Viacom, Inc. Q1 2006 Earnings Conference Call Transcript (VIAB)

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


Good day, everyone, and welcome to Viacom's first quarter earnings release teleconference. Today's call is being recorded. At this time I would like to turn the call over to Senior Vice President of Investor Relations, Mr. Jim Bombassei.

Jim Bombassei

Good morning, everyone, and thank you for taking the time to join us for our first quarter 2006 earnings call. Joining me for today's discussion are Sumner Redstone, our Chairman; Tom Freston, our CEO; and Mike Dolan our CFO.

Before we begin let me remind you that statements made on this call relating to matters which are not historical facts are forward-looking statements. These forward-looking statements reflect our current expectations but involve risks and uncertainties that may cause our actual results, performance or achievements to be different from that expressed or implied by these statements. Risks and uncertainties are discussed in our filings with the SEC. Reconciliations for the non-GAAP financial information discussed on this call can be found in our earnings release or on the Viacom website. And now I'd like to turn the call over to Sumner.

Sumner Redstone

Thanks, Jim. Good morning, everyone. Thanks a lot for joining us. Today Viacom reported its first quarterly results as a publicly traded, standalone company. As you see from the numbers, Viacom stepped out in 2006 on solid footing. Operationally it's also been a busy quarter as we continued to take advantage not only of our strong brands and leadership positions in our core businesses, but we also added important new assets that build on our multi-platform strategy.

Of course Tom will take you through the details of our performance and initiatives, but let me just say that we remain confident and totally committed to the path we have laid out. We are right where we need to be to achieve not only our annual performance goals but also, more important, to create and deliver value to shareholders over the long-term. That's the future we envision in creating this content rich, creatively nimble Company and that's the commitment we intend to fulfill.

Our assets are second to none. Our content creation abilities are unsurpassed. We have the strategic focus and resolve to rapidly capitalize on all these strengths in the digital universe and it's emerging all around us. So remember, it's not only early in the morning, it's also early in the long-term Viacom growth strategy. We like where we are today, we think that our shareholders will like where we will be tomorrow. Now I'm going to turn this over to Mike.

Mike Dolan

Thanks, Sumner and good morning, everyone. Today I'd like to talk to you about our first quarter results; I'd also like to update you on several initiatives we've talked about before. And finally, I'll reaffirm our guidance for the year before handing the call off to Tom.

Let's talk about the quarter. Our first quarter 2006 results were generally in line with our expectations. On a total company basis revenues were up 12% to $2.4 billion. The DreamWorks acquisitions, I should point out, contributed 8 of the 12 total points of growth. Operating income grew 3% to $623 million. Remember that the Q1 earnings release includes data for '05 on a carve out as well as pro forma basis.

As we've said before, we believe that the pro forma information provides a more meaningful basis for comparison to 2006 results. Net earnings from continuing operations was $317 million or $0.43 per diluted share in the quarter. By the way, this includes expense of $9.4 million for options and RSUs equivalent to $0.01 penny of EPS.

Although revenue and operating income were higher, net earnings from continuing operations were down because of higher year-over-year interest expense of $34 million net of tax. Interest expense was higher due to increased debt outstanding and higher interest rates. The debt added in the first quarter was due to share repurchases and the acquisition of DreamWorks.

Free cash flow was $369 million for the quarter, up 17% versus last year. The primary drivers of the improvement in cash flow were higher EBITDA, improved receivable collections and lower cash taxes partially offset by higher cash interest payments.

Now let us turn to the performance of the segments. Before we do though, I should point out that this release now provides supplemental information which we believe will be helpful to you, such as revenues by type within segments, revenues by geographic area within segments, and a condensed balance sheet for March 31 and December 31 of 2005. We believe this new format addresses questions you've had in the past. We'll continue to work on the presentation of our results so that you can have a better understanding of the key factors driving the Company's performance.

Let's start with cable, which accounts for two-thirds of total Company revenues. Revenues in the cable segment were up 7% to $1.6 billion. Advertising revenues were up 4% in Q1 of '06 reflecting the 6% growth in domestic ad sales and a 13% decline in international. Domestic ad sales accounted for 87% of total advertising sales for the cable segment and 91% of total ad sales for the Company as a whole.

Let's put that performance in perspective. The domestic business is as vibrant as ever, driven by strong ratings performances. The 2005 numbers, as many of you will remember, were unusually robust with ad revenues at MTVN up 28% and BET networks up 21%. But we have a significant lagging issue that we fully expected going into the year and had built into the our calendarization of our plan.

