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Viacom (NASDAQ:VIAB)

Q2 2013 Earnings Call

May 01, 2013 8:30 am ET

Executives

James Bombassei - Senior Vice President of Investor Relations

Sumner M. Redstone - Founder and Executive Chairman

Philippe P. Dauman - Chief Executive Officer, President and Not Independent Director

Wade Davis - Chief Financial Officer and Executive Vice President of Strategy & Corporate Development

Thomas E. Dooley - Chief Operating Officer, Senior Executive Vice President and Director

Analysts

Brian W. Wieser - Pivotal Research Group LLC

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

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Richard Greenfield - BTIG, LLC, Research Division

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

Eric Katz - Wells Fargo Securities, LLC, Research Division

John Janedis - UBS Investment Bank, Research Division

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

David Bank - RBC Capital Markets, LLC, Research Division

Anthony J. DiClemente - Barclays Capital, Research Division

Douglas Creutz - Cowen and Company, LLC, Research Division

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Operator

Good day, everyone, and welcome to the Viacom Second Quarter 2013 Earnings Release Teleconference. Today's call is being recorded. And at this time, I would like to turn the call over to Senior Vice President of Investor Relations, Mr. Jim Bombassei. Please go ahead, sir.

James Bombassei

Good morning, everyone, and thank you for taking the time to join us for our earnings call for our March quarter. 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 #2 in the web presentation and remind you that certain statements made on this call are forward-looking statements that involve risks and uncertainties. These risks and uncertainties are discussed in more detail in our filings with the SEC. Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website.

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

Sumner M. Redstone

[Audio Gap]

You to Viacom's Second Quarter Conference Call. Once again, our outstanding team delivered on its proven strategy to grow our business and drive value for shareholders. Today, Viacom's brands are better than ever. Our creative operative is booming. We are making smart, sustainable use of exciting new distribution measures and technologies.

At the heart of this effort is Viacom's outstanding executive team led by its incomparable CEO, Philippe Dauman. His expertise and wisdom continue to guide Viacom's success and fuel our ability to deliver the outstanding returns our shareholders have come to expect.

Now it is my pleasure to introduce my friend, my colleague, the wisest man I have ever known, Philippe Dauman.

Philippe P. Dauman

Thank you very much, Sumner. And good morning, everyone. Thank you for joining us today to discuss the second quarter of Viacom's 2013 fiscal year.

Our results for the March quarter were highlighted by our return to positive advertising revenue growth driven by continued ratings' momentum at our Media Networks. Nickelodeon posted solid year-over-year gains, with ratings up 7% and up 11% at Nick at Nite, in their respective key demos, marking the strongest ratings growth we've seen from Nick in 2 years. We're achieving ratings growth and revenue improvement through increased investment in content. We continue to invest in new original programming, diversified creative formats and marquee and emerging talent, both on and behind our screens.

Even as we invested in on-air programming, Nickelodeon took the leading edge of a sweeping effort across Viacom to reinvent how we deliver content and connect with fans. In March, Nickelodeon launched the Nick app for the iPad, the first of several dynamic apps to come from our individual brands. Nick app will debut for the iPhone later this quarter. And a number of our other brands will launch standalone apps this summer.

In our Filmed Entertainment segment, Paramount expanded another strong film franchise with the successful launch of G.I. Joe: Retaliation. Not only did the film perform well at the global box office, it also provided another successful example of how the studio is creative, nimble and opportunistic in optimizing release timing and formats in order to maximize profits.

Tom and Wade will detail the results in a moment, but let me quickly recap Viacom's financial performance for the March quarter. Revenues declined 6% to $3.135 billion, operating income decreased 9% to $847 million and adjusted net earnings from continuing operations attributable to Viacom declined to $481 million. Adjusted diluted earnings per share from continuing operations came in at $0.96 per diluted share.

We remain committed to returning capital to shareholders, and we again repurchased $700 million of stock in the quarter under our $10 billion share repurchase program. We expect to repurchase an additional $700 million of stock in the current quarter as well. Given our operating performance and cash flow expectations, we now expect to repurchase a total of $2.8 billion of stock this fiscal year. Since we initiated the program in October 2010, we've repurchased close to $7 billion of our stock at an average price of under $48 per share. In our board meeting later this month, we will also review our dividend rate, as we usually do around this time of the year.

Our Media Networks segment had a solid quarter, with revenue up 2%. Advertising revenue also grew 2%, thanks to ratings improvement at our networks and strong demand. Growth represents an 8-point sequential improvement from the December quarter. We expect to achieve further sequential improvement in advertising revenue growth in the current quarter.

Affiliate revenue grew 2% in the quarter. Similar to the previous quarter, our core domestic affiliate revenue grew in the low-double-digit range, but the overall affiliate line was moderated by the timing of content availability for digital distribution partners in the quarter. We expect total domestic affiliate growth of 10% for the full fiscal year. We are in constructive discussions with several parties, including Netflix, concerning digital distribution of various portions of our rich portfolio of content beyond the expiration of our Netflix agreement later this month. We continue to see such distribution to be a growing and complementary avenue for our affiliate business.

