Paramount Skydance Corporation (PARA) Earnings Call Transcript & Summary

Okay. So we are here. Doug Mitchelson, media and telecommunications analyst for Crédit Suisse. Doing our first virtual conference with a little bit of technical difficulty, but we are here now and very pleased to have with us Bob Bakish, CEO of ViacomCBS. We will run the full 45 minutes, and we have a lot to get through, Bob. So thank you so much for being here. Appreciate your time today.

Great to be here. Thanks for having me, Doug.

So let's jump in. The world has become a pretty complicated place over the last couple of months, certainly since your first quarter earnings call, with so much of the focus having been placed not only on COVID-19 but also social issues. Are there any updates you want to provide relative to the effects on your businesses more broadly?

Well, look, before I dive in, I do want to take a moment to acknowledge the events of the past several weeks, which on top of the impact of COVID have laid bare the long-standing pain of racism and inequality that so many people in our communities face every day. At ViacomCBS, we fundamentally believe in a more diverse and inclusive company that does business with an equally diverse and inclusive list of partners and talent. It's good for business, good for our communities, and we continue to take actions which reflect this. So for example, we recently participated in Blackout Tuesday. We're also launching BET's content for change. And we've been using our platforms and resources for COVID-related PSAs and specials, things like #AloneTogether and BET's Saving Our Selves event. Now in parallel to acknowledging and addressing the impact of COVID and certain social issues on our employees and communities, we've also remained hyper-focused on our business. The good news is we continue to see robust consumption across all our platforms. A vibrant example of that is news. We're seeing strong viewership across our linear network, local TV stations as well as record streaming on CBSN. It's worth also noting that the pandemic has highlighted the robustness of our team and infrastructure, which weathered numerous production challenges, but continue to put compelling fresh products on the air to inform consumers all across the country and beyond. And speaking of production, we're definitely excited to be ramping activity back up. As you know, sports started last weekend with PGA golf on CBS. Ratings were up 50%, Saturday and Sunday, over the last year's tournament and, in fact, were the highest in over 15 years. And in developing our return to golf plan, we learned many lessons that allow us to produce golf and other sports in a much more innovative and efficient way going forward. Know that boxing and Bellator will return this summer. We expect to have football in the fall. We'll also shortly have a women's soccer tournament on All Access. And we expect film and TV production writ large to start again soon. We're currently finalizing safety protocols in coordination with various guilds and production venues. We do anticipate a return to production in the summer. And in the meantime, we continue to do remote postproduction work on projects that were in the can before the shutdown and continuing our animation work as well. So a lot going on in this crazy world.

Yes. A lot of change taking place. So let's take the perspective a little bit further out. As the world shifts from stay at home to back to work, how do you think ViacomCBS creates the most value going forward? And what does management have to do to execute to capture that value?

Well, first, Doug, I'd offer an edit to your word choice. We've been using return to facilities and return to production, not return to work because the reality is ViacomCBS has been executing hard over the past 6 months despite this overwhelming stay-at-home model. That said, when it comes to creating value, it's about unlocking the power of the combination, focusing on 3 interrelated elements of our business: studios, networks and streaming. Each element is significant on a stand-alone basis, but the combination unlocks enormous and powerful synergies. Take networks. We're #1 on sharing every demo across broadcast and cable. That's a powerful position to be in. And now our combined company improves monetization. That's across advertising, distribution and content licensing. To this end, we've seen early proof points with distribution with multiple deals completed in Q1 and Q2. I'm sure we'll get into that a bit later. We're also seeing accelerating momentum in streaming across both our free and pay assets that we'll also dig into a bit, I'm sure. And then beyond strategic execution, we're also committed to unlocking value from our assets as part of driving shareholder value and returns. As you know, we're selling assets that are not part of our core strategy that don't fit that studios, networks and streaming framework. That includes Black Rock and Simon & Schuster. And right now, our dividend policy allows for a 4% yield.

So obviously, a lot of commitment at your company in terms of shareholder value with the structure, along those lines. You've taken some actions to -- relative to liability management. Can you talk about those actions? And how you're thinking about free cash flow associated with that?

