Paramount Skydance Corporation (PARA) Earnings Call Transcript & Summary

Good afternoon and welcome to JPMorgan's TMC conference. For those of you who don't know me, I'm Alexia Quadrani, the media analyst here at JPMorgan. I'm thrilled to have Naveen Chopra, EVP and CFO of ViacomCBS here with us today. Thank you so much, Naveen, for joining us.

Thanks for having us, Alexia. We're happy to be here.

I think we'll kick it off by -- I'll just start of asking some questions that I have here. But I do want to remind the folks in the audience that if you do look on the digital book, there is a place to put in questions, if you like, and I'll kind of go back and forth and check it throughout this session. So you do submit some questions, I'll be sure to ask them. But I guess we have to kick it off kind of with the recent announcement we heard last week, Naveen. I'm curious about given the recent announcement of the planned consolidation in the media world that we heard early last week, I guess, how do you see it impacting your competitive positioning, if at all? And I guess, would you see more consolidation ahead?

Yes. Thanks, Alexia. We continue to really like our competitive position. As you well know, we've had tremendous momentum in streaming of late. We finished Q1 with 36 million streaming subscribers, 50 million Pluto TV MAUs, streaming revenue growing at 65% year-over-year with an expectation of further acceleration beyond that. I think that momentum is really a validation. Thanks for having our strategy and the unique assets that we bring to the streaming equation.What do I mean by that? Well, I think it really comes down to 4 key things. Number one, we are one of the largest producers of content in the world and we're proven hitmakers. What do you think about Paramount? What do you think about Paramount? What do you think about CBS Studios, Showtime, Nickelodeon, MTV? We have incredible creative breadth and we're harnessing that to be able to do things like put 36 new originals on Paramount+ this year going to 50 next year. So we also then have a second component, which is a very broad, valuable and deep library of intellectual property. We're talking 140,000 episodes of television, over 3,600 film titles, and we can use all of that to feed our streaming ecosystem. And I'd point out, by the way, that I think that combination of deep valuable library and scale production capability is sort of the magic combination, and it's one that is becoming increasingly rare in our industry today. So we take those 2 components, and we layer on extensive global distribution relationships with distributors of many different shapes and sizes around the globe. That includes MVPDS, streaming platforms, connected TVs and the like. And then we also have -- and I think this very important, the financial scale to invest in the development of new content. As you know, we spend around $50 billion a year on content today, and we're operating with net leverage of 2.2x. That balance sheet gives us tremendous flexibility when it comes to investing in new content. And I'd point out, that's before the incorporation of additional cash that will come in upon the sale of Simon & Schuster later this year and other asset sales that we will do in the future, like the sale of the Black Rock building. So whether do you think about it in terms of production scale, whether you think about it in terms of breadth of content library, whether you think about it in terms of distribution, financial capacity, we really like our competitive position. We think we've got the ability to really scale our streaming efforts. And we had all of those things 8 days ago before the water discovery deal was announced, and we still have them today. So we feel good about that. And specifically to the part of your question around consolidation, I'd say that from our perspective, there aren't any must do deals. That being said, as we've done in the past, I do think we'll continue to be opportunistic, particularly when we see deals that can augment our organic streaming growth strategy. The Miramax deal, a great example of this. That's where we had an opportunity to acquire control of a valuable catalog of content at a very attractive price. And I think we'll continue to look for those kinds of opportunities going forward.

So it doesn't sound from your answer that you need to do any other deals at more, you'll just look on opportunistic as you always have been, nothing's really changed on that front.

I think that's correct.

And then, I guess, given your strong financial position you just highlighted and your strong balance sheet, I guess, does this combination maybe change your strategy at all in the sense you're more likely to invest maybe more aggressively in content, build up, that content expansion at a faster pace. Are we focused more of your content to the streaming platform versus third-party sales next year before you see the sort of the new launch of the new discovery?

Well, the reality is we were doing all that anyway. So the transaction itself doesn't really change anything about our strategy. We've been very focused on streaming growth. We've been very focused on transitioning our assets to help drive streaming, and we're going to continue to do that. I think we're actually making some noticeable progress in that regard. I mean, I mentioned, obviously, some of the growth in streaming itself. But when you think about even the broader transition of our business, I expect that streaming revenue will actually comprise close to 15% of the total revenue of ViacomCBS this year, which perhaps with the exception of Disney, I think, puts us ahead of almost all of our media peers in terms of that composition of revenue moving in the direction of streaming. So we're deep into that plan, and we'll continue to execute against it.

And I think you've said this on your past earnings call, but I just wanted to clarify it, that the plan is to continue to sell less and less to third parties and invest more and more in terms of your content production internally. Is that fair?