Additionally, Nickelodeon was particularly affected by the timing of the Easter holiday; it fell in the first quarter of last year but the second quarter of this year. As we said on the last call, despite the strength of scatter the upfront base was relatively soft in the quarter affecting overall ad sales and exacerbating the tough year-over-year comps. The scatter market was strong through April and so far into May and we feel comfortable, based upon what we see at this point, about the trends in Q2 and beyond.

Digital ad revenues, which are still small as a percentage of total domestic ad sales, grew rapidly, up 109% quarter over quarter. Total digital revenues including transactional revenues were up 85%. Tom will tell you more about some of the factors that affected international advertising sales, so I won't go into detail.

Suffice it to say that specific operational issues in Europe are being addressed and we remain convinced that international remains a growth opportunity both organically and through business building acquisitions or joint ventures.

Let's move on to affiliate fees. Affiliate fees were up 9% for the quarter to $489 million driven by a combination of subscriber and rate increases. Rate increases, as you know, are contractual. Digital Suite, MTV2, Tempo and NOGGIN added a total of 40 million new subs year-over-year. LOGO, launched just nine months ago, passed the 20 million sub mark.

Ancillary revenues were up 15% driven by cable home entertainment sales such as South Park, Dora the Explorer and Go Diego Go and license income on the sales of consumer products.

Cable operating income rose 8% to $621 million in the quarter. Operating income growth exceeded revenue growth by 100 basis points resulting in an improvement in margin to 39.5%. We're pleased to have improved margin while continuing to invest in new programming and absorbing the expense of stock options.

Let's now turn to the entertainment segment. In the first quarter revenues in the segment increased 25% to $825 million. The DreamWorks acquisition contributed incremental revenues of $174 million. As a result, all of the growth in the entertainment segment in the quarter is attributable to the acquisition.

The impact of DreamWorks in the entertainment numbers is clear. This is an acquisition which has re-energized Paramount and put the recovery of the studio on fast forward. It also clearly and directly addressed the gap in Paramount's '06 and '07 slate.

Despite the 25% increase in revenues, operating income in the entertainment segment declined 28% in the quarter to $51 million. This decline in operating income was driven by four key factors:

  1. The $174 million in revenues from the most recent releases at DreamWorks was largely offset by P&A and film amortization.
  2. higher Paramount losses of $34 million due to having two releases this quarter, Last Holiday and Failure to Launch, as compared to one new release, Coach Carter, in Q1 of '05; again this is a P&A timing issue.
  3. Higher overhead costs of $17 million associated with the integration of DreamWorks and Paramount.
  4. $7 million relating to the amortization of DreamWorks intangibles.

Now let me update you on some of the initiatives we've been discussing with you over the past few months.

First, the sale of the DreamWorks live action library. As you know, we closed on a sale of the live action library last Friday and received full payment of $900 million on the same day. The terms of the deal provide Paramount with an exclusive five-year agreement to distribute the library. We retained ownership of the music publishing and other ancillary and derivative rights associated with the library, including sequel and merchandising rights. In addition, we have certain rights to reacquire the library in the fifth year at the then current fair market value.

So we're happy with the now fully completed transaction and we believe we achieved all of our going in objectives:

  1. We reduced our capital commitment in the deal and, importantly, overall capital employed in the business.
  2. We maintained control of the distribution rights for the highly attractive DreamWorks animation and DreamWorks live-action properties.
  3. We have the right to repurchase the live-action library in the second cycle.
  4. Finally, we upgraded our producer relationships at Paramount.

Second, refinancing our bank debt. As you know, the public debt of old Viacom went with CBS after the split. We used bank debt to fund the special dividend to CBS of $5.4 million paid on December 29, 2005. CBS has subsequently sent notice of an additional $460 million due. We paid $170 million on May 5th and are working with CBS to resolve the difference.

We told you it was our intention to turn out this bank debt and we did this in April with our first bond offering. The bond offering, I'm happy to say, was enthusiastically received. We had originally planned on a $4 billion offering, but demand was over $10 billion allowing us to upsize the deal to $4.75 billion. All of the increase, by the way, occurred in a 30-year tranche. The blended coupon rate is 6.32% and, by the way, since issuance spreads on the bonds have traded tighter than the original offer spreads and have outperformed the market.

With regard to leverage ratio, the $900 million of proceeds from the sale of the DreamWorks library was used to pay down debt. Pro forma for the sale of the library, at the current time our debt and capital leases outstanding totaled $7.4 billion which puts us at the low end of our target leverage ratio of 2.75X to 3X.

