Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Viacom (NASDAQ:VIAB)

Q3 2014 Earnings Call

August 06, 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

John Janedis - Jefferies LLC, Research Division

Michael Nathanson - MoffettNathanson LLC

David Bank - RBC Capital Markets, LLC, Research Division

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

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

Brian W. Wieser - Pivotal Research Group LLC

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

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

David Carl Joyce - ISI Group Inc., Research Division

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

Operator

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

At this time, I would like to turn the call over to Senior Vice President of Investor Relations, Mr. Jim Bombassei. Please go ahead, sir.

James Bombassei

Good morning, everyone, and thank you for taking the time to join us for our earnings call for our June 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 CFO. Please note that in addition to our press release, we have slides and trending schedules containing supplemental information available on our website.

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

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

Sumner M. Redstone

Thank you, Jim. Good morning, everyone. Viacom continues to build its leading brand and build outstanding value for its shareholders. As our industry continues to evolve, our management team is keeping right on position for even greater success.

Now I'd like to turn the call over to Viacom's CEO, my great, great 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 third quarter of Viacom's 2014 fiscal year. Viacom is in great shape. Audiences are enjoying our programming in more ways than ever across screens and around the world. Paramount Pictures delivered the global mega hit of the summer in Transformers: Age of Extinction, the highest-grossing film of all time in China, and we continue to return significant capital to our shareholders.

Let's look at a snapshot of our financial performance for the quarter. Tom and Wade will go into greater depth in a moment. Revenues decreased 7% to $3.42 billion, reflecting revenue declines in Filmed Entertainment, partially offset by increases in Media Networks. Operating income rose slightly to $1.09 billion. Adjusted net earnings from continuing operations decreased to $618 million. Adjusted diluted earnings per share were up 10% to $1.42.

As always, we maintain a strong balance sheet, allowing us to invest consistently in content across platforms and capture growth opportunities worldwide. And as I mentioned, we remain steadfast in our commitment to returning substantial capital to our shareholders. In the June quarter, we repurchased $850 million in stock under our ongoing stock repurchase program. In the current quarter, we plan to repurchase another $850 million in stock, and expect our buyback for the September-ending fiscal year to total $3.4 billion. Including dividends, we will have returned nearly $4 billion in capital to our shareholders by the close of fiscal 2014.

Speaking of growth opportunities, a quick update on our acquisition of Channel 5 in the U.K. We're well along in the regulatory process, and we expect the transaction to close by the end of this quarter. In the meantime, we continue to identify content and marketing synergies between Channel 5 and our current network portfolio. As we've said, this acquisition is a fantastic opportunity for us to grow our business in the strong U.K. market with a great free-to-air asset. We're looking forward to our bright future with Channel 5.

Returning to our results. At our Media Networks, domestic advertising revenue increased 1%, and worldwide advertising increased 2% in the June quarter. In the current quarter, which has a difficult comp against double-digit growth last fiscal Q4, we expect domestic advertising to grow low-single digits.

It's been widely reported that this year's Upfront selling season was relatively soft, with most networks seeing decreases in volume as a few major advertisers held back dollars. While the market generally was indeed challenging, our Media Networks outperformed, and we grew volume in the low to mid-single digits over last year. This positions us very well for next year. This is a credit to the strength and vibrancy of our brands and our ability to create value for our marketing partners in new, innovative ways. Our new Viacom Velocity Integrated Marketing unit has driven tremendous business for us this year as it develops more and more custom campaigns and content for advertisers and connects advertisers to our huge social media footprint and wealth of data and insights on our audiences. These programs will only grow in importance.

The recent BET Experience is another great example of how we're creating new opportunities to work with advertisers. In its second year, BET nearly tripled the number of sponsors for the LA-based festival and substantially grew advertising revenue.

On the distribution side, total affiliate revenue was flat in the quarter, largely due to the lapping of our Amazon Prime deal in the comparable quarter fiscal 2013. Domestic affiliate revenue for traditional distribution grew in the low-double digits. With a strong fourth fiscal quarter, we continue to expect affiliate revenue to grow in the high-single to low-double digits for the full fiscal year.

In the quarter, we struck a number of distribution deals reflecting the breadth of opportunities at hand for us to serve audiences and monetize content. As we've mentioned, we opened the quarter with a successful renewal of our agreement with the National Cable Television Cooperative, extending our partnership with nearly 800 cable operators and 4.8 million subscribers nationwide. We also struck an agreement with Google Play, covering a wide swath of library content from across our brands. We completed a great agreement with Hulu, renewing our existing deal and bringing the entire library of South Park to the streaming service. Finally, in the current quarter, we secured distribution for EPIX on AT&T U-verse, growing the footprint of the network to nearly 50 million homes nationwide.

In the June quarter, many networks across television experienced rating softness, including a number of our own. Even in this landscape and amidst heavy competition from sports programming, we did have 2 of the strongest stories in cable in the quarter.

