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Morningstar | AMC Reports Strong 4Q; Domestic Ad Revenue Expands Despite Weak Walking Dead Ratings

AMC ended 2018 with a strong fourth quarter, as revenue and EBITDA beat consensus expectations despite weak ratings for The Walking Dead. Advertising revenue grew by 1.4% in the U.S., as the firm was still able to push through higher pricing even as the ratings for its flagship program dropped. We are maintaining our narrow moat rating and fair value estimate of $69. With shares trading in 3-star territory, investors should wait for a pullback before investing.

Total net revenue expanded by 6% year over year to $773 million. National networks posted a 2% year-over-year decline as the 1% improvement in ad revenue was more than offset by the 5% decrease in distribution revenue. Affiliate fee revenue rose midsingle digits year over year once again, but was more than offset by the fall in content licensing due to the timing of deals. Advertising revenue growth was driven by double-digit increases at the smaller networks, including BBC America, which increased 20%. International and other revenue grew by 49% to $188 million due largely to the acquisition of Levity, a comedy venue operator, and RLJ, the home of Acorn TV and Urban Movie Channel. Overall adjusted operating income grew by 7% year over year to $219 million, and adjusted operating margin was flat year over year at 28.3%, as revenue growth offset the programming cost growth.

The firm’s overall growth continues to depend on original scripted content. The in-house studio will produce 15 shows for its networks and streaming platforms in 2019. While the studio business generated $400 million in revenue in 2018, the programming cost expansion continued to outpace revenue growth, as the gross margin for the full year fell by 400 basis points to 48.2%. We expect that the firm will be able to gain some leverage on its content spending. However, the overall increase in content spending across the media industry may pressure smaller players more due to their lack of scale or bargaining power.