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Viacom (NASDAQ:VIAB)

Q2 2014 Earnings Call

May 01, 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

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

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

Michael Nathanson - MoffettNathanson LLC

Richard Greenfield - BTIG, LLC, Research Division

Brian W. Wieser - Pivotal Research Group LLC

David Carl Joyce - ISI Group Inc., Research Division

Douglas Creutz - Cowen and Company, LLC, Research Division

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

Benjamin Swinburne - Morgan Stanley, Research Division

Andrew Borst - Goldman Sachs Group Inc., Research Division

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

Anthony J. DiClemente - Nomura Securities Co. Ltd., Research Division

Operator

Good day, everyone, and welcome to the Viacom Second Quarter 2014 Earnings Release Teleconference. Today's call is being recorded.

At this time, I'd like to turn the call to the 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. 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.

Now I'll turn the call over to Sumner.

Sumner M. Redstone

Thanks, Jim. Good morning, and thank you for joining us. It was another successful quarter for Viacom. Our leading Media Networks and Paramount Pictures continued to attract large audiences all around the world. We have an outstanding management team [indiscernible] every single day.

Now, I'd like to turn the call over to the leader of that team, my good friend, the wisest man I have ever known, Philippe Dauman.

Philippe P. Dauman

Thank you very much, Sumner, and good morning, everyone. Thanks for joining us to discuss the second quarter of our 2014 fiscal year.

Viacom had a strong quarter. The company achieved steady growth in quarterly revenues, earnings and operating income. Our media networks delivered strong top and bottom line growth even as we grew our investment in original programming. Ratings were up for the majority of our networks and we saw the successful run of Paramount Pictures' The Wolf of Wall Street, and the #1 debut of Noah, a bona fide global hit.

Let's take a quick look at our financial performance for the quarter. Tom and Wade will go into greater detail in a moment.

Revenues increased to $3.17 billion, reflecting both higher affiliate fees of advertising revenues in our Media Networks. Operating income rose 3% to $872 million. Adjusted net earnings from continuing operations increased to $482 million. Adjusted diluted earnings per share grew 13% to $1.08.

Viacom's balance sheet is strong. We remain committed to returning significant value to our shareholders while investing in great content and the growth of our business worldwide. In the March quarter, we repurchased $850 million in stock under our ongoing stock repurchase program. This quarter, we also plan to repurchase $850 million in stock, and expect our buyback for the September ending fiscal year to exceed $3.25 billion.

We are very pleased to announce this morning that we have agreed to acquire the United Kingdom's Channel 5 broadcasting for GBP 450 million to be funded by our international cash on hand. After we close, we expect the transaction will be accretive to Viacom on an operating income basis in the first year. Channel 5's diverse programming slate will complement Viacom's popular pay-TV networks. We believe that we will be able to invest in more programming for Channel 5 that will make the channel even more vibrant and utilize some of that programming on our UK pay channels and even more importantly, on our existing and future networks around the world. We look forward to welcoming Channel 5's accomplished executives and employees into the Viacom family for the very exciting future ahead.

As I mentioned, our Media Networks had a great quarter. Ratings were up on a year-over-year basis at many of our networks, including Nickelodeon, Comedy Central, VH1, CMT, SPIKE and TV Land. Our Media Networks segment grew total advertising by 3% and domestic advertising by 2% in the March quarter. In the current quarter, we expect domestic advertising to grow mid-single-digits.

On the distribution side, total affiliate revenue increased by 10% in the quarter, and we concluded with the successful completion of our deal with the NCTC, the National Cable Television Cooperative. We also continue to drive value for distributors by launching new branded apps for our channels, including the recent Comedy Central and BET NOW apps. Across Viacom, our apps were downloaded at a rate of more than 1 million times per month in the March quarter.

For the second straight quarter, Nickelodeon was the #1 network for kids 2 to 11. Ratings grew 4%, while its 2 biggest competitors saw significant declines. Nickelodeon's ratings have now increased year-on-year for 15 consecutive months. Nickelodeon can lay claim to 8 out of the top 10 shows for kids in the current broadcast season. The network's continued dominance in preschool is a big part of this success. Wallykazam! debuted in the quarter as Nick's highest-rated preschool series and strengthens a formidable lineup which includes PAW Patrol, Dora the Explorer and Bubble Guppies. Nickelodeon also had the top 5 animated series in the March quarter, including the newly launched Breadwinners and of course, SpongeBob SquarePants, which is as strong as ever approaching its 15th birthday. Live action is strong for Nick, too. Sam and Cat gave the network the top-rated show with kids 2 to 11 and The Thundermans and The Haunted Hathaways followed closely on its heels.

The content pipeline in Nickelodeon is rich. At its recent upfront presentation, the network introduced 10 new series, along with a tent-pole, the Kid's Choice Sports 2014 to be hosted and executive produced by Michael Strahan.

