CBS's CEO Discusses Q4 2010 Results - Earnings Call Transcript

Transcripts

CBS (CBS) Q4 2010 Earnings Call February 16, 2011 4:30 PM ET

Executives

Sumner Redstone - Founder and Executive Chairman
Leslie Moonves - Chief Executive Officer, President and Director
Adam Townsend - Executive Vice President of Investor Relations
Joseph Ianniello - Chief Financial Officer and Executive Vice President

Analysts

James Goss - Barrington Research Associates, Inc.
Michael Meltz - JP Morgan Chase & Co
Michael Morris - Davenport & Company, LLC
Jessica Cohen - BofA Merrill Lynch
Laura Martin - Needham & Company, LLC
Anthony DiClemente - Barclays Capital
Alexander Paris - Barrington Research Associates, Inc.
Marci Ryvicker - Wells Fargo Securities, LLC
David Miller - Caris & Company
Douglas Mitchelson - Deutsche Bank AG

Operator

Good day, everyone. Welcome to the CBS Corporation Fourth Quarter and Fiscal Year End 2010 Earnings Release Conference. [Operator Instructions] At this time, I would like to turn the conference over to Executive Vice President and Investor Relations, Mr. Adam Townsend. Please go ahead, sir.

Adam Townsend

Thank you, Lisa. Good afternoon, everyone, and welcome to our fourth quarter and full year 2010 earnings call. Joining me for today's discussion are Sumner Redstone, our Executive Chairman; Leslie Moonves, President and CEO; Joe Ianniello, Executive Vice President and CFO. Sumner will have opening remarks and will the call over to Les and Joe, who will discuss the strategic and financial results. We will then open the call up to questions.

Please note that during today's conference call, financial results and comparisons, with the exception of revenue, will be discussed on an adjusted basis unless otherwise specified. Reconciliations for non-GAAP financial information related to this call can be found in our earnings release or on our website. In addition, statements on this conference call relating to matters which are not historical facts are forward-looking statements which involve risks and uncertainties that could cause actual results to differ. Risks and uncertainties are disclosed in CBS Corporation's news releases and securities filings.

A webcast of this call and the earnings release related to today's presentation can be found on the Investors section of our website at cbscorporation.com.

With that, it's now my pleasure to turn the call over to Sumner.

Sumner Redstone

Thank you, Adam. Good afternoon, everyone. I thank you for being with us today. Now I'm not given to all the stations, but the performance of CBS this year was nothing less than sensational. What an extraordinary finish to an extraordinary year. Every single division improved on its performance and Leslie's team, as usual, they did everything right. Our strength lies in our extraordinary content and CBS' content leads in every single area where CBS competes: On the network, which is yet again ranked one; on all the global markets where people watch our hit programming on our major market TV and Radio. Nationwide and on our top global websites, CBS has the content that by far leads its competitors, the content that audience want most, and that content and our performance get better and better and better. We saw it in the 2010 results. We're seeing it continue in 2011 today, and I am certain we'll keep seeing it for years to come and it will be never, never-ending. The winning streak for CBS is bound to continue under the great management team, and it is a great management team, led by Les Moonves.

So let's now hear from my very close friend, CBS' CEO, Les. And Les, I congratulate you.

Leslie Moonves

Thank you very much, Sumner, and good afternoon, everybody. Thank you for joining us. I'm very pleased to discuss our fourth quarter results with you today, results that capped a tremendous 2010 and speak to the momentum we saw throughout the year and are now seeing this year as well. Every one of our businesses grew during the quarter, with solid revenue increases and double-digit OIBDA growth across all of the company's operating segments. Our success continues to come primarily from the performance of our content and the increasing demand we're seeing for that content in an improving economic marketplace, locally, nationally and internationally.

Today's very strong fourth quarter results closed out a terrific year which we have consistently delivered on our promises. We've capitalized on the sharp increase in advertising, while at the same time continuing to diversify and de-risk our business model by building profitable secondary revenue streams that don't depend on advertising. We've prudently managed both our cost structure and our balance sheet and at the same time, delivered more value to our shareholders. And through a number of long-term strategic deals throughout the company, we've set up CBS for a very bright future, one in which we are ideally positioned for continued growth this year and beyond.

