Viacom Q2 2010 Earnings Call Transcript

Aug. 5.10 | About: Viacom Inc. (VIAB)

Viacom (VIA.B) Q2 2010 Earnings Call August 5, 2010 8:30 AM ET

Executives

Sumner Redstone - Founder and Executive Chairman

Philippe Dauman - Chief Executive Officer, President and Director

James Bombassei - Senior Vice President of Investor Relations

Thomas Dooley - Chief Operating Officer, Chief Financial Officer and Director

Analysts

Spencer Wang - Crédit Suisse AG

Imran Khan - JP Morgan Chase & Co

Richard Greenfield - BTIG, LLC

Anthony DiClemente - Barclays Capital

Alan Gould - Natexis Bleichroeder, Inc.

David Bank - RBC Capital Markets Corporation

Ben Swinburne - Morgan Stanley

James Dix - Wedbush Securities Inc.

Douglas Mitchelson - Deutsche Bank AG

Matthew Harrigan - Wunderlich Securities Inc.

Tuna Amobi - S&P Equity Research

Operator

Good day, everyone, and welcome to the Viacom earnings release teleconference for the third quarter ended June 30, 2010. [Operator Instructions] At this time, I'd like to turn the call over to Senior Vice President, 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 the quarter ended June 30. Joining me for today's discussion are Sumner Redstone, our Chairman; Philippe Dauman, our President and CEO; Tom Dooley, our Chief Operating Officer and CFO; and Jimmy Barge, our Controller and Head of Tax and Treasury.

Please note that in addition to our press release, we have slides and trending schedules containing supplemental information available on our website.

Let me refer you to Page #2 in the web presentation and remind you that certain statements made on this call are forward-looking statements that involve risks and uncertainties. These risks and uncertainties are discussed in more detail in our filings with the SEC. Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website.

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

Sumner Redstone

Thank you, Jim, and good morning, everyone. As all of you can well imagine, we are more than pleased to be with you today to share our perspective on the strong results we have seen in the quarter ending June 2010. With six months under our belt in this calendar year, day after day, our confidence continues to grow as the emerging economy recovery builds. Now of course we're not all the way back, but the horizon's brighter than it has been for some time. Consumers are returning to the marketplace, marketers are beginning to spend again to grow revenues and capture share. And Viacom, Viacom with a leading entertainment brand, strong audience connections, is now and will continue to benefit from the upswing in confidence and the upswing in spending.

I have a very capable, an insight for leadership of CEO, Philippe Dauman and COO (sic)[CFO], Tom Dooley. Viacom has made investing in programming it's top priority, and that has kept our creative engine very strong despite the difficult environment. As a result, our film and television pipeline is deep with potential new hits and popular returning television series and film franchises, and this have turned exciting ways to driving box-office growth. And thanks to our continued laser focus of enhancing the efficiency of our business, our creative success continues to translate directly to our bottom-line performance. Viacom is generating strong cash flow and returning the value to shareholders as we have demonstrated by our recently initiated dividend program.

And today's announcement underscores Viacom's clear advantages. What we have is this: we have a smart strategy, we have an extremely capable and disciplined management team, and we have great world-class brand [indiscernible](22:51). The success that we touched on in these results is the [indiscernible](22:56) to the bright future we see not just for this year, not just for next year, but for indeed many years to come.

And now, I would like to turn this call over to my very, very close friend, Philippe Dauman. [indiscernible](23:19), Philippe.

Philippe Dauman

Thank you, Sumner, and good morning, everyone. Thank you for joining us today. We have just closed out another great quarter. Our performance over the first half of the year reflects continued progress against our operational objectives. This, in turn, is driving strong bottom line results. Both our Media Networks and Filmed Entertainment businesses are delivering strong results creatively, operationally and financially.

As the media industry continues to evolve and adapt to a digital environment, our singular focus on creating the compelling content our audience's desire across every screen has positioned Viacom very well. While the economic recovery appears to be progressing in fits and starts, a condition that leaves us cautious, we are encouraged by the growing momentum we see in the domestic advertising market. As I will discuss in a few moments, we completed a much stronger upfront than we experienced a year ago. This establishes a stronger base for our next fiscal year.

This morning, I will briefly review our financial performance and then turn to our operational results in both Media Networks and Filmed Entertainment. Tom will provide additional detail on our progress, and then we'll be happy to take your questions. As we review our results this morning, Tom and I will refer to the adjusted numbers.

Viacom's consolidated revenues were $3.3 billion in the June quarter, flat with the prior year's results. Media Networks generated a 6% increase in revenues on higher advertising sales and affiliate fees. This growth offsets a decline in our Filmed Entertainment segment, where home entertainment revenues were down substantially year-over-year, primarily due to the number and mix of titles.

Viacom's adjusted net earnings from continuing operations grew 40% to $418 million in the June quarter, and adjusted diluted earnings per share were $0.68, a 39% improvement over the prior year. The increase was fueled by higher operating income in both Media Networks and Filmed Entertainment.

Our business continues to generate strong free cash flow. We had $355 million in operating free cash flow during the quarter, up from $159 million a year ago. The tremendous progress we've made in strengthening Viacom's overall financial position was further validated by the recent upgrades by two ratings agencies. And last month, we were very pleased to deliver a regular quarterly cash dividend to our stockholders. We also look forward to resuming our stock buyback program, which we expect to commence early in the first quarter of our new fiscal year.

