Operator: Ladies and gentlemen, thank you for standing by, and welcome to AMC Networks Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]. With that, I would now like to hand the conference over to your host, Mr. Seth Zaslow, Senior Vice President of Investor Relations. Please go ahead, sir.

Seth Zaslow: Thank you. Good morning, and welcome to the AMC Networks Full Year and Fourth 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 full year and fourth quarter 2019 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 website 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. With that, I would now like to turn the call over to Josh.

Joshua Sapan: Good morning, and thank you for joining us.

In 2019, against the backdrop of a rapidly shifting media ecosystem, AMC Networks achieved the key financial targets that we articulated at the beginning of the year, generating healthy free cash flow and maintaining a very strong balance sheet. We continue to respond to the pressures on the pay-TV bundle and linear advertising in an increasingly consolidated media world with strategies to take advantage of these changes. They are a focus on increasing content ownership, expanding distribution of targeted direct-to-consumer services, development of advanced advertising and maintaining the high-value of our linear channels. The size of AMC Networks and our particular strengths and approach put us in a position to benefit from levels of success that we believe are highly achievable and sustainable. We're off to a productive start to the year with the announcement we made yesterday, with one of our biggest MVPD partners that reflects the changing and increasingly holistic relationship with the distributors.

Our new long-term distribution agreement with DISH includes the launch of our full suite of targeted SVOD services as well as a desirable agreement for the carriage of our linear networks. This agreement comes on the heels of a long-term renewal we reached last year with Charter Communications, which includes making all of our SVOD services available to their subscribers. We're very pleased that our MVPD partners have embraced our subscription video-on-demand strategy and are launching those services as part of their platforms. Our new multifaceted agreements demonstrate that MVPDs are increasingly recognizing the value that our growing SVOD services bring to their own offerings, particularly as their businesses change and evolve. These deals also underscore the continued strength, vitality and value of our linear ad-supported number of brands and content.

These targeted subscription video-on-demand businesses are an increasing area of focus for us, and we believe we are well on our way to being one of, if not, the leading creator and distributor of highly targeted subscription ad-free services here in the U.S. and across the globe. I'd like to take a few minutes, if I may, to share some further thoughts on how we view this business to give you a sense of our strategy as well as to provide a couple of updates. As the category for general entertainment streaming services, what we would like to call something-for-everyone offerings, have gotten more competitive and with massive free trials and connects in the last several months, we are particularly pleased with the continued momentum for our targeted SVOD offerings. In the fourth quarter against that backdrop, we passed 2 million paid subs in aggregate across our 4 targeted services.

We take this as a strong indicator that our position offering special interest services as companions to Netflix, Disney+, Amazon and others will continue to grow well. Each of our 4 services are highly distinct and provide deep content libraries for fans of the genres. I'll remind you, if I may, of what they are. Acorn TV, our largest service with over 1 million subs, is dedicated to British mysteries and dramas; shudder is for horror and suspense fans; Sundance Now is for fans of true crime drama and docs; and Urban Movie Channel, or UMC, is dedicated to Black TV and film. By focusing on specific segments and because we're not trying to be all things to all viewers, these businesses have an economic profile that is radically different than those of large general entertainment streamers.

We are programming and marketing to a highly specific audience, and we can be very selective in our content and marketing investment, taking advantage of efficiencies versus spending all one needs to spend in general entertainment subscription video-on-demand. While this may seem nuanced, it has a profound impact on content cost, on SAC and on churn. Acorn TV, our British-focused service, is among the industry leaders in low churn. In fact, it may have the lowest churn of any service in the marketplace today. In addition to having broad appeal domestically, these genres translate quite well overseas.

And we believe the international market opportunity is as yet untapped and quite significant. We're now beginning development overseas on distribution of these services on a direct basis as well as through our international MVPD relationships. And these services are beginning to yield financial benefits to our top and bottom line. They currently generate approximately $100 million in revenue on a run rate basis, and we expect them to grow rapidly. We also expect them to have favorable margin characteristics, and over time, we expect those margins to continue to improve as these businesses grow and scale, reaching healthy levels by 2024.

We are confident now that after several years, we have the right people, the right tech and the right experience to succeed in the specialized subscription video-on-demand category. And while, of course, the major streamers will offer tremendous video choice, we will continue to run our playbook creating distinct and clear destinations that appeal to targeted audiences as a complement to the larger for something-for-everyone offerings. Another important focus for our company is advanced advertising. We recently completed a deal with the TV measurement and analytics company called 605 to get proprietary set-top box and smart TV viewership data for more than 21 million U.S. viewers, enabling us to know much more about where and how our viewers are interacting with our content.

