Viacom Management Discusses Q4 2012 Results - Earnings Call Transcript

 |  About: Viacom Inc. (VIAB)
by: SA Transcripts


Good day, and welcome everyone to the Viacom Fiscal Year Fourth Quarter 2012 Earnings Release Teleconference. Today's call is being recorded. At this time, I would like to turn the conference over to 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 earnings call for the quarter and fiscal year ended September 30. 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.

And now I'll turn the call over to Sumner.

Sumner M. Redstone

Thank you, Jim. Thank you, all, for being with us this morning. I'm really pleased to join our leadership team to report Viacom's financial results. Our shareholders once more again benefit from our relentless focus on producing great content, operating efficiently and maximizing returns to shareholders in every single environment. As our industry continues to ever more rapidly evolve, this obsessive focus will separate Viacom from its peers and help ensure our continued leadership and many, many years in our success.

The fact of the matter is that Viacom has always been in the reinvention business. Our cable networks continue to innovate and strengthen their connections with new fans on new programs year after year. And our motion picture operations continue to bring innovative filmed entertainment to more people on more screens in more places than ever before.

Of course, the man at the center of this success is my friend Philippe Dauman. Philippe provides extraordinary leadership to Viacom's outstanding management team, and in fact, he has been at my side, creating all that I have built over the past 25 years. And I know, I'm confident he will continue to provide the same strategic insight and operating skill that will ensure Viacom's success for many, many years to come. He, in fact, is my most trusted advisor who understands my vision and has the eye as well as [ph] ability to see it through.

I'm proud to turn the call over to my forever friend, Viacom's CEO. I often refer to him as a genius and as the wisest man I ever met, and the reason is that Philippe has operated Viacom in a truly fantastically successful manner. So here – it's yours, Philippe, take it over.

Philippe P. Dauman

Thank you, Sumner. I really appreciate it, and good morning, everyone. Thank you for joining us today.

We know that many of you on the call today, like many of us here at Viacom, live, work or have loved ones in areas enduring the devastating effects of Hurricane Sandy. We hope that you and your families were able to weather the storm and return to the normal rhythm of life that we too often take for granted. For those still trying to rebuild, we are with you. Viacom remains committed to recovery efforts, whether it's our corporate support of the American Red Cross and other relief organizations or the initiatives of our individual brands, including MTV's Restore the Shore textathon tonight. And we thank our employees who continue to support the recovery through the company and their own personal efforts.

Let's move into the discussion of our September quarter and Viacom's 2012 fiscal year. It was a year in which the company achieved success in several key areas of strategic focus even amidst challenges. Our diverse brands continue to engage and entertain audiences on every platform throughout the world. We're investing consistently in content to ensure that those brands remain vibrant, strong and well positioned to attract greater viewership as audiences evolve and measurement improves. Those investments, along with key organizational changes, are yielding progress at Nickelodeon and our other networks.

We're aggressively pursuing every sensible opportunity to monetize our Media Networks, both through advertising and distribution. For the fiscal year, we generated double-digit growth in affiliate revenue as we captured substantial value for our content with existing and emerging distributors alike. We see fees from traditional and emerging distribution platforms as an important and consistent area of growth well into the future.

We're also creating ever-greater opportunities for our content internationally, where we're fortifying the position of our core brands in Nickelodeon and MTV, expanding with COMEDY and the Paramount Channel and building our consumer products business. This is another big opportunity for future growth where Viacom is extremely well positioned. In Filmed Entertainment, Paramount Pictures enters fiscal 2013 with a remarkable slate, which will see the return of key tentpole franchises such as Star Trek and the launch of new ones, including World War Z.

Even as we increase investment for content on every screen and add programming talent to our organization, we've enhanced operational efficiency, kept a tight rein on costs, maintained a strong balance sheet and continued to generate excess free cash flow. Viacom was able to drive bottom line growth and significant increases in earnings per share for both the quarter and full year, and we continue to deliver on our commitment to return capital to our shareholders through dividends and share repurchases.

This morning, I will briefly review our financial results for the quarter and the full year and provide highlights from our divisions. Tom and Jimmy will provide more detail, and then we'll gladly take your questions.

Let's begin with the results. Viacom's revenues in the fourth quarter declined 17% to $3.36 billion with revenues in our Media Networks segment flat and revenues in our Filmed Entertainment segment down 39%, due to a different mix and lower number of releases compared to the prior year's comparable quarter. Our fiscal 2012 revenues declined 7% as a result of the decline in advertising sales in Media Networks and theatrical and home entertainment revenues and Filmed Entertainment. Media Networks revenues rose 1% for the full year, driven by an 11% increase in affiliate revenues.

In the September quarter, Viacom's adjusted diluted earnings per share from continuing operations increased 14% to $1.21. For fiscal 2012, adjusted diluted earnings per share were $4.21 per diluted share, an 11% gain over the prior year period. Our operating free cash flow was nearly $2.4 billion for the fiscal year.

Fueled by our cash generation, we repurchased $700 million in stock in the September quarter under our $10 billion share repurchase program. The company repurchased a total of $2.8 billion in stock for the full fiscal year. In fiscal 2012, Viacom also increased its quarterly dividend 10% to $0.275 per share. As we begin fiscal 2013, we are on track to buy back at least $2.5 billion of stock this year. In the current quarter, we plan to purchase $700 million of our stock. We have consistently ranked among the top of our peers in returning capital to shareholders.

