AMC Networks Inc. (NASDAQ:AMCX) Q3 2019 Earnings Conference Call October 31, 2019 8:30 AM ET

Company Representatives

Josh Sapan - President, Chief Executive Officer
Ed Carroll - Chief Operating Officer
Sean Sullivan - Chief Financial Officer
Seth Zaslow - Senior Vice President of Investor Relations

Conference Call Participants

Michael Morris - Guggenheim Securities
Ben Swinburne - Morgan Stanley
Todd Juenger - Sanford Bernstein
Steven Cahall - Wells Fargo
Marci Ryvicker - Wolfe Research
Alexia Quadrani - JP Morgan
David Joyce - Evercore ISI

Operator

Ladies and gentlemen, thank you for standing by and welcome to the AMC Networks, Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions].

I would now like to hand the conference over to your host, Mr. Seth Zaslow, Senior Vice President of Investor Relations. Thank you. Please go ahead.

Seth Zaslow

Thank you. Good morning and welcome to the AMC Networks third quarter 2019 earnings conference call. Joining us this morning are members of our executive team, Josh Sapan, President and Chief Executive Officer; Ed Carroll, Chief Operating Officer; and Sean Sullivan, Chief Financial Officer.

Following a discussion of the company’s third quarter 2019 results, we will open the call for questions. If you don’t have a copy of todays earnings release, it is available on our website at www.amcnetworks.com.

Please 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 the 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. The company disclaims any obligation to update the 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 provides you with useful supplemental information concerning the company’s ongoing operations and is appropriate in 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 we will refer to on this call.

With that, I would now like to turn the call over to Josh.

Josh Sapan

Good morning and thank you for joining us. AMC Networks delivered solid results in the third quarter and we remain on track to meet our financial targets for the full year. We continue to deliver on our key financial objectives, including growing adjusted operating income, generating strong free cash flow and using our capital to position the business for the long term.

AMC Networks is well on its way to strategically transforming itself from a cable channels company into a premier content company with a suite of focused and targeted video entertainment products that are delivered to viewers on an ever expanding array of platforms.

These include our linear TV channels carried by traditional and new virtual MVPD’s, our targeted direct-to-consumer streaming services, our digital platforms on social media, and anywhere else that viewers consume content today and will in the future.

As we said previously, the underlying strategic priorities fueling this transformation have and continue to be creating, owning and producing great content and valuable intellectual property and maximizing monetization of that content.

Developing and growing new targeted direct-to-consumer content offerings and brands, maximizing the long term value of our core networks and brands by partnering with distributors and advertisers, by growing and extending our loyal audiences and diversifying our revenue by developing new avenues of content monetization. These are the key pillars on our road map to continued success, and we are executing on each of them in a very dynamic and obviously competitive environment.

There are two prevailing and related media trends that are captivating our attention today. The first relates to pressures around the cable ecosystem, as a result of what many refer to as cord-cutting and associated changing consumer behavior.

The second relates to the so called Streaming Wars as large companies would access to significant resources and IP bulk-up to attract consumers for their general interest streaming services that are frequently packaged with other non-video products.

AMC Networks is executing on a plan that will enable us to thrive alongside these major changes that are recurring in our industry, as we capitalize on unique opportunities around both of these trends. We have a few competitive advantages that are clear and simple and are driving our transformation and will drive our future success in this changing environment.

First, our company continues to fundamentally be defined by our strong content. Today, through our AMC Studios operation we own and control roughly 90% of the original scripted series that we delivered to viewers on our linear networks and on our streaming platforms, more than we ever have before. Representing a major change from when we entered the original content business a little more than a decade ago.

Today, we are the positioned to optimize our content by using it in different ways without a one size fits all approach to each piece of content or each series. We are developing new monetization patterns and strategically windowing each series across our various networks and streaming platforms, while building a strong library of acclaimed and award winning shows.

For instance, the monetization plan for the new upcoming third series in The Walking Dead Universe is this: We did a deal earlier this with Amazon to distribute that series internationally, outside of territories where our AMC Global channels will air it. However, in the U.S. we are holding back rights that we’ve traditionally sold to third parties. So domestically we will not sell the SVOD rights to this third Walking Dead series, but rather the series will be used to fuel our own platforms, both streaming as well as linear, as we window it and take full advantage of the opportunities that it presents for us.

However on a different show AMC’s recent successful genre series called Nosferatu, we premiered that first on our linear AMC channel in the U.S. then it went to two of our streaming platforms, our horror, suspense service called Shudder, and our ad free AMC Premier offering driving new subscribers to both of those platforms.

A third variation – we had a great series called this Discovery of Witches. It debuted earlier this year on our streaming platform Shudder and Sundance Now where it drove for us record usage and subscriber acquisition before making its way to our linear AMC Channel where delivered strong ratings.

These examples illustrate how our multiple platforms are creating increasingly varied past to monetization and significant and different opportunities for our intellectual property, content engine.

