Good day everyone and welcome to the Viacom, fiscal first quarter earnings release teleconference. Today’s call is being recorded.
At this time I would like to turn the call over to the Senior Vice President of Investor Relations, Mr. Jim Bombassei. Please go ahead, sir.
Good morning everyone and thank you for taking the time to join us for our earnings call for the quarter ended December 31. Joining me for today’s discussion are Sumner Redstone our Chairman; Philippe Dauman, our President and CEO; Tom Dooley, our Chief Operating Officer; and Wade Davis, 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 number two in the web presentation and remind you that certain statements made on this call are forward-looking statements that involve risks and uncertainties.
These risks and uncertainties are discussed in more detail in our filings with the SEC. Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website.
Now, I’ll turn the call over to Sumner.
Thank you Jim. Good morning everyone. It is once again my great pleasure to join Philippe, Tom and the rest of the team to discuss Viacom’s quarterly results and our exciting future.
The media business is evolving at an accelerating rate and Viacom is not only adapting to the changes, but in fact we are leading the way. Our investment in new programs that thrives on multiple screens is a driving force behind our extraordinary ability to great television shows, blockbuster movies with worldwide appeal. In fact Viacom’s part in resolving this distributed in innovative ways that were inconceivable only a few years ago.
Our management team continues to deliver on right on its commitment to continuously improve, relentlessly innovate and steadily return capital to shareholders. I have unwavering confidence in my good friend Philippe and his leadership of Viacom’s executive and creative team. Together we will continue to build Viacom’s core business and drive even greater value.
And now it’s my pleasure to turn this call over to the man who is actually the wisest man I have ever met in my life, my good friend, Philippe.
Thank you Sumner my friend and good morning everyone. Glad you could join us today to discuss the first quarter of Viacom’s 2013 fiscal year.
As expected, our results for the December quarter were impacted by short-term challenges. Most notably fewer home entertainment releases and a less favorable mix of theatrical releases from our film entertainment segment and the lingering effects of laden softness at rapidly improving Nickelodeon, which masked a solid performance by our media networks overall.
We are achieving sequential ratings improvement in most of our key brands and excluding our Nickelodeon group, our networks return to positive ad revenue growth in the quarter.
The signs of raised momentum we saw during the quarter confirm our view that our significant and sustained investment in fresh, original content is working and will continue to drive future ratings growth and revenue improvement and we continue to be excited about the rich and diverse slate that Paramount Pictures brings to theaters this year, including the just released Hansel & Gretel: Witch Hunters and the upcoming G.I. Joe: Retaliation and Star Trek: Into Darkness.
As always, we’ll move our content and build our brands across markets and screens around the world. As we do, we’ll continue to deliver significant value for our shareholders.
Tom and Wade will go into greater detail in a moment, but let me quickly recap Viacom’s financial results for the December quarter. Revenues declined 16% to $3.31 billion. Operating income decreased 22% to $797 million and adjusted net earnings from continuing operations attributable to Viacom declined to $461 million. Adjusted diluted earnings per share from continuing operations came in at $0.91 per diluted share.
We continue to generate significant free cash flow, which we use to repurchase $700 million in stock in the quarter under our $10 billion share repurchase program. We expect to repurchase an additional $700 million in stock in this quarter.
In our Media Networks segment, advertising revenue was down 6%, due entirely to the shortfall at the Nickelodeon group. Excluding the Nickelodeon Networks, our domestic networks returned to positive ad sales growth in the quarter and Nickelodeon’s ratings improvement will help us significantly improve our overall ad sales performance going forward.
Affiliate revenue grew 3% in the first fiscal quarter. While our core domestic affiliate revenue grew in the low double-digit range, the overall affiliate line was moderated by the timing of content availability for digital distribution partners in the quarter. For the full year we expect 10% total domestic affiliate growth.
We continue to see strong demand for our branded content from traditional and digital distribution partners alike. Our focus remains on investing to bring more and more new, original content to air. Although our network portfolio courts a more varied cross-section of demos than any other, the consistent refrain we hear from our audiences is that they want new shows and new episodes in faster cycles, and so we are delivering at all our networks, accelerating development timelines and production to accelerate our ratings turnaround.
Today I’m going to focus on two key networks and go a little deeper in our strategic thinking and the vast amount of production activity under way, as well as touch on some important activity at several other networks.
MTV to start, began to answer the question, what’s next after Jersey Shore? Catfish: The TV Show was the number one new cable series of 2012, with MTV’s core 12 to 34 demo and the vitality of this show has been remarkable, even before the phenomenon of Catfishing went mainstream in recent headlines.