MTV, more than any network, has an imperative for reinvention. The network must anticipate changing tastes and trends among its young audience. A bold period of reinvention is at hand at MTV. Even as the network continues to launch unscripted hits like Catfish, it is doubling down on scripted fare with a trio of smart, complex new series coming to air this year. Each explores the universally relatable youth theme of self-discovery through a different lens.

Faking It just debuted as MTV's highest-rated new scripted premiere in 2 years. The show gives a humorous high school take on evolving social attitudes towards sexual orientation. Happyland is a mother-daughter comedy that touches on the Latino experience in America. And Finding Carter is a mystery drama with an absolutely gripping plot that we believe can connect with a very broad audience. These shows will appeal not only to our younger audience, but to their older siblings and young parents as well. Of course, this reinvention also extends to how fans interact and connect with the brand. MTV is undertaking an exciting new initiative to transform the viewer experience. The network is building a new team to focus on real-time interstitial coverage of cultural and social media events each day. Think the quick hit video pieces invented by MTV but produced on-the-fly throughout the day to reflect trending topics, extending the network's always-on dialogue with its audience. MTV is hiring top editorial and design staff, including Richard Turley, the award-winning former creative director of Bloomberg Businessweek, and investing in upgrades to its tech infrastructure to get this concept up and running. It's a fresh new approach, and from a sales perspective, it will shorten commercial pause for our advertisers and allow us to give A positions to multiple clients. It will also enable marketers to buy into trending cultural conversations at the scale that only television can offer.

Coming off 6 consecutive months of primetime ratings growth, VH1 is working to build consistent strength in Thursday primetime and establish another solid night on Wednesdays to extend the success of its powerhouse Monday night lineup. The network is seeking loud, fun shows with a high celebrity quotient. It has increased its stable of production partners, resulting in 10 new series coming to air through the beginning of 2015. Additionally, VH1 is building on its music movie franchise, successfully launched with CrazySexyCool; with Drumline 2, starring Nick Cannon. Like Being Mary Jane on BET, we think Drumline can pave the way for an ongoing series if it connects with audiences.

CMT is building on major growth. Ratings were up 26% in the March quarter, with more and more original programming, including 20 hours of programming from its new CMT docks [ph] unit and a new CMT Crossroads with Katy Perry and Kacey Musgraves.

Without a doubt, Comedy Central is the place right now for young comedic talent. Thanks to its successful investment in new original series, anchored by fresh voices like Key & Peele, Broad City and Inside Amy Schumer; and Chris Hardwick of @midnight, a rethinking of the late night talk show that is growing its audience every month and attracting double the social media traffic of The Tonight Show. Much of this talent, including Amy, came up through what Comedy Central refers to as its farm team system, a roster of young comics and nurtures through sponsored tours, records, home video and Sirius radio channel. New originals have powered Comedy Central to its third consecutive quarter of year-over-year ratings growth. That success is fueling demand on all platforms from the new Comedy Central app to the newly relaunched sites for Daily Show and Colbert.

Speaking of Colbert, Comedy Central looks forward to sending him off in style in these next 8 months, and we're excited about the opportunity to reinvent late-night television again in the 11:30 slot beginning in 2015.

SPIKE also continues to see strength from its originals, including its 2 biggest series Bar Rescue and Ink Master. Two new extensions of the Bar Rescue franchise, Hungry Investors and Frankenfoods are coming to Spike in the current quarter.

At BET Networks, the team is hard at work planning the second annual BET Experience, set for this June in Los Angeles. BET has created a number of new sponsorship opportunities around the festival, which will again serve as a strong promotional platform for the BET Awards. In the current broadcast season, BET has the top 3 sitcoms on cable among adults 18 to 49 with The Game, Real Husbands of Hollywood and Let's Stay Together.

And CENTRIC, coming off its most-watched quarter ever, recently announced plans to develop a lineup of new original programming for African-American women in partnership with Queen Latifah.

Internationally, we're reaping benefits from our decision to move MTV Brazil, Italy and Russia to owned and operated models last year. All 3 have grown ratings, revenue and reach in the interim. Overall, our international ad sales grew double digits this past quarter. In the 6 months since its relaunch, MTV Brazil has risen from the 30th to the 16th ranked network in its core demo in a very crowded marketplace. Ratings for MTV Italy grew 31% year-over-year in the March quarter. The March quarter also saw MTV launch in the Philippines, as well as the launch of the Paramount channel in Russia and Hungary. And as I mentioned at the beginning of my remarks, we are truly excited by the potential Channel 5 will bring to us, not just in the U.K., but in our operations around the world.

Beyond our screens, we are aggressively executing a low-risk licensing strategy for stores and recreation to extend our brand presence globally and continuing to expand our consumer products business to drive our bottom line.

