Q4 2019 Earnings Call
Good day, everyone and welcome to the Viacom Conference call today's call is being recorded at this time I'd like to turn the call over to senior Vice President Investor Relations and Treasurer Mr., Jim Bombay see please go ahead, Sir good morning, everyone. Thank you for taking the time to join us for September quarter, and full year fiscal 2019.
Earnings call.
Joining me for today's discussion, our Bob Bakish, our president and CEO and Wade Davis, our Chief Financial Officer.
Please note that in addition to our press release, we have trending schedules containing supplemental information available on our website.
We also have an accompanying slide presentation that you can follow along with our remarks.
I want to refer you to the second slide in the presentation I remind you that certain statements made on this call are forward looking statements involve risks and uncertainties.
These risks and uncertainties are discussed in more detail in our filings with the FCC.
Today's remarks, we'll focus on adjusted results.
Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website.
Before we begin I want to know that due to the pending merger with CBS , we will not be providing forward looking guidance for Viacom on today's call.
During the February 2020 called for by comps yet we should be the first call for the combined company, who will provide full year 2020 guidance now I'll turn the call over to Bob.
Good morning, and thank you for joining US Q4 was a strong quarter.
Wrapping up a strong and pivotal year, one more viacom deliberate on the ambitious plan, we set out at the beginning of fiscal my team strengthening and growing the business for today, while accelerating the company's transformation for the future.
Let me start off with a few of the headlines.
As promised we were turned paramount to for your profitability, we delivered full year growth in domestic AD sales and affiliate sales. We grew international media Networks' revenue on a constant currency basis, despite macroeconomic issues in the UK in Argentina, we used M&A as a transformational accelerant.
Including importantly, acquiring integrating and scaling Pluto TV, the leading AD supported streaming TV service.
These are significant achievements, particularly in this dynamic media environment.
But what is perhaps most important but all of this reflects the delivery of promises we made to you our investor base.
So, let's break down the quarter M, a year or a little more.
First I want to highlight the success we've had a parallel.
The studio was profitable for the first time in four years and all improved by over $500 million in the last three years. We did this by improving execution across the board putting in place a new balanced film slate strategy and by significantly ramping the TV business.
Very importantly, it's again become a place where talent brings their past work.
And we're just getting going well Gemini man and Terminator dark they didn't perform as we hope our exposure was limited and we remain optimistic and excited about what the studio has common including key franchises from our portfolio that we're bringing back for audiences. These include acquired place to coming in March the new spot.
Bob can be expected demand and top gun Maverick coming in June which by the way looks amazing.
On the TV side or studio business continues to Brian during the year Paramount television deliberate hits like the third season at 13 reasons why the second season of Jack Ryan as well as debuts like catch 22, looking for Alaska and more.
Moving to domestic media networks.
Oh maintained the number one share of U.S. basic cable U.S. among key demos.
Our portfolio grew market share in the quarter mm for the full year with strong result at MTV comedy Central and Paramount network.
In fact in the quarter, we had the number one table comedy told Catholic South Park. The number one drama series with Yellowstone. The number one reality series with Love and hip hop Hollywood and the number one preschool series with winds mystery plating and that is just the tip of the iceberg.
We had nine of the top 30 cable networks more than any other cable family.
More recently in Q1 it'd be tea, we watch Tyler Perry the old insist does in fact, the overall became the number one new series for African Americans 18 to 49 for cable and broadcast season to date.
Looking beyond linear TV in Q4, well I sound digital studios delivered its highest views ever on you tube Instagram and Twitter in fact, bts drove year over year increases in Viacom's <unk> number of social video views in minutes, like 38% and 75% respectively across.
All of our domestic social accounts.
Nor total social video views to 9.6 billion in the quarter.
So no question about our content continues to cannot.
Moving to domestic AD sales, thanks to the combination of our fibrin friends and strong out sales execution, including our sophisticated suite of advanced marketing solutions, we delivered 6% headroom, marking the second consecutive quarter of positive performance, perhaps more importantly, we also delivered full year rubber.
The growth for the first time in six years.
This represents a significant milestone for Viacom and is evidence of our transformation.
In particular, the success of our advanced marketing solutions business, where revenue grew 83% in the quarter, it's 76% for the full year shows how we have a ball the out sales business right even in the face of linear impression constraints.
Our AD sales strategy was built to enable sustainable growth in an evolving TV marketplace.
Executing that strategy, we created an acquired a suite of products beyond the pay TV ecosystem.
Yeah. It is working.
Evidenced by our strong domestic AD sales growth in the fiscal fourth quarter and return to growth for the full year, well MMS was an important driver.
Looking forward, we expect continued growth given the demonstrated power the model.
And our leadership position.
Pluto TV is of course, one of those strategic acquisitions and is quickly becoming integral part of our M.S. offering.
You know TV continues to grow expanding its leadership in the free streaming TV space and its contribution to our AD sales grow.
Now has approximately 20 million domestic monthly active users a nearly 70% increase this calendar year to date.
Our focus on an investment in lieu that was evident in Q4 alone launched 43, new channels and last month. Latino added 11, new channels given the platform a total of 22 channels with over 1000 hours of Spanish and Portuguese language programming.
We also continue to grow Pluto TV distribution, both globally, and all new platforms, which benefits both our audiences and our partners.
And Pluto and not only been a driver of our returns overall AD sales rose.
It's also been a platform to enable viacom too wide, nor AD sales business and radically increase the number of clients, we do business with.