The overarching mission of MTV remains unchanged. We are focused on being a cultural home of the millennia generation. But within that context, we are rolling out more and more new original programs that tap into creative themes we see popping up in youth culture. Among those are the complexities of modern relationships for young people. With Catfish, we’ve tapped a rich generational theme and we have a number of pilots in development that will explore the new ways millennial navigate relationships.
MTV also continues to reinvent reality with diverse young voices, ranging from Washington Heights to Buckwild, which attracted a series high 2.7 million viewers last Thursday. We are also expanding on the strong female comedy franchise we have in Awkward, which returns next quarter with new shows like our topical comedy series Nikki & Sara Live, which debut this week.
The underpinnings of this creative breadth is a schedule strategy that uses our existing hits as a launch pad for the influx of new originals and creates a more balanced weekly schedule for audiences and advertisers.
Jersey Shore was a game-changing look for MTV, but it also precipitated an overemphasis on one night. We are now successfully building out additional nights, whether it is the Teen Mom and Catfish Reality Block on Mondays or female comedies like Snooki and JWOWW, Nikki & Sara LIVE and Awkward on Tuesday nights.
Currently four of MTV’s five original series on air rank number in their time period across all televisions in the network’s core demo. We are also working to eventize our weekend programming, where we see marathons of library programming like True Life and Jackass perform well.
On last quarter’s call, we mentioned that MTV had scored a crew by hiring proven hit makers Susanne Daniels as its new President of Programming. Susanne has hit the ground running, already having completed a review of our production partners and accelerated our pilot process. She’s also building out her team, most recently bringing aboard a new head of scripted development who developed a hit Pretty Little Liars. We are excited about the momentum at MTV and the creative direction and strategic thinking behind it.
Nickelodeon continued its resurgence in the December quarter, posting three consecutive months of sequential ratings improvement. A lot of that strength was driven by greater emphasis on event programming. We’ve seen specials, stunts and new episodes do really well with young audiences. So we packed the quarter with events from strong franchises like SpongeBob and Fairly Oddparents and new ones like Peter Rabbit.
In the short-term, Nickelodeon is focused on three priorities; reclaim and retain its Saturday morning leadership, strengthen its weekday afternoon block, and strengthen its preschool viewer-ship to feed long-term viewer-ship of its big kid audiences.
That last point is particularly critical as the network hits the generational reset button. Nickelodeon’s long-term strategy is to refine its programming filter, for an audience that is purely post-millennial. It’s positioned as a network with detail for advertisers as the kids up front kicks off next month.
Fueled by unprecedented investment in content, the development pipeline at Nickelodeon is flowing strong. Through September, Nickelodeon is debuting six new animated series, including Monsters Vs Aliens, which is based on the hit DreamWorks film and we are seeing ongoing strength from Teenage Mutant Ninja Turtles, both on air and at retail, where sell-through rates of most products approached 100% in the quarter. The Turtles return with all new episodes this Saturday. In addition, in an important new initiative, Nickelodeon will be introducing a new live afternoon block in about a month.
Much of our success in getting new programming to screens faster can be tied back to Nickelodeon’s move to centralize and reorganize its creative leadership in Los Angeles under Russell Hicks. Our television movie and short film, live action and animation teams are working in a more coordinated fashion, sharing best practices and writers, and have taken steps to accelerate development and production.
We have especially focused on enhancing our animation efforts and we have attracted significant new talent in that area. Additionally, Nickelodeon continues to build out a strong multi-platform offering to compliment its on-air programming will debut an innovative standalone app in the months to come. Through this year and beyond, the Nickelodeon story will continue to get better.
Comedy Central has ramped up original productions significantly. This first half of calendar 2013 features six new series from young comedians coming to air, including the Kroll Show, which has already been picked up for a second season. This represents a great payoff in the network’s development strategy, through which it identifies young, distinct, comic voices, incubates them to our stand-up specials, exposure in our road series and our record label and DTL platforms, and gives the best and most promising, a shot with their own series.
In the current quarter Comedy Central also has several hit series returning with new episodes, including Tosh.0, The Burn and Workaholics. Spike brought Bellator MAA to air this month. Bellator is a great long-term growth opportunity for us, given that we own a large majority of the MMA enterprise, unlike our previous association with UFC. In the near term, Bellator enables Spike to establish a Thursday night block focused on live fights, leverage its expertise in marketing MMA, and capitalize on high advertiser demand for the sport.
At the same time, Spike continues to build on new original programming with broader appeal on every other night of the week, including new seasons of series such as Bar Rescue and Auction Hunters that expand the network’s audience base in time and repeat well throughout the schedule.
At BET, the network launched two big new hits this month in The Real Husbands of Hollywood and Second Generation Wayans. Real Husbands attracted 4.1 million viewers since debut and is a great example of how we are being fast and flexible in bringing new programming to air. The series went into development after Kevin Hart’s sketches on the BET awards in July, with initial plans to launch in the spring. However, BET decided to push up the launch of Real Husbands to early January, to respond to the shift in competitive landscape.