Let's take a look now at our -- at how our divisions performed in the quarter and the full year. At our Media Networks, we continue to be completely focused, completely focused on creating great content for every screen. We continue to increase our investment in programming to roll out more originals, including more new episodes of hit shows and more new franchises. In fact, a number of our core networks, including MTV, Nickelodeon, COMEDY CENTRAL, SPIKE and TV Land, are showing sequential improvement in the current quarter over our fiscal fourth quarter.

With any network portfolio, it is inevitable that some networks will be on the rise while others will be in reinvention. To be sure, the entire broadcast and cable industry is at an inflection point. Time-shifted viewing is growing more prevalent, and our networks are stretching the window for fan engagement with our shows as a result. In the fourth quarter, ratings for MTV's 10 Spot, for example, increased 34% when including DVR playback through 3 days. COMEDY CENTRAL's Tosh.0 nearly doubles its audience when including DVR playback through 3 days.

Content consumption across platforms is also growing rapidly and exceeding our ability to measure it by a greater margin than ever. We know that our audiences are viewing more video in more places than ever, but lack of comprehensive measurement remains a significant roadblock to monetization. However, we are confident that we have the right strategic mix to grow ratings in the short term by investing in original content, enhancing and empowering our creative teams, applying our deep audience insights, maximizing scheduling opportunities across screens and leveraging our unrivaled strength in social media. This will, in turn, allow us to restore more robust ad revenues as the year progresses to enhance our otherwise strong financial performance.

Across our Media Networks, we are investing in the future and making the strategic decisions, particularly in the areas of programming development, marketing and distribution that will position us as a leader in a truly convergent multi-platform world, where expanded viewership is accurately accounted for on all screens. We are not waiting for business to change. We are changing how we do business.

Earlier this week, for example, MTV announced a new addition to its creative leadership team, adding a proven hit maker as its President of Programming. This follows on the heels of Nickelodeon's moves to create centralized west coast leadership for all of its content teams and recruit new talent, particularly in animation, as it rolls out an ambitious development slate and expands across platforms. COMEDY CENTRAL is increasing original programming by 55% in the current fiscal year as it installs digital as a function in every group across the network, for an even more holistic approach to content development across platforms.

Our advertising revenues were down 6% domestically and 7% worldwide for the quarter. We were able to achieve modest sequential improvement in our domestic advertising revenue performance despite the 10-day blackout of our channels on DIRECTV, which effectively canceled out the benefit of the BET Awards moving into the fourth quarter. For the full fiscal year, ad revenues declined 4% domestically and 5% worldwide. In the current quarter, we're seeing pricing up in the mid-teens over the upfront and scatter-versus-scatter pricing up in the mid-single-digits year-over-year. Advertiser demand for our content is there, and we are in a position to quickly monetize ratings improvement as it takes hold.

In distribution, affiliate revenues increased 12% domestically and 11% worldwide in the fourth quarter. For the full year, affiliate revenues increased to 10% domestically and 11% worldwide. During the fourth quarter, we successfully completed several distribution agreements in which we secured significant rate increases.

As previously noted, we struck a long-term agreement with DIRECTV, securing a healthy rate of increase. We also entered into a deal to provide EPIX films for the Amazon Prime subscription streaming service. In the current quarter, we renewed and expanded our agreement with Hulu, adding Tr3s at a limited offering from Nickelodeon to the Hulu Plus subscription service. We also made our content available for download to own through the Nook Video service.

Additionally, we increased distribution with existing affiliates, which launched TV Land and MTV 2 in HD in the fourth quarter. In the current quarter, we significantly expanded our TV Everywhere partnerships with distributors by rolling out our video-on-demand websites for ATT U-Verse, Time Warner Cable and DIRECTV subscribers.

Despite some rating softness, MTV continues to connect with its core 12- to 34-year-old demo, an audience with whom it scores 4 of the top 15 cable series more than any other network, including Teen Mom, Awkward, Snooki & JWOWW and Teen Wolf. The network remained #1 in the demo among ad-supported cable networks in its critical 10 Spot programming slot. In the current quarter, MTV has a solid mix of returning hits and new originals in its 10 Spot lineup, anchored by Jersey Shore and Teen Mom 2. In its final season to date, Jersey Shore has been the #1 cable telecast on Thursdays in its demo. Leading into the series finale on December 20, MTV will air a week of countdown programming celebrating the event.

Teen Mom 2 returned on Monday this week, a new night from which the hit series will jump-start the network's lineup each week and drew 3.4 million total viewers, up from the final season of Teen Mom and outpacing the Teen Mom 2 season finale. MTV will air seasons 3 and 4 of Teen Mom 2 back-to-back for the first time, giving fans new episodes of the series through April of 2013. Teen Mom 2 will serve as a platform to launch several new series debuting through next quarter, including Catfish, a reality look at identity and truth in the social media age, which premiered Monday to an average audience of 2.7 million total viewers and ranked as the highest-rated 11 p.m. show premier in MTV history.

We've spoken at length about our efforts to reinvigorate Nickelodeon, and I'm pleased to report that those efforts are yielding results, with viewership stabilizing and a continued infusion of new original programming coming to air. By addressing ratings issues, half hour by half hour, Nick has made improvements across the schedule and is now flat to up in several day parts, including preschool.

The network has reclaimed its leadership of Saturday mornings among kids 2 to 11, thanks to new episodes of SpongeBob SquarePants and the long-awaited debut of Teenage Mutant Ninja Turtles, which ranked as the highest-rated animated launch on the network since 2009. For 4 straight weeks, SpongeBob has stopped all of television and Ninja Turtles has won its time period by double digits with the critical 2 to 11 audience. The Ninja Turtles consumer products line has also been selling very well with our partner Playmates managing out-of-stock situations for action figures and selling out additional items rapidly. We expect brisk sales to continue.

