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Morningstar | AMC Posts In-Line 3Q; Domestic Ad Revenue Growth Remains Weak

AMC Networks reported an in-line third quarter, as revenue and EBITDA met consensus expectations. The firm’s ability to generate over two thirds of its revenue from nonadvertising sources continues to offset the weak domestic advertising revenue, which was up only 1% year over year for the second quarter in a row. We are maintaining our narrow moat rating and our fair value estimate of $69. Shares still appear modestly undervalued to us.

Total net revenue grew 8% year over year to $697 million. National Networks posted 4% year-over-year growth, with distribution revenue up 5% and a 1% improvement in ad revenue. Affiliate fee revenue rose by a mid-single-digit percentage year over year, in line with the second quarter. Both affiliate fee and content licensing growth continue to be driven by the ongoing investment in original programming, leading to the continued expansion in programming costs. International and other revenue grew by 35% to $152 million due largely to the acquisition of Levity, a comedy venue operator. Overall adjusted operating income grew by 5% year over year to $211 million, and adjusted operating margin declined by 60 basis points year over year to 30.3% as the programming cost expansion continues to outpace revenue growth and the firms increased its marketing in the quarter due to the timing of new season launches.

While AMC has and will continue to benefit from selling the subscription video on demand rights to its most popular shows to third parties like Netflix and Hulu, the firm is placing its own SVOD bets. Unlike its major peers Disney and WarnerMedia, which are launching comprehensive platforms aimed at Netflix, AMC appears to be using a niche platform strategy. As we discussed in our October Select report “Netflix Needs to Chill: The Director’s Cut,” niche platforms like AMC’s Shudder are aimed at a specific fandom, horror film and TV fans in the case of Shudder, that want a deeper library than the general platforms like Netflix or Amazon are willing to create. AMC’s acquisition of RLJ Entertainment demonstrated part of the company’s commitment and investment into this strategy for navigating the SVOD landscape. Among the properties acquired in the deal are Acorn TV, an SVOD for British programming, and Urban Movie Channel, an African-American-focused streaming service. The two services have almost 1 million subscribers. While we don’t expect any of the firm’s platforms to threaten Netflix, we note that Netflix and its competitors are focused on serving all consumers, which could allow targeted platforms to thrive by focusing on their niche bases.