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Executives

Thomas Dooley - Chief Operating Officer and Director

James Barge - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

Sumner Redstone - Founder and Executive Chairman

Philippe Dauman - Chief Executive Officer, President and Director

James Bombassei - Senior Vice President of Investor Relations

Analysts

Jessica Cohen - BofA Merrill Lynch

Benjamin Swinburne - Morgan Stanley

Laura Martin - Needham & Company, LLC

Richard Greenfield - BTIG, LLC

Michael Nathanson - Sanford Bernstein

Alan Gould - Evercore Partners Inc.

James Dix - Wedbush Securities Inc.

Douglas Mitchelson - Deutsche Bank AG

David Bank

Viacom (VIA.B) Q4 2010 Earnings Call February 3, 2011 8:30 AM ET

Operator

Good day, everyone, and welcome to the Viacom Earnings Release Teleconference for the Quarter Ended December 31, 2010. [Operator Instructions] At this time, I would like to turn the conference 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 the quarter ended December 31, which is the first quarter of our fiscal year. Joining me for today's discussion are Sumner Redstone, our Chairman; Philippe Dauman, our President and CEO; Tom Dooley, our Chief Operating Officer; and Jimmy Barge, our Chief Financial Officer.

Please note that in addition to our press release, we have slides and trending schedules containing supplemental information available on our website. 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. Good morning, everyone. We're extremely happy to be here today. I'm glad that you joined us.

Viacom, as you know, generated solid results in our first quarter. And importantly, we are extremely well-positioned creatively, operationally, and financially for a strong fiscal 2011.

Our focus on creating the world's greatest entertainment. Greatest entertainment content defines Viacom. Today, everyone talks about the value of content. But at Viacom, we have always known that content that connects with audiences was the key to our destiny and to our long-term growth that our investors seek.

We have continued to nurture our global brands to ensure that they reflect our audience’s interests and that they reside with equal confidence in both the linear world and rapidly evolving digital world. Every year seems to bring a new opportunity, a new device for consumers to engage with our content.

As we work with our marketing and distribution partners, one thing is clear, our partners know that our brands serve as powerful connectors to the consumers they want to reach. With a clear mission, the right assets, unlimited creative fire power and a proven management team, Viacom. Viacom has what it needs to build on its success and capitalize on the many new opportunities.

Now, of course, I will turn this call over to my extremely close friend, Viacom's President and CEO, Philippe Dauman.

Philippe Dauman

Thank you very much, Sumner, and good morning, everyone. I'm pleased you could join us.

Viacom closed out the first quarter of our new fiscal year in great shape. Every part of the company is strong and getting stronger. 2011 is shaping up to be a terrific year.

During the first quarter of our fiscal year, we made progress on our top priorities. We continued to invest in revitalizing our brands and creating more original programming that will resonate with our audiences. We enhanced our marketing efforts, utilizing innovative campaigns and taking advantage of new media to build awareness. We further expanded our advertising base as the marketplace strengthens and built on our already powerful affiliate relationships. We delivered a compelling slate of motion pictures while maintaining a disciplined cost structure at the studio. And finally, across the company, we kept a close eye on maintaining and enhancing efficiencies, which helped us to drive strong free cash flow and to return capital to our stockholders.

Looking ahead, our businesses are firing on all cylinders. We have groundbreaking programming across every screen, and the audiences are responding in impressive numbers. This puts our Media Networks in an extremely good position as we prepare for the upcoming advertising upfront.

Internationally, our channel and programming strategies are driving broader distribution and strengthening our brands around the world. Our motion picture studio is in excellent shape. Operationally, the studio is stronger than it's been in many years, and creatively, we have an unparalleled lineup of franchise films coming to theaters this year as well as an enviable portfolio of projects in development.

Today, I will briefly review our financial results and spend some time talking about the highlights for our divisions. Jimmy and Tom will provide additional detail on our performance, and then we'll be happy to take your questions.

Now to the numbers. As always, we'll speak to the adjusted numbers during our discussion this morning. Our consolidated revenues were $3.83 billion in the first quarter, down 5%, as solid gains in Media Networks were more than offset by declines in our Filmed Entertainment segment. Media Networks delivered 6% growth in revenues and a 7% increase in adjusted operating income on strong increases in both advertising and affiliate revenues. The top and bottom line declines in Filmed Entertainment primarily reflect, as expected, a challenging year-over-year comparison in home entertainment.

Viacom's adjusted net earnings from continuing operations decreased 11% to $620 million in the December quarter, and diluted earnings per share were $1.02, down 11% from $1.14 earned in the prior year. We also continued to return capital to shareholders with the resumption of our stock repurchase program and our quarterly cash dividend. During the first quarter fiscal 2011, we purchased $400 million in stock, and we are on track to purchase another $400 million in stock in the current quarter.

For the full fiscal year 2011, we plan to purchase at least $1.75 billion in stock and expect to complete the remainder of our current $4 billion buyback program sometime in fiscal 2012. We also plan to discuss with our Board an increase our dividend beginning with the dividend payable on July 1.

Let's move on to our Media Networks. Our major cable networks are on a roll, and that strong performance is the result of our thoughtful and disciplined strategy over the past several years. In a nutshell, it's about investing in the right research, the right programming, the right marketing and the right people. Our top-flight and unique approach to market research provides us with a deep understanding of our audiences and ensures that our brands continue not only to resonate, but also to shape the viewing habits of those audiences.

