Q3 2020 ViacomCBS Inc Earnings Call

November 6, 2020

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Good day, everyone and welcome to the Viacom Cvs third quarter 2020 earnings Conference call today's call is being recorded.

At this time I'd like to turn the call over to executive Vice President of Investor Relations Mr. Anthony Diclemente. Please go ahead Sir.

Good morning, everyone. Thank you for taking the time to be with us for our third quarter 2020, <unk> earnings call.

Joining me for today's discussion are Bob Bakish, our president and CEO and Divvying Chopra our CFO.

Please note that in addition to our earnings release, we have trending schedules containing supplemental information available on our website. We also have a slide presentation for you to follow along with our remarks.

I want to refer you to the second slide in the presentation and remind you that certain statements made on this call are forward looking statements that involve risks and uncertainties.

These risks and uncertainties are discussed in more detail in our filings with the SEC.

Today's remarks will 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 now I will turn the call over to Bob.

Good morning, and thank you for joining us today.

Today's call I'll cover three key topics.

First how weve unlock the power of a combined Viacom CBS in the years since Weve merged.

Second our third quarter results demonstrate the company's building momentum.

And third how we're focused on achieving growth in the short and long term by aggressively leaning into streaming.

I'll, then hand, it over to intervene Chopra, who I'm pleased to welcome to his first earnings call as Viacom CBS as CFO.

The V. and we'll give you it's early perspective on the company as well as the detailed financial commentary on Q3.

Following that well take your questions.

Okay. So first off it's been almost a year since the Viacom CBS merger closed and I'm thrilled with the way our organization has come together to create value from the combined asset base.

In fact, despite the challenges presented by the world around US our company's transformation is ahead of schedule and we moved quickly to realize the power of the Viacom CBS combination.

By establishing a best in class management team, including most recently through the creation of a new consolidated streaming organization.

By accelerating our strategy and execution across pay in free streaming.

Driving growth in subscribers monthly active users and revenue.

We're also unlocking more value in distribution by expanding our footprint through cross company renewals and new deals.

And simultaneously strengthening our positioning and advertising by bringing to bear the power of our combined portfolio and capabilities.

Oh, while improving operational efficiency and exceeding the cost synergies, we promised when we announced the transaction.

We've accomplished a lot in a short amount of time.

And we're just getting going.

Second let me turn to the quarter's financial and operating results.

Viacom CBS is Q3 reflects the continuation and acceleration of a strategy that is clearly working yeah.

Even as we navigate through the pandemic.

To that end importantly, during the quarter, we saw improving top line trends across affiliate advertising and domestic streaming and digital video revenue.

In affiliate revenue grew 10% in the quarter, marking a significant improvement versus Q2.

This improvement was fueled by strong growth in subscription streaming revenue as well as higher reverse comp and retransmission fees.

It was also fueled by a return to growth in domestic cable affiliate revenue, which saw a 10 percentage point improvement in growth rate versus Q2.

Advertising revenue also improved dramatically versus what we saw in Q2.

With the rate of decline slowing to 6%.

Improvements were seen across the board in broadcast cable sports National local digital and international.

And the scatter market was robust with strong activity across key categories.

Speaking of categories. We've also seen certain co lead impacted industries like auto and retail gradually return.

Which reflects improvement in the economy and the significant value our portfolio brings to advertisers to drive their own business recovery.

Importantly, as we look forward. The return of CBS is stable fall schedule is upon us with several scripted series already on air and more premiere dates coming up ads.

Add to that the NFL, the FCC and the masters our content position is strong.

This dynamic paired with a successful upfront and the hot political category should provide further benefit in the fourth quarter.

Overall, we're encouraged by what we're seeing and Big picture advertising is certainly moving in the right direction.

The commercial momentum of Viacom CBS is clear.

And it is underpinned by the durables strength of our brands and IP.

CBS was once again, the most watched network across primetime daytime and late night during the 2019 2020 broadcast here.

We maintained our leadership in key demos as the number one cable portfolio for share viewing and we own the more top 30 cable networks than any other media family.

Internationally, our linear share of viewing increased for a third consecutive quarter.

And for the second quarter in a row tubular labs ranked Viacom CBS the number one media and entertainment company in social reach.

Reinforcing the popularity and relevance of our brands and IP in the digital space.

The strength of Viacom CBS is foundation in content franchise, IP and audience reach is an important competitive advantage, including as a growth accelerant for our streaming business, where we had another great quarter.

To that end Viacom CBS grew domestic streaming and digital video revenue by 56% in Q3.

Up from 25% in Q2.

Reflecting the real momentum in usage and monetization in our pay and free streaming products.

Something we're aggressively leaning into.

Let me unpack this a bit.

In pay we ended the quarter with 17.9 million domestic subscribers up 72% year on year, which basically puts us just under the raised year end guidance, we issued last quarter, where we took it up from 16 to 18 million subs.

And both CBS, all access and Showtime OTT TT each had robust consumption growth and sign ups.

Starting with all access the service benefited from strong demand for sports like your wafer and the NFL originals like Star Trek, lower decks, and CBS network content like Big brother and Love Island.

As well as from the 3500 library episodes added from Nickelodeon DT comedy Central MTV and Smithsonian.

Yes, the almost 200 films from Paramount that we added in late July as part of our preview launch.

CBS all access is now in the early stages of benefiting from the power of the combined company.

And there's much more to come.

More on that in a bit.

And Showtime OTI Ti had a strong quarter as well driven by the trifecta of original programming, including the shy billions. The final season of homeland, all of which drove strong adoption and engagement.

Our momentum in pay streaming is driven by the combination of compelling content and ubiquitous distribution.

On the distribution side. The latest example is the all access and Showtime streaming bundle, we recently began offering through Apple TV plus.

Which follows our recent Amazon renewal.

We have a lot going on here and the combination of compelling content and ubiquitous distribution is clearly working.

As evidenced by Viacom CBS subscription streaming revenue growth accelerating to 78% in Q3 from Q twos, 52%.

On the free side Pluto TV continues to build on its position as the number one fast free AD supported streaming television service in the United States.