Which is a very good thing.
In short in a crowded subscription universe as consumers become increasingly more value conscious we strongly believe having a leading free streaming TV service in the country and overtime the world, It's a huge competitive advantage.
Turning to affiliate revenue.
Our growth in the quarter and for your demonstrate our strong execution in a challenging environment over the past few years, we've renewed or extended almost all the viacom's traditional subscriber base gained inclusion on VNB, PD and announced mobile partnerships.
Last quarter, we highlighted our distribution, we're doing with NCTC.
Today I'm pleased to report that virtually all of the M.C.T.C. members opted into the agreement further demonstrating the strength of our brands.
Over the past several years, we've implemented a distribution strategy to serve the widest addressable market our business today delivers and monetize the IP in content across all price points, including MPPD, the m. bbds that spot and free our dynamic affiliate strategy has led us to grow.
And demonstrated resilience, despite the macro trends within the industry.
We believe persistent headwinds from subscriber trends in rates will continue to impact the business, which is why our multifaceted approach is the right strategy going forward.
On the media networks studio side, including next studios Awesome. That's MTB Studios anymore. We have 17 domestic series order to were in production for third parties, which has an impressive achievement for business, we created less than two years ago.
I had the 26, we havent Paramount TV and we haven't totaled 43 shows in the rapidly growing TV studio business in the U.S. alone.
This business continues to show strong momentum.
For example, we got two new deal Netflix just this week Nickelodeon Studios announced a new multiyear output deal to produce original animated films M series based on both Nick Library and brand New IP for kids and families around the world.
I'm also pleased to announce it Paramount has licensed the rights to Beverly Hills top Netflix, which will produce a new film based on an iconic IP further expanding our relationship with this important original production client.
In October comedy Central Productions, and Trevor Noah signed an agreement to develop a comedy series for quickly.
And we recently license south park's domestic streaming rights to H.B. old Max further demonstrating the appeal of our IP and our ability to maximize its value.
We continue to broaden the business internationally as well as an example, we now have almost 40 mobile deals like reaching 5 million subscribers. This is important early problem and we believe this segment will ramp significantly in the near term.
Finally, we said we'd make more out of our foothold in live events and we did just that with total event attendance growing to more than 4 million people in 2019.
Mid Con is a great example of how we're expanding our advent franchise as.
When we first acquired in early 2018, it was purely in Anaheim based experience.
But now we have been kind of Benson, Australia, London, Mexico, Singapore, and the Middle East with more planned in the coming year.
Hi, leveraging Viacom significant international operating footprint mid con is rapidly becoming a global brand.
Now before I turn it over I want to take a minute and take wafers relentless hard work dedication to Viacom.
Over the past 15 years, he's been a critical strategist and operator.
And over the last three years played an integral role in helping develop and successfully execute our strategy to evolve Viacom for the future.
I'm grateful for his many contributions and look forward to watching his future endeavors with that I'll hand, it over to wait to provide some of the financial details.
Thanks, Bob Weve had a fantastic run together and I really want to thank you for your friendship your partnership and your support.
During the rest of Viacom couldn't be better position for success going forward.
Now getting into the numbers as Bob just discussed we ended the year as a standalone company on a high note delivering on our promise returning viacom to long term sustainable growth.
Paramount has had an amazing resurgence and deliberate its first full year of profitability in four years.
Worldwide Media networks grew total revenue on a constant currency basis with both domestic AD sales and domestic affiliate revenue growing in the quarter and on a full year basis.
The execution against our key growth initiatives, an AD sales are driving the evolution of the company and are now at a scale those fully offsetting headwinds in the linear business and we'll predictably deliver growth going forward.
Over the course of the year, we invested in M.S. to reinforce our leadership position in advanced advertising.
We acquired Pluto TV, establishing viacom as the leader in free streaming TV in the U.S. and we expanded our suite of streaming offerings with the launch of B T plus.
We accomplished all of this well continuing our focus on de leveraging the company and strengthening our balance sheet.
The progress we've made over the course of the year is remarkable and leaves an extraordinary foundation for the growth of Viacom CBS going forward.
Now turning to the results on slide 10 of our earnings presentation, where we have a summary of our consolidated performance.
For the full year on a constant currency basis total revenue grew 1% driven by growth at both media networks and filmed entertainment.
Adjusted diluted EPS grew for the third consecutive year.
In the quarter on a constant currency basis total revenue was flat as growth at media networks was offset by a decline at filmed entertainment.
Taking a closer look at the segments on slide 11, I'll start with filmed entertainment.
Paramount has delivered on its turned around promise returning to profitability on a full year basis for the first time since fiscal 2015.
Adjusted ROI improved $117 million versus a year ago and has improved in excess of $500 million over the last three years.
Profitability for fiscal 2019 benefited from Terry over profitability of the prior year film slate.
Increased monetization of the library and growth in TV production.
In the quarter revenue for Paramount declined 14%, what we saw strong growth in licensing revenue of 26% fueled by TV production. This was more than offset by a decline in theatrical revenue, reflecting the comparison to the release of mission impossible fallout in the prior year quarter.
Filmed entertainment profitability in the quarter was $54 million benefiting from profitability of the current year slate.
Growth in TV production increased monetization the library as well as disciplined cost management.
Turning to media networks, which is on slide 12, my comments on media networks will be in constant currency terms for detail on a reported results. Please see our earnings release.