The move required a quick and herculean effort by the BET programming, marketing and PR machine, which clearly paid off, giving the network a very solid platform for the return of its hits, The Game and Let’s Stay Together in March. This is a great example of how we’re pushing harder to be thoughtful, nimble and aggressive in programming across our portfolio.
So that’s a quick look at some of the ways we are investing in content and bringing more new programming to air, to engage our audiences and capitalize on positive ratings momentum, and of course, we are laser focused on the number one scene that echoes across our industry, alleviating current limitations on cross-platform measurement.
We are working aggressively, both internally and with partners, to address the situation and find that path to measurement and monetization of multi-platform viewing, which will be a particular boost for us. We hope to have more to share with you on that front in the near future.
Internationally, Viacom International Media Networks continues to feel the impact of the economic conditions in Europe. But we also see real gains in our long-term strategy to grow our adult-focused business. In the December quarter, our comedy channels posted ratings gains of 14% internationally and the paramount channel in Spain posted steady ratings increases as well as we prepared to launch in several additional countries this year.
We also continue to optimize our approach market-to-market, establishing strong partnerships in some, while assuming full ownership of our media properties and others. Colors, our general entertainment channel join venture in India saw strong ratings gains early in the first quarter.
Our partnership with SBS in Korea has yielded revenues, revenue and distribution increases for MTV and Nickelodeon in that market since it began in 2011, and in Italy we recently took direct control of our Comedy Central and Nickelodeon brands, ending a joint venture with a local partner. We expect our international networks group to return to ad sales growth in this second fiscal quarter.
Finally, let’s move to our film entertainment segment. Revenue was down 37% because of a very different mix of film and the timing of theatrical releases in the quarter. In the comparable quarter in fiscal 2012, we have significant revenue for Mission Impossible: Ghost Protocol and the DreamWorks animation feature Puss In Boots.
The Tom Cruise action of Jack Reacher posted a solid performance at the box office, particularly internationally. It is encouraging as we increase our focus on developing pictures with extensive global appeal. Hansel & Gretel: Witch Hunters for example opened a number one last week in the US and in all but one of the 19 global markets in which it launched.
The Paramount slate kicks at the high gear in March with G.I. Retaliation and continues through the end of the year with Michael Bay’s Pain & Gain, Star Trek: Into Darkness, World War Z, the fifth installment of Paranormal Activity, The Anchorman sequel and then Tom Clancy reboot Jack Ryan, all due in theaters before the end of the calendar year.
To conclude, we are working to accelerate our ratings momentum by investing in content and bringing new programming to air quickly, as we move the company back to ad sales growth, and we have a strong succession of promising films hitting theaters through the end of the calendar year. We’re very excited about the creative energy throughout the company, the content we are delivering to audiences, and the value we will continue to deliver for our shareholders.
With that, I’d like to introduce Wade Davis, our newly appointed Chief Financial Officer. Wade has been with us for some time and has a strong financial background and a very strategic view of our businesses. He is a great addition to our senior executive team. Congratulations Wade and welcome.
Thanks Philippe. I’m excited to be here and look forward to working with the team in the capacity of CFO. Before I take you through our operating results, I want to note that our earnings release and web presentation summarizing the results for our December quarter are available on our website.
Now, let’s take a look at our segment results. At our Media Networks segment revenues in the quarter were down 2% compared with the prior year, with domestic revenues down 2% and international revenues down 5%.
Foreign exchange losses had a one percentage point impact on international revenues. The decline in revenues in the quarter was driven by lower advertising revenues, which were partially offset by growth in affiliate revenues. Page 10 of our web deck provides a breakdown of our media network’s revenue performance.
Domestic advertising revenues were down 6% in the quarter and international advertising revenues declined 10%. The declines in international advertising were driven by lower revenues from production and promotional events, as well as softness in Europe. Foreign exchange losses impacted the international advertising growth rate by one percentage point.
In terms of affiliate revenues, domestic revenues increased 4%, while international revenues were up 1%. Excluding the impact from the timing of product available under digital distribution agreements, domestic affiliate revenues grew low double-digits.
International was up due to new channel launches, as well as rate and subscriber increases, partially offset by lower digital distribution revenue, due to the timing of product availability.
Expenses increased 3% in the quarter. Within expenses, programming expense grew 8%, while SG&A expense was flat. SG&A expense benefited from lower incentive based compensation.
Media Networks adjusted operating income was down 9% and the adjusted operating income margin was 43%, down approximately 300 basis points compared to the prior year. The margin decline was principally due to lower advertising revenues, as well as increased programming expense.
