AMC Networks Inc. (NASDAQ:AMCX) Q4 2018 Results Conference Call February 28, 2019 8:30 AM ET

Company Participants

Seth Zaslow - Investor Relations
Josh Sapan - President and Chief Executive Officer
Ed Carroll - Chief Operating Officer
Sean Sullivan - Chief Financial Officer

Conference Call Participants

Bryan Goldberg - Bank of America Merrill Lynch
Michael Morris - Guggenheim Securities
Ben Swinburne - Morgan Stanley
Michael Brian - Nathanson MoffettNathanson
Steven Cahall - RBC Capital Markets
Marci Ryvicker - Wolfe Research
Vasily Karasyov - Cannonball Research

Operator

Good morning. My name is Stacy, and I will be your conference operator. At this time, I would like to welcome everyone to the AMC Networks' Fourth Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions].

Mr. Seth Zaslow. You may begin your conference.

Seth Zaslow

Thank you. Good morning. And welcome to the AMC Networks full year and fourth quarter 2018 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 full year and fourth quarter 2018 results, we will open the call for questions. If you don't have a copy of today's earnings release, it is available on our Web site at 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'll refer to on this call.

Before we begin, I want to cover one additional item. As noted in our earnings release, the company modified its definition of adjusted operating income or AOI. We now include our proportionate share from greater than 50% owned equity method investees. This change did not have a meaningful impact on our fourth quarter performance and had no impact on prior period results.

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

Josh Sapan

Good morning and thank you all for joining us. AMC networks have a strong fourth quarter capping off very successful year with significant contributions from our portfolio of linear networks and our studio, our growing direct to consumer businesses and what was a year of economically attractive and strategic acquisitions that are helping to reshape our business and create significant value over the short and the long term. For the year, our revenues increased 6% and we grew AOI 3% and we generated a record $502 million in free cash, an increase of 75% over the prior year.

This is one headline for the year. We think it is that AMC Networks continues to be a company that punches above its weight on almost every count; the long history of having an outsized impact and influence among the most important constituents for our business; our viewers, our distribution partners and our advertising partners all to the benefit of our shareholders. We continue to make significant progress on a few key strategic priorities, which drove our fourth quarter and full year results; they are, creating great content, expanding our distribution base, diversifying our revenue, which includes expanding our direct-to-consumer activities, developing new approaches to add monetization and continuing to maintain a strong balance sheet.

I'd like to spend a few minutes expanding on these priorities to give you an understanding of how our execution of each is positioning us well for the future. As to content, our first priority has always been and remains making great shows that are truly compelling. We had great success with content in 2018. Across our portfolio, our shows, new audiences, partnered rewards and drove the broader cultural conversation, demonstrating our ability to have content that has outsized impact, even as we operate alongside increasingly deep-pocketed content companies.

We continue to prove with our cultural pacemakers in our creative choices appeal to and resonate with audiences around the world. BBC America, in particular, had one of its most successful years in its history. About five years ago, as many as you know, we partnered with the BBC investing in BBC America, because we believe the channel has untapped potential. We've steadily realized that ambition. And I think 2018 was a particularly bold demonstration of it. Most notably, BBC America's new series called Killing Eve, emerged as the sleeper hit of the year. Viewership of the series grew substantially to word-of-mouth, which led ratings to increase each and every week of its first season.

A proof of the convictions we hold close that truly great content will break through no matter how rich the world might be with options. Lead actress Sandra Oh was notable for being the first actress of Asian descent to be nominated for an Emmy for lead actress in a drama series. And last month, she took home the Golden Globe, the Sag and the Critics’ Choice Awards for her performance. Season two, which is looking great, returns in early April.

BBC America's Doctor Who, the longest-running sci-fi franchises in TV's history, returned in the fourth quarter with actress Jodie Whittaker becoming the first female doctor in the history of the show. Audience for the series increased 50% for the season debut and were proud to have a hand in pioneering the next new chapter of this iconic franchise. BBC America also continued to establish itself as the premier U.S. destination for the best nature programming on the planet, and that content has become a real cornerstone of the brand. Planet Earth Blue Planet 2 debuted last year and became the most watched nature program on ad supported TV in nearly a decade.

Recently, we premier another BBC natural history series, called Dynasties, which we simulcast across our channels, significantly elevating viewership for that series. We recently renewed our partnership with BBC Studios as part of our overall BBC relationship to continue to coproduce and be home to the most inspiring and successful natural history programming in the world, including new installments of the iconic Planet Earth and Frozen Planet series. These natural history series have never been more vital, relevant or more popular and that is driving the phenomenal engagement in viewership we're seeing for this material.

Another highlight has been a reality show on WE TV called Love After Lockup, which much like the trajectory of Killing Eve, grew its audience every week of the first season in key demos. The series recently returned and has been a rating star yet again with steady viewership growth in the current second season. In 2018, AMC continued to solidify its position as being the home of TV's biggest scripted series. We ended the year with three of the top six dramas on basic cable with The Walking Dead, Fear the Walking Dead and Better Call Saul. 2018 also marked the ninth year of AMC having the number one show on cable with The Walking Dead.