From SpongeBob to Avatar, our history has shown that top animated programs typically continue to build audiences over time. So the strength of Teenage Mutant Ninja Turtles out of the gate, in addition to the success of its consumer products line and the anticipation for the forthcoming live-action feature from Paramount, give us great encouragement that Nickelodeon has a lasting and lucrative hit on its hands.

Additionally, new seasons of returning programs, including iCarly, Victorious and Big Time Rush, had strong premieres in the fourth quarter and continue to perform well in the current quarter. The iCarly one-hour series finale airs Thanksgiving weekend and is among a greater number of event programs throughout the current quarter, including Christmas specials from SpongeBob and Fairly OddParents. Event programming is a consistent and critical ratings driver for Nickelodeon, and you'll see more and more of it from the network.

On COMEDY CENTRAL, new episodes of Tosh.0 and Workaholics performed well with the network's young male audience in the fourth quarter. COMEDY CENTRAL's newest hit, Key & Peele, solidified its place in the cultural zeitgeist. And in late night, Jon and Stephen again proved to be strong as they held leadership in late night across all of television with men 18 to 34. As I mentioned earlier, COMEDY is increasing its original programming significantly, including the launch of 6 new series in the first half of the 2013 calendar year.

VH1 continued its ratings rise as the network increased its viewership in primetime by 19% among adults 18 to 49 in the fourth quarter. Monday nights on VH1 remain particularly strong with women viewers. During the summer, VH1 was the #1 network with women 18 to 49 for 13 consecutive weeks, thanks to hits Love & Hip Hop: Atlanta and Single Ladies. The network is building on its momentum with the introduction of a new Friday night comedy block in January, which will feature The Jenny McCarthy Show and the return of Best Week Ever. Hit series Mob Wives and La La's Full Court Life return with new seasons in January as well.

BET saw success in the fourth quarter with its gospel original series, SUNDAY BEST, which has its best season to date, and 106 & Park, which the network has given a refreshed look and new hosts. In the current quarter, the BET Hip Hop Awards drew 3.1 million viewers, and BET's new reality series, Keyshia & Daniel: Family First, successfully premiered with 2.9 million viewers. In the current quarter, BET will air the 2012 Soul Train Awards later this month. And next quarter, we'll see the return of the network's hit originals, The Game and Let's Stay Together.

TV Land had a solid quarter with total day ratings up 5% year-over-year at the network's core 25 to 54 demo. In the current quarter, TV Land will look to build on that momentum with the return of Hot In Cleveland and Happily Divorced later this month.

As SPIKE prepares for its much-anticipated debut of Bellator mixed martial arts in January, it continues to build out its lineup of originals. Returning series Auction Hunters and Bar Rescue showed momentum with Bar Rescue achieving double-digit ratings gains over its first season. In the current quarter, Tattoo Nightmares was SPIKE's highest-rated series premiere among viewers 18 to 49 in nearly 2 years.

CMT made progress in the fourth quarter by updating its afternoon and primetime lineup with new acquisitions, including Reba. In the current quarter, the season 2 premiere of Redneck Island last Saturday attracted more than 1.4 million viewers and stands as the highest-rated season premiere in CMT history.

Moving now to international. Our international Media Networks improved both its operating income and margins in the fourth quarter despite the volatile economic environment abroad, particularly in Europe. We continue to drive strong growth in affiliate sales through organic growth, new channel launches and, to a lesser extent than prior quarters, digital distribution. Our continued strength in affiliate sales internationally, combined with significant cost management, have enabled Viacom International Media Networks to mitigate softness in advertising and ancillary sales due to the economic factors mentioned earlier.

In fiscal 2012, we made great progress in driving the reach and success of our adults-focused business abroad, a key priority for international. Ratings at COMEDY CENTRAL increased nearly 30% internationally for the full year, and this month saw the launch of COMEDY across several markets in Southeast Asia. The launch marks a major milestone in our effort to establish COMEDY as our third truly global brand alongside MTV and Nickelodeon.

In the current quarter, fans around the world cast a record-breaking 184 million votes to decide the winners of last Sunday's 2012 MTV European Music Awards, and early results indicate that the broadcast grew its estimated TV reach in Europe by 15% over last year's strong ratings. We are on track to achieve our goal of 20% plus margins in our international networks in fiscal 2013.

Finally, let's take a look at our Filmed Entertainment segment. The fourth quarter closed a fiscal year in which Paramount Pictures took reasoned and decisive action to manage its release schedule and give its films maximum global visibility in theaters, even as it aggressively managed costs behind the screen, all of which resulted in higher profitability. The studio continues to demonstrate significant long-term progress in enhancing its margins.

In our fiscal 2013, Paramount has as diverse and promising a slate as we've seen from any studio in recent years, including star-driven tentpoles, prestige films and the type of highly targeted, high-margin releases it pioneered with the Paranormal Activity franchise. Indeed, Paranormal Activity returned to theaters in the current quarter with its fourth installment, which has grossed more than $50 million to-date at the box office and set the stage for a fifth Paranormal next Halloween.

Paramount also released Flight, which earned rave reviews for the performance of 2-time Oscar winner, Denzel Washington, and has had 2 strong weekends at the box office for cumulative gross of more than $50 million. The studio has an additional 5 films hitting theaters through the end of the quarter, including: a Tom Cruise action vehicle, Jack Reacher; The Guilt Trip, starring Seth Rogen and Barbra Streisand; David Chase's Not Fade Away; and DreamWorks Animation's Rise of the Guardians.