Moving to filmed entertainment, revenues declined 30% in the quarter due to lower theatrical home entertainment and TV license fee revenues. Page 12 of the web presentation provides a breakdown of filmed entertainment revenues.
World wide theatrical revenues decreased 42% due to the difficult comparison to last year’s release of Mission Impossible: Ghost Protocol, as well as lower revenues from the current quarter’s Rise of the Guardians as compared to Pus In Boots, which was released in the December quarter of last year.
World wide home entertainment revenues declined 43%, reflecting fewer home entertainment releases in the quarter as we released one title this year compared to four titles in the December quarter of last year. The decline in home entertainment revenue also was impacted by lower carryover revenues, as the December quarter of last year benefited from Transformers: Dark of the Moon.
The decrease in TV license fees of 24% in the quarter principally reflects the number and mix of titles available in the Pay TV marketplace.
Filmed entertainment generated an adjusted operating loss of $139 million in the quarter, as compared to a loss of $31 million last year. The lower results principally reflected lower home entertainment profits, as well as the timing and performance of our theatrical releases.
With that, I’d like to turn the call over to Tom.
Thanks Wade and welcome. I’m going to discuss our cash flow, our debt profile and the return of capital to our shareholders. I’ll also cover the seasonal factors impacting our 2013 fiscal year.
For the quarter we generated $549 million in operating free cash flow, compared to $602 million last year. We continued to maximize our free cash flow efficiency, converting nearly 70% of operating income into free cash flow. Page 5 of the web deck presentation provides the components of free cash flow.
The decline in operating free cash flow was principally due to lower operating income and higher cash taxes, partially offset by lower working capital utilization. The favorable working capital variance was impacted by lower theatrical receivable balances, as well as improved collections of advertising revenues in the December quarter of this year.
Now turning to our debt, for the most part, it is fixed rate with an average cost at quarter end of 4.7%. This past quarter we continue to take advantage of the favorable rate environment by issuing $250 million of new 30-year debentures with a very attractive coupon of 4.375%. We also executed an exchange offer for our 6.875% debentures due 2036 and our 6.75% debentures due 2037.
In total $844 million in principal amount of these higher coupon debentures were tendered and exchanged for additional 4.375% debentures. These transactions, together with our other actions over the past year have lowered the average cost of our fixed rate debt by 80 basis points since December 31, 2011.
During the quarter we also amended our revolving credit facility, which increased its size from $2.1 billion to $2.5 billion and extended the maturity two years to November of 2017, providing us with significant financial flexibility for the next five years. To the extent we have incremental borrowings, we are funding this in the commercial paper marketplace at an annual rate of 40 basis points. We had no variable rate borrowings outstanding at quarter end.
In terms of leverage, we ended the quarter with $8.4 billion of debt and capital leases outstanding and $671 million of cash and cash equivalence. Our leverage ratio at quarter end was 2.2 times.
At December 31, our $2.5 billion bank revolver was undrawn. Our commitment to return capital to shareholders continued in the December quarter. Between our buy back and dividend programs, we returned a total of approximately $977 million of capital back to our shareholders.
Looking ahead, we are on pace to purchase approximately $700 million of our stock in the March quarter, which means that in the first six months of the year, we will have returned a total of approximate $1.7 billion to our shareholders. When we began our buy it’s back program a little over two years ago, we had more than 600 million shares outstanding. As of December 31, we had less than 500 million shares outstanding.
Now let’s turn to some of the factors impacting our 2013 fiscal year. For 2013, we see affiliate revenue growth of 10%; however, quarterly affiliate revenue growth will fluctuate, given that revenue recognition on some of our digital agreements is tied to product availability.
In the March quarter we expect that the reported affiliate revenue growth rate will be in low single-digits, which is the combination of lower digital revenues and double-digit growth in traditional revenues.
For the full year, we continue to expect a high single digit growth rate for media networks program expense. 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 our organizations and/or in order to preserve or enhance our margins for the rest of the year.
At filmed entertainment, we are excited about our up coming tentpole releases, including G.I. Joe, Star Trek and World War Z. We expect to grow in profits, the growth in profits to be weighted to the back half of the fiscal year, as the studio benefits from the availability of titles in the TV and home entertainment market places.
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. As for our stock buy back program, we expect to repurchase at least $2.5 billion for fiscal 2013.
In summary, we continue to invest in our brands. At Media Networks, we are growing the level of original programming and are encouraged by the rating progress we are starting to see at several of our flagship networks, and at Paramount, we are developing new franchises to enhance our pipeline of films into the future.
We continue to be opportunistic in the capital markets, taking advantage of the current attractive rate environment to lower our average cost of debt, while at the same time extending our average maturity, and we continue to use the capacity from our balance sheet and our free cash flow to aggressively return capital to our shareholders, by both shrinking our equity base and providing a dividend.