Not only was it a very good quarter and year, but given the growing value of our content, the trends we see in our businesses and the media landscape as a whole, we expect these results to continue for a long, long time.

Before I turn it over to Joe and we take your questions, I'm going to spend a few minutes to walk you through our financial and operational highlights, beginning with our full year and fourth quarter results. Our revenue for 2010 of $14.1 billion was up 8%, and quarterly revenues of $3.9 billion was up 11%, once again speaking to our building momentum throughout the year. 2010 OIBDA of $2.4 billion was up 32% and fourth quarter OIBDA of $770 million was up 32% as well, illustrating our ability to turn increasing revenue into even better profits. And most importantly, EPS for the year was $1.11, up 102% from 2009, and fourth quarter EPS of $0.46 was up 77% from last year's fourth quarter. CBS also drew up $1.45 billion in free cash flow in 2010, up 75% from our total in 2009.

So as you can see, in every single key measure, we had a remarkable quarter and a remarkable year. Plus we had an OIBDA margin of 20% in the fourth quarter, three percentage points higher than last year's quarter, and we are confident we will deliver even better margins in 2011 by continuing to manage our expenses, growing our secondary revenue streams and realizing better economics from our recent Comcast and NCAA deals. And going forward, we are positioned to exceed peak margin levels within the next couple of years. Finally, last month, we began executing on our $1.5 billion share buyback program. It is going very well, and we are pleased to be continuing our commitment of returning value to our shareholders. So clearly, we are in great financial shape across-the-board.

Now let's take a quick look at some fourth quarter highlights throughout our businesses. Beginning with our Entertainment segment, where fourth quarter revenue was up 11% and OIBDA was up 31%. At the CBS Television Network, ad revenue was up more than 8%, with Primetime and Sports performing particularly well. We're having a terrific 2010, 2011 season. We are the leading network by a lot once again, and the margin continues to grow. CBS was the only network to successfully launch its entire new fall lineup, and three of our new series, Blue Bloods, Hawaii Five-0 and Mike & Molly are the top three new shows of the season. At the same time, our returning shows continued to dominate. For example, number one ranked drama, NCIS, just broke another series record, attracting nearly 23 million viewers to a show that's now in its eighth season.

Looking ahead to next season, we could almost play a pass hand. There could be very little change necessary in our schedule because we have so many successful programs. One thing is for sure, any new show that does make it onto our schedule is going to have to be pretty extraordinary. This means reduced cost for development, reduced cost for promotion, et cetera, et cetera. Having the number one schedule also is helping us lead the way in the scatter market, which was extremely hot in the fourth quarter and continues to be even hotter through the first with prices 40% over upfront. So looking ahead to May and June, you've got a pretty good idea where pricing is heading in this year's upfront.

In Sports, our programming is also being sold into a very strong marketplace, with pricing significantly higher than a year ago and our ratings growth is a terrific story too. The NFL on CBS was up 10% this year, the highest viewer average in 23 years. And the AFC Championship game between the Jets and the Steelers delivered nearly 55 million viewers, the highest total in the game's history. And we are soon gearing up for the NCAA Men’s Basketball tournament, where we and our new partners at Turner have virtually sold out inventory already at very favorable pricing. Our deal with Turner de-risked our exposure in this terrific property without taking away our offsite. As a result, we have a very profitable deal over the next 14 years.

Last week, we also made some management moves that will have a positive effect on our Sports and News division. CBS Sports programming obviously means more and more to our corporation all the time, so we took Sean McManus' real passion, has always been sports, and allowed him to focus all of his time growing that division. At the same time, we took Jeff Fager, a universally admired journalist who has been running the critically and ratings-acclaimed 60 Minutes, the most successful news program in history, and put him in charge of CBS News. In doing these moves, we have significantly strengthened both organizations.

Finally, at the network, the Grammy Awards on Sunday delivered its highest audience in 10 years with more than 26.5 million viewers. Just like in sports, big-ticket events continue to show ratings growth, proving once again that broadcast television is the best game in town.