Moving over to Filmed Entertainment, Paramount Pictures achieved success in the March quarter with the extended run of Martin Scorsese's The Wolf of Wall Street and the #1 debut of Darren Aronofsky's Noah. Noah continues to be a big hit with international theatergoers as well. The success of these films demonstrates not only their outstanding quality, but also the continued ability of Paramount to connect broad audiences with challenging, creatively ambitious filmmaking.

Paramount also successfully launched Paranormal Activity: The Marked Ones, yet another very profitable film from its in-surge label. As we head into the summer tent-pole season, Paramount's exciting release slate includes Transformers: Age of Extinction, Teenage Mutant Ninja Turtles and Hercules.

There's great momentum at Paramount Television as well. The unit recently announced its new leadership team with production and development executives who've worked on a wide range of hits from Walking Dead to South Park. And just this week, Paramount Television announced its first major network production, a 3-hour live broadcast of the hit musical Grease for FOX. This gives you an idea of the kind of ambitious and diverse projects the new unit intends to pursue. It also pulled back the curtain on a number of additional projects in development. We have projects inspired by Paramount hits, including The Truman Show and Narc, as well as the Terminator franchise. We are also developing a series based on the best-selling mystery novel The Alienist with the executive producers of True Detective, and a limited run series based on A. Scott Berg's Pulitzer Prize winning biography, Lindbergh. We see a sellers' market for these types of rich, character-driven shows, and we're excited to get them into production.

To close, Viacom is in great shape. We are positioned for an era of growth for our company. We continue to invest in programming and films that resonate with audiences worldwide and drive the businesses of our marketing and distribution partners. We remain focused on mining the many growth opportunities at hand for content creators, both at home and abroad and on new devices. As a result, we see sustainable, high-single to low double-digit growth at affiliate revenues, an improving environment for ad sales in the U.S. and abroad, great potential for significant growth in our international business, consumer products revenue and new initiatives at Paramount and throughout our company. As all these initiatives bear fruit, we will continue to deliver results, create value and return substantial capital 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 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 6% compared with the prior year, principally driven by increases in affiliate and advertising revenues. Domestic revenues were up 6%, while international revenues grew 10%. Page 10 of our web deck provides a breakdown of our Media Networks revenue performance.

In terms of advertising, domestic revenues were up 2% in the quarter and international revenues increased 14%. The growth in international advertising reflects the impact of new channels, as well as continued improvement in the European marketplace. In terms of affiliate revenues, domestic revenues increased 11% in the quarter, while international revenues were up 7%. 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 increases in subscribers, new channel launches, as well as higher rates. Expenses increased 5% in the quarter. Within operating expenses, programming expense grew 5%. SG&A expense increased 6%, reflecting advertising and promotion expense related to the marketing of original series and specials, as well as the impact of new channels in international markets.

Media Networks' adjusted operating income was up 9%, and the adjusted operating income margin was 40%, an increase of approximately 90 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 12% in the quarter, principally due to declines in home entertainment and theatrical revenues. Page 12 of the web presentation provides a breakdown of Filmed Entertainment revenues.

Theatrical revenues decreased 17%, reflecting lower carryover revenues from prior quarter releases. Home entertainment revenues declined 30%, principally due to fewer releases in the quarter, as well as lower carryover revenues. Filmed Entertainment generated adjusted operating income of $11 million in the quarter, as compared to $65 million last year. The decrease principally reflects the number and mix of current year releases.

In terms of taxes, the year-to-date adjusted effective tax rate was 33%, reflecting a 150-basis-point improvement as compared to the prior year. The reduction in the adjusted effective tax rate was primarily driven by the mix of domestic versus international profitability.

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

Thomas E. Dooley

Thanks, Wade. Good morning, everyone. Let me talk about our cash flow and debt profile, as well as the return of capital to shareholders. I'll also cover the seasonal factors that impact the remainder of our 2014 fiscal year.

For the quarter, we generated $524 million in operating free cash flow compared to $700 million last year. Page 5 of the web deck presentation provides the components of free cash flow. The decline in operating free cash flow for the quarter was principally due to higher cash taxes and cash interest. The increase in cash taxes was primarily due to the timing of cash tax payments during the year. As for our debt, it is principally fixed rate with an average cost at quarter end of 4.6%.

During the March quarter, we took advantage of favorable market conditions to maintain our leverage ratio at our target level by issuing a total of $1.5 billion of senior notes and debentures in a combination of 5-, 10- and 30-year maturities. On April 3, a portion of the new issuance proceeds was used to redeem the $600 million of outstanding 4.375% senior notes that were due September of 2014. The new debt was issued at an average rate commensurate with our overall cost of debt, and taken together with the redemption, allowed us to extend our weighted average maturity.