Worldwide Media Networks' revenue finished up 1% for the year, driven by 1% worldwide advertising growth and 2% worldwide affiliate growth.
For the quarter worldwide media Networks' revenue grew 6% capping a strong finish to the year.
Adjusted operating income for the segment was down 5% for the year and 13% in the quarter largely due to investments, we're making and growth initiatives, including Pluto TV. The launch of B T plus and the scaling of our M.S. infrastructure.
Moving to domestic AD sales revenue finished up 1% for the year benefiting from a return to growth in the back half, including a strong Q3, and Q4 with both quarters up 6%.
The September quarter marked the second consecutive quarter of year over year growth and the fourth quarter of sequential improvement, excluding the timing impacts of Easter.
Domestic AD sales benefited from strong M.S. growth, which finished up 76% for the year end up 83% in the quarter.
Hey, I'm asked is enabling us to decouple, our AD revenue performance from broader industry declines in linear capacity.
Setting us apart from our peers and helping us now deliver industry, leading advertising revenue growth.
And mass revenue accounted for 17% full year domestic AD sales in over 20% of our fiscal fourth quarter domestic ad sales.
The growth in M.S. is being driven by Pluto were both audience growth and engagement are contributing to a massive pool of premium digital video inventory.
Beyond pseudo the core components, a damn s. are seeing continued momentum as well with advantage addressable media and brand solutions, all setting new records in the quarter.
Not digging into more detail on Pluto.
We've worked quickly on the integration and we couldn't be more pleased with the performance.
Pluto's growing rapidly fueled by expanding content offerings and distribution.
Pluto launched 43, new channels in the quarter, including the NFL channel and its own James Bond channel Pluto TV double low seven as well as 24, Viacom branded channels and internationally pluto's expanded its content offering and device ability ability in the UK, Germany Oscar.
<unk> in Switzerland, and will soon be made available in Latin America.
Importantly, advertisers are increasingly embracing Pluto TV as evidenced by a very successful upfront as well as having over 3500 brands advertising on the platform during the September quarter.
In fact in the month of September Pluto registered its highest ever revenue month, and total viewing minutes tripled over the prior year.
We continue to see Pluto TV as a global opportunity, including over $1 billion of AD sales in the us alone as we expand the content offering grow audience and enhance monetization.
Now moving to domestic affiliate revenue revenue was up 1% for both the full year and the quarter.
Performance was driven by contractual rate increases as well as OTI T. In studio production revenues, which were partially offset by subscriber declines.
On slide 13 of the deck, we have an overview of international media networks.
Total revenue finished the year up 2% with the quarter up 15%.
International AD sales finished the year flat with the fourth quarter down 2%.
Solid performance in light of the ongoing macro headwinds in the UK.
Outside of the UK advertising revenue grew high single digits for the year, including strong growth in Q4.
Growth was driven by strength in Latin America, as well as event driven spend.
Looking at the ratings channel five achieved its fifth consecutive quarter of growth in viewership share and tell us. They remain the number one network and ratings for 22 straight months.
International affiliate revenue increased 8% for the year and 34% in the quarter benefited from strong S., Vod and OTG deliveries expanding studio production and growth in linear.
Turning back to the consolidated results and looking at items below the line.
Net interest expense was lower than year ago by $7 million in the quarter and $71 million for the full year due to our deleveraging actions.
Our adjusted effective tax rate was 24% for the quarter and for the year.
On slide 14, there's a summary of our cash flow in debt.
We delivered free cash flow of $1.4 billion for the year, which is down versus the prior year due to higher cash taxes and lower operating income.
Moving to the balance sheet at quarter end, we had $8.7 billion of gross debt outstanding a reduction of 13% versus the prior year.
Our adjusted gross debt, reflecting the equity credit we receive from S&P and Fitch on our hybrid securities was $8.1 billion.
During the year, we repaid $1.4 billion of senior notes in debentures, including $220 million that matured in September .
Now before I turn it back to Bob for some closing remarks, I want to thanks, Sherry and the rest of the Viacom board for their support their leadership and their vision.
I also want to thank the investors and analysts on the call sprint a privilege working with you all and you will be well served by the amazing combined Viacom CBS team that will be taking you forward.
Thanks Wade.
Im extremely pleased with the performance, we demonstrated during the quarter and for the year.
2019 caps off and intense three year era of revitalization and transformation for Viacom.
Our success reflects a combination of strategy and execution of assets and people of organic growth and M&A.
And now we're beginning the next leg of our journey one that is transformational the merger of Viacom and CBS .
At the center of it all is content.
Viacom CBS will be a truly global multi platform premium content powerhouse with tremendous assets and scale.
Tom CBS will be positioned to serve consumers the creative community commercial partners employees and other constituents, while creating significant value for shareholders.
The strength and scale of Viacom CBS assets, which include one of the largest troves of IP in the world and production capabilities that are second to none will enable us to pursue a growth strategy driven by one agenda to maximize the value of the content, we create for our own platform and for others.
These distinct strengths supported by our cultural content will make Viacom CBS , one up just a handful of companies position to shape the future of the media industry.
We will be well position to meet the increasing demand for premium content across the global distribution ecosystem.
We will be a leader in the U.S. ad market.
We will pursue expanded opportunities and distribution, including through streaming on a global basis, and we will extend the use of our IP into important adjacent spaces.
We anticipate the Viacom CBS merger closing in early December .
But we are already hard at work.