We have built integration with advanced TV platforms, including [clip]from AT&T and OpenAP, which allow our ad partners to source, understand and connect with our audiences in a more real-time and automated way. In addition, we've begun to iterate and build upgrades to our own stuff, our own proprietary advanced TV platform called Mediator. And as I've mentioned in the past, this tool offers a direct connection for our ad partners to target specific audiences across our content, leveraging our capabilities to deliver the most optimized media plans. As we - and we continue to be very focused on ensuring we are fully monetizing all of our high-quality content. Our portfolio in AMC Networks is premium and diverse, ranging from high-quality scripted drama, unscripted material, comedy and award-winning natural history programming.

And our distinct brands represent the best of what's out there in the ad-supported world. We continue to have a very high concentration of discerning, hard-to-reach audiences that advertisers find attractive. And with the proliferation of ad-free subscription services, which we understand and are in, we are one of the very few options on basic cable that consistently delivers high-quality content in very deeply engaging environments. In addition to continued investment in our targeted SVOD businesses and in these advanced ad efforts, we will increase our focus on owning and controlling more of our own IP. We believe that continued investment across these

3 areas: targeted SVOD, advanced advertising, with content creation and ownership underpinning them, will move our organization from what has been solely a cable channels company into a premier targeted content company that is now simultaneously inhabiting the traditional pay-TV ecosystem, the advanced ad world as well as the emerging targeted SVOD marketplace.

And while our investment is quite modest compared to the larger players, we believe that this is the right course for AMC Networks to ensure the long-term viability and financial performance of our business. Before I turn the call over to Sean, if I may, I'll offer a few brief comments on some of our content highlights. We have a rich slate of new and returning series in the first months of the year, and I'll mention a few of the specifics. We kicked off the year with a multi-network event for Seven Worlds, One Planet, our latest natural history co-pro with our BBC partners that delivered significant gains over last year's tentpole nature series. BBC America is the definitive home of this iconic programming on U.S.

television through our exclusive TV partnership with the BBC. And this new series' success speaks to the growing relevance and enduring interest in the genre. Our WE tv channel continues its momentum as the #1 network on Thursday and Fridays among African-American women and adults. The network is broadening its slate to include the music documentary genre, with new series that integrate WE tv's popular docusoap franchise, such as Love After Lockup, Growing Up Hip Hop and Marriage Boot Camp, among others. And just this past weekend on AMC, we had back-to-back debuts of the second half of the creatively very strong season 10 of The Walking Dead, and the Emmy-nominated, somewhat beloved, Better Call Saul, which heading into its fifth season, is now moving deeper into the world of Breaking Bad and seems to be embraced wildly by critics and viewers.

It is worth noting that both these shows returned to AMC with across-the-board ratings increases from their most recent episodes, and that for the 2019/20 television season, AMC currently has the top 2 cable drama premiers in all key demos with The Walking Dead and Better Call Saul. In a few weeks, we'll premiere a new series from the expanded Walking Dead universe called World Beyond, which focuses on the duration of survivors who have grown up in a post-apocalypse world. It will be the first close-ended Walking Dead series with just 20 episodes. Following on from that will be the latest series of Fear the Walking Dead. I will note that as we continue to build out The Walking Dead universe, we see rich opportunity to extend the franchise beyond traditional TV series, of which we'll have 3.

As we've mentioned before, we're making a movie with Universal Studios featuring the celebrated cop hero. If you watch the series, you'll know

the name: Rick Grimes. And our Walking Dead chief franchise czar, Scott Gimple, and his team, are prepping a variety of specials, digital short-form series and other iterations, which we'll talk more about as the year progresses. Later this week, we'll premiere a new anthology series called Dispatches From Elsewhere. It's from the multitalented creator, writer and star, Jason Segel, who some of us may know from his long career, including the TV series, How I Met Your Mother, and the film, Forgetting Sarah Marshall.

He appears with the killer ensemble cast of Sally Field, André Benjamin, Richard E. Grant, and a new breakout star named Eve Lindley. This intriguing, immersive series is about a group of 4 strangers who stumble upon an elaborate alternate reality game that exists just beyond the confines of everyday life. Other returning series include the final season of the much-acclaimed Brockmire with Hank Azaria on IFC; the critically-lauded thriller, Liar, with Joanne Froggatt; and in April, our much celebrated and award-winning fan phenom, Killing Eve, which returns for Season 3, starring Golden Globe, SAG, and Critics' Choice winner, Sandra Oh, and Emmy winner, Jodie Comer. Later in the year, we're looking forward to several new series, including a show called Soulmates, which is an anthology drama with a sci-fi twist from Black Mirror writer, Will Bridges, co-starring Sandra (sic) [Sarah] Snook from Succession.

It is about a new technology that lets one find one's true genetic predetermined soulmate. It's a genre-bending dark comedy from executive - plus - forgive me, there's also a genre-bending comedy from executive producer Rashida Jones that is called Kevin Can (expletive) Himself. That show probes the secret life of the - the passive, agreeable sitcom life in what we think is an arresting new format. And on Shudder, we're in production of second season of a very popular original series, Creepshow, from Walking Dead executive producer Greg Nicotero. And our acclaimed and popular series, A Discovery of Witches, which broke subscriber records last year for both Shudder and Sundance Now, will also return for a second season later in the year.