As I said earlier, our strategy is strong, sustained investment in original, wholly-owned content. We firmly believe that if we fuel the creative engines that drive our brands, we will continue to create hits that resonate with diverse audiences, keep audiences deeply engaged with our networks and increase viewership on new and emerging platforms as well as drive value for our marketing and distribution partners.

While we invest in programming, we're also investing in the future of content itself. We believe that apps are a critical piece of that future. The recently-launched Nick app is the first of several brand apps we're rolling out this year. Our guiding principle is that the app opportunity is greater than just online video. Apps give us the opportunity to deliver a total brand experience to fans. The Nick app, for example, is an interactive playground that offers not only short-form and full-episode video but also a rich offering of games, media and other features that allow fans to connect with Nick stars in the network's new Nick Studio 10 afternoon block of live programming. And advertisers are taking notice, with several studio clients on-board at launch and other marketers poised to join.

MTV is taking a similar approach with its forthcoming app which will feature its hit programming but also deep social TV integrations and original video content. And beyond the core brand apps, we continue to launch apps for individual franchises, like The Colbert Report and Teenage Mutant Ninja Turtles, extending the engagement that many of our shows have built with fans beyond traditional TV.

Additionally, our core brand apps drive value for our distribution partnerships and reinforce the subscription model through TV Everywhere functionality. Our authenticated apps and websites are currently available to more than 50 million pay TV subscribers with distributors including DIRECTV, Time Warner Cable, Verizon FiOS, AT&T U-verse and more.

Moving into programming highlights, I'm going to focus on 3 of our networks.

Things are going very well at Nickelodeon. The network had a great quarter in which its ratings built each month, finishing March up 21% year-over-year on its way to a 7% overall ratings gain among kids 2 to 11 for the quarter. A highlight was the 2013 Nickelodeon Kids' Choice Awards, which grew ratings over last year in the U.S. and continued its expansion into a true global franchise, with ratings up double digits in markets including the U.K., Brazil and Spain. In the current quarter so far, ratings at Nick are up 9%. We are gratified by the progress the network has made and the creative and strategic execution its team has undertaken to get back on top.

Nickelodeon has now completed the process of consolidating its West Coast development hub, allowing for greater consistency of creative vision and sharing of talent and resources across its programming teams. Throughout this quarter and beyond, Nick will bring a significant amount of new programming to the air, giving it ample time to establish new hits in advance of the critical holiday season for marketers.

Nickelodeon also continues to be strategic in maintaining demographic balance in its audience. The Kids' Choice Awards are a great example. After seeing an exodus of boys among the viewership of last year's show, the network loaded the 2013 show with talent having greater appeal for young boys, including host and Transformers star Josh Duhamel. As a result, ratings were up 19% with boys 2 to 11, the key driver of the show's overall ratings growth.

Nickelodeon rebounded with preschool audiences in the March quarter, thanks in part to the successful launch of Peter Rabbit, and continues to invest in preschool content. The network is also sharpening its focus on older girls, particularly with the upcoming launch of Sam and Cat in June, starring iCarly's Jennette McCurdy and Victorious' Ariana Grande.

Finally, animation remains a key focus for Nickelodeon. We're bringing more animated programming to the screen, including the new hit Monsters vs. Aliens; our newest series Sanjay and Craig launching later this month; the upcoming Rabbids and Breadwinners; and new episodes of Teenage Mutant Ninja Turtles, the Legend of Korra and SpongeBob.

At MTV, the network continues to earn its reputation as the cultural home of the millennial generation. Connecting with millennials means staying a step ahead of them, and the network continues to accelerate its development timelines to accommodate an audience that constantly demands fresh, original content. That means shorter windows between seasons of the network's biggest hits. Season 2 of Catfish, for example, will debut in June. Awkward just successfully debuted a new season and will return with another season in the fall. And Teen Wolf will return with a summer run beginning in June before debuting another new season early in 2014.

MTV rounds out its schedule with highly-repeatable shows like Ridiculousness and True Life that generate great ratings relative to their low cost. Girl Code is a new series in that mold that is performing well and strengthening MTV's Tuesday night female block. Efficient shows like this allow us to place expanded orders of our big hits and bring more new originals to air without dramatically growing our programming spend.

In the March quarter, hits Catfish and Teen Mom 2 continued to perform very well and the network also once again showed its ability to mine great stories from vibrant subcultures. In April, the network scored a solid hit with the 2013 MTV Movie Awards, which increased ratings 22% over last year. MTV shrewdly moved the show from June to April this year to take advantage of the additional advertising dollars in the market ahead of the summer blockbuster season and to steer clear of the NBA Playoffs.

Moving forward, MTV continues to bring more and more original programming to air to create a balanced weekly schedule for audiences and advertisers. In fiscal 2013, the network is bringing 17 new series and 15 returning series to air.

Currently, we're in a pivotal time in the network's development year. Last week, MTV unveiled upcoming programming to advertisers at its annual upfront presentation in New York. In July, the network will hold its summer pilot screening, the first pilot screening that will entirely reflect projects brought to MTV by its new development team.