This all allows us to build an expanding library of owned content. To give that a little dimension, by year-end among our studio assets will be nearly 500 episodes from owned series, including The Walking Dead, Fear the Walking Dead, Halt and Catch Fire, Turn the Terror, Nosferatu, and many others. That’s an addition to the 1000 or so films in our film library that we’ve gained through our IFC Films Operation over the last 20 years.

And as our TV Series come off their exhibition windows on main stream streaming services such as Netflix, Amazon, Hulu, they will then come back to us AMC Networks for the first time, representing a new business opportunity as we make determinations around the optimal utilization of that content. In terms of Future Global Licensing, expressions within our own ecosystem of SVOD services, as well as our use on linear and global channels.

Another competitive advantage of our company has to do with the very nature of our own direct to consumer efforts, some of which I just mentioned. These targeted hyper focused SVOD services are thriving and we believe will continue to thrive alongside what some may call the Something for Everyone SVOD category that is becoming more crowded and competitive by the day, among the major players in what appears to be a pretty big share battle that may put downward pressure on the retail price for their services.

The economic fundamentals around these targeted services have great attributes and are in some cases particularly for a company like ours, superior to the general entertainment SVOD category as there’s not the same pressure on retail price and there is not the same share battle. For example, our Acorn TV British streaming service took a $1 price increase several months ago and our growth pattern continued.

In addition to Acorn TV, the largest of our services, we have Shudder, our horror and suspense service, Sundance Now with acclaimed series and films and the urban focused UMC, Urban Movie Channel.

As we grow subscribers to these targeted series, we see that the deep fans of a genre will sign up and stick with the service they identify with and feel strongly about, while aggressively priced and packaged general entertainment offerings from Netflix, Apple, Disney, HBO Max and others proliferate and become very successful.

Our approach in this area, building specific targeted SVOD offerings that appeal to fans of specific genres and content categories now, has led us to invest and produce original material as we’ve developed sufficient scale for that to be economically rational for those targeted services. And that activity, this original programming is yielding strong growth, as well as stable user base and favorable economics for us.

Acorn TV recently passed the 1 million subscriber threshold, an important milestone that underscores the vitality of the special interest SVOD market. Our suspense and horror service, Shudder is also growing at a very strong rate, driven most recently by its exclusive and growing content slate, including our newest original series called Creep Show, which is right in the sweet spot for this genre.

The series is based on the iconic 1982 movie from Stephen King and George Romero and the show has been break-out for this targeted service, driving more subscriber acquisition than we’ve ever seen and setting records in terms of viewership and total minutes streamed. So we just renewed that series for a second season.

If I may, I’ll point out that we are not by accident in the areas of British Centric dramas, horror and suspense, prestige series and films and urban programming. Our interest in developing services focused on these specific areas was quite premeditated and long in planning. These are genres that travel well and have broad appeal in the U.S. and across many parts of the globe.

We assess the total addressable market in the U.S. alone to be an excess of 10 million subs for each of these services. That represents a tremendous growth opportunity for us in the U.S., not to mention abroad as broadband penetration continues to grow everywhere.

You may remember that on our last call we indicated that we’re on target to end the year above a cumulative 2 million subscribers in aggregate for these services, and we are in fact now pacing to be ahead of that stated target. As we have also previously mentioned, we anticipate crossing 3.5 million to 4 million cumulative subs by 2022 and by 2024 we anticipate being in the 5 million to 7 million subscriber range with over $0.5 billion in run rate revenue from those for targeted services.

I’ll note again that our overall SVOD approach represents a different, another side of the streaming landscape. While it does not dominate the headlines, it represents a very healthy future margin business for us and a very meaningful opportunity for a company of this size, scope and genetics of AMC Networks, and something that will be a true contributor to the fabric of our company and our economics as we go forward.

As we continue to diversify and shift away from being solely a U.S. cable channels company, our core network linear group has the ability to continue to have an outsized presence in the world of traditional and virtual NVPDs, by consequence of our manageable portfolio size 5 channels, our relatively very low wholesale price to these distributors, and our proven ability to deliver popular and critically acclaimed shows that get noticed and by almost everyone’s agreement to occupy an outsized cultural presence in the scripted drama arena.

And the growing direct-to-consumer business I just mentioned is becoming increasingly attractive to these very MVPD partners as their business models evolve. An example of this is our recent agreement with Charter Communications. In addition to renewing our long term affiliate agreement at rates that we are pleased with for continued carriage of our linear channels, Charter will be launching our targeted SVOD services: Acorn TV, Shutter, Sundance Now and UMC as well as AMC Premier.

The scope of this agreement represents a larger shift in our relationships with traditional and emerging distributors, who are finding our growing SVOD services to be of significant appeal, especially as they focus on catering to broadband only subscribers.

Our ability to offer attractive linear, as well as subscription ad free services creates a more expanded and advantages relationship with these distributors. Value to both our traditional and emerging MVPD partners as their landscape continues to evolve.