So thanks for listening to them. They are just a few of the shows that we're looking forward to. Much, much more to come. With that, I'd like to turn the call over to Sean for more detail on our financial performance.

Sean Sullivan: Thanks, and good morning.

As Josh highlighted, 2019 was a successful and productive year for the company. Despite the challenging macro environment, we met each of the financial targets we laid out at the beginning of the year. For 2019, total company revenues grew 3% to $3.1 billion, and AOI increased 1% to $944 million. Adjusted EPS was $9.27, an increase of 7% versus the prior year. And the company continued to generate strong free cash flow, delivering $377 million.

So let's review the performance of our operating segments. For the full year, National Networks revenues were $2.4 billion and AOI was $904 million, a decrease of 2% as compared to the prior year for both metrics. In the fourth quarter, National Networks revenues decreased 1% to $589 million. AOI was $182 million, a decrease of 13% as compared to the prior year period. Distribution revenues increased 6% in the fourth quarter.

As expected, it was a particularly robust quarter for content licensing revenues due mainly to the timing of the licensing of our scripted original programs. Results in the quarter reflected the SVOD availability of Preacher, Into the Badlands, NOS4A2 and Killing Eve, which more than offset the absence of SVOD revenues from Dietland in Q4 2018. The international distribution of The Walking Dead also contributed to this increase. As for the subscription revenue component of distribution, revenues were down in the mid-single digits as compared to the prior year period. In addition to the quarterly fluctuation based on the timing of various agreements, renewals and adjustments, we continue to see a moderation, mainly due to macro factors.

As we mentioned on prior calls, the results in 2019 were also impacted by the interpretation of a contractual provision with 1 of our distribution partners. We're pleased to announce that we resolved our differences with this partner in early 2020. With respect to advertising, advertising revenues in the quarter decreased 8%. At AMC, the channel results were influenced by lower delivery, primarily related to The Walking Dead as well as our Best Christmas Ever programming lineup. At BBC America, results were impacted by the absence of Doctor Who.

However, growth at WE tv and IFC as well as increased pricing across our portfolio of networks helped to offset the unfavorable comparisons. Moving to expenses. In the fourth quarter, total expenses increased 6% versus the prior year period. Technical and operating expenses increased 6% to $306 million. The variance principally related to the timing and mix of original programming across our networks.

In the quarter, we recorded $23 million in charges related to the write-off of various programming assets across our portfolio of networks. This amount compares to write-offs of $29 million in the fourth quarter of 2018. SG&A expenses were $113 million in the fourth quarter, an increase of 12% versus the prior year period. This variance primarily related to an increase in bad debt and an unfavorable comparison in stock-based compensation. In addition, marketing decreased year-over-year.

Moving to the International and Other segment. For the full year, revenues increased 23% or $136 million to $734 million. The main drivers of the increase were the acquisitions of RLJE and Levity. To a lesser extent, revenue also reflected an increase from our other targeted subscription streaming services, Shudder and Sundance Now. For the full year, AOI increased $31 million to $50 million.

This increase was principally related to the acquisitions I mentioned as well as improved performance at AMC Networks International. In the fourth quarter, International and Other revenues grew 7% to $201 million. The increase primarily reflected growth of our targeted subscription streaming services as well as Levity. AOI was $15 million, an increase of $6 million versus the prior year, primarily attributable, again, to improved performance from our targeted subscription streaming services. Moving to EPS.

For the full year, EPS on a GAAP basis was $6.67 compared to $7.57 in the prior year. On an adjusted basis, EPS was $9.27 compared to $8.69 in 2018. The year-over-year change in adjusted EPS reflected the increase in AOI, lower tax expense as well as a reduction in outstanding shares as a result of our stock repurchase program, partially offset by a decrease in miscellaneous, net. GAAP EPS also reflected the increase in impairment and related charges. For the fourth quarter, EPS on a GAAP basis was a loss of $0.15.

On an adjusted basis, EPS was $1.69. The year-over-year change in adjusted EPS reflected a decrease in operating income and higher tax expense, partially offset by an increase in miscellaneous, net. GAAP EPS also reflected $107 million in impairment and related charges recorded at our international networks, partially offset by a reduction in restructuring and other related charges. As disclosed in our earnings release, the impairment charges primarily reflected the partial write-down of goodwill associated with AMC Networks International. In terms of free cash flow, the company continues to deliver healthy amounts of cash.