Meanwhile, throughout the rest of our Entertainment segment, we continue to grow our non-advertising revenues well. Content licensing, global syndication and retransmission consent are becoming increasingly important as the broadcast model evolves in CBS's favor. Let me address a few of our accomplishments in these areas during the quarter now. Starting with syndication which continues to be strong for us. During the quarter, we sold the second cycle of CSI, which was a key driver in the company's content licensing and distribution fees, which grew by 21%. In addition, we continue to benefit from selling new shows overseas, thanks to an exploding international marketplace. All three of our new dramas this year, Hawaii Five-0, Blue Bloods and The Defenders were profitable before we aired a single episode in the United States. The current seasons of all three of these shows are now being monetized in more than 200 markets. Our three CSIs, in addition to our two NCIS', all CBS-owned shows, consistently ranked as top programs in markets around the world. And thanks to more channels being offered by international distributors, our presence on top 10 lists in emerging markets is growing all the time.

At the same time, our new international channel in the U.K., India and Australia are already steadily increasing their audiences. These channels are allowing us to build our brand internationally and establish demand for our content in new growing markets. And of course, the rapid growth of retrans also continues to diversify our revenue base. We beat our full year target of $100 million by a nice margin and we're working on new deals all the time.

And finally, in the world of new media, we continued to be well positioned to capitalize on the competition for our premium content. There is clearly tremendous demand for network programming from all of the online video distributors coming to market. As you know, we've been very judicious about the ways in which we grow this new revenue stream. We will continue to look to do non-exclusive deals that provide recurring revenue and are incremental to the big picture.

Speaking of new media, CBS Interactive turned in a very strong fourth quarter as well, with display advertising revenues up 18% year-over-year. CBS.com has now been the number one TV network website for 25 straight months in terms of unique viewers. At the same time, more and more advertisers are buying across both TV and the web, and we're seeing this virtuous circle reflected in our results. CBS Interactive continues to grow our presence across mobile platforms as well. We produced more than 40 apps for iPads and other tablets during the year, each of which generate revenue for us, and we've doubled the page views across our mobile sites and apps versus 2009.

Our Entertainment segment also includes CBS Films, which had a good showing these last few weeks with the release of The Mechanic. The film opened well, and, most importantly, will be profitable for us. Once again, we are slowly going into this business. We've done four small films so far. We've got our toe in the water, and we like where we stand right now.

Moving to our Cable Network segment, we had a solid finish to 2010. Fourth quarter revenue was up 6%. OIBDA was up 10% with the margin of 46%. Showtime subs continue to grow, and we ended the year at just under 20 million subscribers, so we've closed the gap considerably with our top competitor, and we have plenty of growth left ahead of us. In fact, 2010 marked the seventh straight year of annual growth in subscribers for Showtime. Showtime's original programming continues to be the catalyst for our growth. The most recent seasons of Dexter, Weeds were their highest yet, and newer shows like Nurse Jackie and The Big C have become new hits for us as well. This quarter, we gave you Shameless starring William H. Macy. Shameless launched to Showtime's best numbers ever for a freshman drama and six weeks in, continues to outperform every new show we've ever premiered with viewership rising every single week.

In Publishing, revenues for the fourth quarter were up 5% year-over-year and OIBDA was up 32%. Like our other businesses, it's leading content that's driving our growth. And also like our other businesses, Digital is an increasingly important part of our results. Sales of Simon & Schuster e-books were up 160% for the year in 2010, and we had a terrific holiday season. All the people who got e-readers for Christmas needed to buy books to load them. The week after Christmas, we sold electronic versions of 78% of the books in our entire digital catalog, showing the breadth of titles that are now being bought in this new format. We continue to digitize our library. We're now approaching 10,000 titles, demonstrating once again that great content endures and we can monetize it forever.

Turning to Local Broadcasting. This business built on its momentum throughout 2010, producing its best results of the year in the fourth quarter and the best segment performance in the entire company. Revenue was up 21% with Television Stations, advertising revenue up 20% in Television Stations, and Radio ad revenue up 14%. At the same time, Local Broadcasting OIBDA increased 43% year-over-year, and our OIBDA margin was 39%, up six percentage points from last year's quarter. Political advertising certainly contributed to our results, but the resurgence in local advertising was the story here. In fact, given the intense demand we're seeing from local advertisers before the election, we could've taken the inventory results of the candidates and sold them in the open market at very attractive pricing.