Now, operator, we will turn the call over to questions. Operator, we are ready for questions.
Thank you. (Operator Instructions). And we will take our first question from Michael Nathanson with Nomura.
Michael Nathanson - Nomura
Thanks. I have one for Philippe and one for Tom. Hey Philippe, if I heard correctly you guys are going to launch a new Nickelodeon app this year. I wondered is that going to authenticated and part of an associate relationship or do you expect to go out and try the incremental payments and rights from your distributors for that app. So how is that going to roll out and what is the monetization model?
Well, I’m going to let Nickelodeon announce all of the features of the app, which is going to be launched in the very near future. It’s quite innovative, it will be authenticated, but it will allow us to really grow in the future and you’ll see it’s very different from anything you will see in the marketplace.
Michael Nathanson – Nomura
Is this model, is it part of your existing relationships with distributors?
Michael Nathanson – Nomura
Okay. And then Tom, can you talk a bit about -- I don’t know if you know this number off the top of your head, but if you look at your program spending over the past year let’s say, what percentage of the content you’re paying for is actually acquired content and how has it changed and how will that change? So the sense of, as the mix shift continues, how much is left that’s acquired of what you spent?
Acquired programming still represents a pretty significant amount of money. It’s a little over half of what we were spending, but that number has decreased significantly and will decrease significantly into the future. So we think acquired programming does have a place on a lot of our networks, certainly the ones like TV Land and Nick at Night that require and live on more of that.
But into the future, as you know on both of those networks we started to put original programming to begin to replace that, original programming that’s new and exclusive to us where we own all the rights and we think that is going to be critical as you move into the future where this program lives across platforms and around the world.
Michael Nathanson – Nomura
Yes, thank you.
Operator, we’ll take our next question.
And we’ll take our next question from Doug Mitchelson with Deutsche Bank.
Megan Durkin - Deutsche Bank
Hi, this is actually Megan Durkin in for Doug. So you talked about attacking the preschool audience at Nick, but competition in that category has increased with Disney now aggressively programming Disney Junior. So can you tell us a little more about your plans there? Do you think you could go after girls, boys, and also I wanted to see if you could talk about how you think about balancing preschool programming between Nick and Nick Junior?
Well, we are focused very much on improving the Nickelodeon rating situation, where we probably last year put a little too much programming on Nick Junior from Nickelodeon and we reversed that direction in part there and we are seeing part of those results.
In terms of how we are going to do it, it’s really an intense focus on new animation contact. As I mentioned, we are launching a number of series. We have Peter Rabbit, which we launched as a special event in the last quarter, which will be a regular series, and we have a number of additional animated efforts.
As I had mentioned in my remarks, we organized how we are developing, we’ve added more animators, more animation talent, we speeded up the development process, and importantly, we are also speeding up the production process.
So we’ll be able to turn around and turn in these new series much more quickly, and at the same time, we are sticking with what works and you will see some exciting developments in some existing franchises like Dora. You will see and again Nickelodeon will lay it out up front, but our existing franchises will be at least partially reinvented to be more exciting, to girls and boys alike.
Megan Durkin - Deutsche Bank
Okay, and then a very quick follow-up. Is the Nick Junior sponsorship ads that you added this year, is that having any impact on your advertising dollars at Nick Group.
We offer our advertisers a multi-platform opportunity, really reaching our audiences, whether its Nickelodeon Kids or MTV, Teenagers, that’s the direction the world is moving in real closely with our advertisers to reach our audiences wherever they are and that is why we really look forward to having better measurement systems. But we are experimenting very actively in that regard and we expect once we get to that point to be a real driver of growth for us in advertising, because we over index, our audiences over index in utilization of non-television platforms.
So Megan, Nickelodeon Junior, Nick Junior’s sponsorship revenue is not a very significant portion of total advertising revenue.
Megan Durkin - Deutsche Bank
Okay then. Thank you.
And our next question comes from Alexia Quadrani with J.P. Morgan.
Alexia Quadrani - J.P. Morgan
Hi, thank you. Can you just comment a bit on the tone of the advertising market? How scatter is tending, any notable cancellation activity for the June quarter?
Alexia, no notable cancellation activities. The scatter market is strong. In fact it appears to be picking up strength in this quarter. Pricing continues to be up in the teens over the up-front. Its up mid-single digits scatter-to-scatter and we are seeing demand from categories like food, QSR, wireless, electronics, automotive and we are also looking forward given those categories are so important to us.
So we have more film product that is pinned against the audiences. Towards the end of last quarter we had a lot of value built and we added ourselves and obviously we prefer those big franchise as with family films and there a lot of them coming out as the year unfolds.