We generated $377 million in free cash flow for the full year. For the 12 months, cash interest was $152 million, tax payments were $140 million, capital expenditures were $92 million and distributions to noncontrolling interests were $16 million. Program rights amortization for the 12-month period was $975 million and program rights payments were $970 million, resulting in a source of cash of $5 million. This compares to a use of cash for programming of $18 million for the prior year period. Turning to the balance sheet.

We continue to maintain a very strong balance sheet and have the financial wherewithal to carry out the strategy Josh discussed. The 4 key tenets of our capital allocation policy remain unchanged.

They are: first, invest organically in our core business and new businesses on projects that will produce attractive returns for our shareholders. As we continue to invest in content and reposition for a direct-to-consumer focused landscape, we're gaining increasing confidence in this strategy. We believe the highest return for our capital is to fund the content that is core to 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 market.

Second, maintain leverage as appropriate for the business outlook. As of December 31, AMC Networks had net debt and finance leases of $2.3 billion. Our leverage ratio based on LTM AOI of $944 million was 2.5x. As previously disclosed, earlier this month, we announced our intention to redeem $200 million of our outstanding 4.75% notes due 2022. We will continue to look to opportunistically manage our upcoming debt maturities and reduce our interest expense.

Third, make disciplined and opportunistic acquisitions and advance our strategic plan. And fourth, return capital to shareholders. Over the past 3.5 years, we returned over $1 billion through our share repurchase program, having repurchased approximately 26% of our outstanding shares. As of last Friday, the company had $489 million available under its existing authorization program. Return of capital remains a priority.

To date, we have returned significant capital to shareholders, and we will continue to be opportunistic with pacing that will continue to vary from quarter-to-quarter and year-to-year. So looking ahead to 2020, as Josh discussed, we expect 2020 to be a pivotal year in our continued evolution. We expect total company full year revenues to be down modestly. We anticipate our results will reflect continued strong growth from our targeted SVOD services. This growth is expected to be offset by continued pressure on our traditional linear business and content licensing unfavorability due to shows that were written to conclusion in 2019, including Into the Badlands, The Son and Preacher.

As for the total company full year adjusted operating income, as Josh outlined, we are accelerating investment in several areas of our business that we anticipate will position us for long-term growth. These areas primarily include content creation, targeted SVOD as well as advertising-related initiatives. The implementation of these initiatives, in several instances, will impact our financial performance in 2020. For instance, our decision to retain select SVOD rights to our programming impacts the amortization timing and results in the acceleration of incremental expense into 2020. In addition, we are likely to incur expenses in 2020 related to the development of new growth opportunities, such as the international expansion of our targeted streaming services.

As we have in the past, we will, at the same time, continue to aggressively manage our overall cost base. We expect that the net impact of these items will result in a decrease in total company full year AOI in the mid- to high single digits. As for free cash flow, we expect to continue to deliver healthy levels of cash and project full year 2020 free cash flow to be at or above 2019 levels. Most notably, we expect a decrease in CapEx, taxes and interest to offset the AOI decline. Looking beyond 2020, we expect our results to improve as we position AMC Networks for long-term success in an evolving landscape.

As for the cadence of our performance during the year, we anticipate continued variability quarterly as a consequence of the specific timing of our investments in the airing of our shows. With respect to the first quarter, we expect total company revenue to be down in the mid-single digits versus the prior year period. We expect healthy revenue growth on our International and Other segment, led by increases at our targeted SVOD services. At the National Networks segment, we expect the results to reflect a continuation of the trends we're seeing both in subscription and advertising revenues. Advertising results in particular will be impacted by the timing of our programming, most notably a 2-week shift in the airing of The Walking Dead, somewhat offset by the airing of Better Call Saul on AMC and Doctor Who on BBC America.

As for content licensing revenue, we expect a decline in the quarter due to the timing of availability of our content in ancillary windows. As for total company expenses, we expect an increase in the high single-digit range as compared to the prior year period due most notably to the timing of programming and marketing. As the year progresses, we expect the timing of expenses to turn more favorable, and therefore AOI performance to improve. So in conclusion, overall, we're pleased with our performance in 2019, and believe we are positioning the business for long-term success moving forward. So with that, we'd like to move to the question-and-answer portion of the call.

Operator, if you could please open the call to questions.

Operator: [Operator Instructions]. Our first question comes from the line of Ben Swinburne from Morgan Stanley.

Benjamin Swinburne: Josh, could you talk about the opportunity you see with these targeted SVOD services globally? I don't know if you have any research you've done on sort of the TAM or how big these genres are in your view. And also, are you able to use the linear channels from a promotional and content and brand perspective to drive these businesses? And then I just wanted to follow-up with Sean.

Sean, can you just help us understand sort of the bridge around AOI and free cash flow? Last year, you guys had AOI growth. Cash from ops is actually down, which didn't sound like it was programming related, so I mean, any color there? And then just in '20, you're talking about a better free cash performance relative to AOI. I just wanted to see if you could help us understand those drivers.

