Jeffrey Dean Morgan starring as The Walking Dead 's Negan. The show attracted 17 million viewers to the first episode of season 7. Image source: AMC.

AMC Networks (AMCX 3.02%) reported results for the third quarter of fiscal year 2016 on Thursday morning. The report apparently left many investors scratching their heads as AMC shares bounced as much as 6.4% higher and 6.5% lower before the tolling of the closing bell, when the stock was up 4.5% from the previous close.

AMC Networks' third-quarter results: The raw numbers

 Metric

Q3 2016 Actuals

Q3 2015 Actuals

YOY Growth

Net revenues

$634.6 million

$632.2 million

0.4%

Net Income attributable to AMC Networks' shareholders

$65.4 million

$72.8 million

(10.2%)

GAAP earnings per share (diluted)

$0.91

$0.99

(8.1%)

YOY = year over year. Data source: AMC Networks.

What happened with AMC Networks this quarter?

Zombie drama The Walking Dead is still at the very core of AMC's operations. The first episode of season 7 brought in 17 million same-day or next-day viewers. That's some 5.6 million ahead of that week's second-largest cable audience -- the final presidential debate featuring Donald Trump and Hillary Clinton.

  • Licensing and distribution revenues in the all-important National Networks division increased 8% year over year. At the same time, advertising sales in the same segment decreased by 9.9%. Overall, that division's sales rose by 0.8% to $525.7 million.
  • International sales held steady at $144 million. Strong serial content under the AMC Networks International banner made up for weakness in the international operations of IFC Films.
  • AMC Networks bought back 1.1 million shares during the third quarter, worth a total of $62 million. The company now has approximately $375 million left of a $500 million buyback authorization that took effect in the second quarter.

AMC Networks is not known for offering detailed financial guidance. This time, CFO Sean Sullivan spoke in broad terms about flattish revenue and operating income trends in the international segment but solid growth in the domestic division. There, advertising sales should turn back to year-over-year growth again, supported by double-digit growth percentages in distribution revenues.

What management had to say

On a conference call with analysts, AMC Networks CEO Josh Sapan offered a helpful overview of how self-produced content has become the beating heart of this business:

By establishing a studio operation through which we own, control, and distribute our own content, we saw an opportunity to enjoy the upside of delayed viewing, to take advantage of sales to various platforms and to reduce our reliance on domestic advertising and affiliate revenue streams.

Today, our AMC Studios operation is an important and thriving part of our business. We currently have eight AMC Studios-owned scripted dramas airing on our own channels and three more in production. That's a level of output that rivals some of the more well-established TV studios.

...We benefit when our content plays in the linear window, when we sell our shows into domestic subscription video-on-demand platforms like Hulu and Netflix, we benefit from licensing and merchandising and when we sell our content overseas to our own AMC Networks International channels as well as to third-parties.

Over the past several years, the revenues generated from ownership and control of our content has grown at a very rapid rate. So, content remains the engine that drives the success overall of AMC Networks.

-- as transcribed by Seeking Alpha (lightly edited for clarity)

That's an important strategy shift. Over the past five years, distribution and licensing revenues have risen from 62% of AMC's total consolidated sales to 67%. Long-lasting distribution contracts provide a higher-quality revenue stream than the notoriously volatile advertising operation.

Looking ahead

AMC Networks continues to explore high-quality content production, building on a portfolio that already includes award-winning hits such as The Walking Dead, Mad Men, and Breaking Bad. The company is also moving into new geographical markets, having recently started a Middle East operation covering 21 previously unaddressed countries. Overseas sales accounted for just 23% of AMC's total revenues in the third quarter, leaving plenty of runway for future growth there.