In terms of scripted impressions among adults 25 to 54, AMC dominates every other cable group delivering 28% of all scripted impressions on cable-TV. A few weeks ago, The Walking Dead returned with ratings up over where we left off in the fourth quarter, quite a phenomenon nine years into the franchise; and supporting our view that the world of The Walking Dead is strong and vital and filled with potential in many, many different forms.

If I may, I will turn back to strategic priorities I mentioned a few moments ago and talk about our distribution across linear as well as other platforms. In the U.S., AMC Networks is the most attractive programmer to distributors in terms of our price value offering. Our focus in this area continues to deliver results. And that comes without of course our having sports and without our participation in what seems to be an increasingly bloated ecosystem of retransmission consent that now has some $9 billion circulating in it.

Last year, we increased our domestic affiliate revenue in the mid-single digits. Because we offer such high-value programming and powerful established brands at the most competitive price in the industry, no other independent programmer has broader carriage on virtual MVPDs. And our reach on these emerging platforms continues to expand. With our networks launching next month on charters recently announced OTT services. Content again, is the key driver. Distributors simply recognize that our programming matters to audiences and so our networks matter to them and the price they pay is right.

Revenue diversification is another important pillar of our company, and there are a few elements to our approach to it. First as many of you know, our studio operation has grown from its launch in 2010 when we had one show to what will be upwards of 15 shows for our networks and screening platforms in the coming year. Our expanding studios business in which we own and control our content has enabled us to grow revenue from what was zero back then to a run rate of over $400 million a year today. In the year ahead, we will be moving forward with the expansion of The Walking Dead universe, which we believe is some of today's most valuable intellectual property on any screen anywhere. We've talked several times about potential we see for this vibrant franchise, and the many opportunities it provides to us.

Our next stage plans around it are beginning to take shape. And we're pleased to say that we've been nearly overwhelmed with interest from potential partners, which would give us some more substantial economic platform for launching the next iterations of this franchise, which includes a third season currently in development under the direction of our Walking Dead creative czar Scott Kimball.

A critical element of our revenue diversification is our direct to consumer activity .2018 was an important year for us as we advanced our direct to consumer undertakings, which we've been carefully managing and developing for a few years now. Collectively, our direct to consumer initiatives have been growing well. In 2019, we expect our various B2C services to generate over $100 million in revenue and we see a clear path toward this becoming an increasingly meaningful component of our business over time.

If I may, I'll quickly recap our interest in this area for those of you on the call may be a little less familiar with them. We have services we've created and built ourselves. They are AMC Premier, Shutter and Sundance Now. And we have Acorn TV, which has produced mystery and dramas and Urban Movie Channel, which caters to African-American audiences. These are the growing streaming services we now operate and report on a consolidated basis as part of our acquisition last year of RLJ Entertainment. We now have the opportunity across the company to gain benefits and cost savings from centralizing our text stack, improving our overall customer service, promotion and content across all of our SVOD offerings.

AMC Premier, as you may recall, is the first in ecosystem, if we can use that word, commercial free offering of its kind. It continues to grow nicely and we're very focused on involving it by offering early windowing of content, as well as exclusive new content. Most recently, we did use the midseason premier of The Walking Dead a week prior to its linear premier on Super Bowl Sunday with strong results. Coming to the platform later this year is a new series called NOS4A2 from talented writer, Joe Hill, who happens to be Stephen King's son, and that series is being produced by AMC Studios. Shutter and Sundance now performed well last year, and significantly expanded their distribution with Australia and New Zealand joining territories in the UK and other parts of Europe.

A notable recent programming success is a new series called The Discovery of Witches, which began streaming on both platforms just last month. The series has quickly become the most successful in the history of both those services driving record usage, and moving the book on which that series is based up to the New York Times bestseller list. All this activity comes on top of a very successful year for Acorn TV and Urban Movie Channel UMC, including international expansion for Acorn TV into countries across Europe and Latin America.

The management team at RLJ, which is now part of a company, has done what we think is an excellent job growing these services and their subscribers, have steadily increased. When we first invested a few years ago in RLJ, the company had a few hundred thousand subs and I'm pleased to say that that subscriber number is multiples of that today. This is a profitable business and we're very pleased with the price we paid for the acquisition and we see great, great things ahead for Acorn and UMC.

Turning if I may to advertising. We’re very focused on a couple of areas; first, increasing our ad monetization. Amongst all of ad supported cable, AMC ranks as having the highest levels of time shifted viewing for originals and primetime. The opportunity to increase the ad monetization for the large viewership of our shows not captured in the current C3 window has significant economic upside for us. So we’re hard on developing several approaches to monetize this audience, including talking with MVPD partners about offering different versions of our shows with varying ad loads.