Edward Carroll: Ben, it's Ed. Actually, I'll weigh in on the opportunity, the international opportunity, against our SVOD.

One of the things that is interesting and favorable about this business is we're able to develop an intimate relationship with our subscribers. We see all the data. We know what shows they watch. We know what their completion rate is of the show. We know how long it takes them to go on to the next episode.

And obviously, we know what shows are our most popular and most utilized. We're then able to develop a demographic profile of those customers and look at populations in other territories. We also overlay that with rights availability, what we can co-produce, what we own. Increasingly, as we own more content, there become more efficiencies about expanding. So we look first to English-speaking territories for obvious reasons for some of our OTTs.

We're looking at parts of Europe and we're also looking at Latin America. Also the overlay of our international sales force provides us a head start on getting these services on the major platforms. So that's also an important part of the strategy that you will see going forward. To your second question. With the linear channels, there's absolute crossover between the brands and the content on some of our linear channels and the OTT services.

Some good examples that are top of mind, Creepshow premiered on Shudder and you will see later in the year, it will run on AMC. We think that will be successful on AMC, but also to build audience then for the Season 2 launch of Creep Show back on Shudder. We did the reverse dynamic with NOS4A2, where we premiered it on AMC and then transferred over to Shudder, and now we're building towards Season 2 as well. And other examples with content moving fluidly between UMC and WE tv abound and also between Sundance TV and Sundance Now.

Sean Sullivan: And Ben, on the free - sorry.

So just on the free cash flow. So as we think about '18 to '19's performance with the increased AOI, there was an investment in working capital in '19, which was really the year-over-year driver in terms of free cash flow performance '18 to '19. As we fast forward to 2020, we expect working capital turn more positive. But as I said in my remarks, CapEx, we're coming through a heavy CapEx cycle. We'll see some benefits there.

We'll see better cash tax profile in 2020. And those items will more than offset the AOI discussion that we had. So we feel great, again, about the free cash flow portrait dynamic as we continue to invest in content. And as we continue to pursue, obviously, these growth initiatives. So we feel very good about the free cash profile.

Operator: Our next question comes from the line of Michael Nathanson from MoffettNathanson.

Michael Nathanson: A couple for Josh and then 1 for Sean. So Josh, now they have DISH and Charter done on the renewal side. Could you give me a sense of what percentage of your footprint is coming due in the next couple of years? And given that you always say to us, well, you're a better guide or judge of subscriber trends going forward, how do we think about the inflators you guys have? So if no one really, truly knows the shape of subscriber declines, help us think about, okay, in any decline world, how do we offset those declines with inflators? So that's the subscriber questions. And then for Sean, to Ben's question, your second half cash flow this year really came down.

And just - I haven't updated the model you gave us on the update. When we look at second half versus first half, was the driver working capital? Was that the main part of the decrease in free cash flow?

Joshua Sapan: Sure, Michael. So this is Josh. Yes, so I think a couple of things. We did do the two renewals you mentioned, and we feel quite good about them for multiple reasons.

One is, frankly, stability continuity. The second is - and we did well on that front. So we - all of our linear channels deeply penetrated as they've been. The second is the launch of these targeted SVOD services. And as you know, MVPDs that are wireline have incentives now, particularly to sell video to an increasing percentage of broadband-only subscribers.

And we like to believe that we have very good relationships with these distributors, and we'll work with them in new ways to have them realize incremental revenue and margin from video, and we'll be the beneficiary. The deals were - the deals all have annual escalators in them. They're - the pace of those annual escalators, I can't tell you with certainty given what will occur into the subscriber profiles that we've been seeing of late, particularly on the satellite side, where we'll net out. So I will say what I said before. You study it more closely than I do.

We're all watching trends quarter-by-quarter, and it is slightly difficult, I think, for anyone over a 12-month horizon to say satellite will be this, wireline will be this. There's a proliferation of streaming. It is a moving animal. You know the numbers today. I think, as where we stand today, there's 80 million satellite cable telco.

There's 9 million virtual subscribers. That's a total of 89 million. You know the trends, that some of the virtuals are moving around in terms of entrance growth reduction. You also know the satellite trends. So when we offer our prospective view of the year, we do our best calculation on what's going to happen to those subs.

And of course, we update it with great regularity. I can't give you a better answer than that, except to say rate escalators and an expectation of erosion in the subscriber universe, but I would [add] 1 macro thing, if you don't mind, macro - micro, and that is that AMC Networks is, I believe, among the, if not the best material to carry on basic cable, understanding that there's some pressure on the environment. And I'll say that because, and I hope it's not boastful, when last Sunday night we premiered two shows to season-high results, The Walking Dead and Breaking Bad. And then we have Seven Worlds on with our partners on the BBC, and all 3 of those things have upward momentum. And our wholesale rate, if you look at it on a comparative basis, and I don't want to knock anyone, but to the sort of bloated, in some cases, wholesale rates that come from some companies that are constructed differently, we are something that every retailer that sells video wants to have because the price is highly attractive for the value, and we work with them intimately to build that value, and now to build it further on the SVOD side.