On our international businesses, we’re continuing with the strategy of using our franchise shows form AMC Studios on our global AMC Channels, with shows like The Terror and Fear the Walking Dead continuing to perform extremely well overseas.

I’ll also note that our international assets in many territories are a mix of these big franchise shows that have global appeal, in addition to locally produced lifestyle content. Just one example, Canal Cocina in Spain and Portugal is the leading food channel in that region and our channel called Spectrum is the leading factual channel in Hungary giving us a good strong mix of assets across our international footprint.

With respect to advertising, as this space evolves, we are focused on embracing all the new opportunities it presents; from working with our MVPD partners in new and strategic ways, to mapping AMC Networks strategy around the potential of AVOD. We are seeing good growth in VOD advertising which is up 20% year-over-year with increases in spending coming particularly from the entertainment and financial categories.

We’re also creating new opportunities for brands to leverage the strength of our content and our large and passionate fan communities on social platforms, as well as through on the ground live events, including premieres for The Walking Dead and other fan events, which has helped grow our social revenue by 25% year-over-year. As always these opportunities are rooted in our strong content and proven ability to build vibrant large and engaged fan communities around our shows.

On the subject of content I’ll offer a few, just a few highlights if I may. We recently agreed with two new services for AMC that will be AMC Studios owned and produce shows. The first is called 61^st Street. We think it’s a compelling examination of race in America, set against a gripping legal cop backdrop in Chicago from the people who did the wonderful series on HBO called The Night Of.

And a second series titled Kevin Can F**k Himself, a show that is we think a thoroughly breakthrough format. It blends single camera realism and traditional multi camera sitcom comedy in a way that has never been done on TV before. It’s an arresting format and a great narrative.

The Walking Dead just returned for its 10^th season. It continues to attract a very large and very loyal core audience, and even in season 10 continues to be the number one show on ad supported cable TV by a two to one margin ahead of American Horror Story. A ranking The Walking Dead has held for 10 years in a row among adults 25 to 54.

Actress Jodie Comer fresh off her Best Actress Emmy win for her breakout role in our hit show Killing Eve is back in production with co-star Sandra Oh for an upcoming third season. And in just a few days BBC America will debut something called Wonderstruck, a weekly network takeover that will be the exclusive U.S. television home to The Planet Earth Collection and other iconic series from our partners at the BBC.

Wonderstruck will transform BBC America every Saturday for 24hrs, offering viewers and advertisers landmark natural history content, including the upcoming Sir David Attenborough fronted series, Seven Worlds, One Planet debuting early next year, as well as new installments of Frozen Planet and Planet Earth franchises.

Natural history programing has seen a surge in popularity and interest in recent years and we’re happy to have the leadership position in this space to our long term agreement with the BBC, which is we believe simply the best producer of this content on the planet and we look forward to creating a new franchise and a weekly viewing family ritual through Wonderstruck.

And our reality focused WE TV network continues to manufacture hit after hit, including two of the most successful franchise series, LOVE AFTER LOCKUP and Growing Up Hip Hop, which has helped contribute to a very strong third quarter.

So I’ll close out by saying that as we continue to transition from being a cable channels based company to a contract content centric company, we remain particularly focused on increasingly owning and controlling our content, allowing us to do with it what we choose and distributing that content on multiple platforms to maximize its value.

Including our linear channels, selling it to third parties where it makes sense to do so, and now increasingly putting it on our own subscription video on-demand channels. In short, we make the shows that people want to watch and we have a structured and strategic approach to delivering them to viewers that is purpose built for where the world is today in terms of video consumption and we will move with it to where it goes tomorrow.

Now I’d like to turn the call over to Sean for more detail on our financial results.

Sean Sullivan

Thanks Josh and good morning. Before I review the results for the quarter and the outlook for the remainder of the year, I want to begin with a few additional comments on our broader strategy of transitioning from a predominantly portfolio of linear cable networks into a premier content company with new multiple distribution growth opportunities.

There are three fundamental elements that will drive success in this new phase. First element is that our success is rooted in our content quality and the strength of our owned IP. Our quality content is our greatest asset and we will prudently scale our investment with a continued focus on total return.

Our additional investments will yield increased IP that will continue to expand our brand. We will increasingly invest in owned renewal content that serves both our core networks, our portfolio SVOD services. We’re excited that our SVOD services have grown to scale where increasingly first window content makes economic sense.

As part of our IT strategy we will be increasing our rights portfolios from projects we believe in. As evidenced by recent library deals in the market, the value of high quality content library continues to grow and will be prudently and selectively reserving rights for our own services and libraries.

As Josh mentioned, we will no longer look to pursue wide ranging output agreements for our shows as we have in the past, instead we will look to maximize asset value for the long term on a project-by-project basis. This means that we may air our content on linear and sell SVOD, air on SVOD without linier, air on linier and our SVOD services together or potentially develop project directly for third parties. As always, we are return driven and we will continue to pursue content investment with the highest long-tale value.