SPIKE marked its fourth straight quarter of year-over-year ratings growth with Adults 18-49 with increases in every key daypart. In fact, SPIKE achieved the largest year-over-year net ratings gains of any non-sports cable network in the demo. Bar Rescue led the way for the network. Remarkably, the show recorded its highest-rated cycle yet in this, its third season, establishing itself as appointment viewing even among a very crowded Sunday night field. Ink Master also continued to perform well, along with newcomers Catch A Contractor and Hungry Investors.

VH1 had the second-largest year-over-year net ratings gain of any non-sports cable network in the demo, right behind SPIKE. The network's hit series Hit The Floor and Love & Hip Hop: Atlanta were key drivers of that growth. More recently, VH1 successfully launched a new Thursday primetime lineup, highlighted by the solid performance of Candidly Nicole and the network's complex meditation on romance, vulnerability and human connection in the modern age, Dating Naked.

As we move forward, we're consistently investing in original content, and bringing more and more new programming to air. Nickelodeon has a torrent of new programming for us coming, including 9 new shows launching from the current quarter through the first quarter of calendar 2015, including the premiere of Dora and Friends this month and new live action series Henry Danger and Nicky, Ricky, Dicky & Dawn in September.

In the period through the critical back-to-school and Hard Eight selling seasons, Nickelodeon has 12 straight weeks of premieres, many of which are returning hit series that powered the network to substantial gains last fall, including Sanjay and Craig, and Teenage Mutant Ninja Turtles.

Nickelodeon also launched a new tentpole in the current quarter with the solid debut of the Kids' Choice Sports awards, which delivered on our expectations and BBSP's in total viewership. Advertisers loved it, too, with a number of the inaugural, as well as new sponsors, already committing to next year's show.

MTV just debuted its highly anticipated, scripted drama, Finding Carter, which is currently cable's #1 new series of the year with teens and the network's best scripted launch in more than 2 years. Carter is one of the many MTV shows that benefit remarkably from nonlinear viewing. Last week, the show saw a 104% lift in live-plus-3 playback.

Finding Carter joins the recently renewed Faking It in MTV's lineup of new scripted originals this year, along with the forthcoming Happyland. In addition, MTV has new episodes of hit series, including Teen Wolf, Teen Mom 2 and Ridiculousness this quarter. And of course, the 2014 Video Music Awards air live on August 24. The VMAs have confirmed fantastic performers like Usher and Ariana Grande and already booked greater ad revenue than last year's show.

In the current quarter, Comedy Central has hit an all-time high in volume of original programming, which now accounts for more than 50% of its schedule. In fact, Comedy is hitting its peak in terms of quantity and quality. It recently earned 21 Emmy nominations, a new best for Comedy Central, which also had more shows nominated than ever before. Remarkably, 4 out of the 6 nominees in the Outstanding Writing for a Variety Series category are Comedy Central shows. One of those series, Key & Peele, returns in the fall, as does the enduring hit, South Park. The sheer volume of original programming we're producing now and the ever-multiplying ways in which we're delivering it to audiences underscore the ongoing transformation of the viewing landscape.

When we look at video consumption across the many screens we program -- Linear TV, DVR playback, VOD, apps and streaming services -- we see overall viewership outside traditional measurement is growing strongly. This aggregated growth speaks to the continuing demand for high-quality content and the vitality of our brands. It also points to the yet untapped potential we see as new measurement tools are introduced, some as early as next quarter.

Across Viacom's networks, total video consumption of our full episode programming has grown year-over-year, with a number of our series seeing dramatic lift when you factor in time-shifted and on-demand viewing. Take MTV's Teen Wolf for example, a show with a very tech-savvy audience, an entire online and social media culture onto itself. Live-plus-same-day ratings for the just-completed cycle of Teen Wolf were up 18% among all viewers over the show's debut season in 2011. But when you factor in all measured screens, the total audience of the show is up 38% over the same time frame.

Comedy Central's Inside Amy Schumer is another great example. The show grew ratings in its recent second season over its first, but it doubled its total video consumption on nonlinear platforms, VOD, SVOD, and of course, the Comedy Central app. This show does particularly well in the day-4-plus window on VOD, which represents a great opportunity for us as dynamic ad insertion increasingly comes into play.

Moving on to international. We continue to expand and diversify our brand portfolio across the world. The June quarter saw the launch of a number of new networks, including the Paramount Channel in Romania. We've now launched 28 channels internationally since the beginning of 2013, and we will continue a steady pace of channel launches as we go forward and establish a platform for a much bigger international business.

We've also benefited significantly from the improved ad market abroad and the strategic moves we made during the economic downturn. International ad revenue increased 20% in the June quarter. MTV Italy continues to be a great story for us, with ratings up 20% since we acquired full ownership of the channel last fall. We launched the Paramount Channel in Spain 2 years ago and it has since grown to become the most-watched network in our international portfolio, with ratings up 50% in June. Currently available in 5 international markets, the Paramount Channel will take another big step forward when it launches in Latin America in November.

