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Viacom (NASDAQ:VIAB)

Q1 2014 Earnings Call

January 30, 2014 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 C. Davis - Chief Financial Officer and Executive Vice President

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

Analysts

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

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

David Bank - RBC Capital Markets, LLC, Research Division

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

Brian W. Wieser - Pivotal Research Group LLC

Barton E. Crockett - FBR Capital Markets & Co., Research Division

Richard Greenfield - BTIG, LLC, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Vasily Karasyov - Sterne Agee & Leach Inc., Research Division

David Carl Joyce - ISI Group Inc., Research Division

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Michael C. Morris - Guggenheim Securities, LLC, Research Division

Tuna N. Amobi - S&P Capital IQ Equity Research

Operator

Good day, everyone, and welcome to the Viacom First Quarter 2014 Earnings Release Teleconference. Today's call is being recorded. At this time, I would like to turn the call over to Senior Vice President of Investor Relations, Mr. Jim Bombassei. 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 December 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. Today's remarks will focus on adjusted results. 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

Thanks, Jim. Good morning, everyone, and thank you for joining us. Viacom continues to deliver great audience experiences, strong reasons [ph] for our shareholders, our leadership and as well position us for many, many years to come, and we are extremely excited about the future.

Now I will turn this call over to my good friend, Viacom's CEO, the wisest man I have ever met, my friend, Philippe Dauman.

Philippe P. Dauman

Thank you so much, Sumner. And good morning, everyone. Thanks for joining us to discuss the first quarter of our 2014 fiscal year.

Viacom turned in a solid performance in the December quarter. We delivered strong double-digit growth in both our quarterly earnings and operating income. Our Media Networks achieved strong top and bottom line growth, thanks in part to continued ratings strength at many of our networks. Among them Nickelodeon, which regained its long-held perch as a top cable network among kids, 2 to 11. It was a great start to what we expect to be a strong fiscal year in which we will continue to invest consistently in original content and connect with our audiences in a growing number of ways across platforms and geographies.

Let's take a quick look at Viacom's financial performance for the quarter. Tom and Wade will go into greater detail in a few moments. Revenues were $3.2 billion in the quarter, a decline of 4%, reflecting increased Media Networks revenues, which were more than offset by declines in Filmed Entertainment due to the number and timing of releases in the quarter. Operating income increased to $960 million, up 20%, thanks to improved performance across the company. Adjusted net earnings from continuing operations increased 19% to $547 million. Adjusted diluted earnings per share were up 32% to $1.20.

Viacom's balance sheet remains strong and the company remains steadfast in its commitment to returning significant value to our shareholders while continuing to invest in the growth of our business. We delivered about $1.1 billion in capital directly to shareholders in the quarter through share repurchases and dividends. This includes $850 million in share repurchases under our ongoing stock repurchase program. We expect to repurchase another $850 million in stock in the current quarter, and have increased our expectations for the full fiscal year to at least $3.25 billion.

As I mentioned, our Media Networks delivered strong growth in the quarter, and ratings strength at a number of our key networks fuel that momentum. Nickelodeon reclaimed the top spot among kids' networks for the 2 to 11 audience in the December quarter, thanks to its continued content surge of new original programming across formats and dayparts. Its preschool block was a major highlight with new series "PAW Patrol" performing particularly well. Animation generally performed very well, with SpongeBob SquarePants, Sanjay & Craig and Teenage Mutant Ninja Turtles pulling in big audiences. The Ninja Turtles' consumer products line continues to perform very well and is growing fast, ending 2013 as the #1 boys action property in the U.S. toy industry according to NPD.

Through this month, Nickelodeon achieved 12 consecutive months of year-over-year ratings growth. In the current quarter, a special episode of mix live action hits Sam & Cat drew 4.8 million total viewers and was the network's highest rated telecast with kids 6 to 11 since 2012. Episodes of new series, Haunted Hathaways and The Thundermans, also hit new highs. Next month, the network will continue to expand its programming lineup, with the launch of Wallykazam!, a new preschool series focused on children's literacy and Breadwinners, a new series from 2 young animators new to Nick, one of whom is discovered through its Animated Shorts Program. Nickelodeon will bring the quarter to a close with a 2014 Nickelodeon Kids' Choice Awards, which will be hosted by the star of Transformers: Age of Extinction, Mark Wahlberg. In short, Nickelodeon is on a roll.