Broad strokes, yes. I mean, we will continue to be in the content licensing business. There's a number of reasons why there are components of it that, frankly, are sort of orthogonal to what we do in streaming. There are parts of it that actually support what we do in streaming in terms of helping build awareness and audience. And then there's certain content that we make that just isn't well-placed on our streaming services, and so we can monetize that in other way. So that will continue to happen.

Okay. And I guess turning to your recent Q1 results, you posted earlier this month with record subscriber growth across your streaming platforms. Can you talk about the launch of Paramount+ and its rebrand from CBS All Access and the early success you've seen there?

Yes. Well, we're -- I think our strategy of continuing to pivot our assets and resources to support streaming is working, and that's evidenced by the early returns we've seen from Paramount+. We noted when we announced our Q1 results that we added 6 million streaming subscribers in the quarter. The significant majority of those were from Paramount+ and the significant majority of those Paramount+ subscribers came from the domestic market. Those -- that growth was obviously a component of the revenue growth that we saw, the 65% streaming revenue growth. Streaming subscription growth was actually higher than that at 69% in the quarter. So that's all proceeding well. We're also seeing some very positive engagement trends in the first few months of Paramount+ which I think has been enabled by the fact that we're now bringing the full breadth of ViacomCBS and Paramount into the service. We pointed out that in March, as one example, over half of the total engagement that we saw from subscribers came from the combination of Paramount, original content and cable network content as opposed to content from the CBS network fee, which historically was the primary driver behind CBS All Access. But now, as you see, our content portfolio expand. More originals come into the service. Obviously, that composition will continue to evolve. So we like that. We've seen some great improvements in the demographics of our user base. Average age of new subscribers actually declined by 6 years in Q1, reflective of the power of content like a lot of the kids content that we brought to Paramount+ content from MTV and also soccer, which is a big focus area for us and obviously has very attractive demographics. We also saw some very positive trends around conversion from free to pay and also churn. Those metrics improved in April, both on a sequential basis and on a year-over-year basis. So we like that. And all of those metrics that we're seeing is part of why we're bullish about our expectations for next quarter. We do expect streaming revenue to -- revenue growth, excuse me, to accelerate in Q2 versus Q1, not just total streaming revenue, but advertising -- streaming advertising revenue will accelerate, streaming. Subscription revenue will accelerate so that's all, as I said, very encouraging. And at the same time, our traditional businesses continue to execute well. We expect some acceleration in affiliate revenue and as we said previously, in advertising, Q2 looks like we should have another quarter of strong double-digit growth. So early signs are very good, both on Paramount+ and what we've been able to do with other parts of the business in parallel.

And just staying on the SVOD side for a minute. The competition is obviously really increasing every day. I'm curious how you see the biggest differentiator of Paramount+. You mentioned some highlights already, but how does it really differentiate self versus its peers? And sort of generally, would love your perspective in terms of how many streaming services do you expect the average household to subscribe to and how you see kind of Paramount+ kind of fitting into that mix?

Yes. I mean, part of our excitement for Paramount+, quite frankly, is the fact that the global TAM for streaming is growing very robustly. In the United States, for example, when it comes to that question of how many subscribers -- how many services is the average household willing to subscribe to, we've seen the appetite from consumers continue to grow over a multiyear period. I mean a few years ago, it was 1 or 2 paid subscriptions and then people were asking well, "They're ever going to get to 3 and it got to 2 to 3 in 2019." Now it's easily somewhere between 3 and 4, and I think, trending toward 5%. So we think we're very well-positioned to be one of those services. We described Paramount+ as live sports news and a mountain of entertainment. Some of those categories, we don't think have been well served by existing streaming services. And now we have the ability to bring things like live NFL games, soccer, PG8 Golf to a streaming subscriber base. So we think that will be a real differentiator. And on the entertainment side, we have real strength in things like Kids content, unscripted content and obviously now, a rapidly growing portfolio of scripted originals as well. So we think that combination will be a differentiator. We are also very focused on leveraging our strength in international because that's where we have a wealth of local content and a lot of formats that we've been able to export from the U.S. and localized very efficiently and very effectively. So we think Paramount+ will not only be compelling to customers here in the United States, but we think it will be very compelling to folks outside the U.S. as well. And obviously, that's a big part of the broader streaming opportunity.

I guess, in terms of content on Paramount+, I guess, what details about what's coming? And I guess, what are you most excited about?