So I did hope I answered, at least, reasonably your question specifically on what's going to happen in the year. I do want to say that I think that the manner in which we've constructed the business and the manner in which we're investing is smart, prudent and wise and clear-eyed and clear-minded against developing a return in the United States and elsewhere, underpinned by this cash of content that is incredibly attractive on basic cable, the way it's organized, particularly with our partnership with BBC, is smartly done because we know increasingly own it and put it in our own little library, if you can imagine that, for use where we want to deploy it later, and we have a very responsible and smart plan for growth.

Sean Sullivan: And Michael, to your second question on free cash flow. So yes, in 2019, first half, second half, in some respects, to a lesser degree, cash tax payments were lighter in the first half than in the second half. But at the end of the day, again, it relates to the working capital content licensing activities in the back half of the year.

Production activities for our shows and our originals are impacting free cash flow. But again, as we fast forward to 2020, I think the free cash flow profile that are articulated just reflects the robustness of our model and our platform.

Operator: Our next question comes from the line of Michael Morris from Guggenheim.

Michael Morris: Two questions. My first one, maybe for Josh or Ed, is around the role of advertising on your SVOD services.

Can you just tell us right now how much ad-supported product you have out there? And as you look forward, what's the role of advertising? Or what's the contribution you would expect? Would you expect to offer different tiers of service perhaps and ad-free and ad-supported? How are you thinking about those types of things? And then secondly, Sean, within your outlook, you talked about results improving beyond the investments that you're making in 2020. Can you just talk about the key contributors to what would cause that upward inflection in 2021? And maybe sort of how you're thinking about the swing factors, whether it's on the top line or on the expense side?

Edward Carroll: Michael, it's Ed. On advertising and our SVOD services, we do not feature any now. With AMC Premiere, part of the thinking was to give our viewers a choice working inside the ecosystem with our distributors of how they'd like to experience the AMC content. They could get it in the ad-supported environment or they could get it in a more binge-friendly ad-free environment.

And there's some interesting things we can do with our distributors, and we - I think we'll do some interesting things with them in 2020. On the OTT, the target OTT, we don't feature advertising now. We don't have immediate plans to. Theoretically, that could be an opportunity because we have an upscale audience that's highly targeted, but we do not have any plans at present to look that way.

Sean Sullivan: And Michael, to the beyond 2020 question, again, I think as I articulated, 2020 has some unfavorable programming timing and investments.

Obviously, we're developing a number of growth initiatives, including the targeted SVOD that we've been talking about this morning, including international expansion of those. So my expectation on improved performance is really a result of the uptake in excess of those initiatives that we're executing in 2020.

Michael Morris: And Sean, if I could just ask you one more. You talked about the resolution of the difference with a distribution partner in early 2020 that impacted you in '19. Could you quantify at all sort of how much that may have impacted your 2019 subscription revenue? And how we should think about whether that gives you a little bit of a favorable benefit in the coming year?

Sean Sullivan: Yes, Michael.

Again, as you know, we don't go into specific program agreements or distribution agreements. So I think all I would say is, a, we're pleased we resolved it. We did it in 2020. And the articulation of the guide for the full year 2020 is reflective of that resolution.

Operator: Our next question comes from the line of Todd Juenger from Sanford Bernstein.

Todd Juenger: If I could first, if you don't mind, take another shot at what Ben was, I think, trying to get at in the very first question in the Q&A. Let me try it this way. Ed, if you still want to engage on this. So thinking about the TAM for some of these niche SVOD services, as you described them. If we could just focus on the U.S.

even. I guess what I'm trying to wrap my head around is niche, by definition and as you've said, means targeted sort of a very particular audience. You talked about 1 million subscribers already or more than that for Acorn. How many potential households do you think there are in the U.S. for a service like Acorn? To help us understand whether a million is a lot of that potential market or a little bit of that potential.

But I'd love your thoughts on that for really all the services, Acorn, Shudder, UMC, Sundance, if you don't mind. And then, Sean, if you just - hopefully quick second question and I truly apologize if this was in your guidance and I missed it while I was taking notes. But the content licensing side of the National Networks, especially with the evolving SVOD strategy, that's the hardest, at least for me, to try and gauge in terms of growth. And now, especially, as you're changing it. Did you make any comments - or can you just help us - should we think of that as a growing item generally for next year? Will that maybe go down as you rethink your willingness to license some things, just plus minus? Any help you give us to narrow it.

I would appreciate it.