Third, share repurchases. We committed to aggressively repurchasing our shares and we have. Through May 5th we've repurchase 29.9 million shares at an average price of $40.82 for a total value of $1.2 billion. We continue to see buying back our stock as an attractive use of our cash flow and debt capacity, an efficient way to return value to our shareholders.

Fourth, taxes. Our effective tax rate in the quarter was 40.6% compared to a pro forma rate of 40.5% for the first quarter of 2005. We're implementing initiatives to lower our tax rate and you should expect to see progress on these fronts as we get deeper into the year. We're confident that we will achieve our goal of 100 basis points of improvement by year end.

Finally, let's talk a bit about guidance for the year. We told you we would deliver double-digit revenue and operating profit growth in 2006 and EPS in a range of $1.95 to $2.00 per fully diluted share. We're on track and we reiterate our guidance for the full year.

I'd now like to turn the call over to Tom who will give you more specifics on the performance of the businesses this quarter and our plans going forward.

Tom Freston

Thanks, Mike. Now that you've reiterated our guidance I will elaborate on how we will meet it and deliver double-digit growth on a full-year basis. In the last few months we've been intensely focused on growing our business and executing our strategy of developing and distributing great television, digital and film content worldwide on both existing and emerging platforms.


Let's start with Paramount. Revenues were up 25% over last year due to the DreamWorks acquisition. The integration plan is done and the implementation of DreamWorks is nearly finished. We've already reaped the benefits of this combination which provides many important assets including all of DreamWorks' projects in development, the ongoing production partnership with Steven Spielberg, and the distribution of DreamWorks' Animation titles including 'Over the Hedge' which will be released later this month.

Of course the DreamWorks combination is only one of the reasons we're excited about the prospect for the studio's turnaround. The release schedule for the rest of the year is strong. 'Nacho Libre' with Jack Black and Oliver Stone's 'World Trade Center' are key summer movies for us. In addition, we're extremely proud of what we've done with the Mission Impossible franchise. Just last week 'Mi3' opened to terrific reviews and solid box office results grossing $118 million worldwide in its first weekend, the biggest worldwide opening in the MI series.

Also in the first quarter the great success of 'Failure to Launch', which had a domestic box office revenue of about $90 million, proves that Paramount's new team is very well-equipped to make the most of our new slate.


Now moving to our cable results, you'll note that our international revenues were down and that's largely due to two factors affecting our German operation. First, consistent with our multi-brand international strategy and our plans for the integration of VIVA Media properties in Germany, we recently replaced one of our four music channels in Germany with the launch of Nickelodeon Germany. While this resulted in a short-term revenue decline as we had to transition the account base and tap into the kids' advertising market, it's a strategy we are excited about as it's really fundamental to Viacom playing a larger role in that market. I'm happy a to say that Nick Germany's ratings are stronger than projected and that the market is beginning to notice.

The situation in Germany was also affected by a large customer in the German ring tone business dramatically reducing its ad spending as it changed its marketing approach. We have now taken several significant steps to strengthen our operations in Germany and improve our advertising sales organization across Europe. We hired a new Chief Operating Officer for Germany with terrific advertising sales and digital media experience. We're in the process of opening new sales offices in Frankfurt and Düsseldorf and to augment this we've brought in a new Head of Pan Regional Ad Sales for Europe, a proven performer who previously ran our successful Latin American sales organization.

We've also been focused on continuing to expand our digital footprint in Europe. Towards that end we recently launched MTV Overdrive, our broadband channel in the UK, to strong advertising interest and plan to launch it in Germany in the coming weeks. These launches make possible a multi-platform advertising offering in these countries and mark an important step in executing our digital strategy in our top two markets outside the U.S.

We're also continuing to see growth in our international consumer products business which are generating terrific top line results. Compared to the first quarter of '05, international consumer product revenues increased more than 40% reflecting a more aggressive rollout of our branded content worldwide. The international business is still one of our growth drivers and the dynamics of that business are generally good.

I'd now like to spend a few minutes to take a deep dive into the cable segment and explain why we're so bullish on this part of our business. The cable segment represents about 70% of our overall revenues and is supported by three streams of revenue: advertising, affiliate and revenue from ancillary sources.

It's simple, the development and global distribution of great content on all platforms is the primary driver in this business. This content in turn serves to strengthen the power of our brands and we believe our portfolio of properties is the best in the industry. Our brand centric and multi-platform approach is a unique competitive advantage, our audiences are incredibly engaged with our programming, are loyal to our networks and they trust our brands.