To wrap up, Viacom delivered significant value for shareholders in fiscal 2012. Our consistent investment in content will continue as we enter a new year, and our audiences will see it on every screen, on our television channels around the globe, on the web, on tablets and mobile devices and on the big screens in theaters worldwide.

As we deepen engagement and drive ratings, we'll continue to connect marketers with our audiences and advance distribution through innovative and fruitful partnerships. At the box office, Paramount Pictures will serve movie-going audiences with a deep and diverse slate that will drive theatrical revenue through the year. Our entire organization will continue to strive toward creative excellence, operational excellence and effective cost management. And as a result, we will deliver on our commitment to continue to maximize free cash flow and return capital to shareholders.

Thank you again for your time. And with that, I'll turn it over to Jimmy.

James W. Barge

Thanks, Philippe, and good morning, everyone. I hope you've all had a chance to review our earnings release and web presentation summarizing the results of our September quarter. Our 10-K will be filed shortly.

This morning, I'm going to take you through our operating results in more detail. My remarks will focus on adjusted results from continuing operations. Adjusted results for this year's September quarter excludes $17 million of discrete tax benefit. Last year's September quarter adjusted results excluded restructuring charges of $130 million on a pretax basis and $90 million after tax, as well as $52 million of discrete tax benefit.

Now let's take a look at our segment results. In our Media Networks segment, revenues of $2.3 billion in the quarter were in line with the prior year. Domestic revenues increased 1%, and international revenues were down 6%. Foreign exchange had a 4 percentage point unfavorable impact on international revenues.

Page 10 of our web deck provides a breakdown of our Media Networks revenue performance. As Philippe mentioned, domestic advertising revenues were down 6% in the quarter. International advertising declined 14%, with foreign exchange losses impacting the growth rate by 5 percentage points. The decline in international ad sales was primarily due to fewer production and promotional events in the quarter, as well as softness in Europe.

In terms of affiliate revenues, domestic revenues increased 12% while international revenues were up 3%. Foreign exchange negatively impacted the international growth rate by 5 percentage points. Excluding the impact of the digital distribution agreement, domestic affiliate revenues grew high single digits in the quarter. International affiliate growth reflects revenues from new channel launches, as well as rate in subscriber increases.

Worldwide ancillary revenues declined 4% in the quarter, primarily due to lower consumer product licensing and home entertainment revenues.

Expenses increased 2% in the quarter. Within expenses, the programming expense grew 9% while SG&A expense declined 7%. The decrease in SG&A expense was primarily due to lower accrued incentive-based compensation expense and savings realized from our 2011 restructuring.

Media Networks adjusted operating income of $933 million in the quarter was down 3% as compared to the September quarter of last year. The operating margin of 41% decreased approximately 100 basis points compared to the prior year.

Now moving to Filmed Entertainment. Revenues in the quarter were down 39% to $1.1 billion. Page 12 of the web presentation provides a breakdown of Filmed Entertainment revenues. Worldwide theatrical revenues decreased 83% to $131 million in the quarter. As anticipated, the studio faced difficult comparison to the September quarter of last year benefited from carryover revenues from Transformers: Dark of the Moon, as well as the release in the quarter of Captain America: The First Avenger. Worldwide home entertainment revenues decreased 32% to $345 million in the quarter, primarily due to the mix of titles released in the quarter, including a difficult comparison to last year's release of Transformers 3.

TV license fees increased 19% to $464 million. The increase in TV license fees in the quarter principally reflects the number and mix of titles available in the pay TV and foreign syndication marketplaces. Ancillary revenues increased 21% to $147 million in the quarter due to higher digital revenues. Filmed Entertainment generated adjusted operating income of $195 million in the quarter as compared to income of $185 million last year.

Now moving below operating income, total company equity losses from investments were $13 million in the quarter. Losses in the quarter principally relate our investment in EPIX. On a full year basis, EPIX was profitable.

The reported tax rate in the quarter was 31%. The reported rate was favorably impacted by $17 million of discrete tax benefits. For fiscal year 2012, the adjusted effective tax rate was 34.0%.

And with that, I'd like to turn the call over to Tom.

Thomas E. Dooley

Thank you, Jimmy. Today I'm going to touch on our full year results, as well as talk about our cash flow, our debt profile and the return of capital to our shareholders. I will also talk about the seasonal factors impacting our 2013 fiscal year.

Now turning to the full year results. Media Networks generated revenue of $9.2 billion and adjusted operating income of $3.9 billion. Affiliate revenues grew 11% for the year, and advertising revenue declined 5%. Media Networks' margins of 42% increased 20 basis points over the prior year. The international part of our Media Networks business generated approximately $270 million of profitability for the year and achieved high-teens operating margins. Filmed Entertainment generated revenues of $4.8 billion and adjusted operating income of $325 million. This translates to an operating margin of 7%. As Philippe mentioned, we generated full year adjusted earnings per share of $4.21 and $2.4 billion in operating free cash flow.

Also, we continue to be aggressive in returning capital to our shareholders. For the full year, we repurchased 60 million of our shares for an aggregate purchase price of $2.8 billion. Between our buyback and dividend programs, we returned a total of approximately $3.4 billion of capital back to our shareholders, which is a return-on-market capitalization of approximately 14%. If you look back to when we started our buyback program 2 years ago, we had 609 million shares outstanding. Since then, we have repurchased a total of 121 million of our shares in the open market for an aggregate purchase price of $5.6 billion, which brings our shares outstanding to 502 million as of November 7.