Turning to BET. The network is launching an exciting new initiative around the BET Awards this summer to bring its brand to life, live and in person for its audiences. BET Experience will take over Downtown Los Angeles for 3 days in late June with an ambitious lineup that includes the debut of Beyoncé's world tour at the STAPLES Center, along with a host of musical performances by acts including R. Kelly and Miguel, a festival of BET-produced films, panel discussions on issues affecting the BET audience and a massive outdoor festival. The BET Experience marks the first time that AEG has activated all of its Downtown Los Angeles facilities at once. And the events will fuel 16 hours of live on-air and online programming for the network. Ticket sales for the BET Experience are already outpacing our projections. It's a big undertaking with a solid business rationale.

BET has been consistently successful in commanding healthy spending from advertisers seeking to reach African-American audiences. But a live event like the BET Experience allows the network to access different marketing budgets and sell unique sponsorships. The BET Experience has already locked up several blue-chip advertisers.

Finally, let's move on to our Filmed Entertainment segment. Although revenues from our theatrical releases in the March quarter exceeded those of the comparable quarter in 2012, revenue declined 20% due to lower carryover revenues in the quarter, compared to the carryover revenues from Mission: Impossible last year. But the big story was the successful premiere of G.I. Joe: Retaliation, which is a great example of Paramount's flexible approach to release scheduling in order to maximize profit. G.I. Joe was initially slated for release in June 2012, but the studio made the call to move the film to March 2013 to avoid an overcrowded summer tentpole season, allow for a conversion to 3D and improve its chances for distribution in China. Additional 3D revenue helped drive the film's stellar worldwide box office of nearly $350 million to date, including nearly $50 million in China, increasing its strong international haul.

In the current quarter, Pain & Gain kicked off Paramount's summer slate at #1, to be followed by the release of Star Trek Into Darkness later this month and World War Z in June. And Paramount continues to drive value for Viacom beyond the big screen. We recently marked the 1-year anniversary of the Paramount Channel in Spain, which continues to grow ratings and set the stage for the launch of Paramount Channels in additional international markets this year. Paramount also announced plans to return to television production, with its first project to be a potential Beverly Hills Cop series, in partnership with Sony TV.

Paramount has a rich library of film franchises to mine for television, as well as the capacity to develop original television productions, and we see a great opportunity here.

To wrap up. We will seek to build on our ratings and revenue improvement by investing in more original content. We're returning hit shows to air in faster cycles and bringing new shows to our screens in greater numbers. And we'll continue to be aggressive in unlocking further value for our shows through multiplatform viewers. We are looking to the future by evolving the brand experience through apps. Our principal revenue streams are now growing in tandem at a healthy pace. As we grow our business and our content offering across screens, we remain committed to delivering value and returning capital to our shareholders.

Thank you. And with that, I'll turn it over to Wade.

Wade Davis

Thanks, Philippe. Before I take you through our operating results, I want to note that our earnings release and web presentation summarizing the results of our March 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 up 2% compared with the prior year, with domestic revenues up 3% and international revenues down 4%. Foreign exchange had a 1 percentage point unfavorable impact on international revenues. The increase in revenues in the quarter was principally driven by increases in advertising and affiliate revenues. Page 10 of our web deck provides a breakdown of our Media Networks revenue performance.

Domestic advertising revenues were up 2% in the quarter and international advertising revenues were up 1%. The improvement in international advertising was driven by strength in the U.K., partially offset by softness in parts of continental Europe.

In terms of affiliate revenues, domestic revenues increased 3%, while international revenues were down 4%. Excluding the impact from the timing of a product available under digital distribution agreements, domestic affiliate revenues grew low double digits. International revenues were down due to lower digital distribution revenue related to the timing of product availability, which was partially offset by growth in revenues from new channel launches, as well as rate and subscriber increases.

Expenses increased 5% in the quarter. Within expenses, programming expense grew 8% while SG&A expense was up 1%. Media Networks' adjusted operating income was down 2%. And the adjusted operating income margin was 39%, down approximately 170 basis points compared with the prior year. The margin decline was driven by a 5% increase in expenses, partially offset by the top line growth of 2%.

Moving to Filmed Entertainment. Revenues declined 20% in the quarter principally due to lower theatrical and home entertainment revenues. Page 12 of the web presentation provides a breakdown of Filmed Entertainment revenues.

Worldwide theatrical revenues decreased 15% primarily due to lower carryover revenues as a result of last year's December quarter release of Mission: Impossible - Ghost Protocol. This was partially offset by higher revenues from the current quarter's releases of Hansel and Gretel: Witch Hunters and G.I. Joe: Retaliation. Worldwide home entertainment revenues declined 38%, reflecting lower revenues from both the current quarter releases as well as from carryover titles. These declines are primarily due to fewer titles in the current year, as compared with the prior year.

Filmed Entertainment generated adjusted operating income of $65 million in the quarter, as compared to $115 million last quarter. The results principally reflect lower theatrical profits, partially offset by savings from lower overhead costs.