Research informs everything we do: how we position our brands, how we invest our content dollars, how we program each network, we develop our marketing plans, even how we window and monetize content across new platforms.

Over the last three years, we have increased our research investment across our brand portfolio by more than 15%. Today, we're doing more consumer insights work than ever before at all of our brands. We are also sharing those insights further upstream in the content development process, not just internally, but also with the outside producers with whom we worked. As a result, we've steadily expanded the type of programming we put on our networks. More animation on Comedy, new scripted sitcoms on TV Land and CMT, a broader mix of scripted and unvarnished reality programming for MTV and more scripted programs for BET. You'll see all of those genres growing in our networks today because of our continuous investment in programming and programmers.

Even through the worst economic downturn in nearly a century, we continue to allocate resources to feed our content pipeline. Our investment in programming last year was 25% higher than it was when I became CEO in 2006, a compounded annual growth rate of about 6%. At the same time, through disciplined cost controls in every other area of the business, we were also able to expand our Media Networks operating margins, even as we operated through a major recession.

And since we own most of our programming, around 90% of some of our major networks, we can look forward to rapidly growing opportunities to monetize this content across multiple platforms and to expand it into new geographies around the globe.

All of this new content needs to be marketed in a way that breaks through the noise, and in this regard, our capabilities are unmatched in the industry. Today, we are investing in more off-channel messaging to raise awareness and bring in the audiences. We are also capitalizing on new and emerging media. For example, the MTV brand and individual show pages on Facebook collectively have more than 45 million fans, and in some cases, we're providing those fans with the tools to be our loudest advocates. Our consistent investment in research, in programming and in marketing, and, I'd add, superb execution, produces the kind of rating success we're enjoying today, which is exactly why advertisers want to be associated with our brands and on our networks.

Highlighting our deep connection with audiences, we announced today a new agreement Hulu, extending into 2012 a return to Daily Show with Jon Stewart and The Colbert Report to Hulu. Equally important, this deal creates a new and complementary window for our current and library programs on Hulu Plus that brings us new revenues through subscription fees and ad sales. A selection of current programs will be available to Hulu Plus subscribers beginning 21 days after they air.

Our domestic advertising revenues grew 10% in the quarter, driven by a strong scatter market. Kids, youth and adult spending on our networks all increased. We continue to attract non-endemic advertisers, particularly on our Nickelodeon networks, which attracted a number of new substantial advertisers in the packaged goods, auto and insurance categories. With a strong scatter market, money came in earlier in the first quarter as buyers became increasingly concerned about price.

Looking at the current quarter, we expect to again deliver double-digit growth in domestic ad revenues even though the Kids' Choice Awards, which was a major revenue generator in the March quarter last year, falls into the next quarter this year.

On the international side, we are also very much on track to deliver double-digit organic growth in ad sales in our fiscal 2011 second quarter. With strong ratings momentum and compelling new programming in the wings, we are looking forward to a particularly robust upfront this spring. So let's take a brief look at some of the programming highlights at our networks.

MTV is back on the moment. Its programming is attracting bigger, broader audiences than ever before, and it is driving the cultural conversation. Importantly, its success has been deep and broad-based. Last quarter, MTV had three of the top five original cable series with Jersey Shore, Teen Mom, and Sixteen and Pregnant. Strong programming across the network drove double-digit ratings gains in total day, prime, late night and weekends. And the ratings continue to climb.

Last month, the Season 3 premiere of Jersey Shore was the network's highest rated series telecast ever with 8.45 million viewers. In fact, Jersey Shore is a top five show on all of television, including broadcast, not just in young demos, but in 18 to 49 year olds, and this, at 10 p.m. on Thursday night, the most important night in television. And it continues to set new viewership records as the season unfolds, a trend I'm sure will continue all the way to Season 4 on the shores of Italy.

The audience for Teen Mom 2 has grown each week since its strong premiere in January, pulling in an average of 4 million total viewers, and the new original scripted series, Skins, averaged a 1.6 and 1.5 coverage rating in the last two weeks. Coming up, My Life as Liz returns for a second season, Real World heads to Las Vegas for its 25th season and we'll debut another scripted show, Teen Wolf.

BET, which has successfully implemented its new brand strategy, is now also enjoying its rising renaissance. We have more than doubled our investment in original programming for BET over the past several years, and it is paying off with a total day audience in the past month growing 23% year-over-year.

The cable debut of THE GAME last month ranked as the top, ad-supported scripted series premiere in cable history with 7.7 million total viewers. That was followed by the romantic comedy, Let's Stay Together, and it debuted to 4.4 million viewers. Ratings for both of these shows continue to be strong. The network is producing these shows in-house in Atlanta, which improves their cost structure, and they joined fan favorites such as FAMILY CREWS and BLACK GIRLS ROCK! as well as established BET tentpoles like BET Honors, Rip the Runway and the BET Awards.

Original programming on Comedy Central continues to deliver more core viewers. South Park and Tosh.0 both delivered impressive growth last quarter, and the latest Tosh season is building on that progress. And even though there are at the top of their game, both The Daily Show with Jon Stewart and The Colbert Report just keep getting better. Both shows increased their 18- to 49-year-old audiences by 8% in the quarter despite a new entrance in the late night category on cable. Comedy will continue to build on their success with great originals. It recently launched The Onion SportsDome and announced a new tentpole, The Comedy Awards, which will premiere at the beginning of the next quarter. We will air the Roast of Donald Trump in March. Donald, best of luck.