We’re also focused on building out our proprietary ad planning tools that allow advertisers to assess and optimize their ad buys. We introduced one of these called Aurora during last year's upfront, and we've had an excellent response to it with nearly a dozen clients now putting it to work as part of their buys with AMC Networks. In addition, we continue to be focused on helping our clients increase the relevance of their marketing message by offering addressable opportunities, including serving more targeted ads to individual households, as well as selling increasingly targeted audience segments, enabling our ad partners to more efficiently reach their intended audiences.

Moving to international, which is another key element of our revenue diversification. In 2018, we saw ratings growth across our international portfolio of channels, with stand out shows that included AMC's, The Terror, as well as Fear The Walking Dead, which continues to be the number one series on our AMC global channel in the territories where its carried. In addition, several of our portfolio channels are leading in their respective regions, including in Spain and Portugal, where we have the number one pay-TV film channel and in the UK where our reality channel is the number factual entertainment channel for women.

As I mentioned earlier, at the beginning of call, continuing to maintain a strong balance sheet is a key priority for us. In 2018, we generated record free cash and over the past 36 months, we generated in excess of $1.2 billion in free cash. We expect that our company will continue to generate significant levels of free cash going forward. In addition, we continue to maintain a very strong balance sheet with leverage in a range that we're very comfortable with. This strong financial profile has allowed us to be opportunistic and selective as we pursue what we believe have been quite smart, strategic investments that are changing our business and are creating real value for shareholders.

Before I turn the call over CFO, Sean Sullivan, I want to spend just a minute talking about the recent reorganization we conducted at our company, that particularly applied to our linear channels. In which we put AMC, BBC America, IFC and Sundance TV under common management, led by the very talented former head of BBC America, Sarah Barnett, who is now president of these four entertainment networks. With this reorganization we expect to realize efficiencies as we begin to better leverage our brands and platforms, expand our audiences and importantly to connect more viewers to our excellent content. In the months ahead, you'll see us identifying more key moments to introduce audience from one of our networks or streaming services to content that originated on another.

In closing, I'll reiterate that we believe we occupy a differentiated and singular position of strength. We have highly desirable content, competitively priced linear networks, a valuable studio operation and a growing direct to consumer business. With our strong balance sheet and ability to generate healthy levels of free cash, we believe we are well situated to continue to have outsized impact and deliver value to our shareholders over the mid and long-term.

I would now like to turn the call over to Sean for more details on our financial results.

Sean Sullivan

Thanks and good morning. As Josh highlighted, 2018 was a successful and productive year for the company. For the full year, we delivered record revenue, AOI and adjusted EPS. Total company revenue grew to $3 billion, a 6% increase over the prior year. AOI was $933 million, an increase of 3%. And adjusted EPS was $8.69, an increase of 18% or $1.32 per share versus 2017. Company continued its performance of generating strong free cash flow with a record $502 million in 2018, an increase of 75% versus the prior year. Over the past three years, we've generated $1.2 billion in aggregate free cash. The fourth quarter contributed to our strong annual performance whereby total company revenue increased 6% to $773 million, and AOI increased 7% to $219 million.

So moving through the performance of our operating segments. National networks revenues for the full year increased 2% to $2.4 billion. National networks AOI increased 3% to a total of $925 million. Margins expanded by 50 basis points to 38%. In the fourth quarter, national networks' revenues decreased 2% to $593 million. AOI was $209 million, an increase of 7% as compared to the prior year period. Advertising revenue in the quarter grew 1%. As anticipated, The Walking Dead delivery moderated in the quarter. However, this performance was more than offset by a strong December at AMC led by our best Christmas ever programming lineup, as well as double-digit advertising growth at each of WE TV, BBC America, IFC and Sundance. BBC in particular reported growth in excess of 20% as it benefited in the airing of Doctor Who.

With respect distribution, as anticipated, distribution revenues decreased in the fourth quarter. Subscription revenue, which represents the majority of our distribution revenue stream, continues to provide us with steady and attractive growth. Growth in the quarter was in the mid-single-digits. As Josh discussed, we continue to benefit from the strong price value relationship that we offer to our distribution partners, both traditional MVPDs, as well as the newer virtual MVPDs.

As expected, content licensing revenues declined in the quarter, due mainly to the timing of the licensing of our scripted original program in various windows. Results in the quarter reflected the SVOD availability of Killing Eve and Dietland, which was more than offset by the absence of SVOD revenues from Halt and Catch Fire and Turn in Q4 2017. A shift in the timing of the international distribution of the most recent season of Fear The Walking Dead also contributed to the decrease.