Now touching on corporate. Expenses increased $9 million in the quarter. The increase relates to higher deferred compensation costs as a result of the appreciation in our stock price. Excluding the deferred compensation costs, corporate expenses were flat in the quarter.

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

Thomas E. Dooley

Thanks, Wade. And good morning, everyone. I'm going to talk about our cash flow, our debt profile and the return of capital to our shareholders. I'll also cover seasonal factors that are impacting the remainder of our 2013 fiscal year.

In the quarter, we generated $700 million in operating free cash flow compared to $869 million last year. We continued to maximize our free cash flow efficiency, converting over 80% of operating income into cash flow in the quarter. Page 5 of the web deck presentation provides the components of free cash flow. The decline in operating free cash flow in the quarter was principally due to an unfavorable working capital variance and lower operating income, partially offset by lower cash taxes. The unfavorable working capital variance was principally impacted by the timing and mix of theatrical and home video receipts, which last year included Mission: Impossible IV.

Now turning to our debt. For the most part, it is fixed rate, with an average cost at quarter end of 4.6%. During the quarter, we issued $300 million of 3.25% senior notes due in 2023 and $250 million of 4.875% senior debentures due in 2043.

Given our strong balance sheet and free cash flow generation, we have been able to access the capital markets, secure long-term funding at very attractive rates. Over the past couple of years, we have issued approximately $5 billion of public debt at an average rate of 3.6% with an average maturity of approximately 16 years. Additionally, we either called or tendered for approximately $2 billion of previously-outstanding notes. These transactions, taken together, have lowered our overall average cost of debt by approximately 150 basis points.

In terms of our short-term funding, to the extent we have incremental borrowings, we are funding this in the commercial paper marketplace at an annual rate of approximately 35 basis points. We had no variable rate borrowings outstanding at the quarter end.

As for our leverage, we ended the quarter with $8.9 billion of debt in capital leases outstanding and $1.3 billion of cash and cash equivalent. Our leverage ratio at the end of the quarter was 2.4x. At March 31, our $2.5 billion bank revolver was undrawn.

Our commitment to return capital to shareholders continued in the March quarter as we returned a total of $700 million of capital back to our shareholders. Looking ahead, we are on pace to purchase approximately $700 million of our stock in the June quarter, which means that in the first 9 months of the year, we will have returned a total of approximately $2.5 billion to shareholders through our share buyback and dividend programs. Since starting the current share buyback and dividend program in September 2010, we have returned over $8 billion to our shareholders, and over 75% of that return was from excess cash flows from operations.

Now let's turn to some of the factors impacting the remainder of our 2013 fiscal year. For fiscal 2013, we anticipate affiliate revenue growth of 10%. However, quarterly affiliate revenue growth will fluctuate given the timing of transactions and the recognition of revenue related to some of our digital agreements which are tied to product availability. For the full year, we continue to expect high-single-digit growth rates for Media Networks' programming expense. Given the timing of shows coming on the air, growth is weighted to the first half of the year. In terms of non-programming expense, we will continue to drive efficiencies throughout the organization in order to preserve and enhance our margins.

At Filmed Entertainment, we are excited about our upcoming summer tentpole releases, including Star Trek and World War Z. We expect growth in profits to be weighted to the September quarter as the studio benefits from the carryover performance of our summer tentpoles as well as the availability of titles in home entertainment marketplace.

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.

In terms of cash taxes. Due to the retroactive reenactment of provisions allowing for accelerated deductions related to domestic film and TV production expense, we now anticipate that cash taxes will be significantly lower than book taxes for fiscal 2013. Accordingly, we will see strong growth in free cash flow for the year.

As for our stock buyback program, as Philippe mentioned, we now expect to repurchase $2.8 billion for fiscal 2013.

To wrap up, our increased investment in original programming has started to yield results in both terms of ratings and our ad sales performance. We are also investing in our organization and our infrastructure in order to engage and monetize our audiences as they increasingly embrace consumption of our content on digital platforms. And we continue to drive efficiencies throughout our company in order to enhance our margins. The current attractive capital market interest rate environment has enabled us to lower our average cost of debt while, at the same time, extend our average maturity.

In addition, our continued focus on organic investment in driving operating efficiencies throughout our organization has contributed to strong free cash flow generation. These factors have enabled us to consistently and aggressively return capital back to our shareholders, which we believe will drive value now and into the future.

Now we'll turn the call over to your questions.

James Bombassei

Operator, we're ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Brian Wieser.

Brian W. Wieser - Pivotal Research Group LLC

I was wondering, what metrics are you selling marketing partnerships on when it comes to your apps? It's -- I guess you're going to bring this out before, I guess, some of the more advanced say Nielson [ph] ratings are going to be more widely being used. And separately, I guess I have a tax question. I was just wondering, which retroactive adjustments is it that are being applied? And wondering if you could dimensionalize it and whether you think it's going to be an ongoing benefit.