Edward Carroll: Todd, it's Ed. So on the targeted SVODs, I think the best guidance I can give you is, we've said we're looking out to year 2024. We expect 5 million to 7 million OTT subscribers, and we expect upwards of $500 million in revenue. I don't think I'll break out individually by OTT service, except I think what's interesting since the last time we all talked is the marketplace has been dominated of late by the new entries in the free subscription samples and the partnerships with mobile phone services and such.

And so that's a lot of noise, and that's a lot of subscribers. But we are continuing on our plan, and we are on the pace that we have talked about in the last two calls. So we think we're on to something because we have such an intimate relationship with those subscribers. And for us, managing churn and keeping our subscribers as we grow them is the name of the game. And in doing so, those services then can become profitable at much, much fewer subs and will run at a healthy margin.

I hope that's helpful.

Sean Sullivan: Yes. So again, I did try to at least give some qualitative comments to content licensing. Again, as you know, the cadence of writing a show to conclusion, it becoming available on a domestic SVOD service. That is going to create content licensing unfavorability in 2020.

I think I guided you to that for the full year. I also gave you some context as it relates to the first quarter. I will also reiterate again; we're doing this on a select basis. So this isn't a formal or firm policy. So I think we're looking at each show, each opportunity in determining the best way to monetize it, whether it's on our platform or by monetizing it, both domestic and abroad, internationally.

So we have shows that write to conclusion in '19, and we have a bunch of new shows that Josh walked through, whether it's Soulmates, whether it's Kevin Can (expletive) Himself, whether it's Dispatches. So obviously, we have a number of new shows as we maintain our content investment, and those are premiering. So given the windowing of our historical behavior, there is an unfavorability and timing impact occurring.

Operator: Our next question comes from the line of Vasily Karasyov from Cannonball Research.

Vasily Karasyov: I have 1 for Sean and 1 for Josh.

Sean, for years, we had the [comment] that was very helpful for us, the broadly stable margin in the National Networks segment. So I understand in the new world that changes. I

wonder if: a, this is true? And b, would you be able to give us a similarly useful guidance or outlook for how margins will evolve as you go through this transition? And then I have one for Josh.

Sean Sullivan: Yes, Vasily. Thanks.

So as you look at 2019 versus 2018 at the National Networks, I think we delivered a pretty stable margin at 38%. Prospectively, I didn't offer that guide. I do think that my comments speak for themselves about areas of investment, areas of growth, areas of opportunity, but at the same time, managing aggressively the cost base. So I'm not going to give you a hard and fast guide that we're going to have either consistent or a broadly stable margin, but I think we're being very prudent and disciplined around the investment for our National Networks, our linear channel business, in light of the macro factors and what we can control and what's occurring to us. So I think that, hopefully, our past behavior and activities and financial results speak for themselves.

Vasily Karasyov: All right. And Josh, I would like to ask you to elaborate on this view out there that the industry is going through effectively unbundling. You have multiple direct-to-consumer services and so on, but eventually, it will have every bundling to occur. So since you offered in the past very insightful views on the future of the industry, I was wondering if, a, you agree with that? And b, who do you think will be that entity that will rebundle services? And what does that mean for you, for your initiatives in linear and direct-to-consumer services?

Joshua Sapan: Sure. I'll give you my best perspective on it, Vasily.

It is, first of all, in motion. And so I think that there have been some occurrences that have probably surprised many. So I think prognosticating with clarity or certainty, I should say, with certainty is a risky business. With that, I think what I'd say is a few things. And unfortunately, it won't all sound like 1 big simple home run.

There's erosion, obviously, in the pay-TV side of the existing ecosystem. It's occurring with much greater speed, for obvious reasons, on the satellite side than on the wireline side because of presumably the attachment of broadband to the wireline side. I think the numbers today are there's around 80 million in the U.S. that are cable satellite telco. I think there's 9 million that are so-called virtual MVPDs.

So there's been erosion in those numbers. I think I stated them before. That's the state of the union. There's price pressure on that part of the business on what we used to call the basic cable bundle. By the way, there's oodles of price pressure on what we used to call premium cable, HBO, Showtime, Starz, as the streaming services have caused, I think, MVPDs to revisit some of the fixed deals they've done on that segment.

But the price pressure, I'll just take this segment by itself, on the basic cable part of video will continue. We think that AMC Networks is a winner in that arena against that trend because, frankly, of price/value. And so if something costs $4 or $10 or $12 and has a gazillion channels and we cost a fraction of that and have several hit shows that people are watching a lot of, that we're a great buy, and therefore, we are an essential part and the smartest economical part of that piece of business. So that, I do think in truth, though, goes through some sort of erosion for the multiple reasons that we've described and we're, frankly, forecasting that. The super rapid proliferation and adoption of streaming services, I think, took some by surprise.

Some of the events in the last several months, the stats one reads about, you'll have them (inaudible) 24 million Disney+, 33 million free trials on Apple because of device sales are rather breathtaking. Now some of them are essentially free trials. But nonetheless, they're a phenomenon of the combination of tech and content. And so that is out there. My own personal view is that there is likely to be some packaging occurring as we go forward.