Moving to expenses, in the fourth quarter, total expenses decreased 7% versus the prior year period. Technical and operating expenses decreased 8% to $289 million. This variance principally relates to the timing and mix of original programming across our networks. In the quarter, we recorded $29 million in charges related to the right-off of various programming assets across our portfolio of networks. This amount compares to right-offs of $38 million in the fourth quarter 2017. SG&A expenses were $101 million in the fourth quarter, a decrease of 5% versus the prior year period. The variances primarily related to a decrease in employee related costs as marketing was relatively flat year-over-year.

Moving to the international and other segment. For the full year, revenues increased 31% or $141 million to $598 million. The main drivers of the increase were the acquisitions of Levity and RLJE. To a lesser extent, revenue also reflected an increase from our subscription streaming services, Shutter and Sundance Now, as well as the absence of DMC, the technical operations facility that was sold in the middle of 2017. For the full year, AOI increased 19% or $3 million to $19 million. This increase principally relates to the acquisitions I mentioned.

In the fourth quarter, international and other revenues grew 49% to $188 million. The growth primarily reflected revenue from Levity and RLJE, partially offset by a decline in our international networks, principally related to the unfavorable impact of foreign currency translation. AOI was $9 million, an increase of $3 million versus the prior year, attributable again to the acquisitions of RLJE and Levity.

Moving to EPS, for the full-year, EPS on a GAAP basis was $7.57 compared to $7.18 in the prior year. On an adjusted basis, EPS was $8.69 compared to $7.37 in 2017. Year-over-year change in adjusted EPS reflected the increase in AOI, lower tax expense, as well as a reduction in outstanding shares of the results of our stock repurchase program. GAAP EPS also reflected the one-time adjustment in 2017 related to the enactment of the new U.S. tax laws, as well as an increase in restructuring expense and a decrease in impairment and related charges.

For the fourth quarter, EPS on GAAP basis was $1.24 compared to $2.33 in the prior year period. On an adjusted basis, EPS was $1.92 compared to $1.68 in the prior year. Year-over-year change in adjusted EPS reflected an increase in operating income, as well as the reduction in outstanding shares. GAAP EPS also reflected $43 million charge or $0.56 per share related to the restructuring expense, as well as the absence of $57 million benefit, or $0.91 per share that we reported in the prior year related to the change in U.S. tax laws. As disclosed in our earnings release, the restructuring activity was taken to improve the organizational design of the company and was in connection with our ongoing focus on managing our expense base.

In terms of free cash flow, the company continues to deliver healthy amounts of cash. We generated $502 million of free cash flow for the full year. For the 12 months, tax payments were $138 million; cash interest was $148 million; capital expenditures were $90 million; and distributions to non-controlling interests were $14 million. Partnering rights to amortization for the 12 month period was $961 million and program right payments were $979 million, resulting in a use of cash of $18 million. This compares to the use of cash for programming of $43 million for the prior year period.

Turning to the balance sheet. As of December 31st, AMC Networks had net debt and capital leases of $2.6 billion. Our leverage ratio based on LTM AOI of $933 million was 2.8 times. In terms of capital allocation, our primary focus remains investment in our core business. We will continue to be disciplined and opportunistic in the use of capital for both repurchases and non-organic investments. With respect to share repurchases, during the fourth quarter, the company repurchased $16 million worth of stock. This represents approximately 297,000 shares.

For the full year 2018, we repurchased approximately 5.4 million shares for $283 million. Subsequent to the end of quarter, the company has repurchased an additional $1 million or approximately 18,000 shares. As of last Friday, the company had $558 million available under its existing authorization program. Program to-date, we repurchased approximately 24% of our outstanding shares. We continue to expect that our level of repurchase activity in any one quarter will depend on several variables, including our view of the stock price and other potential uses of capital. As a result, we expect the pace of our repurchases to continue to vary from quarter-to-quarter.

So looking ahead to 2019, we 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. This growth will reflect a mix of continued growth from our core businesses, as well as incremental investment in new development initiatives such as AMC Premier, Acorn, UMC, Shutter and Sundance Now. At our national networks, we expect distribution revenues to again be the main contributor to growth. With respect to distribution revenues, we expect the rate of growth and subscription revenue to remain in the mid-single-digits. In terms of content licensing, this revenue stream remains a source of growth for us and we expect the rate of growth to accelerate in 2019 as compared to 2018.

We’re excited about our programming lineup, which includes a strong mix of new and returning shows across all of our networks. We will continue to look to take advantage of the strong demand for our content and continued progress with our digital initiatives to maximize advertising revenue. It's worth mentioning that two of our more notable shows, Better Call Saul on AMC and Doctor Who on BBCA, are not airing on 2019 due to the timing of their production cycles. The absence of these shows will create a modest headwind in our full-year advertising performance.

At national networks, while we will continue to invest in content, mainly in the form of programming and marketing and expect to also increase our investment in AMC Premier, we remain focused on limiting growth in the remainder of our expense base. As for our international and other segment, we expect reported results to continue to benefit from the acquisitions of both RLJE and Levity. Excluding the non-organic activity, we expect the other businesses in this segment in aggregate to deliver healthy revenue and AOI growth in 2019. As for the cadence of our performance during the year, we anticipate continued quarterly variability as a consequence of the specific timing of our investments in content and the airing of our shows.