Philippe P. Dauman

As far as the marketing with apps, we'll -- marketers love to have multiplatform engagement with our consumers. So it just expands our offering, creates some opportunities. There's -- the apps have additional content, both video and games, and other opportunities to highlight our marketers' initiatives. So it's just continuing our deeper engagement on the consumer side and bringing up our marketing partners with us into that deeper engagement. As far as the tax question...

Thomas E. Dooley

From the tax point of view, Brian, given that it's a retroactive tax adjustment, it will have a benefit to us that we hadn't been forecasting of around $400 million. So it's a significant benefit but it's a catch-up for almost 2 years of not having that benefit in place. Once it's caught up, the benefit goes away.

Operator

And we'll take our next question from Michael Nathanson with Nomura.

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

A couple for Philippe, on Netflix. Philippe, I wanted to hear from you, how would you characterize the inability to not renew or extend the deal with Netflix? Was it a change of philosophy on your side? Was it simply price? And then how confident are you of your ability to find money out there to replace that hole? And could it -- might be coming from people that we haven't seen show up yet? So that's where we are.

Philippe P. Dauman

Michael, as I indicated in my remarks, we're still in discussions with Netflix. Remember, our deal does not expire until later this month. So we are in discussions. They -- with them and with others. Obviously, we don't want to announce specifics until we have new dealer deals to reveal to you. As Netflix indicated in its call last week, it has interest in different kinds of content, some exclusive. We're open to licensing content, some of it on an exclusive basis, some of it on a nonexclusive basis, and with a view to -- overall to maximizing our revenues. We continue to see the digital distribution arena as a growing opportunity and one that will be complementary to what we do. And it's just growing the pie over time. Now from a -- because of -- the kind of recognition, it appears choppy, but when we look at it overall, a full year basis, we have enough visibility to tell you that we are going to meet our 10% growth in affiliate revenue forecast that we've given to you in previous quarters.

Operator

And we'll take our next question from Doug Mitchelson with Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

I just wanted to follow up on that a little bit, Philippe, not so much the -- whether you're going to increase SVOD revenue, but what's the right long-term strategy for selling programming, with Netflix wanting more exclusive program sales? But I imagine you have a desire to foster competition in the SVOD sector. Are you going to be open to doing exclusive program sales knowing that it could hurt other SVOD players? Or do you have a desire to only do nonexclusive sales?

Philippe P. Dauman

Well, again, there -- as you point out, there is increasing competition in that distribution arena. And we are doing business with several players today. We have content up on Amazon, on Hulu. There are discussions going -- that are taking place with others. And by the way, this is a global phenomenon, and there are other players in individual countries that are emerging. We have -- we are fortunate enough that we own a lot of compelling content. We have deep libraries with many thousands of titles. So we look at what our distribution partners are looking for. Their strategies are different, their strategies evolve. And we'll work with them to help them improve their business in a way that's consistent with maximizing our relationships with all distributors, not just the SVOD but our long-term affiliates and others. So we balance our different considerations. We look at what's good for our brands. There's a lot of marketing value to some of the content that we have in the SVOD arena, particularly with shows that have more seasons to come. So there are a number of factors. And we work with all of our partners in all aspects of distribution to come up with win-win situations.

Operator

And we'll take our next questions from Richard Greenfield with BTIG.

Richard Greenfield - BTIG, LLC, Research Division

A couple of questions. When you look at Teenage Mutant Ninja Turtles, you launched it last year, and I think there was, I think, among investors, a little bit of skepticism in your ability to reboot this franchise. And it seems like it's done pretty well in the network. And I -- it's like you're -- on iPad, you're like the #1 paid app. And I'm just kind of curious, why do you think this franchise has resonated so well? And what do you do from here to keep building its brand and making more out of it as you look out over the next couple of years?

Philippe P. Dauman

Well, Richard, thanks for bringing it up. We couldn't be happier with the way this franchise has been rebooted. And it has a long life ahead of it. The -- you have a lot of young dads who remember the old series fondly. And the execution on the new animated series on Nickelodeon is really great. It's visually beautiful, and it echoes the prior series but it's an improvement on it. And it resonates on a global basis. It's driving our consumer products business. Our -- in a difficult general environment, our ancillary revenues have grown in the past quarter, and that's really driven by the Teenage Mutant Ninja Turtles franchise. And a lot more opportunity there. And I'm really excited about the Paramount film that is -- has just started production, with Michael Bay as the producer. And when that gets released next year, that will be yet another step forward in building that franchise again on a global basis. And it just -- it works on our -- on all of our platforms and it will just add an important new leg on the stool of our consumer products business and reinforce our other properties, by the way.

Richard Greenfield - BTIG, LLC, Research Division

And just a follow-up with Tom on the leverage. Your leverage, I think, you said is down to 2.4x. It sounds like, from your commentary in terms of the pickup in distribution fees and accelerating ad sales, that you're going to end up with far more rapid growth in EBITDA in the back half of the fiscal year and into '13 -- and I'm sorry, into '14, and just at what point do you start to get more comfortable to move your leverage target up a little bit? Because it just seems like you're generating a good amount of cash and growth is accelerating and you're ending up kind of deleveraging.