The Nickelodeon Kids and Family Group is on top of all their targeted demos and the networks continue to add new hits. Nick holds four of the top five preschool programs in commercial television led by Team Umizoomi. iCarly, Big Time Rush and Victorious rank among the top five live-action series for kids 6 to 11 and tweens 9 to 14. And the network is launching four new series this quarter.

The Nick at Nite audience increased 8% in the quarter, driven by its newest acquisition, My Wife and Kids. You can find strong original programming on each of our networks. Some are already blockbusters, like the award-winning Hot in Cleveland on TV Land. Others are solid hits, such as Celebrity Rehab on VH1 and Auction Hunters on Spike, and still others are up and coming, including Retired at 35 on TV Land, Blue Mountain State on Spike, and Working Class, CMT's first full-ranged of [ph] scripted programming, which premiered last week to a record 1.2 million viewers, making it the most-watched series debut in the network's history.

Now let me address our international operations. Last month, we announced the formation of the Viacom International Media Networks group, headed by Bob Bakish. This new organizational structure brings together all of Viacom's non-premium international television networks and related digital properties to create a far more efficient and influential organization. The growth potential of our media properties in international markets cannot be overstated. We have a well-established global footprint that we have been refining over the past few years, always striving to optimize our presence and increase distribution in the individual markets.

In the last quarter, we increased the distribution of Nickelodeon by 30% in Russia, moved MTV to a more widely distribute tier on Sky in the U.K., and launched three networks on a basic tier pack in Australia. We have also created substantial efficiencies by consolidating many of our international creative functions into two regional studios while still maintaining a local flavor in every market.

For example, we're garnering impressive audiences for MTV's Niñas Mal telenovela, which is number one in Colombia, Mexico and Argentina; and across Latin America, the Nickelodeon original telenovela, Sueña Conmigo, continues to rank high.

Properties such as MTV World Stage are powerful content assets globally, but they also build significant brand awareness of local loyalty where the live concerts are filmed. We expect our international operations to grow significantly in importance and even more significantly in profitability over the next several years.

Now let's switch to Filmed Entertainment. Paramount Pictures had an impressive first quarter to box office. The studio released or distributed seven films and chalked up an extremely high hit rate, driving our theatrical revenues up three-fold in the quarter. Our films received critical acclaim with numerous award nominations. Paramount garnered the most Oscar nominations of any studio: 10 for True Grit; seven for The Fighter, which already won two Golden Globes; two nominations for DreamWorks Animation's How to Train Your Dragon and one for Iron Man 2.

Our home entertainment quarterly results primarily reflect a challenging year-over-year comparison with the release of our three 2009 blockbuster films Transformers: Revenge of the Fallen, Star Trek and G.I. Joe: The Rise of the Cobra. As we move through the rest of fiscal 2011, we won't have those kinds of difficult comps. In fact, our successful theatrical releases will become a powerful home entertainment slate as the fiscal year unfolds.

As we saw with the success of films such as Jackass 3D, which is an MTV film, and Paranormal Activity 2, our focus on developing branded films and franchises is paying off. These types of films have a built-in fan base, which significantly increases their chance of success in every distribution window. You will see more of these branded and franchised films in the coming months and years. For example, next week, Paramount and MTV Films release Justin Bieber: Never Say Never, a film that was developed jointly by the studio and MTV and brought to theaters in record time. And I feel quite confident that Justin's impressive fan base will turn out in droves.

And next month, our tentpole Rango, a Nickelodeon movie starring Johnny Depp, hits theaters. Later in the year, we will distribute DreamWorks Animation sequel Kung Fu Panda 2 and, of course, the highly anticipated Transformers: Dark of the Moon in 3D and a terrific new franchise, Super 8.

In conclusion, we're off to a great start in fiscal 2011. The creative momentum in our major networks is building as we judiciously invest in original programming. This puts Viacom in the pole position in the race to capitalize on new opportunities for monetizing television content through emerging media here and around the world. We're excited about the potential for expanding our international businesses, and we know that our film studio is poised for a great year. Running our businesses efficiently will always be a top priority. But equally important is fostering an environment in which the tremendous creativity that exists across the company can thrive. We are doing both today, and we'll continue to do so tomorrow. And that will lead to even greater success for Viacom and for its investors.

Now I will turn it over to our CFO, Jimmy Barge.

James Barge

Thanks, Philippe, and good morning, everyone. I hope you've all had a chance to review our earnings release and web presentation summarizing the results for our December quarter, which is the first quarter of our fiscal year. Our 10-Q will be filed shortly.

This morning, I'm going to take you through our operating results in more detail. My remarks will focus on adjusted results from continuing operations. Adjusted results exclude from last year's December quarter $50 million of discrete tax benefits related to prior audit settlements, as well as a non-cash impairment charge at Media Networks related to certain broadcast licenses, which had a $60 million impact at the operating level and a $19 million impact on net income. As a reminder, Harmonix is classified as discontinued operation in all periods presented.