A lot, I guess, to put it shortly. But let me hit some of the highlights for you because there are some interesting things coming both very soon and then over the course of the year as well. In the immediate future, we've got the Champions League Final, coming to Paramount+ on May 29. I think that's going to be a big event to, obviously, Superstar teams there with Chelsea and Man City playing. Also this week, the reboot that we're doing of Rugrats, the beloved kids show, we'll be hitting the service. And then our new iCarly, also a very, very successful show. Historically, we'll be coming to Paramount+, along with a PAW Patrol live musical in June and new seasons of The Good Fight in Why Women Kill. And then in the scripted side, you may have seen that we recently announced that the next season of Evil will be coming to Paramount+. For those who are not familiar with it. Evil is a really fun show, it was a Top 10 series, I should say, Season 1 was a Top 10 series on Netflix. And now, Season 2 is going to be available exclusively on Paramount+ starting in June. So we're excited about all of that. And then moving into the summer, we'll be firing up our mountain of movies. Starting with the addition of 2,500 library movies coming to Paramount+, including big hits like The Avengers and Skyfall. And then in June, Infinite, which is a Mark Wahlberg sci-fi driller, big theatrical quality movie will premiere exclusively on Paramount+. That will be followed in July with A Quiet Place II, which will come to Paramount+ after its 45-day theatrical run. That will hit the theaters this weekend, which, by the way, we're very excited about. It's a great movie. The reviews have been really, really positive. I think it's going 91% on Rotten Tomatoes. And I'll tell you, if there ever was a movie that would make you want to go back to a theater, this is definitely one of them. It's going to be really cool. And then the next movie that we'll bring to Paramount+ will be the PAW Patrol Movie. So we think there's obviously a group of kids that are going to be eagerly awaiting that. And then later in the year, we start to get NFL Football and FCC Football back. Those have historically been big drivers for Paramount+, and you'll also then see some of our new scripted originals starting to arrive, including Y: 1883, which is the spin-off from Yellowstone, which, as you know, has been a very, very big show. We'll also be launching another new show from Taylor Sheridan, the creator of Yellowstone. That show will be named the Mayor of Kingstown. And then we're going to bring the next season of SEAL Team, which has been a very successful show on CBS to Paramount+. It's going to get a suspense-fill send off from CBS, so we'll kind of build that up. And then the rest of the season will be on Paramount+. So lots of big stuff coming. There'll be more on reality as well. I think we have what is easily one of the most compelling reality slates out there. So new seasons of Big Brother, The Love Island After Show, the return Behind the Music, that will all be coming to the service. And then new made for Paramount+ films also starting to ramp up. Our goal is to get to a new movie a week at some point in 2022. And so that will start to happen later this year as well. So a lot to come, a lot to get excited about, and I think that's going to be exciting for a lot of our customers as well.

All right. And I believe you're planning to launch the ad-supported tier Paramount+ in June for $4.99 a month, which I think is $1 a month lower than the current ad-supported offering from CBS All Access. I guess, how do you see the ad-supported to your position and the position of the marketplace?

That's right. So we're going to be launching our $4.99 service in June. It's going to be called our Essential Plan and then our $9.99 service will be called our Premium Plan. The Essential Plan, as you said, is ad-supported. We're excited about that, both because it will obviously expand the addressable market for Paramount+, given what we know about consumer elasticity. But it also has a couple of other benefits for us that are really important. Number one, because it's an ad-supported service, it greatly expands the volume of digital video advertising inventory that we have to sell and package as part of our broader IQ platform. We are very bullish about those businesses, digital video inventory, particularly high-quality, full episode viewing continues to be in high demand. And that's going to be one of the things that we think puts us in a position to generate ARPUs with the essential plan that could, over time, grow to exceed the premium plan, which does not get the benefit of significant advertising revenue. So strategically, we think that's a great growth opportunity. The other big benefit that the Essential Plan gives us is the opportunity to more creatively bundle and package and promote Paramount+ with a variety of different distribution and marketing partners. Obviously, by having a less expensive service, we just get more flexibility to do that. So that will be a part of our plan going forward as well.

Outside of the U.S., you've launched Paramount Plus in Latin America, Canada, the Nordics, I believe. You stated you're launching in Australia, I think in August 11. I guess, which -- think about the markets that present the most, the biggest opportunity as you ramp to 45 markets by the end of '22?