Thomas E. Dooley

Rich, we continue to kind of target, like, 2 to 2.25 leverage ratio. We'll continue to do that for the foreseeable future. We think the strong cash flow that we generate as a company and the excess free cash flow that we talked about, over $8 billion dollar return in a little over 3 years is pretty impressive. If you go back to when we started this, it's over -- almost 25% to 30% of the market cap at that point in time. So we think that model serves us well and provides us with greater access to capital markets.

Wade Davis

Why not stick at that.

Operator

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

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

Just circling back on your comments about the advertising outlook and expecting ad revenue growth to accelerate in the third quarter. I guess, are the drivers behind that really just the very strong improvement you're seeing in ratings? Or are you also seeing some, I guess, pick-up or acceleration in the underlying advertising market? I guess any comments on scatter you could provide would be helpful.

Philippe P. Dauman

We have -- certainly, a driver of the improvement is correlated to improving our ratings, but we are also seeing strong demand. Particularly if you look at our mix, we're seeing a better mix of advertising demand. So we've really made great strides in categories like autos, retail, quick-service restaurants, beverages, computer, hardware and software, but we're seeing strength in important categories to add to our traditional areas of strength that's been there. Then pricing is very strong. We're seeing -- in the last quarter, we had -- upfront-to-upfront pricing was up in the mid-single-digit area. Scatter-over-upfront, on average, for our networks was up about 20%. And if you look at scatter-over-scatter, that was up in the low double digits last quarter. So there's good demand, and we're feeling very good with the combination of our better performance, particularly the Nickelodeon family; and the general environment, which is positive. And that also bodes well for the upfront that we are entering into.

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

And just a follow-up on Nick At Nite where we've seen some improvements there. Is that just from a better lead-in from Nick? Or are you also feeling the programming there is where you want it to be?

Philippe P. Dauman

It's both. It's a good lead-in from Nickelodeon delivering a better audience. And we are seeing strength in Friends, for example, which has built up. And we're combining -- from an advertiser perspective, combining strong third-party content with our original content, it just provides an attractive mix for them. So it's a good story, and it's one that we worked hard on over the last several quarters and it's coming to fruition.

Operator

And we'll take our next question from Marci Ryvicker with Wells Fargo.

Eric Katz - Wells Fargo Securities, LLC, Research Division

This is Eric Katz, on for Marci. I was just wondering if you can comment on the tone or strength of the Nickelodeon upfront that recently took place?

Philippe P. Dauman

We had wonderful reaction at our presentation. I talked to a lot of advertisers. It was exceptionally well-attended. And they're very pleased with the progress Nickelodeon has made where we've already sold about 1/3 of our upfront inventory. And obviously, it's very early in the upfront season. So Nickelodeon should have a very healthy upfront this year.

Eric Katz - Wells Fargo Securities, LLC, Research Division

And could you also comment on -- it seems like you're investing in originals in networks such as SPIKE now. Which networks other than Nick and MTV do you see the most upside and likely to see the most investment going forward?

Philippe P. Dauman

Well, we are -- you're right to point out, SPIKE went from having very little in the way of original content. We have -- we went into the reality genre, with some success with shows like Ink Master and Tattoo Nightmares -- by the way, those shows also improved the gender balance on SPIKE. They're very close to even between men and women. And Bar Rescue, a lot of these shows are, again, shows that our advertisers like. And we are going to also go into the scripted business on SPIKE. So that's a network we're going to build. COMEDY CENTRAL continues to do well. We're increasing the number of shows. We debuted another show last night, Inside Amy Schumer, and there'll be more shows to come there. CMT is starting to show signs of improvement, as we have increased our investment in original programming there with Dog and Beth, and other programming. So we think there's a big opportunity in some of those networks, particularly those like some of the ones I just mentioned, TV Land included, which capture more share in demos where we not -- we have not had traditionally a big market share. So this is an incremental opportunity for us and one that we want to invest in. BET is another example of a network where we have increased our investment in original programming, and that's improved the health of that network.

Operator

And we'll take our next question from John Janedis of UBS.

John Janedis - UBS Investment Bank, Research Division

A little bit more on kids, maybe more broadly. Can you give us an update on the kids market overall? Is this year's upfront healthier? And to what extent can you monetize the ratings in Nick ahead of the new upfront pricing?

Philippe P. Dauman

Well, as I said in response to a couple of questions ago, the kids upfront marketplace is shaping up well for us. Our marketers need to be on our Nickelodeon networks. And so they've been working very closely with us, they're rooting for us. And they're very gratified, as I am, by the new programming that's already on air and that's coming. So the -- really important is the holiday season coming up. We're seeing -- apart from the toy category, we're also seeing a lot of new video game launches, both on platform and games themselves, as we get into that holiday season. And we are growing our non-endemic business, such as automotive. Nickelodeon is a part of the house where automotive business has been growing, and other categories. And we're able to capture more adult dollars as marketers are realizing that there are a lot of moms and dads watching our Nickelodeon networks.

