AMC Networks reported higher second-quarter earnings, with its top-rated show,The Walking Dead, helping to generate big gains in ad revenue. But high levels of program investment scared Wall Street, which sold off the company’s stock.
Net income rose 16% to $71.4 million, or 98 cents a share, from $61.5 million, or 85 cents a share a year ago.
Revenues rose 37% to $525 million.
“AMC Networks continued to build momentum in the first quarter of 2014, with double digit increases in revenue and AOCF. At our national networks, our original programming performed well, driving attention for and strengthening our network brands,” CEO Josh Sapan (pictured) said in a statement. "Having completed our acquisition of Chellomedia, we are quickly integrating those networks and are streamlining our operations. We view our now-robust international platform as a springboard for additional growth for the company in the years ahead as we continue to focus on creating and delivering maximum value for our shareholders.”
But cash flow and earnings per share were below Wall Street expectations, sending AMC shares down more than 8% in afternoon trading to the $59 level.
“Despite the stronger-than-expected advertising growth, the lack of visibility on expense growth continues to concern investors,” said David Joyce, analyst at the International Strategy & Investment Group, who downgraded the stock to neutral from buy, and reduced his stock price target to $75 from $81.
Todd Juenger, senior analyst at Sanford C. Bernstein, noted in a report that AMC “crushed it” on the bottom line and what could have been a bullish report was “overwhelmed by the magnitude of program investment.”
Juenger added that the company had no apologies for its programming spending and gave no indication it will stop. “One can't help but give them some credit; they are true believers (and to some extent seem befuddled by what they perceive as the investment community's focus on the short-term),” he wrote in the report.
According to Juenger’s calculations, AMC had $20 million in incremental spending on programming and marketing in the quarter, which he said was a lot for a company of AMC’s size, with most of that spending focused on SundanceTV.
“The good news is, some of that investment will be recouped in the near future, with certainty, from international and SVOD licensing,” Juenger said.
During AMC’s conference call with analysts, Sapan reiterated the company’s strategy.
“At each of our other channels, WE tv, IFC and SundanceTV, we are pursuing the same focus on original programming. We continue to ramp up our investment in original content, and these networks are each enjoying solid momentum,” he said. “As we said in the past, our focus is to make each of those channels better, which we believe will ultimately make our portfolio of channels stronger and our business more resilient and have better growth in the long term.”
Sapan added that the company is also looking to become more global. “We continue to view the International market as one that has the potential to provide attractive long-term growth and value. And we are, therefore, pursuing opportunities to accelerate and enhance our International presence and exposure,” he said.
Cash flow at AMC’s national networks, which include AMC, WE tv, IFC and SundanceTV, was up 8% to $178 million, as increases in revenue were offset by higher programming and marketing expenses.
Revenue at the networks were up 21% to $449 million. Advertising revenues were up 27% to $208 million, with most of the gains posted by AMC Network.
The company said growth will not be at the same level in the second quarter, because AMC will be airing fewer episodes of Mad Men. Cash flow will be affected by two new shows—Turn and Halt & Catch Fire—which are wholly owned by AMC.
“While there will be tough ratings and advertising revenue comps in 2Q and 3Q14, we believe there will be a strong 4Q14, when there are premieres of the next season of The Walking Dead and the new Better Call Saul," Joyce said.
Sapan said currently the scatter market is fine. As for the upfront, “our products being really well-received,” he said. “Not only AMC but the original shows on IFC, WE and Sundance are increasingly better known by name. I think that's enhancing the perception of the brands. And when you speak to buyers and planners, they know exactly what you're talking about.”
He said an appetite is building among buyers for original programming on AMC and its sibling networks. "They think that—I hope they think—I think they do, that we're above the crowd and that we will do well, and certainly relatively well. So I think we're positioned pretty well,” Sapan said.
Distribution revenue increased 16% to $241 million.