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AMC Networks, Inc. (NASDAQ:AMCX)

JPMorgan Global Technology, Media and Telecom Conference Call

May 14, 2013, 10:00 am ET

Executives

Josh Sapan - President & CEO

Analysts

Alexia Quadrani - JPMorgan

Alexia Quadrani - JPMorgan

Good morning. I think we’ll get going so we can stay on schedule. Those of you that don't know, I am Alexia Quadrani, the media analyst with JPMorgan. Thank you all for coming. We are very pleased to welcome AMC Networks to the JPMorgan TMT conference. With us today is Josh Sapan, the President and CEO of AMC Networks which owns Cable networks such as AMC, IFC, WE tv and the Sundance Channel.

Josh is with AMC for over 20 years successfully transforming the network from a classic movie channel into a top entertainment network today with the highest rated show on both cable and broadcast this season, The Walking Dead. Under Josh’s lead AMC made TV history in 2011 when it won the Emmy Award for outstanding drama series for the fourth year in a row as well as a Golden Globe Award for the best television series drama for the third year in the row. He also spearheaded the developments and networks IFC and WE tv which were launched under his leadership in 1994 and 1997 respectively.

Thank you very much Josh for joining us today. You've done an incredible job in the right series or at least from an outsider’s point of view. You are hit rates seems to be well above average, I guess what do you attribute that to and more importantly do you have confidence it can continue with some of new series or pilots that are coming later this year?

Josh Sapan

We have had good track record on particularly AMC. I’ll say something that sounds obvious we have a management team across the board that's been placed for quite sometime on the AMC Channel and COO and myself and several leading companies, so I think it is team effort and that provides some sort of stability and sort of easy talking language amongst one another that I think helps us make selections. Perhaps more importantly, it’s something more fundamental to the nature of the business which is if you are in the business of getting TV shows that are not necessarily intended to do a three rating or four rating and to prove themselves within two weeks which is something that others second to the business have in their genetics, it tends to be somewhat higher success ratio and better leverage.

So if one looks at the shows developed or piloted or made and whether or not they or on the air a year or two or three to four later and when we will take this into categories for instance channels that are commonly thought of to do what is often for prestige programming and then that's all we do, but as commonly a word, and so if one were to take AMC and FX and HBO and Show Time and look at their, if you want to call it batting average of shows made to shows that sustained, it ends up being slightly different percentage I think than if one were to look at the broadcast network as a category and that really has to be with the fundamental nature of those businesses and they differ quite a bit and this is a long explanation to your first question.

I hope I don't take too much time, but premium services of course, paid services don't have advertising. So their purpose in putting on shows is of course audience, but perhaps more fundamentally consumer attachment to whether it would be Homeland (inaudible) Sex and the City, technically Sopranos, Californication etcetera. In the case of FX or AMC while the audience is very important, the average cable channel has let's say 50% of its revenue coming from advertising and 50% coming from affiliate fees, round numbers, and so the orientation that those channels including hours to begin with has a more flexible step criteria for what makes a successful show and if the show is high quality, and if the show needs some good critical and consumer reception, then those businesses, the basic cable channels have genetically, it's not an attitudinal question, they have an inclination to give it more time to succeed and more time to capture an audience.

And so if one rewinds and allocates to Mad Men and Breaking Bad and Walking Dead, we’ve seen audiences grow not only double-digit season over season but we've seen them grow in cases of Walking Dead Season III 50% over season 2. In the case of Breaking Bad, 50% Season 5 over season 4. So in certain, I stopped short of saying the exercises in patience but I would say certain cable channels are rewarded economically more for consumer attachment than just for the absolute blunt number that the show does in week three and it creates a different percentage of success. So that sort of beginning (inaudible) more to say about that but I will allow you to go on.

Alexia Quadrani - JPMorgan

(Inaudible) new pilot this year, lowering for some and have several other pilots ordered. I guess for Breaking Bad and from this and Mad Men I believe ending its run in 2014, is your goal to stay around the five original series or expand beyond that?

Josh Sapan

So, we will on AMC expand beyond that. There is no theoretical limit to how many shows we can put on AMC or in fact any channel, it really is a question of net economics and as long as we can finance show and have enough money coming in from now the increasing sources that money comes in from we could do more originals, and more originals; I think practically we won’t expand at two rapid rate from where we are, but there is one thing to note that is actually appealing for our business and our category of businesses, which is between what we can expect from subscription video on demand from EST or electronic sell through, from international sales and then this ends up being a judgement call, what you do or don’t allocate in terms of shows cost to the affiliate revenue stream in a certain sense we begin with a fairly substantial amount of cost spoken for and the at risk piece of our commitment has been reduced as this specific business model as ours has emerged and as those sources of revenue have grown which doesn’t necessarily affect five, six, seven, eight, but it does mean that when you go make a sixth or seventh you are not looking at a 100% of the money at risk, you are looking at a much reduced percentage.