Now moving on to our debt. For the most part, it's fixed rate with an average cost at quarter end of 5%. This compares to an average cost of 5.8% 12 months ago. So we continue to make great progress in lowering our average cost of debt. To the extent we have incremental borrowings, we are funding this in the commercial paper marketplace at an annual rate of approximately 40 basis points. We had no variable rate borrowings at quarter end.

In terms of leverage, we ended the quarter with $8.1 billion of debt and capital leases outstanding and $848 million of cash and cash equivalents. Our leverage ratio at the end of the quarter was 2x. At September 30, our $2.1 billion bank revolver was undrawn. Last week, we completed an amendment to our revolving credit facility that increased the size from $2.1 billion to $2.5 billion and extended the maturity 2 years to November of 2017. This action reflects the strength of our balance sheet and provides us with significant financial flexibility for the next 5 years.

Now I'd like to talk about some of the factors impacting our 2013 fiscal year. In terms of affiliate revenue, for fiscal 2013, we continue to see growth in the high single-digit to low double-digit range. However, quarterly affiliate revenue growth will fluctuate, given that the recognition on some of our digital agreements is tied to product availability. Accordingly, in the December quarter, we expect that the reported affiliate revenue growth will be in the low single digits, which is a combination of lower digital revenues and double-digit growth in traditional revenues.

For the full year, we expect that the growth rate for Media Networks programming expense will be in the high single digits. Given the timing of shows coming on air, growth will be weighted to the first half of the year. In terms of non-programming expense, we will continue to drive efficiencies throughout the organization in order to preserve or enhance our margins.

At Filmed Entertainment, in the December quarter, we anticipate a greater loss than in the prior year. This is primarily due to difficult comparisons in the home entertainment marketplace. The prior year benefited from carryover revenues from Transformers 3, as well as releases in the quarter, which included Super 8 and Captain America. However, the studio should see healthy growth in profits in the back half of the fiscal year as they benefit from the availabilities of titles in TV and home entertainment marketplaces.

For 2013, we are forecasting a book tax rate of 34.5%. We will refine this as we go through the year and get a better sense of the domestic versus international profitability mix. We expect cash taxes to be similar to book taxes for the year.

As for our stock buyback program, as Philippe mentioned, we plan to purchase approximately $700 million of our stock in the December quarter, and we expect to repurchase at least $2.5 billion for fiscal 2013.

Looking ahead at the studio slate and development pipeline, on November 21, Paramount will be disturbing DreamWorks Animation's Rise of the Guardians. For the holidays, the studio will release the comedy, Guilt Trip on December 19, starring Barbra Streisand and Seth Rogen and which is produced by Lorne Michaels. And on December 21, they will release Jack Reacher, which stars Tom Cruise and is based on the best-selling book series. In addition, Paramount Vantage will be releasing the film Not Fade Away from David Chase, the creator of The Sopranos.

As we look into 2013, we have a number of 3D releases. In January, the studio will release Hansel and Gretel: Witch Hunters, which stars Jeremy Renner, and in March, they will release G.I. Joe: Retaliation. The next installment of Star Trek, which is directed by J.J. Abrams, follows in May, and in June, Paramount will release World War Z, which stars Brad Pitt.

Now looking at Paramount's development, they are currently in production on Noah, which is directed by Darren Aronofsky and stars Russell Crowe, as well as a new installment to the Jack Ryan series, with Chris Pine in the lead role. The studio is also in development on the Michael Bay-directed Teenage Mutant Ninja Turtles movie and on a SpongeBob movie. They are planning a fourth installment of Transformers, as well as a fifth installment of our low-budget Paranormal Activity franchise. If you look at our 4 Paranormal films, which have released to date, they have cost only $27 million to produce and have generated over $700 million in worldwide box office.

In summary, we continue to focus on organic investment, disciplined management of our cost structure and returning capital to our shareholders. At Media Networks, we remain committed to strengthening our brands through increased investment, as well as by growing the level of original programming on our networks across all platforms and devices. And we look forward to the day when total content consumption is more accurately measured. At Paramount, we have developed several tentpole franchises and are excited about our upcoming slate and pipeline. We continue to seek ways to reduce our capital commitment in the business in order to enhance our margins, as well as our returns. And we are committed to aggressively returning capital to our shareholders through our buyback and dividend programs.

I want to thank you for listening. And now, operator, we'll turn the call over to the questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Anthony DiClemente, Barclays.

Anthony J. DiClemente - Barclays Capital, Research Division

I think investors are, in some ways, pleasantly surprised by the lack of correlation between the level of some of your ratings declines in the past quarter and the level of your domestic advertising decline, which hasn't been as dramatic of a decline. So just wondering if, maybe Tom and Philippe, if you could remind us of some of the reasons why ratings haven't correlated as directly with advertising trends, why advertising hasn't quite been as bad as linear ratings declines. And you guys have been more aggressive on TV Everywhere, particularly with current release windows than your peers. And so, clearly, that's probably one of the reasons they don't correlate. And, Tom, you mentioned the measurement, and you look forward to a day that those digital viewers can be measured more accurately. So any update on measurement in that way for TV Everywhere would also be helpful.