In Filmed Entertainment, the big story at Paramount Pictures is the biggest movie of the year thus far, Transformers: Age of Extinction, which recently surpassed $1 billion at the worldwide box office. The film now stands as the highest-grossing theatrical release of all time in China, a crowning achievement in its phenomenal international run.

Paramount announced last week that it has extended its first-look deal with film maker, Michael Bay, the visionary behind the multibillion-dollar Transformers franchise and many of the most popular films of the last quarter century. Hercules is also off to a strong start, with a solid debut domestically and internationally. The film will continue to roll out internationally over the next few months.

And this weekend, Paramount's Teenage Mutant Ninja Turtles hits theaters, which marks another milestone in our revitalization of the franchise since acquiring it in 2009. Following on the heels of the film, Nickelodeon is rolling out 26 new episodes of the animated series, and continues to grow and build out new categories of the very successful Turtles consumer products lines.

Speaking of Nickelodeon, we announced earlier this week that Paramount Television will produce a live-action TV series based on Paramount Pictures' 2003 musical comedy, School of Rock, for the network. The series, which debuts in the spring of 2015, marks Paramount TV's first foray into children's programming and its first straight-to-series order. This announcement is the latest in a flurry of activity at Paramount's new television unit. We also recently announced that Oscar-winning screenwriter, Dustin Lance Black, will script his forthcoming Lindbergh limited-series event. Additionally, Paramount TV announced a first-look deal with Oscar-winning director, Robert Zemeckis, who has a long and storied history with the studio from Forrest Gump to Flight.

To close, we see a lot of opportunity at Viacom. We continue to invest more than $3 billion a year in content and connect with audiences that are consuming entertainment in more ways, across more platforms than ever. We're investing to capture growth opportunities, both at home and abroad, whether it's distributing and monetizing our content on new platforms, building or acquiring new networks internationally, or building robust television production, film animation and consumer products businesses. As ever, our focus is to continue to deliver results, create value and return substantial capital to our shareholders.

Thank you, and now 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 June 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 1% compared with the prior year. Domestic revenues were up 1%, while international revenues grew 2%. Page 10 of our web deck provides a breakdown of our Media Networks revenue performance.

In terms of advertising, worldwide revenues were up 2% in the quarter. Domestic revenues were up 1% and international revenues increased 20%. The growth in international advertising reflects the impact of new channels, including MTV and other -- MTV Italy and other channels, as well as continued improvement in the European marketplace.

In terms of affiliate revenues, domestic revenues were flat year-over-year, while international revenues were down 5%. Excluding the impact from the timing of product available under certain distribution agreements, domestic affiliate revenues grew low-double digits in the quarter. The decrease in international revenues was due to the timing of product available under certain distribution agreements, partially offset by new channel launches, increases in subscribers and higher subscriber rates.

Expenses increased 4% in the quarter. Within operating expenses, programming expense grew 8%, while distribution and other expenses declined 17% year-over-year. SG&A expenses increased 3%. The decline in distribution and other expenses primarily reflects lower participations related to the timing of product available under certain affiliate distribution agreements.

Media Networks adjusted operating income was down 3%, and the adjusted operating income margin was 43%, a margin decrease of approximately 180 basis points compared to the prior year. The decline in adjusted operating income primarily reflects lower revenues from certain distribution arrangements and the increase in programming expense during the quarter. The margin decrease was driven by top line growth of 1%, which was more than offset by the 4% overall growth in expenses.

Moving to Filmed Entertainment. Revenues were down 26% in the quarter, principally due to the declines in theatrical and home entertainment revenues. Page 12 of the web presentation provides a breakdown of Filmed Entertainment revenues. Theatrical revenues decreased 43%, reflecting the number and timing of titles in the quarter. We released Transformers: Age of Extinction at the end of the June quarter, while we released Star Trek Into Darkness, World War Z and Pain & Gain in last year's June quarter. Home entertainment revenues declined 24%, primarily due to lower revenue from carryover titles, as well as the current quarter's releases. The decrease in TV license fees of 21% primarily reflects the number and mix of titles available in syndication.

Filmed Entertainment generated adjusted operating income of $55 million in the quarter as compared to $17 million last quarter -- last year. The increase principally reflects the number of current quarter releases.

Moving to taxes. The year-to-date adjusted effective tax rate was 32%, reflecting a 180-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 and international profitability. In terms of noncontrolling interest, the $43 million principally reflect -- represents the minority interest share of income associated with the renewal of a content distribution agreement.

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

Thomas E. Dooley

Thanks, Wade. I'm going to talk about our cash flow and debt profile, as well as the return of capital to our shareholders. I'll also cover factors impacting our September quarter.