Alexia Quadrani - J.P. Morgan
And just following up on your comments about the shift towards the focus on the younger demographic at Nick, is that sort of a notable shift sort of away from the tween’s demo or is it sort of more in addition to that.
No we are going to serve all of the demos, but we have a generational shift and so we want to capture that preschool audience so they grow with us in the Nickelodeon family. That’s what we’ve always done. We need to reinforce that and we are going to program toward all age groups.
What we are going to do is increase the amount and range of programming that we have. That’s why we increased our investment programming in Nickelodeon. That allows us to make more animated shows, more shows for the older kids and continue to make more shows for tweens.
So its realty increasing and accelerating the programming address to all kids. But the special focus on the young ones is to capture the new kids, so that they grow into childhood long aficionados of Nickelodeon.
Alexia Quadrani - J.P. Morgan
All right, thank you very much.
Next we’ll go to Brian Wieser with Pivotal Research.
Brian Wieser - Pivotal Research
Thanks so much for taking the question. Just following up to Alexia’s question, I wanted to get your sense on how you see volumes in the marketplace and more specifically, did you see any impact in macroeconomic conditions in any way holding back volumes that were showing up on the MTV networks?
And then the second question, we have been looking at set-top box data and it’s obviously very different than the Nielsen data, but what we see is really heavy concentration of SpongeBob on Nick in terms of the viewing hours, and on the other hand it also shows viewing going up. Is that kind of concentration in your view a good thing? Is it causes the rates to go up or would you rather see a broader base of viewing?
So on your first question on general demand volume in the marketplace and macroeconomic conditions, certainly speaking broadly, towards the end of last quarter there was a lot of concern as we had this fiscal cliff discussions and alike from a macro standpoint on the part of a lot of companies around.
Did that have a modest impact in general on the industry? Probably, but I think that’s really gone away. I think as we see from a macro standpoint increasing confidence in the marketplace, while European conditions continue to be weak. I think there is more stability there. So we think that GDP growth this year will improve over the last year and that’s good for us and as I said in response to your earlier question, demand is good right now.
As far as SpongeBob is concerned, some have raised doubts in the past about SpongeBob’s vitality. He is one of the great enduring characters and not just for us, but in the entertainment universe generally. We are continuing to build that franchise. I recently visited the production facilities for the SpongeBob film that Paramount will be releasing at the end of next year and it will be spectacular.
So SpongeBob is great for us, not just on air in driving ratings, but also is a driver of our consumer products business, which allows us to launch other franchises. So it’s good inherently and it helps us launch new programming on air and new franchises on the consumer products business. So yes, we continued with SpongeBob and yes, we are also building diversity in programming and more pro-rata in programming and consumer products opportunities.
And Bryan, as Philippe said we use it strategically to launch other new franchise which Nickelodeon has been launching recently and it is a very successful launch vehicle to get new programming established on the air. So it works. It’s a workhorse for us and one we are very, very happy to have and hope to have long into the future.
Brian Wieser - Pivotal Research
Okay great. Thank you very much.
We’ll now go to Richard Greenfield with BTIG.
Richard Greenfield - BTIG
Hi, thanks for taking the question. Nick is clearly getting better based on what everyone talked about during the call. But I think investor theory shifted a bit to MTV and I was wondering, how do you react kind of the post Jersey fear about MTVs health and how do you make sure you don’t have a problem at MTV, looking into what happened in the past year at Nick.
Well, I think you are seeing these things outside MTV right now, and you are seeing the post Jersey Shore environment. We had great development even before Susanne came onboard and Catfish and Buckwild are both new shows, have really strong ratings that have been growing. I’d like it more to have several hits like that than to rely on one show. I think it will be healthy and our continuing shows like Teen Mom and Snooki and JWOWW are Jersey Shore offshoot also doing well.
So I feel very comfortable with MTV and on top of that we have about as good a development pipeline of that seen here and we have really great strong programming talent. The new hire we just announced will make the program within MTV stronger. So I feel very good about the MTV franchise, very good about the Nickelodeon franchise, very good about the Comedy Central and BT franchises and all the others we have around the house.
As I said in my remarks, we have focused intensely. Our company is all about content, its all about programming, we are focusing entirely all of our groups are focusing intently and developing more new compelling programming.
Richard Greenfield – BTIG
And we will go to David Bank with RBC.
David Bank - RBC
Hey, thank you very much. I have two quick questions. The first one is, is there any way you can give sort of an order of magnitude expectation for sequential improvement in ad revenues, assuming that audience deliveries for Nick remain pretty consistent in the current quarter versus the prior?