Yes. Well, there's really 2 big initiatives that we have internationally. You mentioned one of them, which is market expansion and rolling out markets. And then we have a second one, which is really about our optimizing on our global content portfolio. So let me tell you a little bit about both. In terms of market expansion, we're very focused on prioritizing markets where we have 3 important ingredients. Number one is content availability. So we look at markets where we can leverage our global production capabilities to get that right mix of local and global content. We have, in various markets, combinations of broadcast television assets, local studio capabilities, cable network content, and we're always looking for ways to package those things into a very powerful offering. So places where we can do that, obviously, rise to the top of our list, and it allows us to do things like create local versions of U.S. formats. We also have Showtime content outside the United States that we incorporate into Paramount+. Obviously, in the U.S., Showtime operates as an independent service. So we like markets where we can bring things like Dexter, Billions, Black Monday and incorporate them into Paramount+. That's what we've done in the Nordics. It's what we've done in Lat Am. And Showtime content will be part of our launch in Australia in August. So content availability, critical ingredient. We also look for markets where we have on the ground international presence. That's very important in terms of not only having local market knowledge, but being able to execute the marketing and the customer acquisition programs that we need in place in order to grow quickly. And then we also prioritize markets where we have distribution partnerships. And those can take a number of different forms. But in general, we are a big fan of those relationships because they allow us to grow more quickly. They lower the cost of acquiring subscribers. And in many cases, we actually get stickier subscribers through those types of relationships. And so we can get a nice combination of both true direct-to-consumer and then customers that we address through a distribution partner. So those are sort of the ingredients that we look for, and it's how we thought about not only the markets we've launched to date, but then how we'll be ramping to 45 markets by the end of '22. And then just a quick one on the second initiative that I mentioned because it is very important to our overall global strategy is this idea of optimizing our content. And we do that by, number one, leveraging key formats across multiple markets. So a great example is something like Jersey Shore, which has an Acapulco Shore in Mexico, which is one of the most popular shows on Paramount+ in that market. We want to find more ways to do things like that because it's an extremely efficient and effective way of attracting an audience around the globe. We're also starting to use content from local markets on a global scale. So taking content out of some of our Latin American ] as an example, and bringing it to the U.S. market. That's something you've seen Netflix start to have some success with. As it's clear, I think the U.S. audience and audiences in places like the U.K., Australia, et cetera, really does have an interest in some of the great content that's coming out of those markets. And then we're also looking to just move how we -- or I should say evolve, how and where we produce content to leverage our international presence more effectively. There is significant cost advantages to doing that, all of which ultimately allows us to produce more content, attract more subscribers and drive more growth in our streaming efforts.

Just turning to, I guess, FAST or AVOD. Pluto TV has substantially grown its base of MAUs. You touched on in the beginning to nearly $50 million last quarter. I think you've said in the past that the revenue of Pluto has more than doubled for the third consecutive quarter. I guess with such great growth, any color on how you view the longer-term advertising opportunity for Pluto?

Yes. Look, I think it's fair to say that Pluto has blown away everyone's expectations. We had big ambitions for it. And I think we're now taking those up a notch. And part of that is because the fast industry itself, the free ad-supported streaming television market is growing very quickly. Some of the data we've seen suggests that, that could be a $50 billion or larger market in the next 4 years, as an example. Pluto is already the leader in that market and continues to have some great momentum. That momentum is being driven by MAU growth. We're at around 50 million MAUs now. That's grown substantially. And looking forward, we see more potential for MAU growth, albeit probably skewing more internationally now versus domestic but that will still be valuable in the long run. We see growth in engagement as consumers are getting more familiar with the service, and we've been able to increase the breadth and quality of content that is available through Pluto TV. And then we've had great success with monetization, whether you think about sell-through, pricing, we have been able to continue to grow and evolve. Sell-through was up 600 basis points in Q1 and the type of inventory that we're selling on connected TVs is some of the most valuable inventory out there. So we feel really good about what's been happening on the monetization side. And we're excited about the opportunity to take the success we've had around monetization, primarily in the United States and extend it to the international market as the base of MAU starts to grow internationally and those markets evolve. So we're in a really good spot with Pluto, and I think it's going to continue to be a big part of our overall streaming ecosystem.

Before we segue to some questions on the traditional side of your business, I just want to dig deeper on a comment I think you made on the Q1 earnings call related to the long-term opportunity for streaming ARPU. I guess how do you think about the opportunity and subscription ARPU relative to advertising? And how does it compare with the linear?