Let me turn now to our Media Networks. Keeping our thing on the pulse of the ever-changing entertainment taste of our audiences is what makes our cable networks so successful. Our ability to tap into and reflect the interest of varied and highly-valued demographics attracts marketers from a multitude of industries. Investing in and developing new content, that is how we continue to build strong global brands. That is how we broaden the reach of those brands, and that is how we position each Viacom network as an invaluable nexus between our marketing partners and the consumers they want to connect with.

The overall advertising market continues to strengthen. That trend, along with a boost from stronger ratings at several of our networks, pushed our domestic ad sales up 4% versus a year ago and up sequentially over the 1% growth we achieved in our March quarter. Worldwide ad revenues increased 4% in the June quarter as well. The domestic growth came from a stronger scatter market, and while it is still early in the current quarter, we are expecting to see further sequential improvement in our domestic ad sales growth.

With regard to the advertising upfront, we went into it this year in a much stronger position than a year ago. Our ratings were up at key networks, and we had new and improved programming slates to show at potential marketing partners. As a result, upfront pricing across our networks increased mid to high-single digits, and we sold just over 50% of our volume, a low double-digit increase over last year.

Our Nickelodeon Kids and Family Group had a strong kids' upfront, with gains across several major categories. This year, we were able to secure a substantial increase in non-endemic or adult categories, such as insurance and automotive. This shift reflects the fact that Nickelodeon is now firmly established as a co-viewing destination, with more parents watching shows on Nickelodeon alongside their kids.

Our affiliate revenues continue to grow, primarily driven by rate increases in the past quarter. The multi-year nature of our affiliate relationships will provide us with steady revenue growth for many years to come. In addition, we're continuing to roll out our high-definition channels and extend distribution of our standard-definition channels to smaller affiliates.

Now let me take a few minutes to review what's happening creatively at our networks. Our investment in programming continues to pay off, helping us to sustain the stellar performance of perennial stars like Nickelodeon, and to fuel the momentum that's underway in networks such as MTV, COMEDY CENTRAL, BET and TV Land. Nickelodeon broke records again this quarter, delivering its biggest second quarter audience ever among total viewers. In fact, the Nickelodeon family of channels now captures more than half of kids viewing on television during its programming hours, giving it a 20 percentage point share lead over its nearest competitor.

Uber franchise SpongeBob was again the number one rated program with 2 to 11-year-olds and newcomer, Team Umizoomi, was the number one ranked preschool program. Nick had six of the top 10 programs on all of television with both demos. In addition to iCarly's strong regular episode performance, iCarly tentpoles consistently draw record-setting audiences. For example, the iCarly iWon't Cancel the Show premiere was the highest-rated and most-watched telecast of all TV in May among kid and tween demos. That was trumped by the June premiere of iCarly iPsycho, which was the number one rated telecast of the entire quarter across all television with kids. And as the series appears in more countries around the world, iCarly continues to grow into a true global franchise.

Meanwhile, our newer live actions shows True Jackson, Big Time Rush and Victorious are building their own impressive following. A combination of new and proven programming on Nick Jr., TeenNick and Nicktoons fueled double-digit growth in audience size for each of these networks. Ratings in Nicktoons were boosted by the additional Avatar programming that aired in June, which was part of the cross-network promotional campaign leading up to Paramount's theatrical release of The Last Airbender. Building on this success, Nickelodeon recently greenlit a new series tentatively titled The Legend of Korra, which will continue the evolution of its animated franchise and is slated to premiere next year.

MTV enjoyed its second consecutive quarter of year-over-year ratings growth, with four of the top 10 original ad supported cable series among its target audience of 12 to 34-year-old as the network continues to successfully diversify its programming. MTV's new scripted comedy, Hard Times of RJ Berger, has delivered solid ratings that have steadily increased and has just been picked up for a second season. This show has drawn a strong male audience, which is consistent with one of MTV's objectives as it develops new programming.

And the good MTV News keeps coming. In the past couple of weeks, two of MTV's most successful new shows return for a second season. Teen Mom, MTV's number one new series in 2009, was the number-one telecast in its timeslot across all television among its core demo of 12 to 34-year-old for the first two weeks of the series. And fans just can't get enough of Jersey Shore. The season two premiere broke all of the series previous ratings records, delivering a 5.1 rating and attracting 5.3 million viewers. It was the number one cable telecast of the year for its demo, and it was MTV's best season premiere rating in more than seven years. While already moving ahead on season three for this phenomenon, it's impact was extended literally around the globe. The first season of Jersey Shore has already been seen in more than 30 countries.

Coming up later this quarter, MTV will bring back The Buried Life for another season and debut docu-series, World Of Jenks. In October, the network will air another season of 16 and Pregnant and My Life as Liz.

The MTV Networks Music Group is also making innovative moves in the digital space. Late in the quarter, we announced a multi-year partnership with Warner Music Group through which we will have the exclusive rights to sell advertising inventory related to the WMG's premium music video content across our U.S. digital properties and mobile services, as well as on WMG's growing network of proprietary artist sites and third-party affiliate sites. The addition of WMG's video views to our collective total will expand MTV Networks Music Groups' online reach to more than 15 million monthly unique visitors, solidifying the group's position as a leader in the digital music space.