Including having announced the bulk of the senior leadership team of the combined company, which is deep into integration planning as we speak.
And this integration is not just about cost savings.
Core it's also about extracting more value from our content assets.
To that end just this week Pluto TV announced the launch of three new channels from CBS .
Giving customers free access to lot of local news streams from CBS , and New York CBSN, Los Angeles, as well as a leading entertainment news streaming channel.
Hi.
Yes, it's just a taste of what's to come once this deal closes in a few weeks old.
Overall, nobody will hit the ground running unlocking synergies and opportunities as a combined company in the near term.
And with that I'd like to open it up to questions.
Thank you will now be conducting a question and answer session and the interest of time, we ask that you. Please limit yourself to one question and one follow up if he would like to ask a question. Please press star one on your telephone keypad confirmation telling one indicate your line is another question Q. You May proceed start to if you'd like to some of your question from the Q for purchase.
Vince using speaker equipment, maybe necessary to pick up your hands that before passing the Starkey is.
Our first question comes from the line of Alexia Quadrani with JP Morgan. Please proceed with your question.
Hi, Thank you very much Bob understanding the deal Hasnt closed quite yet, but can you. Please update us on your thinking of potential revenue synergies now that's been several months since the plans Chemours, yes, I've gone through at any I guess, specifically any potential positive how we should think about potential benefits for affiliate revenue.
Is that.
Sure Alexia.
Look we're now as we said deep into integration planning building a detailed in the actual view of both revenue opportunities and cost synergies by the way associated with the combined company that in turn is feeding into our action plan, our calendar 2020 budget and in short order will also lead to a more.
To your L. RP. Your specific question is on revenue synergies.
That is ultimately the reason we did this deal we believe there are substantial revenue opportunities in the combination there really are four areas to consider.
First was the one you named check distribution remember on a combined basis Viacom CBS delivered about 22% of us primetime TV viewing with a range of highly sought after content today, we only receive about 11% share of the fees. We believe that represents a significant going forward API.
Trinity and we will have a combined.
Cross company affiliates Salesforce going after that we've already announced leadership second area.
Synergy revenue synergy as U.S. advertising as you know, we will have a market leading position in linear across every demographic where the number one share a player overall will be the number one player on every single demographic combine that with the industry's leading advanced marketing solutions platform.
That will position us as the go to solution and problem solver for agencies and their clients and that in turn will allow us to grow share.
The third area is content licensing here were uniting Hollywood film slate with substantial TV production across multiple entities, whether that CBS or Showtime or black on media networks are Paramount TV that'll allow us to create have a single point of contact for a bundled offering which in turn will let us take a larger.
Our share of buyers budgets globally.
The last area streaming again slightly different kettle of fish, but bringing the complimentary content and platforms together to enhance our offerings and create this streaming ecosystem, which crosses free and paid.
We believe that's a tremendous opportunity it will allow us to serve more consumers in freight and also allow us to upsell and evolving set of S. Vod services, starting with CBS , all access Showtime OTT TTB T plus.
Doug and others.
It's worth noting on that point that the streaming sector is not only a revenue opportunity, but also one where we see opportunity in content investment as we make going forward decisions to improve ROI and free cash cash flow conversion.
Key sector of the business across all these four areas clearly the domestic versus international mix will vary but at least on all we have at least some global potential again all of this will ultimately feed into our 2020 guidance, which as we indicated will be provided on our first combined company earnings call.
In February 2020.
And just sat in just one follow up Bob you highlighted many great. Examples of success, you're having in selling content to third parties I guess, either new content as well as library content can you walk us through how you evaluate what is best can be license or cap to support your cryan portfolio of distribution channels.
Sure.
Biocon and soon to be Viacom CBS , we have a tremendous library of IP and very significant production capacity across short genres and format is really on a global basis and that means we have the ability to support our own platforms with compelling original content.
And supply third parties.
And we can do both at scale now let me give you a little more on how we think about IP and whether flows in house for third party platforms, we really use a three part framework to drive decision making.
Here at Viacom and going forward at Viacom CBS first clearly we look at the direct financial consequences of a decision. We obviously think about the economic value renting a piece of IP to a third party for some period of time in the current marketplace and how that value.
Feed into the delivery of our overall financial plan simultaneously, we think about strategic considerations, we think about in that regard the potential for a piece of IP to be deployed in a manner to create other value that might include the value of putting IP on an owned and operated platform to drive growth.
And value creation for that platform. It also could include the value of using IP to drive other businesses. For example, using awareness increased awareness of a piece of IP to drive businesses like consumer products like recreation or potentially downstream feature film initiatives.
And then the third thing we think about his partnership and specifically how the decision to place a piece of IP could affect a broader relationship with a partner those are typically in the distribution space, but in some cases.
Could be in other spaces, including the creative space as well.
Importantly, this framework applies both to how we think about library usage as well as new production.
Thank you very much.
Thank you. Our next question comes from the line of Rich Greenfield with light shed partners. Please proceed with your question.
Hi, Thanks for taking the question first I just wanted to say.
Wait it's been amazing watching what you've done I guess, you're going to be missed that the new company I think when I think about the Paramount turnaround I don't know if it ever would have started without you and I think Vms strategy is put viacom in a pretty interesting position relative to its peers and obviously, Jim you've been through the trenches I'm going to Miss hearing your voice is on these calls but.
I wanted to get to kind of a high level question for Bob Thats really a follow up on Alexey as because.
