Paramount Skydance Corporation (PARA) Earnings Call Transcript & Summary

Thank you. I think we have a minute or so before we start, which is unusual with a conference, but we live in a different world. So I see Anthony is on. Welcome.

Good morning. Thanks for having me. Hope you guys can see me okay.

Yes. You are a walking advertisement for your company.

Well, we're trying to stay on brand. Someone was telling me, "Look at these airline stocks, many of which have doubled off the bottom." Ours is one that has done that. So we're trying to keep the trend our friend here. So thanks for having me here, John. Happy to try and be helpful. Looks like you've got a lot of folks participating in the conference. So hello, everybody. Good morning. And I hope I can be helpful.

Okay. So on that note, I will now officially introduce you, Anthony DiClemente, Executive VP, Investor Relations. ViacomCBS has 615 million shares outstanding. It's about $22 a share. The market cap is about $14 billion, $17 billion of net debt, with an assets of $2 billion, a capitalization of $30 billion. The -- Anthony, welcome.

So CBS network has been the most watched broadcast network for the last 12 years. That said, with all the -- with COVID, the production issues, what are the -- how do the new fall shows look like?

Right. So I think the fall schedule for CBS is one of stability. We have 23 returning shows, 2 new ones. We are in very strong -- very good shape in terms of being near completion on having most or all of our episodes that we plan in the can. So one reason for that is that we had accelerated production, given our conservatism around the potential for a WGA, DGA strike. And because of that, it turns out that strike wasn't the issue, the virus was. But be that as it may, we were well prepared for that. And there are some episodes, like, for example, a show might have 7 or 8 out of 10 episodes completed, including post-production work. And so those are fine in terms of starting the fall schedule. We do hope and expect at this time that, broadly, TV production will resume. We said mid-summer, but as long as we can resume by, call it, July, August, we should be in really good shape for completing what we need in terms of the TV content that we have scheduled for the fall. But we're pretty enthusiastic about schedule, it's one of stability, it's one of a kind of recurring success. CBS, as you all know, is the #1 watched broadcast network 12 straight years, and we expect the schedule to continue to drive the success of the network.

Going into the upfront. It's going to be a different kind of upfront this year, obviously. What -- how do you think it will work? And what are your expectations?

Yes. Well, we've gone forward with a virtual upfront. Our Head of Ad Sales across ViacomCBS is Jo Ann Ross. She's really a legend in her field. We've not been able, obviously, to do our normal Carnegie Hall presentation. But I think that even though, logistically, the upfront is a little bit different, we're there for our clients. We think the market probably, logistically, will break a little bit later than it normally does. But we're confident. I mean we're seeing some really nice green shoots coming out of the pandemic in the scatter market. I think it's important to note that because the scatter TV market, typically, is a leading indicator, if you will, of upfront and upfront pricing. And so a lot of times, what you hear out of CPMs, that the networks garner out of the upfront, that keys off of how healthy the scatter market is now. April was pretty darn dead in terms of spot scatter market. However, May and June have -- each month has been better than the next in terms of the health and the activity that we see in the advertising market. Areas -- I know you'll ask about this, John, more so potentially in terms of near term, but areas we've seen strength in has been tech. So the fine stocks, be it Facebook, Apple, Google, they're big advertisers. It's always a little bit ironic to me on television. And so that's been a source of strength for us in scatter. And then, I would say, the enthusiasm around return to live sports. So we've got one of the first pro sports events coming up in PGA TOUR. CBS will be broadcasting the Charles Schwab tournament. That's June 11, so that's coming right up in Texas. And enthusiasm and demand on the ad side, not to mention the consumer side, I think this might be like the masters, just a normal PGA event, but so much pent-up demand from consumers, but also on the advertising side. I'll leave it there.

On political, always interesting and with everything that's been happening recently, becoming the hot topic.