Now let's take a look at our segment results. Media Networks revenues increased 6% to $2.4 billion in the quarter. Domestic revenues increased 8% and International revenues declined 6% in the quarter.

Foreign exchange added two percentage point unfavorable impact on international revenues.

Page 9 of your web deck provides a breakdown of our Media Networks revenue performance. As Philippe mentioned, Domestic advertising revenues grew 10% in the quarter. International advertising declined 7% with Foreign exchange reducing the growth rate by three percentage points.

International ad sales in the quarter were impacted by the timing of event-driven programming. In terms of affiliate revenues, our domestic revenues increased 11% while international revenues increased 4%. Foreign exchange negatively impacted the international growth rate by two percentage points.

Approximately 80% 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 increases, new channel launches, as well as increased subscribers.

Now moving to Ancillary revenues, worldwide Ancillary revenues declined 18% in the quarter, principally reflecting lower consumer products and home entertainment revenues. The decline in home entertainment revenues reflects fewer releases compared to last year.

Media Networks adjusted operating income of $1.1 billion in the quarter was 7% higher than last year. The operating margin of 44% improved 60 basis points over the prior year. The improvement in the margin was driven by the 4% growth rate in total expenses.

Within expenses, programming expenses grew 10%, while SG&A expense grew 2%. The low-single-digit growth in SG&A expense was due to higher employee cost offset by the timing of advertising and promotion expense.

Now turning to Filmed Entertainment. Revenues in the quarter declined 16% to $1.5 billion. Page 11 of the web presentation provides a breakdown of Filmed Entertainment revenues.

Worldwide Theatrical revenues increased $323 million to $416 million in the quarter. The Theatrical results were driven by a greater number of releases in the current quarter, including the successful and profitable films, Jackass 3D, Paranormal Activity 2, True Grit and DreamWorks Animation's Megamind.

Worldwide Home Entertainment revenues decreased 44% to $638 million. As we had anticipated, the decline reflects difficult comparisons with last year's DVD release of Transformers 2, Star Trek and G.I. Joe, as well as lower catalog sales.

TV license fees declined 38% to $274 million. The decline in TV license fees principally reflects the number of titles available in the pay TV, foreign syndication and network TV marketplaces during the quarter.

Ancillary revenues increased 56% to $169 million as we benefited from the guarantee related to the sale of the distribution rights to the Avengers and Iron Man 3 to Marvel.

Filmed Entertainment generated adjusted operating income of $68 million in the quarter, which was $234 million lower than last year. The decline in operating income principally reflects the difficult comparisons with the prior year's home video performance of Transformers 2, Star Trek and G.I. Joe, as well as lower TV license fees, partially offset by the sale of the distribution rights to Marvel. Since no Paramount releases became available to our Epix pay TV joint venture during the quarter, there was no impact on Paramount's results.

Now moving below operating income, total company, equity income from investment was $24 million in the quarter. The income principally relates to our investments in Epix and our Viacom 18 India TV venture, both of which were profitable in the quarter. The effective tax rate in the quarter was 35%, reflecting a 100 basis point improvement over the prior year adjusted rate. The reduction in effective tax rate reflects an improved mix of taxable income from our international operations.

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

Thomas Dooley

Thanks, Jimmy. Good morning, everyone. I’m going to focus my comments on our cash flow, our debt profile and the return of capital to shareholders. I'll also talk about seasonal factors impacting the remainder of our 2011 fiscal year.

Now moving to our free cash flow for the quarter, we generated $701 million in operating free cash flow in the December quarter compared to just over $1 billion last year. Page 5 of the web deck presentation provides the components of free cash flow. The decline in operating cash flow was principally due to an unfavorable working capital variance and lower operating income, partially offset by lower cash taxes. The unfavorable working capital variance was impacted by the timing of annual incentive compensation payments related to the change in our fiscal year-end. So these payments we're made in the December quarter of this year, whereas last year, they were made in the March quarter.

In addition, working capital was negatively impacted by production spending for upcoming tentpole releases including Rango, Super 8 and Mission Impossible 4. As for our debt, for the most part, it 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 market place at an annual rate of approximately 35 basis points. We had no variable rate borrowings outstanding 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 $911 million of cash and cash equivalents. At December 31, our $2 billion bank revolver was undrawn. Our leverage ratio at the end of the quarter was 2x, which is our target level. The only financial covenant in our bank revolver requires that interest coverage for the most recent four quarters be at least 3x, and at the end of the quarter, our interest coverage was over 8x.

In terms of our commitment to return capital to shareholders, on October 1, we commenced purchases under our $4 billion stock repurchase program. For the December quarter, we bought back $400 million of our stock. On both October 1 and December 30, we paid a quarterly dividend of $0.15 per share. So in the December quarter, we returned a total of $582 million of capital to our shareholders. Looking ahead, we are on pace to purchase approximately $400 million of our stock in the March quarter.

Now I'd like to talk about some of the factors impacting the remainder of fiscal 2011. In terms of advertising and some of the timing factors, the Kids’ Choice Awards on Nickelodeon will air on April 2 of this year, whereas last year, it aired on March 27. Also, Easter falls later in April this year.

In spite of this impact, given the robust scatter market and the ratings success of a number of our new and return series, we anticipate that our domestic ad sales will grow double digits in the March quarter. We also anticipate that international ad sales will grow double digits in the March quarter, as we see strength in Europe and Latin America and as we benefit from a number of strategic initiatives including new programming launches as well as improved channel positions in certain territories.