In the quarter Pluto TV is domestic and May use grew 57% to 28.4 million and globally grew to nearly $36 million may use.

On top of that Pluto's AD monetization has been growing rapidly.

And the trend line is compelling.

Consider this.

After logging its first 1 million dollar AD sales day in 2019, it took Pluto 10 months to log its first 2 million dollar AD sales day.

But it just took one month after that for Pluto TV to achieve its first 3 million dollar day.

Well the shouldn't be interpreted as a daily run rate, we are seeing revenue inflection at Pluto TV in a most positive way.

The trajectory is extremely exciting.

And we remain confident that Pluto will meet or exceed its 30 million domestic and may you target by year end.

Bolstered by the fact that we continue to add even more high quality content to the market leading service.

In fact in the U.S. Pluto now has well over 100000 hours of compelling content available to consumers.

We recently added nine Viacom CBS channels, including Startrak, Delatour, CBS N Dallas and see ESI.

And of course, we continue to add a broad range of compelling third party content.

As an example in October Narcos began streaming on Pluto TV, marking the first time, a series will be widely available to U.S. streaming viewers without a netflix subscription.

We also ramped up Pluto TV distribution across multiple devices and services include.

Including new distribution agreements with LG and Sony Playstation Excel.

Extending Pluto TV reach to well over 100 million additional devices worldwide.

What's even more exciting is were on an official launch partner of the highly anticipated Playstation five console debuting in mid November.

Outside the U.S. Pluto TV is expanding rapidly and seeing strong adoption as well, especially in Latin America.

And last month, we launched Pluto TV in Spain, with 40, the medic and uniquely curated channels across multiple genres.

In fact during the first week of launch in Spain, Pluto TV with the number one downloaded the app for Android devices.

Looking ahead, we plan to bring new local versions of Pluto TV to other priority markets, including Brazil, This year, and France, and Italy in 2021.

Importantly, these are all markets, where Viacom CBS has strong local operations, including a large pipeline of local language content in place and ready to go.

The world is quickly embracing fast.

Which is why Pluto TV his leadership and growth is a key component of our streaming strategy.

And remember as we progressed really build out a link ecosystem Pluto will also serve as a gateway to and funnel for our pay services.

So there was a lot to be excited about provide calm CBS in Q3 in the streaming space.

And I'm, even more excited about where we're going here.

Here I want to touch on a few items.

First consistent with our strategy to maximize our position in assets across both pay in free in mid October we announced the creation of a new consolidated streaming organization.

Tom Ryan the co founder and CEO of Pluto TV has assumed the role of president and CEO Viacom CBS streaming over.

Overseeing paramount plot and Pluto TV.

In this expanded role Tom will drive our strategic execution globally as we create a progressive we integrated streaming ecosystem across pay him free.

Toms interpret aerial drive deep knowledge and over the top is focused on the consumer experience and demonstrated ability to work effectively across our company, making ideally suited to lead. This next leg of our streaming journey.

A second item I want to touch on is Paramount plus which is on track to debut in early 2021.

As you know Paramount plus will combine live sports breaking news and a mountain of entertainment, including exclusive original content plus a diverse and deep library of shows and movies spanning all programming genres from Viacom CBS is leading brands in one unified service.

Here, despite the challenges of Kogut, our original programming plans continue to advance.

And we will have a deep roster of original series that leans heavily on our franchises, including the offer a scripted limited series that will tell the incredible story behind the making of the godfather, one of Paramount Pictures most iconic franchises.

A new addition of behind the music a truly iconic music series.

Real criminal minds, a true crime documentary series spinning out of CBS is criminal minds.

Camp Coral a new original children's series from Nickelodeon Spongebob Squarepants, which we will release after the new Spongebob movie sponge on the run and will be exclusive to Paramount plus.

And we also have new original content, including Linus a new series from the creator of Yellowstone.

We will of course have more original programming to announce as we get closer to launch.

As we get into 21, we see substantial incremental growth ahead.

Our preview launch at the end of July served as a proof of concept.

And that gives us the confidence to lean into streaming even more.

We're executing a plan, which will bring more content more marketing and more distribution to the table.

Paramount plus with its live sports breaking news and mountain of entertainment together with Pluto TV in the free space and Showtime OTT TTM premium will take Viacom CBS streaming to a whole new level.

This is certainly an exciting time for our company.

And I'm, so glad that Naveen Chopra has joined US for the next leg of our journey.

Since early August he's truly hit the ground running.

He's brought a fresh and valuable perspective to Viacom CBS, especially as we gear up for our launch of Paramount plus early next year.

With that I'll hand, it over to intervene to provide his thoughts as well as additional financial detail on the quarter Naveen.

Thank you Bob and good morning, everyone.

I'm excited to be here for my first Viacom CBS earnings call. It is now been three months since I joined the company.

I was initially drawn to Viacom CBS because of its strong position in the media industry.

Having now had some time to listen and learn I find myself, even more bullish about our future and our ability to create long term value for Viacom CBS shareholders by leveraging the scale of our brands content and distribution.

Thus far Viacom CBS has exceeded my expectations in several respects.

The company has moved quickly and effectively to capture synergies from the merger has successfully found ways to enhance both the financial and strategic value of its traditional media businesses.

And has an even stronger presence in streaming than people recognize all of which are demonstrated in our Q3 results.

I am, particularly inspired by the opportunities, we haven't streaming or the addressable market is expansive and growing both domestically and globally.

In addition, the value of the users of our largest paid streaming services continues to increase driven in part by favorable trends in underlying churn and growth and engagement.

Similarly in free AD supported streaming Pluto TV is not only rapidly growing I may use and total viewing hours, but it is seeing a significant mix shift to consumption on higher value connected TV platform and material growth in monetization with plenty of room to grow in sell through and see.

Yes.

I'm also in bold and by the fact that we have the rare DNA to produce world class content at scale, including for the streaming generation.

From original programming like billions or Yellowstone to unscripted like MTV. The challenge the kids programming like patrol or sponge, Bob and of course iconic movie franchises, such as top gun and the godfather Viacom CBS content has proven to be a powerful audience magnet on both our.