Yes. So in response to COVID, but really also as part of a longer-term planning process, we recently took a number of steps to strengthen our balance sheet. In early April, we issued about $2.5 billion of debt, of which we used $800 million to pay off maturities due in early '20, resulting in $1.7 billion of enhanced liquidity. Then in May, we went back into the markets and refinanced $2 billion of our nearer-term maturities, replacing those with longer-dated debt. Having accomplished that, we now have no maturities until 2022. We also have access to a committed and undrawn $3.5 billion revolver. And it's important to note, we remain committed to delevering to our fully synergized 2.75x target, though it might take us a bit longer to get there given the COVID-driven delay in asset sales. On an operating basis, you asked about cash flow, we feel very good about our free cash flow. And related to that, we're making real progress realizing merger-related cost synergies. In fact, we're tracking ahead of our expectations for $250 million in realized synergies for 2020 as well as ahead of our $750 million synergy target over 3 years. And in addition to those merger-related synergy targets that we have disclosed in the past, we see opportunities for additional cost savings based on learnings we've had over the past few months about how we can operate our business more efficiently. Finally, on the free cash flow topic, we continue to be laser-focused on improving free cash flow and free cash flow conversion. We are being very disciplined in general, and that includes a heightened focus on the content front, really optimizing the mix of programming investments across our platforms and looking for opportunities to improve monetization of our programming and marketing investments, broadly speaking.

So you just mentioned content spend. It's a central theme and central to your businesses. So let's start there as we talk about operations. You're spending $13 billion on content a year, the number you've thrown on in the past. Is there a holistic view at this point as to what content to make, how much content to make, how much to invest and how that relates to all the changes that you're tracking in consumer behavior?

So sure. Now big picture, our content plans are increasingly about cross-company use of content, and that's through franchise management and windowing. We are prioritizing incremental content investment to streaming, which we view as a significant growth opportunity. All of our key streaming products, that includes Pluto TV, CBS All Access, Showtime OTT, have seen significant acceleration in sign-ups and consumptions over the past 3 months. We view that as a clear indicator of the growth potential of these products. And importantly, we also see clear and growing monetization from that consumption, both in the form of subscription and advertising revenue with a long runway for growth ahead. And from an expense standpoint, note that we're funding investment stream by shifting investment from lower-growth sectors. And those investments have already been contemplated in our existing internal planning and expectations. But to be clear, we're not walking away from lower-growth sectors. So for example, in the linear space, we're remixing our spend to further improve content ROI, thus, ensuring we have effective content out there. We're doing that by adjusting spend across genres to optimize performance. So a greater focus, as an example, on unscripted, which tends to work these days better on linear television. We also have evolved certain IP formats. So for example, we took -- The Daily Show with Trevor Noah, we took that from 30 minutes to an hour. That improves the ROI on that franchise. And recently, we significantly reworked some deals to improve the economics on certain series and IP. And by the way, relative to the $13 billion number you referenced, COVID will result in some reduction in that spend this year because, as you know, we have a pretty broad production shutdown. But as we exit COVID and return to a more normalized world, that trajectory will get us back to that level.

So I think in your last earnings call, you indicated and you sort of mentioned this morning -- this afternoon, the company grouped in 3 main interrelated businesses, right? So studio production, streaming and networks. I think we think about the world that way as well. So let's talk about each one of those, starting with studio production. How do you think about the studio business now? How do you decide what programming to keep for yourselves versus license to third parties?

So studio production is a big market. And as ViacomCBS, we have the resources and capacity to both supply third parties and supply our own platform, both in the linear and streaming space, with really compelling programming. Now of course, we're thoughtful in terms of how we allocate IP and maximize the value of our content. And to your point, on our earnings call, I think it was our Q4 call actually, we highlighted 3 filters: financial filters, strategic filters, partnership considerations, which we do use to make individual content placement decisions. And so when we run decisions through those filters, we do make decisions to selectively license content, which means we overwhelmingly rent content, but we do that for third parties. So we did a South Park deal with HBO Max. We did a Yellowstone deal with Peacock. Those deals were financially attractive, limited windows, and we still own the IP. But importantly, when you look to those deals, at this point, we will not license critical mass of any of our key programming areas, areas like sci-fi, like kids, like procedurals, to any single player. And we will prioritize franchise IP to our owned and operated platforms.