At Media Networks, our targeted annual growth rate for fiscal 2011 programming expense remains mid-single-digits. However, due to the timing of new shows coming on air, this growth rate will fluctuate on a quarterly basis. We will find cost efficiencies in operating areas that will enable us to continue to enhance our margins as we invest in our programming. Given our current estimate of our domestic versus international profitability mix, we are now forecasting a booked tax rate of 35% for fiscal 2011.

As we look to the back half of our fiscal year, we are in great shape. At Media Networks, we have had breakout ratings performance for several new and returning series that we have launched. We are seeing stronger volumes in a number of key advertising categories, and we have made progress in growing several non-endemic categories.

At the studio, we are optimistic about our upcoming slate. On March 4, we will be releasing Rango, our new animated franchise picture under the Nickelodeon film label. In June, Paramount releases the J.J. Abrams directed Super 8 and on July 1, Transformers 3 in 3D will be released. In addition, we will be distributing Marvel's Thor and Captain America as well, as well as DreamWorks Animation's Kung-Fu Panda 2.

Given the growth in our earnings that we see as we progress through this year, we anticipate purchasing north of the $1.75 billion of our stock in fiscal 2011.

To wrap up, over the past couple of years, we have put in place a number of strategic initiatives that have begun to pay off and positioned Viacom for long-term growth. At Media Networks, we have put a renewed focus on research and understanding our audiences in order to develop programming that resonates with our viewers. We have increased the level of original programming on our networks and have seen the benefits of this translate into our ratings. We have secured long-term growth in our affiliate revenues, and we continue to drive efficiencies in our operations, which have enabled us to grow our core margins for the last seven quarters. At Paramount, we have rationalized our investment in film production and focused on developing franchise films. This has put the studio on a path to greater profitability and higher margins. We have also invested in several joint ventures, both our Epix pay TV and our Viacom 18 India TV ventures have transitioned from the investment stage to successful and profitable operations that create asset value for our company.

In addition, we have enhanced our balance sheet and our financial position, which will enable us to continue to return significant capital to our shareholders over the coming years. Combined, these initiatives have put us on a path to a strong top-line and bottom-line growth and improving returns for our shareholders.

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

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Doug Mitchelson from Deutsche Bank.

Douglas Mitchelson - Deutsche Bank AG

Philippe, I think the improving content cycle is the real story here, right? So at this point, given your race of events [ph] is probably better than any of the other major groups. Does it follow that in this year's upfront, your CPM increases should be higher than peers, because it's been a few years since that's been the case? If I could ask a second, just curious about your description of the Hulu deal as a new window, 21 days after airing, does that imply that you’d cut a similar deal with Netflix?

Philippe Dauman

Yes, we feel extremely well-positioned for the upfront. We actually had, yesterday, early in the season, an MTV Network upfront presentation. And the response from our advertisers, both on our existing franchises and the new shows coming on stream, was very exciting. So, yes, we are targeting the high range of CPM increases as we go into the upfront season, given our great ratings and programming success. As far as Hulu goes, we are very interested in the new business plan that Hulu has come forward with, because it replicates the dual revenue streams that we enjoy in the traditional distribution realm. We will be enjoying both advertising revenue streams and subscription revenue streams. The programming that we will be putting on Hulu Plus will include a large number of library programming that we have. That's targeted to young audiences, obviously. And we have a selection of current programs that will not air on Hulu Plus until at least 21 days after they've aired on television. And that, in our view, is a window that makes it complementary and makes the revenues that we are getting under this deal incremental to our revenues. And that's really our strategy as we expand our participation broadband and mobile window. As far as Netflix goes, we have a library product on Netflix right now, and we look forward to discussing with Netflix growth in our relationship, both in economics and helping to drive our business and their business, and possibly an expansion in the programming lineup for Netflix.

Douglas Mitchelson - Deutsche Bank AG

Is the Hulu deal relatively short term so you can gauge any impact on ratings? Or is this sort of a long-term partnership?

Philippe Dauman

The Hulu deal extends into 2012. So, yes, we do have the opportunity to see how the business evolves. Generally speaking, our deals for our cable networks and broadband distribution will be shorter in term for now than traditional affiliate deals.

Operator

Our next question comes from Michael Nathanson from Nomura.

Michael Nathanson - Sanford Bernstein

Philippe, the question would be is, we’ve heard that you said the first quarter is picking up momentum in scatter, can you give us a sense on scatter versus scatter pricing in the March quarter versus the December quarter?

Philippe Dauman

Again, the momentum keeps building. Our endemic categories are showing signs of strength when you think about motion picture outputs, the types of pictures that are targeting young audiences. Beverages, you see non-endemic categories for us are becoming more significant like autos and insurance, packaged goods. So we're seeing the pricing, particularly on the adult networks growth, scatter versus scatter. And a lot of it is driven by the excitement and cultural resonance of a lot of the shows. It's really getting people's attention. And we're not just talking about MTV, but we're talking about BET and Comedy Central. BET has come out with these new scripted shows that are not just leading its demographic categories by a lot, as it always has, but really breakout shows for television in general. So that should help continue to drive our pricing, particularly as we deliver large audiences on our shows that expand beyond our target demos.