Owned and third party platforms.

And I consider this pipeline of content.

Regardless of where it is distributed a tremendous asset that we can optimally allocate to support our overall strategy.

And I share with you that this depth of content production capability is quite rare.

Both the content assets themselves and.

And the ability to create them are scarce valuable and they are the envy of some of the largest technology and media players in the industry.

So while the competitive environment is intense and requires sharp execution to achieve our streaming ambition.

I am encouraged by the progress we have made and together with industry trends Philippe and free streaming will yield compelling ROI consistent with our goal of creating long term shareholder value.

Now let me take you through some of the highlights of our third quarter results.

Total company revenue was 6.1 billion down 9% year over year.

Adjusted OIBDA was 1.1 billion down 12% year over year and adjusted diluted EPS was 91 cents.

I'll provide some additional details on revenue in a moment, but as you would expect the year over year trend in total company revenue represents significant pandemic related effects on advertising sales content licensing and theatrical revenues.

Compared to the year ago quarter, adjusted OIBDA declined driven by lower revenue somewhat offset by lower costs, principally associated with delays in production expense.

Q3, adjusted free cash flow was very strong at 1.5 billion largely because production activity remained limited throughout most of the quarter, resulting in a significant working capital benefit.

As a reminder, adjusted free cash flow excludes $164 million of payments for restructuring merger related costs and cost to achieve synergies.

Looking more closely at our revenue performance in the quarter.

Domestic streaming and digital video revenue grew 56% versus the year ago period to 636 million owing to significant growth in sign ups across CBS, all access and Showtime OTT TTP and very strong growth in monthly active users and minutes viewed on Pluto.

Domestic subscription streaming revenue grew 78% in Q3 and acceleration from 52% in Q2, driven by the continued momentum we are seeing across our subscription services.

And on the AD supported side digital video advertising revenue also experienced a strong recovery versus Q2.

Pluto TV was a key contributor to this recovery in fact growth at Pluto TV accelerated materially from Q2 with revenue more than doubling from the year ago period.

In aggregate, our domestic streaming and digital video revenue is now pacing at an annual run rate north of 2.5 billion and growing over 50% year on year as of Q3.

Streaming momentum also benefited affiliate revenue, which grew 10% year on year in Q3 versus 2% in Q2.

The growth in total company affiliate revenue was driven by growth in streaming subscription revenue and distribution renewals, which included incremental carriage and improved economics.

Domestic cable affiliate revenue grew 4% year over year in Q3 versus a decline of 6% in Q2 and grew year on year, even excluding the growth of Showtime OTT TV.

In addition, TV Entertainment affiliate revenue grew 25% in Q3 and acceleration versus 22% in Q2, driven by strong growth in streaming subscription revenue and retrans fees and reverse comp, which also benefited from renewal activity in the quarter.

Advertising revenue was down 6% year over year, reflecting continued COVID-19 headwinds however.

However, the Q3 growth rate was a significant improvement relative to the year over year decline we experienced in Q2.

The improvement in advertising trends has been broad based across broadcast and cable, but we are especially encouraged by the increasing contribution from the inventory included in Q.

As a reminder, the I.Q. platform provides advertisers a single transactional point of entry to our digital video content advertising inventory and.

And include not only digital video advertising revenue from Pluto TV, but full episode inventory from our other Viacom CBS networks.

The recovery in Q3 also benefited from improvements in scatter pricing owing to firming marketplace demand.

In terms of key categories pharma remains strong and we've seen improvements in automotive financial services and retail.

As expected political spend was very robust in Q3.

Turning to content licensing Q3 revenue was down 33% year over year, reflecting a lower volume of licensing due to kobin related production delays and several licensed programs, reaching series and in the year ago period.

As you know licensing revenue is inherently lumpy as evidenced by the licensing of South Park earlier, this year, which contributed a significant amount of revenue and adjusted OIBDA in Q2.

So while content licensing will be a part of our strategy going forward, we do not expect to replicate a deal of that size and nature in 2021.

Theatrical revenue was immaterial in the quarter as most theaters remain close so we have found ways to mitigate the near term lots of theatrical revenue through alternate monetization strategies, including early EPS T P Vod and licensing select titles to streaming platforms.

And finally publishing revenue increased 29% year over year due to strong sales in Q3, including married trumps too much and never enough and Bob Woodward's Rage.

On the expense front, we remain focused on reducing our costs we.

We benefited from merger related cost synergies in the third quarter and are on track to realize at least 300 million in savings for the full year 2020, and 800 million in annualized run rate merger related cost synergies by the end of 2022 before consideration of onetime cost to achieve.

In addition, we are benefiting from coated related cost savings, which help offset some of the cobot impact to revenue.

And a portion of these cost savings are sustainable while some are timing related and will return as we increased production activity.

Turning to cash flow.

Adjusted free cash flow in the quarter was $1.5 billion equaling 2.9 billion year to date benefiting from a significant working capital tailwind due in large part to temporary production delays.

We expect this trend will reverse somewhat in Q4 as we continue to ramp production.

Regarding the balance sheet as a result of the financing transactions completed earlier this year.

And our strong free cash flow, we ended the quarter with over 3 billion of cash on hand, and have no debt maturities until 2022.

When considering merger related cost synergies, our gross debt to adjusted OIBDA ratio calculates to 3.4 times.

And 2.9 times on a net debt basis.

Following the quarter, we closed the sale of Sina on October Thirtyth, resulting in proceeds of 350 million net of taxes and transaction costs.

Our cash balance and maturity profile provide operating flexibility and capacity to de lever, even before factoring future noncore asset sales.

We continue to hold a 2.75 times long term leverage target.

And we will use our excess capital after streaming investments and dividend payment to pay down debt.

We do not currently plan to repurchase any shares.

I'd now like to share some insights regarding our expectations for the remainder of the year first regarding our domestic streaming and digital video revenue. We anticipate continued momentum as we move closer to the launch of Paramount plus next year.