Alexia Quadrani - JPMorgan

Does that change your thinking on sort of licensing versus building yourself?

Josh Sapan

It does and it’s an interesting question, its not black or white; if you license to pay a studio, studio pays a fair amount of money, and we pay the rest; but it use to be the case that the studio own (inaudible) we need the right to exhibit on our TV channel, these days every days every deal is different that you can share those ancillary rights, so its not really a binary consideration. With all that said, we have a preference to own if we can because the nature of the ancillary revenue stream is around the globe; meaning EST, what kind of self through items as far as international opportunities expanding, so it is a more rewarding model to pursue, number one. And number two when you own you sell it yourself; so you may have talent cost that escalate in a successful show, in season four or five but you don't have a studio that you are negotiating with that’s also increasingly profiting from the entry points, you and studio, so it’s a better position to be in; in success frankly a failure, its better to have licensed it and reduce your commitment, so it’s a judgment call and there is clearly consideration, I would say net biased toward where we can.

Alexia Quadrani - JPMorgan

So actually, should we expect the mix shift maybe going forward a little bit more revised in terms versus the past for you guys?

Josh Sapan

So the answer is fundamentally yes. If things remain as they are, we will license whatever we can, whereas I think when we began this current effort in a circumstance six or seven years ago, we preferred because we were (inaudible) and those ancillary means we were not as significant as we are today, licensing first is owning but I just would mention one thing which is we will continue to license and license significantly part of that actually has to do with creative considerations, if a studio has writers locked up and has something that we think is highly attractive in their control then we will make an arrangement to buy that show and make the economics work under that scenario. So who has the creative in certain sense control under their auspicious or significant (inaudible).

Alexia Quadrani - JPMorgan

It sounds like you have a bunch of new sort of exciting and different programs coming on shows now over the next 12 months. Could you briefly just sort of walk through what we can expect with what's coming out and what the thoughts are?

Alexia Quadrani - JPMorgan

Oh sure, sure. So there's an awful lot to talk about. If anyone goes to see at this point the morning conversation (inaudible) and I'm going to start not with AMC, but I will start with IFC. We have a show on IFC which is the channel IFC has been focused on what we call alternative comedy some of you may yourselves or through someone you know be familiar with the show called Atlantia which one of Peabody awarded stars (inaudible) its produced by Laurent Michaels of Saturday Night Live and it struck a responsive cord for the channel IFC it’s sort of alternative comedy. It’s being joined by a number of other shows that are in that same editorial spectrum or retraining show that's produced by (inaudible) and called Comedy Bang, Bang that's sort of a gag on a real life talk show. It’s a full talk show it’s rather funny as it features many of today's most popular comedians. We just premiered another alternative comedy show called Marron which is the comedian Mark Marron who has a very popular podcast and we have a Will Farrow-Ben Stiller produced show called Spoils of Babylon coming to IFC in the not too distant future and a show produced by Bob O’Dunkirk whose name you may not know but whose face you may know if you are a Breaking Dad viewer as the lawyer named Sol. He himself has a comedy background and is a producer and he has a sketch comedy called Birthday Boys and that will be his show coming to IFC. That's a quick summary.

On the Sundance Channel, we've been increasing our investment rather substantially as we have across all our channels and Sundance Channel most recently aired a couple of mini-series one called Top of the Lake, which was directed by Jane Canthian and starred Elizabeth Moss from Mad Men. We are in episode four going to five of Sundance’s first wholly owned scripted series called Rectify from the producers of Breaking Bad and we have another Sundance series that is currently in the process, early stages of being made tentatively titled the Descendants which we think is a spectacular story and swift. We are exploring scripted dramas on WE tv which is our women’s channel for the first time and that there is a drama working title Philly Law from people who have great creative auspices and it is the story of merely a woman who works with something called the instance initiative.

And then on AMC several different shows; we are just editing a pilot called Turn which is a pure piece revolutionary war drama based on book called Washington Spies and we have a dramatic series called Holt and Catch Fire with takes places in the 80s and its about the beginning of a computer industry in Texas which I think is a really spectacular show and we just decided to go to pilot on something that is in the broader sci-fi arena that you think is spectacular script called Line of Sight. So as I said, I maybe put you to sleep, you probably think that didn’t talk about but so there is an awful lot of stuff coming.