In terms of short-term funding needs, to the extent, we have incremental borrowings. We are funding this in the commercial paper marketplace at an annual rate of approximately 20 basis points. We had no variable rate borrowings at quarter end. As for our leverage, we ended the quarter with $13.4 billion of debt and capital leases outstanding. We had $2.6 billion of cash and cash equivalents. Our leverage ratio at the end of the quarter was 3.1x. But taking into consideration the April 3 redemption of the $600 million of senior notes, our leverage ratio was 2.9x, and of course, our cash balance decreased to $2 billion. At March 31, our $2.5 billion bank revolver was undrawn.

Our commitment to return capital to shareholders continued in the March quarter. During the quarter, we returned a total of $850 million of capital back to our shareholders, and we ended the quarter with 432 million shares outstanding. For the June quarter, we are on a pace to purchase approximately $850 million of our stock, which means that for the first 9 months of the year, we will have returned a total of approximately $3 billion to our shareholders.

Now let's turn to some of the factors impacting the remainder of the fiscal year. In terms of our affiliate revenue, we continue to see long-term annual growth in the high-single-digit and low-double-digit range. However, quarterly affiliate revenue will fluctuate given the timing of transaction and the recognition of revenue related to certain distribution agreements, which are tied to product availability. Accordingly, for the June quarter, we anticipate that affiliate revenues will be flat compared to the prior year. However, we expect that affiliate revenue will grow double-digits in the September quarter. 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 non-programming expense, we will continue to drive efficiencies throughout the organization in order to preserve and enhance our margins.

For 2014, we are now forecasting a book tax rate of 33%, reflecting the mix of domestic versus international profitability. At Filmed Entertainment, we are very excited about our upcoming summer tent-pole releases including Transformers: Age of Extinction, Hercules and Teenage Mutant Ninja Turtles.

Looking ahead at Paramount's production and development pipeline, we are currently in production on the hybrid, live-action and CGI animated film, Monster Trucks, which is directed by Chris Wedge and is scheduled for release in May of 2014. We have started production on a Terminator reboot, which is in coproduction and partnership with Skydance and we recently wrapped production on The Gambler, which stars Mark Wahlberg in the lead role.

The studio is 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 summary, we continue to invest in our brands and franchises, developing new revenue streams and diversifying existing ones.

At Media Networks, we continue to grow our global footprint, launching new channels and apps in the international marketplace. Nickelodeon continues to grow its consumer product and licensing businesses, having developed Teenage Mutant Ninja Turtles into the #1 live-action figure in the United States. And the launch of the new animated series Dora and Friends this summer and Paramount's release of the SpongeBob Movie early next year will create new merchandise and licensing opportunities for these enduring franchises.

At Filmed Entertainment, we will release the first titles from our in-house animation division in 2015 and in conjunction with this, the studio will be developing merchandising opportunities tied to these films. Paramount's also getting back into the television production business, seeking to capitalize on increasing demand for original content from broadcast, cable and pay TV networks. These initiatives will enhance both our top and bottom line growth, and combined with our focus on managing cost and returning capital, we will drive additional value for our shareholders.

With that, I'm going to turn the call over to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Doug Mitchelson of Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

So Philippe, a couple of questions. First, can you talk a little bit more about the conversations you're having with advertisers around the upfront process and what your expectations might be for price per volume this year? And I was at The Cable Show, there was a lot of discussion around putting Netflix and the other SVOD providers as a channel in the cable box. And as you approach your conversations and your modeling around -- since you guys are the arms suppliers, the likes of Amazon, the licensees that you are charging, did you consider the fact or are you worried at all about the fact that there could be increased viewership competition as those guys start to get integrated in the cable box over time?

Philippe P. Dauman

Thank you, Doug. As far as our heading into the upfront, we've had some very successful presentations to advertisers. I mentioned in my remarks all the new series and events that we have planned across our networks, including our major ones, like Nickelodeon, MTV, where we had blockbuster presentations, but also some of our other networks that people generally don't think much about like CMT. So we are very well positioned based on the strength of the programming across the board. We see an improving environment as we go forward, so we anticipate very successful upfront market for us. And many of the categories that are showing strength are the categories that are squarely in our wheelhouse, like electronics, wireless, the kids' marketplace, the movies, the way they're skewed for the rest of the year and into next year, the kind of franchise that are out there. So we see a lot of opportunity as we look forward. As far as the SVOD distributors, we always face competition. We live in a world where we are suppliers of programming, as you so aptly put it. We are, to some degree, the arms merchants. We can be selective in what we provide, what we make available when, how, the content that we put on the SVOD operators serve to promote new episodes, new seasons, new shows, drive our consumer products business. There are a lot of aspects to how we distribute our programming on different windows. And as far as competition goes, we live in a competitive world. It is our core strength to build brands and great programming, and we are just continuing to step up the pace on that, and the results show. We see a lot of opportunity. You focus on the set-top box, we see opportunities beyond that in the mobile environment; not just in the U.S. but around the world. And we have geared our whole organization to play successfully in that world.