Our entire organization is intently focused on creativity and this approach is clearly reflected in the ratings, brand equity and financial performances of each of our individual networks.

For example, the first quarter was the highest-rated Q1 in MTV U.S.'s 25-year history among the 12 to 34 year age group. This is the 17th consecutive quarter in which MTV has posted growth versus the prior year. Along with record-breaking TV, MTV is setting standards in digital with more than 33 million digital streams delivered in March alone on MTV Overdrive and 33 million unique visitors at

At BET networks we've begun to successfully execute on our strategy to invest in original, high-quality programming that we believe will take that brand to the next level. We did take a revenue hit in the first quarter there as we pulled off five-and-a-half hours of religious paid programming on Sundays and have yet to fully realize the new programming we put in place there. But we're confident that this programming will strengthen the BET market position.

We have a terrific new programming organization at BET Networks and their work is just beginning to debut on the network and to strong reviews. Q1 ratings were up 25%. The network had the number one original series in the quarter among African-American audiences entitled 'Lil Kim Countdown to Lockdown'.

That's just the tip of the iceberg. In the second quarter we'll be rolling out a number of new programs such as 'Vince Young - Next Level' which follows the Titan's quarterback as he ventures into the pros. In total BET is rolling out nine new series this year. We're very excited about what we have in-store for BET so stay tuned for more of this in coming quarters.

For Comedy Central here in the U.S. 'The Daily Show' and 'The Colbert Report' continue to build viewership week after week, maintaining audiences of over 1 million viewers a night. Year-to-date through April, South Park's 10th season ranked as the number one rated original series on basic cable among men 18 to 34 and of all viewers 18 to 49. Comedy Central also launched on iTunes in January with tremendous success, and as we add additional programs like 'Mind of Mencia' and 'The Showbiz Show' with David Spade we're seeing those good numbers continuing to grow. Despite the loss of Dave Chappelle Comedy Central grows as a creative powerhouse.

Nickelodeon ended the first quarter with a 4.0 rating among kids 2 to 11 beating the Disney Channel and Cartoon Network by 49% and 97% respectively. Several big events and premieres drove these ratings. 'SpongeBob's Lost in Time Special' averaged over a 16 rating in its demo, making it the highest-rated SpongeBob telecast ever.

As we told you previously, we did lose some ground among 2 to 5-year-olds last year, about 9% overall for Nick and Nick Jr., but we're pleased to see that preschoolers have come back in droves in 2006. In Q1 '06 Nick was up 3% with kids 2 to 5 while Nick Jr. was up 5% for this demo. For example, 'Wonder Pets!', which is Nick Jr.'s latest hit, launched in early March and currently ranks as the number two show on all commercial TV with kids 2 to 5 only behind 'Go, Diego, Go!' which is also on Nick Jr.

We just announced plans to launch a new network targeting the $3.5 billion U.S. Latino market called MTV Tres. Our goal is to launch a multi-platform brand that will become the leading destination for bilingual and bicultural Hispanic youth. Now in order to be successful with this audience from an advertising standpoint you really need to have 50% penetration of Hispanic households. Because Hispanic digital cable penetration is very limited, we plan to employ a hybrid distribution strategy which integrates our cable distribution with a recent acquisition we've made of Caballero TV which reaches key Hispanic markets through 10 O&O low-powered stations as well as some affiliate agreements. So in total we intend to reach 65% of all Hispanic households within one to two years and see this as a tremendous business opportunity for us.

Now those are just a few of the highlights that are being generated across our 26 domestic cable networks and 97 channels outside the United States. Our original program development abilities improve every year and this success is directly reflected in our ratings. In fact, MTV Networks and BET Networks account for 26% of cable's overall ratings -- 26%.

I want to talk for a moment about distribution which is approximately 30% of our cable segment revenue. It's consistent and it's predictable, but it also represents a sustainable growth opportunity for three reasons.

First and foremost, our existing distribution partners are actively developing new products for their viewers, particularly with VOD. This activity is already providing us new revenue as well as repackaging opportunities. But make no mistake, it's not just about new tech products, there's growth in traditional TV services as well. For example, so far this year we're seeing solid subscriber increases across all of our brands.

Second, we're also seeing a big push from new distribution entrants like the telcos who see our content as a real driver of their video business. We already have an agreement with Verizon which has a head start, but other high-profile players like AT&T are making big moves as well.