For the quarter, we generated $571 million in operating free cash flow compared to $728 million last year. Page 5 of the web deck presentation provides the components of free cash flow. Decline in operating free cash flow in the quarter was due to higher cash taxes, which was primarily due to the sunsetting of provisions allowing for accelerated deductions related to domestic film and TV production expense.

As for our debt, it is principally fixed rate with an average cost at quarter-end of 4.6%. In April, we completed the redemption of the $600 million outstanding of our 4.375% senior notes that were due in September.

In terms of our short-term funding, to the extent we had incremental borrowings, we are funding this in the commercial paper marketplace at an annual rate of approximately 25 basis points. We had no variable rate borrowings at quarter end.

As for our leverage, we ended the quarter with $12.8 billion of debt and capital leases outstanding. We had $1.6 billion of cash and cash equivalents. Our leverage ratio at the end of the quarter was 2.9x. At June 30, our $2.5 billion bank revolver was undrawn.

Our long-term commitment to return capital to shareholders continued in the June quarter. During the quarter, we returned a total of $980 million of capital back to our shareholders through our buyback and dividend programs, and we ended the quarter with 424 million shares outstanding. For the September quarter, we are on pace to purchase approximately $850 million of our stock, which means that for the fiscal year 2014, we will have returned a total of nearly $4 billion to our shareholders.

Now let's turn to some of the factors impacting the September quarter. In terms of our affiliate revenue, we continued to see long-term annual growth in the high single-digit to low double-digit range. However, quarterly affiliate revenue will fluctuate given the timing of transactions and the recognition of revenue related to certain distribution agreements, which are tied to product availability. Accordingly, for the September quarter, we anticipate that affiliate revenues will grow double digits as compared to the prior year.

For the full year, we continue to 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 booked tax rate of 32%, reflecting the mix of domestic and international profitability.

Looking ahead at Paramount's production and development pipeline, we are in production on the hybrid live-action and CGI-animated film, Monster Trucks, which is directed by Chris Wedge. We are also in production on a reboot of Terminator, which is a coproduction in partnership with Sky Dance and is scheduled for release in July of 2015. And later this month, we will be going into production on Mission: Impossible V. The studio is also in development on a number of sequels to existing franchises including Star Trek, World War Z and Beverly Hills Cop.

In summary, we remain committed to investing in our brands, increasing the level of original programming on our networks, and strengthening the connection with our audiences on every screen. Our industry is evolving and consumers have an ever-increasing array of choices and ways to consume our content. Our continued investment in our organization, in our infrastructure, as well as advancements in technology, is enabling us to monetize our audiences as the industry evolves.

As we partner with distributors, we are increasingly able to deliver targeted ads to our viewers, both in our apps and on VOD through the use of dynamic ad insertion and first-party data. Advertisers are increasingly looking for new and innovative ways to reach their consumers. Our investment in specialized products within our ad sales offering, like Viacom's Velocity and Viacom's Echo, is enabling us to develop unique integrated marketing opportunities that create additional value for our advertisers. As Philippe mentioned, these were instrumental in helping us drive the increased volume in this year's Upfront. These investments and initiatives, combined with our continued focus on driving operating efficiency and on returning capital, will drive value for our shareholders.

As a matter of fact, if you go back to when we restarted our share buyback program in 2010, through the end of this fiscal year, we will have returned a total of $15.7 billion of capital to shareholders over the full year period. Our market cap, when we restarted the current program, was approximately $22 billion. So this represents a 70% return of capital as compared to our market cap at the start of the program. Our leverage ratio has gone from 1.9x during that period to 2.9x now within -- and it stays within our target range of 2.75 to 3.

With that, I want to turn the call over to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first one from John Janedis from Jefferies.

John Janedis - Jefferies LLC, Research Division

Philippe, you spoke to the soft domestic ad market. On the Upfront, were there particular categories where you gained share? And on the international side, can you speak to profitability and channel launches going forward? Does the Paramount Channel launch plan slow given penetration?

Philippe P. Dauman

Sorry, what was the last thing about the Paramount Channel brand?

John Janedis - Jefferies LLC, Research Division

Does it -- does the Paramount Channel launch plan slow given the penetration increases?