Alexia Quadrani - JPMorgan

I guess can you talk about CPMs in general, you’ve hit more CPMs closer to sort of prime time broadcast show to something your well hit series. How big is the gap between the Mad Men and CPMs and maybe some of the newer; when you go to sell some of these newer series in the upfront like Low Winter Sun, did the advertise give an event, give you a higher CPM or there is still a pretty big gap between establishers and your shows?

Josh Sapan

CPMs have been moving up for AMC the channel in particular and particularly on our original CPMs do vary by the type of content on AMC movies get lower CPMs than our originals. Half of the addictive world is recognizing that and I think Mad Men and Breaking Bad and then Walking Dead had a beneficial effect in terms of truly either instructing and approving the (inaudible) community that we were broadcast like in certain senses, but Mad Men has the most upscale show on the television. The Walking Dead is the biggest single show of the broadcast season in terms of (inaudible) years old to a television set that includes not only cable broadcasters. So we've been closing the gap, but we're not yet fully closed. There are still some left.

Alexia Quadrani - JPMorgan

You mentioned the [EST], a contributor to affiliate revenue growth I think in your first quarter earnings call, or in the past, I don't think it had been as quite a significant in some of your back end digital sales and more traditional means. How meaningful is this revenue and can it become like a real substantial revenue stream going forward?

Josh Sapan

So I think it's worth distinguishing sort of all acumens (inaudible) subscription video on demand revenue from EST, electronic sell through revenue, they are really quite two different sources meaning Netflix is as far Amazon fine as far you subscribe, where as if you got iTunes and purchase a show or season we call that EST, electronic sell through, as far probably has been a bigger revenue stream to-date and EST is on a percentage basis have been growing very healthily, but is not today year-over-year significant (inaudible) and in terms of future, it remains to be seen, it's hard to say how much all of you in the room and me and or kids will be gone on some platform and saying yes I will buy that for $0.99 for a buck, for a show, every season for $0.99 today I would say it's a small (inaudible) but not huge.

Alexia Quadrani - JPMorgan

And you posted really incredible advertising growth in the Q1 results in the domestic networks, obviously this was helped by the strong ratings of The Walking Dead, but can you I guess speak to what else got an impressive gain, is it just the higher audiences that continue growing CPMs, I guess what else is there?

Josh Sapan

Yeah. There are several things in the quarter, I think the most notable was the advertising game quite obviously and I think the most significant contributor of those the outsized performance of The Walking Dead and that sort of note to the future that The Walking Dead is great deal in our economics, so if it's on and if the audience continues, we will see the monetization, if it's not on then we won’t see the monetization of it. Behind or underneath that was our affiliate as we reported, a red road which had two different components, the rest were paid from MVPDs or cable operators and in that supporting line is the revenue that we get from outlets for subscription to the on demand. Our MVPD or affiliate like a growth which has historically been low to mid single digits is moving up a bit as we have done some deals. We did six deals over the past six or nine months. So that number but for one anomaly in the will see increasing, I think it increased to sort of mid or mid to high single digits and that is probably we are able to be, so those things all contributed to what a current quarter.

Alexia Quadrani - JPMorgan

And now we have the broadcast in fact going on this week and I believe you had your presentations a few weeks back, I guess can you comment on the general tone of what you expect in the upfront, I mean you must be in a much stronger position each year that you are going to it given your incredible success on your shows. Do you feel that, I don't know if you publicly talked about may be mix of advertising revenue you saw on the upfront versus what keep back or I guess any comments on that front?

Josh Sapan

Right, so the upfront is not yet, as I say broken, but I think those who are describing the markets say that it appears to be in good shape. We have been having historically scattered, this year particularly good performance is very much show based. So we have been bit outperforming the market because of our TV shows. I think that two things of note to day, one is that advertisers are looking for content that really works for them to sell the products and we have been focused on the investment in that content not only on AMC but in IFC and Sundance and we will significantly step up that investment across all of our channels to make them not only vital to advertisers but to make these brands work in a competitive environment.

So I think our reception is good. We actually had separate upfront events which I know you are familiar with for AMC and for IFC. And I think that the programming is what we are seeing. So I think we feel pretty good about it in terms of the percent we sell, it’s largely at constant historical levels. It is the consideration with fairly straightforward. We want to balance the stability of bookings is much money, at good rates as we can watching where the market goes and not leaving money on the table so we have enough opportunity left and scattered to take advantage of demand as we calibrate it.