At COMEDY CENTRAL, we have been revamping our programming lineup, and the audience is responding enthusiastically. Ratings began to turnaround in the month of June with year-over-year improvement of 5%. During the first five weeks of this quarter, COMEDY's total day audience has grown 20% year-over-year. Anchored by the continued success of The Daily Show with Jon Stewart and The Colbert Report, both of which had ratings growth over the prior year, South Park, Ugly Americans, new original episodes of Futurama, as well as Tosh.0, all have delivered outstanding results. Ratings for Tosh.0, now in its second season, have been building steadily and impressively as the show has found its audience. Just last week, Tosh hit a new series high, delivering 2.7 million viewers and further cementing its status as the number-one show among young men on Wednesday evening this summer.

The success of our linear programming lineup is also driving digital success. The suite of sites that constitute Comedy Central Digital, including ComedyCentral.com, TheDailyShow.com, ColbertNation.com and SouthParkStudios.com enjoyed its best quarter ever. Comedy Central Digital averaged 9 million monthly unique visitors in the quarter, up 23% versus last year and ranked number one in the entertainment humor category.

Across our networks, we have had numerous other original programming standouts. For example, TV Land's hit sitcom, Hot in Cleveland, its series premiere was the most-watched sitcom telecast in cable history, with nearly 6 million viewers. We've already greenlit a second cycle of the show, which will air in early 2011. This series, along with the upcoming third season of She's Got The Look, is one of several initiatives we have underway at several of our networks to broaden our target demographics, mainly attracting more of the 18 to 49 and 25 to 54-year-old adult market, which will open up new and lucrative marketing opportunities for us.

BET's The Family Crews and the second season of Tiny & Toya, both ranked among the top original series ever on BET, and The Mo'Nique Show continues to grow its late-night audience.

At our scenes [ph](35:42) award shows, including the MTV Movie Awards, the BET Awards and VH1's Hip Hop Honors, all delivered outstanding ratings, as well as strong digital traffic. We are looking forward to the MTV Video Music Awards, which will air live on September 12 from Los Angeles.

I also want to mention the rebranding of MTV Tr3s. Now known as Tr3s, MTV, Musica y Mas, we are expanding this brands content to appeal to a broader spectrum of the 12 to 34 Latino demographic, a growing force culturally and economically. Working more closely with MTV Networks International's Latin American operations, Tr3s will feature more original programming and key acquisitions, with particular emphasis on driving more co-viewing among teens and their parents. Again, a new expanding demographic category for us.

In our International business, we are seeing solid progress in most of our major territories in Europe and in Latin America, as well as in India, and expect improvement in margins as we move forward.

Now I'll move on to Filmed Entertainment. Our theatrical slate at Paramount Pictures continues to perform very well this year. Our major releases in the past quarter were Marvel Studios' Iron Man 2 and DreamWorks Animation's Shrek Forever After. Both franchises delivered solid box office performance, and we expect that to extend into strong DVD sales later this year. We are also pleased with our Nickelodeon tentpole, The Last Airbender. This film has defied critics' expectations and is still in the early stage of expanding overseas where it's performing well thus far.

The home entertainment market continues to be soft. In addition to lower revenues from third-party distribution arrangements this past quarter, we had three fewer DVD releases than in the prior year. In June, Paramount Home Entertainment announced the extension of its revenue sharing license agreement with Redbox to continue to make its DVD and Blu-ray titles available for rent to the Redbox kiosks on the same day they are released for sale. The data from our 10-month test with Redbox suggested this arrangement had minimal impact on DVD sales and offered our consumers more choice on how they wish to enjoy our movies.

Back in the theaters. Dinner for Schmucks just opened this past weekend and Middle Men opens tomorrow. Looking ahead, we have a number of promising films slated for release. Next month, we will be distributing Academy Award winner Davis Guggenheim's latest documentary, WAITING FOR "SUPERMAN", which focuses on the crisis and the current state of America's public schools. In the fall, you won't want to miss Jackass 3D and the highly anticipated sequel, Paranormal Activity 2. These will be followed by DreamWorks Animation's Megamind and Ethan and Joel Coen's remake of True Grit.

In conclusion, we are very pleased with the strong results we have delivered over the first half of the calendar year. We will continue to focus on driving and nurturing the enormous creativity that exists within our company and on improving our operational efficiencies. Our investment in original programming is clearly yielding positive results. We will continue to generate more and more new content for our audiences, and find more ways to monetize that content as digital, mobile and international forms of distribution become more significant. And we will also build on our financial strengths to ensure that we are well positioned to return money to our shareholders and capitalize on future opportunities.

And now I'll turn it over to my partner, Tom.

Thomas Dooley

Thank you, Philippe, and good morning, everyone. I hope you've had a chance to review our earnings release and web presentation summarizing the results for our June quarter. Our 10-Q will be filed shortly. This morning, I'm going to take you through our results in more detail and update you on the key factors impacting the remainder of our fiscal 2010. I will also talk about our balance sheet, our leverage and our cash position. My remarks will focus on adjusted results from continuing operations, which exclude from the June quarter of last year, $33 million of severance charges, $16 million at the Media Networks and $17 million at Filmed Entertainment.

You may have noticed that adjusted operating income from our segments now excludes equity compensation in addition to any one-time items that affect comparability. This change in presentation should help you better analyze segment operating results.

As a reminder, this year we are transitioning to a September fiscal year end. The trending schedules on our website should allow you to easily track the company's performance as we move through this transition.