Yes. And there's really no change for us. I mean we expect to be a big beneficiary of political in the back half of 2020. A lot of our analysts think it will be a record year in terms of political ad dollars for us. We're seeing spending from both sides of the aisle in terms of -- on the democratic side, Super PAC fundraising has really picked up in terms of its momentum. And similar on the Republican side, where there have been different pockets of spending. Of course, we benefit from local spending. And so in areas like Colorado and Massachusetts, areas where there are senate races, where they're spending in May and areas where candidates and groups have not had the ability to travel, it's been -- so far, the activity that we've seen bodes quite well. And obviously, it's early. It's June, and a lot of this activity will really pick up in the next 3, 4, 5 months leading up to November 3. But we're very, very optimistic. And we all know it's against an environment, particularly in local, which is where we'll see it mainly, where local has been challenged cyclically from the local ad categories that are frontline categories. I'm thinking autos, I'm thinking physical retail, which has been really a headwind in Q2 for local advertising. That said, we've said that local, writ large, where political resides, we'll see sequential improvement in Q3 and then again in Q4, according to what we're seeing right now.

You're going to see your stock doubling up the bottom. I think part of that was driven by your strong CBS All Access numbers. The -- it's about 13.5 million, up 50% year-over-year. You have a 25 million goal in 2022. Can you talk a little about CBS All Access, where it fits in? And in particular, the -- you know you had tremendous growth numbers. At Disney, $50 million, perhaps, HBO Max, $30 million. And you're still relatively small in the environment. You're used to be in a large part in the environment. So how does it fit in and where would you like to see it go?

Yes. So just to be clear on your question, the 13.5 million that we talked about on our Q1 call, that is a domestic number. That's a total sub number, and that includes CBS All Access, Showtime OTT as well as our other subscription video streaming apps, some of which are smaller like Noggin and BET Plus. But that number is growing rapidly. In terms of streaming, March and April were our 2 biggest streaming months ever in terms of usage and engagement. We did talk about in Q1 the revenue disclosure that we have, which is streaming and digital video revenue, which includes subscription revenue and ad revenue, and that was up 51% year-on-year to $471 million, I believe. And we feel great about where we're going in streaming. We've got a free, a pay and a premium product, and that's Pluto, CBS All Access and Showtime OTT, respectively. You're going to see more content on the pay service hit in July, where we're adding a number of content across ViacomCBS, including Paramount library films, including Viacom Media networks content from across the portfolio, including Nickelodeon, Comedy Central and BET, and that's going to accompany an improvement in the user interface. I'm talking about CBS All Access right now. Pluto has tremendous momentum. We talked about 24 million MAUs as of the end of Q1. That's up 50% year-on-year. And so we're going to start building connective tissue in between the 3 streaming products. What I mean by that is, as I think about Pluto, CBS All Access and Showtime OTT, what we could bring is the ability to use Pluto as a free funnel to then upsell or create a freemium layer, if you will, that drives CBS All Access. CBS All Access is crushing it in terms of usage and engagement, and that's despite the fact that we didn't have March Madness in Q1 and the beginning of Q2. But yes, those subs are growing materially. We've got guidance out there for 16 million domestic -- sorry, domestic total subs, and that's on the subscription side, where we feel great about that. We don't, by the way, John, any longer have that 25 million number out there in terms of guidance because we've combined the services. But I think the bigger question I didn't answer yet is how do we feel in terms of where we're differentiated. I mean we're not trying to play a game where we're literally competing with Netflix and -- or Disney+. We're trying to occupy a space in streaming that is differentiated. So for broadband-only home -- by the way, many of our subs are not broadband-only home, so they already get CBS as part of their linear subscription, but they subscribe to All Access because of the library, because of the originals, which have done quite well, Star Trek: Picard this year, as an example. And the place that we really differentiate would be originals, number one; live sports, number two, where we're really excited about a deal we have for European soccer and UEFA. And this is in addition to the rights that we have as part of the CBS Broadcast Network. So NFL, NCAA college basketball, those are huge drivers of CBS All Access uptake for those consumers who are not subscribing to the big bundle or to a vMVPD. And then thirdly, live news, which CBSN is just crushing it. And amongst the broadcast networks, is the leader in terms of the streaming platform and CBS and obviously through the pandemic and now into this latest crisis around the protest in cities. Nationally, CBSN has seen tremendous acceleration in its engagement. So I think there's -- there has been and there is room in the marketplace for that differentiation for originals, news and sports. You can't get that on Netflix. You can't get live entertainment on Netflix. And so that's really a big point of differentiation.