Speaking of being on a roll, COMEDY CENTRAL had a great December quarter, its highest-rated quarter in nearly 6 years among men 18-34 in primetime, thanks to the strength of returning hits, Tosh.0, Key & Peele and South Park. Add to that the continued success of @midnight, the first successful entry into the competitive late-night field in recent history. It's a hit with audiences but also with advertisers who now have additional marketing opportunities in the network's highly coveted late-night block, which, with The Daily Show and Colbert, both the top 3 shows in all of late-night among young men.

In the current quarter, COMEDY CENTRAL returning hits Workaholics and Kroll Show to air along with the debut series Broad City for executive producer Amy Poehler. Poehler recently noted that the network is at a core major point, where it's representing really vital up-and-coming talents. Those talents are fueling a greater offering of top-notch original programming than at any other time in COMEDY CENTRAL's history. SPIKE, VH1 and CMT all delivered strong double-digit year-over-year ratings growth in the December quarter, reflecting our significantly increased investment in originals for all 3 networks. SPIKE, in particular, turning its best December quarter ratings performance since 2010 and its second quarter in a row of double-digit ratings growth. The network continues to successfully broaden its audience, achieving a more desirable gender balance and median age for advertisers. BET also had a great quarter and successfully premiered new series, Being Mary Jane, starring Gabrielle Union this month.

In the current quarter, MTV is returning many hits to air behind an aggressive, targeted marketing campaign. Already, we are seeing results. Teen Wolf, debut its new season this month to a record 2.4 million viewers. Teen Mom 2 also returned last week with 3.2 million viewers, rankings as MTV's highest-rated series premiere in more than a year. It also looked at the premiere of MTV's new dating show, "Are You The One", the network's best new franchise launch since Buckwild. Ratings for the revamped Real World continue to grow every week. And MTV is seeing significant strength in its new Thursday night male-focused block, which includes Ridiculousness, Rob Dyrdek's Fantasy Factory and the all-new Jerks With Cameras.

Our Media Networks segment grew domestic advertising by 3% in the December quarter, a result that was tempered somewhat by ratings at MTV in a softer marketplace in the month of November. In the current quarter, while it is still early, we expect to see sequential improvement in our domestic ad sales growth despite the headwind of the shift of Easter to the June quarter this year. We're also encouraged by the improvement in the international ad market, highlighted by growth in certain European territories, which resulted in double-digit growth in international ad sales in the quarter. Additionally, we recently unveiled our reinvented integrated marketing and branded content team, Viacom Velocity, to serve our marketing partners with even greater creative collaboration. This is an area where we've considerably increased our resources over the past several years and the marketplace is taking notice. A recent survey of marketing executives ranked Viacom Media Networks Music and Entertainment the #1 and #2 integrated marketing units in our industry.

On the distribution side, domestic affiliate revenues increased by 10% in the quarter. We continue to expect high-single to low-double digit growth in our affiliate fees for the full year. The highlight of the December quarter was our successful completion of our renewal negotiations with Time Warner Cable, which resulted in one of our most comprehensive multiplatform agreements to date. The deal covers not only our Linear television networks but also streaming channels on the mighty WCTV app, streaming video via our TV Everywhere websites or apps for MTV, Nickelodeon, SPIKE, COMEDY CENTRAL, VH1 and CMT, dynamic ad insertion and more. Very importantly, it also includes distribution of EPIX, beginning in May, marking a major step in the growth and profitability of the premium multiplatform network.

Initiating and supporting product innovation continues to be a key component of our value proposition for cable, satellite and telco distributors. We continue to expand our lineup of TV Everywhere apps with a Nickelodeon and MTV apps rolling out on Android and apps from COMEDY CENTRAL, Nick Jr. and Logo due this year. And in the next few months, we're partnering with Verizon FiOS to bring a new one of its kind linear service to U.S. consumers, My Nick Jr. Results initially by Nickelodeon Friends, My Nick Jr. is a standalone linear channel that gives parents and their young kids unprecedented personalization functionality. Parents can customize the programming lineup based on certain educational themes, math or science, for example. Kids can also indicate whether they like or dislike a show to influence their program offering. It's a truly innovative new service and we hope to roll out with additional distributors, both domestic and international, in the future.

Internationally, we're seeing improving conditions in the European economy, as I mentioned earlier, which is lifting the ad market. We continue to increase our content investment abroad to capture the opportunities we see at hand. This includes our recent moves to take operational ownership of MTV Italy and to launch wholly-owned MTV channels in Russia and Brazil. We're already seeing the benefit of these moves, as well as our launch of the Paramount Channel in France and I am pleased to announce today that the Paramount Channel will launch in Russia and Hungary by the end of the current quarter.