Now let's take a look at our consolidated results. From a total company perspective, revenues were flat to last year at $3.3 billion. Media Networks revenues increased $125 million or 6%, primarily driven by higher affiliate fees and advertising revenues. Filmed Entertainment revenues declined 10% or $135 million. Home Entertainment revenues were lower in the quarter, reflecting fewer new releases and lower catalog sales.

Total company expenses declined $173 million or 6% for the quarter. Filmed Entertainment expenses declined by $212 million or 15%, and Media Network expenses increased $28 million or 2%. The decline at Filmed Entertainment was primarily due to lower print, advertising and production costs as a result of fewer theatrical and home entertainment releases in the quarter. Consolidated operating income in the quarter increased 28% to $794 million.

Now let's take a look at our segment results. Media Networks revenues increased 6% to $2.1 billion in the quarter. Both domestic and international revenues increased 6% in the quarter. Foreign exchange had a one percentage point unfavorable impact on international revenues. Page 8 of our web deck provides a break down of our Media Networks revenue performance.

As Philippe mentioned, domestic advertising revenues grew 4% in the June quarter, which was an improvement from the March quarter's 1% growth. International advertising increased 6% in the quarter, with foreign exchange reducing the growth rate by two percentage points. This growth was driven by strength in the European and Latin American markets.

Turning to our affiliate revenues. Our domestic revenues increased 12%, while our international revenues increased 6%. Approximately 75% of the growth in domestic affiliate revenues was from rate increases, with the remainder driven by an increase in subscribers. In terms of international affiliate revenues, growth for the quarter was driven by a combination of rate and subscriber increases.

Moving to ancillary revenues. Domestic revenues declined 3%, while international revenues increased 7%. The decline in domestic ancillary revenues principally reflects lower Rock Band revenues, partially offset by increased online content licensing fees. The increase in international ancillary revenues was due to higher consumer product sales.

Media Networks' adjusted operating income of $789 million in the quarter was 14% higher than last year. The operating margin improved 250 basis points to 38% in the June quarter, primarily due to lower Rock Band losses. If you exclude Rock Band, the core margin was 39%, which was an improvement of 20 basis points from last year. The improvement in the core margins was driven by higher affiliate, advertising and ancillary revenues, partially offset by higher programming expense.

Programming expense in the quarter grew 10%. During the quarter, we aired licensed programming such as Everybody Loves Raymond and Roseanne, new scripted series like the Hard Times of RJ Berger and Hot in Cleveland, as well as returning series and specials including America’s Best Dance Crew and Hip Hop Honors.

Now turning to Filmed Entertainment. Revenues in the quarter declined 10% to $1.2 billion. Page 10 of the web presentation provides a break down of the Filmed Entertainment revenues. Our strategy of producing a smaller but more focused slate continues as we released fewer titles, both theatrically and in home entertainment, compared with the June quarter of last year.

Worldwide theatrical revenues in the quarter increased $60 million or 10% to $644 million. Foreign currency had a three percentage point favorable impact on worldwide theatrical revenue growth. The performance in the quarter was driven by the distribution of Iron Man 2, Shrek Forever After and HOW TO TRAIN YOUR DRAGON. This compares to last year's June 26 release of Transformers 2, as well as the release of Star Trek and Monsters vs. Aliens. Worldwide home entertainment revenues decreased 43% to $248 million. The decline reflects lower revenues on distribution title, as well as fewer home entertainment releases.

We released three titles in the quarter as compared to six titles in the June quarter of last year. Filmed Entertainment generated adjusted operating income of $69 million as compared to an operating loss of $8 million last year. The $77 million improvement in operating income principally reflects lower print, advertising and production costs as a result of fewer theatrical and home entertainment releases.

During the quarter, certain Paramount releases from 2009 were made available to our Epix pay-TV joint venture. Accordingly, we recognized $40 million of revenue and $24 million of income at the Filmed Entertainment related to those releases. We also recorded $27 million of equity losses, so there was no net impact to Viacom.

Moving below to segment results. Total company equity losses from investments were $24 million in the quarter. The losses principally relate to our investments in Epix and Rhapsody America. The tax rate in the quarter was 36%.

Now let's turn to our cash flow, our leverage and debt profile. We generated $355 million of operating free cash flow in the quarter as compared to $159 million last year. Page 5 of the web deck presentation provides the components of free cash flow. The increase in operating free cash flow was principally due to higher operating income and lower working capital uses, partially offset by higher cash tax payments. The increase in cash taxes was driven by the sunsetting of accelerated deductions related to domestic film and television production expense and by higher pretax earnings.

Our debt, for the most part, is fixed rate with an average cost of approximately 6%. To the extent we have incremental borrowings, we are funding this in the commercial paper marketplace at an annual rate of approximately 35 basis points. We had no variable rate borrowings at the end of the quarter.

In terms of leverage, we ended the quarter with $6.8 billion of debt and capital leases outstanding and $677 million of cash and cash equivalents. At June 30, our $3.25 billion bank revolver was undrawn. This facility expires in December, and we are in the process of renegotiating a new $1.5 billion facility to replace it.

Our leverage ratio at the end of the quarter was 1.9x, which is consistent with our target of approximately 2x. The only financial covenant in our bank revolver requires that interest coverage for the most recent four fiscal quarters be at least 3x. At the end of the quarter, our interest coverage was 8x.

We have continued to strengthen our balance sheet by reducing our leverage, managing our cost structure and improving our free cash flow conversion. Our enhanced credit profile has resulted in recent upgrades from both Fitch and S&P to a BBB+ rating, and Moody's has put our ratings on review for possible upgrade.