The -- you've talked a lot about spending about $13 billion or so on content. The -- how do you break that down between sports and news and entertainment? And how much are you actually spending directly on CBS All Access, plus your other services in terms of -- is that $13 billion a fair number to use?

So the $13 billion is a number that we had used and we have provided publicly, but that's a pre-COVID number. And I think that given the pause and interruption in film and TV production, you could expect that we're not quite going to spend that much in terms of $13 billion in 2020. That does provide some near-term benefits to us in terms of EBITDA margin and free cash flow, both of which we had a very strong Q1 on. But what I would say is, we're really -- in terms of the apportioning of that content spend, we're mixing or remixing where that spend goes and applying more of that spend to the growth areas of the company. And those definitely include streaming. And I'd say, notwithstanding the remark I just made, within the $13 million streaming content spend, will grow regardless of COVID. But the total number won't. So what does that tell you? It tells you that the linear content spend will likely be down this year. And so that's a story of getting more disciplined upon the combination of the companies and Bob and Chris and the finance team and I, looking at it and saying, "Where can we be more judicious? How can we maximize our return on invested content spend? How could we execute against a recovery in cash flows? I'm talking OIBDA and free cash flow, and particularly against -- how do we manage the linear business in terms of that?" We think that you guys are valuing the networks business on cash flow. And it's probably not the right way to look at streaming or, necessarily, studio. But we're going to be prudent in that regard. We're looking to execute against a recovery in showtime cash flows, if you will. And a lot of that has to do with discipline on spending and a little bit of strategic reallocation of spending to the growth areas in the company. And so that's really strategically very high level of how we're looking at it.

And the area that the investors are really picking up on, on an onstream is about how do you figure out what shows to keep and what shows to sell? And you've highlighted the fact that you have a business, it's a very profitable business and there's really a split valuation taking place on The Street. The -- and that's a difficult process to manage. But the -- I think that Jack Ryan was sold to Amazon. South Park, which is a major hit show, 23 seasons, Comedy Central, was sold to HBO Max, which -- the rule, I think, was speculating numbers over $500 million. So on a traditional basis, that's a stunning win. Basically, the speculation is you double the number you've previously gotten from, I think, it was Hulu. On the other hand, HBO Max, will be able to: a, have all 23 seasons; and b, they're going to add first episode, 24 hours off of Comedy Central and it's going to serve as an anchor for HBO Max's young adult animation's way. So that will figure out how to manage this critical process.