As a result of this shift we may experience continued quarterly earnings variability depending on the pace and the number of content opportunities at any one time. As in the past, we will continue to point you to annual guidance rather than quarter-to-quarter results.

Number two, we will drive continued affiliate and advertising opportunities while maximizing the operating efficiency of our linear cable networks business through prudent content investment and operating expense management. Where those models are challenged, we will continue to innovate. We believe that our core linear business will remain quite profitable and continue to generate significant cash flow for many years to come.

And the third element is direct-to-consumer. In areas of success we plan to increase our investments in our portfolio D2C services. As Josh mentioned, the new ecosystem is today dominated by a few players with massive scale. We believe our strategy of focus on services for passion audiences is a road map for success in an increasingly crowded marketplace.

We intend to expand on the strategies through organic investments and where appropriate through M&A. We have successfully executed on this in the past and will continue to employ it where it makes sense.

While some companies are focused on total volume content investments, we believe content that resonates and aggregate passionate audiences is the key to winning on linear or the new evolving distribution models, whether that be SVOD or AVOD.

In the year of massive media shifts, we again reaffirmed the 2019 guidance we provided you at the beginning of this year. We believe that AMC Networks is unique and that we have a business model that allows us to react quickly to the ever changing marketplace.

Given our size, we have the ability to fine tune our assets to quickly deliver maximum value. We are confident in our core business and believe we’re investing prudently for continued success. And we believe we have the management experience and the tools to continue to successfully navigate the changing environment.

So with that, let’s review our financial results for the third quarter. We are pleased with our results in the quarter as total company revenues were $719 million, AOI was $219 million and adjusted EPS was $2.33. The company continues to generate very healthy free cash flow, $88 million in the quarter and $318 million for the nine months ended September 2019.

Moving to the performance of our operating segment, at the National Networks Q3 revenues were essentially flat at $559 million. AOI was $208 million, a decrease of 1% as compared to the prior year period.

Advertising revenue in the quarter decreased 3%. At AMC the channel, results were influenced by lower delivery as well as the timing of originals, in particular the absence of Better Call Saul in 2019. However, growth at each of our other four networks BBC America, IFC, Sundance and WE TV, as well as increased pricing across our portfolio of networks helped to offset the unfavorable comparison.

With respect to distribution, distribution revenue increased 1%. As for the subscription revenue component, revenues were down modestly 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 our last call, our results continue to also be impacted by the interpretation of the contractual provision with one of our distribution partners. Absent this item, year-to-date subscription revenue would be up year-over-year. We remain in discussions with this partner and hopeful that we’ll resolve our differences in the near future.

As for the content licensing component of distribution revenue, this line item drove the growth in the quarter. Results primarily reflected the availability of The Walking Dead, Fear the Walking Dead, The Son and The Terror, in ancillary windows which more than offset the absence of revenues from Dietland in the prior year period.

Moving to expenses, total expenses were essentially flat versus the prior year period. Technical and operating expenses increased 1% to $260 million. The variance principally reflected an increase in program amortization related to the timing and mix of originals across our portfolio of networks. This increase was partially offset by favorable investment tax credits related to our production activities. In the quarter, we recorded $1 million in charges related to write-off in various programming assets. This compares to write-off of $11 million in the third quarter of 2018.

SG&A expense were $102 million in the third quarter, a decrease of 5% versus the prior year period. This variance primarily related to a decrease in marketing costs due to the timing and mix of originals, most notably the absence of Better Call Saul.

Moving to our international and other segment, in the third quarter international and other revenues grew 20% to $183 million. The increase primarily reflected revenue form the acquisition of RLJE. AOI was $13 million, an increase of $6 million versus the prior year. The increase was primarily attributable to an increase on our international network, as well as RLJE.

Moving to EPS; for the third quarter EPS on a GAAP basis was $2.07 compared to $1.93 in the prior year period. On an adjusted basis EPS was $2.33 compared to $2.15 in the prior year. The year-over-year increase principally reflects the increase in AOI, a decrease in income tax expense, primarily reflecting the benefit of some tax planning strategies related to investment tax credits and the reorganization of foreign IP and a reduction in outstanding shares as a result of our stock repurchase program.

These were partially offset by an unfavorable variance in miscellaneous net, primarily into a gain that was recorded in the prior year on our investment in RLJE. GAAP EPS also reflected an increase in restructuring and other related charges.

Moving to free cash flow, the company had another strong quarter generating $88 million resulting in a nine month total of $318 million in free cash. Through nine months tax payments were $121 million, cash interest was $105 million, capital expenditures were $69 million and distributions to non-controlling interests were $14 million.

Program rights amortization for the nine month period was $696 million and program right payments were $677 million, resulting in a source of cash of $20 million. This compares to a source of cash from programming of $13 million for the prior year period.

Turning to the balance sheet, we have on the back of our success to-date, a very strong balance sheet and the financial wherewithal to carry out the strategy Josh discussed. Since we’ve been a public company, we’ve used our strong balance sheet and cash flow profile to execute on the four key tenets of our capital allocation policy.