Moving on to our Filmed Entertainment segment, Paramount Pictures launched a number of successful releases in the December quarter including Anchorman 2, Wolf of Wall Street and yes, ladies and gentlemen, the Oscar-nominated Jackass Presents: Bad Grandpa. In fact, the studio garnered 13 Oscar nominations in total, not only for Bad Grandpa, but also for Wolf of Wall Street and Nebraska, both of which, we are proud to say, earned nods in the Best Picture, Best Actor and Directing categories.

Looking ahead into 2014, we have Darren Aronofsky's Noah, starring Russell Crowe, debuting in March. We also have strong tentpoles lined up for the summer season including Michael Bay's Transformers: Age of Extinction, and Teenage Mutant Ninja Turtles, as well as Hercules, starring Dwayne Johnson.

Also, expect to see more announcements in the months to come from Paramount's new television production units. For starters, the TV studio has just completed a multiproject deal with director and screenwriter Craig Brewer of Hustle & Flow and Footloose. This deal includes humming 2 dramatic pilots for the studio.

To close, the December quarter marked a very solid start to the 2014 fiscal year for Viacom. As we move ahead, we will maintain our strategic focus on content, investing in the programming and films that drive the new entertainment ecosystem. We will leverage that content to connect marketing partners with our audiences, who remain among the most eager consumers of media and the earliest adopters of new technologies and features. We will continue to fuel the platforms of existing and emerging distributors alike on a worldwide basis. And we will continue to drive results and return substantial capital and value to our shareholders.

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

Wade C. 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 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 up 6% compared with the prior year, with domestic revenues up 5% and international revenues up 10%. The increase in revenues in the quarter was principally driven by increases in affiliate and advertising revenues. Page 10 of our web deck provides the breakdown of our Media Networks revenue performance.

Domestic advertising revenues were up 3% in the quarter and international advertising revenues were up 16%. The growth in the international advertising reflects an improving marketplace in Europe, as well as the impact of new channels. In terms of affiliate revenues, domestic revenues increased 10% in the quarter while international revenues were up 8%. Excluding the impact from the timing of product available under certain distribution agreements, domestic affiliate revenues grew high single digits in the quarter. Growth in the international revenues was due to rate and subscriber increases, as well as new channel launches.

Expenses increased 5% in the quarter. Within operating expenses, programming expense grew 2% while distribution and other costs increased 19%, principally due to new channels in the international markets.

SG&A expenses increased 5%, reflecting higher compensation as well as the impact of new channels in the international markets.

Media Networks adjusted operating income was up 8% and the adjusted operating income margin was 44%, an increase of 80 basis points compared to the prior year. The margin increase was driven by top line growth of 6%, partially offset by 5% growth in expenses.

Moving to Filmed Entertainment, revenues were down 30% in the quarter, principally due to declines in theatrical and home entertainment revenues. Page 12 of the web presentation provides the breakdown of Filmed Entertainment revenues.

Theatrical revenues decreased 52%, principally reflecting fewer releases in the quarter, as well as lower carryover revenues. We released 5 titles this year compared to 8 titles in the prior December quarter. Home entertainment revenues declined 37%, driven primarily by the absence of the current quarter release. Filmed Entertainment generated an adjusted operating loss of $74 million in the quarter as compared to a loss of $139 million last year. The improvement principally reflects lower print and advertising costs related to the number and mix of theatrical titles released in the quarter.

Now moving below the line, the increase in the interest expense reflects the full quarter impact of the $3 billion of fixed rate that we issued back in August. In terms of taxes, the adjusted effective tax rate for the quarter was 33.5%, reflecting a 100 basis point improvement as compared to the prior year. The reduction in the adjusted effective tax rate was primarily driven by the mix of international income.

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

Thomas E. Dooley

Thanks, Wade. I'm going to talk about our cash flow, our debt profile and the return of capital to our shareholders. I'll also cover the seasonal factors impacting our 2014 fiscal year.

For the quarter, we generated $278 million in free cash flow compared to $548 million last year. Page 5 of the web deck presentation provides the components of free cash flow. The decline in free cash flow in the quarter was principally due to higher working capital utilization and cash taxes, partially offset by higher operating income. Working capital was impacted by production spending for our upcoming tentpole releases, including Transformers 4, Interstellar, and SpongeBob.

Now turning to our debt. For the most part, it is fixed rate, with an average cost at quarter end of 4.6%. 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 20 to 25 basis points. We had no variable rate borrowings outstanding at quarter end.