Michael Nathanson - Sanford Bernstein

I guess my question was, as you lead into the next quarter, is it pricing and/or volume that's giving you the improvement?

Philippe Dauman

Well, we see both with the ratings improvement, we'll have more volume. And the success of the shows and attracting new advertisers and the economic recovery that we see underway will help drive pricing.

Michael Nathanson - Sanford Bernstein

If rumor is right and Amazon wants to get into the Online Film business, is there any stopping you from selling Epix to an online distributor like Amazon relative to your deal you have with Netflix?

Philippe Dauman

The deal that Epix has with Netflix involves, as far as broadband-only distributors, we had a two-year period of exclusivity beginning when the deal started. So we're into that period. We are allowed to distribute under the Netflix deal on broadband with the traditional distributors who have broadband offering. And you may see some of that as we go forward. So at the end of that two-year period, we will be free for Epix to continue to distribute to Netflix, of course, but also to look to other distributors who are broadband-only.

Operator

Our next question comes from Richard Greenfield from BTIG.

Richard Greenfield - BTIG, LLC

When you look at your equity and affiliates, I think you mentioned that both the major businesses in there were profitable, wondering whether -- as we think about timing, was there anything unique to this quarter that led to the strength, and should we think about that as kind of a run rate as we go forward over the next several quarters, given what happened with Epix and Netflix last year? And two, just on programming costs, Tom, I think you said that you were looking for mid-single digits for the full year. And I think the first quarter, the comment was that you were up double digits or 10%. I assume that means you should see much better margin improvement, barring a change in SG&A over the next several quarters. Is that fair to say for Media Networks?

Philippe Dauman

I’ll address the profitability, and let Tom address the second question. Yes, Epix has achieved profitability, thanks to both the traditional distribution and the Netflix deal, of course, within a year of launch, which is unprecedented for a national network. We now have Epix on solid profitability settings, so you can expect to see that continue. The degree of profitability will be impacted by availabilities on pay that affect the cost side, of course, on increasing distribution. At the end of the quarter, we had a new distributor in Suddenlink, and you can expect to see additional distribution announcements as time unfolds. Tom?

Thomas Dooley

Yes, Rich. On the first and second quarters of 2011, programming expense will be running on the higher end of the curve, and then that will come back into line as we get to the second half of the year. And that's due to the way the price and amortization streams of the shows that we put in place in the first half of the year. SG&A will also kind of move around a little bit, but we will continue to try and drive margin growth in each of the quarters between now and the end of the year.

Richard Greenfield - BTIG, LLC

And just Philippe, when you made the comment about Epix and the availability of titles, I think you mentioned that there were no major titles made available from Paramount this quarter. So was there basically an unusually high equity pickup from Epic this quarter versus what we should expect on a full-year basis?

Philippe Dauman

Well, no. You had -- I mean, that was made up by having titles, a lot of titles from Lionsgate that were available in the quarter. So it depends on the seats [ph]. On an overall basis, the availability of titles is pretty steady. But there could be certain quarters where you just have a lot of avails that impact the cost side, giving the recognition of cost accounting for a venture like Epix. On the other hand, our revenues keep growing. So, we are on a solid path. Epix is in profitability territory for good. And now, it's a question of driving profitability. As we go forward, that will be largely influenced by expansion of our existing distribution relationships and the new distribution relationships that are coming on stream.

Thomas Dooley

Because it won't be a straight line as you go forward quarter after quarter, but it is pacing at a rate that we'll be able to continue at for the full year.

Operator

Our next question comes from Jessica Reif Cohen from Bank of America Merrill Lynch.

Jessica Cohen - BofA Merrill Lynch

I was just wondering if you could address the improvement at Paramount. It's had its best performance in years in Theatrical. Is there anything structural going on? I mean, you talked about cable networks investing in research. And then as a separate topic, on the kids’ area as you go into the upfront, do you expect any impact from your newer competition, any impact either on the upfront or on scatter?

Philippe Dauman

As far as Paramount goes, yes, we have made several structural changes at Paramount over the last two, three years. Obviously, from a cost standpoint, we have really looked for increasing efficiencies in our overhead, and Paramount has done a great job in that regard and continues to. And then our film strategy has evolved. We have reduced the number of releases. We target approximately 15 releases a year. And those releases are very much focused and anchored on franchises like Transformers, like Star Trek, like Mission Impossible, like others in development, and our brands. And you can see with Jackass 3D, as an example, you'll see with the Justin Bieber movie being released next week, they take advantage of our brands, our cable brands' reach, they tend to be more low cost and put it all together, you have a better risk-reward profile for the studio both compared to our past but also compared to the competition. So we feel very good about the direction, and, creatively, Paramount is in as good a shape as I've seen in many, many years. As far as the kids’ area, Nickelodeon continues to be very, very strong. Every new program it has launched for quite some time has been successful, both for young kids and tweens. And the new competition has not been a factor, thus far. Its ratings have not yet been significant. We never underestimate competition, of course. But Nickelodeon has a very, very strong position, and the ratings on Nickelodeon are many, many, many times higher than the new competition. But we don't see any impact as we head into the upfront.

Operator

Our next question comes from Alan Gould from Evercore Partners.

Alan Gould - Evercore Partners Inc.

