Paramount Skydance Corporation (PARA) Earnings Call Transcript & Summary

Welcome, everyone, and thank you for joining us today. I am Shari Redstone, Chair of ViacomCBS' Board of Directors. I am also joined by the other members of our Board today, including your President and CEO, Bob Bakish. Before we begin, I want to take a moment to acknowledge the unexpected passing last week of Carolyn Reidy, the beloved and talented President and CEO of Simon & Schuster. Over the course of almost 30 years at the company and 12 as CEO, Carolyn not only continued Simon & Schuster's proud legacy but also evolved the business to meet the needs of audiences today, unearthing new voices, pushing into new formats and reaching new markets. She led with strength, kindness and humor and will be missed by all who knew her. Our deepest sympathies are with the family at this difficult time. We are, of course, meeting in a very different format this year. These are extraordinary times, and my heart goes out to those who have been affected by the COVID-19 crisis. I also want to express my thanks to all of the many heroes on the front lines who are working tirelessly to keep us safe and well. While I'm sorry that I can't be with you all in person or by video, I am pleased to have the opportunity today to share my passion for our incredible company, ViacomCBS, and the significant opportunities we have positioned ourselves to capture. First and foremost, the strength of our company starts with our unmatched content assets across all categories, genres, demographics and geographies. Make no mistake, together, CBS, Paramount and our portfolio of brands, including BET, Comedy Central, MTV, Nickelodeon and Showtime, are a global multi-platform content powerhouse. And with 4.7 billion cumulative TV subscribers in 180-plus countries, our #1 share of broadcast and cable viewing in all key demos in the U.S. and the largest overall share of U.S. TV viewership, our content has never been in greater demand among audiences around the world. It is from this position of strength that we are transforming our business for the future. Led by a management team that represents the very best in the industry, in just 5 months, ViacomCBS has moved quickly on the important work of becoming one company, and we are already beginning to see the results. I could not be more proud of the way this team has come together to be one vision, one strategy, one culture and one set of values. We have brought not only the strength of our assets but the strength of our team to realize the power of the combination for our partners and for our shareholders. And while we are seeing momentum across all aspects of our business, I am particularly excited by the incredible growth of our free and pay streaming services and our vision to bring to the consumer differentiated content through a unique and integrated user experience. By bringing together live and on-demand news, sports and events with incredible entertainment spanning the breadth of our portfolio, kids, movies, comedy, scripted dramas, reality and more, we will provide consumers with everything they need, all in one place. There is no question that the media landscape is changing rapidly. We not only understand this transformation, we embrace it. Know that we are moving quickly on our streaming plans and putting the full power of our portfolio behind this significant growth opportunity. And I want you to know that as important to me as what we do at ViacomCBS is how we do it. I've been very fortunate to work with a Board that believes as much as I do in building a strong culture and a diverse and inclusive environment where everyone is empowered to innovate and to succeed. This will be the foundation of our company's success and was a critical factor in the creation and integration of our team. Our culture not only empowers our ability to create decade-defining content for audiences, it also underpins our support for communities through our corporate social responsibility efforts. This is an area where we have always led the way, and these efforts have never been more important than today. I am so proud of our employees across ViacomCBS for the way they have approached the COVID-19 crisis, their continued focus and commitment to our business and their creativity in deploying our platforms for consumer education and relief. It goes without saying that their health and well-being is foremost in our mind as we contemplate return-to-work scenarios. I could not be more grateful for their support and hard work during this time. Today, you will hear from Bob on the company's progress and priorities before Christa D'Alimonte, ViacomCBS' EVP, General Counsel and Secretary, begins the official business portion of our meeting. Subsequently, we will open for a general Q&A which will be moderated by Anthony DiClemente, ViacomCBS' EVP, Investor Relations. I hope you leave today with a clear sense of our vision for ViacomCBS, the significant growth opportunities we are moving quickly to capture and our commitment to driving shareholder value for the long term. The Board and I strongly believe in what the company can achieve in the path we have embarked on to reach our goals. We are pleased to have the opportunity to answer your questions and hear any comments you may have. And with that, it is my pleasure to introduce your President and CEO, Bob Bakish.