Makes sense. I think on the Paramount side, it's felt like a business that's received a lot more investment given the ramp in TV shows, you're ramping film production now and sort of juxtapose that with not really being that far off of breakeven. So more investment, not yet very profitable. Do you see a shift coming in the margin and return structure for Paramount? And how did you access -- assess the risk of putting more capital into that business?

So look, Jim has done a fantastic job turning around Paramount. He got the business back to profitability in '19 for the first time in 4 years. And he did that by also getting it back on a strong trajectory. Now that turnaround was executed through a more balanced and larger slate strategy by leveraging and leaning into IP we own. We did increase co-financing, particularly on our larger-budget films to manage risk. And we also leaned into TV production, but in a capital-efficient and highly dependable and predictable way. So we like that. We think that has a long road to go in terms of continued upside. On the film side, a lot of discussion, but we continue to believe in the theatrical model. We do have a strong slate ready to go when things open back up. That includes: The SpongeBob Movie: Sponge Out of Water; A Quiet Place Part II, which we previewed right before the COVID shutdown but didn't release; Top Gun: Maverick; Coming to America 2, just to name a few. We also are benefiting from strong demand from the streamers. You saw us sell Lovebirds as an example early in the COVID cycle. We also accelerated our EST window with Sonic. That performed very well for us. And we're monetizing the Paramount library, including utilizing it on CBS with a Sunday night movie franchise now, and on CBS All Access, where we recently added over 100 films, and we're already seeing material benefit on the time spent side. So look, COVID in the short term has set us back in terms of film releases and TV production, obviously. But we continue to see a path to nicely improve profitability over the longer term. And when you think about Paramount, you really got to remember, it's a scarce and valuable asset. Our film and TV product is in high demand. We are monetizing it on multiple platforms, including on our own linear and streaming services as well as benefiting from a robust third-party marketplace. So the Paramount story has great days ahead of it.

Great. So let's shift over to streaming. So first, when I think about your streaming platform versus your linear networks, how do you balance protecting existing revenue streams versus -- and business models versus investing for the future on the streaming side?

Well, look, broadly speaking, we look to have -- ensure that every dollar we invest in content will benefit the entire company, both in linear and in streaming, sometimes in third parties, too, across varying windows. On the linear side, we have the strongest portfolio of networks in the country. We have the #1 share in every demographic, again, across broadcast and cable. That's a powerful position to be in. We have the #1 broadcast network for now the 13th straight season. We have compelling original programming and strong library assets backing that up. But it's really more than that. We have become a critical supplier to the TV distribution ecosystem, and that value is reflected in a multifaceted business model. So obviously, you have affiliate revenue driven by broad carriage of our products as they serve their consumers. We've got partnerships around advertising, advanced advertising, which enables access to additional inventory, data and targeting, all of which enhances revenues in our competitive positioning. We've now got extensions into broadband and wireless through carriage of our streaming offerings. As an example, Comcast now carries both CBS All Access and Pluto TV. Verizon distributes Pluto on FiOS and soon will distribute it to their wireless subscribers. And this is only the beginning of the broadband wireless streaming sector. And the fact that we're also in the linear business is a powerful advantage that we build on as we partner with our distribution clients. On the streaming side, our goal is to provide consumers with the broadest video experience, spanning news, sports, entertainment, local and live, across these 2 complementary lanes of free and pay as we become the global leader in premium streaming. So Pluto TV, a massive free gateway to the ViacomCBS streaming ecosystem, and we continue to build out Pluto's content offering and distribution. We're also adding the ability to upsell consumers into pay this month and the link to subscribe to CBS All Access through a click-through ad as a first step. We do have a broad and differentiated pay offering with All Access, which, again, includes live news, sports and local. And in fact, if you combine our free and pay offerings, we now have over 120,000 hours of content in the U.S., and we believe that's larger than any other streaming offering. And that combination will benefit both ViacomCBS and our distribution partners as we continue to play forward in this evolving distribution landscape. And by the way, it's not only a U.S. play, it's a global play.

So how are those streaming services performing? I think you mentioned earlier that COVID's having an impact with increased consumption. Any update that you want to give us on streaming?