No I'm trying to understand the larger strategy of what you sell versus what you keep and it seems like you sort of have to pick Alain the number one show on Disney plus within the first 48 hours is the Simpsons, and so kind of catalog content like that like South Park, obviously I think itself.
Mark had been on CBS all access it probably would be CBS . All access is number one show and I don't have a problem with you selling South park for Big numbers are Nickelodeon content for big numbers to Netflix actually prefer that arms dealer strategy, but im just trying to figure out why even bother with CBS all access why bother with BTG. Please.
Yes.
The Street, obviously panicking were upset with what CBS as disclosed in terms of the level of investment they are making and CBS all access now.
Relative to the ROI on that and so I'm just trying to understand from from your standpoint don't you have to pick Alain either arms dealer or your own escalade strategy, playing in both isn't that going to kind of just make it might make life harder for you the company.
Yeah. Thanks rich.
Look.
You're right, we have a multipart strategy, one, which we believe and this is at Viacom and this will be true for Viacom CBS , one, which we believe allows us to unlock a range of opportunities in the shifting media landscape.
So as you know, we're we're playing in the linear TV and in the bundle because that's still a massive business.
It may be declining somewhat but the majority of homes in the U.S. continued to consume media. This way and we're 20% of total debuting on a combined company basis number one positions and every demo much much content across a range of genres, including sports. We're an extremely important partner to video distributors. So of course, you know, we don't want to pull away from that we're going to continue.
Due to serve that market we'd be crazy.
Not too and as we do it importantly, we see this is a segment, where we can grow share and margins and our strategy and operating plan is to do just that.
At the same time to your question on third party demand for content from third parties is incredible.
And the combination of our assets and capabilities with the fact that some of our competitors are pulling back makes this sector and enormous opportunity for Viacom CBS as you know we have deep libraries and extensive production capabilities at the moment, we have 750 series ordered two or in production.
Not to mention a library of over 140000 television episodes and over 3600 films I strongly believe this level of volume is sufficient to supply both our needs and third parties. So why not access the revenue income and cash flow yields your arms dealer point.
And the upcoming merger with CBS and associated sales consolidation consolidation of global product licensing will only enhance our position to extract value from that sector the market.
Then finally streaming.
Viacom, we have a wheel head start in both the free and niche pay spaces. Our AD supported free TV streaming product Pluto is on an incredible growth trajectory as you've heard monthly active users up 70% 20 million.
I wonder year to date total consumption growing faster that monetization already in the hundreds of millions dollars combine that with a partnership driven Rev share based model, which means we scale cost as the business grows versus deficit funding content in advance of users in revenue, it's an incredible opportunity and of course, we're leaning into it.
Our niche asphalt businesses are really natural compliments to our media networks, they leverage of common infrastructure leverage programming, it's not large, but it's a nice incremental business and so you put all that together, we have the assets and capabilities, including the financial resources to pursue all of them and we think.
This balanced economy is the right way to create returns and manage risk which creates substantial value overtime.
So so we like the strategy rich.
That's really helpful and could you just take 130 seconds and just comment Bob Iger announced on the last Disney earnings call that they're going to put content from FX. Several hours later on and on authenticated who knew service just wondering whether you thought about taking content. That's on your air and several hours later licensing it whether just CBS all access.
Yes for weather, putting it on Netflix or even healing, whether that's something you think about doing as well.
So.
We are in the middle of developing our combined company streaming strategy as I said that strategy will cross free.
Leveraging the tremendous head start we have with Pluto and Pluto you know today. The last number I said Pluto has 50000 hours of content on it.
250 odd channels.
We added many viacom channels, but it's not just Viacom channels you saw that this week, we announced we're adding some more CBS channels. So there's no question that.
The free segmental market and the associated.
Subset of consumers that participate in it we think that's clearly a growth segment and we believe deploying our content and third party content to that segment as a way to create a lot of value our deployment of content in that segment.
It continues to be library values Thats, the way of getting more ROI out of assets, we already own that's certainly the roll forward.
And you know PCB.
Time, where it moves from one place to Trudeau, that's something we continue to evaluate but again using pure Viacom library content.
Good distance from Air date, Thats, working very well for us.
And I.
Again were tremendously excited about that so I'm not surprised.
I go wants to participate in the free space too.
It's a big part of the market.
And finally that market is partially people that are only using freight and is partially people that are using free as a complement we see a lot of complimentary use of Pluto, particularly in its on the go mobile configuration, which is a very high growth portion of the user base.
Operator, we'll take our next question.
Thank you. Our next question comes from the line of Duck, Doug Mitchelson with Credit Suisse. Please proceed with your question. Thanks, So much Bob I wanted a company continued solid poodle path and you talked about it being the leader lead free streaming premium video service in the World I guess, just curious what's the competitive set from your point of view Peacocks Kamin Theres it'd be an AD component teach field.
Backs in 2021.
Two been Roque, who are out there what do you have to do to differentiate Pluto into the future. It's obviously growing fast right now, but I'm. Just curious if you look forward and say that there's sort of an evolution of that product that we should be thinking about and then separately I think you mentioned, Bob I'll focus on free cash flow conversion on the content side of the house certainly.
Ah, yes boards that were issued a had some working capital on the CBS side that was Oh, well above the street over the next several years, but on the Viacom side.
And wait I hope you will jump in on this.
It's been the working capital Guru and you've been ramping production of content without seeing a increase in working capital at least the last year or two out any thoughts around the.
