Paramount Skydance Corporation (PARA) Earnings Call Transcript & Summary

All right. Good morning. So I am Doug Mitchelson Credit Suisse's media and cable satellite and wireless analyst. Very pleased to have with us here today, Bob Bakish Chief Executive Officer of Paramount Global for our second keynote presentation. It's be a fireside chat format with Bob, and my questions are likely to run the full time. But just in case we -- if by chance do have some time remaining, feel free to email me questions if you like. So Bob, we saw some disclosures up on the screen. Welcome. Thank you very much for coming. I'm not sure if there's any more disclosure commentary.

Well, I don't think there's disclosures commentary per se. It's great to be here.

All right. Great. Thanks again. So look, I mean the February end's Analyst Day feels like a lifetime ago, Bob. Why don't we start with the state of the union? How is Paramount positioned? And how do you believe the management team can create value from here?

Yes. So Doug, look, as I shared with you in the past, all our positioning is unique and differentiated. We're really the only major media company with a scale broadcast, cable, pay streaming, free streaming and theatrical offering. And the truth is we have momentum across all those businesses. We start with our TV media segment. We have the #1 broadcast network. We have a leading cable network portfolio and those deliver a broad range of popular content that consumers love. And that, I'm talking about FBI, I'm talking about the NFL, I'm talking about Yellowstone. And there's real resiliency in that business where price increases and cost optimization really offset -- largely offset ecosystem declines. And then there's our theatrical business. That's a market that is strengthening. And again, one where we have real momentum. All 5 films that Paramount Pictures released this year opened at #1. And that, of course, includes the incredible success of Top Gun: Maverick. And I'd note that all of those titles, the First War already will be available on Paramount+. And speak with apparels, Finally, in the streaming segment, our third segment, is another area where we have real momentum in the business. Our position as a diversified media business fundamentally improves the unit economics of streaming for Paramount+ and our other D2C products, streaming clearly benefits from our broad popular content offering, which serves the whole household, both for Paramount+ and for Pluto TV. We, of course, benefit from a dual revenue stream model, enabling lower-cost consumer entry points. That broadens the TAM and it's probably helpful during times of slower economic growth. And finally, we're global. We're a truly global operating company and our international presence adds a lot to our streaming execution. So look, all those segments create value on a stand-alone basis and really the combination benefits from synergies. So I think we're very well positioned for today's marketplace.

All right. So let's dig in. I mean, streaming is obviously in focus. So twice in the last 2 years, you've taken upstreaming investment guidance. You're now, I think, guiding to $6 billion plus in 2024 content spending. Can you walk us through the dynamics driving the more aggressive posture and streaming? And then I'd just be interested in any reflections you might have on the streaming news flow since your Analyst Day and whether or not that's been influencing your strategy and how flexible that strategy might be?

Well, look, our streaming approach, by the way, as with entertainment in general, all starts with content. Our content investments are critical to building our company for their streaming future, and they really support our long-term revenue growth and subscriber plans. An advantage that we have is that a lot of our content investments do double duty. They work across platforms and that drives enhanced ROI for us. If you just look in recent times, a few examples, Lost City, the rom-com that we released theatrically, played on theatrical and is currently playing on Paramount+. The NCIS a show on CBS, again a broadcast TV, also on Paramount+, the Yellowstone franchise on cable TV, also on Paramount+ I could go on. But what I'd say is that shared approach has proven superior for us to a single platform strategy. And -- because when you have a single platform strategy, you focus all your spending on a lot of your spending on exclusive scripted originals only for that platform, we're able to spread it. And we see tremendous benefits in that. And it gives us the confidence to continue to strategically invest in streaming given the benefits we're seeing across the business. In terms of our level of streaming investment that you asked in your question, we remain committed to the plan we laid out at Investor Day. Yes, there have been developments in the market. No, they have not impacted our strategy. We anticipate increased investment in D2C content spend in '22 and in '23, after which the growth rate of B2C content expense will slow. And it's important to note that the revenue side of this thing is really on fire. It will grow from slightly over $3 billion in '21 to over $9 billion in 2024, and we're very much on track for that. So make no mistake, we're excited about our streaming business. We believe it represents an extraordinary value creation opportunity for Paramount, and we're confident in our ability to execute and deliver on that plan.

So that leads right into a question on content. I'm just curious, Bob, because I feel like content development production for Paramount has shifted a lot the last couple of years. And I think you've made a lot of management changes. You're focusing more on in-house and on content that works for streaming as well as these other platforms. Of course, the market shifted, pandemic, maybe Netflix has cleaned off a little bit in some of their Hollywood focus. Any reflections or learnings across either production of content or quality of content as you sort of think about these last couple of years and all the changes you've made?