Regarding our commitment to return capital to shareholders, last week, we announced another quarterly dividend of $0.15 per share that will bring our total dividends paid to shareholders to $182 million since we initiated our dividend program in June. And starting in the December quarter, we will begin buying back our stock under our $4 billion stock repurchase program.

Now I'd like to talk about some of the factors impacting the rest of our fiscal year. At Media Networks, we will continue to find cost efficiencies in operating areas that will enable us to enhance our core margins, while investing in programming. Our targeted annual growth rate for programming expenses remains mid-single digits.

In the September quarter, however, the growth rate will be comparable to the June quarter due to the timing of shows coming on air. In September of 2009, Rock Band launched The Beatles game worldwide on Xbox, Wii and PLAYSTATION 3 platform. This year, they will launch Rock Band 3 worldwide on October 26, which falls in our next fiscal year. Rock Band will sell the software and song downloads related to Rock Band 3, while Mad Catz will be responsible for the hardware sales.

Year-to-date operating free cash flow of $737 million is $442 million higher than the same period in 2009. While we expect to generate substantial free cash flow this year, the increase will be somewhat mitigated in the September quarter, as last year, we benefited from the theatrical performance of Transformers 2. This year, we will be incurring production spend related to some of our fiscal year 2011 tentpole films, as well as increased participation payments.

In summary, while the quarter was characterized by concerns about the macro environment, advertising showed continued strength, and we remain focused on executing our strategy. At Media Networks, the launch of new original programming and the return of several successful series are resonating with both viewers and advertisers. Our recently completed upfront demonstrates this momentum.

At Filmed Entertainment, we continue to build our portfolio of franchise films, strengthening the pipeline for the studio. We are managing our cost structure and driving greater efficiencies throughout the organization with a focus on growing margin and increasing cash flow. Our commitment to reallocate capital in order to invest in key strategic initiatives positions us for long-term growth.

With that, I want to thank you for listening, and now we'll turn the call over to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Imran Khan from JPMorgan.

Imran Khan - JP Morgan Chase & Co

First, I was wondering, you had a very strong upfront, how that position you -- how that translate into next year advertising growth in your mind? So if you can give us some color. I know you're not ready to give a guidance at this point. And secondly, you have been consistently improving your core margins. As we look forward, more of a high level, how should we think about -- where do you think your core margins can go?

Philippe Dauman

Well, as you suggest, the upfront season really set us up well for the next fiscal year. The upfront sales will begin to be reflected in the December quarter, which will be our first fiscal quarter. Across the board as I mentioned in my remarks, we had pricing in the mid to high single digits increases. We had increase in volume, and the scatter market that we're experiencing now despite the turbulence in the overall economy or some of the headlines you see out there, the scatter market continues to be strong. Our pricing over the upfront in the last quarter, in the second quarter, was up mid-teens, and as we begin the third quarter, it is at that level or a little better than that level. So we continue to see strength. That gives us optimism for advertising growth in the next fiscal year. As far as our core margins, we work hard to not just maintain it but continue to improve it through efficiencies as Tom mentioned, while continuing to invest in programming. Obviously, as our revenues grow, as the advertising market continues to be strong, we know that our affiliate fee growth rate will continue to be strong. We may have an opportunity for further improvement.

Thomas Dooley

Imran, on the core margin front, as the Rock Band losses go from being losses and turn around into a profitability, which we foresee in the near future. We think that is a driver of core margins. We also see opportunities to expand the core margins in the International segment as we roll into next year. So we see continued momentum there, as well as we continue to find more operating efficiencies in all of the business segments. So we've been investing in programming, while at the same time driving those core margins, and we see the opportunity for that to continue. On the Filmed Entertainment side, we've done a lot to drive the cost equation there and improve that. Yet at the end of the day, the core margins there will be driven by the overall success of the film lineup.

Operator

Moving on to our next question from Doug Mitchelson from Deutsche Bank.

Douglas Mitchelson - Deutsche Bank AG

Look, I was just curious, some peers have had some pretty terrific international advertising growth rates, 25% plus. I'm not sure you can summarize international easily, but can you square the difference to your 6% for us and are you more mature or making changes in your business? Is there any rating shares issues or is it potentially, we're going to see some improved results in international, as well as domestic. And then secondly for Tom, have you given any consideration to moving up your share repurchase program given the strength of your results and what appears to be a pretty attractive valuation?

Thomas Dooley

On the international side, we do see the opportunity for that to improve faster in the future. Once again, some of the markets, our market lineup doesn't exactly parallel their market lineup, and our demographic mix doesn't parallel their demographic mix. Certainly, there's been more strength in the older demographics relative to the younger demographic, and that's equal on the international and on the domestic side. We see strengthening in the younger demographic mix coming through. I guess, traditionally, I don't know if there's any stats on this, but it probably comes back later in a recovery period. So we do see international's advertising growth strengthening down the road. As far as the share repurchase program, we've been pretty disciplined about how we're going about doing that and be very mindful of the overall leverage of the company and the cash flow dynamics of the company. As you guys all know, the quarter ending December 31 is usually very strong from a cash flow point of view, and we will as we stated wait until that quarter, even though the stock is very attractively priced at this point.

Philippe Dauman

Only a couple of months away, Doug.