We expect to end 2020 at an annual run rate North of 2.8 billion in domestic streaming and digital video revenue.

We continue to prepare for the launch of Paramount plus by adding content to all access rolling out new features like customer profile and enhance recommendations.

And consolidating our marketing efforts to support the launch.

As part of this consolidation in Q4, we will start sunsetting some of our smaller legacy streaming services like MTV heads, whose content will be incorporated in Paramount plus.

This will create a onetime headwind to streaming subscriber growth in Q4, as we set up for a much larger streaming service longer term.

Nonetheless, we now expect to finish the year with at least 19 million domestic streaming subscribers up from our original guidance of 16 million.

We continue to expect Pluto TV to finish the year at over 30 million domestic and they use.

And expect 40 million when measured on a global basis.

Looking at affiliate revenue, we expect Q4 to show similar affiliate revenue growth rates to Q3 in both total company affiliate and domestic cable affiliate revenue.

As the combined strength in pricing retrans reverse comp incremental carriage and subscription streaming revenue more than offsets linear subscriber declines.

In terms of advertising revenue, we expect another quarter of improving trends driven by strength in political sports and digital.

And finally on free cash flow in Q4, we expect some reversal of the working capital Tailwinds as content production spend ramps materially no.

Nonetheless for the full year 2020, adjusted free cash flow will still enjoy a material temporary working capital benefit from the delayed timing of production, which will continue to unwind in 2021.

Looking to 2021, we are encouraged by the growth opportunity ahead for Paramount plus Showtime OTI and Pluto TV and we expect to support this momentum by increasing our investments in streaming.

As it relates to adjusted OIBDA and free cash flow, we expect the impacts of additional streaming investment to be partially offset by the benefits of incremental merger related cost synergies and the Super Bowl on CBS in the first quarter.

As we look forward I want to reiterate.

How happy I am to be here and how excited I am about the growth opportunity we have.

With that we can now open the line for questions.

Thank you at.

At this time, we'll be conducting a question and answer session.

In the interest of time and to allow as many as possible. That's questions. Please limit yourself to one question.

If you like to ask a question. Please press star one on your telephone keypad and the confirmation tone indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the Q.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One of 'em policemen and assemble the queue.

Thank you our first question will be coming from the line of Brett Feldman with Goldman Sachs. Please proceed with your question.

Yeah. Thanks for taking the question a two part question. If you don't mind about Paramount plus into these are questions we've been getting a lot.

First as we think about where how should we think about the content, it's really going to be the foundation of driving the reacceleration in another way. We get asked that question is more simply how do you think about how many original hours you need to really draw and attract users to the service and then secondly, what ultimately is going to be there.

To determine whether the rebranding has been a success I I'd assume we'd be looking at subs I don't know if you're willing to put a target out there right now, but if theres. Another way we should be looking at it that would be very helpful. Thank you.

Yeah sure Brett look I'm incredibly excited about the launch of Paramount plus in early 21, it's going to be a truly differentiated and compelling offering that's on unlike anything that is really out there today.

And then look as a reminder, Paramount plus is building on CBS all access a product that already has strong momentum as you've seen in the metrics in the third quarter that.

That said panel plus it's going to be live sports breaking news and a mountain of entertainment look at live sports include the NFL. The FCC you wafer PJ golf, the NC double a and more the breaking news side it'll be live CBS news anytime from CBSN live local news from CBS stations.

Key new shows like 60 minutes and more to be announced and then there's the mountain of entertainment from our flagship brands, which are Paramount CBS, Nickelodeon MTV BT comedy Central Smithsonian. It really provides us strength in a whole set of key genres reality crime procedural.

Kids' films and more it'll appeal across demographics everything from preschoolers to 50 plus of course, it's going to be available on demand, but has some live elements on and it's going to have a very strong original slate many based on franchises that come from across the board.

Brands that are represented in the service.

I'd also point out that the consumer response from our preview launch and remember in late July we added 3500 episodes from Viacom brands as well as about a 190 Paramount films that consumer response was strong and really served as proof of concept, that's given us the confidence to lean in the response in.

Include growing subscribers and a significant decrease in the average age the average age of new subs came down by almost 10 years and was more diverse and we saw a material increase in time spent that included more than doubling time spent with film and Viacom content, becoming a strong.

Double digit part of overall consumption so.

So no question the product is working the plan now is to continue to add content that will be about 10000 additional hours of course rebrand CBS all access to Paramount plus in early 21 and that will be the time when the original slate also as expanded further to encompass the flagship brands.

The last thing I'd say is you know the response to a selecting paramount plus as the brand has been overwhelmingly positive so lots to be excited about here around Paramount plus and we see substantial incremental growth ahead.

Thanks, Brett operator, we'll take our next question. The next question is from the line of Michael Morris with Guggenheim.

Hi, Thanks, guys. Good morning, I'm, hoping you can go into a little bit more detail on the cable networks affiliate strength in the quarter I'm certainly came in ahead of what we were expecting and there was a a few moving parts in there with the strength in streaming.

What you're seeing sort of in the kind of core.

Traditional cable universe also you had a couple of new agreements with you too I think maybe one with another major distributor. It can you help us at all with those different components that contributed to the acceleration, maybe whether we need to consider any that might not be recurring going forward and then if I could just real quick.

Really.

You talked a bit about cash flow into the coming year and I I am curious if you can share a little more about how paramount plus.

Might impact free cash flow like how how much of your investment in that business is sort of a re purpose, saying or a shifting of UBS sort of existing run rate and how much will be incremental thank you.

Yes, sure Michael I'll take the affiliate piece and I'll flip it to intervene for the cash flow piece.

So the Philly, what I'm really happy with the state of our affiliate business. We clearly had a very strong dynamic in the quarter and that dynamic was driven both by unit and by rate. So if you look at the unit side of the equation subscriber declines were less than expected from an industry perspective, we saw that too.

I remember and we had the benefit of incremental carriage in the form of Viacom networks being added to you to TV in July and.