Operator

Our next question will come from Alexia Quadrani of JPMorgan.

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

Just a couple of questions. The first one is on the acceleration of domestic advertising growth that you're seeing in the fiscal third quarter. I guess, what specifically is driving that? Is it the healthier marketplace? Is it better movie slate in that quarter? Is it Easter to a certain degree? And will that continue for the rest of the year?

Philippe P. Dauman

Thank you, Alexia. Well, many of the factors that you mentioned, we did see some movie releases move out of the March quarter into the next couple of quarters. So certainly, that will help us, given what a strong category that is. You're quite right that Easter is in this quarter and certainly, in particular, for the Nickelodeon business, that makes a difference as we had in this quarter. And as I mentioned in answer to Doug's question, some of our key categories are strengthening categories. When you look at the competitive environment that exists in mobile, wireless, in electronics, in quick service restaurants, the breakfast meal wars and all these competitive categories, these provide strength for us. And of course, the strength of our networks, as well as the integrated marketing capabilities that we are providing to our advertisers. We are the leaders in that, and that is exactly what advertisers are looking for. And we are going to them with those offerings. We are getting more deeply embedded with social media and providing entire packages. So that's serving us well currently and will serve us well as we look into the next broadcast year in the upfronts.

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

And just to follow up, if I can, on the acquisition. You guys have been really very aggressive in your buybacks historically, at least the last few years. And I guess, given this acquisition, I guess, can you update us on your priorities for use of cash going forward? I know you mentioned the buybacks for this year. Do you still expect to be that aggressive going forward? And I guess, maybe any commentary if we should expect further acquisitions or how the pipeline looks.

Philippe P. Dauman

Well, let me emphasize, we have a strong commitment to returning capital to our shareholders. Now as I've always said, we don't see any big, transformative transactions in our future, but we do look for targeted opportunities and intellectual property and in the international environment. This Channel 5 opportunity, in a very strong market in general, and for us, in particular, just really fit the bill. It will be accretive right away and it's done well. We think we can take Channel 5 and its family of networks to the next level, utilizing some of the programming and capabilities that we have on our pay channels in the U.K., taking advantage of the vibrant U.K. production marketplace. We are going to step up, as we are doing around the world, in our production activities, increase the mix of original programming. That will allow us to grow the U.K. business and will provide us with another bucket of programming that we can distribute across Continental Europe and around the world, including the U.S., given what a fount of creativity there is in Britain. So we're excited by the fact that this increases our potential. And as a global company, we have the ability to take what has heretofore been a local business into a much bigger place. So we're very excited. This will add to our operating income, add to our growth, and...

Wade C. Davis

Alexia, let me just add to Philippe's remark, I mean, it's a great strategic transaction, but it's also very elegantly structured from a financial point of view. And that will have -- the cash being used here is not cash that would've been available for the share buyback program. These are international proceeds that are pretty much kept offshore, and as a result, they were invested at rates that are sub-1%, very conservative investment return. So this investment will yield a very high incremental return of -- in terms of what it offers shareholders and the company. And it's kind of unique in that regard in terms of its characteristics, and it also comes with about GBP 125 million of net losses that we can apply to future income here. So it's a very attractive transaction from a financial point of view, and Philippe outlined all the strategic attractive elements of it, but it will not impact the buyback program at all.

Operator

Our next question will come from Michael Nathanson of MoffettNathanson.

Michael Nathanson - MoffettNathanson LLC

I have a couple on Channel 5, and can I just ask one to Tom quickly? When you guys say it's accretive, are you assuming something for amortization within that accretion? Or is it accretive on cash EPS and cash earnings?

Thomas E. Dooley

Michael, we think about half of the purchase price is goodwill. We have to actually go through a valuation exercise to get exactly the right numbers. But for modeling purposes, you could take about half of the purchase price, allocate it to goodwill and the balance of the purchase price would be amortized somewhere between 10 and 15 years.

Michael Nathanson - MoffettNathanson LLC

Okay. And then I have 2 for Philippe on Channel 5. One is, I believe in the U.K, Viacom uses BSkyB as their sales agent versus Channel 5 sells directly to the market. How do you think you guys will integrate Channel 5 sales team into your network business, and that's one?

Philippe P. Dauman

Michael, our current intention is to continue with business as usual in the ad sales house. They have operated very successfully. Of course, we just signed the agreement yesterday. We are moving forward. Our real focus in making this acquisition was the combined programming opportunities, distribution opportunities, the cross-marketing opportunities that we see here. For example, there's a very successful children's block on Channel 5 called Milkshake! It has some Nickelodeon programming on it now. We think by marrying Milkshake! with some of the Nickelodeon capabilities and programming, there is opportunity to grow both sides of the house once we are able to close this transaction. So that's really been our focus. And again, it's a broadcasting asset that can work well with our pay channels, but it has its own characteristics.