Yes. So we're going to continue to selectively license our content. And the way we look at that, I mean, HBO Max, as an example, we had an internal assumption for what we thought the value to our streaming services would be for South Park. And HBO Max came along and blew us out of the water in terms of that valuation. And by the way, that's all going to be reported in our Q2 2020. So you'll see that big number, a highly profitable number, and you mentioned the number, which was reported in the press. And so we just thought that the financial aspect of that license of that -- of licensing it, outweighed for us the strategic benefits of what we call warehousing it or utilizing it for our owned and operated platforms. I do think that we continue to be prudent. And by the way, for South Park and for a lot of other of our third-party licensing, the IP does revert back to the company after a certain number of years. So I just want to encourage everybody listening to remember that we're not necessarily selling the IP outright. We're selling a window of it. And what that means is that we can do it in a strategic way where we can create spin-offs. We can create content against it. So as, for example, South Park, HBO Max builds the brand of South Park by the fact that it will be on HBO Max, we can then go out and create new and additional IP that relates back to the South Park brand. And then it also -- so what it does, so what licensing does is it strategically builds the value of the IP even though that value is increasing and the brand awareness of it is increasing on somebody else's platform. And obviously, we're doing that in a really smart and lucrative way because of how much we can generate. I mean this is also true for our third-party production business. You mentioned Jack Ryan. That's an example where, yes, it's a cost-plus deal with Amazon, but the rights -- the IP reverts back to us over time. I do think that as we lean into streaming and we are leaning into streaming investment, and that was a plan for us coming into 2020, coming out of the merger, which was consummated in '19, that we are selective about what we license strategically. So I mentioned the financial lens. The strategic lens would be, "hey, what are the genres of content that are on brand for ViacomCBS?" I would tell you, kids is on brand because of Nickelodeon. And so kids content that we're putting on All Access, that strategically is a lane for us. It's true for sci-fi, which is on brand for All Access. It's true for procedurals, et cetera. Fearless females is kind of a sub-genre that I think of, which is Why Women Kill and The Good Fight on -- previously The Good Wife on CBS All Access. So we will -- if it's on brand, then I think that what you heard from Bob on the Q1 earnings call is that we'll be a little bit more strategic in terms of what we choose to license versus what we choose to utilize for our growing streaming platform. So -- but I will tell you that licensing, you'll see the high-margin South Park in Q2, and it will continue to be a thriving and very large business for us going forward. And I do think there's room to do both. I don't think you need to choose. And I think for other media companies that have chosen, whether it be Disney or Warner Media, basically saying like, "We're going to keep all of our content for our owned and operated platform," that, in some ways, in the marketplace, limits the supply of content into the third-party market, both domestic and international. And again, I'm talking about -- I'm blurring the lines on the answer because I'm talking about first run and third-party production. But in general, it limits the supply. And to the extent that there are new streaming services that are very hungry for content, you have an environment where supply is coming in, demand is rising, and that should, as we move through 2020 and into '21, provide a pretty firm pricing environment for the licensing business that we will continue to participate in. So I hope that gives you a little bit of insight as to how we look at it.

You mentioned that Pluto can be used to help as a funnel to your other services to the TV. Can you talk a little more about how that could work?

Yes. I mean I think -- so first off, Pluto is the #1 free ad-supported streaming TV platform. It's -- we were early to it, predated May, but it was a Viacom acquisition that happened over a year ago now, and it's been a great acquisition for the company. It's linear-based. And for those of you who haven't used it, go on your Roku device or whatever connected TV or streaming platform you have and check it out. It's over 200 channels, I think close to 250 now. Many of those channels are ViacomCBS branded, so very roughly sort of 50 of them. And the great thing about Pluto is that it's ubiquitous in terms of not having any marriage to one distribution channel or another. So you'll find it across connected TVs, Amazon Fire, Roku, so really not embroiled in some of those disputes where you do have vertical integration in the streaming space. The user growth on Pluto has been awesome and up 55% in the Q1. And that's against viewing time, which has been tripling. And the ad revenue, I mentioned the 51% growth in streaming revenue for us. Broadly, we haven't distinguished how much of that was Pluto or even how much of it was subscription in that versus advertising. But suffice it to say that Pluto revenue is growing faster than the overall growth rate of our streaming revenue. So a significant potential there. And the connected tissue would be kind of a click-through promotion or click-through ad, where if the user is watching Pluto TV, we would really have the ability to upsell them from free to our paid platforms, be they CBS All Access and Showtime OTT. And you're going to see more of that. You'll see that executed as we move throughout the year. And that's certainly true internationally to where Pluto is seeing fantastic growth, particularly in Latin America. So yes, I mean I think that people should think of our streaming strategy as 3 main sort of products, with Pluto sitting on the top of the funnel, if you will, and being able to convert those users into pay. It's not the only place that CBS All Access is going to get users. I mean CBS All Access did benefit from the big free trial push earlier this year. But yes, it's part of our streaming growth strategy. And I'll just sort of ramp it a little bit, but it's a strategy that we don't really get credit for in the capital markets. So John, you'll -- the way I would sort of highlight it would be you mentioned the $471 million that we reported in the Q1. So what is that? That's almost a $2 billion, $1.9 billion revenue run rate, and it grew 51% in Q1. Our previous guidance had it growing 35% to 40% for the year. We have put that guidance because of Q2. And -- but just figure out what you think the secular growth rate is on that $2 billion. And if we're getting even a fraction of what a Disney+ or other streaming services are getting, you're really talking about $8 billion to $10 billion of value to ViacomCBS. You mentioned $25 billion enterprise value. I'm using rough numbers, and that implies that you get all of the rest of the non-streaming assets at ViacomCBS for less than $15 billion, and that includes Paramount, which we know has a substantial valuation. So that's why when I look at the sum of the parts, and I kind of -- even using conservative assumptions on what our streaming platforms ought to be worth relative to others, it kind of makes me upset a little bit at how cheap our stock trades.