So we have a strong and scaled positioning already in streaming. As we indicated, we generated about $1.6 billion in streaming and digital video revenue in 2019. That's domestic only. That revenue grew 60% in 2019 and just over 50% in Q1. We have clear momentum in both free and pay. In the pay space, we now have 13.5 million subscribers. And in free, with Pluto TV in the U.S., we have 20 -- over 24 million monthly active users. Both of those stats as of the end of Q1. We only disclosed stats at end of quarter. But Q1 was our strongest streaming quarter ever. Even though we didn't have a Super Bowl and we had the COVID-driven cancellation of NCAA, we still had the strongest quarter by far in our pay sector. And both services broke records for sign-up streams and time watched in Q1. When you look at April and May, those Q1 trends have continued. We've seen strong growth in domestic subscribers and MAUs across CBS All Access, Showtime and Pluto. And importantly, even as those -- as trials ramped up, we continue to see strong conversion from trials to paying subscribers both on All Access and Showtime OTT. So a lot of momentum there, and feeling really good about where that points us for the future.

I think you've made some important updates to those services this summer. What are the changes that you're making?

So in streaming, we really have a 3-part strategy. The first thing we're doing is accelerating the growth of Pluto TV. We're going to extend our U.S. leadership position. We're doing that by adding more content, more distribution and continued product enhancements. We released Pluto Venetia earlier in the year. That's the most significant upgrade ever. And by the way, Pluto now has over 100,000 hours of premium content here in the U.S. And if you haven't checked it out, you really should. I use it on a daily basis, both in mobile and on a 10-foot screen, and it's a killer service. In addition, we continue to translate that strong MAU and consumption growth into rapid ad monetization growth, including this month. A lot of demand for that product. Second part of our strategy is to transform All Access into a super service, building on the presence All Access has in the market today, and we will have a preview launch of that service later this summer, where we add content from Nickelodeon, Comedy Central, Smithsonian, MTV, BET and Paramount. I think the important point here is that these brands and their content reach 80% of viewers under the age of 35, and that should meaningfully expand the market opportunity for us going forward. We have a good position in the older segment with the current All Access product, but this really brings a lot of young audience to the table. Over time, we're going to add over 15,000 of -- 15,000 hours of additional on-demand TV and film content to our existing 15,000 hours that are currently on CBS All Access. You should know that our biggest franchises will be key to this strategy, as will our broad strength across genres, like animation, sci-fi, comedy, reality, kids, procedurals and more. We are going to have a critical mass of live sports on the product. This includes CBS Network delivered NFL, NCAA, PGA and more, plus exclusive streaming rights to major properties like women's soccer and UEFA. Add to that global, national, local sports and entertainment news from CBS News, including over 200 local CBS TV stations. And our 24/7 live streaming networks, CBSN, CBS Sports HQ and ET Live on the entertainment side. We do anticipate a full launch of the to be rebranded service in 2021, and that will add thousands more hours of TV and film content and, importantly, a much broader slate of original content, much of it based on our key franchise IP from across ViacomCBS. And there'll also be substantial changes to our user experience. The third part of the strategy is really to bring those things together and increasingly integrate our ecosystem across free and pay. As I said earlier, that starts this month with the ability to click-through from Pluto and subscribe to All Access. But it's really all part of a strategy to utilize a range of platforms to capture consumers at every price point and connect them to all of our assets, not only in streaming but also benefiting from linear promotion and the like. So in short, I'm pleased with our momentum in streaming to date, and I'm super excited about where our plans will rapidly take us.

Yes. There's been a lot of activity there. And I think we can all, in the United States, see, touch and feel your service here, but there's a lot of debate about the right international strategy for streaming. And one thing that we talk about is, are you better off as a company just taking your content and license to third parties overseas and bringing that cash home maybe to invest in domestic streaming? Are you better off taking this opportunity global because you need some amount of global scale to compete with Netflix and others in streaming? How do you think about it?