Operator

We'll move on to Spencer Wang from Credit Suisse.

Spencer Wang - Crédit Suisse AG

Philippe, I was wondering if you could just talk a little bit more about your strategy to grow non-endemic advertising for some of your channels, where you are in that process and when you expect to see that re-accelerate ad revenue growth. And second, just for Tom. To clarify your programming costs growth comments mid-single digits, it looks like for fiscal 2010, the programming cost growth will be about 8% year-over-year. So is that what you mean by roughly mid-single digits, or should it be closer to 5% to 6%?

Philippe Dauman

On the first question, we're making a big push to grow non-endemic advertising in the Nickelodeon family of networks in particular and making great progress. We saw it in the upfront sales where as you know, the automotive category in general is back in advertising. We have a very low market share in that category. Many of the new car models coming out are geared to younger purchasers, young families. And we saw great progress in our upfront sales in that category. We see also a lot of progress in electronic products and a lot of new products out there, insurance, as well as advertiser like Procter & Gamble and the like. So we start to see a lot more progress going forward, but we are already seeing good signs of that in the upfront season that we just completed, as well as on the scatter. Tom?

Thomas Dooley

On the mid-single digits we're referring like 5% or 6% but depending upon which shows are working, which shows aren't working in the third quarter. We may mix it up but it won't get any higher than the 7% or 8% range in any case.

Operator

We'll take our next question from Anthony DiClemente from Barclays Capital.

Anthony DiClemente - Barclays Capital

Tom, on the equity line, maybe you could just refresh us on when you expect Epix to be cash flow breakeven and profitable? That $26 million in below the line from Epix and Rhapsody, how should the losses there progress in terms of the recoup?

Thomas Dooley

Yes, the equity losses on Epix will continue from a P&L point of view. They'll be cash flow breakeven, we expect to be pretty close to that in the December ending quarter, the first quarter of our new fiscal year. So we're in pretty good shape from a cash flow point of view we believe on Epix, and I'm very excited about that. As far as the other categories, the number that we reported this quarter will pretty much round out to be the number we report. There's pluses and minuses. We have profits coming in from our India venture that are offsetting some of the losses that are coming from some of our other ventures around the world. But that rate or aggregate number seems to be a number that you can roll forward with for a period of time.

Anthony DiClemente - Barclays Capital

And then, Philippe, when you look at the nature of some of your MTV brands, whether it's -- not just Jersey Shore but Teen Mom or 16 and Pregnant, I mean, these things are controversial. Some of these topics are controversial. I know that works to your advantage in terms of your TV ratings. I'm just wondering in terms of the financials, how does that work in terms of your advertisers? What are your advertisers saying about some of these topics? And I know at times, it's a tough balancing act. It must be. How do you approach that balance?

Philippe Dauman

Well, actually there was some issues when Jersey Shore's first season launched. A lot of talk out there about, before the show really hit, and now we have advertisers that are scrambling to get on it. We have some advertisers who want to get wall-to-wall on particular episodes. We're turning them away. So it's resonating culturally, and with our audiences and of course, marketers want to reach those hard to reach passionate audiences. Same with Teen Mom, which is actually a very sweet show if you've watched it. There's a lot of life lessons in it and very uplifting. So those shows are actually doing very, very well from a marketing standpoint.

Operator

Moving on, we'll take our next question from Richard Greenfield from BTIG.

Richard Greenfield - BTIG, LLC

Philippe started out asking about -- mentioning that the Film business' home video line was continuing to weaken or be weak year-over-year. Just wondering, given everyone seems to be shrinking their film slates and shrinking the number of releases, have you thought about or would you have interest in doing more of what you used to do in terms of a joint ventures overseas both on the theatrical side, as well as on the home video side? And just how you think about getting the cost structure at the Film business to a better place?

Philippe Dauman

Well, Rich, we are continuously looking at ways to reduce the cost structure and overhead of our business, and make continuous improvement in that respect, including in the home entertainment line. As far as international distribution, we continue to have joint ventures in several territories. We look at that again as the marketplace evolves. The international marketplace is growing. In some markets, it makes sense for us to have our own distribution. In others, we will look at opportunities for joint ventures either with local players or some of our colleagues such as Universal, with whom we already have ventures in certain territories. So we continue to look at that equation and are looking to improve our cost structure at the studio.

Thomas Dooley

Rich, just a follow-up on that. The point about the Movie business continuing to contract the number of films they release, we see that actually changing. We see that beginning to change in the end of the second quarter, certainly as we go into the third quarter. I'd say the first and second quarter of this year will be sort of the bottoming out point of the downward contraction in major releases, which draw a lot of advertising, put a lot of advertising in the marketplace, and we think that bodes well for us as we move forward.

Philippe Dauman

One of the factors in that, not just the major studios but you have studios such as DreamWorks and other mini majors, who were coming out with new slates. Having not put them out before or increase slates as we look forward beginning next year.

Thomas Dooley

So movies that will put advertising into the marketplace. The volume there, we'll actually start to see a bit of an uptick, which is the first time that's happened in a while.

Operator

We'll take our next question from James Dix from Wedbush.

James Dix - Wedbush Securities Inc.