At the national networks, in terms of advertising revenue. We expect a modest year-over-year decline in the first quarter as a favorable shift in the timing of our programming, most notably The Walking Dead, is expected to be offset by lower delivery. We also anticipate that the second quarter of 2019 will be our most challenging quarter of the year in terms of advertising revenue due to the timing of our programming lineup, most notably the shift forward that I just mentioned in The Walking Dead, as well as an expected shift backwards in the timing of Fear The Walking Dead.

As for distribution revenue, we expect first quarter growth to be similar to what we reported in the fourth quarter. Within distribution revenue, we continue to expect healthy subscription revenue growth. As per content licensing, we expect a decline due to the timing, availability of our content and ancillary windows, most notably the international availability of Fear The Walking Dead. However, as we move past Q1, we expect to return to healthy levels of growth as the comps turn more favorable.

As for expenses at the national networks, we expect them to be relatively consistent with the prior year period, as anticipated increases in programming are projected to be offset by efficiencies in other areas. At our international and other segment, we expect the impact of both RLJE and Levity to be similar to what we've seen to-date, both in terms of revenue and AOI. Excluding RLJE and Levity, we expect modest growth in both revenue and AOI. So in conclusion, overall we're quite pleased with our performance in 2018 and how the business is positioned for 2019.

So with that, we would 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] And our first question comes from Bryan Goldberg.

Bryan Goldberg

I've got two quick ones. On the advertising side, thanks for the commentary around some of the new approaches you've taken to ad monetization. I was just wondering if maybe you could give us a little bit more color on how widely deployed these efforts are today and how we should think about your ability to scale them in 2019? And then separately on the streaming strategy, thanks for the update there. I think you talked about a run rate towards $100 million in revenue in 2019. And I was just curious, assuming you'd owned RLJ for all of 2018. What would the 2018 base of revenues look like? How much growth should we be anticipating? And then how are you thinking about the optimal cadence for original programming rollouts on each of the streaming services? Thanks.

Ed Carroll

Bryan, its Ed. Maybe I can provide a bit more color on Josh's remarks on advertising. We develop a planning tool, we call it Aurora and it can increase the efficiency of media buys across all of television. And we're using it with a number of more than a dozen blue-chip advertisers. And that includes a variety of categories, we have pharmaceutical, auto in there, retail quick service food restaurants and beverages are represented. We also have something different, which is an ad targeting tool that we call mediator and that can help advertisers with specific segments of consumers from across all five networks. So for example, we can help advertisers identify people who are in the habit of going to see movies on their opening weekend or people whose car leases maybe coming to an end or people who are allergy sufferers, those will be examples. So we have the capability of price a portion of our inventory against those specific segments, and this helps us to increase pricing and also to get a higher volume of dollars from desirable advertisers.

Josh Sapan

Bryan, this is Joshua. I will try and if I may respond to your question on streaming. We did mention $100 million run rate to try to provide some dimension to the size of the business. We are managing those streaming services that we mentioned very carefully. And with a set of metrics of course that are different from the base metrics in our business that included Sag subscriber et cetera. They are all growing and we're pretty careful about things like free periods and splits. We're watching the economics. So we have an eye on the long-term and in the midterm but we also have a reasonable degree of focus on what's happening in the near term. And so that's what I think is reflected in those economics and in our approach. In attempt to respond to what you asked, they're all growing. And so depending upon how you pick and choose the pieces, if you try to go back what you see is growth, growth and growth is the best answer I can give.

In terms of programming, it's a really rich and interesting question, because they each have different characteristics. Acorn has found this very strong constituency with British dramas. And it really has a fan base that is actually surprisingly big, because when you say British dramas, you might think that’s very small and limited. It’s a little larger than one might think at first glance, it is said not in substantially material that is of course pre-existing. It's a nice particular -- note is that the company RLJ on the piece of Agatha Christie, so it participates in that. But the base composition of the business is licensed material, which has fueled its growth and continues to fuel its growth.

On AMC Premier, it's a bit of a different species. It lives within the ecosystem of the MVPDs with whom we do business. We mentioned that we're doing a number of things differently, including early access to shows you can see them here before you can see them on linear, and we will begin to do original programs that actually premier on that service. So we have more reasons for purchase among people who are already seeing AMC on their cable system or paid television system. And then on Sundance and Shutter, now it's a mix of both. We've done some inexpensive originals, which have performed well. There is a history of horror, Eli Roth thing that’s doing well now. And then there's a show that was well priced called Discovery of Witches, which had performed overseas quite well. We had some hand in how it manifested. And I won't make a personal recommendation, but I will say is extraordinarily popular and it showed the greatest uptick in subscribers for those two new services.