Philippe, I was wondering if you can drill down a little bit into the 10% ad sales -- ad domestic, ad revenue growth for this quarter. I mean, 10% is a very good number, but when we look at your ratings and we look at the results that Time Warner and News Corp. gave yesterday, I think there might have been some expectations it could have been even better than that. What is the difference, is it that your '10, '11 upfront was not as strong as theirs, are you just not generating the same revenue per CPM or per gross rating points that they are, could you just go into that a little bit given the rating strength?

Philippe Dauman

Well, the ratings strength, sales of course. Many of our biggest drivers have been big hit shows that have come on air towards the latter part of the last calendar year as well as -- if you look at the last month. BET, for example, with its two new scripted shows, a lot of our scripted programming is coming on-stream with great success. I would point out that we've had great sequential improvement in ad sales growth for several quarters now with each quarter bringing greater sequential growth. So, there's more for us to do to take advantage of these new shows that are coming on-stream. There couldn't be a better time for all our important brands to be enjoying such success as we head in to the upfront season, so we feel very comfortable about the trajectory in ad sales.

Thomas Dooley

And some of our competitors, Alan, had the benefit of some pretty strong sports programming in that quarter, which I think gave them a lot of volume and pricing power, as that category continues to sort of be very strong in the space. And the way the upfront spreads is not exactly linear in terms of how it's booked quarter to quarter to quarter. And the first quarter can be a little light for us, given the mix. Certain of our programming will get stronger as we go throughout the year.

Alan Gould - Evercore Partners Inc.

Tom, what was your ratings growth in the December quarter in your core demos? And is the March quarter ratings growth trending better than the December quarter was?

Thomas Dooley

Well if you look at MTV, they had a great quarter last quarter. It's trending this quarter about 18%, 20% level. BET is trending about the same level over the past month. Nickelodeon continues to -- it's been picking up, actually, the last couple of weeks and has been very, very steady with all the new shows coming on. We have a couple of networks that had been lagging, but, again, they've stabilized and we have more programming and applying a brand filter to those networks that will lift them up, again, focusing on new original programming including scripted programming on networks like Spike and VH1. So the trend line looks very good.

Operator

Our next question comes from Laura Martin from Needham & Company.

Laura Martin - Needham & Company, LLC

I'd like to follow up, Philippe, with something that Doug asked you. So from the outside, we saw you had product on Hulu, then you pulled it off and then you put it back on, which we thought was interesting. And then in follow up to your answer to Doug, you were talking about maybe what changed was that they gave two revenue streams, advertising plus subscription revenue stream. And I think all these premium, all the premium content companies want their revenue to be incremental. So I guess I'm interested in hearing from you, as you think about moving your premium content to over-the-top platforms, what should we expect to see that you're going to -- what is your policy here in terms of what you need in order to move your content onto over-the-top platforms that you think, therefore, will be additive?

Philippe Dauman

Well, yes, I would also add to what you said that as the broadband distributors become strong and get -- they have an ability to pay more for programming. We saw that in a very significant way in the Epix deal with Netflix, where the amount that Netflix was able to pay increased significantly over the more than a year that we were having discussions with them because of their success in reaching consumers. There are many other distributors out there that we're in conversations with. Some of them will be more successful than others. All of them would like to have our content. And we look at what their economic model is and what the potential is for us. We like the dual revenue stream. But again, different distributors will have different models, and we're willing to explore those. The other arena that will be interesting in this regard will be mobile, as you get more capability on mobile. And we're beginning to look at opportunities there. So really, the criteria would be, can we obtain significant revenues and attractive economic model without undermining existing forms of distribution? And windowing is very important in this arena. Yes, windowing has always been...

Laura Martin - Needham & Company, LLC

Yes. I know windowing has always been your primary strategy.

Philippe Dauman

Windowing has always been very important in our industry, and we'll be experimenting with those. And people's thinking has evolved, and the Hulu deal reflects another evolution in that regard.

Laura Martin - Needham & Company, LLC

And back just to follow up on a prior answer, can't remember -- I don't know if it was Tom or Jimmy that was giving it. But on the issue of sports, we're writing a lot about the economics of the sports leagues, and one of the things we are seeing with some of your competitors is, they're grabbing sports and they're putting them on their channels, and that is giving those channels more affiliate fee negotiating power. Are you finding that, when you walk into some of these satellite telco cable companies, that they are trying to re-grab from you part of your payments, to put you under pressure because you actually don't own sports, and they're getting under a lot of pressure because of growing retransmission consent payments. How do you protect your affiliate fee revenue streams without sports is my question.

Philippe Dauman

We haven't seen that at all. We provide great value to our distributors. We deliver now close to 22% of all viewing on ad-supported cable, and our proportion of affiliate fees is much lower than that. We also provide great value on traditional distributors VOD platforms and otherwise. So we have negotiated several extensions during this time period very successfully, and you see the results in our affiliate fee growth. Yet the scope and diversity of our brands puts us in a strong position. We don't have sports, but we have brands like BET, Nickelodeon, MTV, Comedy Central, Spike that just have passionate audiences and our affiliates, as well as their ultimate consumers, appreciate what we provide.

James Barge

And to some extent, the prices for those audiences get drafted up, that benefits us greatly.