Philippe P. Dauman

I'll start, Anthony. Look, there's never been a linear correlation between ratings and ad sales in discrete periods of time. Naturally, over the long term, you have to rebuild your ratings. Where we focus on is working very closely with our major marketing partners. We do get a pickup from the C3 measurement in many cases, and so it's a question of mix. We have the ability to shift units from DR to paid advertising. So we operate at all times to maximize the available ad dollars. The good news for us is that as ad -- as ratings improve, we can pretty quickly monetize those improved ratings because of the under-delivery that we have experienced over the period of weakness that is starting to lift. As far as TV Everywhere and measurement, we believe that in the long term, in order for our whole industry to succeed, we have to provide consumers, and particularly our young audiences, with the content they want on the gadgets and platforms and the places they want it. And we're going to do it in a way that intelligently manages the windows and work with our marketers to ensure that we monetize that viewing, a part of it is measurement. And we are working with Nielsen and others to ensure that, that measurement improves over time. And I'm convinced that we're going to see gradual improvement of that; not as fast as we would like, but it will improve. And in the meantime, we are demonstrating to our major marketers the kind of additional viewing we are getting on the content that they are in partnership with us on. And as they understand that, that cements the relationship we have with them and, going back to the beginning of your question, allows us to maximize our advertising revenues even in the face of weak ratings in some of our networks.

Anthony J. DiClemente - Barclays Capital, Research Division

Okay. And then my understanding was that you and Nielsen and some of your peers are working on mobile device measurement in the home. That's in beta for Nielsen. And there was some talk that it would be operational perhaps the early part of the calendar year. Is that possible? Like can you give us a specific update on that?

Thomas E. Dooley

Yes. There are those -- there are conversations on that, and that is one timeline that's on the table. Whether that will be met is up in the air. I can't comment on how aggressive or unaggressive that timeline might be. But, Anthony, we also look forward to the day -- Facebook and Google actually bill based on delivered impressions, and I think there's opportunities down the road for traditional media to begin to go down that road. And that would be an exciting new day. Add that to the possibility of dynamic commercial insertion, where commercials are inserted at the time when the content is consumed, which in today's day and age, based on video-on-demand and all the technologies that are available to deliver our content discretely to a consumer, you got to get very excited about that, that power of that concept and that delivery capability. When is that going to take place? That's over the next 12 to 24 months that those technologies really begin to hit the marketplace very quickly, and that changes a lot of the dynamics in the advertising marketplace and the content measurement marketplace. So we're real excited about that, because we know our content is being consumed aggressively by the younger audiences that we deliver across many devices where measurement isn't completely captured.


We'll go next Michael Nathanson with Nomura.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

I have 2 for Philippe. Philippe, firstly, over the years, you've talked a bit about forward trends. You gave us scatter versus scatter pricing on -- and how you guys capitalize on ratings game better. But do you want to talk a bit about what you see in the current fourth quarter, if it's accelerating, decelerating or staying the same? And if not, why won't you comment about the fourth quarter? And then secondly, in the past, I asked you about changes of programming talent, and you guys did. You brought Susanne Daniels in. What do you think she brings to the job and what vision -- what direction you think she'll take MTV?

Philippe P. Dauman

Michael, as far as the current quarter, we're continuing to look to sequential improvement in our ad revenues. We're still climbing back up. I don't expect that this quarter will see us get into positive territory, but we'll see improvement. And we are going to strive very hard to get back into positive territory as the year progresses and continue to improve from there. And as I mentioned earlier, there is going to be a correlation to the continued trend in ratings improvement. As far as Susanne Daniels, we're very excited. We've had our eye on her for a long time, and we're very pleased that she has committed to coming with us and devoting her total energy to the exciting programming we have in place. And she will bring with her, and you'll see announcements in the near future, some additional talent who will bring to bear more development in both the reality and scripted areas. So we've got a good pipeline now, and this will only turbo charge it. And likewise, we have continued to add talent across many other networks. I talked about Nickelodeon, talked about how we changed the structure of the organization, but we've also infused the Nickelodeon organization with new outside talent. From Disney, we recently have made a significant hire from Disney and from other places. So we are centrally focused at our company on bringing in great programming talent, developing more series and different genres across all of our networks. Because if we do that, that drives everything else.


We'll go next to Doug Mitchelson with Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

A couple for Tom. Tom, can give us any more details on what needs to happen execution-wise to preserve cable network margins in fiscal '13? You said that you'd be able to offset advertising pressure and programming cost investment?

Thomas E. Dooley

Yes. I mean, Doug, we're working all the time to try and drive down the net investment that we do to kind of fill out the program mix around everything else, the making what goes on in the screen. That includes everything from the financial areas to the production areas that uplink onto satellites and deliver our signals around the world. Technology has begun to benefit us in that regard in terms of cost savings and in terms of the number of folks we have do it. We've made some significant investments, both in the financial side and the distribution side, to basically drive our cost efficiencies there. Those have happened over the last several years. And they're beginning to pay dividends, and I expect them to pay dividends into the next couple of years. So we're pretty excited about that, and that gives us confidence that we'll be able to save money in other areas of the company.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And am I right in thinking that you'll get further compensation from Disney for the stronger-than-expected performance of The Avengers and that you did not accrue any of that benefit in fiscal '13?

Thomas E. Dooley

That is correct, and that movie did very well for them and will also benefit us.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So you'll book that on a cash basis? When would that be...

Thomas E. Dooley

We took it on when they report the receipts to us, and we have a good estimate as to what that number might be.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Okay. So I'm right that -- sorry, that wasn't during fiscal '12, right?

James W. Barge

It'll be in '13.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

In '13, yes. Okay.

Thomas E. Dooley

And some will flow over into '14 when [indiscernible] has the results flow in.


We'll go to Richard Greenfield with BTIG.

Richard Greenfield - BTIG, LLC, Research Division

On an organic basis, it looks like your ad revenue, domestically, down 6%, was the worst you experienced during the year. I think if you organically trace back the last few quarters, you were down 3.5%, a little less than 1% and 3% in the past 3 quarters. How do you think about the network and channel kind of put and take when you look at that down 6% in the quarter? What were the key pluses within that number? What were the key minuses from a network standpoint really driving those results? And then just, Tom, you mentioned, I think, that you expected the non-digital piece of affiliate fee to be up double digits in fiscal Q1. When you look at the full year, if you excluded digital from all of fiscal 2013, could you actually get to double digits for the traditional portion of your affiliate fee?