Thomas E. Dooley

Our aim to monetize in the marketplace. While a large percentage of Nickelodeon's inventory is sold in the upfront, much more so than our other networks, because of the liability bank, we had the turnaround in ratings, was able to be monetized by using the liability bank that we had in place. So the upside in ratings does that come back to us through that.

John Janedis - UBS Investment Bank, Research Division

Well, maybe one other quick one. You've talked about owning more of your content at your networks. I assume that means you'll be buying less content in syndication. Has there been any change in pricing for syndicated content?

Philippe P. Dauman

So we're certainly being selective. We are -- we continue to buy third-party content. It's really a shift in emphasis. And so in terms of what we're buying, we're seeing some improvement in pricing, but again...

Thomas E. Dooley

Pricing and terms.

Philippe P. Dauman

What's that?

Thomas E. Dooley

Pricing and terms, overall terms.

Philippe P. Dauman

Yes, pricing and, as Tom points out, overall terms are improving. But look, the important trend is shifting dollars from acquired programming to original programming, not taking away all acquired programming -- we do rely on that, including some of the great film libraries out there, like Paramount. Those continue to play well across all networks, which bodes well for Paramount. But original programming just works better for our brands generally.

Operator

And we'll take our next question from Barton Crockett with Lazard Capital Markets.

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

I was curious a little bit about the equity in JV, which I know in this quarter was relatively small, but it's interesting. I was wondering if you could give us some color on what are the trends at EPIX and in the India JV? And do you know much we should make as kind of the year-over-year improvement there?

Philippe P. Dauman

Well, EPIX continues to perform very solidly. Well, I think you can expect EPIX's bottom line to grow over time as existing distribution revenues grow with lot of stability in -- on the programming cost side, generally speaking, with more distribution coming onstream over the years. So EPIX will -- should be a growing story for us and our partners. India continues to be a great building opportunity, long-term opportunity. We think it's a really strong market. We have a strong position. Along with our partner in India, we will continue to invest to launch new channels and to take advantage of the opportunity to build scale as the revenues improve there. So again, in terms of value, India will improve. We are adding to the growing portfolio of national networks within India. We're looking at regional networks to serve different communities within India. And the bottom line over time should increase once we've established our scale position in India.

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

Okay. And then if I could follow up on the premium network market. There has been something of a change there in the environment, with Starz being spun out as a separate company, a lot of discussion now about the possibility for merger and acquisition activity in that area. I was wondering if you could comment kind of generally what you see as the competitive dynamics there and the need or lack thereof of more consolidation.

Philippe P. Dauman

Well, we certainly don't see any need for consolidation on our part. We created -- we have a service owned directly by -- by 3 studios. And it's a very good, strong partnership. We -- it's a -- EPIX is, of course, associated with our basic cable networks, which give us some ballast and strength in the distribution arena. So yes, we're going to keep growing EPIX, the profitability will increase. And we can do that in the existing competitive environment. So I can't speak for what is going to happen with Starz, but our focus is on organically growing EPIX.

Operator

And we'll take our next question from David Bank with RBC Capital Markets.

David Bank - RBC Capital Markets, LLC, Research Division

A couple of questions are ad-related. The first one is just a follow-up on the very first question. As you roll out the apps, how do you view the optimal monetization of the premium video advertising within those apps? Do you think that OCR and a demo-based measurement is the kind of the optimal path to monetization? Or do you think, over time, you'll seek to take more advantage of traditional sort of ad targeting? And how do you see that developing over the next couple of years? The second question is, if you look at MTV ratings kind of "post the conclusion of season 5 of the Jersey Shore" comps, on March 15, can you talk about how ratings have behaved at MTV since the middle of March through the end of April versus the rest of the first quarter? And lastly, the sequential acceleration in the current quarter versus the prior one, would we still be seeing that or still have that expectation if it wasn't for the movement of the BET Awards from the end of June versus the beginning of July?

Philippe P. Dauman

David, as far as the apps go, which obviously are just being launched, right now, we are using them to provide incremental marketing opportunities to some of our key advertisers, studios notably, like the ability to broaden their marketing offering with us. You mentioned OCR: There are a lot of issues right now with the -- Nielsen's OCR measure that they're testing. Again, there are some sample issues, a lot of things to be worked out there. So right now, we're -- we -- there are other ways to measure that kind of viewership and monetizing that and, over the longer term, targeting, and particularly with our networks, our ability to see where the content is delivered. Our own information is a valuable tool for advertising partners. And we are engaged in a lot of good conversation, particularly with our major advertisers. And that will be a growing trend over time. As far as MTV's ratings, we -- we're again -- as I mentioned in the last earnings call, we have a better balance across the week than we did when we were so reliant on the Jersey Shore ratings. So that's giving us a better lineup for our advertisers. And we've seen good year-over-year stability at MTV's ratings over the last several weeks, and we expect to have a good ratings performance and better balance for -- as we go forward. And then I think your last point was on the acceleration and the BET Awards. There are a number of -- that's -- overall, that's not really the factor. We also had -- at the beginning of the quarter, there was actually unfavorable comparison in terms of the Easter timing. So when you balance all that out, it's -- there's really not much of an impact, and really the acceleration is more a reflection of both ratings performance and market strength and, thirdly, a better mix as it relates to our own networks. I think I covered all your questions, right?