First, I guess for Tom. Looking at maybe in networks and the non-programming expenses, how should we be thinking about growth there? What are the puts and takes in terms of holding that down? How much further inefficiencies can you get because you've obviously taken a fair amount of cost out of the business already. And then secondly, just on your deal with Redbox, I was wondering if you could comment a little bit on the data that you've obviously seen in terms of the impact of your window on DVD sales and data, which some of your peers have talked about, indicating that they do see some benefit to a longer window on their DVD sales. Is there anything to reconcile there? Or is there any comment you could offer on that or the data that you have?

Philippe Dauman

This is Philippe. I'll take the Redbox question and turn over the expense question to Tom. As far as Redbox, unlike some of our competitors who were in litigation with Redbox, we had an agreement that gave us actual data over a 10-month period. So we had objective information. That data showed us that there was extremely little degradation in DVD sales, and the financial terms offered by Redbox for an earlier window far outweighed the degradation. Our competitors who have the 28-day window are getting much lower pricing in their Redbox deals. So thanks to our actually having real world data, unlike our competitors, we were able to make what we think is the best decision for us.

Thomas Dooley

On the cost side of the Media Networks, the business, we will be increasing the compensation line, which we held pretty tight last year. That will be a factor that will drive increases in costs. We're also looking at ways to expand some of our promotional dollars, what we used to promote shows, and that will be tied to the overall efficiency that we get from promoting those shows. So that will basically translate into higher revenue growth. So I think we will continue -- we've got some pretty good models in place to really be able to release dollars and spend as it relates to the overall revenue equation on the other side of it. And we've been very successful at driving more investment in higher margin dollars, which is improving our bottom line, and that's the focus that we've had across the company.

Operator

Moving along, we'll take our next question from Tuna Amobi from Standard & Poor's Equity Group.

Tuna Amobi - S&P Equity Research

So with regard to Rock Band, it seems like the strategic shift that you implemented recently is actually starting to stem the losses there. If you can provide a little bit more color on when you think Rock Band might actually attain profitability and any further changes along those lines that you're making. And separately, still within the gaming theme, I noticed that you've started to make even more concerted push into social gaming, Social Express, et cetera, and I think some time a couple of years ago, you had Flux as well. So obviously, casual gaming is one of your strong suits. So I wanted to get a sense in terms of gaming as a category? Any idea as to how much that business could grow? What's your longer-term strategy to kind of synthesize all of these platforms perhaps into one coordinated and centralized platform? So any color on your gaming strategy would be helpful and any quantification as well, just to get a sense of how much of your overall growth that might contribute over time?

Thomas Dooley

Let me turn a little bit back to metrics behind Rock Band and Philippe will talk more about the overall gaming strategy. Rock Band, we have put in place the deal with Mad Catz, the distributor that will distribute the hardware peripherals associated with the game unit. That substantially reduces or effectively eliminate the economic risk associated with that, which had been a drag on our previous earnings potential associated with the entity. The second piece of the equation deals with the deal we recently did with Microsoft around a dance game for the new Connect product that they have out there. We have great hopes and expectations for that, but the way we structured that deal, we believe we have little downside risk and all upside risk associated with that. As we roll forward here, Rock Band 3 will be distributed in the marketplace. We think it's got great potential, we'll be very cautious on inventory levels that we put into stores. So we have the ability to realize profits finally on this segment, and we're very excited about that and very optimistic about it.

Philippe Dauman

And really the Rock Band strategy, it's really been reducing the risk. So going forward, we don't have the risk that we experienced in the past and hoping for better rewards. As far as our overall gaming strategy, we are very excited at pushing our strong position in the casual gaming arena. We have great reach. We are now beginning a number of initiatives that will lead to subscription revenues for us, that will enhance virtual good sales. We think there's a lot of opportunity in the mobile platforms, as we go forward around the world. And incidentally, we're experiencing some good success in many of our international markets in this domain. And the Social Express acquisition, which you pointed out, it's very, very low cost. It's in keeping with our strategy as it relates to acquisitions, driving our business, very low cost really, helping our organic growth accelerating the development of social gaming, not the larger approach that you've been reading about in this arena. So we think we can drive revenues and have a good growth curve in that business.

Operator

Moving on, we'll take our next question from Alan Gould, Evercore Partners.

Alan Gould - Natexis Bleichroeder, Inc.

First, when I look forward to the September quarter advertising. If we look at it, how much is that going to be impacted by the weak upfront from last year? It sounds like the June -- if I remember correctly, the upfront last year, you sold, what, low 40s percent of your inventory, down about 8%, and that's probably what drove the June quarter to have lower ad growth than the rest of the industry. Is the September quarter going to face that? And secondly, Philippe, I was wondering, if you could update us on the status of the YouTube litigation. Is that now over with, or is that going to be a continuing item?

Philippe Dauman

Yes, well, the September quarter is the last quarter that we'll have last year's weak upfront that we have to overcome. So that certainly is a factor in the September quarter. However, as I mentioned in my remarks, because of the continued strength in the scatter market and good ratings in our core networks, we expect to see sequential improvement in the rate of growth from the 4% that we delivered in the second quarter. As far as the YouTube litigation, we intend to pursue an appeal at the Second Circuit. The decision of the lower court allowed us to deal with the legal issues on an expedited basis without having to go through a protracted trial and the expense of a trial. So we look forward to the Second Circuit Court of Appeals to deal with this issue and the ruling, which was by the way inconsistent with rulings that have been made by other courts around the country.

Operator

Moving on, we'll take our next question from Matthew Harrigan, Wunderlich Securities.

Matthew Harrigan - Wunderlich Securities Inc.