CBS working capital on the S four and and whether we should consider that a guide for the combined company would be helpful. Thank you.
Yeah.
Let me start and then wait Aladdin well actually flip, but I want to talk little about this working capital piece now what we had to talk some more about Pluto.
I'm going to comment directly.
On the CBS call in terms of their streaming content investment and as I said, we're in the middle of integration planning of which includes forming a combined company operating plan and budget. That'll. Obviously include the level of content investment across specific areas and business, including streaming at of course, it will feed our 2020 guidance that said.
Let me give you some context from a viacom perspective with respect to content investment in streaming Theres, a few things I would highlight.
First a key objective of the Viacom streaming strategy has been differentiation that in turn led us to launching niche services based on our brands targeting our specialized audiences in here as you know, we havent expanding portfolio.
It also led us to the free AD supported TV space, where we now have the industry leading offerings.
As we pursue differentiation. We also focused on the development of a capital efficient model for example on the niche as spot side. Our services are overwhelmingly based on use of library versus original made for EPS Vod content and that radically improve the economics, where we do have original.
Press Vod content, which is B T plus we've done that in a partnership model in this case would Tyler Perry, which has enabled advantaged economics in terms of access to his library as well as its original production.
On Pluto TV, we have a different path to capital efficiency Pluto TV model is based overwhelmingly on Rev share based content partnerships, which as I said allows us to scale expenses as the business gross versus investing significantly ahead of user growth and AD revenue and that creates a much more attractive funding.
Actual envelope were candidly, we're not losing billions and billions of dollars for a number of years. In addition, we've deployed Viacom library assets versus new production as a key content source again, producing attractive financial returns as we move forward with a combined Viacom and CBS , including.
In the streaming space differentiation and capital efficiency will be key considerations and the good news as we believe the combined company content asset base as well as existing mix of free and paid services are really powerful levers in that regard and Wade wanting to talk a bit more about Pluto.
Yes, the only thing I'd add on cash flow. Bob is just we have seen for quite some time, we'll continue to see buyer Viacom businesses. Some of the highest rated to free cash flow conversion.
In the industry, you did see a little bit of a decline in a in this year.
In fiscal year that was not really so much function of working capital utilization as it was just lapping cash taxes from prior year tax reform.
You know there is some lumpiness when you're in the film business because just the timing of when the production in the and release of the film's comp there is some lumpiness to a working capital consumption that is derived from the film business, specifically, but in general the working capital characteristics of the Viacom businesses are going to do.
Continue to be leaders in free cash flow conversion.
With respect to Pluto ads can competitive positioning I guess, I guess, what I would say, what's kind of break it down into too.
Competitive positioning versus those in the market today and competitive positioning versus those that aspire to be in the market at some point in the future, perhaps with with respect to the folks that are in the market today, Oh Pluto is the definitive market leader. So I guess I would just say its.
Differentiation viewed to be the existing Patrick competitors speak for itself.
With respect to people who might enter the market at some point.
In the future.
We'll see but we are confident pluto's ability to maintain its market leadership for a number of reasons I guess I'd focus probably on for.
The product differentiation its distribution approach to the content and then ultimately that how that ladders up into its business model so for our product differentiation standpoint.
Who knows pursued a unique product.
Approach one that linear first that's a great familiar lean back experience, that's a front door to Vo D. Whereas most people have focused on a VIP first experience.
Second from a distribution standpoint, I mean, there are some folks like Roque, who were doing really really well with their free product, but they're constrained to only being on their own oh in l. platform photos differentiating itself by being really everywhere.
Uhhuh people, who are going to be coming to market of course everybody's going to be on the big three or four platforms.
I think we will have an extraordinary read on is that for years, we've been working on the long tail of distribution, particularly having the foodservice imbedded in devices that sit in the Liberal. So you know the fact that we've been able to get embedded distribution on the world's largest connected television plot.
Farms in a very differentiated way is something that's going to serve us well as a big lead people can do that over time, but it takes years to get that level of penetration.
The third thing is just the content scope. So we have an incredible or content offering absolute others over 260 channel in the aggregate that's 50000 hours of content across the genres that people care about like news sports whether movies Entertainment kids.
And then the last thing as I said, just ladders up into the business model. So this is a platform as a platform the benefits all partners.
The cost structure is overwhelmingly variable since since it's on a Rev share basis, we're able to sustain and refreshed those 50000 hours of content without losing billions of dollars year. So those are I'd say, probably the four big points to keep in mind as it relates why we believe what was going to continue.
We need to be the market leader in free.
Super helpful wealthy thank you.
Thank you. Our next question comes from the line of Michael Nathanson with Moffettnathanson. Please proceed with your question.
Thanks, I have to maybe one for weight on for Bob So weighed on the Paramount <unk> Paramount side, given the ramping you guys have done an original TV in film you talk a bit about what's the ROI frameworks that you put in place to think about maybe payback period and what type of thresholds do you need if we put something you know greenlight and then for.
Bob now you Turner profitability a paramount.
My next question would be worse, where's kind of the normal resting profitability looked back at history.
It's been higher than here, obviously, but but do you think the business mix has changed enough.
We could see perhaps or new level profitability paramount into the future given the higher investment made in TV shows my two questions.
So I'll start on the on apparel your questions on Paramount TV in particular, and our TV and film ROI, How do you manage ROI.