So look, Doug, the Paramount content engine is really firing on all cylinders, and it's the quality and diversity of the popular content that we create that sets us apart from the competition. It sets us apart in linear television and bill and streaming. So look at theatrical, as I said, we're the only U.S. studio, Paramount Pictures, to have 5 films open at #1 in the box office this year, and that of course is, Scream, Jackass Forever, Lost City, Sonic 2 and Top Gun: Maverick. And as I said, the first 4 of those are on Paramount+ today, used our 45-day fast-follow model. And Top Gun: Maverick will get there. In television, we break through in broadcast and in cable. That starts, of course, with CBS. The U.S. is #1 network yet again. We have fan favorites like dose like NCIS, like FBI, the power broadcast ratings and broadcast advertising revenue, but they're also among the strongest performers on Paramount+. So again, that dual duty point. And by the way, we have a lot of events, too, like the GRAMMYs, we had Harry & Meghan last year. We had Adele: One Night Only. All those were great on CBS broadcast and also come over to Paramount. Then there's our cable networks. As you know, Nickelodeon, leader in kids and family; Cindy Central, South Park and more; MTV reality and music, really a [indiscernible] in the space; Showtime, hits like Dexter, like Billions and more; and of course, Yellowstone, the most watched show on cable TV. So a lot going on there with popular content. And then they're streaming, which is what everyone wants to talk about. All the platforms I just referenced feed our streaming efforts, including with their library. And now -- as you know, our library is massive. And when you add to that, new original series like the Yellowstone spin-offs that's powered by our relationship with Taylor Sheridan. He's a really prolific writer and producer of programming. That brought us 1883. That will bring us 1932, which is the next era, if you will, of Yellowstone. And also a cool show Tulsa King, which I'll come back to you in a second. It brings -- you look at the franchise space. We've launched a challenge world championship, leveraging what's going on in broadcast and then bringing it to Paramount+. And we're also doing more sports there on Paramount+, including internationally. It's important to note that across almost every category we're really leaning into franchises. I like franchises, example, Sonic, we had the first movie that brought the second movie. We have a series on the way for Paramount+, very exciting Star Trek. I think you know the Star Trek story. We just experienced again with Strange New Worlds, which is off to the fastest start from a viewership perspective of any Star Trek season to date. South Park, you know we bought special movies, multiple movies per year to Paramount+, which coincidentally one is tied to The Streaming Wars, that will be available this month. We got Beavis and Butt-Head special coming in June and the Alien series later. I can go on and on. But what you hear here is franchise, franchise, franchise. We really like them, and we have depth of opportunity in that space that we're executing against. And lastly, remember, we're global. We have more than a dozen studios creating compelling original content around the world that has advantages in diversity of ideas and in factor cost for production. So that's a real hallmark of the company. all of this feeds into our broad and diverse really irreplaceable content library. Now before we go any further since hey, we're in the entertainment business, I thought I'd show you a clip from Tulsa King. This is a new show from Taylor Sheridan that we're making for Paramount+. It's the first series that Sly Stallone has ever done. And I think you'll see from this clip why I'm so excited about it. Play the clip. [Presentation]

I -- one can't wait. I mean you can think of almost like a new incarnation of Sopranos. And again, Sly first episodic TV series and it's great. I think it's going to be a lot of fun. So that will come this fall to Paramount+.

You talked about television a lot and filmed and obviously, Top Gun: Maverick quite the success. How does the film slate look 2023, '24? Are we going through this an unusually strong period for Paramount as there's always volatility in the film business? Or do you think the slate continues from strength to strength?

Well, I'd say -- I wouldn't say quite to success. I was a huge success. I mean, we knew this film would be great, but it has been a complete home run in so many ways for our company. It set the record for the biggest Memorial Day weekend ever. It's Tom Cruise's biggest opening ever. It's done about $0.75 billion worldwide and still going. And it's already actually driven engaging on P+ because we put the original Top Gun there. And that was one of the most watched titles on our service this month. And in fact, it was the #3 acquisition driver this week. So franchise again. In terms of the overall slate '22, as I said, we remain committed to theatrical. We held some movies. We have more than one and a lot of movies, waiting for a better time. '22 brought a better time and we've got 5 #1 date. We feel really good about that. The rest of '22 is a little lighter in volume. We got an animated comedy coming Paws of Fury: The Legend of Hank. We've got another great horror film Smile, and we've got Damien Chazelle's highly anticipated Babylon, which stars Brad Pitt and Margot Robbie. That will be in the holiday season, and I think it will create a lot of noise. More to come in '23 and '24, the slates really look excellent. We've got existing franchises that we're using. We've got another Scream, and other Mission Impossible and other Turtles at this time with Seth Rogen, we've got another A Quiet Place, we've got a PAW Patrol, we've got Star Trek. We got Transformers. We had a new one that we -- new one to us and Smurfs. And then we've got some original stuff going on like a Dungeons & Dragons film. We got a new franchise If by John Krasinski, starting Ryan Reynolds. We got Bob Marley biopic. And look, I'm tremendously excited. I think this is setting up to be a great era for Paramount Pictures, and it's great to see it firing on all cylinders.

Of course. I think certainly, one of the areas investors have asked you about and focused on is how do we add up all of this content spending across the company, some cross currents between investing in streaming and how you manage linear for profitability. So over the next few years, how do we think about company content spend in total? And you've got some inflation impacts in content production costs, maybe you just need more volume to manage churn levels on streaming? How should we think about it?