Thank you, Shari, and welcome again to our first Annual Meeting of Stockholders as a combined company. As Shari said earlier, this meeting comes in an extraordinary time. And I want to start off by acknowledging everyone who's been affected worldwide by the COVID-19 pandemic, especially those who have lost loved ones. To the heroes on the front lines of health care and first response and to all the essential workers, we're incredibly grateful for all that you do. Now turning to our business. 2019 was undoubtedly a transformative year. We completed the historic combination of our 2 iconic companies and are now operating as a unified ViacomCBS. Since our merger in December, we've overwhelmingly focused on integrating our company to unlock the full power of our combined asset base. Organizationally, we've built a best-in-class management team and consolidated our reporting structure. Operationally, we're executing as a combined entity to better monetize our advertising, distribution and content licensing businesses, maximizing our position as one of the most important partners in the media ecosystem. And financially, we remain on track with our committed annualized run rate synergy target of $750 million over the next 3 years. As one of the world's preeminent content producers and providers, we've also brought together one of the most powerful portfolios of brands, franchises and IP, reaching audiences across every genre, format and demographic worldwide. Take a look. [Presentation]

As you can see, ViacomCBS is uniquely positioned to be a market leader as we tap into the growing consumer and commercial demand for premium content. We're focused on quickly realizing these benefits, much of which we began to see in our first full quarter earnings. We achieved a number of operational wins, thanks to the strength of our combined portfolio, including strong viewership growth across our broadcast and cable networks; new partnership agreements, including a deal with the NFL to broadcast an additional wildcard game in 2021, with a live stream on CBS All Access and a telecast on Nickelodeon tailored for a younger audience; significant distribution deals with Comcast, Nexstar and Meredith; plus our first true combined company affiliate deal with Verizon; and a just announced deal with YouTube TV that renews CBS and Showtime early and brings Viacom cable networks to the platform, a clear proof point for the ViacomCBS combination. In film, Sonic The Hedgehog was a clear hit, which means we have a new franchise to build on. And in streaming, we achieved our strongest quarter ever with Pluto TV's domestic monthly active users growing 55% year-over-year to more than 24 million and our domestic streaming subscribers in pay increasing 50% year-over-year to surpass 13.5 million. These operational highlights and more drove key financial wins for the quarter. Importantly, we sequentially improved all key earnings and cash flow-related metrics, including adjusted free cash flow, which was almost $500 million in the quarter. We grew advertising revenue year-over-year excluding the comparison to last year's broadcast of the Super Bowl and the impact of this year's cancellation of the NCAA tournament due to COVID-19. Affiliate revenue grew year-over-year and our domestic streaming and digital revenue increased 51% versus a year ago. Our studio productions for third parties also drove revenue growth in content licensing. And lastly, in Publishing, revenue increased, reflecting strong digital book and audio sales. Taken together, these results point to important momentum in our evolution even amid COVID-19, which we are proactively managing through. As the crisis hit, we quickly moved to reinforce our financial flexibility and balance sheet strength to weather a sustained crisis. We issued $2.5 billion in bonds in April and just last week, raised additional capital to tender some near-term maturities. And with our strong Q1 cash flow and our undrawn committed $3.5 billion revolver, we're in excellent shape from a liquidity perspective. We're also taking a series of significant cost-reduction measures to mitigate COVID-related revenue impacts for the year and now see a greater cost opportunity on top of the $750 million synergy target, informed by how we've had to rethink our operations over the past weeks. Furthermore, to maintain business continuity, we've significantly adjusted operations around our most affected areas: production, ad sales and film. And of course, we focused on supporting our employees audiences and communities by moving the vast majority of our employee base to remote working, by committing $100 million in relief for non-staff impacted by the pause in our productions and by deploying our platforms for COVID-19 education and relief through PSA campaigns like #AloneTogether and televised specials that have raised money for the cause. During this crisis, we've also remained focused on value creation and maximizing stockholder returns through continued cost and revenue opportunities. And yes, our stock has been under pressure since our merger and it continues to be significantly undervalued relative to our unique assets, strong earnings potential and ability to execute, but the power of our combination is starting to come through and the market is starting to appreciate this. For one thing, our momentum in streaming is undeniable, and our milestone growth this quarter puts us well on our way to meeting the subscriber targets we laid out previously. We're continuing to broaden Pluto TV's #1 position in free streaming. And in pay, we're accelerating our plans for an expanded subscription service that builds off of CBS All Access, with major advancements coming this summer, including additional content from our cable brands and more movies from Paramount. So we're extremely excited about the future. We're well positioned to navigate the COVID-19 crisis and are just beginning to tap the potential of our combined assets, material synergies and points of differentiation. And we're confident that our growing scale, audience reach and earnings power will become even more apparent as the market rebounds as we accelerate our momentum in streaming. Underpinning all of this is our commitment to driving strong stockholder returns as we execute our growth objectives. So thank you for your ongoing support, support that has been so critical to our success. And now let me introduce Christa D'Alimonte, our General Counsel, to conduct the official portion of this meeting.