As for our leverage, we ended the quarter with $11.9 billion of debt and capital leases outstanding. We had $1.4 billion of cash and cash equivalents. Our leverage ratio at the end of the quarter was 2.73x. At December 31, our $2.5 billion bank revolver was undrawn. Our return of capital to shareholders continued in the December quarter. Between our buyback and dividend programs, we returned a total of approximately $1.1 billion of capital back to our shareholders, and we ended the quarter with 440 million shares outstanding.

Looking ahead, we are on pace to purchase approximately $850 million of our stock in the March quarter, which means that for the first 6 months of the year, we will have returned a total of approximately $2 billion to shareholders.

Now let's turn to some other factors impacting the remainder of our fiscal year. In terms of affiliate revenue, we continue to see annual growth in the high-single digit to low-double digit range. However, quarterly affiliate revenue will fluctuate given the timing of transactions and the recognition of revenue related to certain distribution agreements, which are tied to product availability. For the full year, we expect that the growth rate for Media Networks programming expense will be in the mid-to high-single digits. In terms of nonprogramming 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 the upcoming summer tentpole releases, including Transformers: Age of Extinction and Teenage Mutant Ninja Turtles. We expect profits at the studio to be weighted to the back half of the fiscal year. Looking ahead at the studio's production and development pipeline, we've recently wrapped production on Interstellar, which is directed by Chris Nolan and stars Matthew McConaughey. We are also currently in development on a number of sequels to existing franchises including Mission: Impossible, Star Trek, G.I. Joe and World War Z. In terms of our animation label, Paramount has a number of products -- projects in the pipeline with SpongeBob and Monster Trucks, scheduled for release in 2015.

For 2014, we are now forecasting a book tax rate of 33.5%, reflecting the mix of international profits. We will continue to refine this as we go through the year and get a better sense of the profitability mix.

Wrapping up, we delivered strong bottom line results and we saw a positive developments on several fronts during the quarter. With the European marketplace showing signs of improvement, we saw our international advertising accelerates, and improving macro environment, coupled with our investment in original programming and new channels, should position us well for long-term growth in our international operations. In terms of affiliate fees, we continue to reach long-term agreements with our distribution partners that position us for growth, as well as for consumption of our content on digital platforms. We secured additional carriage for our EPIX pay TV service, and we are encouraged by the incremental opportunities we see to monetize our brands with new distribution partners.

Paramount continues to develop tentpole franchises, and we are excited about the upcoming slate and development pipeline, as well as the studios plans to develop new revenue streams. And we continue to find the opportunities to drive efficiencies throughout our businesses in order to enhance our margins and drive earnings per share and free cash flow. These efforts, combined with our aggressive return of capital, will continue to drive value for our shareholders.

And with that, I will now turn the call over to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Michael Nathanson of MoffettNathanson.

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

I have a question for Philippe. You guys are the first pure-play cable networks to report and you talked about some weakness in the quarter around November in advertising pacings. Could you provide a little more information of what happened, did you think, in the fourth quarter? I know you ended the third quarter really strong, so when you looked at what happened in the fourth quarter, what was -- what do you think the drag was from? And then when we look at the first quarter, I think Easter is about 150 basis points impact on a quarterly comps, if you can just give us, is that the right type of drag you have and you're going to grow even despite that comps? I just wanted to hear what you said about the quarter and why do you think that was?

Philippe P. Dauman

Thank you, Michael. As far as November, remember, we were coming out of the continued budget discussions in Washington as we were coming out of October. And that just created a lot of uncertainty in the business community. You had companies who were feeling uncertain, trying to make their years and retrenching a bit. That dissipated once the budget deal occurred and we started seeing strength again in December and certainly continuing into this quarter, where demand is back to normal. As far as the move of Easter from this quarter to the next, yes, it has probably a little over 150 basis points of drag -- of headwinds in this quarter. Of course, it'll be a tailwind in the next quarter. But despite that, we will see absolute growth, sequential improvement in ad sales growth from December quarter, and we see good strength in demand in the marketplace right now. And of course, we're off to a great start on our ratings.

Operator

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

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Just I guess a couple of questions, Philippe. Netflix announced it would've significant European launches later this year. Is that a meaningful incremental revenue opportunity for Viacom? Or is that sort of already expected? And I'm curious if you think that 2014 will be the year that a virtual MVPD gets launched? Sony's talked about launching something and how that would impact Viacom's businesses?