Philippe P. Dauman

Okay, so in terms of the demand on -- in the advertising marketplace, there were certain advertisers in the consumer goods sector and the automotive sector who chose to either defer or withhold dollars from the upfront marketplace. And at the same time, there was some softness in some of the same sectors in demand in the scatter market. We have strength with many of our traditional advertisers, whether it's the movie category, new -- all the many new devices that are coming out, fast food areas, things like gums and other categories that we are strong in. And as both Tom and I mentioned in our remarks, we were greatly helped by the -- the targeting, the integrated marketing solutions that we were able to offer as part of this Upfront, and we were able to capture dollars and, we believe, gain market share in the Upfront. As far as our international launches, we are benefiting from an upturn in the advertising market, primarily in Europe. We're also benefiting from the channel launches we have done thus far, Paramount Channel being a new brand that we are rolling out. Obviously, as we achieve improving results in international, we are also absorbing the launch cost of Paramount Channels across our international footprint, but that will set a base for -- really enhance the growth as we go forward. So this is a good situation that we're in, in international because we're able to grow our aggregate profitability, while at the same time, investing a lot in our future growth. So we're going to have -- once we establish this brand, we're planning to launch another brand shortly. I've talked before about the SPIKE brand. We will have a much bigger platform, which we'll be able to monetize, both in distribution and advertising, consumer products in the case of our many Nickelodeon brands.

Operator

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

Michael Nathanson - MoffettNathanson LLC

Philippe, I have 2 for you, particularly on the advertising theme, first domestic. This is your third straight quarter of ad growth that's come in weaker than we first expected into the quarter. So what do you think is driving that weakness in scatter? And what do you think improves that scatter in terms over the back half of this calendar year?

Philippe P. Dauman

Well, in the case of this quarter where we had, at the beginning of the quarter, we were looking to mid-single digit growth and ended up at 1%. I would say about half of the difference related to the soft demand that we talked about before and half were some ratings issues at individual networks, in our particular case. And that the latter part, we expect to improve as programming rolls out. In terms of the back half, we see an improving economy. We do believe that some of the dollars that were withheld in the general Upfront market will be coming back in the scatter market. Some advertisers made the calculation that, either because of their individual situation or their perception of the general marketplace, that they would not be greatly disadvantaged by waiting for the scatter market and they would gain flexibility by waiting for the scatter market. Some of those advertisers who tried that in some prior years ended up costing themselves more money. We'll see what the future brings, but we do see a continued improvement in the economy. We do see a more competitive sector so we do expect, in that kind of environment, that the scatter market will pick up steam as the year progresses.

Michael Nathanson - MoffettNathanson LLC

Okay, let me ask you a quick one on international. You mentioned MTV Italy as a helping network. I know you spent a lot of time redoing your MTV Brazil partnership. So are you seeing any benefit now in the ad numbers from Brazil or is that to come?

Philippe P. Dauman

Yes, MTV Brazil is really -- we've been expanding our distribution there. Our -- the ratings position has improved significantly in Brazil. We are currently in discussions in Brazil to further expand distribution of MTV and other brands.

In Latin America, in general, we see great opportunity. We have a great focus on that. As I mentioned in my remarks, we are launching the Paramount brand in November throughout many territories in Latin America, which will give us more heft on the distribution side and advertising side. So this is an opportunity that we had not monetized very strongly to date. And we -- for ourselves, we have a lot of catching up to do, and we are devoting a lot of effort to doing so.

Operator

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

David Bank - RBC Capital Markets, LLC, Research Division

Two questions, I guess. The first one is, if you could you can give us an update on the sort of TV production-side initiatives at Paramount, both from a, maybe, kind of projects in the works and when we might expect to see some -- the first kind of slate of shows and financial impact from that. And the second is kind of more big picture on the advertising side, forgetting maybe fiscal 3Q or 4Q. But you guys have been more forward thinking, at least from the outside, it looks like in terms of integrated digital, as well as traditional, linear advertising. And a lot of what you read in the press about the softness of the Upfront seem to suggest that some advertisers were moving money from traditional into digital advertising. Did you see any of that across your platforms as you sort of observed where money was being spent? And I guess, in a related sense, do you think that there's been a shift in the intermediate-term trajectory, kind of sustainable rate of cable advertising? [indiscernible] of growth?

Philippe P. Dauman

On the, David, on the TV production initiative, Paramount is making announcements as shows are gelling and getting distribution, so you will see a steady stream of announcements. The most recent one, of course, was the School of Rock with our very own Nickelodeon. The nice thing about our production activity in the current environment, which is a very good one for production activity, is we're able to build up this entirely new business with a very low overhead and a very low cost and, also, very little capital employed. So it will not have a major financial impact right away, but I think, as we continue to build it out over the next fiscal year, it will produce meaningful results to Paramount after that and it will be a steady build from there. So this is an exciting new business that will create strong long-term value for us. In terms of the big picture on the advertising side, in this Upfront, I think a major factor was really certain [indiscernible] -- particularly large advertisers who withheld dollars from the Upfront and every indication and it certainly seems to have been confirmed by remarks from some of our peers out there, every indication is that some of those dollars will come back in the scatter. And some of the other dollars may not come back, but it's more because of some difficult circumstances that an individual company or 2 are at in their general business where they're trying to save some dollars in the short term. At the same time, there are trends out there, which we are trying to and succeeding in participating in. There are a lot of dollars to capture by making use of data and putting our content out there on new platforms and getting monetization. And monetization is, of course, facilitated once you get measurement and that is improving. We're getting it on our own apps, because we have the data ourselves. Nielsen is rolling out a new measurement of mobile devices next quarter. That will help. So all the trend lines are such as to favor monetization on other platforms. And we are moving in that direction because our audiences are adopters of these other platforms. Our content is already being viewed by them. We're not getting the full monetization today because of some lag in the measurement and that will catch up over time.