Michael Nathanson - MoffettNathanson LLC

Okay, and then the other question would be, you mentioned the original programming, is there any history or any financial history of them selling their content overseas either to other networks or SVOD? Or is that simply untapped financial opportunity?

Philippe P. Dauman

I think to some limited degree, thus far, I think it's an untapped opportunity. So as you look forward, we will, as we do, we tell you consistently that Viacom's overall programming investment is growing at mid-single to high-single-digits every year. I think that's a good prospect in the U.K. for us to do that. And as we increase our investment across our networks in the U.K., we will also probably shift the mix toward more original programming. And that will allow us to enrich the programming experience in the U.K, but also allow for greater monetization given that this will be more programming that we own. And I believe we'll be able to use and re-purpose some of that programming in our U.S. channels. And another exciting thing to me, as you know, we are planning to launch more brands internationally, and the programming that we develop in the U.K., when added to the programming we develop in the U.S. and the local programming we produce in other geographies, will accelerate our ability to launch new brands, targeted at new demographics around the world.

Operator

We'll go next to Richard Greenfield of BTIG.

Richard Greenfield - BTIG, LLC, Research Division

A couple of questions. First off, when you look at calendar Q1, you mentioned that the movie schedule was light or things got pushed out. But are there anything kind of uniquely when you look at calendar Q1, that seems to make it one of your slower quarters advertising-wise versus other quarters throughout the year? And then just a big picture conceptual question. Sports programming seems to be something that all of your peers seem to be focusing more of their time and attention on. You've obviously done a little bit for SPIKE. But just wondering your appetite for increasing your overall exposure to sports programming to ensure or accelerate your subscriber fees.

Philippe P. Dauman

Thank you. Thank you, Rich. Yes, there were some movies that did move out of calendar Q1 or fiscal Q2. But also, if you look back on last year and the year before, you do see in the general marketplace, this time of year end of first calendar quarter, beginning of second calendar quarter, you see a pattern of what the demand is in the marketplace for a variety of reasons, and then it builds as the calendar second quarter continues. And we are seeing that, particularly in categories that we have particular relative strength in. As far as sports-related programming, one, yes, as you point out, we have some participation in that. But as you look at some of the programming that we have, for example, the new event that we're going to have on Nickelodeon, hosted by Michael Strahan, The Kids' Choice Sports 2014, that takes advantage of the vibrancy of sports. If you look at MTV2, we have programming tied in with Major League Baseball that -- they are very interested in working with us. So we are looking at opportunities where we can. There may be some opportunities internationally as well, and that was one of the rationales behind our getting involved with Bellator here in the U.S. We see that as potential programming as we roll out the SPIKE brand, if we roll that out internationally, that would be a natural there. So we look at those opportunities, but we're very focused on having a broad range of programming that has that live event -- that eventized appeal like sports does. So that could be the [indiscernible], but it could also mean fresh series that animate social conversation. So it's really not so much of sports, it's really having fresh, current vibrant content of all kinds, including sports-related content, that counts.

Operator

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

Brian W. Wieser - Pivotal Research Group LLC

It seems like the last couple of years, there has been generally lower volumes of scatter budgets available if advertisers try to lock in higher [ph] budgets and share in advance. I was wondering if that's what you're seeing, that there's still just a lower volume of budget share up for grabs in scatter in general? Separately, I was wondering if you could talk a little bit about TV license fees. There's growth there for the first quarter in a while and so I'd love to hear what you think is what's driving that.

Philippe P. Dauman

What was the second question? I didn't quite hear it.

Brian W. Wieser - Pivotal Research Group LLC

I apologize for the background noise here. I was wondering about TV license fees. We saw growth there for the first quarter in a while, so I was wondering if you could talk a bit about what's driving that?

Philippe P. Dauman

The license fees in the -- in which part of our business?

Brian W. Wieser - Pivotal Research Group LLC

I'm sorry, in the studio.

Philippe P. Dauman

The studio. Okay, thank you. Well, as far as the scatter market, it really depends on what categories you're looking at, and there's not a constant theme there. It really depends on what categories become competitive, what the plans year-to-year are of different major advertisers. There have been some years where major advertisers have decided to make a large commitment in the upfront; in other years, they decided they were just going to play the scatter market. So there's no particular rule to follow there in the broader market, and of course, we have different areas of strength in that market. As far as the TV license fees' strength, when you look at the opportunities for content and new networks being created around the world, including our own, that presents new opportunities for Paramount. And a lot of it also depends on the cycle of existing deals.

Thomas E. Dooley

Product availability.

Philippe P. Dauman

Yes. Product availability with licenses when they get -- they're up for renewal, particularly on different packages in movies as we go ahead in the pay license cycle. So there are a number of opportunities, and this year, Paramount has, as the year progresses, a number of opportunities in play.

Operator

Our next question will come Vijay Jayant from International Strategy Investment Group.