The initial early experiments of packaging, I don't know if you're aware of them, have been rather small. They've been on the sidelines. I'm not so sure they've worked that well to date. And the major sort of tech stores, if you want to call them or channel providers, have not yet seen to package. My own personal view is that the first packaging we'll see will likely come from content providers who will package what they do in their own umbrella.

In a certain sense, Disney+, you could call a package because if you actually look at the interface, you'll see 4 well - or 5 well-known brand names all under 1 sort of roof. So I think the early packaging occurs from the programmers as opposed to from what we commonly consider the retailers in as much as these direct-to-consumer services are using retailers. And there's - then a separate question. I'm sorry, I'm going to bore you with too much information. There's a division of whatever it is of direct-to-consumer services, not, in fact, being direct-to-consumer but being sold by other retailers, Amazon, now MVPDs, et al.

From an AMC Networks point of view, our view is that we need to have great material that's extremely well-priced and super sticky on basic cable, and we need to own the rights so we can navigate and move where they go, and we can make the decisions selectively and with control about what we saw and what we deploy on our own and where we deploy it because the landscape is going to move. And we will see opportunities, and we don't want to be in a position to not control our own fate. On the SVOD side, you heard Ed talk about the manner increasingly in which we are windowing the same content and leveraging it and scaling it. And we have some decisions to make when shows come back now, from our licensing to third-parties like Halt and Catch Fire and Rectify. You may not know those shows.

They're coming back from Netflix. What do we do with them? Do we sell them again? Do we put on our own services? Where is the greatest return? That will all feed into whether, frankly, repackage or not, which is, I think, what is likely a likely consideration occurring among the number of different media companies today. So there's an inconclusive speech. Vasily, I'm sorry it's inconclusive. If I had to say it, I would say that the first packaging is likely to come from programmers.

And I think that they're going to look to muscle their way into value and share. And then I think AVOD services are going to live at a level underneath that, and they're going to actually put some pressure on the price and value of commercial-free subscription services because certain people will be able to say, I get enough stuff from those services and I can sort of just chew on that for a while. It may not be sublime, but it's free. So at least we have our minds on all that occurring and how to invest properly and be prepared for both the headwinds and the tailwinds that occur from that in the United States and beyond. And we've given you our plot.

The plot has been in place for a long time. I'm sorry if I'm going on so long. Seth Zaslow is telling me to be quiet. I'm going to now stop. You asked open-ended, you got open-ended.

Operator: Our next question comes from the line of Bryan Goldberg from Bank of America.

Bryan Goldberg: I've just got a couple. Thanks for the updates on the international direct-to-consumer plans. I was wondering if you could help us think about this year. Which markets make the most sense to go into first? And how much localization do you think is going to be needed for those rollouts as we think about the building blocks that need to come together for a successful launch? And then, I guess, more specifically, for Sean.

On the guidance, you talked about $100 million run rate revenues on direct-to-consumer exiting 2019. Could you frame for us the latest thoughts on the path to breakeven in direct-to-consumer? And how much dilution might be occurring in this year's AOI outlook from DTC? And then 1 housekeeping. I think you called out an accelerated amortization policy for your own content, where you control the SVOD rights in 2020. And I was just wondering, could you clarify, are you accelerating because you're taking those rights in-house for play out on your own SVOD services? Or are you accelerating to a different assumption for the value of that window to third-parties? Is it a bit of both? Any color would be appreciated.

Edward Carroll: Bryan, it's Ed.

On your SVOD question. I identified earlier parts of Europe and Latin America as the priorities for expansion of some of our SVOD services. I would say localization is not a year 1 priority. But I would also point out because of the local regional content, much of it lifestyle, that we produce in Iberia, in Latin America and in the U.K., we do have a head start. We have a number of co-productions in the U.S.

and original productions in the U.S. that we think travel well. And then we also can supplement that with the content that we control in territories where we already do business on the linear side.

Sean Sullivan: So Bryan, just to your few items there. Again, I think that we've talked about the revenue run rate.

I think in the past, we've talked about both our expectation in terms of targeting profitability as well as even outer years in terms of run rate, in terms of subscribers and revenue. So there's no change to that. In terms of the amortization, just to be clear, we're not changing a policy. It's really as a result of how we do our ultimates and the revenue and expense recognition where when we selectively hold back rights and not monetize to a domestic SVOD platform, it does have the corresponding effect of accelerating amort into a current period. That's all I was saying.

It wasn't highlighting a change in policy per se.

Seth Zaslow: All right. Well, thank you, everyone, for joining us on today's call and for your interest in AMC Networks. Operator, at this point, you can conclude the call.

Operator: Thank you, ladies and gentlemen.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day.