David Bank - RBC Capital Markets, LLC, Research Division

I think you did.

Operator

And we'll take our next questions from Anthony DiClemente with Barclays.

Anthony J. DiClemente - Barclays Capital, Research Division

Just following on, on digital advertising, I'm wondering if you could comment on trends within your domestic advertising numbers on digital as a percentage of the total? Is it accelerating? And then just to follow up on the last question, which I thought that was a good one, about audience targeting. I mean, Philippe, you talked about your conversations with marketers. Do you think it's likely, and are they starting to embrace audience data in the way that you described? And as the online TV market, I guess, becomes more data driven, as opposed to, as we know historically, it's been reach-driven, it's been content-driven. Do you think that, that audience data, the multivariable data about viewers, is becoming more valuable? Or do you think it's maybe just not as valuable outside of content adjacency? I know you have the data, you see the data, so wondering if -- to what degree you'll be able to use that as a competitive advantage in your conversations with customers?

Philippe P. Dauman

The most important aspect is that we -- yes, we've been under-measured. We -- Our audiences are watching our content in different arenas. The existing third-party measurements data is currently not capturing the viewership that's out there. As we go more into a TV Everywhere environment where people will be -- will have the ability to watch our content on their different devices, both inside and outside the home, that will become increasingly important. And I think the marketing community and the content community are working increasingly directly together to figure out how to work to better measure and target the audiences. Remember that our networks are very targeted to begin with. So it's -- they know who they're reaching, but we can start getting into more data, to more granular data to help that. As far as digital advertising, again, it's becoming more and more a part of the multiplatform package. Clearly, video advertising is a stronger category than the industry broadly. And display advertising, which -- where the trend is down overall, and you're seeing that across many of the technology companies, as well as the media companies. So that's definitely a trend.

Thomas E. Dooley

Well, Anthony, as you know, the digital inventory is very valuable, especially if it's associated with high-value brands and you can never get enough of that. This week the new fronts are going on, and a majority of the new fronts are being conducted with very -- under very different currencies. The currencies that Google uses, the currencies that Facebook uses, the currency that Hulu uses is a very different currency than the rest of the advertising marketplace. And it's a very fast-growing aspect of our business and one we're paying a lot of attention to and hope to participate in with our inventory because we believe we'll have valuable and good quantities of that inventory in the not-too-distant future.

Operator

And we'll take our next question from Doug Creutz with Cowen.

Douglas Creutz - Cowen and Company, LLC, Research Division

To kind of follow on this theme, as we have sort of this convergence of better ability to deliver content to audiences on multiple devices, better ability to measure the audiences and then better ability to deliver ads that are relevant for advertisers, is there a point where your willingness to sell content to OTT providers where you don't have the ability to advertise gets less so that your reservation weights for your content goes up because you're better and better able to monetize advertising through your on-demand content?

Philippe P. Dauman

Well, again, they're not mutually exclusive. Hulu Plus, obviously, does carry advertising. There are different models out there. There are future-emerging distributors that similarly have models that have advertising associated with it, and we're exploring those. We'll have the ability to evaluate the best way for us to maximize our -- both our brand and our economic situation. And as the world evolves, we will evolve our own strategy, as is happening on the distribution side. Today, we find the deals that we have done to be incremental for us. We've been able to monetize previously-not-monetizeable deep library in a way that's incremental net-net. And we will only do business if we think it will short-term and long-term improve our business. So yes, each situation needs to be evaluated on its own.

Operator

And we'll take our next question from Tony Wible with Janney.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

I was hoping you could talk a little bit about programming cost, both in film and TV. As you see more of these over-the-top players getting into originals and, as you alluded to, moving more towards originals, and a lot of the other traditional TV networks moving to originals, how do you expect that playing out in programming cost inflation longer term?

Philippe P. Dauman

I actually don't think it's -- creating great content is one of the hardest things to do in the overall marketplace. We have a long history of doing it, and we'll continue to do so. So it's not about the cost, it's about finding the right creative talent, putting it together. And we produce a variety of content on television, some of it low cost, some of it high cost. Scripted is generally more expensive than reality. I talked about some of our content being very efficient and repeatable. So it's getting the right mix to support the brand. On the movie side, the big movies such as Star Trek and World War Z coming out, they obviously have a big budget, as those films tend to have, but very often, they're lower risk than some of the lower budget. I'm not too worried about the performance of our strong franchises. It's just a question of how well they will do. And then you -- again, you balance that with less-expensive releases like Paranormal Activity, which is a very profitable franchise for us. So the way we manage on the film side is to -- we have not been increasing our net spend on the studio side. The studio has been a capital provider to us, and it's more about finding the quality than it is to throw a lot of dollars at it.

James Bombassei

Thank you, everyone, for joining us for our earnings call.

Operator

And that concludes today's conference. Thank you for your participation.

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