Alexia Quadrani - JPMorgan

Can you talk about how you are sort of weighing your investment decisions between your the traditional sort of AMC network and IFC Sundance and you mentioned a couple of times of building up definite program and then some of those other networks. I guess how are you thinking about allocation of capital in those decisions? And then I guess along that lines maybe take a one step further and talk about the migration of Sundance to an advertising driven model.

Josh Sapan

Sure. So it is something we've been working on with a plan that is actually several years in the making. We are increasing our investment in say broadly non-AMC channels, IFCV and Sundance. That's not an accident over the past four to five years we have increased the subscriber counts in aggregate for those three channels by over 50 million subscribers. So they are now distributed respectively to round numbers 80, 70 and 50 million homes in the U.S. on WE TV, IFC and Sundance. That puts us in a position as we have most, more recently cleared the way for us to add advertising, to put ads on, IFC a year and a half ago and Sundance for the first time in the fourth quarter of this year too realize the full benefit of audience and the second revenue stream.

So we think that it has been time and it’s increasingly the time now to put in program investment because it really completes the circle of opportunity which is to say we've grown the distribution to a point where from an advertising point of view it’s meaningful, those are meaningful numbers. To some degree we've had to balance rate increases to get those services and we've also had to redo our contracts with MVPDs to allow for advertising to be on.

Now that advertising is allowed on all four channels, we have an opportunity/need to increase the audience and the attractiveness of those channels from an advertising point of view. So I would sort of say on a balanced basis whereas we had been investing historically in AMC because we had all of that done, we are now going to invest increasingly in our other channels as well to take advantage of that opportunity, but I would add it’s offensive, meaning there is money to be made and as we did with AMC if we can grow our top line, we can find an increasing contribution to AOC for EBITDA and increase our investment. And so we will do that with those channels now increasingly.

Alexia Quadrani - JPMorgan

How much can you leverage programming across those networks? I think you are showing reruns of the Breaking Bad, and one of the other networks outside of AMC. If you were to have a huge success, let's say, in Rectify Sundance, would it be possible to -- would it make sense, I should say, to move it over to AMC or just leave it on Sundance and continue to grow that network?

Josh Sapan

So, it's actually -- it’s not, it's hardly surgery but I would say considerations are surgical and we use the different channels for different purposes. So Rectify showed on AMC not for the purpose of mining the ad opportunity but introducing the show to a larger audience after Mad Men. So we could introduce the show and then people we hope move over to Sundance to find it. So in general, we use the different channels to create programs access, if you want to call it that and to introduce larger groups of people to the channels that are somewhat less viewed.

It does some time work in the inverse where we have a show under license and we think that there is simply a pure monetization opportunity and so we're moving to a channel where we think we can improve the ratings performance of that show in a certain night and simply make more money. You have to be a little careful when you do that that you don’t end up being excessively short-term minded, accounting the dough for a week and then looking up and finding that you actually haven't built momentum and continuity in audience that you could take advantage of in week 2.

Alexia Quadrani - JPMorgan

And we just have a few more minutes. Are there any questions from the audience?

Question-and-Answer Session

Unidentified Analyst

I know this is very subjective, but when you are rolling through all this new programming that you are funding, licensing, qualitatively do you see what's the difference in terms of the actual creative content of the shows versus what you might have seen 5, 10 years ago?

Josh Sapan

Yes. I think the answer is yes, we do see qualitative differences in content, but I am going to separate the answer if I may. In non-fiction the so-called reality shows, I think that there is not a market difference in the reality shows of five years ago reality show, but today there may be some greater focus on who are the next hero for opportunity audience (inaudible). Of course we saw just notably music competition in front and broadcast of course to (inaudible).

On the scripted side, we have spent more of our time, energy and money, I think we had seen an improvement in creative quality that is this may be a long answer to your questions, I believe not necessarily because there are better (inaudible) but because the new models business have given greater economic years to TV shows that are made of craft and so this is your complicated answer to you probably (inaudible) will explain it, which take a show like Mad Men and Breaking Bad, I would argue that 10 years ago, the four that were subscription to you (inaudible) so this is in the flow that was cable on demand, the film show simply hit TV schedule, they might be cancelled in a very short period of time, because they were slow, they require future commitments. If they are only available on Thursday night nine, (inaudible). So we saw somewhat smaller in the season one and in the phase season one and season two but it shows available on cable on demand and they were available on networks and what we do see happen is that people (inaudible) this to be true. So people sort of found or manage something in between seasons and decide watch from the season so-called (inaudible) and once they were introduced to them during the subsequent season (inaudible) and so they are interested in seeing how Breaking Bad or Homeland or Mad Men or the (inaudible).