Well I would on the TV piece is very important to remember how we've built a television business at Paramount, which is we have taken a very very capital efficient approach to getting into the television business and which we really mines. The vast library of IP we've had.
Leverage that into a leadership position in premiums scripted.
But because we're doing that in partnership with you to with our customers principally their underwriting the cost of that and we're taking our fees on top of them underwriting the cost.
And that has a lot of strategic benefits, but from an ROI standpoint, it's almost an infinite ROI right. All we're doing is we're underwriting the overhead.
And then the volume of production that we're been building has largely been on a cost basis that that does some important things for us strategically. So first it allows us although we were licensing to those customers. The first window. This product we're building the long term library par value of Paramount SEC.
And by building out a real scale television business.
Next to the studio the film studio, which hadn't had one.
Since the split Viacom CBS , we're really able to leverage our distribution power and ultimately having distribution power combined across film and TV is one of the things that allowed us as you've seen to really thought through really increased dramatically how efficiently we're monetizing the.
The film Library.
Then as it relates the film there's not there's not such a clear answer to ROI thresholds because as Bob said before about how we think about the returns on content creation franchise management, we're really looking at this holistically some films like the sponge, Bob Phil we might actually.
On the pure underwriting of that but fill in that fell Malone, except the road, we look lower threshold, although in that case, we didnt.
Films is going to be an extraordinary piece of business on its own, but we really think about the broader ecosystem and how we can underwrite our franchise content to growth broader ecosystem.
Yeah, and love stepping back and thinking about Paramount bigger picture.
You've seen the arc of where we got to from 16 to 19.
And we think 19 is really important milestone in our journey.
To move Paramount back to an end to your point.
Beyond historical profitability levels, we look at 2020, and we're excited about what's going on you got quite place to coming you got a sonic film that we dropped the trailer on this week that created a bunch of excitement you've got sponge, Bob you got a top gun sequel that everyone's waiting for.
We continue to manage risk. So we got 40% about 40% of slate co financed which we think's important.
And we like what we're seeing at Paramount TV as well, we mentioned 26 shows order tour in production pipeline of other properties that are already in development given all the activity in the streaming world. We don't expect that demand slowed down anytime soon so you look forward, we'll continue to ramp volume, we clearly see abroad.
Trickle business, serving the streamers is another business TV production as a business, taking that IP and doing more and more with it in the recreation space with something else run too as you think about Paramount in the context, the Viacom CBS a way to create additional value out of that bundle is out of that collection paramount acid.
It is through bundled sales, we talked a bit about that on the global product licensing, we think thats a material share opportunity also paramount access to our owned and operated platforms whether that's in.
The television space the premium space, the streaming space and also Paramount as part of a.
Viacom CBS , which is undergoing cost transformation and the benefit of scale whether that's.
In terms of support services, whether that's in the form of sourcing et cetera, all that contributes to growth.
Growth in revenue and also our ability to improve margins and really take this business to the next level so to speak.
And I think it's important to note that as we do this this is really a unique asset.
This is one of the few iconic.
Motion picture a television studios in the World. There are few of them today than there were in the past. The library is truly irreplaceable and you saw the benefit of us continuing to improve monetization to that in 19 tremendous demand for that product. So this is an asset that we love to own that we love.
The momentum were seeing we think the team is executing well and the road ahead is extremely exciting.
Thanks, Bob Investee away.
Thank you. Our next question comes from the line of Marci Ryvicker with Wolfe Research. Please proceed with your question.
I have to the first and this may be premature, but how did the NFL factor into viacom's decision.
Guardian content investment if at all number one and then number two it sounds like you're sharing some of the economics on the TV production side and I guess I just wanted to clarify that that is cracked and then second corollary to that what percent of like you produce in television do you tend to own.
I don't understand your second when you when you say, we're sharing some of the economics of TV production needs to be a little more specific as to your question.
I guess, what with regard to wade's comments.
Hey, the underlying question do you own 100% to the hearing you produce.
On a <unk>.
Why don't I, just clarify yeah, I'd take the yes or no.
Generally speaking, we all the IP and the majority of the majority of the business that we have been doing historically on the television side is that we are selling to a customer the project and so that customer whether its netflix or who are or you know Showtime.
There are underwriting that we're doing that business on a cost plus basis and they own a window of that confidence so they're they're ordering the show we're bringing on a budget their underwriting the budget and they're paying us that budget plus call it 20%.
They're on the show for a certain either or certain window of time, a certain geography. The rights on a certain platform. We can then exploit the rights that they don't own and then in the longer term the negative ER and the associated IP reverts back to us that answer your question.
Okay, great and NFL, yet by the way I would use the word rent not own we didn't we tend not to sell property in the model that way just described it's really a rental for a term we ultimately on the IP and Ken.
We monetize it over time.
To your question on the NFL outlook. The NFL is important is a world class brand. It's important to certainly American video consumers, we have at CBS .
Very long standing and highly productive partnership.
With the league and the teams.
As we look to the NFL, we think the Nfls important going forward, we and when you think about ultimately and NFL renewal and it's still a little ways way.
If you think from my conversations with people at the leads as well as people at CBS . The NFL clearly values and continues to value broadcast reach why do they do that because they got a mass market brand and there's a well.
Understood consumption habit of people sitting around and watching Sunday football on their television through broadcast feeds they want to continue to have a mass market business and broadcasters mass market reach so that clearly important to them. The second thing that people don't talk so much about.