So I think the sum of all that babble, Bryan, is that there will be a composition of originals, of acquired, of early windowing, of extended material and each of the services will have a different application applied to its content strategy.

Operator

Your next question comes from Michael Morris.

Michael Morris

I have a couple of Walking Dead related questions. First, I’m hoping that you could provide some frame of reference for the economics of the franchise at this point. So specifically I'm curious if you can help size the ad contribution relative to the other revenue sources now compared to the peak live audience levels for the franchise. And whether that the relative revenue for the franchise at this point you believe it's aligned with that audience size? Then Josh, I believe you referenced to third series based on the franchise. I'm curious if you can give us more information on the timing and whether that will be part of the Hulu SVOD agreement? And then last for Sean, Seth referenced the change in the AOI presentation. I'm sure you answered this as like coming out of it. But what’s the contribution from any of those 50% or greater equity holdings to the AOI outlook for the coming year? Thanks.

Ed Carroll

So Michael, its Ed. On the Walking Dead for what we call Series 3, that is in active development. We're not yet at a stage where we will be announcing its plans to premier. But we have higher creative people that have pitched story outlines. We feel very good about the development of that series. We are not in a position to talk about partnerships in terms of other territories or ancillary windows, other than as Josh mentioned there's a healthy appetite for it and we've had discussions with a number of different players in the space. On The Walking Dead, generally going to your first question, as you know, the series continues as the number one show on cable TV by a wide margin. In fact, its audience is more than twice as big as the next highest show on cable-TV and it’s the second-biggest drama in all of television, second only to NBC. And it's in season 9 so that is unprecedented.

The performance of the first three episodes that have aired in February is actually a bit ahead of our estimates. And I would just say generally to your question, we are well aware that when a show has been around for nine years, you would expect the viewership to be declining. But I think we've managed that and managed that well. And when The Walking Dead when the flagship series is no longer part of the channel, I think that will have more of an impact on revenue than it will on AOI, because generally with shows such as this, expenses go up as the seasons continue and viewership declines. That’s just a general pattern of any show that's been around for as long as The Walking Dead has. But what’s so interesting about this and it's never been seen before is still the number one show on cable by such a wide margin in Season 9.

Sean Sullivan

And then Michael, just on your last point as you noted in the release or I'll note in the release, the contribution of AOI was $3 million in 2018. Obviously, the '19 number is incorporated in my guide for the year. But again, it’s not a big number.

Michael Morris

And just Ed, if I could, I know that you're not speaking specifically about the third series. But can you help us at all is the existing SVOD agreement that you have with Hulu, does it encompass a new program that could potentially come out? Or is that something that is part of a future discussion that you would have?

Ed Carroll

Mike, I’m just not going to be able to say which show is flowing into which deal.

Operator

Your next question comes from Dan Swinburne.

Dan Swinburne

Josh, what's your vision as you look out over the next couple of years for AMC Premier? I think it’s been a successful launch so far. You talked about putting more original programming there. Maybe if you just update us on what you think that product looks like over time, and whether we should expect you to place more original programming through a signature AMC programming on that platform on a more exclusive basis. And then related you guys had a very strong free cash flow year. It sounds like you expect that to continue. Can you help us understand your appetite to grow your overall investment in content, which as you mentioned, Josh, is your number one strategic priority with the fact that if we look at the numbers, you're guiding to I think to basically flat programming or flattish direct OpEx in '19. And you've got this really attractive free cash flow conversion level. So just help us understand and reconcile those two things that would be helpful.

Josh Sapan

Let me attempt to do that. I think that as I mentioned earlier, each of these subscription services is a bit of a different animal; and has different needs and opportunities as to how high the headroom is; what the target audience looks like, what they like; and how fast and sensibly we can grow them. So they really all have different genetics. I would say thing one. The thing two I would say that that whole part of the world as you know it better than I do is undergoing rapid evolution. There are now many more entrance into it; someone might define has having whole house ambition, meaning something for everyone; some is having a general entertainment ambition; and some is having more niche ambition, if that’s an attempt to lay the land. So each of our services is operating against that backdrop, and also the moving picture of what's happening with the so-called conventional Pay TV landscape is also moving. And we see some downward pressure on what we call conventional cable pricing for video. By the way, parentheses we think we’re going to be the beneficiary of that, because we have the best price value relationship for those channels. And there are others we think that are getting dangerously expensive in the manner in which that system is evolving.

Specifically to your question, we think that AMC Premier is today the place where the AMC brand-name lives. And so we're moving up we think on a very logical rational and careful basis, the amount of original programming and benefits and features that a consumer experience is there. So as they can say, gee, I like that, I want to buy it while I have linear AMC and we learn every day that we go. And so we have great visibility to data that's frankly wonderful, because we can actually see cause and effect in real time. And what I think we will see is that there will be some transition and evolution in where original content emerges first, how the services promote one another and how some of the streaming services actually cross promote. So I think we’re going to see a whole different flow of content.