Well, look, in '21, our content investment was about $15 billion. So that puts us in the big boys club, if you will. Looking forward that number will continue to grow. That growth will be moderated by sharing and remixing some of that with streaming investment. I talked earlier about the benefits of running multiple platforms and the benefit shows up on the content side as well. We haven't guided on content spend in specific. But I'll say that we do expect total company content spend to grow at a much lower rate than direct-to-consumer, given that we are doing some remixing and we are managing linear and legacy side for where they are in the cycle. And importantly, again, we can spread content amortization across platforms. for a large portion of our slate. And by that slate, I mean both our television and our film. And that really drives attractive financial returns against our content investment. In terms of content cost in general, Again, we are very conscious of ROI on content spend, and that's true on the direct consumer side, but it's also true on the linear side. Of course, we are investing for growth. in a strategic way. But simultaneously, we're enhancing our we see and, in fact, are executing on opportunities to enhance cost management leaning into franchises, believe it or not, that helps with cost management because you have a higher probability of success. We are increasingly leaning into our global production capabilities not only for diversity ideas, but also for advantaged economics. We're evolving our mix, leaning a little more to unscripted and some of the linear sides on TV media. We're using more formats than ever. That's taking a show that you know works and creating an international or many international specific versions and of course, windowing. So a range of tactics designed to achieve tighter cost management as we continue to invest in content, which is really the foundation of everything that we do.

All right. Understood. And I want to continue on talking about inflation a little bit more broadly for the company. Any macro -- has any of the macro backdrop impacted any of your revenue streams and how you think managing your business through this uncertain environment, particularly any inflation impacts as of now?

Yes. So look, inflation is obviously very top of mind for consumers and for businesses alike these days. I'd say a couple of things. One, we believe the diversity of our business. Again, this composition broadcast, cable, theatrical, streaming, et cetera is a relative advantage in periods of high inflation. I'd also point out that historically, entertainment, including streaming and theatrical entertainment has fared well when consumer confidence can be a little soft since it provides a great value for consumers trying to avoid high-cost other ways -- other areas. Advertising, yes, it does have exposure, for sure, to the economy and to inflation, and it's a little choppy at the moment. But our best-in-class offering, which really combines those platforms in a turnkey way and adds creative capabilities and really world popular content will help maximize share for us in this time. On the cost side, the primary impact is production. But the reality is the production impact has primarily been talent, and that has already happened. So talent inflation, if you will, has front run regular inflation. And so we're managing that and again, leaning into the tools that I mentioned earlier. But net-net, the construction of our company is quite sound for inflationary time, and we're going to manage to it and maximize share.

All right. Makes sense. And on the advertising side, let's just talk through that a little bit. Any macro-related slowdowns in advertising that you've been able to tease out and I was the upfront going or did it go? I thought it might be closed out by this conference, but it seems not quite. And we've heard buyers in the high-single digits and some of the sellers, high single, below doubles. So I'd be curious where Paramount Global selling out? And any comments on political for this fall, which looks like it will be pretty big?

Yes. A lot in there. So look, the market, in general, visibility is mixed. And there are some challenges in it, given the economic headwinds. That's true. We are seeing some categories that are affected by things like supply chain and inflation. But we're also seeing some categories that are doing well, quite frankly, travel, movies, sports. And you mentioned political that will certainly be a huge plus in the second half of the year. There's a lot going on in the political environment that will feed the need for advertising. So we're quite happy about that. On the upfront, we had our event last month. As you know, it was really an excellent presentation. We brought the whole company together on a turnkey basis for clients and presented it in a very short, only about an hour and 15 minutes and a comprehensive turnkey way for our clients. It really showcased our content slate, which, as you know, and we spoke about earlier includes a plethora of #1s, great stuff for people to be part of. We also showcased IQ, which is our turnkey product for delivering digital reach, which combines Pluto TV and Paramount TV and some of our other video assets. With that combination, again, this combination of linear, number ones and streaming, including the #1 fast service in the U.S. with Pluto TV. We're well positioned to take share. As your question on where the upfront is, we're very pleased with what we've seen on the agency side. We have real engagement. It speaks to the power of our portfolio and how we've approached the market, quite frankly. We're about 80% to 90% done at this point. So not totally done, but almost there, pricing, look, I take broadcast we're in high singles. Interesting, we're high signals for cable, too. Historically, cable has lagged broadcast, tucked in under it. We're delivering high singles on both, and that's a reflection of the quality of our product, but also the way we're bringing to market. Digital is really a volume play. And actually, our volume is up materially. And I think it's driven by some of our competition doing some things that are probably too aggressive on the linear pricing side because we've seen agencies add digital volume as the upfront has gone on. So I'm very happy with that. So that the market is a little tough for sure, but the upfront is progressing very well. We're pleased with the outcome, and I think you will see us do very well on share coming out of this.

And I think when you mentioned volume up materially, I think you were specifically talking about digital. Should we think about the overall up as well?

You should think about the overall -- that will be...

For Paramount across...