Yes. Well, I think the point we were trying to communicate there was that, first and foremost, we think streaming ARPUs have a very compelling long-term trajectory and a more compelling long-term trajectory than linear, where obviously, there are changes in consumer behavior that are putting pressure on that part of the model. And within streaming, there's a subscription component where we expect ARPU to continue to grow as the mix of our subscriber plans evolve, mix of distribution channels evolve and as pricing evolves to reflect the growth in the value proposition that we can offer to customers. And then on the advertising component, there's significant upside in what we can generate in terms of advertising ARPU as engagement continues to grow as we improve modernization, as we develop new ad formats, and we continue to optimize ad load, sell-through, et cetera. So we're -- we think both of the components of streaming ARPU can grow. And just to give you some sense of where we think that can go. I think some people may not be aware of the fact that in Q1, for example, blended domestic ARPU for our paid Paramount+ subscribers was close to $9. So we think that's a pretty exciting place to be and then to be able to grow from there is a big part of the reason that we think this business can ultimately be more attractive than linear. And when we think about that comparison, we're sort of already there in the international marketplace where the per sub economics for streaming in some cases are a multiple of what we can generate in linear, in part, because pay television economics are just different in those markets. It also has the benefit of a much larger TAM in streaming than in linear, where, historically, for us, linear distribution outside the United States was limited by the scope of the pay television universe and wherever we had a broadcast presence. But streaming, we can go everywhere. We can get to virtually every customer so we like that. But domestically, we're not quite there yet. Linear ARPUs are still higher than streaming. But as I said, given what we think can happen on both the subscription and advertising component, we do think that, that can flip. They're probably not as different as many people suspect. And I think over time, streaming will be accretive relative to all linear subscriber.

I want to jump to your theatrical slate, which looks amazing. You touched on a little bit earlier, I'm actually very excited for A Quiet Place II, already bought my tickets for Thursday night. I've heard great things. But I wanted to ask you about the windows in general. You noted this movie has a shorter theatrical window, I think, at 45 days. I guess, how are you deciding on the length of theatrical windows for your releases ahead?

Yes. Well, we're excited about Quiet Place II also. So glad to hear you'll be seeing that with us. We're going to launch it on 7,000 screens, and I think it's going to be in about 11 markets internationally, with more to follow as the cove situation improves there. We are seeing some very compelling evidence-based on the research that we do that customers are ready to come back to theaters. But the fact is that model is changing and consumers, many of them really enjoying movies in theaters, but there are also consumers who clearly prefer to consume content through a streaming service. And I think that's the reason why we have developed the approach that we have because we think the theatrical window does remain valuable both to consumers and content creators. But given what's happening in streaming, that short of theatrical window is likely here to stay. And so we've tried to develop a strategy that preserves the vast majority of the value of the theatrical window, but also gives us the ability to have fresh, big movies coming to Paramount+ on a regular basis. So we're obviously trying to balance those interests. And I think the way we're approaching it is a more sustainable model than saying we're going to go all in, in one direction or the other. And I think that's probably being proven by the fact that a number of other studios are starting to adopt some similar models. So I think it's the right balance based on how we're seeing the market evolve right now.

We only have a couple of minutes left. I want to ask you about your upfront presentation you recently hosted. I think it was last week. Can you provide an update on how advertising is trending? And I guess, what the initial reception was from advertisers for your broad content offering?

Yes. Initial reception from upfront has been very positive. We did our upfront presentation last week. As you would expect, our message was very focused on the aggregated scale that we can offer advertisers across multiple platforms, which ultimately translates to very unique reach in terms of premium, high engagement, brand-safe environments across both linear and digital platforms. So IQ was a big part of that strategy. Paramount+ and Pluto TV or sort of the cornerstones of IQ for those who aren't familiar with it, IQ is our digital video advertising platform. That now reaches 60 million full episode monthly unique users. So it's one of the largest domestic media platforms out there. So that, as I said, the response was very positive. We are optimistic, although it's still early in the process. That upfront pricing will be very strong. As you know, linear impressions remain in very tight supply. Scatter premiums are at record levels. And the combination of those 2 things, I think, is a good indication that both broadcast and cable CPM increases could set new watermarks this year. And advertising demand generally remains very high. The economy is obviously coming out of COVID. The overall health of the ad market seems to improve. And we think we're well-positioned to take advantage of that. We have a very stable broadcast schedule this year, which is helpful for advertisers. We have a very diverse audience, which they like. And obviously, our sports properties are kind of a must buy for many advertisers. I'd note that our NFL schedule this year, by the way, I think, is going to be one of the strongest we've had in many years. So that portfolio allows us to partner very closely with our advertisers, with our clients and to think about how to optimize for the reach that they want to achieve with linear and the audiences that they want to capture as they move between linear and digital. So we're excited about everything we're seeing there. It's one of the reasons, as I said earlier, that we're expecting double-digit advertising growth in Q2 as well.

All right. Well, we are out of time. Thank you so much, today, and I really appreciate it. This has been very helpful, and we really appreciate your time and your insights.

It's our pleasure. Thanks for having us, Alexia. Take care.