Thanks, Bob, and good morning, everyone. I am Christa D'Alimonte, Executive Vice President, General Counsel and Secretary of ViacomCBS. First, I want to echo Bob's gratitude for your support. I'm glad that so many of you could be with us today at this virtual meeting. I'd also like to add my thanks to the first responders, health care providers and other essential workers who have worked so selflessly throughout this crisis to help us all. And now I will take us through the formal portion of today's meeting. I ask that you take note of and observe the rules of conduct that are posted on the annual meeting website. We will have a general question-and-answer session following this part of the meeting. So for now, please limit your questions to the specific agenda items being voted on. Attending the webcast today are representatives of PricewaterhouseCoopers, our independent auditor; American Election Services, our independent inspector of election; and Broadridge Financial Solutions, which has certified that it properly mailed the proxy materials on our behalf. Stockholders who held ViacomCBS Class A common stock at the close of business on our record date of March 23, 2020, are entitled to vote today. A list of Class A stockholders as of the record date is available for inspection by such stockholders using the registered shareholder list link found on the annual meeting website. Based on information provided by Broadridge, I can confirm that we have a quorum of stockholders present and we can conduct today's meeting. The polls for the items to be voted on at this meeting are open. Class A stockholders who have not already voted or who wish to change their votes may do so now by following the instructions on the annual meeting website. Please note that if you have already voted and do not wish to change your vote, you do not need to vote again here. The first item of business is the election of the 13 directors named in our proxy statement. As a reminder, the nominees are Bob Bakish, our President and Chief Executive Officer; Candace Beinecke, the Senior Partner of New York law firm Hughes Hubbard & Reed; Barbara Byrne, former Vice Chairman of Investment Banking at Barclays plc; Brian Goldner, Chief Executive Officer of Hasbro; Linda Griego, President and Chief Executive Officer of business management company Griego Enterprises; Robert Klieger, a Partner in the Los Angeles law firm Hueston Hennigan; Judith McHale, President and Chief Executive Officer of private investment company Cane Investments; Ronald Nelson, former Executive Chairman of the Board of Avis Budget Group; Charles Phillips, Chairman and former Chief Executive Officer of Infor; Shari Redstone, President of National Amusements and Cofounder and Managing Partner of Advancit Capital; Susan Schuman, Executive Chair and Cofounder of consulting firm SYPartners ; Nicole Seligman, former President of Sony Entertainment and Sony Corporation and former Chief Legal Officer of various Sony units; and Frederick Terrell, former Executive Vice Chairman of Investment Banking and Capital Markets at Crédit Suisse. Biographies for each of the nominees are included in our proxy statement, and the Board recommends a vote for each of the 13 Director nominees. The second item of business is the ratification of the audit committee's appointment of PricewaterhouseCoopers to serve as our independent auditor for fiscal year 2020. The Board recommends a vote for this proposal. The third item of business is the advisory nonbinding vote on the compensation of our named executive officers as described in our proxy statement. We refer to this vote as being advisory because results are not binding on the company. However, the Board and the compensation committee will consider the voting outcome in connection with their ongoing evaluation of the company's compensation programs and arrangements. And the Board recommends a vote for this proposal. Since there is no other business to come before the meeting, the polls are now closed. I have the preliminary report of the inspector of election on the voting results, and I'm pleased to report that each of the proposals voted on today has been approved by the requisite vote. We will report the voting results of today's meeting on a Form 8-K in the coming days, and the final report of the inspector of election will be included in the records of this meeting. That concludes the formal portion of the meeting, and I now declare the formal portion of our meeting adjourned. We're now happy to open the meeting to questions, and we'll answer as many questions from stockholders as time allows. And I'd like to introduce Anthony DiClemente, our Executive Vice President of Investor Relations, who will moderate our question-and-answer session.