David Carl Joyce - ISI Group Inc., Research Division

This is David Joyce for Vijay. I was just wondering if you can provide some more color on Channel 5. What their revenue stream mix is like there compared to the other European assets? When the carriage agreements might be coming due? And then separately, in the U.S., there's been an increase in uptake of skinny packages probably capturing some of the people who may be cord cutters or cord narrowers. I'm just wondering if there's been any impact on your subscriber base there?

Philippe P. Dauman

Yes, so as far as Channel 5, the very large majority of revenues there, just to size it for you, the revenues of Channel 5 is approximately, in U.S. dollar terms, about $600 million as of this past year. It's largely advertising. This is a broadcast family of channels, and it's public sector broadcasting channel in the U.K. So think of it in that way as compared to our pay networks, where we also have affiliate revenues. This is largely driven by that, as well as some other revenues relating to programming and consumer products, where by the way, we see some opportunities to enhance our consumer products business by promotion on Channel 5. As far as your question relating to the so-called cord cutters. Look, we live in an environment where we are seeing our affiliate revenues grow. We are very encouraged by the fact that distributors are providing more robust TV Everywhere capabilities, meaning that users in general, and in particular the young viewers, which support many of our networks, will be able to access programming in the way they want and we believe that will entice people who are starting out without these broader subscriptions to subscribe as they get older. We've always seen some delay in young people getting out into the workplace and signing up for subscriptions, so that's not in and of itself a new phenomenon. But we are also providing content and we will be providing more content directly on mobile devices. But I think you will see more reinforcement of the subscription model as more functionality is implemented by the distribution community.

Operator

We'll go next to Doug Creutz of Cowen and Company.

Douglas Creutz - Cowen and Company, LLC, Research Division

Yes, I just wondered if you could talk about -- in your last call, you had said you expected acceleration in the quarter in domestic ad growth, and just what changed -- you mentioned some movies moving out of the quarter, maybe that was it, but if there's anything else that affected the ad growth in fiscal Q2?

Philippe P. Dauman

Well, Doug, that was really the difference for us in terms of having improved ad sales growth domestically in this quarter compared to last quarter. So that was -- there were a lot of ins and outs. But if you can pinpoint one thing for us, that would be it, given how important the movie category is to us. Now the converse of that is that the date changes on these movies pushed them into the latter half of our year. So on a full year basis, we will benefit from the marketing relating to those movies.

Operator

Our next question comes from Vasily Karasyov of Sterne Agee.

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

Tom, I have a 2 part question for you about consumer product licensing. In your prepared remarks, you highlighted all those opportunities coming up in the next several quarters. So looking at your ancillary revenue in the networks for the past couple of years, that -- it looks pretty flattish. So are those new opportunities, are they a result of some renewed focus on this revenue stream for you? And then after that, can you tell us what competition is like in the market, because I'm sure you know every peer of yours is hoping for growth in the consumer product license category, Frozen and the Marvel characters and Star Wars at Disney, DreamWorks Animation with Dragon 2 and so on and so on. How do you see the market? Is there -- is competition benign enough for you to count on substantial success there?

Thomas E. Dooley

That's a good question, Vasily. Thank you for it. We do see this category, both from a revenue and a bottom line contribution, increasing both throughout the rest of this year and certainly, into the future years. And it is competitive, but that's why it's important to have something -- a franchise like Teenage Mutant Ninja Turtles where you're #1. And I think that will continue to be our focus. And as you noted in my remarks and I noted in my remarks, we continue to focus on franchises that have very much a toyetic appeal that will put us as a very competitive player in that marketplace. Until those shows, movies get made and get up and on the air, it'll be hard to predict the outcomes, but we're in this business for the long run. We see the tremendous success others have had in it. We put in place in the organizations to take advantage of it, and we have great content and IP to drive that business into the future.

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

But you don't feel like that ship has sailed and you're late to the game and the market is taken over by competitors and there's just no room for your properties there?

Thomas E. Dooley

I mean, it's not a question of room. It's a question of which properties resonate with the kids. And our goal and given our franchises and, certainly, having a very strong franchise in terms of being able to platform that product with children in general, so like Nickelodeon, that is a big opportunity for us. In the rest of ancillary revenue though, some of the growth that consumer products will drive will be offset by some of the declines in home entertainment and the ability to sell product in that marketplace as DVD sales related to the Media Networks side of the house continue to decline.

Philippe P. Dauman

I guess I would add on that is as you see some stabilization strengthening in European consumer markets and growth of retail in emerging markets, that creates a bigger pie in consumer products as we look forward in the years ahead.