Third, there's a potential for added distribution revenue through broadband wireless channels, some of which we're already capitalizing on and others we're only now starting to think about. The revenue models we're exploring include both affiliate fees as well as download fees.

So we're very optimistic about the opportunity to continue to deliver sustainable growth from the distribution side of our business.

Moving from distribution to the ancillary part of our business, which includes our incredibly lucrative licensing and merchandising business which, by the way, is the sixth-largest consumer products business in the world, we see additional opportunities ahead. Our success here is a direct reflection of the power of our characters and our brands and let me just talk about a couple.

Dora the Explorer continues to be the leading preschool license and has a huge presence in the toy industry. Dora was honored recently for the second year in a row as Property of the Year by the Toy Industry Association. This year Dora sales will exceed SpongeBob sales for the first time, while SpongeBob sales maintain their strength at a projected $1.5 billion for the fourth year straight.

In addition to Dora and our SpongeBob success, there's great retailer response in anticipation for our new licensed products based on our new hit properties, the Backyardigans, Go, Diego, Go! and Avatar, so our pipeline in this area continues to expand.

And it's not just kids' products; we've seen increasing success for our Comedy Central produced standup CD. Dan Cook has already sold more than 1 million units and will continue to leverage both Comedy Central's name and its talent relationships to keep that pipeline strong.

Finally, there's advertising, the biggest contributor to our cable business representing 56% of total segment revenues. We're seeing a steady scatter market going into this upfront which is a good sign. Demand is up and pricing is strong. We feel good about this upfront, money will continue to move to cable, our rating positions are strong and the limited supply of premier programming and multi-platform opportunities provides a really strong incentive for advertisers to lock in at the upfront as opposed to just waiting for the scatter market.

Strategically we feel we are extremely well-positioned versus our competitors and I want to describe a few elements which will continue to be growth drivers.

  1. Capturing additional ad spending for programming in the adult demo.
  2. Bringing newer highly focused niche networks to scale.
  3. Expanding our multi-platform opportunities.

Everyone seems to focus on the demographic leadership of MTV and Nickelodeon when they talk about Viacom, but we have many strong networks that address the adult demo; channels like Spike, Comedy, VH1, BET, Nick at Nite, TV Land and CMT. Ratings growth for these networks is very valuable to us as the fact remains that substantial pools of broadcast money in 18 to 49 will continue to move to cable. Dollars that we are confident we will capture our share of. As our adult channels continue to develop even more compelling original programming, we expect to attract even more of this money from broadcast.

Next we have a newer set of networks, our emerging services. They have narrow niches, great loyalty and are all on a strong growth path. These are networks like The N, MTVU, MTV Tres and LOGO. These are niche-focused networks that have little competition in the marketplace and do a great job of attracting loyal demos. The emerging networks are reaching distribution levels that position them for ad revenue growth and are very attractive to blue-chip advertisers who are looking to reach demos in a more focused way. For example LOGO's advertisers to date already include General Motors, American Express, Kodak, Miller among many, many others.

Finally, we feel that the quality and depth and creative applications of our multi-platform offerings is second to nobody in this business. It won't surprise you to hear that we've seen strong demand for our rapidly expanding digital advertising inventory and for what we call our multi-platform solutions. Advertisers want their message carried by one brand across many screens and MTV Networks leads the industry in multi-platform offerings. We've doubled our digital inventory versus last year and we're exploring creative ways to grow it much faster.

Pricing, particularly for video inventory here, is at CPM's which are two to three times our TV CPM's. And it's not just strong pricing, we're seeing market-beating growth across our digital platforms in terms of both advertising and increased traffic. MTV Networks' online ad revenue more than doubled from Q1 '05. The user base across almost all of our sites have increased at double-digit rates over the last quarter and users are becoming much more engaged with streaming growth outpacing user growth. In the quarter our cable branded broadband site served over 180 million video streams just in the United States.

While our organic digital growth is outstanding, we're committed to compounding it by making smart acquisitions that address our core demos like NeoPets, and iFilm and that's where Xfire comes in, the acquisition we announced late last month. As a leader in communications and social networking specifically in the massive multi-player online game space, Xfire represents an entirely new vehicle through which to reach our core demographics. This is a vibrant and fast-growing area of digital entertainment and a clear bull's-eye against our multi-platform strategy.

So when we look at all of this we are confident in our ability to capture a disproportionate share of the ad market and generate significant returns over the long-term. Advertisers know that we deliver a unique proposition to reach key demos and we feel that nobody can compete with our ability to provide highly specialized, branded, consistent, compelling content across multiple platforms.