So look, we see a big opportunity for ViacomCBS in international streaming, and we see it based on the assets, infrastructure and capabilities we have already all around the world. Now that starts with our excitement about the free space, where we're in the early stages of Pluto TV's global expansion. Pluto already has a growing presence in Europe, in the U.K., in Germany, in Austria and Switzerland. And we launched in Spanish-speaking Latin America's 17 countries with over 12,000 hours of content in April. That's off to an exceptionally strong start. Month 1 was way ahead of plan, and month 2 doubled from that. And you'll see us over the next 12 months roll out Pluto in Brazil, in Spain, in France and Italy and probably more. We also believe we have a major opportunity on the pay side. You'll see us launch a broad pay streaming product in multiple markets over the next 12 months. And again, this service will harness the full power of the ViacomCBS portfolio, creating a meaningful brand presence in streaming in key markets all around the world. Importantly, as you think about that, our streaming initiatives will benefit from the content, promotional and partnership assets we've created through our global portfolio of linear networks. We're not starting from 0. We have positions all around the world. We have relationships. We have broadcast cornerstones in places like the U.K., and Argentina and Australia, and those are tremendously powerful. It doesn't mean we won't license. We do think there's an international licensing opportunity. We believe we can continue to selectively license product in international markets, similar to the way we're thinking about in the U.S., and we continue to see good traction there.

So you mentioned the linear network. So we should talk about those. Advertising. So what's the outlook for advertising the rest of the year? And what's the path for recovery for -- whether it's local or U.S. national or international advertising?

So Doug, on our Q1 call, we stated that Q2 would be the bottom in terms of year-over-year ad declines. Today, we reiterate that belief. The trends we've seen have been in line with our expectations, actually marginally better across both the U.S. national market, the local market, the digital markets and international. If you look at the U.S., the trajectory of scatter was good in Q2. Again, April was the bottom here. May and June improved sequentially. We did see some advertisers that cut dollars early in Q2 return later in the quarter. And in fact, the first 2 weeks of June scatter, which is all the June data we have, is actually multiples in terms of volume of prior year June scatter for that period. So that's very encouraging. Pricing remains at a premium to upfront pricing. Categories of strength continue to be consumer goods, tech, pharma. The categories that are harder hit by the pandemic tend to continue to be the weaker ones. Like I said, in trend lines digital, that is improving week over week, and Pluto's right back on track to pre-COVID, which is awesome. Looking forward, Q3 options came in lower than we projected. So that was a good thing. And there was a bunch of retail news that was out this morning, which I think is a good omen for the future. Likewise, the local market, automotive is starting to pick up. Political dollars are starting to come in. So that market's starting to show some signs of life. And when I look outside the United States, in general, that continues to be in line with what we expected. We are seeing signs of life in the U.K., which obviously is an important market for us given the portfolio we have there, which includes Channel 5, and Australia as well. So some green shoots outside the U.S. as well as good trajectory in the U.S.

So first sort of virtual upfront has kicked off. Hopefully, it's going to be easier to get started than it was for me to get this presentation going. But how the upfront negotiations going? And what's the strategy for the company, this first sort of combined year with Viacom and CBS under one roof and one head sales chief?

Well, let's start where you ended there. So we fundamentally have -- we believe in the power of ViacomCBS. We brought our ad sales team together to have an integrated operation. Logistically, in terms of your question on the upfront, obviously, it's a bit different this year. It's virtual. But we are presenting as one ViacomCBS, and we're talking with agencies that way. We are able to present and transact virtually. And I feel very good about our ability to do both of them. Had many conversations, including this week, with Jo Ann Ross, who runs ad sales. So there's real engagement there. Now practically speaking, the upfront will probably start later and take longer, certainly relative to last year. And what we've told and continue to tell our agencies and their clients that we stand ready to do business when they are ready to do business. The reality is clients are in different states of readiness from a planning standpoint and an ability-to-commit perspective. I'm sure deals are going to be more staggered from a negotiating standpoint. Now it depends somewhat on the category. The wireless category, the food category, the personal care categories, tech category, they're all relatively healthy, and I think you'll see some action there. Travel, restaurants, entertainment, auto, retail, they're not ready to go yet. They're still kind of returning to business, et cetera. So we stand by and ready to move when they are ready to move. But as you think about that, you got to know that marketers will need media to drive their business. Advertising works. It brings people into stores. It gets people to transact. It raises awareness. And when you think of media, we have the #1 share on every demographic in linear. We have a strong and stable schedule on CBS with 23 returning shows, shows like NCIS, the #1 show on television; Young Sheldon, the #1 comedy on television; and 60 Minutes, the #1 news program. Advertisers know what they're buying when they're going to ViacomCBS. And that is not as true given some of the positions of the other networks. And by the way, we're talking about sports and return to golf. We saw exceptionally strong advertiser demand for our golf product, including from clients who have not traditionally been part of golf. So people know what they're getting when they go to us. They know it's premium product. They know it connects with consumers. They know we service a client. They know if we get -- if they get into issues, we can move stuff around. So we're ready. To the extent people who want to play in scatter because they can't commit to the upfront, they're going to pay a premium. Even in Q2, scatter continued to be at a premium to the upfront. And if the client wants to go in Q4 in scatter, they're going to pay a premium. So that is an incentive to transact. And I think as people -- as some people start moving, you will see other people follow. But again, we're happy to transact in any way they want. We love our programming slate on CBS. We love our programming slate across our linear networks. We're very excited about our Pluto product. So we're ready to go. And again, we're in the marketplace talking to people every day.

