows they're coming back from Netflix what do we do with them do we sell them again do we put on our own services where is the greatest return.
Turn that will all feed into whether frankly, repackage or not which as I think what is likely unlikely consideration occurring among the number of different media companies. Today. So there is an inconclusive speech.
Yeah.
The silly I'm, sorry, it's inconclusive, if I had to say it I would say.
After June is likely to come from programmers and.
I think that theyre going to look to muscle their way into value and share and.
And then I think Avon services are going to live at a level underneath that and they're going to actually put some pressure on the price and value of commercial free subscription services, because certain people will be able said get enough stuff from those services and I can sort of just chew on that for a while it may not be supplying but it's free.
So at least we have our minds on all that occurring and how to invest properly and be prepared for both the headwinds and tailwinds that occur from that in the United States and beyond and we've given you our plot.
The plus been in place for a long time Im sorry from going on for long sets as low as tended to be quiet.
I'll stop you asked open ended you got to open ended.
Thank you very much of a good day.
All right operator, we have time for one last question. Please.
Thank you. Our next question comes from the line of Bryan Goldberg from Bank of America. Your line is open. Please go ahead.
Oh, Thanks, I've just got to a couple.
Thanks for the updates on the international direct to consumer plans I was wondering if you could help us think about.
In this year, which markets make the most sense to go into first and how how much localization you think is going to be needed for those rollouts as we think about the building blocks that need to come together for a successful launch and then.
I guess more specifically for Sean on the guidance.
You talked to you talking about about a 100 million runrate revenues on direct to consumer exiting 2019 could you frame for us the latest thoughts on the path to breakeven in direct to consumer and how much.
Dilution might be occurring in this year's ally outlook from DTC and then one housekeeping.
I think you called out an accelerated amortization policy for your own content, where you control. The Svod rights in 2020, and I was just wondering could you clarify our you accelerating.
Because you're taking those rights in house for play out on your own Svod services or are you accelerating.
Due to a different assumption for the value of that window to third parties as a bit above any color would be appreciated.
Thank you.
Hi, Brian its add on your five question I identified earlier.
Parts of Europe, and Latin America, as and priorities for expansion of some of our S. Vod services I would say localization is not a a year one priority, but I would also point out because of the local regional of content much of it lifestyle that we produce in.
Iberia in Latin America and in the UK, we do have a head start we have a number of co productions.
In the us than original productions in the us that we think.
Travel well and then we also can supplement that with content that we control in territories, where we already do business on the linear side.
So.
Brian just to your few items there again I think that we've talked about the revenue run rate I think in the past we've talked about both are.
Expectation in terms of targeting profitability as well as even outer years in terms of run rate in terms of subscribers.
Revenue. So there is no change to that.
In terms of the amortization just to be clear, we're not changing a policy.
It's really as a result of how we do our ultimate it's in the revenue and expense recognition.
Where when we selectively hold back rights.
And not monetize to a domestic as Faade platform does have the cars to bonding effect of accelerating amort into a current period. That's all I was saying it wasn't highlighting a change in policy.
Per se.
Okay, great. Thank you very much.
Thanks.
Right well.
Thank you everyone for joining us on todays call and for your interest in AMC networks. Operator at this point you can conclude the call.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you all for participating you may now disconnect have a great day.
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