AMC Reports Higher First-Quarter Earnings

UPDATED: Ad revenues up 30%
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Updated 3:55 p.m. ET

AMC Networks said its first-quarter earnings rose on the
strength of its original programming. But the company warned that a dispute
with Dish Network could have a material effect on future earnings.


Net income rose 45% to $43.2 million, or 60 cents a share, from $29.8 million,
or 43 cents a share. Revenues rose 19.5% to $326 million.


"Continued viewer enthusiasm for our programming resulted in ratings gains
for our national networks, most notably AMC's The Walking Dead,"
Josh Sapan, CEO, said in a statement.


Sapan added that AMC's Mad Men is having its
most-watched season ever. "These successes underscore the strength of our
original programming strategy, which continues to drive audience and advertiser
demand for our networks," he said.


Cash flow at AMC's national networks rose 25.4% to $133 million as revenues
rose 20.8% to $304.2 million. Advertising revenue was up 29.7%, led by AMC,
which had two original shows airing in this year's quarter, including the
blockbuster The Walking Dead, versus none
in the year-ago quarter, highlighting the value of originals to marketers.

On the company's conference call with Wall Street analysts, Sapan
warned that there won't be a similar spike in ad sales in the second quarter.
"Don't expect to see year-over-year growth rates similar to what we reported in
the first quarter due to the relative size of the audience for the originals [Mad Men and The Killing] in second quarter as compared to The Walking Dead, an absolute ratings juggernaut."

Nevertheless, Sapan said AMC Networks is going into the
upfront "quite encouraged." He said the company has been seeing healthy, double-digit
price increases in the upfront and good interest in its original programming
from media buyers.

Affiliate revenues rose 15%. Excluding digital, affiliate
revenues were up 8% a bigger gain than in past quarters. While 8% increase may
not be the norm for the year, "I think it's fair to say it represents the
beginning of an upward trend in the more recent agreements that we've signed,"
Sapan said. "We believe we are underpriced in the market and we've been looking
to increase those rates."

AMC Networks is having a dispute with one major distributor,
Dish Network, which said it might drop AMC's channels sometime this summer.

AMC said the dispute was the result of a $2.5 billion lawsuit
over Dish's dropping of the defunct Voom high-definition programming service
launched when AMC was part of Cablevision Systems.

"We believe that Dish's stated plan is the direct result of
the litigation and is not at all related to rate or other commercial
considerations," Sapan said during the earnings call. "We believe that Dish is
not acting in the best interest of its subscribers and is trying to create
leverage for itself in the Voom lawsuit."

Sapan said that the loss of affiliate fees and ad revenue
that result from being dropped by Dish "may have material impact on our
financial results." The severity of the impact would depend on how long
carriage is interrupted.

An analyst asked if AMC planned a marketing campaign aimed
to have subscribers leave Dish Network to be able to continue to see AMC
programming. "We'll see how it goes," Sapan said, adding "of course we're
contemplating and making all sorts of contingency plans...The potential absence
of our services on any platform by definition created a competitive opportunity
for another platform. It's a competitive world for multichannel video."

AMC said a conference about setting a trial schedule was
happening next week.

An analyst asked about the strategy regarding the suit
because if AMC wins, it splits the proceeds with Cablevision. While AMC might
want to settle the suit quickly to resolve carriage issues with Dish,
Cablevision might prefer a trial to maximize the award, the analyst said. The
company declined to comment.

The networks had higher programming and marketing expenses
in the quarter. The company said it plans to continue to invest in original
programming. One analyst noted that with the most recent pilots at AMC, one was
fully-owned and the other partly-owned, and asked about the company's strategy
going forward.

"Our first desire if we can is to own because of the
benefits in success and because the availability of ancillary revenues on the
international front and the digital front have been increasing very significantly,
so it actually creates a risk profile that has altered from the time we
commenced" airing original programming, Sapan said. "I don't think we will
absolutely ignore or exclude having a partner or a studio because you don't
want to exclude great creative material," he said, adding that as AMC gets
stronger it will be able to wring more favorable terms from the partners with
whom it works.

One of the issues being discussed in the TV business is the
effect Netflix and other digital subscription video on demand services are
having on ratings.

"We have an agreement with Netflix for some of our original
content, including The Walking Dead.
In general a guiding principle for our digital SVOD distribution is delayed
windowing," Sapan said.

"Specifically we make our shows available about a year after
they air on our networks. We think this approach works and has several benefits,
he said.

"First, the year delay protects the cable ecosystem by
maintaining the value of the premiere window," he said. "Secondly, the one-year
holdback drives ratings. Based on the data we're seeing, offering shows like TheWalking
Dead
, Mad Men and Breaking Bad, in a post-home video
digital syndication window seems to be improving ratings for those shows on our
linear channel. It appears that new viewers are finding these shows on a
digital service, are catching up on prior seasons and are then tuning into AMC
for new seasons in greater numbers, many for the first time."

Sapan noted that while shows rarely get higher ratings as they
age, viewership of season four of Breaking
Bad
was up 24% from the prior season,
The Walking Dead
season 2 was up 32% and Mad Men season 5 was up 30%.

 "So for us, the data
suggests that this delayed digital distribution is in fact increasing linear
viewership and in turn driving the value of the paid ecosystem," he said.

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