Thomas E. Dooley

David, just to add to that, our -- Viacom's Echo product is a product where we joint venture with a company called Mass Relevance to measure Viacom's earned media across the social spectrum. So as dollars do move to digital, we're able to follow those dollars because a lot of the digital movement -- a lot of the activity in the digital space is consumption of our content and other big media companies' content. And we're now able to work with advertisers to measure that earned media, provide them with accurate statistics as to how their brand and their message travel across all those social platforms. And as Philippe said, the better we're able to measure that, the better we'll be able to -- and sooner we'll be able to, monetize that brand message being echoed across many platforms.

Operator

And our next question comes from Alexia Quadrani from JPMorgan.

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

Just jumping back to your commentary on the international business. I guess, what inning do you think you are in international expansion and your efforts to improve profitability there? I guess, any way you can give us some more color on the size of that opportunity?

Philippe P. Dauman

I think it's a huge opportunity. It's an opportunity that will not stop, so we are very early. I think the potential is -- so for many, many years of continued growth. I see double-digit annual growth in operating income from here on in, and I see our international business having the potential to become very big. This acquisition we're going to -- we expect to close this quarter of Channel 5, will build our business in a country that is very strong for us and where the economy is doing reasonably well, and it will be good for us in the U.K. But also, it's part of our ability to produce a lot more international content, which we will be able to distribute, not just in U.K, but around the world as we build existing brands and launch new brands. So this is a very, very big opportunity. In addition, on the distribution side internationally, there's some places where there are obstacles to traditional distribution, and we are benefiting and we see that growing from distribution on -- whether it's an SVOD platform, whether it's a distribution of certain content on mobile. So we just see a lot of opportunity across the board in many parts of the world.

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

And then just a follow-up on your -- I think, your commentary earlier about seeing -- expecting low single-digit growth in domestic advertising in the September quarter despite very challenging comps. Is that just from your -- is that from your expectations of the scatter lifting, like you had mentioned? Or are you actually seeing, I guess, little bit of a pickup as you're entering that quarter?

Philippe P. Dauman

Well, again, another way -- everybody's pretty much closed out their Upfront season. You're seeing the market normalize a little bit in the scatter market, the pricing is strengthening a bit in the scatter market and, yes, we'll see how it unfolds. We do have a -- last year's quarter is a very strong quarter for us, so we're lapping that. And we're still early in the quarter. We'll see how it plays out.

Operator

And we'll take our next question from Michael Morris from Guggenheim Securities.

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

Two questions. One, just back to the advertising potential from the distribution of your shows on multiple platforms. Can you talk about sort of the competitive environment there? You sound very bullish on the potential to see growth as the measurement improves. And I guess, my question is, do you feel that you are in a stronger position relative to your peers? Does the data that you have show that you can actually be share takers across platforms as that measurement improves? And then my second question is on the slate at MTV. I think Susanne Daniels has been with Viacom for about 1.5 years at this point. And I'm curious as you look at the slate of programs and the mix of sort of scripted versus non-scripted and the amount of new programming on MTV, do you feel like you've sort of achieved the mix that you want to be at? Or is this something that's still evolving? And anything that you can point to for how that mix would evolve from here would be helpful.

Philippe P. Dauman

Okay, Michael. Yes, there's evidence that our content performs very well in new platforms. Just take VOD, our content really outperforms our peers' content on video-on-demand. Our viewers, who are young -- remember, we are very young-skewing -- if you look at demos, we are the leading family of networks when it comes to teens in 2 to 34s. We have 30%-type market share in cable in those categories, and those are heavy users of new technologies. Those are -- they look at VOD. They use devices. So to the extent that we can monetize that, we will disproportionately benefit as compared to producers of content geared toward older audiences. We also happen to have a greater mix of original programming compared to other programmers. And again, original programming is what will play the best in these new platforms. As far as the programming on MTV, Susanne has done a great job in developing compelling scripted shows, which really drive our audiences. We also have a good slate of reality programming on the boards. We're also looking at some individual animated possibilities. So this is a continuing building effort as part of our overall Viacom plan to increase the level of compelling original programming that will play well on all platforms. This is a big initiative of ours. At the same time, we're also looking at creating much shorter-form content directly using these new platforms -- non-television content. That's also a separate opportunity that we're devoting new resources within our company to participate in.

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

If I could follow up on that, how -- what would be the plan for capitalizing on a different form of content? I mean, would that go on to linear networks or through your existing web properties? Or would you look to invest in different web properties to monetize that?