To recap. I am very confident in our strategy and know that we are well-positioned to leverage our content to drive significant shareholder value. Our channels are as strong as ever with solid rating increases. Paramount is now on track with a terrific slate of films lined up for the year. We are aggressively addressing the issues in our international operations in order to position it for better long-term growth. We will continue to outperform the industry in terms of advertising. Last but not least, we are moving very rapidly on our multi-platform strategy in taking full advantage of growing digital audiences.

Thank you for joining us on today's call, and I will now open up the call to questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Bill Drewry, Credit Suisse.

Bill Drewry - Credit Suisse

Thank you. A couple questions. One, could you talk about your conviction on the accelerating fundamental tranche into the second half? Just wondering, is the pickup in advertising revenue at the cable network, is it predicated on a reversal of those international trends or would it be just more strengthening in the domestic ad market? Part of that would obviously be build on your bullish upfront expectations.

The second question, just wondering if you can expand on how you expect to accelerate the growth in digital. Do you need to package the additional sales in the upfront as a big part of the strategy or do you need to concentrate more on promotion to drive the audience here? Thanks.

Tom Freston

First off, we do see stronger ad sales domestically. We're seeing scatter right now, volume is up double-digit, pricing is at or above upfront levels, and our ad sales situation internationally has also improved. We had a terrific April; May is good.

I'll also just say on the revenue front for the rest of the year the studio is onto its new slate. We feel positive about the upfront and we think that the multi-platform offerings are going to be really key to us.

In terms of increasing or inventory there, we're doing a bunch of things. We're very actively increasing our inventory, very consciously driving traffic to all of our sites the results of which we're seeing daily. As we sell this stuff in the upfront there's virtually now almost no advertising proposition that goes out there without the integration of some type of multi-platform opportunity for our advertisers.

Bill Drewry - Credit Suisse

And Tom, is there a target for digital going in to this year, next year, over the next couple years? A target for digital as a percent of total ad revenue?

Tom Freston

Well, we're looking to see about $500 million worth of digital ad revenue within three years and we're well on the way to beating that. Our goal really is everyday to try and figure out ways to accelerate our growth there, whether that's internally building out networks that we have, driving traffic on our sites or making acquisitions in this space that would increase our inventory.

Bill Drewry - Credit Suisse

Okay, thank you.


Our next question comes from Anthony Noto, Goldman Sachs.

Anthony Noto - Goldman Sachs

Margins at cable networks were able to expand on a year-over-year basis despite what looks like a significant amount of programming. Do you see that continuing throughout the rest of the year, especially as international sales comes back?

The second question relates to bundling in the upfront. A lot of media buyers are pounding their chests that they'll be able to gain back some Internet advertising share from Internet companies that sell directly and don't go through agencies by this bundling process. Are you worried at all that you're really just getting the same dollar spread across the two platforms, and you could be in fact cannibalizing your television advertising? Thank you.

Mike Dolan

Anthony, this is Mike. What we have done in the past, as you know, is talk about constant margins for the year. There are things going our way, there are things going against us. We think that in the first quarter, because of good control of the cost base, we were able to pick up some 35 or 40 basis points of improvement in margin. I think in the full year our target is still constant margin.

Tom Freston

On the issue about cannibalization, we don't really see that. Our whole approach, Anthony, is this multi-platform position which seems to drive total revenue. We've seen big increases in our digital revenue commensurate with increases in our television revenue as well. Advertisers generally look at this as an opportunity to do a lot of shopping in one place in a really unique way.

Anthony Noto - Goldman Sachs

Great, thank you.


Our next question comes from Jessica Reif Cohen, Merrill Lynch.

Jessica Reif Cohen - Merrill Lynch

Thank you. Two questions. One, could you discuss your acquisition focus since you are at the lower end of your target leverage ratio? As part of that, could you talk a little bit about the Xfire potential both in revenue and operating contribution?

The second question is on the creative. You had really growth in the quarter. Is that all due to the subscriber increases? Were there any new contracts? Can you discuss average length of contracts?

Mike Dolan

Let me start with the affiliate piece and then Tom I think will probably want to talk about the acquisition. The affiliate, it was good growth, Jessica, in the first quarter. It was a combination of sub and price increases. On the domestic side it was probably about 10% and on the international side it was about 6%, so the average was the 9% and we felt very good about it. So we think that that will continue based upon what we see for the rest of the year.