As it relates to overall spend, we’re in the range of $1 billion. I think that we have prided ourselves on getting big bang for our buck for what we do. We prided ourselves on having a return when we invest in content, whether it'd be wholly-owned by the studio, whether it'd be coproduced with the BBC, whether it'd be an acquisition that we do with a UK company. So we're very pleased with Killing Eve, not only its performance but its economics. We’re very pleased with the Discovery of Witches, not only its performance but its economics. We’re very pleased with Plant Earth and Frozen Planet, and Dynasties, not only its performance but its economics. So I say all that to just say that we're mindful that we're running a business that business has an evolution and changing opportunities. And you know the changing opportunities that we do. We want to be at pace with it in front of it enough to grow sensibly and to maximize our return to shareholders while taking advantage of all those opportunities. And it's a bit of a moving target to tell you the truth. We spend all of our lives watching and playing in that moving target. I like to think we do it reasonably well.

So that those are the levers that we manage, and I think will manage them. And I think we have to the greatest return seeing where there is true opportunity and that’s where we will put risk, if you want to call it, money and also managing carefully the dollars that are going out of our pockets. So we are not doing things that are in front of us.

Ed Carroll

And Ben, just to clarify, sorry we are increasing the programming investment. As I highlighted on AMC Premier, we're really investing in those services and others and limiting the non-programming, non-marketing investment in the business. So I don’t know if that came through clearly or not. But we are not moderating and certainly we love our balance sheet and our free cash flow attribute, so that as this business involves and opportunities present themselves, we can quickly accelerate our investment to the extent we see a near, mid, long-term return.

Operator

Your next question comes from Michael Nathanson.

Michael Nathanson

I have one for Josh and one for Sean. So Josh, let me ask. You guys called out on the call that content licensing is now over $400 million and Sean was clear about what happened in the fourth quarter and what first quarter looks like, I guess and what '19 looks like. But my question licensing is this. When you look at the next few years, is this still a growth category? So are you now determining to keep more content in house? Is it demand and the SVOD world changing? So could you just give us a little big picture view on where you think the outlook is for the content licensing business that you guys have built $400 million?

Josh Sapan

The thing you said second, which is very interesting is, do we keep it for ourselves versus sell it, or do we keep it for ourselves substantially and sell parts of it. And if I can get nuance, because I think it certainly applies to us perhaps not others. We look at all of our shows often individually and the answer that comes we think appropriately is that there is an answer domestically. Meaning, we may play it on our channels and sell it to an service a year later for a period of time. And I would note that after that period of time if we own the show, it comes back to us. So we’re now seeing certain shows starting to come back that had been licensed to domestic Pay-TV services. You may recall a show called Rectify on Sundance and actually extraordinary piece of drama, one of the best things I have seen in my life, it's now in the horizon of return; a show called the Red Rose, which starred Jason Momoa, it's now in the horizon of return; a show called Turn about the American Revolution, which I think was a spectacular drama, a little later in the horizon of return.

So the answer to where it goes is, it goes to us domestically in that instance of those shows then it went elsewhere, and then it comes back to us. And that's one of the benefits of being a studio. Turn the frame of reference to rest of world, and we have a different set of considerations. We sell some shows to ourselves and in the territories where we have channels and in other territories we license them to other parties, it maybe streaming and other entities who are paying substantial amounts of money. And so those decisions are all individual as well and we are in the driver’s seat respectful of our participants and making decisions that are strategic and economic. So what I would say is that our horizon for content licensing I think is good and rich over the long term.

We will make decisions as time goes forward as you see others doing about where and when we want to sell, where the greatest return for our company is and what makes the most sense. We're in the driver's seat happily. We have the levers happily. The worldwide appetite is of course undergoing evolution, but it's hard to know exactly where it will be in 36 months. To-date and for the foreseeable future the name AMC has worked well and delivered real value to entities who have bought from us. And so they are in reasonably strong pursuit of it. So that’s a picture of what it all looks like. I hope that’s helpful.

Michael Nathanson

And then for Sean, there is a restructuring tariff. You guys called out a sentence that there is a termination of distribution in certain territories. What was terminated in distribution centers if you could help us get some clarity on what that meant?

Sean Sullivan

When we terminate a feed in a certain territory and the primary geographies is Asia, we take that through a restructuring charge. So that's what we're referring to.

Michael Nathanson

Do you have any specific margin that was in the…

Sean Sullivan

That's just in the Asian markets, the small feed, small channel effectively immaterial, it's not a lot of money. I think we've disclosed. You will see it in the K later today is in terms of what relates to the feeds versus what the rest of the employee related restructuring activity, not material.

Operator

Your next question comes from Steven Cahall.

Steven Cahall

Maybe first just to follow-up on restructuring. Can you give us any idea of what you think the benefit is that you are seeing from all those investments in 2019? And do you expect to have any more restructuring costs in 2019? And then I had a quick follow-up on cash.