Philippe P. Dauman

Welcome, Doug. While whether it's Netflix or Amazon, or local players, over-the-top players in different countries around the world, there is clearly an expansion of this new distribution marketplace. It's an opportunity for us to monetize our global library. It was U.S.-based product or more and more original content that we are producing abroad. And that can only be good for a company like ours, who produces a lot of content. So yes, it will over time continue to be an incremental opportunity for us. As far -- I do think, obviously, I don't control what companies do, but based on a variety of discussions that we're having, I do believe that there'll be at least one virtual MVPD player commencing operations in 2014. And once again, that is a good opportunity for us to enter into a new relationships with emerging distributors to add to our stable of the existing ones. So all of these are good incremental opportunities over time. Obviously, they're small when they launch, but they can build over time.

Operator

We'll go next to David Bank of RBC Capital Markets.

David Bank - RBC Capital Markets, LLC, Research Division

You spent some time talking about some of the international initiatives, launch of Paramount, consolidating Italy, launching Russia, Brazil. Can you give us a sense of the lift you think you could get to revenues from all those things on both on ad side and then affiliate side? And what the impact -- is it a lift? Is it a headwind in the initial years on the operating income side?

Philippe P. Dauman

Well, clearly it's a lift on the revenue side. We are taking every opportunity as we have renewals or even before renewals of affiliate deals to add distribution, not just for the Paramount Channel and the launches that we talked about for MTV in Russia and Brazil and so forth, but additional Nickelodeon channels where we can leverage a content library around the world that really works very well. So again, I talked about it in the past, but where we have Nickelodeon, we've been adding Nick Jr. and Nicktoons, and looking at other opportunities to leverage all this great content we are producing. And clearly, when you do channel launches, there are some expenses, startup expenses associated with those launches. But it's really setting ourselves up for really fast growth over a period of years. We are focused on building significant asset value over time around the world, and it's very exciting where we're doing very, very well in growing our footprint.

Operator

We'll go next to Alexia Quadrani of JPMorgan.

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

Just going back to your commentary about acceleration in domestic ad growth in the March quarter, how much of that do you think is coming from the strength you mentioned about the stronger demand and the marketplace, sort of helped your marketplace overall versus maybe some potential improvements in ratings at MTV given your strong start to a couple of new shows?

Philippe P. Dauman

Well, clearly, the strength of our ratings is important and MTV is off to a good start in the quarter and several of our other networks, including COMEDY CENTRAL and SPIKE and CMT. Really across-the-board, we are seeing some good strength. We also provide the best opportunities in the business to our advertising clients and integrated marketing. We made an announcement about Viacom Velocity. But that's not the beginning. That's just the continuation of the increased investment that we have made in integrated marketing, creating content for our marketing partners. And that's also driving growth in ad revenues and deepening our relationships with our marketing partners. And we keep adding new shows, new events. So later in the year, we're going to have a big new Nickelodeon event, the Nickelodeon Kids' Choice Awards Sports Edition in the summer. And those events allow us, again, to have additional conversations with existing and new advertising partners.

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

And just saying -- and just a follow up on MTV, do you have any sense on how much of the viewership in MTV is sort of a delayed viewing and how much you could potentially see a lift, therefore, from the final rollout of the cross-platform system by Nielsen by the end of the year?

Philippe P. Dauman

You raised a very good issue because increasingly, there should be less focus on the live same day ratings. A lot of shows see a lot of lift in the C3 period, and so the C3 ratings, which, of course, are the ones we monetize, particularly for a lot of our original shows, really see a nice lift. We are very encouraged by Nielsen working to get to a more effective multiplatform measurements, and we are working with them as a test of the new services that they are providing to programmers, and that will provide additional monetization opportunities for us, particularly as we are rolling out our TV Everywhere functionality with distributors. And accordingly, we'll have more monetization opportunities on different platforms.

Operator

We'll go next to Bryan Wieser of Pivotal Research.

Brian W. Wieser - Pivotal Research Group LLC

Actually, I did have a question on velocity. More specifically, I was wondering, is there any way you could dimensionalize what percentage of your ad revenues or campaigns or anything like that, that you sell in a, let's call it, an enhanced manner? In other words, it's more than just about the tonnage, it's about something like what Velocity is trying to do. And secondly, I was wondering on the European advertising, I was wondering if there are any particular countries of particular strength of performance versus your average in particular countries that are underperforming than average?