Tom Freston

We're looking at Xfire as really a great growth vehicle. It currently grows its users about 8% to 10% a month. The heavy users of it, which is 1 million of its 4 million registered users, actually are on Xfire 91 hours a month, if you can believe it. A very hard to reach group in terms of reaching them through traditional advertising. So we have good expectations to be able to use Xfire to drive our business in several ways in this new emerging gaming area that we find ourselves in.

Jessica Reif Cohen - Merrill Lynch

Thank you.


Our next question comes from Michael Nathanson, Sanford Bernstein.

Michael Nathanson - Sanford Bernstein

I have three and they're for Mike. Mike, I'm surprised that you guys didn't talk about currency impact this quarter, because I know the dollar went against you. So could you quantify for me the impact of currency on international advertising for the quarter?

Mike Dolan

We didn't comment about it because we're still determining the full impact of forex. But as soon as we have that sorted out we'll report on it.

Michael Nathanson - Sanford Bernstein

The second one is I'm surprised that Germany had that big of an impact. What percentage of your international revenues are coming from Germany?

Mike Dolan

It's about 25% to 30% of the total international revenues are in Germany. We're very heavily skewed to Germany and the UK.

Michael Nathanson - Sanford Bernstein

Lastly, your guidance when the year started didn't include stock options, I believe. I wonder, now that you are so far into the year if you have a better view now of what the impacts of options could be on '06 earnings?

Mike Dolan

The option expense we mentioned, the $9.4 million includes option expense and RSUs for prior grants of options, with the exception of a relatively small amount of options that were granted to new Board members at the start of this year.

The compensation committee of the Board has not yet approved a new grant this year to employees, because they're in the midst of doing an overall review of the compensation of senior executives. When we get that we'll have a better sense of what the option expense will be for the year.

Michael Nathanson - Sanford Bernstein

At what point do you think you'll get that?

Mike Dolan

They're working on it. I would expect sometime in the second quarter that we'd have made good progress on that.

Michael Nathanson - Sanford Bernstein

Okay, thinks.


Our next question comes from Doug Mitchelson, Deutsche Bank.

Doug Mitchelson - Deutsche Bank

With your multi-platform strategy, what percentage of upfront sales do you expect might be from new media versus the linear networks?

You're buying back a ton of stock, I think the average price you bought was about $41 a share this year. So obviously you think your share price is attractive. When you look across your assets of brands and if you consider just cash flow growth, if you could only own two or three of your networks which would they be?

Mike Dolan

I think we like them all. The answer is we like them all. What we've got, as Tom indicated before, is a portfolio of terrific brands across a variety of segments. The thesis of MTV historically has been strong verticals targeting very specific customer segments. As you know, that's the most attractive approach for advertisers as they're seeking to become more and more targeted in who they attempt to reach and improve the ROI in their investment dollars.

So I think the entire portfolio, as we look at it, is attractive. There are some that are obviously closer to maturity. There are others that are in the early stages of growth, but we want them all.

Doug Mitchelson - Deutsche Bank

Well, I'm trying to get to where the value is most underappreciated by the Street.

Mike Dolan

I think, as Tom said, there's probably an under-recognition of the growth opportunity in the newer channels.

Tom Freston

As well as the adult services.

Mike Dolan

And the adult services. So I think you're going to see over time that those will be the new MTV's and the new Nickelodeon's.

Tom Freston

On the first part of your question, I would just say that our advertisers, particularly our advertisers, are extremely interested in multi-platform opportunities, particularly those in video. We've gone to some really enormous lengths to provide a really wide range of alternatives for them. So we don't really have a media plan that goes out without some digital piece in it as a high level of interest. But I would say that our digital revenues in the upfront, it's going to be anywhere in the 5% to 8% in terms of a range of total dollars.


Our next question comes from Doug Shapiro, Banc of America Securities.

Doug Shapiro - Banc of America Securities

I don't know if you could do this on a macro basis, but could you break out the domestic advertising growth between pricing and volume?

Mike Dolan

No, we don't do that, Doug. But what we do is talk about it in total because it will vary significantly quarter by quarter. We think that over the year the better way to do it is to talk about ad sales in general.

Doug Shapiro - Banc of America Securities

Great. Thanks.


Our next question comes from Aryeh Bourkoff, UBS.

Aryeh Bourkoff - UBS

Thank you. Good morning. Just two quick questions. One, I was wondering if you could break out as an example some of the digital media revenue you're seeing, maybe talk about the iPod ideal. Just wondering where you can show us the out-performance on the digital side.