Sean Sullivan

Steven, I think that there will be de minimis small restructuring activities I believe as I see it today in '19. I won't size the benefits that we see. I think I'll bring you back to my comments about, obviously, how we see '19 in terms of revenue and AOI growth, how we’re looking at the efficiencies of the business and clearly signaling that we intend to reinvest a lot of those savings into the initiatives and the strategic priorities that Josh outlined.

Steven Cahall

And then just on free cash flow. I mean, it would seem like if you do a similar level on '19 to '18 that’s after your number one priority, which is investing in the business. So we’re still left with this luxury problem of access cash. The stock is pretty close to all time highs but you've been a little less aggressive on buy back activities of late. So should we take that as a signaling that you have some interesting investments out there like some of the acquisitions you made last year? Or how about just maybe put that in context? Thanks.

Sean Sullivan

So again, I think what’s important as you think about '18 and '19 related to free cash flow is obviously, we've highlighted the impact of tax reform. So there was $20 million to $30 million of one-time benefit in '18 that won’t repeat in '19. Obviously, we look at business that we're probably at a higher watermark in terms of CapEx, I would expect that to moderate over time, maybe not '19. We obviously are very focused on working capital management, some of the benefits we saw in '18 were timing related. But at the end of the day, if you just look at our historical free cash flow to AOI conversion very strong. So the capital allocation thing is no different, it's opportunistic and it's flexible, I think we have been disciplined and appropriate in our share repurchase activity; the average price that we purchased at is very attractive relative to the current trading stock; trading price, obviously, with Levity in RLJE last year that definitely utilized some of those sources of free cash flow. But at the end of the day, I think the great part about how we set this business up and the balance is it gives us tremendous flexibility, tremendous optionality. So whether that's organic opportunities, M&A or share repurchases, I think we’re very well suited to pull any one of those levers as those opportunities present themselves.

Operator

Your next question comes from Marci Ryvicker.

Marci Ryvicker

Sean, just a clarification question. On one hand, you talked about non-organic activity in international being healthy in revenue in AOI. And then you said excluding RLJ and Levity, you mentioned modest growth. So I don’t know if I’m connecting two different concepts, or if you could just clarify what you meant?

Sean Sullivan

So Marci just as for everybody's benefit; we have the international networks business; we have our IFC films business; we have Shutter Sundance now; we have Levity and RLJE, I think are the primary components of the international and other segment. So what I was trying to highlight is taking out the impact of Levity and RLJE, the rest of those businesses in aggregate is the guide for 2019. So I think we feel good about where the international networks business is. Given the independent film business that is another business that can be lumpy year-to-year depending on what movies, what releases and the timing and success of those; Shutter and Sundance now is still both in investment mode but probably not a material year-over-year differential in terms of our approach there. So hopefully that clarification is helpful.

Marci Ryvicker

And then secondly totally understand the buyback activity is going to vary from quarter-to-quarter. Can you just about the fourth quarter activity, it was a little bit low, was that because of the purchases and not the stock price?

Sean Sullivan

We have tremendous confidence in the business, our strategy and approach and our position in the current ecosystem and the strength of our balance sheet. We’re going to opportunistic. I think that our past purchasing activity I think says a lot about our approach and perspective. But again we're playing for long-term shareholder value in the creation of that. So like I said, I wouldn't read too much into any individual quarter.

Operator

Your next question comes from Vasily Karasyov.

Vasily Karasyov

I have a question for Ed on advertising. In prepared remarks, there was a mentioning of addressable advertising. So I wanted to ask you to elaborate on that please, what the CPMs are like compared to your linear inventory. How much inventory you actually have there? And how is the adoption by brands and media buyers going? Is there any pushback or not? So that would be helpful. Thank you.

Sean Sullivan

I think I did elaborate a bit, my feelings aren’t hurt too much that you didn’t remember earlier. But I will…

Vasily Karasyov

Because you didn’t talk about CPMs…

Sean Sullivan

Yes, I didn’t talk about CMP and probably won’t at this moment. I was going to say what I said, which we do collect a premium on CPM. And the other thing we do is we increase the volume of advertising committed dollars from some of those blue chip advertisers. And as said, we have upwards of a dozen advertisers that we're actively working with. And there's a broad range of categories in terms of autos and beverages, and retailers and pharmaceuticals that we are working with right at this moment.

Vasily Karasyov

And pushback from those who don't participate yet?

Sean Sullivan

No, I don’t its pushback. I think there's a finite and evolving opportunity, and we have conversations with all the major agencies as you would imagine. And they are helpful in identifying which of their clients they think are best situated to take advantage of that. And as we continue to meet with success, we think we will have capacity to work with more advertisers in that capacity.

Seth Zaslow

Well, thank you everyone for joining us call and your interest in AMC Network. At this point, Stacy, you can conclude the conference call.

Operator

This does conclude today's conference call. You may all disconnect.