Philippe P. Dauman

So, Bryan, your first question, there's really no way to dimensionalize. It's really a part, it's a special sauce that we provide to our advertising and marketing partners. And it gets us in the door, it enhances it. But it's becoming a normal part, increasing part of our value proposition with the marketers. As far as European advertising, we're seeing really solid strengths also driven by ratings, by the way, in the U.K., throughout Northern Europe. We're seeing stabilization in Southern Europe with some signs of emerging growth there. So it's expansioning the decline in the countries that were having difficulties over the last few years and greater velocity in countries that were relatively stable during that period.

Brian W. Wieser - Pivotal Research Group LLC

Maybe relatedly, do you think the Olympics in Sochi makes any impact on some of the European markets in the quarter?

Philippe P. Dauman

To some degree, but it's temporary. Certainly, it was planned for and it's a little bit of a drag during that period in the quarter, but underlying that, we have good momentum.

Operator

We'll go next to Barton Crockett of FBR Capital Markets.

Barton E. Crockett - FBR Capital Markets & Co., Research Division

I wanted to follow up on the lumpiness of affiliate fees that's tied to Internet deals. Can you talk a little bit about what you see in terms of timing that could affect the next couple of quarters? Is there anything that you can talk to at this point?

Philippe P. Dauman

Well, again, it's really hard to use a word that Bryan used, to dimensionalize that because a lot of this is tied to product availability and some of the distributors involved request availability at certain time periods. But that does add a level of lumpiness that you don't see in the traditional affiliate agreements, which are the baseline. And that's why we stick to the full-year guidance, which we've been comfortable giving year after year of high-single digits to low-double digits affiliate growth. And we continue to see that guidance as being the underpinning of our affiliate revenue stream.

Barton E. Crockett - FBR Capital Markets & Co., Research Division

Okay, all right. Let me switch gears a little bit then. On the TV production focus, could you talk a little bit about where you see the real opportunity? I mean historically, the money has been in broadcast level shows, but I think the new opportunity is for more shows on Internet platforms and on cable networks. Where is your focus going to be on the TV side and how much of an opportunity do you see there?

Philippe P. Dauman

Our TV production group at Paramount is, it's first creatively driven. They've had an amazing amount of interest from the creative community. Some were involved with the studio on the film side, some of them were more traditional television writers and directors and producers. So there are discussions going on with the over-the-top players, with pay services, really both in the U.S. and international players because we do want to marry both when it comes to dramatic series, for example. And for cable networks, including, for certain projects, our own, as we continue to increase our ambitions and scripted original programming. And then of course, to the extent that there are some broadcast opportunities, we'll look for those. So you'll see there are a number of projects that are close to green lighting and the Paramount will be making some announcements over the months to come.

Operator

We'll go next to Richard Greenfield of BTIG.

Richard Greenfield - BTIG, LLC, Research Division

EPIX is an interesting topic. I think even we were pretty critical of the original decision or skeptical of the original decision. Your distribution has gotten pretty wide and I'm -- it seems like you've got a couple of major issues to deal with over the next couple of years and I'm curious how do you think about them. One, with the Time Warner deal, I assume you're going to move now into original programming. Curious how much the partners are willing to commit and kind of how you're going to approach building out original programming to really differentiate it from just being a movie distribution service? And then two, I think your deal with Netflix is up in summer of 2015. They've talked about the lack of interest or less interest in noninclusive programming, yet they seem to be marketing a lot of the EPIX product now on the movie side pretty aggressively. I'm just wondering how you think about the importance of continuing that Netflix relationship or whether there is other ways to continue to drive the value out of EPIX through your MVPD partners?

Philippe P. Dauman

Thank you, Richard, and thank you for your comments about EPIX. Yes, EPIX has been a very successful new venture for us and our partners, Lionsgate and MGM. It was profitable within a year of launch, and it has continued to grow since then. And we've been patiently expanding the distribution that will continue. It's working well for the distribution and, of course, that's proof of concept and helps us to build distribution over time. Movies are the underpinning, and EPIX has a particularly strong lineup of movies when you consider the great franchises that all 3 partners have, whether it's all these franchises we talked about in our earnings remarks for Paramount and when you think about a Hunger Games from Lionsgate or the Bond Pictures from MGM. It's perhaps the best lineup of any pay service in the marketplace. As we have increased, certainly with Time Warner Cable being a big step in the so-called traditional distribution, the time is near to -- for us to expand our original programming lineup. We already have original programming on EPIX, but we are talking, the partners are talking about getting into scripted series programming at EPIX, and you'll see that coming to help cement and further grow the economics of EPIX. As far as distribution arrangements, whether it's Netflix or Amazon or others that we have, we think it's a desirable service for everyone, and we of course will engage in private discussions and negotiations with all of our distributors about the future. But I'm quite confident that EPIX will see even better times ahead.