And then on top of that you overlay rate and the rate story is very strong we had renewal activity that benefited retrans and reverse comp as well as our premium services and that's in addition to the built in escalators. We have an all our network deals I'd also remind you that on the reverse comp side deals or pricing.

<unk> dollars and therefore insulated from subscriber declines so that's effectively another driver of rate and.

And then of course as you mentioned our affiliate growth is also being driven by the strong momentum we haven't streaming.

And as I indicated in my prepared remarks subscription streaming revenue growth accelerated to 78% in the quarter. So you put all that together and we had a very strong affiliate story and importantly, we expect growth the growth we experienced in Q3 will continue at a similar rate in Q4, and then more broadly.

I really like our position our product line positions us very well to respond to changing consumer behavior, we have compelling offerings in paying free streaming EPS Clos and industry, leading linear bundle and we know how to work with a broad range of distribution partners. We know how to get deals done and we have a legacy.

C of creating mutually beneficial values, so feel great about affiliate on the cash flow side the beam.

Yeah in terms of the streaming investment piece you know, we're not going to provide specific guidance for 21 at this point, but what I can share is that you know as we think about the magnitude and the composition of our content investments, we're very focused on thinking about it relative to the growth.

Cities, we see.

What I mean by that is you know look streaming is obviously a big opportunity.

It's one where we've got several years of experience and increasing momentum so its not a greenfield investment.

Remember, our domestic streaming and digital video revenue is growing 50% on an annual run rate for two and a half billion. So we see that as a really compelling case for investing to continue to support the growth.

And as I mentioned in my earlier remarks, we do intend to do that in 2021 some of that investment will be funded by the growth itself and some of it will be funded by incremental cost synergies.

And so you know unlike a pure play streaming company I think our content investments have a lot of leverage meaning that every dollar we spend on content can benefit us across the entire company from streaming the linear to film and adjacent businesses like consumer products. So.

We spent a lot of time thinking about how to allocate and reallocate that spend to optimize that leverage across all of those is different distribution channels.

Thank you Mike Operator, we'll take our next question.

Next question is from the line of Jessica race are linked with Banc of America Securities.

Oh, Thank you know I'm, Bob you touched on this in your prepared remarks, but then the streaming reorganization can you talk a little different let them have color on a hypothetical transition compete.

Compete in a world that quickly shifting more towards direct to consumer inkjet business models. What can you do now under this new organizational structure that you couldn't do before do you need to reorganize any other parts of the company and then just a separate topic, but could you touch on the Upfronts and you know how it turned out.

Yeah sure Jessica so.

So first in terms of the streaming or probably three things that I should highlight first as I mentioned in my remarks. We recently created this combined organization under Tom Ryan to enhance our ability to create value from the combined asset base now look in particular, that's really about maximizing the benefit of us operating in both the.

Okay, and free space I see that combination of having a range of benefits it'll advantage us in terms of increasing lifetime value, including helping manage sack and churn and integrated model also facilitate sharing of tech data and analytics.

And I believe an integrated model will facilitate a more sophisticated approach to windowing across our streaming services. The second thing you should know is that as part of this change Tom Ryan joins our content Council and that means he is partnering with our content leadership as they execute on a multi platform mandate our brand Lee.

As you know them, Jessica George Cheeks, Jim Giannakouros, Chris Mccarthy, David Nevins, Brian Robbins, they're the best in the business and there are now aligned with time to ensure we put the full weight of our company behind our streaming aspirations I believe that enables a stronger team and allows us also to extract benefits from outside streaming from which.

To drive streaming things like traditional reach in our broader IP portfolio, including importantly, as related to key franchises and by the way we're already seeing that benefit in terms of our plans for Paramount plus and for Pluto TV. The last thing you should look you should look at this really in the context of our overall.

All execution as one Viacom CBS as you know Jessica since day, one of the merger I've been focused on harnessing the combined power of this company and you've seen us move quickly to integrate key functions both on the commercial and strategic services side to really benefit from that.

It's a powerful model, it's already working in many ways and I believe there's much more to come.

On the upfront side.

Yeah, what we doing an upfront a virtual up front in fact in the middle of COVID-19 was something no one has ever experienced before but I'm really happy with where we ended up I think the team did a phenomenal job really are benefiting from our asset base, we were up low single digits on price and.

And we were very careful with volume holding back inventory. So that we have inventory to sell in scatter and as you know Jessica scatter market. Today is very robust, we're seeing historically high premiums versus the upfront higher than pre koby by the way and we're seeing scatter to scatter in broad.

Cast in double digits and in cable in high single, so that market's robust you want to have inventory to play there we will.

On the digital side or the up front demand was very solid up versus last year's upfront. It's another reason why I love our position with Pluto. It's a solution because if you think about Pluto for a second it's a solution to our clients need for high quality video reach in today's marketplace and it's a slow.

Sure our needs for impressions to drive growth and when you look at the numbers. It's a solution that is clearly working and it has room to run so again.

A different on upfront than any of us have ever experienced but I feel very good about how we're exiting it and it is a good base to build on going into 21.

Thanks, Jeff Operator next question.

Next question is from the line of Alexia Quadrani with JP Morgan.

Hi, Thank you call my answer to question first one on your impressive performance you've seen it pretty now I'm curious if you've seen any impact on guidance grant.

Some of your competitors <unk>.

Hey, no broker Peacock <unk> name a few and then just a follow up if I can if you could my no common telecom Italia or not given your ownership over such important common ground I'm, sorry, I thought the top crocker are choosing to call that tiny Bakken keeping it.

Our panel.

[noise], Yeah, I'm sure Alexia so let.

Let me start by saying I couldn't be happier with our decision to acquire Pluto in late 2018, it's an amazing asset and it's grown even faster than we had hoped never mind plan, but hoped at the time.

Well you heard the metrics today the momentum is unquestionable in both usage and monetization. If you recall, we closed on that deal in March of 19.

And we quickly talked about it being a long term opportunity I'm, having a billion dollars in revenue I think people thought we were crazy when we said that but given the growth. We've experienced since then our ambitions have actually grown from there why because as I said I really it's in my last answer it's an amazing thing is a solution to the marketplace need for high quality video reach.

And it's a solution to us needing more impressions to sell its a great intersection.

In terms of the category and competitors or what the category is very strong but the good news is we have the number one fast service. So are we feeling any pressure no not let me look at the revenue growth rates Pluto more than doubled in the quarter and Ah and it's again, it's got tremendous momentum.

With respect to your question on comedy Central and H.B.L. Max.

Look our content licensing strategy I think there's really two things to think about it one is content licensing is an important business, but two is our strategy is clearly evolving, particularly with Paramount plus so first in terms of the content licensing business.

We have a tremendous asset base in content both from a library you know film Library of 4000 titles TV Library of 140000 episodes current series production of 750 service series globally.

We can't keep all that for a self it doesn't make sense, it's too much and we do have strong demand from third parties, because we are proven hitmakers and that demand, we can reliably and profitably monetize it and we do and remember the monetization is overwhelming a rental model. So the IP does return to us over time for.

Other downstream uses a I'd also say the beyond the financial value of licensing it has strategic value, we can and do use third party platforms to extend and expand audience and that also provides downstream benefits to our owned and operated platforms that could be about early seasons on a third party platform.

Im driving demand for new seasons or spin offs on ours could also be about broader revenues like consumer products all that said.

And this is where I want to talk a bit about comedy central specifically that you out our strategy is clearly evolving in a more oh leno owned and operated based direction and Paramount plus has already impacted our content licensing decisions. We do have a two year view of the original slate for Paramount plus that leaves heavily on franchise IP from across.

The company, we made those decisions before we decided what to license. That's IP. We're very excited about you heard a bit about it but there's more to come as we get closer to launch in terms of library, which is where your comedy question fits and we've increasingly move to a co exclusive or nonexclusive model to ensure that Paramount plus also Ben.

If it's from the product and a and again you know you look at what isn't acquisition driver versus what is an engagement driver.

Library product is not acquisition drivers you know these we believe will be our franchised linked originals and our original originals, but library product, including some stuff from comedy Central is good for engagement and so we want to have it for our own use but again, we don't think that detracts from subscriber acquisition.

For Paramount plus.

So again I feel very good about where we are in content licensing we have a very thoughtful strategy. We are supporting that business, but we are clearly evolving it include.

Including in a more owned and operated direction as we ramp Paramount plus and again very excited about what 20 one's going to bring thank you Alexia operator next question. Please.

Next question is from rich Greenfield with lights should partners.

Hi, Thanks for taking the questions I I've got two <unk> first I guess, if we look at Peacock in H.B. I'm actually it's pretty clear that EPS five just as a business model is really hard and that you need sort of must watch and kind of only can get their type content.

You got things like Star Trek that are only available on all access sites and will only be available on Paramount plus but when I look at things like the NFL you can get those in other places you don't have to watch Paramount plus to get the NFL. So maybe just help investors understand like what type what what's the content can you give us any preview of like what's going to be the must have.

Franchises that are going to be only available on paramount plastic to drive that product.

Yeah sure rich so we're absolutely focused on creating a must watch service in Paramount plus and we do believe that our positioning of live sports breaking news in a mountain of entertainment is differentiated and compelling now as part of that there is no question that franchises.

Will be key to the success of Paramount plus.

And related to that our strategy is to have new original variance of franchises to service subscription drivers those originals in turn much like my commentary to Alexia is pointing away will be linked to larger library assets to drive subscriber engagement. So we're very focused on this strategy at all.

Also note that one of our competitors has clearly demonstrated the value of that approach. So star Trac you mentioned arguably the original proof of concept for CBS. All access there are now multiple variants of it on all access it works well for US sports, which you also mentioned there are a bit different but clearly palaver powerful we have.

[music] wafer that is exclusive and we're very happy we got it by the way we're Super Happy we got it early and now habit for a whole bunch of years going forward, but you know look the NFL the FCC the golf, even though they're also available on CBS linear they definitely work for all access and will definitely work for Paramount plus in terms of.

Pernod, plus we have announced some new entertainment franchises that we're bringing to the plus the godfather sponge, Bob the criminal minds spin out but under the covers our prelaunch showed that there's other franchises that work to that out potential things like MTV is reality show.

The challenge things like mix and Nicks animated Library series Avatar and all this is really the tip of the iceberg and we do have other franchises in the company. So you can safely assume the upcoming announcements will include new original variants of them for Paramount plus we will of course have some non fat free.

Chinese based new originals to keep things fresh, but I'm not going to get ahead of things and reveal them until we get much closer to launch. Thank you rich operator next question.

Next question is from the line of Ben Swinburn with Morgan Stanley.

Thanks, Good morning, sticking on the direct to consumer theme two questions. Bob How do you think about the kids and family investment in opportunity in front of Paramount plus particularly around sort of the Nic brand an animated content you know that some of the more general entertainment broader services have kids con.

Intent, but they're not dedicated kid's apps so to speak so just wondering how you're thinking about.

Integrating neck and animation and to make sure you get to get the most out of that inside of Paramount plus and then you know for either you or nuveen I'm, just curious and maybe intervenes. Its you know from your Amazon days. When you look at how Viacom CBS is executing on like customer acquisition retention analytics.

Across kind of Pluto Paramount plus show time, you know do you think there's opportunities to align.

Align those across the three services in a more effective way know what's being done today, obviously, they've had a lot of success I'm not asking you to yeah Monday morning quarter back then, but just from from your perspective I'd be curious what you see as the big opportunity to operationally there.

Yeah sure Ben Let me go first and then I'll flip it to mean for the second part so look the kids going it's really the kids and family space. We believe is fundamentally important to us at Paramount plus we obviously believe that bringing the Nic brand and it's incredible library of both.

Goes and IP that can continue to go forward is an amazing advantage. If you look out at the preview launch in what we've done with CBS. All access to date, we have added a bunch of Nickelodeon content that content is definitely a significant contributor to what I characterize as.

Strong double digit share of overall consumption that Viacom network content now represents on CBS all access.

As we get into Paramount plus we.

We mentioned, adding 10000 additional hours certainly a bunch of that will be from Nick We mentioned a growing original slate certainly that come in from Nic We have mentioned one title.

That we are putting a as new exclusive original on Paramount plus that is camp coral, which is a sponge Bob spin out that is getting dropped after we exclusively release the sponge Bob sponge on the run movie in the domestic U.S. market on pair.

Amount plus so we think kids and family is very important and we think we have real advantage in terms of content and capabilities here by the way. We are also and I mean, I think mentioned, adding features and other things to Paramount plus one of the things. We're doing there is in the profile area in.

Including setting it up to be a safe kids environment, We believe that's important particularly.

For the preschool side of the house, but obviously a older kids as well so yeah. That's an important part of the equation and again. This is another place where Viacom CBS brings a tremendous advantage to the table and having Brian Robbins, who as I referenced is on the content Council is working with Tom Ryan is focused on moving this way.

Forward in fact, he was the advocate for camp coral debuting on Paramount plus versus Nickelodeon linear because he believed it was a key part of a franchise player. So he's totally in a us making paramount plus a success, including of course and the kids space the mean.

Yeah. Thanks, Bob.

You know Ben I think in terms of you know the analytics and the metrics that go into making a subscription business highly successful as I said in my remarks, I see a lot of encouraging trends and I look at it through the lens of all the components that are required to maximize.

The overall lifetime of our viewers are so you know what do you look at churn whether you look at Sac, whether you look at engagement I think that we have a great momentum in many of those dimensions and we're highly focused on continuing to optimize them in particular, the fact that we have.

The linked ecosystem between subscription in Paramount plots, and Showtime and flew to Pluto TV as a free offering I think gives us tremendous opportunities to apply analytics and data and figure out you know the most optimal way to acquire subsea.

Fibers.

And ways to maximize their lifetime, perhaps by moving them between those services depending on their needs at any given point.

And I would add to that that you know we can layer on top of those different services some really sophisticated.

Analytics.

And we'll be able to collect more data than we would have with you know a single service. So I'm extremely excited about what we can do there I think.

There's clearly momentum, but also a lot of opportunity that we can take that to the next level.

Thanks, Ben So your next question [noise].

Next question is coming from the line of Doug Mitchelson with credit Suisse.

Thanks, So much one for Bob and one for you if I could Bob you've talked in the past about steady content spending as we look through the cobot impacts I guess I'd be curious how far back to normal the production of content is in Fourq you, but the question is whether that steady with 2019 content spend he is the right way to think about 2021 are as you have all these opportunities.

Streaming if you're starting to take those content spending budget is higher in Burnaby spending not much Bob wants to spend on content in the future. How is the balance sheet position at this point in time, how should investors think about allocation of free cash flow going forward. Thank you both.

Yeah. So look on the content side, obviously co bid a interrupted a trajectory that was pretty well understood because it didn't impact film and television production, but I am happy to say that we've made very significant progress in a safe return to production with the Hell.

Often of our crews and talent top of mind at this point knock on wood, we're almost back to normal volumes you look at our Viacom media network. The cable side of the house. They are probably at 95% of production relative to prior year CBS essentially has all of the phone network series currently in production by the way.

We debuted a bunch of them recently, including young Sheldon mom NCR, yes.

Well as a new comedy from Chuck B, a b positive and there's more common showtime's backup in production in almost all of its series, a and even Paramount on the film side, which obviously very location based is ramping up and expects to be back at full capacity in 2021 and I also mentioned.

That our originals for Paramount plus are on track. So again from a production volume standpoint, we really have made extraordinary progress, particularly in the last quarter, a and we're currently in very good shape and that means you know we're ramping back to a more normal level of content spend obviously that.

Trajectory rule will continue into 21 and look we'll continue to work to remix it as as we have been to optimize our return on investment pushing towards growth areas et cetera, but the production aside is actually in pretty good shape again knock on wood at the moment the mean.

Yes, thanks and so.

In relation to the balance sheet and cash you know I feel very good about the current state of the balance sheet. You know as you heard 3 billion of cash on the balance sheet today, that's before counting any of the proceeds from the sina or other future noncore asset sales.

And going forward, we think about three financial priorities, we want to be able to support our our organic investment principally in streaming.

We want to fund our dividend and we want to pay down debt. The first two are basically funded out of free cash flow.

Debt pay down is accomplished through any excess free cash flow and then noncore asset sales. So you.

You know to the extent, we do complete additional transactions in the future.

I would expect the proceeds are those to primarily go to debt reduction. So hopefully that gives you some clarity.

Thanks, Doug.

Operator, we have time for one last question.

Hi, just a question it comes from the line of John Music with yes.

Great maybe just a couple of quick follow ups first on the some housekeeping the or any update on those noncore asset sales in terms of when we can look for in terms of timing and then and then maybe for Bob on the on the pastry me Hey streaming side net.

Net adds for the quarter slowed a bit versus the last two was there to the consolidation of the legacy D to C platforms impact a quarter or was there some pull forward in maybe two two from coated.

And ER and then lastly, you know Where's the distribution most effective did to the Apple promo that you guys had out there perform as expected. Thanks.

Yes, so I'll take the first part and on a non core asset sales no specific timing updates to provide their other than to say that.

You know as we've announced previously we do intend to divest Simon and Schuster, a we do also intend to divest a blackrock we will complete both of those transactions at a time and in a form where we think we can maximize value Simon and Schuster in particularly as one that we.

Think has been performing extremely well of late and.

It's a very valuable asset. So you know, it's still not core for us and so we do look forward to completing that in the future.

Yeah, and you know to your question really on I would call it mix subscriber adds and what's going on with subscribers in Q3 on a paid subscriber growth basis.

Very strong Q4, we didnt take that number up as much as we did before remember our year end target for pay you.

Used to be 16 million then we took it up to 18 million now we're taking up to 19 million. It is true that in the fourth quarter I think that being referenced in his remarks, we are doing some sunsetting of smaller service and service like MTV hits.

As we prepare for the relaunch of Paramount plus an early 21 and were also you know kind of focusing on marketing in 21 versus in the fourth quarter. So I wouldn't read too much into the fact that we only raised it to 19 versus a higher number we feel very good about our trajectory in 20, and we're super excited about where this thing is going.

In 21 as to your question about kind of mix of adds an apple TV plus versus others. The good news is we have broad and really ubiquitous distribution. It's one of our I believe real advantages in this game, it's partially because we don't have an in house distribution channel that we favor and we're really seeing net adds come from.

From a broad range of places, yes, including Apple.

Apple TV, plus but but by far that's not the only place are coming from.

So we feel good about that look I'm, we're very pleased with our results for this quarter, including the accelerated transformation of our business that you're seeing in less than a year and despite the challenges of pandemic. We brought together a single Viacom CBS that does have growing momentum and is creating value on multiple dimensions you see.

That in our Q3 metrics both on the traditional side and importantly in streaming where our momentum is indisputable and while we're really pleased with Q3, it's what's to come that we're really excited about so thank you for your time today. Thank you for your support and finally I'd like to thank all Viacom CBS employees for all they do.

Every day to drive our company forward stay well everyone.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

[music].

Good day, everyone and welcome to the Viacom CBS third quarter 2020 earnings Conference call today's call is being recorded.

At this time I'd like to turn the call over to executive Vice President of Investor Relations Mr. Anthony Diclemente. Please go ahead Sir.

Good morning, everyone. Thank you for taking the time to be with us for our third quarter 2020, <unk> earnings call joining.

Joining me for today's discussion are Bob Bakish, our president and CEO and the being Chopra our CFO.

I want to refer you to the second slide in the presentation and remind you that certain statements made on this call are forward looking statements that involve risks and uncertainties. These.

These risks and uncertainties are discussed in more detail in our filings with the FCC.

Good morning, and thank you for joining us today.

Today's call I'll cover three key topics.

First how weve unlock the power of a combined Viacom CBS in the years since Weve merged.

Second our third quarter results demonstrate the company's building momentum.

And third how we're focused on achieving growth in the short and long term by aggressively leaning into streaming.

I'll, then hand, it over time to be in Chopra, who I'm pleased to welcome to his first earnings call as Viacom CBS as CFO.

The V. will give you like early perspective on the company as well as the detailed financial commentary on Q3.

Following that well take your questions.

Okay. So first off it's been almost a year since the Viacom CBS merger closed and I'm thrilled with the way our organization has come together to create value from the combined asset base.

In fact, despite the challenges presented by the world around US our company's transformation is ahead of schedule and we've moved quickly to realize the power of the Viacom CBS combination.

Hi, establishing a best in class management team, including most recently through the creation of a new consolidated streaming organization.

By accelerating our strategy and execution across paying free streaming.

Driving growth in subscribers monthly active users and revenue.

We're also unlocking more value in distribution by expanding our footprint through cross company renewals and new deals.

And simultaneously strengthening our positioning and advertising by bringing to bear the power of our combined portfolio and capabilities.

Oh, while improving operational efficiency and exceeding the cost synergies, we promised when we announced the transaction.

We've accomplished a lot in a short amount of time.

And we're just getting going.

Second let me turn to the quarter's financial and operating results.

Viacom CBS is Q3 reflects the continuation and acceleration of a strategy that is clearly working.

Even as we navigate through the pandemic.

To that end importantly, during the quarter, we saw improving top line trends across affiliate advertising and domestic streaming and digital video revenue.

In affiliate revenue grew 10% in the quarter, marking a significant improvement versus Q2.

This improvement was fueled by strong broken subscription streaming revenue as well as higher reverse comp and retransmission fees.

Also fueled by a return to growth in domestic cable affiliate revenue, which saw a 10 percentage point improvement in growth rate versus Q2.

Advertising revenue also improved dramatically versus what we saw in Q2.

With the rate of decline is slowing to 6%.

Improvements were seen across the board in broadcast cable sports National local digital and international.

And the scatter market was robust.

Strong activity across key categories.

Speaking of categories. We've also seen certain co lead impacted industries like auto and retail gradually return.

Which reflects improvement in the economy and the significant value our portfolio brings to advertisers to drive their own business recovery.

Importantly, as we look forward. The return of CBS is stable fall schedule is upon us with several scripted series already on air and more premiere dates coming up.

Add to that the NFL, the FCC and the masters our content position is strong.

This dynamic paired with a successful upfront and hot political category should provide further benefit in the fourth quarter.

Overall, we're encouraged by what we're seeing and Big picture advertising is certainly moving in the right direction.

The commercial momentum of Viacom CBS is clear and it is underpinned by the durable strength of our brands and IP.

Cts was once again, the most watched network across prime time daytime and late night during the 2019 2020 broadcast here.

We maintained our leadership in key demos as the number one cable portfolio for share viewing and we owned more top 30 cable networks than any other media family.

Internationally, our linear share appealing increased for a third consecutive quarter.

And for the second quarter in a row tubular labs ranked Viacom CBS the number one media and entertainment company in social reach.

Reinforcing the popularity and relevance of our brands and IP in the digital space.

The strength of Viacom CBS. This foundation in content franchise, IP and audience reach is an important competitive advantage, including as a growth accelerate for our streaming business, where we had another great quarter.

To that end Viacom CBS grew domestic streaming and digital video revenue by 56% in Q3.

Up from 25% in Q2.

Reflecting the real momentum in usage and monetization in our pay and free streaming products.

Something we're aggressively leaning into.

Let me unpack this a bit.

And both CBS, all access and Showtime OTT TT each had robust consumption growth and sign ups.

Starting with all access.

Service benefited from strong demand for sports like you wafer and the NFL originals like Star Trek, lower decks, and CBS network content like Big brother and Love Island.

As well as from the 3500 library episodes added from Nickelodeon DT comedy Central MTV and Smithsonian.

Plus the almost 200 films from Paramount that we added in late July as part of our preview launch.

CBS all access is now in the early stages of benefiting from the power of the combined company.

And there's much more to come.

Q3 2020 ViacomCBS Inc Earnings Call

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