Operator

Our next question comes from Ben Swinburne from Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

Philippe, I just need to go back again to the Hulu topic. There's an argument out there that the younger generation that Viacom certainly monetizes the best is the one that's most interested in getting content on new platforms. And at the same time, probably the ones maybe with the highest risk of video cord cutting. It sounds like you guys have done a lot of consumer research on how that generation is consuming and interested in getting their content, which I'm sure led you to the place where there’s a lot of money to be made on broadband distribution, but probably also a decent amount of risk. And so what I wanted to ask you about is, when you do these deals with Hulu or Netflix, are you assuming that there's really no risk that you see people transition to a broadband-only entertainment option in the home? Or are you striking deals where, if that takes place, you're setting the economics so that Viacom comes out flatter or even ahead based on sort of the numbers behind these deals? I know windowing is important, but so much viewing is now on-demand that I'm wondering if windowing is becoming, actually, less relevant in the future. Just curious on your thoughts there.

Philippe Dauman

Well, we find the Hulu and Netflix services to be complementary to television viewing. And we look at windowing not just on an aggregate basis, but we look at it based on particular shows or genres, for example, Daily Show and Colbert will be available on a much shorter window because it is a topical show. We have a new show every day, and what we found through our own sites and other distribution is that the online viewing of yesterday's show actually drives a viewing of subsequent shows. So it serves an important marketing function. So not only is it additive from an economic standpoint, but in fact, it can help drive the viewing for shows that have immediacy. And one of the reasons that windowing is so important is that -- and the focus of our programmers has evolved, is that we need to have the immediacy, the impact of our shows like Jersey Shore, like that new episode of iCarly, that people want to see right now. They don't want to wait for 21 days. And in fact, when they look at the older shows, it can introduce those shows to new audiences that will then look at the shows when they become available on television. Now, the marketplace may evolve, and we will track that as we go forward. The good news is that we are as well-positioned as any one because we understand our audiences, we program for our audiences and, to the extent that broadband distribution becomes a stronger competitor than other forms of distribution, that's good for content. We like competition. It was not a bad thing for us when we moved from a world where there was only one stream of distribution through cable, and now we have at least four streams of distribution with satellite distributors, telcos and now broadband.

Thomas Dooley

We've also seen in our research that the older that young person gets when they get married, the likelihood of subscribing to a multi-video provider increases dramatically and then when they have children, it geometrically increases and it is almost 100% at that level. There's very few cord-cutters that have kids. So we see this as sort of a college age phenomena. We don't see it as a big industry trend that people should be all that worried about.

Operator

Our next question comes from James Dix from Wedbush.

James Dix - Wedbush Securities Inc.

Just two things, I guess following up a little bit, Philippe, on what you've said about how well the studio's positioned. I'm wondering if you could give any additional color as to what you think the profit targets or outlook should be for Paramount that we should be thinking about this year just going forward? And then secondly, I guess, given the research that you do on your demo and how that demo is the most interested in social media, I'm wondering if you have any insight you could give us as to whether you see social media and things like Facebook as friend or foe. Is it something which gives advertisers another reason to come to you as a content provider to interact with your audience? Or is it a potential siphon of brand dollars as that platform gets bigger?

Philippe Dauman

As far as the studio's concerned, the one thing we do know is we’ve had a lot of good theatrical releases so far in the year, and that will lead to a number of home entertainment releases of those pictures. So we expect, as I mentioned in my remarks, that to unfold in a very good way. We would like the prospects of the remainder of our slate. But obviously, the actual profitability will depend on performance going forward. I can say that we are well-positioned to enjoy solid margins at Paramount compared to where we were last year and the continued improvement in return on invested capital. As far as social media, we view it as friend. We have worked very actively with Facebook, with Twitter. We have very good -- and others. We have good, strong relationships. We drive a lot of traffic to them, and they help enhance our audience’s affinity with our brands and our content. And we work with advertisers. And we point out to advertisers that they can really reach our viewers and the young audiences they covet through our brands, not just in our networks, but through social media. And the social media has been a great driver of some of the ratings on our shows. It just expands the awareness.

Thomas Dooley

It increases our level of engagement with the consumer that really helps us drive both ratings and relationships with them, and helps us have a much more compelling product to put forward to advertisers.

Operator

Our next question comes from David Bank from RBC Capital Markets.

David Bank

You gave some color on the international advertising trend. There were some timing issues that make the sequential improvements a little bit difficult to understand. Can you kind of give a normalized picture of what's going on there? And if you strip out the timing issues, what's happening sequentially? And how do you -- how is the international advertising landscape kind of looking right now?

Philippe Dauman

Well we got to see improvement, as we mentioned, we expected to see double-digit organic growth in international in the quarter that we are in. We're seeing strength in a number of European countries. We're seeing strength in Latin America. And a lot of it will depend on the strength of individual local markets but also as we get -- we've improved our channel position, we've launched new channels and we are very much focused on improving ad sales as we go forward.

David Bank

But, Philippe, the double-digit improvement is in part due to, I think you said there were some timing issues. I guess, the question was, if you adjust out for the timing issues, does the environment look sort of sequentially improving or flattish or...

Philippe Dauman

Yes, even if you x that out, we'd see organic improvement, x those special factors in ad sales. We see stronger ad market in many of our key markets and a stronger position for many of our key channels in markets, particularly in Europe and Latin America.

James Bombassei

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

Operator

That does conclude today's conference. We thank you for your participation. You may now disconnect.

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