First, invest organically on our core business, as well as new businesses on projects that will produce returns for our shareholders. As we continue to invest in content and reposition for a direct-to-consumer focused landscape, we are gaining increasing confidence in the strategy we started several years ago. We believe that the highest return for our capital is to fund the content that is quarter of driving our platforms to drive holistic value out of our distribution relationships, and to build the assets necessary to best position us in the evolving markets.

Second, maintain leverage that is appropriate for the business outlook. As of September 30, AMC Networks had a net debt and finance leases of $2.4 billion, our leverage ratio based on LTM, AOI of $963 million was 2.45x.

Third, make disciplined and opportunistic acquisitions and investments to advance our strategic plan, such as our International Network, BBC America, and RLJE.

And fourth, return capital to shareholders. Over the past 3.5 years we returned over $1 billion through our share repurchase program.

During the third quarter the company repurchased $12 million of stock, representing approximately $231,000 shares. As of last Friday the company had $489 million available under its existing authorization program. Program to-date we’ve repurchased approximately 26% of our outstanding shares.

Return of capital remains a priority. To-date we have returned significant capital to shareholders and we expect to continue to be opportunistic with pacing, that will continue to vary from quarter-to-quarter and year-to-year.

So looking ahead there are no changes to the full year outlook as we remain confident in our ability to achieve the targets that we communicated at the beginning of the year. We continue to expect to grow total company full year revenue in the low to mid-single digits, and total company full year adjusted operating income in the low single digits.

With respect to the fourth quarter, we expect total company revenue to be down modestly versus the prior year period. At the National Networks we expect advertising revenue to be subject to the performance and mix for our original shows, as well as the current advertising market, including scatter.

As a reminder, last year's fourth quarter benefited from the airing of Doctor Who on BBC America, as well as a strong December at AMC, led by our best Christmas ever programming lineup.

With respect to the National Networks distribution revenue, we expect strong growth in content licensing revenue due to the timing of availability of our content in ancillary windows, most notably the SVOD availability of Into the Badlands, Preacher and Nosferatu.

As for subscription revenue, we expect a continuation of the trend we've seen year-to-date. As for expenses of the National Networks, we anticipate a modest year-over-year increase due mainly to the timing of continued investment and owned originals at AMC.

At our international and other segment, we’ve now locked the acquisitions of both RLJE and Levity, so our reported results will reflect the organic activity of these businesses. We expect the businesses in the segment to deliver an aggregate healthy growth in both revenue and AOI in the fourth quarter.

So in conclusion, overall we feel good about our performance for the first nine months of the year, and how the business is position for the remainder of 2019. We also recognize that the media landscape is changing rapidly and we are refining our strategy to respond to market conditions and position the business for the long term sustainable growth.

As for the outlook for 2020, we look forward to updating you as we normally do on the fourth quarter call early next year.

So what that, we’d like to move to the question-and-answer portion of the call. Operator, if you could please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Michael Morris with Guggenheim Securities. You may ask your question.

Michael Morris

Thank you. Good morning guys; a couple from me. First, when you distribute your SVOD services through these NVPD partnerships that you are talking about, is there a revenue share in there? Can you talk at all about sort of the economics of what those agreements look like versus somebody just directly taking the service?

Also, can you share what the decline rate was for, your domestic NVPDs subscribers during the quarter and how that trended? And then finally on intercompany eliminations they grew in the quarter, was that related to sales or content from the National Networks to the other segment? And how do you expect that to trend for the balance of the year? Thanks.

Josh Sapan

Hey Mike, it's Josh. Our direct-to-consumer services are sold through conventional, we do it directly, where we take all of the money and do it through third parties, and they take a piece of the action and so as we engage with NVPDs to become distributors, they will have a financial reward in their success in deploying those services.

I'll take a moment Mike just to point out if I might, the benefits to us apart from distribution of those services, meaning more touch points and more places for people to get them. Because it actually does touch on the second part of your question, which is it expands to state the obvious, our relationship with NVPD partners.

They are carrying a linear basic channels, we get rate increases from them on that, and then they essentially have, if you want to call it a reward or an opportunity to make money, as they sell what is essentially called a-la-cart services and so their net-out or net-money out to AMC Networks from their point of view starts to decline. Our relationship broadens with them and we become on a net basis less expensive.

In addition to that, as they on the cable side have more broadband-only subs, they have a targeted asset and services to deploy to broadband only subs, putting them in the position of being video providers to broadband only. So if you’re a wire-line MVPD, AMC Networks now becomes a multi-dimensional supplier of content. You actually pay less money if you succeed in achieving rates of penetration on the SVOD services, and you have something to offer to broadband only subscribers that actually [Audio Gap] basically and economic benefit your relationship. So it's really a better, holistic approach. It is, dare I say it, you know a somewhat challenged environment between programmers and distributors; it is a win-win.