Momentum continues at Outdoor as well. Fourth quarter revenue was up 6%, as the advertising market there continued to improve as well. OIBDA increased 22% year-over-year on higher revenues and a lower cost structure. We see ongoing improvement in this business, and as the market has recovered, we have strategically resumed our digital build-out pursuing some high-profile installations in major cities like New York and Washington, D.C., while we still stay well within our CapEx guidance.

So as you can see, every one of our businesses contributed to our best results of the year in the fourth quarter. We're confident it will drive our success going forward as well. We finished 2010 on a high, and we've been busy laying the groundwork for an even better 2011 and 2012. We have every reason to believe we will build on our success, and here is why. The CBS Television Network continues to build hits and provide an unparalleled platform to launch new ones. Advertisers are recognizing this with extraordinary pricing in the scatter market and it will pay off in this year's upfront as well. The success of our own shows continues to grow. That means we can keep getting paid for today's hits for many, many years to come.

At the same time, we're growing retrans and affiliate compensation at a very healthy rate, and the CBS Television Network has become a true dual revenue stream business. The local ad marketplace continues its broad-based recovery. Our 2011 outlook for local business is very optimistic, even without the Super Bowl or political. On the cost side, we continue to watch our operations closely and improve contracts so more revenues now fall through the bottom line. Plus, our balance sheet is stronger than ever, and we'll save about $90 million in interest costs annually following all of our debt actions last year. And finally, we're delivering on our promise to return more value to shareholders.

I mentioned earlier that we started our share buyback in January on schedule. As the economic recovery continues, and as our businesses keep generating healthy free cash flow, we remain committed to returning value to our shareholders going forward.

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

Joseph Ianniello

Thanks, Les, and good afternoon, everyone. Today, I'll provide some more detail on the results for the quarter and full year and update you on what we're seeing in 2011. I'll start with our total company results for the quarter. Our 11% revenue growth for the quarter can be broken down as follows: Advertising revenue was up 12%, reflecting the continued strong ad market both locally and nationally. Content licensing and distribution was up 21%, driven by strong domestic and international syndication sales. Fourth quarter affiliate and subscription fees were up 1% due to the impact of a one-time reclassification in the prior year. To give you some color on the underlying growth within this category, Cable affiliate revenue was up 7%, and retrans revenue up nearly 50%. So for the full year 2010, affiliate and subscription fees were up 9%, which is much more indicative of the performance going into 2011.

As Les said, OIBDA of $770 million was up 32% from the prior year. This quarter, we are adjusting for $15 million of restructuring activities, as well as a $44 million charge for the early extinguishment of debt that we discussed on our last call. You will see the benefits of these actions in 2011. During Q4 of 2009, we also had restructuring charges of $13 million and impairment charges of $186 million. So clearly, our reported results were up significantly more than our adjusted results we're discussing here. We expanded our OIBDA margin for the fifth consecutive quarter to 20%. Meanwhile, operating income was up 45% for the quarter, and diluted EPS came in at $0.46, up 77% from the prior year.

Let's quickly recap our full year results, which speak to the continued strength of our businesses. Total company revenue was up 8%, OIBDA was up 32%, operating income up 49%, and diluted EPS of $1.11, up 102%. This operating leverage demonstrates the strong flow-through of high-margin advertising and affiliate revenues, and our continued cost efforts remain.

Turning to our five segments. Entertainment revenue of $2 billion was up 11% for the quarter, driven by content license fees from both domestic and international syndication. Advertising revenue also grew sharply, with network advertising up 8% due to solid pricing gains in Primetime and Sports. Top categories included Automotive and Financial Services. Fourth quarter scatter pricing was upwards of 35% above upfront pricing. OIBDA for the Entertainment segment came in at $249 million, up 31%, driven by the strong revenue performance. At Cable Networks, revenues of $368 million for the quarter was up 6%, primarily as a result of increases in both subs and rates.

Cable OIBDA of $169 million was up 10%, which is a 46% margin for the quarter. Due to the timing of expenses, we always look at the margin on a full year basis, which came in at 39%, up from 34% in 2009. We expect to continue to expand our margin in 2011 while investing more in original content, where we retain more rights and thus more profits.