Operator

We'll go next to Ben Swinburne of Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

I guess, on Channel 5, can you guys give us a sense for what the margins of that business looks like today, or how it might compare to your core international portfolio today? And I think Philippe, you've talked about a 30% OICAGR before your international portfolio pre-Channel 5 over the several years. Can you just talk about how this asset may or may not lift that growth outlook if you see sort of retransmission fee [indiscernible] trajectory we've seen in the U.S. taking place in the U.K. And then, Tom, I don't know if you'd be willing to give this to us on the advertising side, but can just remind us of the Easter shift in dollars? I'm trying to get a sense for what -- from the March to June quarter trend is if we normalize for Easter on the domestic ad front.

Philippe P. Dauman

Ben, let me pick up, and then Tom will follow-up on the Channel 5 and international in general. So what I've said on our international business is that we expect to see that grow strong double-digits looking forward. And as reflected in the Channel 5 investment, we are committed to growing our international business primarily organically, but where we see opportunities that are very additive like Channel 5, and these opportunities do not present themselves often, we will take advantage of that, and that will certainly accelerate our growth. We just signed the agreement to buy Channel 5. We have some ideas on how we can grow and invest in that business. And certainly, our good executives on both sides of the house have some good ideas, but in the months to come, as we move toward closing the transaction, we will gel a plan to see how we can grow that U.K.-based business. And let me just repeat how committed we are to growing and investing in our U.K. business and what exciting opportunities there are ahead. And we think that Channel 5 will be a very complementary part of our global content and branded distribution business. Tom?

Thomas E. Dooley

Specifically, Ben, the margin on Channel 5 is consistent with the margin of our total international business, and that's low- to mid-teen type margins. And we do believe that, as Philippe said, that we can have expansion in both the margin of our entire international business and the margin of Channel 5 as we move forward in growing international marketplaces.

Benjamin Swinburne - Morgan Stanley, Research Division

And then on the domestic ad question?

Thomas E. Dooley

Sorry, what was it again?

Benjamin Swinburne - Morgan Stanley, Research Division

Just as you normalize Easter, can you just remind us how much dollars that usually is...

Andrew Borst - Goldman Sachs Group Inc., Research Division

It's about 1.5 points of growth, 1.5 points of growth that shifts.

Operator

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

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

So much of the content on Channel 5 seems to be stuff that they're licensing from others. I know you've talked about the opportunity to tap more into kind of local U.K. production. I was just wondering if you could highlight for us what are kind of the key shows that they're making over there that might make sense to think about taking back to the U.S. or moving to other markets? What are the key content franchises you're getting?

Philippe P. Dauman

Well, Barton, yes, as you pointed out, there are a lot of acquired programming there. I mean, for example, the Big Brother franchise is very popular there. They got CSI and other acquired U.S. programming, as well as in U.K. There is some original production taking place. It's been just a very recent investment on their part in that regard, so we're going to continue that direction. And as we look for programming and commission programming from the very diverse creative community there, we will look for shows that will work, obviously, first and foremost, on Channel 5, but we will have an eye to the kind of shows that will also live well in different windows in the U.K., but on our other networks around the world. We think there's a lot of possible cooperation between our U.S., for certain of our networks, between the U.S. and the U.K. in both directions for Channel 5. So we have the opportunity to just take -- not give up what there is there now, but evolve it. And again, with our orientation toward original programming, we'll be able to accelerate what they've already been doing there.

Thomas E. Dooley

Barton, it's also important to distinguish while some of them are acquisitions, they are format acquisitions. As in the case of Big Brother, where it's the format of the show, and then they produce that show on their own air, so it becomes their own show with the -- in the version of a Big Brother format. So that's an important distinction. It's not like they just acquire the show that's made here and put it over there.

Philippe P. Dauman

Operator, we have time for one more question.

Operator

And that will come from Anthony DiClemente of Nomura.

Anthony J. DiClemente - Nomura Securities Co. Ltd., Research Division

Just not to belabor the questions on Channel 5, but I'm just trying to reconcile. So it sounds like you said that you expect margin expansion at Channel 5, but that you also expect to increase the production investment in the U.K. So am I just -- is this just the difference between maybe like year 1 step-up in production expenses, but then you'll get a revenue follow through in successive years to kind of expand margins over the CAGR? Or do you just really expect the revenue acceleration in year 1 to offset the increased production expenses you mentioned? Just trying to kind of reconcile that.

Philippe P. Dauman

Yes, well, so there is -- as we go forward across all of our channels, we look to grow the revenue pie. And the way to do that is to increase our programming investment. That is the lifeblood of our company. And as we make more programming, we then have the opportunity to find ways to monetize it in various windows, whether it's SVOD, whether it's licensing in other territories and the like. So there's already a programming development taking place. We can look at it, modify, evolve it as we go forward. It's within our existing business plan as well as Channel 5's existing business plan to increase programming investment year after year. That's how you build the business. That's how they built the business to get to this point, and we're not going to interrupt that trajectory. We are going to enhance it.

James Bombassei

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

Operator

Thank you. That does concludes today's conference. Thank you all for your participation.

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