In terms of the general trends of subscribers, you are very well aware of MVPD reporting in the quarter. We are of course subject to all those things. We are carried by every major distributor in the United States of America and other places. So if they experienced declines, we generally experience declines that are by degree – may vary of course by company depending upon our positioning, but we are subject to those effects, which is part of our relationship in this ecosystem.

Sean Sullivan

And Mike, your last question, the inter-segment eliminations. As you see from the release, consistent through the nine months in terms of revenue and AOI and I’d expect that trend to continue for the full year ‘19 versus ‘18.

Michael Morris

Great! Thank you both.

Operator

Your next question comes from the line of Ben Swinburne with Morgan Stanley. You may ask your question.

Ben Swinburne

Thanks, good morning. Maybe for Seam or Josh, either. I'd be interested if we stepped back and think about – I don’t know if you would describe this as a new strategy, but certainly sort of the evolving strategy. How do we think about the level of programming investment into the business in totality? It sort of sounded like you guys are leaning into your SVOD opportunity, which makes sense, but maybe put that in context in the overall sort of expense space in P&L.

And sort of the same question on the licensing side. You know I know you guys don’t want to talk about the Hulu arrangement or details of any one deal, but it sort of sounds like you're going to be moving more things on platform. How do we think about sort of the puts and takes around licensing revenue against the SVOD opportunity. If you can help us sort of put all that into a sort of a high level view of how the business trends in your mind over the next couple of years.

Josh Sapan

Sure Ben. This is Josh and Sean may have things to add. I think we are balancing, perhaps to state the obvious, the opportunities that we see for content monetization on what is now an increasing series of opportunities for us to receive money.

It used to be just going back in history, get affiliate fees, sell ads. Then it was get affiliate fees, sell ads, sell to third parties; and then it was, get affiliate fees, sell ads, sell to third parties and sell frankly to ourselves if you want to call it that internationally with a global footprint of linear channels, and now we've added an additional opportunity, which is sell to our own SVOD services in addition to all those other places.

So what we described in our prepared remarks I hope was cogent, because what it said and what I’m saying now is that there is not a one play pattern for all and I will get to the specifics of sort of quantity, and if it does become simply an evaluation of where are there returns, where is there a return on an investment.

So a simple example is Creep Show. It’s a show we might not have done before. We did it because we have the shutter service and our spectrum of rights were specific; we think smart, wise and specific to what our today and future opportunity is with Creep Show, so that’s just one example.

The aggregate if you want to sort of just go a little bit higher in your view, which is what you suggested, is that we’ll increase our overall investment by a degree where there’s a return. And the return will be calibrated against all those immediate opportunities and it will lead us and guide us to make content that monetizes well against those multiple opportunities.

In the prepared remarks the reason that I went through – I hope what was not excruciating detail on the three different examples is that it comes in different flavors and we need to be nimble, flexible, smart, strategic and disciplined and financial, to make sure that we’re doing the smart and the right thing. I believe we are – we take each piece of activity under with great care and make certain that it works.

In the macro I think that will lead us to have more opportunities for monetization and to be able to build the business, because we have more platforms and more places to sell and we will admittedly have sort of more complicated if you will, monetization and play patterns. I hope that’s responsive to what you said – what your question was.

Ben Swinburne

Yes. No, definitely and maybe this is – just going back to this charter agreement lastly, can you help us think about you know how charter distributes this and then these are SVOD services, so I imagine they are delivered in an IP stream over the top. So not all their video customers could get these and any sense for how they distributed and who sets the pricing for these services? Are they going to be sold at the same retail price that you sell them at or any more color as you guys pushed this model forward with what seems like a pretty interesting new relationship – side of the relationship with charter?

Josh Sapan

Yeah. You know I don’t – I really – I’m going to hesitate to speak for charter because I’ll misstep in an explanation of exactly what they’ll do. So what I’ll say is that you know I believe and hope that they entered into this with vigor and with enthusiasm and that the pricing will be essentially the same as it is available everywhere else, and that charter will deploy – I think their experts at it, they’ll deployed wisely and with acumen.

If you look at the spectrum platform today, you’ll see that they seem to know what they are doing with video quite well, and so I think we’ll see charter deploy and they may actually undergo a series of different deployments as time goes on, it’s up to them, but I do think there’s no one wiser about what to do with video opportunities and margin opportunities through their multiple products than them, and I’d like to think we enjoy a very good and harmonious relationship with them and that we’ll work together to make sure that those deployments, that they execute are rich and opportune, and I mean it. That’s not just our words. I think they’ll be incredibly smart about where margin opportunities are and will in part be led by them.

Ben Swinburne

Okay, thank you.

Operator

Your next question comes from the line of Todd Juenger with Sanford Bernstein. You may ask your question.

Todd Juenger

Hi, thanks. Good morning. You seem anxious and we’re all anxious to hear so much more about your SVOD services, so let me ask a couple of things about that.