Philippe P. Dauman

Michael, as you know, we're launching a lot of apps. We think that the apps should have not just the television content that we have, but it should have a lot of complementary content and social media connections. We have, on MTV, we have a very successful budding effort to provide topical information of what's happening in the culture on our websites and our apps. And more broadly, we see mobile operators, the big ones like AT&T and Verizon and others, really looking as we go into the future to enhance their mobile and make case for small devices, mobile video content. And so we think there will be new opportunities on both distribution and advertising side to monetize "made for those platform" short-form content, and we're already working on that.

Operator

And our next question comes from Brian Wieser with Pivotal Research.

Brian W. Wieser - Pivotal Research Group LLC

Just following up on your comments on the strength of viewing on other platforms. I was wondering if you can give us any updated thoughts on how you think the inclusion of mobile-device-viewing data will impact reported viewership or ad revenues on Nick and kids' channels in the year ahead. And secondly, I was curious about your thoughts about selling traditional TV inventory programmatically? Or otherwise, driving more data automation into the process of buying and selling.

Philippe P. Dauman

Well, as far -- if I understood your question on Nickelodeon, the opportunity to monetize content appearing in apps, we've launched the Nick apps very successfully. We are able to add some advertising elements there. We're looking at other -- for some of our other Nick brands and other opportunities we might have to really mine additional advertising revenues, either directly on those or in connection with our television offerings. So that is showing an opportunity for Nick. As far as programmatic advertising for -- in terms of the television product, we don't see much appeal for that right now. It is useful for certain digital product, what I'd call more commoditized inventory. And what we offer, we provide a unique offering, for which we get high CPMs, of premium inventory, integrated marketing opportunities, as Tom referred to, marrying that with social media. None of that is captured in programmatic buying, which really does not provide the value to advertisers that we're able to provide with our premium video content.

Brian W. Wieser - Pivotal Research Group LLC

I guess, on the mobile question, I guess, partially I was wondering about the consequences of OCR, in particular, and just given the issues around measuring younger audiences. But on the programmatic issue, I guess, I was also thinking more on the -- your longer-tail inventory. If there -- if you see any opportunity for the Saturday, 10:00 a.m. on your lowest rated network, for example, if you see any opportunity? Or if again, it just doesn't make sense in the context of how you sell?

Thomas E. Dooley

Brian, as you know, we still run a schedule across many of our networks, with some exceptions, some notable exceptions. For the most part that inventory, therefore, is not subject or applicable to the programmatic world. Where we do have some -- what I would label as remnant inventory, very little of it, and the amounts we have there, we do participate in the programmatic marketplace. But I don't think it's a significant factor in our business, as we continue to emphasize, as Philippe said, how to work with advertisers to come up with integrated marketing solutions to turbocharge their brand region consumer focus.

Operator

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

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

I have 2. The first, Tom, you said affiliate revenue in September is going to be up double digits. Is that low double-digits? Teens? Any range you could give would be great. And then, Philippe, you talked about the Upfront. The volume was up to low- to mid-single digits. What about CPM increases for your portfolio?

Philippe P. Dauman

So as far -- I'll take -- on the affiliate side. Yes, as we indicated, we expect the full year to be high-single digit to low-double digit. So I think you can -- knowing the results of our first 9 months, you can figure out the range we expect for affiliate revenue in this quarter. So in short, it will be not low-double digits. As far as the Upfront CPM...

Thomas E. Dooley

Upfront CPM, we're -- very adeptly managed by our ad sales force. The folks that gave us significant volume increases, paid CPM increases in the low to mid-single-digit range. The people that did not give us significant volume increases paid in the high single-digit range.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Got it. Philippe, can I just ask you one more question on what's driving the variability in the September quarter for affiliates used?

Philippe P. Dauman

Well, again, within our affiliate revenue base, if you look at it on an annualized basis, and as Tom mentioned in his remarks, we have quarterly fluctuation that is really caused by product availability under deals with companies like Amazon, like Hulu, like some of the others that we deal with. And their -- we have the revenue recognition ties into product availability. So you get some variations when you look at last year's third -- third fiscal quarter, we had a big Amazon Prime deal that hit, which resulted in the flat affiliate fees we had in that quarter. This quarter, we have some different dynamics, where we have a combination of our continued steady, very strong traditional affiliate revenues, supplemented by, in this case, some better comps on the revenue recognition relating to product availability, and it's as simple as that. So on a full year basis, it all washes out, and when you get back to our consistent guidance year after year of high single-digit to low double-digit growth in affiliate revenues.

Operator

And we'll take our next question from Vasily Karasyov from Sterne Agee.

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

So given how the advertising revenue growth is panning out this year, I was wondering at what point investors should worry that the Viacom story, which is modest sub2 [ph] rating and earnings growth and a lot of buyback, is in danger? Is low double -- low single-digit advertising revenue growth in the U.S. enough for you to keep doing what you are doing, and what drove the stock price up?