Can you talk about how you think internally on a long-term basis about the ratio of home entertainment revenues to rentals? I mean, not just DVDs and even Redbox, I mean, a broadband over time. And really coupling international, as well as domestic. I mean, obviously, that ratios gotten blown out of the water, the last couple of years. Do you see that stabilizing? Or do you think that, that hits a slight inflection point when we got some growth in a few years as technology evolves and consumption patterns evolve?

Philippe Dauman

Matt, that's right, the entire part of your question. But as far as the sales versus rentals, certainly, you are seeing rentals shifting from the box environment to the Redbox and other platforms. Rentals are increasing. Blu-Ray distribution is starting to pick up again as the consumer markets improve in certain markets, and that's an opportunity to drive greater margin product as we go forward. There has been some stabilization in DVD sales as far as new releases, but continued weakness in catalog DVD sales, and we see that continuing. The international arena continues to be a good opportunity as we see the revenues increasing in theatrical. It's also driving sales of DVD. So international is an opportunity for the studios.

Matthew Harrigan - Wunderlich Securities Inc.

Mor on the frame of home entertainment sales to your box office receipts, not the sales versus rental.

Philippe Dauman

The conversion rates sure have stabilized on new releases.

Operator

We'll take our next question from Ben Swinburne from Morgan Stanley.

Ben Swinburne - Morgan Stanley

Tom, can you just remind us as we look out to the rest of this year, I think, Nickelodeon has a sizable amount of licensing revenue that comes in seasonally with calendar Q4, although you may book that on a sell-in basis. So I was wondering if you could just talk about what you're hearing from retailers and what the year-on-year compare looks like? I think, the last couple of years, obviously, the consumer has been on a tough spot. So are the comps sort of favorable this year, and how we should be thinking about that piece of the business moving into the back half?

Thomas Dooley

Yes, we see great interest from the retailers this year in terms of both the volume and breadth of product that they'd like to carry in the stores as it relates to the CP that we have available, and we hope that will be a big piece of our new fiscal first quarter and look forward to it. We are seeing some good order volumes there, as I said, around some of the great traditional products that we have available for them, and that's product both on existing franchises and some new franchises that we've introduced. We don't get that granular on any specific dollars and cents associated with that, but we do see that as a category that will drive growth in the Nickelodeon.

Philippe Dauman

And it's the 10th anniversary of Dora the Explorer, so a big celebration you can see in the marketplace.

Ben Swinburne - Morgan Stanley

I don't know if you have considered selling Epix or Epix content through Netflix, sort of similar to what Starz is doing. I know that Epix is looking at different sort of distribution models than the traditional pay network, but I wanted to just bounce that idea off you, Philippe, and hear your thoughts.

Philippe Dauman

Well, Epix does well. It's doing well now we're in the marketplace with several distributors we've reached agreements with earlier. We are looking at all forms of distribution going forward, and Epix will be announcing a new distribution agreement pretty shortly.

Operator

We'll take our next version from David Bank, RBC Capital Markets.

David Bank - RBC Capital Markets Corporation

I guess first question is, you've given us a sense, I guess, that the buyback is going to take place kind of proportionately with your seasonal cash flow generation. But can you give us a sense like over what time period we should expect the authorization to be used over? And then two quick ones. The second is, Philippe, could you give us a sense of the magnitude of the acceleration or kind of how you're currently pacing or some more color? And then lastly, I just want to make sure I got what Tom said. On the equity line, are the Epix equity losses going to be consistent with the last couple of quarters, or were you talking about the other businesses in there like the India investment and stuff?

Thomas Dooley

Well, the Epix equity losses will go down as Epix moves closer to breakeven throughout the end of this year and into next year, 2011. So there will be other items in there, whereas, we make different investments in some of the smaller entities or 50% joint ventures or less joint ventures that we have ownership interest in and that will keep that line pacing around that level.

Philippe Dauman

As far as the buyback goes, we expect to initiate it again in the next quarter. We expect to execute it on a steady basis, looking at what our cash needs are and being consistent with our leverage ratio objectives at the approximate 2x leverage ratio. But we think based on our cash generation and our capital needs that this will be a significant pace as we go forward. And what is your question on acceleration?

David Bank - RBC Capital Markets Corporation

Order of magnitude, so a little bit more color around the improvement you're seeing sequentially.

Philippe Dauman

In advertising sales?

David Bank - RBC Capital Markets Corporation

Yes, domestically.

Philippe Dauman

Well, basically we're still, as I indicated in a response to an earlier question, we're still dealing with last year's upfront, and that's being made up and then some by a good scatter market. And once we get into October and into December quarter, we will benefit from this upfront, where we have some greater volume than last year at higher pricing, and we see no reason why the scatter market shouldn't continue to be strong, and we'll able to ride the solid ratings we have at our key networks. And our objective, of course, is to try to keep that sequential growth going.

Thomas Dooley

It's important to note that our older skewing networks like the TV Land, the Nick at Nite and then to some extent, CMT, are very high demand networks and are pacing at great growth rates as we've talked about. The majority of our demo that we have to sell are in the younger skewing demographics, and those have recovered at a slower rate than the older skewing demos. We are seeing an acceleration in the advertisers, who are advertising to the younger demos. And we think that, combined with the new upfront that we just completed will help us launch our advertising revenues and accelerate the growth there.

James Bombassei

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

Operator

Thank you. That will conclude today's conference. We thank everyone for their participation.

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