Can you tell – what more can you tell us in terms of the current state of the businesses other than just subs. Would you be willing to share ARPU, SAC, Churn, net profitability or net cash flow. Any other things would be remarkably helpful and interesting. And then if we extend that to your five year view of your $500 million revenue, I think you said $7 million subs. I can do that math. I think that’s a $6 ARPU. Can you at least tell us what sort of margin profile you think that business would have at that state; that’s the big one?

Quick Sean, just one other quick one if you don’t mind; I feel like I always have to ask about the balance sheet. You’ve got I think $700 million in cash sitting there, it keeps growing. Just wondered what that is sitting there for and your thoughts on why you would have that there and what we could expect to see happen to that over the nearer term. Thanks.

Ed Carroll

Hey Todd, its Ed. On S5 we’re always anxious to talk about it, so yes, thanks for the question. As Josh mentioned in his remarks, we’re pleased with the progress in those services and in fact we’re running a bit ahead of the targets that we set out in our last earnings call.

I guess I would guide you to the statement was made previously, that we’ll achieve runaway profitability in the aggregate by year end 2020, and also the significant growth, Acorn passed the 1 million subscriber mark, and what’s interesting as all of the SVOD services evolve is the program mix and with the way we’re managing churn.

We believe that Acorn, while I won’t get more specific, is among the lowest churn rates in the industry and we think that’s the key with these services, because we are serving a passionate audience group and we can manage churn and we can produce original content and acquire content that makes the services invaluable to those subscribers. And so we are sort of playing on a different playing field if you will than the bigger mainstream.

There’s two theories I’ll site on Acorn that have just been workhorses. One is Doc Martin, which is a mystery series which is now in its ninth season and Murdoch Myseteries is in its thirteenth season and those are among the highest achieving Acorn among viewership and loyalty and completion rates. That gives us the ability then to co-produce original content as Jeff’s mentioned with Creep Show and Shudder has experienced its fastest growing quarter to-date, largely because of the investment in Creep Show.

So mixing the acquired in the core production with the new original content, managing churn and super serving our audiences we think is the key to our healthy growth rate.

A - Sean Sullivan

And Todd, just to tackle the balance sheet question again, I think we have a great capital structure and we have a great interest rate profile, maturity profile for our debt. As we said, our leverage is at 2.5x down sequentially from the second quarter and cash is obviously a reserve for incremental organic investments; M&A to the extent we find something sound and disciplined and obviously return to capital as I said continues to be a priority.

Todd Juenger

Okay, good enough. Thank you both.

Sean Sullivan

Thank you.

Operator

Your next question comes from the line of Steven Cahall with Wells Fargo. You may ask a question.

Steven Cahall

Thank you. Maybe just first one on Acorn to follow-up. Are you contemplating doing any sort of exclusive originals or maybe you can just talk a little bit about what you think the incremental investment is in content at Acorn, and I think AT&T this week talked about having exclusive rights to Doctor Who. So maybe you could just comment on what you need to fill out at Acorn to kind of get to your longer term subscriber objectives.

And then maybe just to keep on this theme that we all seem to be asking about direct-to-consumer. It seems like the movement of that third Walking Dead series to your own platform is maybe one of the first times you’ve pulled back on one of your tent poles of owned content. So can we just talk a little bit about what the long term direct-to-consumer strategy is domestically and you know would you see yourself pulling back more of your sort of flagship shows like The Walking Dead from domestic licensing right? Thanks.

Josh Sapan

Right, Steven I think it’s the Mix. The last part of your question I’ll addressed first with the Walking Dead series 3. We have done a very lucrative and important deal with Amazon to exploit the international rights. We also exploit The Walking Dead Series 3 Will on some of our AMC services around the world.

Then when we look to the U.S. we have a different strategy. We have two platforms which would likely be strong vessels for Series 3. They are AMC Premier and Shudder and of course the big premiere on linear. So all of those things we think are the best ways, the strongest ways to monetize that series.

We may come to a different conclusion on other series. We like the idea of approaching the marketplace on a series-by-series approach, very much being mindful of what the economic opportunities are and what audiences we’re trying to serve and of course we do want to build out for the long term the strength of our platforms and have the benefit of recurring subscriber fees.

On Acorn it will continue to be a mix of acquired content, coproduced content and original content, and as the size of the footprint has continued to grow, the investment budget for original series has grown as well and we think that that trend will continue.

Steven Cahall

Thanks.

Operator

Your next question comes from the line of Marci Ryvicker with Wolfe Research. You may ask your question.

Marci Ryvicker

Thanks. Sean, when you talked about the fourth quarter in advertising, you mentioned the tough comps, we get it; but you also mentioned the overall ad environment and scatter. So anything you can say about how you’re feeling about Scatter; what you’re seeing. And then secondly, when do you anniversary this contract dispute with your distribution partner and how is this impacting your financials? Have you been dropped from this or is it just that you haven’t gotten a rate increase yet? Thanks.