Philippe P. Dauman

Rich, Philippe. As far as the components of the ad revenue, it's what we've been talking about. I mean, obviously, Nickelodeon -- the softness in Nickelodeon ratings in the quarter hit us pretty hard. We had some ratings softness in some of our other networks, which contributed to it. That's why it's so important that we turn that around. And as we look forward, we should see improvement. And we like to look forward, and I feel better about the steps that we have taken to build a foundation for growth in the future. As far as affiliate revenues, as we talked about, we enjoy strong so-called traditional affiliate revenues, as well as an increment of digital revenues. We don't break that down precisely. We project the usual year-after-year high single-digit to low double-digit growth. As I've said before, I expect that in this 2013, it's likely, on domestic affiliate revenue growth, that we will hit the mark we did last year. Last year, we did 10% growth in domestic affiliate revenues. I think that's what we're likely to do in fiscal 2013, and that will include very high growth in -- within that range in traditional affiliate revenues and continued development of new sources of revenues on the digital side.

Richard Greenfield - BTIG, LLC, Research Division

I just wanted to follow up. When you talk about Nickelodeon, I think everyone's aware that Nickelodeon was down sharply in the quarter, given its ratings challenges. But when you look across your other networks, were there actually any of your key networks that actually grew ad revenue year-over-year or were down substantially less than the reported 6%? Just trying to get a feel for where you really were outperforming that overall down 6%.

Philippe P. Dauman

Sure. When you look at networks like BET and COMEDY, TV Land improving, there's a number of our networks that performed better.

Thomas E. Dooley

It's a wide range of outcomes. Some of them performed as good as high-teens, mid-teens and then some were low single digits and then some were negatives. So it was pretty widely spread.


We'll go next to Brian Wieser with Pivotal Research.

Brian W. Wieser - Pivotal Research Group LLC

I was curious if you could talk about the current volumes you're experiencing in the scatter marketplace, how that's pacing versus last year same period. And then separately, there was talk at one point about Sony Pictures and you brother [ph] CBS at one point, but I'm curious, when we think about an asset like that, that maybe comes up for sale, how do you think about whether or not something of that scale makes sense to pursue versus just continuing to return cash to shareholders?

Philippe P. Dauman

Brian, could you just repeat the first part of the second question.

James Bombassei

Yes, we didn't hear you. It was garbled.

Brian W. Wieser - Pivotal Research Group LLC

Sorry, it was a question around Sony Pictures as an example of a large-scale M&A opportunity that may be in the market at some point. The question is really just if a large asset like that were, in fact, available, how you would think about the trade-off between such a transaction versus returning capital.

Philippe P. Dauman

Well, as I've said before, in looking at the universe of available acquisitions out there, I continue to not see any large scale acquisition that makes sense for Viacom. We have a lot to do in growing organically. We have the brands. We have the resources. We have a lot of opportunities. We are living in a world where the media business is transitioning. We are extremely well positioned to grow in that transition because we have a deeper understanding of the young audiences that are driving that transition than any media group out there. So we have opportunities to grow with them on multiple platforms. We have opportunities to grow internationally. We may have some discrete small-priced M&A opportunities that are almost operational investments, particularly in the international arena where it makes sense. But we just have so much opportunity that's more -- that creates more value than large M&A, which, as you know, has a number of pitfalls generally associated with them. We are committed to returning capital to our shareholders. As far as the scatter marketplace with our marketing clients, there is demand out there. We don't have a demand issue on our networks. We've -- what we've had, we've experienced is a supply issue, meaning ratings. So we are engaging in self-help. We are going to create the supply, create the inventory, so that we can capture the demand that we have out there so that we can take the demand, take the dollars in. And that's why it's so important for us to focus on building our programming and building our ratings, scheduling segment by scheduling segment, network by network.


We'll go next to Barton Crockett with Lazard Capital Markets.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Okay, great. Wanted to ask a little bit more about the tone of the ad market. To what degree were the results in the quarter affected by -- do you think by the Olympics or the election? And to what extent are -- is the current quarter affected by fiscal cliff fears or Hurricane Sandy? A little bit of color on any categories that are weak and strong. It would seem that auto sales are resilient and maybe kids movie release slate is weak.

Philippe P. Dauman

Look, we're not going to look for external excuses on our ad sales. There are a lot of factors that go in and out. A lot of people have talked about them. Last quarter, of course, Olympics affected the media industry. There are always concerns of one kind or another. Again, we're going to focus on what we can control. We're going to build our ratings at Nickelodeon, at MTV, every one -- at BET, COMEDY CENTRAL, every one of our networks. There's money out there. And whatever happens in the world, we are going to succeed, deliver bottom line results whatever the economic conditions are out there.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Okay. Well, if I could ask a separate question. You have great sales of the Mutant Ninja license merchandise. I was wondering if you could talk about the materiality of that and the degree to which we might see that affect the December quarter versus the September quarter.

Philippe P. Dauman

The consumer product initiative, including Teenage Mutant Ninja Turtles, will enhance our bottom line. It will start to rebuild our consumer product and ancillary sales, which have, of course, suffered some declines, not just because of the macroeconomic environment, but also because DVD sales, which were a component of our television business, have been declining along with everything else. But we've -- we're getting to the point of bottoming out on that, and the consumer product franchise Teenage Mutant Ninja Turtles will continue to build the bottom line. It's not significantly material. But it's nice, steady business, high-margin business that we will grow, not just in the U.S. but significantly internationally. So we will build on that. We think the Turtles are a long-term franchise to add to SpongeBob and iCarly and Dora, and we have others to layer onto that.