Thank you, Christa, and good morning, everyone. We will now begin our question-and-answer session, and we will take questions from our stockholders. Our first question is for Bob Bakish. Bob, COVID-19 is reshaping how people and companies operate. What is ViacomCBS doing to adjust to the new environment? And has the company adjusted its business model or view of the combined asset?

Yes. Thanks, Anthony. So yes, COVID is impacting the business. As people probably know, we've largely pivoted to work from home. But importantly, we continue to serve consumers, and in fact, consumption is up significantly both in linear television and in streaming. And we continue to serve our customers, ensuring business continuity. Importantly, while production is largely shut down at the moment, we are prepping for its return, and we'll start with golf on CBS Sports on June 11, while also employing alternate virtual techniques and our libraries, all to great effect. But as you think about COVID, you should also not lose sight of how quickly we have moved to integrate this company and unlock value from our powerful combined assets. If you go back to our first quarter earnings call, you see the first quarter clearly indicates this with operating momentum and sequential improvement on all key metrics. So we're well positioned to navigate this crisis and emerge stronger, particularly with our combination of studios, networks and streaming.

Great. Thanks, Bob. Our next question is also for you. A large portion of ViacomCBS revenue comes from ad sales. How has COVID-19 and the related economic slowdown impacted ad sales for the company?

So we are seeing a significant advertising impact in the second quarter. Notably, we do see the third quarter and fourth quarter improving, assuming business reopens. And we're well positioned as a company to capitalize on that and gain share. With respect to the second quarter, on a relative basis, broadcast is strongest, then cable, then digital. Local is the weakest part. And overall, international is a little bit weaker than domestic. You should know that this weakness is dominated by 5 categories: automotive, restaurants, retail, travel, movies and entertainment, all of which are obviously significantly impacted by COVID. As we manage through this, we have reduced load in some cases, both to improve the viewing environment and maintain strong pricing. And on a positive note, one of our largest clients recently came to market with Q2 scatter dollars, and we know we got the largest share. And it's also worth noting we have seen May and June scatter improvement relative to what we saw in April. So some green shoots in advertising, but clearly, we need to continue to manage through it.

Great. Our next question is related to the NFL. Bob, you signed Tony Romo to a lucrative contract. Can you talk about your plans with the NFL and the potential balance sheet impacts from expensive NFL rights use?

Sure. So look, re-signing Tony Romo allows us to now credibly claim that we have the best sports announcing team in the business. We also have the highest quality production. And if you look across our portfolio of platforms, we have the most compelling reach in the industry. In fact, if you go back to the 2 additional wildcard games that the NFL recently granted rights to, we were 1 of the 2 companies that got an incremental game. That will be in '21. We won that, I believe, as a byproduct of our platforms because we're not only airing that game on CBS broadcast, we're not only airing it on CBS All Access over the top, but also are doing a younger audience-tailored presentation of the game on Nickelodeon. And that was really differentiated from a portfolio standpoint and is an example of the kind of things we can do to create incremental value for the NFL. So we're really excited about our NFL partnership. They've been a great partner for many years to ViacomCBS, really the CBS side of the house. And now as ViacomCBS, we're positioned to do even more, and we look forward to the future.

Great. This next question is for Bob and Shari. Since the merger, shares of ViacomCBS have underperformed the broader stock market. What is the company doing to improve the stock price and shareholder returns?

Yes. Thanks, Anthony. Let me start here. Look, the stock price as it stands today does not reflect the value of our unique assets, strong earnings potential and differentiated strategy to be one of the most important content companies in the industry. And we, as a management team, and I speak for the Board as well, are committed to creating long-term value for shareholders and believe that as we unlock the power of the combination, as we execute against our strategy, the market will recognize the significant value-creation opportunity ahead of us. Remember, we only closed this deal in mid-December, but there are already multiple proof points to the power of the ViacomCBS combination. We've already made important commercial and distribution agreements. We've extended our franchises in new and exciting ways. And we're introducing broader sales solutions and are accelerating our streaming strategy. And as I said in my opening remarks, we're very disciplined on cost and have increased our annualized run rate cost synergy target associated with the integration of the merger to $750 million. We will continue to push in this area and, again, see tremendous value-creation opportunity ahead of us as we move forward.