Josh Sapan

Thanks Marci. So to your first question, I think the ad market continues to be strong, the Scatter market is strong, pricing is strong, continues to be a strong demand for our show, so that’s how I would characterize the advertising marketplace.

As it relates to the dispute, we do as we said, enjoy a continued relationship, we enjoy a continuing carriage. I believe first time we mentioned this was on the second quarter conference call, so I think that would probably inform when the impact began and I think in my proactive remarks, absent that I tried to give you a little bit of the contours of what subscription revenue would have been if not for this contractual dispute.

Marci Ryvicker

Okay, and then one follow-up on Acorn. Is this just domestic at this point or is there a mix of international that you could give us?

Josh Sapan

It’s overwhelmingly domestic at this point. We have begun expansion opportunities in some places in Latin America and Europe, but those are early days, very early days.

Marci Ryvicker

Okay, and do you have an actual sub number, just because being over $1 million. If you’re closer to $1 million it means you sort of have to double in the next couple of months to hit your over $2 million.

Josh Sapan

Well, the $2 million subscriber number that we gave is the aggregate of the four SVOD services; so that’s Acorn, UMC, Shudder and Sundance now with the target that we spoke about on our previous earnings call.

Marci Ryvicker

Thank you.

Josh Sapan

Thank you.

Operator

Your next question comes from the line of Alexia Quadrani with JP Morgan. You may ask your question.

Alexia Quadrani

Thank you. Just two quick questions if I may. Firstly, is there any more color you can give us on the third Walking Dead series and physically how you balance leveraging the success of that franchise without potentially adding to the fatigue?

And then just following up on your comments of not selling or exchanging services domestically going forward. Is the economics of selling internationally now becoming more favorable to help you ease the financial burden that has caused more limited sales domestically?

Josh Sapan

The international streaming services, the economics are meaningful; they always have been meaningful and that continues to be. Amazon is an important partner. We have other places that we’ve sold our content and again AMC International is also an important place for our content to be exploited. So I’d say it continues to be meaningful revenue for us international.

On The Walking Dead, the Series 3 of introducing a new cast and the story pivots, because this is really the first generation that came of age during the zombie apocalypse. So they are now young adults, they are asking different questions, they are challenging the way the world has been organized, and they are – as the story will unfold, they are in pursuit perhaps of the underlying mystery as to what created the apocalypse in the first place and how might it be eventually resolved. I think that’s probably all I’ll say about that, lest I get an SD [ph] call from our show runner. But that series is scheduled to premiere in the second quarter.

And the other thing I would say about it, one of the exciting things for the network is, when you combine The Walking Dead and Fear the Walking Dead, and now what we anticipate to be 10 episodes of the Walking Dead Series 3, we will have 40 Sundays of original zombie related – zombie world premieres on AMC in 2020, which gives us the more active consistency that has not happened before, and we think our fans and we know advertisers will be excited about.

Alexia Quadrani

Thank you.

Josh Sapan

Operator, why don’t we take one last question please?

Operator

All right; your last question comes from the line of David Joyce with Evercore ISI. You may ask your question.

David Joyce

Thanks. Just a couple of things. Following on one of the other questions, could you help us understand what the different windows are between some of the BBC programming that you’re sharing with Discovery and Warner Media? Doctor Who was mentioned, but also if you could mention the nature programming.

Secondly, I just wanted to see where we are on the addressable advertising evolution. You know what Aurora is doing to your ad growth. Thank you.

A - Josh Sapan

Right. So David on Doctor Who, all the new Doctor Who’s come to BBC America. I think what you may be hearing about on other streaming services are his library content. It will be the exclusive domestic premieres and we will have that new doctor coming to us I believe in the first quarter and this is the second season that features the new doctor, Jodie Whittaker, and all that is exclusively available on BBC America.

The question about natural history, BBC America also is the home for the overwhelming majority of the natural history sort of Planet Earth premieres. There are a number of individual ones that that may premiere in other places, but for the overwhelming majority, we are the exclusive home on linear television and VOD.

David Joyce

And on the Aurora contribution to ad revenue growth?

A - Josh Sapan

Oh! It continues to be a major growth area for us. Again, Aurora gives us the ability to target advertisers, to target audience segments. So for example we are able to price on heavy consumers of soft drinks or people who suffer from certain kinds of allergies, so we work with the pharmaceuticals and we’re working with financial services and we’re able to target those audiences.

That had double – we experienced double digit growth in that area in ‘19 and it not only helps us to drive pricing. We obviously charged a premium for that, but it enables us to drive volume among blue chip advertisers. And we think our platform which we refer to as agility is among the most capable among our peers and in the ad sales industry, and so it continues to be an area of robust growth for us.

David Joyce

Great! Thank you very much.

Seth Zaslow

Alright, at this point I’d like to thank everyone for joining us on today’s call and for your interest in AMC Networks. Operator, you can now conclude the call.

Operator

Thank you, and that concludes AMC Networks, third quarter 2019 earnings conference call. You may all disconnect.