Richard Greenfield - BTIG, LLC, Research Division

And could you just update us on who you're missing major distributor-wise as you start 2014? Who are the big ones?

Philippe P. Dauman

Well, the big ones, yes, yet to launch would include Comcast and DIRECTV.

Operator

We'll go next to Marci Ryvicker of Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

I just wanted to go back to the Olympics and on your domestic networks. Is there any impact that we might see either on how you program during that time period, or any expected impact on ratings or revenue during that time period? That's the first question. And then secondly, Wade, I think you said international advertising was the -- growth was partly organic and partly from new channels. Can you give us a breakout of what was the contribution from organic growth versus the new channel?

Philippe P. Dauman

That question, Wade, the last one?

Wade C. Davis

The impact in the quarter from new channel launches was actually relatively small, just because the channel launches occurred towards the end of the quarter. So in terms of breaking out a specific amount, I'm not sure that we're prepared to do that, but I think, suffice to say, it was relatively de minimis.

Philippe P. Dauman

As far as the Olympics, it's predictable. The Winter Olympics don't have as much of an impact as the Summer Olympics. The location means, the time -- big time difference, which will impact the Olympics effect on us. And so our networks -- we'll program accordingly, highly predictable and as we discussed earlier as far as the ad revenues, we continue to see sequential improvement overall in the quarter.

Operator

We'll go next to Vasily Karasyov of Sterne Agee.

Vasily Karasyov - Sterne Agee & Leach Inc., Research Division

I have a 2 quick ones. You seem to be very happy with your deal with Time Warner Cable. I was wondering if the potential sale of Time Warner Cable, in whole or in part, is a threat to the terms that you got there? And then the second question is on international networks. Can it be that the improving economics of international networks can help you move your sort of historical margin expansion target above 35 basis points or so a year?

Philippe P. Dauman

Thank you for your questions. As far as the Time Warner Cable deal, obviously, we concluded the extension in the midst of the focus on M&A related to the company. We don't think that a deal would have a significant impact on us, and we look forward to seeing what happens as a result of what's going on now. As far as the international networks, we are continuing to drive efficiency there as we do domestically, but we're also going to be opportunistic about increasing our footprint, and clearly, we're not going to -- so we're driving revenue. We're driving margins on our existing networks internationally, but we will take every opportunity that we see to launch new networks and when we launch a network that has an opposite effect on our margins. But that's really excellent for the long-term health of that group. So, yes, that makes it a little hard to predict the velocity of margin improvement, but over the long term as we do this, clearly, we will emerge with a margin improvement as we build this business.

Operator

We'll go next to Vijay Jayant of ISI Group.

David Carl Joyce - ISI Group Inc., Research Division

This is David Joyce for Vijay. 2 topics. On your new network launches internationally, I was wondering what the revenue mix is between affiliate and ad revenue right now and where do you see that going with these new launches? And then secondarily, you had mentioned dynamic ad insertion as part of your Time Warner Cable deal. Can you talk about when you think that will be impacting the industry in terms of Nielsen, looking at, I think, at the VOD viewership and the relative impressions in ad revenue that could come from that?

Philippe P. Dauman

Welcome, David. As far as new launches, every the marketplace is different, so we look for the revenue maximizing mix depending on the market. So for example, on making decisions on whether we go to pay television distribution or free over the air, yes, we look at the bottom line. Free over the air, obviously, there's no affiliate and higher advertising. But if the -- in a particular country, the affiliate opportunity is stronger, we will sacrifice ad revenues in order to get the affiliate revenue. What we're looking is to maximize results. So it's really a country by country analysis as to what the overall mix. When you blend it all together in a good economic environment, on average, we should grow both at decent rates. And as far as dynamic ad insertion, firstly, the distributors themselves have to have the technological capability. I think with companies like Time Warner Cable, obviously, I let them make their own announcements, but they're very close to implementing that as are other distributors. And then secondly, as we discussed earlier in this call, we are encouraged by Nielsen's imminent progress on measuring multiplatform viewership, and accordingly the ads that appear on these platforms.

Operator

We'll go next to Tony Wible of Janney Capital Markets.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

The Time Warner deal, are there certain level of marketing commitments associated with the EPIX carriage? And then also, I was hoping you could just recap on mobile advertising and just the rapid shift to it? I know you guys have the mobile apps, but are there other opportunities to monetize that trend?