Philippe P. Dauman

Well, Vasily, we have a lot of confidence in our growth opportunities as we go forward. We've been able to invest in growth. We have many opportunities for growth as we go forward. We think there are advertising opportunities that, in addition to the traditional ones, as we've been talking a lot about during this call, that relate to all these new platforms. We have the ability, thanks to the strength of our brands, our #1 position in all the important demos in our peers set, we're able to drive affiliate revenues at a consistent high single-digit to low double-digit rate. We are growing our international business very significantly. We are growing new revenues, whether it's television production, or animation efforts, consumer products, as we create content that is susceptible to ancillary revenues, including consumer products. So we see a lot of opportunity. We are disciplined in maintaining cost -- our cost structure, evolving our cost structure, while investing for the future, generating cash flow and really being focused on organic growth. Very targeted occasional acquisitions in the international arena, which will -- which we are very disciplined looking at as being accretive, and we believe we create a lot of value for our shareholders by returning capital to them. And that formula we've been consistently pursuing now for close to 8 years, Tom and I, and we will continue to do so.

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

Okay, so it sounds like the buyback is not in danger.

Philippe P. Dauman

Not at all.

Operator

And we'll take our next question from Vijay Jayant from ISI Group.

David Carl Joyce - ISI Group Inc., Research Division

It's David Joyce. Question on dynamic ad insertion again, if I could. I think you've got a -- the trial out there now with Time Warner Cable. I don't know what you can talk about there. I was just wondering how widely -- when that would be widely distributed? When do you think it moves the needle? Does it seem like it's more of a product beyond the C plus 7? Or is it more for closer in-viewing for on-demand? And is it more from incremental advertisers or your current advertising base, such as those that you were selling to in the Upfronts?

Thomas E. Dooley

David, the dynamic insertion is a great new opportunity for us. The Time Warner experiment has been a terrific one. However, the volumes have been very small. The demand on the advertising side with this kind of product is great. And the sooner we escalate it, I think the more advertisers that will participate with us, because it allows a lot of data to come into play and a lot more targeting capabilities associated with that advertiser, which draws very, very nice EPMs relative to a regularly distributed commercial insertion. We are working with the other distribution partners and anticipate dynamic ad insertion agreements pretty much on a national level over the next couple of quarters. And when that happens, then we'll be able to produce this kind of inventory upscale somewhere into the second half of 2015. And I think it will benefit significantly, our ability to grow advertising and be much more precise in terms of the delivery of audience. We're working with a lot of partners who are just trying to figure out how to define that audience delivery. There's a lot of revolution on the advertising side to define who that specific audience target is. But as we get better at that and they get better at that, I think this will be a very fast-growing piece of the equation. As far as when we're going to start dynamic ad insertion, we've been doing it after the third day in 4-plus, and that has been very successful for us. And we haven't moved to the C7 currency, as you've heard out there, and dynamic ad insertion is more of an emphasis for us than C7.

Operator

We'll take our last question from Barton Crockett from FBR Capital Markets.

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

I thought I'd ask a question about consolidation since it really hasn't come up yet on this call. The waves of interest in consolidation have kind of, obviously, crested and fallen here. But you guys have some experience here, at least on the other side. You used to be one with CBS. And I was just wondering -- obviously, it was a different world back then. But did you feel, when you were part of one company with a lot of networks that you would would've had more leverage than you do today? And do you see any viable argument that makes sense for a company like Viacom to merge to get bigger in the U.S. to combat the consolidation of cable?

Philippe P. Dauman

Barton, we are focused on creating shareholder value and fortunately, because of the consolidation that we participated in much earlier than this era, we have built up a portfolio of networks that is #1. We have the strategic scale today. We don't have to buy it to be there. So we're #1 in 2 plus, so age 2 to 102, we have the #1 market share in our network family for all viewers; it's over 17%. If you take 2 to 49, we have over 23% market share, #1; 2 to 34, 27.5%, this is all according to Nielsen, #1; teens, we're #1. I could go on, but we have the leading positions in all that, and that's why we are able to do well as we drive affiliate revenues. We provide good value at the same time. We are still a low-priced family of networks. We provide a lot of functionality. Our audiences are using our distributors' VOD platform very heavily. They are using a different device and services that our distributors are offering their own customers. So we are in good shape. We're focusing on creating value in all issues. That's our singular focus, how can we create more value in Viacom, and we've done well in that regard, and by the way, since the split from CBS. So, yes, we were together. We've both done well on our own as we've gone forward, and as we've talked throughout about this call, Viacom has a lot of opportunities to grow as we go forward. And it's strategically well positioned to do so.

James Bombassei

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

Operator

This concludes today's conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Viacom's (VIAB) CEO Philippe Dauman on Q3 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts