Viacom's CEO Discusses Q2 2012 Results

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Viacom's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Presentation

Viacom (VIAB) Q2 2012 Earnings Call May 3, 2012 8:30 AM ET

Operator

Good day, everyone, and welcome to the Viacom Fiscal Year Second Quarter 2012 Earnings Release Teleconference. Today's call is being recorded. At this time, I'd like to turn the call over to the Senior Vice President of Investor Relations, Mr. Jim Bombassei. Please go ahead, sir.

James Bombassei

Good morning, everyone, and thank you for taking the time to join us for our March quarter earnings call. Joining me for today's discussion are Sumner Redstone, our Chairman; Philippe Dauman, our President and CEO; Tom Dooley, our Chief Operating Officer; and Jimmy Barge, our Chief Financial Officer.

Please note that in addition to our press release, we have slides and trending schedules containing supplemental information available on our website. I want to refer you to Page #2 in the Web 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. Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website.

Now I'll turn the call over to Sumner.

Sumner M. Redstone

Thank you, Jim. Good morning, everyone. I'm very pleased to join Philippe, Tom, Jimmy to discuss Viacom's second quarter results. Viacom turned in another strong performance continuing to drive superior profitability despite the uneven overall economy. Underlying our success is the continual outstanding, strategic and operational oversight of our management team, as well as our singular focus on using all of our creative resources to enhance our audience relationships and to deliver greater value to our stockholders.

Our Media Networks are constantly reinventing and reengaging cementing their status as destinations of choice for all audiences all over the world and platforms of preference for a growing number of marketing partners. Paramount Pictures also continues to hone its skills in not only building powerful new global film franchises, but also creating targeted motion picture experiences for our passionate fans. This, along with the disciplined operational approach has put Paramount at the top of the industry. Paramount is the #1 studio in this time of year.

We are well positioned halfway through the fiscal year, and the long-term forecast is bright. All thanks again to the extraordinary strong management team at Viacom, led, of course by my friend Philippe.

Now I'd like to turn the call over to Philippe, a man who is probably the wisest man I have ever met, for an in-depth look at our performance.

Philippe P. Dauman

Thank you very much, Sumner, and good morning, everyone. Thank you for joining us today.

Viacom delivered yet another strong performance in the second quarter of our fiscal year. Across our divisions, we sharpened our focus on execution and efficiency, while continuing to invest in content that connects with audiences worldwide.

A few opening points. Consistent investment and content keeps our brands creatively vibrant and culturally relevant. This fiscal year, our Media Networks are launching and developing more original programming than ever across multiple formats, from reality to scripted, live action to animation. Our programming pipeline has never been more diverse or more tailored to the taste of our audiences. Our affiliate revenue is strong and growing, thanks to brands that remain must carry content for existing and emerging distributors alike.

We are seeing encouraging signs of a strengthening ad market as we enter the upfront season. Overseas, we continue to make great progress in pursuit of our ambitious targets for expansion and operating income growth, particularly as we increase our offerings for adult audiences with Comedy Central and with the new Paramount Channels, while continuing to expand the Nickelodeon brand. Paramount Pictures is cementing its reputation as one of the best run studios in Hollywood, capturing efficiencies even as it unlocks value from innovative and highly profitable releases, including the double insight of the second quarter.

Finally, by monetizing our content and our brands and tightly managing costs, we continue to maintain one of the best balance sheets in the business. Our consistent ability to generate substantial free cash flow reinforces our commitment to return capital to our shareholders.

This morning, I will give an overview of our financial results for the second quarter and review highlights from our divisions. Tom and Jimmy will provide additional detail, and then we'll open it up to questions.

First, the numbers. Viacom's consolidated revenues grew 2% to $3.33 billion in the second quarter, driven by growth in our Media Networks segment. Operating income increased 23% to $932 million. Our Media Networks delivered 5% growth in revenues and an 11% increase in adjusted operating income on strong increases in affiliate revenues.

Filmed Entertainment revenue decreased 5%, reflecting lower theatrical revenue due to a less widely distributed mix of releases in the same period last year, which featured significant hits, Rango, No Strings Attached and Justin Bieber: Never Say Never. Adjusted operating income in Filmed Entertainment increased 195%, driven by lower distribution costs, which more than offset lower revenue. Our adjusted earnings from continuing operations increased 24% to $535 million in the March quarter, and adjusted earnings per share increased to $0.98, up 36% over the second quarter of fiscal 2011.

During the second quarter of fiscal 2012, we repurchased $700 million in stock under our share repurchase program. We expect to buy back $700 million in stock again this quarter and are on track to purchase $2.8 billion in stock for the full fiscal year.

Our Media Networks remains strong and creatively vibrant, with our nearly $3 billion fiscal year investment in content, yielding a greater output of new, original, wholly-owned content than at any time in Viacom's history. In this age of time-shifting and on-demand viewing across platforms, the value of fresh and compelling original content is greater than ever.

All of our networks are tapping rich development pipelines set by strong brand filters and deep consumer insights. As we pop out more content, we continue to innovate how we market, distribute and build experiences around programming across platforms. Our brands are well out in front in experimentation and advances in social networking applied to television content.

In ad sales, we began to see signs of recovery in marketplace. We were able to capitalize on this improvement and return to growth domestically. For the quarter, our domestic advertising revenues increased 1%. Worldwide advertising revenues were flat at $1.07 billion for the quarter. We remain encouraged by what we're seeing and we expect to capture new opportunities in the market as we head into the upfront season.

I want to point out that for our fiscal third quarter, there are 2 event timing issues that will reduce year-on-year domestic ad sales quarterly comps by a total of about 3 to 4 percentage points. This year, the Nickelodeon Kids' Choice Awards took place in the second quarter and the BET Awards will air early in the fiscal fourth quarter, both aired in the third quarter last year.

Distribution continue to be a strong and steady driver of revenue for Viacom. Worldwide affiliate revenues increased 17%, driven by higher revenues from digital distribution agreements, as well as rate increases. During the quarter, we successfully closed a number of digital distribution deals, including an agreement to provide library content to Amazon for its Prime Instant Video service. We also increased distribution with our existing affiliates, with a particular focus on gaining distribution for our HD simulcast. In particular, we made significant gains in carriage of TV Land HD. For our 2012 fiscal year, we expect to grow affiliate revenue by 10%.

Our Media Networks remain first choice partners for distributors as they test in market new products and technologies. We continue to build on our strong VOD offering by striking agreements to provide additional library content, as well as current episodes from some of our most popular brands and franchises. We remain committed to supporting our distribution partners multi-platform efforts, with authenticated sites offering on-demand content for MTV, Comedy Central, Nickelodeon, VH1 and SPIKE. A BET-authenticated site will launch soon.

We're also exploring opportunities to connect with consumers through tablet devices. A recent study by our strategic insights and research group uncovered that tablets have surpassed laptops as the second screen of choice among consumers. Currently, we partner with Cablevision to make linear feeds of our networks available through its in-home streaming tablet app. As we strengthen our existing partnerships, we are aggressively pursuing new distributors for both our long- and short-form content.

Internationally, we're moving ahead decisively in our drive to expand our reach in revenue around the globe. Viacom international media networks turned in another strong performance, powered by affiliate revenue growth in both organic and visual distribution and excellent cost management. We set ambitious goals for our international operations. As I've said on prior occasions, we're aiming for margins exceeding 20% in the next fiscal year and OI growth at a 30% compounded rate over the next 5 years. I'm pleased to report that we're very much on track to achieve these goals and we expect to exceed that OI growth rate this year.

Our growing adult-focused business will be a key driver of this growth. We made great progress in the second quarter. Ratings of our international Comedy Central channels were up 35%. In the last 6 months, we've launched 5 new comedy channels, most recently in Russia, which now puts the network in 5 continents and more than 40 countries.

We debuted our first-ever Paramount Channel in Spain at the end of the second quarter, opening a new chapter in our international expansion strategy. Based on audience share during its first month, the Paramount Channel is the most successful digital terrestrial television channel launched in Spain in the past 12 months and the country's second most successful DTT launch of all time. The channel premiere on March 30 with titles including The Godfather trilogy, Breakfast at Tiffany's and American Beauty. We're on target to sign 80 advertisers for the free-to-air channel in each of its first 2 months of operation. With one successful launch under our belt, we're looking to move quickly on future launches in additional markets.

Even as we expand to new markets, we're strengthening our presence in existing ones. We had a very strong quarter in the U.K., one of our most important markets. Ratings were up 21% at MTV U.K., thanks to Jersey Shore, which just concluded its second season as the highest-rated series ever for the channel. Comedy Central ratings are up 67%, thanks to strong U.S.-based acquired programming and our local original comedy, Threesome. Finally, Nickelodeon U.K., as well as the Nick brand in many markets around the world, saw ratings gains, driven by iCarly and Victorious, with a strong pipeline in the current quarter as well.

[...]

In late night, The Daily Show with Jon Stewart and The Colbert Report achieved the distinction of being the only late-night talk shows to notch year-over-year growth with adults 18-49. The Daily Show is the #1 late-night talk show in the demo, beating all broadcast and cable competition.

Nickelodeon retained its top spot in the second quarter as the #1 cable network in total day. SpongeBob was the #1 animated program on all of television with kids 2-11, while iCarly was the #1 kid's program among total viewers. The second quarter also saw the return of the Nickelodeon Kids' Choice Awards which, in its 25th year, reached 15 million total viewers and generated a record 223 million votes online, hosted by Will Smith and featuring performances by Katy Perry and One Direction, the KCA's made the leap into a truly global juggernaut this year, earning its highest ratings ever by a wide margin in key markets, including the U.K., Germany and Australia.

The upcoming launch of the reinvented Teenage Mutant Ninja Turtles franchise in the fall is just one element of Nickelodeon's largest slate of original content ever. More than 650 episodes of returning hits and new series overall in 2012, 2013 season.

In the second quarter, Nick introduced How to Rock, starring Cymphonique Miller, which debuted as the #1 new show of 2012 with tweens 9-14. FRED: THE SHOW, which successfully expanded the Fred Figglehorn franchise as the #1 new live-action show with kids 2-11, and Big Time Movie starring Big Time Rush, which attracted 26 million total viewers over its telecast.

In the current quarter, Nickelodeon debuted animated series The Legend of Korra to 4.5 million total viewers successfully channeling the cult following of Avatar: the Last Airbender to create a breakout hit.

Korra is Nickelodeon's most-watched animated series premiere in 3 years. Also coming this quarter are new episodes of iCarly, Victorious, SpongeBob and the new original TV movie Rags starring Keke Palmer, and we will continue to pilot on. Nickelodeon is poised to become bigger and better than ever and continues to be an important locomotive of our international and consumer products expansion.

[...]

Thomas E. Dooley

Looking further out, Paramount is developing a Nickelodeon branded live-action movie based on the Teenage Mutant Ninja Turtles franchise, which is scheduled to hit theaters in December of 2013 in conjunction with the significant consumer product initiative. In addition, the studio is working on a CGI-animated SpongeBob movie, and they recently announced the sequel to Anchorman, where they will reunite the original cast of Will Ferrell, Steve Carell and Paul Rudd.

You can read the full Viacom Earnings Call Transcript here on Seeking Alpha.