And so I think that think that the alternation in technology that allows us and our kids particularly to sit down in front of the screen and sometimes not a television screen between seasons and actually get engaged and catch up as given bias for better crafted drama and so somewhat unlikely manner, I would call it better creative material meaning better writing, better casting, more deliberate and better craft, has actually risen and it is a consequence of it’s economically motivated, but this phenomenon of so called (inaudible) or watching at your time schedule, when you can pay more attention and then getting sufficiently into it that when the show comes back on subsequent season for many year (inaudible)

So I would hazard a guess more than half the people in the room at one time or another set with the television set or different screen in between the seasons show and set you come in and lock one two or three of this network. I recently asked the room for teenagers to raise their hand if they binged on two, three and four shows all at once and if that and their hands went up, I then just for fun kept going and I said five, six, seven, eight, nine and I thought that there maybe world peace in the future because no one would rest themselves away from the screen because about 80% of the kids will act nine in the row. So it really is a phenomenon I think of our time and they are not racking up what I would call sort of obvious not well crafted TV shows, they tend to be wracking up shows that nearly do have a great story and great character to go.

Unidentified Analyst

(Inaudible).

Josh Sapan

I think there's a calculation in other things we are trying to do with the overall schedule. So I think that there were certainly benefits provided to the company by splitting it up and we did think that it was also fundamentally reasonably consumer friendly. So I think there was a bunch of it into the mix of that decision. I hope we didn't frustrate you.

Unidentified Analyst

(Inaudible).

Josh Sapan

Right. There is a sort of odd balance that I think one or we employ making decisions about shows and there is a fair amount of research that one can avail oneself other than we do and it has baselines and has comparisons and it’s diagnostic and that's commonly done in TV. So you can actually look at a bunch of research that says how does that pilot rank first, it’s others like ability and time to watch, which character is sympathetic. In the case of Madmen, I think that there was just enthusiasm from our group about its potential that probably disproportionately influence decision and we and I think that is to be a significantly respected. It is influenced about the decision of ours of late as well. And I find myself personally on the side of enthusiasm. Enthusiastic support doubter and I'm happy so that we have a collection of people whose opinions are very worthy. So there's no real answer except to say if a lot of people really think something is great and they have been doing it collectively for a hundred years and they are looking at what's going on there's a lot of reason to say good let's do it.

Unidentified Analyst

(Inaudible).

Josh Sapan

Right. So those are two good things like that's not hard to balance in that, but if you were to say it’s fair, which is how do we balance any effect, negative effect that might have on execution on MVPDs and linear.

Unidentified Analyst

My question was in terms of maximizing the dollar values out of that (inaudible). Is it something that you were willing to take fewer dollars to get a broader distribution there because of its advertising?

Josh Sapan

Yeah, that’s a good question. We actually haven't necessarily had the balance. Those two things did not been a conflict at any point. If they could in the future, can see them. So to-date, we've been able to a have a century of fairly straightforward financial point of view and enjoy the benefits of choice sampling or marketing that come along with that as the world goes forward, that may or may not remain same, they are making trade offs that one will have to make.

Unidentified Analyst

(Inaudible).

Josh Sapan

Right. That’s a few questions. There is other things to get balance versus NVPDs and the cable ecosystem and our contribution in doing what we can to make it (inaudible) because that is primarily the place from which we do ride our revenue. We did of note. We just (inaudible) on Sundance for Rectify, which we think is tackier and was in fact review critically and the ratings which were good for some ends. We actually had that in mind before we premiered it. And so what we did is just against objectives was we gave it to MVPD to cable operators and advanced in this premier to put it on demand which they did in order to get sampling. We actually placed it in 60 movie figures across the country and create events so we invited people at no charge to come and watch multiple episodes of the show before on television channel (inaudible) done before or an effort to create in this place physically based until we deal was a social media, socialized to get media. And so I think it's an interesting, we actually think very interesting way to market. We do have real world consideration (inaudible) and then we do as constituencies that we have to balance and can be very difficult.

Alexia Quadrani - JPMorgan

Unfortunately, we are out of time. Thank you very much.

Josh Sapan

Thanks a lot.

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