I just want to add to what Bob said. We totally believe that the stock is dramatically undervalued. If you step back and you look at the media landscape, the competitive landscape is changing quickly. You have new companies and you have new strategies. And ViacomCBS is one of those new companies. We have a differentiated strategy from our competitors, and the market is looking to us to prove that we can execute on our strategy. And I have every confidence that we will execute on our strategy and that we will do so more quickly than anyone expects. You've seen us do that at Viacom. You've seen us do that at Paramount. And as Bob said, you're already seeing the results at ViacomCBS. The Board and I are committed to maximizing value for all of our shareholders, and we truly believe that the strategy Bob and the leadership team are pursuing will achieve great results.

Great. Thanks, Shari. Shari, this next question is for you. What is your vision for the combined company going forward?

Thank you, Anthony. My goal has always been to position these companies for long-term success and to maximize the value for all shareholders, and that's exactly what this combination does. As I said in my remarks, ViacomCBS truly is a global multi-platform content powerhouse with unmatched content assets across all categories, genres, demographics and geographies. We really do have an incredible opportunity to realize the full power of our position as one of the largest content producers and providers in the world, and that is a very valuable position to hold at a time when both consumer and commercial demand for content has never been greater. We really want to reach the largest total addressable market, and by that I mean be everywhere the consumer wants us to be. To that end, our streaming ambitions represent a significant growth opportunity for this company. Together, I truly believe that Viacom CBS has an unrivaled ability to create value throughout the media system, which neither company could have achieved alone and that this will allow us to create value for all of our shareholders.

Great. This next question is for Shari and Bob. Can you talk about how you view M&A in today's environment? Thanks.

I'll just start with that and say that the company has just completed its transformative deal. And as you can tell, we feel great about our scale position today, our ability to grow organically and our ability to create -- to compete very aggressively in this media landscape. Our primary focus is on executing our strategy and unlocking the value in our unified assets, and I believe we're very well positioned to do that.

Yes. And this is Bob. I couldn't agree more with Shari. And we are fundamentally focused on executing the transformation associated with the integration of ViacomCBS. That said, we will always look at strategic opportunities that are consistent with our content-focused strategy. And you saw that with our recent 49% investment in Miramax. And Miramax has a world-class library of titles, great IP and ongoing production. So we saw tremendous value to be captured there by getting access to that library and integrating it into our distribution system and getting access and the ability to get a first look at that IP. But as we did it, we were highly disciplined, and we ensured that we had a deal structure that allowed us to create significant shareholder value. So that's the kind of deal we will do. There are no must-have assets out there for us in the landscape. So we will be highly disciplined, highly opportunistic, and you should not expect us to do material deals in the current environment.

Okay. Great. Thanks, Shari and Bob. Our next question is on content spend for you, Bob. ViacomCBS spends $13 billion a year on content. What kind of return on investment are you getting on that spend? And how do you allocate it between traditional and streaming content?