I see you haven't lost your sell side skill sets. That's a compelling summary. The -- and that could be, obviously, The Street looking through in a slightly different way than they'd look to ViacomCBS before. But switching gears slightly, the universe cord cutting, maybe a lot of money on affiliate fees. Can you discuss how -- where you see that going?

We do make a lot of money on affiliate fees. And when people talk about affiliate fees for our business, there are different categories, just to be clear, what we're talking about. So you've got linear traditional MVPD, affiliate revenue, which would be your traditional cable satellite telco providers. You've got virtual MVPD affiliate revenue. So what's that? That's YouTube TV. That's Hulu Live. And then you've got streaming affiliate revenue. So when you see us report consolidated revenue by type, suffice to say, CBS All Access affiliate revenue is in that number. Now we're in an environment where we have cord cutting. We did see a tick-up in cord cutting in Q1. What we did internally was get a little bit more conservative on our internal assumptions on what cord cutting might be for the year. And -- but I think against the backdrop of cord cutting, there are really kind of 2 answers to that from a strategic standpoint for our company, 2 counterarguments. One is renewals. We've had an awesome, awesome year in terms of renewals with our distribution partners. We renewed Comcast for CBS in January. We renewed Verizon. That was certainly successful. By the way, Pluto was a nice part of that deal. We announced on earnings incremental new carriage for Viacom Media Networks on YouTube TV, in addition to a renewal of the existing CBS Carriage on YouTube TV. We've done reverse comp deals with Nexstar and Meredith. So we are on a roll. A lot of people want to ask us about DISH Network renewal, but we are on a roll in terms of distribution renewals with our partners. And what is the benefit of that? The benefit of that is when they take effect, you can have either incremental volume, like YouTube TV will be just day 1 accretive to our model. They hadn't even carried Viacom Media before. And that takes effect over the summer, mid-summer, let's say. And you could have increase in rate like our Comcast CBS deal, which was a real economic win on the retrans and Showtime side. That deal also takes effect, call it, midyear this year. And so what we're excited about is that as we move from Q2 to the second half of the year, you'll really see an improvement, sequentially, in our cable affiliate revenue, despite the fact that we are against that really conservatively thinking about cord cutting. And hopefully, cord cutting from Q2 on stabilizes and doesn't accelerate. So I think that's kind of counterargument one. And then what also goes against cord cutting, I think, would be what we're trying to do in terms of taking broadband-only customers, cord shavers, cord cutters and recapture them into our streaming ecosystem, which we already talked a little bit about. So we're enthusiastic. We have not seen, by the way, ourselves, a tick-up in cord cutting from Q1 and Q2. Of course, our remits come in late. Maybe it's a 45- to 60-day delay. So all of you, as analysts on the line, could extrapolate from what we're seeing and hearing from cable satellite telco distributors. But we're pretty confident that we have a chance to grow domestic affiliate revenue, overall, in 2020. That's not guidance, but I think that, that's something that we have a chance to do or hope to do, particularly when you look at that incremental revenue from YouTube.

Right out of time, but I really want to get 2 more questions in quickly. So you mentioned the cutback in supply and products. So how do you think about Paramount strategically? And I have one final question.