And the second question is just going back to the Nick app issue or the opportunity I should say, are you going to try and sell that inventory in connection with this year’s up-front and how will you tackle the cross-platform measurement issue, such that an impression on one platform is equivalent to another? Thanks so much.
David, thank you. As far as ad sales, in this quarter and again, I don’t like to get too far ahead of myself, but we are going to be very close to being flat year-on-year at ad sales and going forward after that we are going to grow our ad sales. So that’s the trajectory that we’re on, based on what we see out there today.
As far as specifics of the nick app I really do want to leave it, because there is a lot to it for Nickelodeon to launch it, but more broadly on the cross-platform issue and ad sales. We are testing putting an ad load on VOD, where we can have the ads that we have on air also appear on VOD and have that measured as part of the package. We will on a multi platform base begin working with Nielsen, but also with others to see how we can capture viewership.
If we can capture the viewership in the ratings of our commercials, we will expand distribution of our content across platforms. We’ve already entered into agreements, so-called TV everywhere agreements with several major distributors, their ability to distribute our networks outside of the home on other devices will be based on measurement. Once we do that, because our audiences are all going into that kind of viewership, it will expand our audience and expand our share of ad dollars.
Hey, we’re definitely selling advertising now across all platforms and we offer that option to advertisers and as we mentioned on a linear basis, we are using the traditional sample base methodology for billing and revenue generation and in the digital world you can use the ad serve, so you really have a very accurate estimate of delivery.
So it’s a brave new world that includes the ability of consumers to watch commercials and television shows when they want, where they want to watch them and we have the ability to insert commercial and we’ll have the ability in the not too distant future to insert commercials whenever they consume them. That would be more appropriate for the delivery of ad commercial or more appropriate for the specific targeting of that consumer.
So it’s a really exciting time in the world of advertising as it relates to multi-platform consumption of content and I think we are a leader in that regard as our content is voraciously consumed across those platforms.
David Bank - RBC
Okay, thank you very much.
We’ll go to David Miller with B. Riley Caris.
David Miller - B. Riley Caris
Yes, hey guys, a couple of questions. Philippe, congratulations on the success with Buckwild and Washington Heights. Can you confirm whether or not the network has ordered a second season or a second season block at all of any of those series?
And then also, it’s been a while since you talked about the animation division, which I guess you started almost two years ago. Could you just talk about like what the next release is, when it’s going to be, what the average negative cost per film is going to be? Any sort of quick-thumb profile you want to give on the animation division going forward would be very helpful. Thank you very much.
Sure. As far as Washington Heights and Buckwild, I don’t believe that MTV has announced yet, whether it is ordering second seasons, but I’ll leave it to the programming department to time those announcements.
As far as the animation division, it’s progressing very well. We have a number of projects in development. SpongeBob production, as I mentioned I visited the production facility. It’s very much on target for release in 2014.
We are shortly going to green light our second feature. Again, I will leave it to Paramount to announce it, which will be released in 2015. It will be based on original IP. It will be chaotic, so will have consumer products possibilities, and then we have a number of other development projects in the pipeline behind those. So we are very much on track to begin with one release a year and some day perhaps building to a faster pace.
The budgets on those features are all designed to be under $100 million and in some cases significantly below $100 million. That’s our objective and we feel we can deliver a great look on the screen for that amount, with the way we are making those movies and the partners we are using to make them.
David Miller - B. Riley Caris
Do you plan to compete in the summer, tentpole frame with those projects or do you feel like these are sort of March releases and/or part of April.
SpongeBob will be a end of the year holiday release next year and beyond that I’ll leave it to the studio to determine when the optimal time for release is of a particular films would be.
David Miller - B. Riley Caris
Thank you very much.
You’re welcome, David.
And we’ll go to Vasily Karasyov with Susquehanna Financial Group.
Vasily Karasyov - Susquehanna Financial Group
Thank you. Tom, I wanted to follow-up on your comments on margins and expenses in the year. I wanted to ask you how much discretion do you have over programming costs increases? Because correct me if I’m wrong, but I think last year you ended up growing costs less than you expected in the beginning of the year. So if the ratings are softer than we expect now, would you be able to still maintain the margin at the networks?
Right now, given the way we’ve made commitments, I think our programming visibilities for this fiscal year is pretty much locked in. There’s not a lot of variability, because we’re either in production with those shows or completed production and waited airing them. So I think our visibility there is pretty tight.
Our flexibility in the cost structure is where we attack SG&A expenses and work to modify the way we do business on a year-in year-out basis to drive efficiencies there, and that has been and will continue to be the driver of margin improvement for the foreseeable future.
Vasily Karasyov - Susquehanna Financial Group
All right, thank you very much.
And we’ll go to Michael Morris with Davenport & Co.
Michael Morris - Davenport & Co.