Sure. Thanks, Anthony. Content is the engine that drives ViacomCBS. Content is what drives our consumer connection. And as Shari said in her opening remarks and as I mentioned, that content today is driving very robust consumption in linear television and very strong and even stronger growth in streaming. At the core of it is content, and we look at that investment and how we allocate that content investment across our platforms in a highly disciplined way. As we do that, we certainly allocate content expense growth to places where we believe there is a growth opportunity. And that means, in today's landscape, we prioritize our content investment growth in streaming, which we see as a significant opportunity and not only an opportunity but one where we already have strong momentum, as Shari indicated, both in the free sector with Pluto TV, where we have the #1 service; and in pay. And we will fund that investment growth by shifting dollars from lower-growth sectors. Now to that end and particularly as we look at streaming, our biggest franchises will be key to our success, as will be our broad programming strength across key genres. And so you'll see us prioritize increasingly our biggest hits for our owned and operated platforms. That said, we will continue to selectively license product to third parties. That third-party licensing has 2 distinct sources of value to us. It obviously has a direct financial value in terms of licensing revenue, but it also has a strategic value where we can use third-party platforms to drive exposure of the IP. That, in turn, drives adjacent businesses like consumer products. If it's a piece of IP, it might drive a downstream film that we develop. And also, we can use that as we develop new IP and in particular, spinoffs of existing IP. Now of course, we look at that in a very disciplined way. And as we license to third parties, as I said, we will increasingly focus our biggest properties on our owned and operated platforms. And where we do license, we will spread content across multiple platforms and have a limited amount of volume per third-party platform. So we're not licensing critical mass of any key genres or iconic IP. And importantly, we're going to do that co-exclusive, if possible, and we're already having good early traction in that regard. So the $13 billion puts us in a very small club of companies that have significant content assets. We continue to optimize that investment across platforms using increasingly disciplined metrics to evaluate that and ensure we're getting the ROI you're asking about. But at the end of the day, it is the lifeblood of ViacomCBS, and it is the engine for value creation.

Okay. Great. And Bob, numerous streaming platforms have launched recently. Maybe can you talk about how committed ViacomCBS is to streaming? And what is the strategy going forward? And then additionally, with the growth of CBS All Access, how does ViacomCBS ensure the parents can easily find the movie and TV ratings of streaming content and that parental controls are easy to use?

Sure, Anthony. So we're extremely excited about our streaming vision, particularly given the momentum we're seeing and the plans we have in place that we are aggressively executing on as I speak. We have several competitive advantages that we fully intend to exploit as we expand our streaming business. And importantly, we'll do so in a capital-efficient way. Remember, with Pluto TV, we lead in the free streaming television space. And the evidence of that is our 24 million MAUs, monthly active users, at March quarter end, which grew 55% year-on-year. Add to that the pay sector that we operate where, again, at quarter end, we had over 13.5 million subscribers and growing momentum. That number was up about 50% year-to-year. By the way, it's worth noting that as our sign-ups have accelerated for our pay services, we're seeing trial-to-pay conversion rates hold steady or actually improve a bit, which speaks to the quality of experience consumers are having. And with this combination of free and pay, we are well on track to create an integrated streaming ecosystem with a massive free front door, and in fact, we're going to add click-through functionality to that front door, Pluto TV, in June, which will allow people to subscribe to CBS All Access, at the same time, rapidly transforming CBS All access into a differentiated, broad pay streaming service which will provide consumers what they want, which is live sports, news and an incredible collection of entertainment, all in one place at an attractive price point. And that's not just talk. It's already underway. Last week, we added Paramount films, about 120 of them, to CBS All Access, and we're already seeing significant increases in engagement, i.e., time spent, in the film category and overall on CBS All Access by just that move. And we're going to be adding thousands of hours of TV and film to All Access over the coming months. And in fact, you'll see a very substantial change to CBS All Access in the summer, including the addition of a transformed user interface, which incorporates our flagship brands as we track towards really a transformative rebrand and relaunch. And as we do this and as production reopens, you'll also see an expanded slate of originals spanning significant IP from all of our flagship brands. Look at what we've done with CBS All Access, Star Trek, et cetera. Now take that model and apply it to the portfolio of brands and it's really going to be a very compelling offering, including original IP on a first-window basis. We're not only doing that in the U.S. We're also going to complement that with multiple international market launches of a broad pay product in the next 12 months. And to your questions on ratings and consumer controls in the service, yes, we will incorporate that. Obviously, we have Nickelodeon, which is a global leader in kids and family entertainment. And we do fully intend and in fact, are currently building the right environment for that within our transformed All Access service. So tremendously exciting with where we're going with this, particularly given the momentum we're already seeing.

Great, Bob. You can now move ahead with your closing remarks, if you'd like.

Yes. As we said, I'd like to thank all of you for joining us here today and for your commitment to our success in this important new chapter of this new company, ViacomCBS. We're confident in our strategy, and we're committed to driving strong stockholder returns as we execute against our growth objectives. We're well positioned to navigate this crisis and we're already beginning to tap into the potential of our combined assets. So thank you again for your ongoing support. Stay well, and we'll talk to you all soon.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.