Well, Paramount is important to us strategically in a sense that we look at the company strategically in terms of assets that are strategic versus nonstrategic. We have noncore nonstrategic asset sales in the form of our Black Rock building, which we own in Midtown. We don't own the Viacom headquarters on 1515 Broadway. We are -- that's on pause because of COVID, but we hope to monetize that and then Simon & Schuster, where we've said that's noncore. And what makes them noncore? They don't fit into our framework of: number one, studio production; number two, networks; number three, streaming. So a lot of people ask about Paramount and Showtime. Paramount is absolutely critical to our studio production strategy. The content that comes out of Paramount feeds the networks business in part, feeds the streaming business in part. And there's enormous scarcity value to Paramount in terms of its film -- its ability to create and produce film and TV. So it is strategic to us. You didn't ask about Showtime. Showtime also ticks all 3 of those boxes. It's effectively a studio, obviously, a network and has Showtime OTT. So we do look at them strategically. A lot of people like to ask in terms of, if you got an offer, would you ever entertain selling, either selling one of those core assets or selling the company. And I would just go back to the Board, the management team and the senior management are all aligned in terms of the overarching goal to create shareholder value. So if something were to happen, where that opportunity were to arise, I can tell you that from the NAI level to the Board, to the management team, we would have a responsibility to ourselves as shareholders and to minority shareholders to absolutely maximize shareholder value where possible.

Last question.

Go ahead. We're out of time? I thought we had -- was this only for 30 minutes? I thought we had longer.

No, we -- in fact, we're not like a tech firm, it's [indiscernible].

Sorry if I was long-winded there.

I don't know. I think you made a very good presentation in terms of -- and a strong argument for your company. Football...

The other thing -- by the way, I have to add, the other thing on valuation because I keep reading on Bloomberg, all these articles why the S&P 500 has got such a better yield than the 10-year at 0.7%. We're committed to our dividend policy. And so we have no active plans to change that. People on the call who follow us know that we pay $0.96 a year. So with our stock where it is, that's a dividend yield of roughly 4.5% against the 0.7%. So that argument is great for us in terms of the dividend yield versus the 10-year yield, and that's not going anywhere. So just another reason why our stock is like way too cheap.

The football, I will tell you how Cliff Baty of Manchester United waiting in the wings, so he's probably quite interested in your answer, even though Man U is based in the U.K. The glue that holds it together, it's important for your ratings, how should we think about football and what they made NFL will be trying to charge you later as those negotiations begin to the next round?

So we like where we are. We want to stay in our lane. "Stay in your lane, bro," as the commercial says. We love our Sunday afternoon package. I can say that we value the exclusivity that comes with it. We have a great relationship with the NFL, as sort of exhibited recently by the wild card game that we struck a deal with, with the NFL on. So we've got one more wildcard game, and there's a simulcast of sorts that will happen on Nickelodeon for younger viewers. So we -- I mean I can't -- it's a negotiation, so I can't sort of make any forward-looking statements on it, but we like where we are with the NFL. We'll probably have to pay more, but we absolutely have the inclination and the resources to do so. And we can afford to, relative to our competitors because we generate the most in retrans and reverse comp dollars in the NFL, which drives the majority of that value. So Bob and Shari have a great relationship with Roger Goodell, and if you're a Patriots fan, Kraft, Robert Kraft. And so we feel like we're well positioned going into that deal. I'll leave it to you guys to determine whether or not the other media companies would want to, in this environment, pay for a second NFL package. But I think the NFL values having all 4 broadcast networks on board for distribution of its product. And for 1 of the 4, particularly one that is most watched, to no longer carry the NFL, I think is -- I think would be surprising to us. And so the way I would say it, from my standpoint in my seat, is that our expectation is that we will renew the NFL on Sundays on CBS.

Good luck. On that note, thank you very much. Appreciate your presentation.

Thanks, and I'm around. And thanks, John. And if people want to talk in any more detail, just hit me on e-mail. Happy to chat. Enjoy the rest of the conference.