Is super high quality production CBS actually produces many games every week for the NFL. This is live sports multi camera dynamic production and it's the way that the American public and some cases the world sees the NFL product or that is very important.
Finally, and again they trust CBS is able to do that the highest level.
You shouldn't underestimate the value of that as you look forward and Viacom enters the equation Ah Theres two other things that we bring to the table in the context of the NFL one is younger audiences.
Whether it's through our linear fees or ondemand product like Pluto, we serve significantly younger audiences are then CBS and up in a league that wants to have a long term brand they need to bring young audiences and get them excited with the game et cetera, and the Biocomm assets are clearly.
Additive to doing so I've had those conversations the second thing also that gets to a long longer term brand development and growth for the NFL is international clearly Viacom has one of the strongest international operating portfolios in media, a including a broadcast CBS like if you.
Well assets a in markets outside the United States as well as a pay bouquet that reaches over 170 countries. So and again, if you're developing a brand long term got to develop your business outside the United States and we're out of them. There. So you know I look at that and say the NFL, it's important to us as viacom's.
He asked we've had a great partnership we bring more to the table on a combined basis, then CBS alone historically, a and sure they're going to want to bigger check, but I'm confident that we'll have a strong partnership for many years to come.
Operator, we have time for one more question.
Thank you. Our final question comes from the line of just go Rice Ehrlich with Bank of America Merrill Lynch. Please proceed with your question. Thank you I've I've follow ups to two topics revenue synergy and Paramount.
Revenue synergy I guess, it's like a two part out but can you talk a little bit about.
The timing on distribution CBS set on that 50% of every chance retrans deals come up in the next year I think you to comes up by year end this year.
Will you be how will you be able to benefit on any of your deals coterminous add on advertising.
Can you talk a little bit about your approach to.
The upfront, but more generally maybe the advertising community because you have such a broad platform of networks now both linear and digital and so much premium content is going to non advertising.
Platforms, meaning subscription only just seems like a really great opportunity and then on that Paramount side.
You had such an impressive turnarounds on to Jim Jana, plus which is I guess not so surprising given its history of managing the business at Fox, but he's done a great job and you talked about the opportunities of scaling up both in film and television maybe could you address some of the challenges the home video market seemed how do you have a place.
A market that is clearly has declined and have you had any pushback from China like is there any push back from the recent trade issues. Thank you.
Sure Jessica lot passed in there so let's try to tick through at a pretty quickly first on your distribution question the combined company.
We do have at first point, where we are in the middle of creating a combined company salesforce, serving mbps and VNB skis here in the U.S.
Raised a lead that and we're like I say, creating combined company team.
We are going to go to market on that post close there are deals in 20.
That.
Our we believe actionable and so we continue to think Thats an opportunity. We do ultimately believed that the realization of that opportunity if not all in 2020. This will take some time.
To play out, but but nonetheless, I'm excited about it and I think.
We really have a very important position in this ecosystem.
Given the breadth of our content audience shares et cetera, and there's no question that that's a revenue synergy on the AD side. As you said, we have a tremendous opportunity here. If you look at what Viacom did in the last upfront, where we combined the Viacom portfolio of networks with advanced marketing Solutions, Inc.
Putting viacom video and Pluto doing things like taking our 18 to 34 reach from low Fortys with our linear networks high Fortys with Pluto 90, with Viacom video, bringing that to market in a package to help get advertisers more reach without frequency cap problems and help them manage inflation.
And that was compelling every agency in the industry signed up for it and as you know we had a very strong upfront.
Viacom CBS is that on steroids or we will be the definitive problem solver for the industry in the first protocol almost without a doubt and what you asked AD impressions U.S. AD delivery some product and services company is very important the market is a complicated given.
What's going on in TV ecosystem, that's why our portfolio of solutions, which spans linear television and other forms of video, including by the way branded content.
Is so important then we're clearly ahead of the industry and you see it in the strength of the market pricing and demand remains very strong. It was strong the upfront is strong and current day scatter 30, plus percent premiums versus the upfront teens premium scattered scatter, there's a strong market and we're really looking forward under a Joanne Ross's.
And John how his leadership to serving it. So that's a great opportunity ahead again, when you will see that play out.
And create value in 2020.
Unparalleled side.
There's challenges sure but.
You see a demand ramping from streamers, whether that's in the television series space or that's in the the film length space. That's a good growth segment in some respects that is the new home video, we have a longer term opportunity probably in the P. Vod space, that's that's something that hasn't.
Come to market, yet and clearly Viacom CBS given its ownership of Paramount combined with its relationships with all the distribution United States is ideally positioned for that should we choose to go down that path on China.
You know to market we watch.
Thank you we haven't had any issues.
And look our product resonates there. So net net we're very excited I'm very excited about this the revenue opportunities associated with the Viacom CBS combination across a whole range of areas and as you heard very very excited about what's going on at Paramount.
Thank you.
In closing.
I just wanted to say, where we are really proud of viacom's accomplishments and evolution over the past few years and we couldn't be more excited about what's next as we get ready to embark on it no. That's applied home CBS management team will be transparent we will be accessible we will lay out a clear plan and we will update you.
On our progress along the way lastly, I'd like to offer my thanks on behalf of the Viacom management team to two important groups first the Viacom employees for their dedication and relentless execution over the last three years. It's your hard work that has set us up for this next exciting chapter.
And second to you our Investor base I want to thank all you for your continued support and partnership and we look forward to the road ahead, we want to thank everyone for joining us for earnings call.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.