We'll go next to Tuna Amobi with Standard & Poor's.

Tuna N. Amobi - S&P Equity Research

I guess my first question on the film studio. Can you talk about how you ended up with what appears to be a major void on your summer schedule? I know some of that has to do with your decision to move G.I. Joe. So in hindsight, I'm trying to get a sense of how -- what other positions might have contributed to that, understanding that comparisons were a major factor in the studio's results. But any color on that would be helpful. I also have a follow-up question.

Philippe P. Dauman

Sure, Tuna. Yes, we aim at Paramount to develop and distribute approximately 15 pictures a year. And as we develop those, we look for the optimal scheduling. We look at what our competitors are doing. If a schedule gets overly crowded, we don't want to beat our heads against the wall. We try to find a place where we can optimize the results and bottom line of our films. As far as the G.I. Joe, which you specifically mentioned, we also saw an opportunity there to go into 3D, which opens up for us several significant international markets. And along with a good release day, we think that will enhance that bottom line for that particular movie.

Tuna N. Amobi - S&P Equity Research

Okay. Separately, with regard to your ad revenue, you've talked about how you're striving to mitigate that in all of the programming investments. Seem like some of them is starting to pay off. But there's been some concerns about the level of your ad loads across your channels, which are trending higher, seems like most of your peers. Wondering how much of a concern that could be in terms of is that a short-term measure? Or you view that as a temporary lever that you can pull? Or was pretty much you expect that that's pretty much going to be the normalized levels even when your ratings start to improve? So any color on that and what you're hearing would be helpful.

Philippe P. Dauman

Look, we -- it's just of the many tools that any network has. And we look at ad loads, we look at how much promotional and tour [ph] we put on, we try to optimize it all. You have to promote your new shows, and we look at it network by network. And it's a decision that our network leaders look at, and you try to get the optimal mix. So you'll see that vary from year-to-year and from network to network any given year.

Thomas E. Dooley

And they've been reduced a lot since that story was written. And the ultimate way to reduce the ad loads and the necessity for ad loads, where we're just trying to fulfill the commitments we've made to our advertisers, is to improve the ratings around the shows which those ads run in. So I mean, that is the goal. As Philippe articulated before, we're well on our way to achieving that.


We'll go next to the Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Philippe, there's this fear out there that MTV is broken. And so I was just wondering if you can comment on how you can, I guess, fix this like you're fixing Nickelodeon.

Philippe P. Dauman

It is not broken. It's highly successful. Just this past Monday, we -- as I mentioned in my remarks, Catfish, which we premiered at 11:00, which, as you know, for MTV is part of their primetime, was the highest-rated launch in MTV history. So MTV is very healthy indeed. We have a great development pipeline, and we have just added one of the major talents in our business, addressing young audiences, Susanne Daniels. So I have no concern about MTV's vitality as we go forward.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

And then my second question, just addressing another fear, is that there may be a possibility that your share buyback falls below $2.5 billion if ratings trends don't improve, specifically at MTV. But is it safe...

Philippe P. Dauman

We will buy at least $2.5 billion of our stock in 2013.


We'll take our final question from Alexia Quadrani with JPMorgan.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Just a couple questions. On your guidance for the growth in programming expense in fiscal 2013, do you think those dollars skew a bit more toward MTV this coming year, given your change in management there and given the programming and ratings there? I'm trying to get a sense if you feel the heavy lifting behind Nickelodeon is sort of behind you, and you're beginning to see the benefits of those dollars spent, but still investments are needed in other networks.

Philippe P. Dauman

We look -- we're investing in all of our networks across the board. There's also, Alexia, a mix issue in some of our networks we have, who license third-party programming. Those licenses come to an end. Those dollars can be reinvested, in some cases, without increasing the programming spend. That makes money available within that average of programming expense growth, money available for some of the networks that need more incremental investments. Certainly, no secret that Nickelodeon has been one of those networks that we're investing in. A lot of it, as Tom indicated in his remarks, is, in terms of the impact you will see in the first half of this 2013 year, front-end loaded to reflect all the programming we've been putting on that we talked about. So we look at all the situations. And we are fortunate to have a portfolio of networks, and we can do what is necessary for all of our networks. And we do invest, as appropriate, in each of our networks, because that is the lifeblood of our company. We do not hold back on any network to the extent it needs more program development.

Thomas E. Dooley

Alexia, we also -- we amortize our programming very aggressively and, certainly in contrast to some of our peers, on an accelerated basis. So as we ratchet up to a level, we have a point in time where it does increase to a level. But once it's at that level, it's constantly providing a new source of programming investment because it's amortized so quickly. So I think that's a bit of a distinction between us and, from what I understand, some of our competitors do.

Alexia S. Quadrani - JP Morgan Chase & Co, Research Division

Okay. And can you just remind us if you have renewals, both traditional and digital, in fiscal '13?

Philippe P. Dauman

Yes, we don't publicize our renewals. We prefer, except when it's -- we're forced to go public, as we did in the DIRECTV dispute. We prefer to do business with our partners confidentially, quietly. And what we can tell you is that we're very confident that we can continue to achieve greater growth in affiliate revenues as we discussed earlier.

James Bombassei

We want to thank everyone for joining us on our earnings call.


That concludes today's conference. We thank you for your participation.

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