Secondly, on the cable and advertising growth, obviously 4% in the quarter, you're speaking very confidently about the rest of the year. Can you just confirm double-digit growth in cable and advertising for the year?

Mike Dolan

Let me start with the second part of the question and why we feel good about it. You know Q1 is the lightest quarter in the year. As Tom said, the April numbers have been robust. We're seeing a really good recovery in the domestic ad sales business and that's both the upfront base and also the scatter market. So we feel very good about that. That represents the bulk of the total ad sales collectively for the Company.

We've also seen a recovery from Q1 into April in the international business. It's not where we want it to be yet, but it's certainly a significant recovery from what we saw in Q1. So we feel good about Q2. We're halfway through Q2 at this point. We feel good about Q2. We think we're on track. As we look at the numbers for the full year we believe we're going to get the targets that we told you folks earlier in the year.

Aryeh Bourkoff - UBS

Just as an example on the tip of the digital iceberg, on our iTunes deal we just crossed the 4 million episode sales mark and we've only really been in business with iTunes since January. So we're doing very well there and regularly have titles in their top 10.

Aryeh Bourkoff - UBS

Thank you.


Our next question comes from Richard Greenfield, Pali Research.

Richard Greenfield - Pali Research

When you think about the margin opportunity within cable networks, there's two issues that appear to be hurting you in terms of the overall mix: one is the emerging networks that you talked about earlier and the second one is your international networks. Could you give us a sense of where the relative margins are for those businesses versus the overall number and how much upside you think over the next few years as you continue to expand distribution you have in those margins? Thanks.

Mike Dolan

Richard, that goes back to the whole issue that we were talking about before of the sustainability of the margins and why we think they're flat. Obviously as we look at the business it's very important for us to invest in new channels and new opportunities because that's the hatchery out of which grows successful ventures like Nickelodeon and MTV. So we want to continue to do that.

We know that the margins on those new channels are not going to be the margins of established channels because of scale effects; but it's an important investment to make in the future of the business and we're going to continue to do that.

The international margins, as we've talked in the past, are obviously significantly lower than the domestic or North American margins, which are extraordinary in this business. Again, it varies by region of the world. The European margins are significantly better, again, largely because of scale than other parts of the world. But we think that the investment in the other regions of the world are important to a business that really is committed to having a global brand.

Richard Greenfield - Pali Research

And could you just comment on the overall year-over-year performance of international margins?

Mike Dolan

They were hurt in the first quarter. We're in the process of doing a review now in terms of where we think they'll be for the full year. We don't think that they will significantly impact the overall results of either the cable segment or the Company as a whole.


Our final question comes from Tuna Amobi, Standard & Poor's Equity Group.

Tuna Amobi - Standard & Poor's Equity Group

Thank you very much. I have a question first on home entertainment. Given that it seems like you've been adding about 2% to 3% of share in the home video market over the last couple years, I was wondering if perhaps you can update us on where you stand in terms of your catalog release and TV, DVD, and how you expect that to trend over the next couple years? So basically the percentage of library and DVD titles that are still out there.

Secondly, on the Xfire acquisition, I'm assuming that this is going to be your core property in terms of the social networking. I was wondering, given that Facebook has a much wider footprint, why perhaps you decided to pass? I'm assuming you took a look at Facebook and given its much more diverse footprint, what do you think in terms of Xfire's potential and how this particular acquisition fits into your overall strategy?

Tom Freston

We think Xfire fits perfectly into our strategy, that it's a bull's-eye and it's a bull's-eye against really one segment of that audience, which is your heavy gamer audience. We're still very active in improving our position in the social networking business. We see many possibilities. We've talked to many people in this space and we really see our strategy involving several different social network platforms, Xfire would be one of them.

To get back to your DVD question, by the end of this year we'll have released about 60% of our library which would include 22 new titles this year. The bulk of the remaining titles have been re-released theatrically prior to 1980. We're always though repackaging and re-releasing our home entertainment products at lower price points.

That's something I would add, that Paramount has been much less aggressive about doing in the past relative to other studios. But as you look at our DVD business you've got to also look at the fact that we're expecting our movie slate to improve, which should carry through for greater DVD performance.

Our TV category, which is the fastest-growing part of the category, and the kids' category which is the other fastest-growing part of the category, are two places where we're particularly well endowed.

Tuna Amobi - Standard & Poor's Equity Group

Thank you.

Jim Bombassei

Thank you, everyone, and have a good day. Thanks for joining us on the call.


This does conclude today's conference. We do thank you very much for your participation. You may disconnect at this time.

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