Philippe P. Dauman

I'll take the Time Warner Cable question. I'll let Tom answer the mobile advertising one. As far as our agreement with Time Warner Cable, yes, we work together very collaboratively. I think both Time Warner Cable and ourselves are excited about the launch of EPIX, and we are determined to see it succeed as are they. So we will support the marketing, the rollout. We have very strong marketing capabilities that have fueled the success of EPIX with existing distributors, and we'll make that work very positively for Time Warner Cable.

Thomas E. Dooley

Mobile's a -- huge folks for the company. Our content is doing very, very well in terms of consumption across all mobile devices. Our apps are being churned out very, very quickly across both the iPhone world and the iDevice world and the Android world and as far as an advertising environment, it is very, very valuable inventory that the more we have, the more revenue we can generate for it. So we see great growth potential as our product becomes more widely available across more mobile apps and more mobile devices. So that's a very exciting growth area for the company in the next few years ahead.

Operator

We'll go next to Michael Morris of Guggenheim Securities.

Michael C. Morris - Guggenheim Securities, LLC, Research Division

Two questions. First, on advertising environment, Facebook and Google, obviously, continue to grow pretty significantly, and they have a different product than your channels, of course, but they seem to be focused on some of your core demographics. So I'm curious as to whether you're seeing their growth impacting the competitive marketplace as it applies to your advertising growth potential. And then secondly, on the cost side, with respect to the rating strength that you've seen, is this -- is the success of your programming having a positive impact on your expectations for program spending over the course of the year? Is that -- did that help benefit margins in the first quarter and is that what gives you some confidence in the higher pace of share repurchases this year in terms of capital being freed up?

Philippe P. Dauman

Well, on your first question, we work very collaboratively with companies like Facebook, like Twitter on -- in many ways, so from marketing standpoint, programmatic standpoint and we are using them to help drive our ratings and accordingly our monetization and increase the engagement of our viewers who are using multiple platforms in their media lives. So we don't see that impacting our ability to grow. It's up to us to produce a great compelling content, provide great marketing opportunities to reach these audiences who are very attached to our brands. And on the cost side, we have been, over a period of years, we have done 2 things: one, we have increased our investment in programming, but two, we have also gradually shifted the mix at several of our networks from -- in some cases entirely acquired programming to more of a mix of original programming, and that has certainly helped. We'll continue to invest. We are going to grow on a full-year basis our programming expansion in the mid- to high-single digit range. But overall on the cost side, we will continue to manage our cost base prudently, as Tom said earlier, to preserve and enhance our margins.

Thomas E. Dooley

And we'll continue to use the excess free cash flow we have on share repurchases. And as everyone knows, our ability to generate excess free cash flow is significant and that's what drives our share repurchase appetite.

Michael C. Morris - Guggenheim Securities, LLC, Research Division

And how is that programming expense growth expectation? Is it impacted by the success of the ratings as the year progresses or is it pretty set whether the show's work or not?

Thomas E. Dooley

We're always investing in new shows for the new hits that are going to impact the next years and the years beyond, and that really drives the incremental growth and you can never be -- you can never sit on your hands and assume the hits you have today are the hits that are going to carry you into the future.

Philippe P. Dauman

The other thing I would like to point out as far as the programming spending is that there are now incremental revenue opportunities on the affiliate side. So investing in programming is just not driving the ratings, it's also an opportunity into the future as you have new launches around the world to monetize what gets added to the library in a way we are unable to do in past years, where there really wasn't for us an incremental monetization opportunity. So we get it -- we get back some of that increased spending on programming through licensing and other revenue opportunities.

Operator

We'll go next to Tuna Amobi of S&P Capital IQ.

Tuna N. Amobi - S&P Capital IQ Equity Research

Tom, is there any reason that we shouldn't expect the same kind of improvement in the ETR that you saw this year, especially with your international ramp up is still ongoing?

Thomas E. Dooley

In programming what, Tuna?

Wade C. Davis

Effective tax rate.

Tuna N. Amobi - S&P Capital IQ Equity Research

The effective tax rate.

Thomas E. Dooley

Well, yes. I think it really depends a lot on how certain movies, one, large movie in particular that we expect to do very well internationally, that would be Transformers 4. The extent to which that has foreign -- overseas profits, revenues and profit, that could impact the tax rate and bring it down a little if it does better than we currently have in the budget.

James Bombassei

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

Operator

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

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