So distribution, and then we'll wrap up. I mean my guess is conversations with your pay TV partners have been changing a little bit since the merger. And can you give us any updates on the more recent distribution, renewals and negotiations? I certainly get a lot of questions from investors as to what's been going on.

So as I indicated when I started, distribution is an area where we've already started to see the power of the combination. You look at our Q1, it was very strong in terms of renewal activity. We did a deal with Comcast. We did a deal with Verizon. We added Viacom services to YouTube TV and renewed obviously CBS. All of these are examples of the power of the combination, and they're all interesting. If you look at the Comcast deal that we've done, they added CBS All Access, becoming the first MVPD to do so. In fact, we had already done a deal pre that deal where they added Pluto. Verizon, that's actually our first true cross-company MVPD portfolio deal. We're very happy with the economics. And the Pluto component is significant, including getting launched on Verizon Wireless, and they are a force in wireless, as you well know. So we're both very excited about that. And then there's YouTube TV. That's a huge win for us, where we add, obviously, 14 -- not obviously, but we're adding 14 Viacom services, including BET, Comedy Central, MTV and Nickelodeon. But it's also a win for them because as they look to their next leg of growth and the YouTube TV product has been growing nicely, they really needed to have the #1 portfolio of services in the country, and they will very shortly have that. The launch is imminent. We also did 2 reverse comp deals in the quarter with Nexstar and Meredith. Those continue to be important pieces of business. We're very happy with the economics. And so that also -- even though that is more traditional, call it, CBS legacy, important dealing, nonetheless. In all of these deals, we really do negotiate from a position of strength, again, given our share of viewership in television, given the strong momentum in streaming where, again, we're adding those kind of products to our partnership model as we broaden our relationships. And the fact that we're seeing increasing sign-up both in free and pay makes us more valuable to our partners. And by the way, since people always ask us this, our cable deals, our MVPD deals, yes, they continue to have built-in escalators as they did in the past, very importantly. So we feel great about the trajectory of our affiliate business for combined ViacomCBS. And I'd reiterate what I said on our Q1 earnings call. We expect to feel the impact of some modest incremental cord cutting in Q2, but we expect improvement in the back half of the year as we benefit from YouTube and other deals we negotiated this year, which either had incremental carriage or incremental rate. So feeling great about the work Ray Hopkins and his team is doing in the affiliate space. It really is an early and powerful proof point on the power of ViacomCBS, and I'm excited about the road ahead. So look, in closing, Doug, thanks for having me. It would be more fun to be sitting next to you as we usually do. But once we got the virtual thing going, it's going, and I think we're all living our life on Zoom calls these days. It's a strange, hopefully temporary reality. But in that temporary reality, it's a complicated world. With ViacomCBS is executing strongly, there's no question that this combination is powerful. We're starting to put those points on the table definitively. There are more to come. And we are absolutely committed to unlocking the value of these assets and the very significant opportunities that lie ahead for us.

Bob, look, thanks so much for doing this. Apologies for everyone listening in for the delay at the start. The replay is also available. A transcript will be available. Bob, thanks so much for your time today. Very interesting times.

All right, Doug. Stay well. Thanks for having me. Bye-bye.

Thank you.