Thank you. Good morning guys. A couple of questions. First, a clarification on the ad pacing you discussed. You said trends were positive excluding Nick. Was that in the December quarter as well as in the coming quarter or would you still have been negative domestically ex-Nick in the December quarter?
No. The point that was made on the December quarter is that the shortfall, the decline in ad sales year-on-year was entirely due to the Nickelodeon groups. If you lease out the Nickelodeon networks, the rest of our networks in the aggregate grew their sales year-on-year in the December quarter.
Michael Morris - Davenport & Co.
Okay, great. So then given the importance of Nickelodeon to the kids’ ecosystem in general in television, I’m curious of your thoughts on where those dollars are going. Are they staying in television and going elsewhere or they are kind of sitting on the shelf so to speak or are your partners increasingly looking for other media that they want to put that money to work in?
I would say the following as far as that goes and remember that December quarter is a big quarter in the kids’ marketplace, which is why it had such a significant impact on our ad sales.
Nickelodeon is doing a very good job in maintaining share. There was some issues in the quarter in the marketplace in general, and the toy category and the fact there were fewer kids releases in that quarter than there usually are. So you had yes the DreamWorks animation film. You didn’t have much else in the marketplace.
There was some less demand, but that really, we left some non-endemic money on the table because of the ratings issues that we have, so that’s not really the cause for such a shortfall that we had in that quarter. But it also means that we weren’t losing a lot of business to our competitors in the quarter.
And Nick worked very closely with a lot of its key strategic advertisers. Obviously the December quarter is a critical quarter for our advertisers to get their messages out and we worked to the extent we were un-delivering relative to the up-front, to deliver as many impressions as we could to satisfy what we had promised those people, and that was one of the reasons.
That becomes less of an issue as we roll forward from here. So that gives us renewed optimism and as we said, some of the categories were off a bit and one of the biggest categories was film releases and we see that shaping up in a different way as we roll forward from here for the rest of the year.
Michael Morris - Davenport & Co.
That’s helpful. If you don’t mind if I could just squeeze in one more quickly. Your on-demand platforms that you are partnering with, so we talked about Netflix; I’m also thinking about cable Telco distribution partners that you provide with content. Can you talk a little bit at this point what you are seeing in the trend of consumption on those video on-demand platforms. Are you seeing more -- help me with maybe the pace of growth of consumption of your content on on-demand platforms? Thanks.
Well the consumption of our content, we have content on platforms like Netflix and Google. The growth of streams of our content far outpaces the growth of subscribers that they have, because we do receive data. So our content is very well there and that includes time that’s been up there for quite a while, non-refreshed content. So again, I think that bodes well for our revenue opportunities on both the advertising front, as well as the distribution revenue front in these new distribution platforms.
And as the interface, consumer interface on on-demand and VOD within cable and Telco distributors improves, we continue to see our products, which has always been one of the top products that was time-shifted if you will, continue to be very aggressively consumed across the ecosystem and growing.
Michael Morris - Davenport & Co.
Great. Thanks a lot for those answers.
Operator, we have time for one more question.
We’ll go to James Dix from Wedbush.
James Dix - Wedbush
Hey, thanks very much; just two questions. Just following up on the discussion about improved cost for cross platform measurements and the experiments you are doing there, any sense as to how much the revenue impact would be across all of your platforms if everything that you were testing got rolled out, kind of as you expected. Is this a low single-digit number, mid-single-digits and just kind of what you envision the actual timing of the actual improvements being?
And then second, your networks appear to younger demographics, which may be somewhat more resistant to the Pay TV bundle. So are there any other ways of going to market with your content, which you think could be material to your business model going forward? Thanks a lot.
It’s way too early to start quantifying the results of cross-platform measurement. We know it will be good and we are going to view it as part of our overall ad sales effort, but it’s very premature to get into that. I’ll leave all of the analysts to do that.
As far as the Pay TV marketplace and how our channels distribute, it continues to be a very compelling consumer proposition. It’s always been the case that you need young people to move into their own apartments and houses before they subscribe. We continue to see the multi-channel universe is expanding very slowly right now, but as the economy picks up I expect that will continue.
Now, the way in which the television is distributed is evolving. Obviously in addition to the satellite and Telco and cable providers, you have the beginnings and a number of companies who are exploring other products, so called over the top delivery, but those will also be multi-channel packages and we are in conversations with many of those.
As to when that will become significant it’s hard to tell, but there’s certainly a lot of investment going behind it and that will be good for us. That will be another form of distribution and we’ll be able to add a number of exciting features to the programming that will increase its appeal to our audiences.
James Dix - Wedbush
Great. Thanks very much.
You’re welcome. We want to thank everyone for joining us on our earnings call.
And that does conclude today’s conference. We appreciate your participation. You may now disconnect.
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