Publishing revenue of $232 million was up 5%, driven by higher digital content sales, as well as strong title sales in the quarter. Digital content represented 10% of total Publishing revenue in Q4 of this year versus 5% in the prior year, and we expect this will continue to grow in 2011. Publishing OIBDA of $20 million for the quarter was up 32%, driven by the change in the revenue mix and our continued aggressive cost containment measures, partially offset by a higher provision for doubtful accounts relating to the border situation. We have been monitoring this closely for some time and have reduced our receivable exposure to a minimal amount as of December 31.

Local Broadcasting revenue of $822 million was up 21% for the quarter. TV Station advertising was up 28%, and Radio ad revenue was up 14%. Political advertising contributed to the growth; however, the increased local demand was impressive. For example, oil, retail and financial services were all up in the teens for the quarter. Even with this growth, the overall spend of major categories is still off by more than 20% from 2007 spend levels, leaving us plenty of room to grow. Local Broadcasting OIBDA was $322 million, up 43% for the quarter. As Les mentioned, the margin at this segment hit 39% this quarter, the highest since the fourth quarter of 2006. As you can see our disciplined cost containment, we can achieve historical margins.

Outdoor revenue for the quarter was up 6% to $511 million. In constant dollars, the Americas and Europe combined grew 9%, with the Americas leading the way with revenue growth of 13%, driven by higher occupancy rates and the onset of better pricing. As expected, we are now seeing more dollars float to this business as the recovery continues. OIBDA for Outdoor of $101 million increased 22% from prior year's fourth quarter as we continue to focus on restructuring our business model. We expect healthy margin expansion at this segment in 2011 as well.

Turning to our balance sheet and cash flow. Free cash flow came in at $40 million for the quarter, which included a discretionary pre-funding of our pension plan of $167 million. For 2010, free cash flow was $1.45 billion, up 75% from prior year. CapEx for the full year came in at $284 million, right within our guidance range of $250 million to $300 million. We've used this year's cash flow primarily to strengthen our balance sheet, reducing debt by $1.4 billion and pre-funding our pension plans. Our cash on hand at the end of the year was $480 million. As you know, in January, we initiated our $1.5 billion share buyback program, and it is well underway. We will update you on the activity for Q1 with our first quarter results. But as we have said previously, we expect to complete this program in about 18 months.

Looking into 2011, here's what we're seeing. Starting with our advertising trends for Q1. As Les mentioned, the scatter market pricing at the network is robust, up 40% above last year's upfront, which is a very positive sign for this year's upfront. Online display advertising is expected to be up in the teens. TV Stations' advertising revenues are pacing to be flat, even with the difficult comp of no Super Bowl or political advertising, meaning our base business strength is offsetting both these prior-year events. Radio stations are pacing to be up low- to mid-single digits. Our Outdoor group is currently pacing to be up mid- to high-single digits on a constant-dollar basis, again led by Americas pacing up double digits.

For the first quarter, there are two specific items to be aware of for comparison purposes: first is Super Bowl, and second, our new NCAA contract. Obviously, we didn't have the Super Bowl in Q1 2011, which will impact our year-over-year growth rates at both the Entertainment and Local Broadcasting segments. With respect to the new NCAA agreement, we will only recognize revenue associated with the games that air on CBS and not the games that air on Turner Networks. As a result, we expect a reduction in revenue in Q1 versus the prior year, but you will also see a greater reduction in expenses, which will drive higher profits and a significant margin expansion for both the Entertainment segment as well as the company.

Looking at the full year 2011. As we said on our last call, we expect to improve our profits and continue our margin expansion trend. We're estimating CapEx for 2011 to continue to be in the range of $250 million to $300 million for the third consecutive year. With this lowered CapEx, depreciation will continue to trend down slightly, but the bigger benefit will be realized in a few years from now. Interest expense and cash payments for interest will be down considerably year-over-year because of lower debt levels. Our effective tax rate for 2011 is expected to be approximately 39%, which is comparable to 2010.

So in conclusion, we are more excited about the future growth prospects of CBS than ever before. We've made long-term changes to our operating cost model, and the structural changes to our revenue mix are real and meaningful. With lower polls on cash from our debt obligations, we are focused on returning value to our shareholders now and in the future.

With that, Lisa, we can open up the lines.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jessica Reif-Cohen with BofA Merrill Lynch.

Jessica Cohen - BofA Merrill Lynch

Les, as you think about the changing landscape and your positive commentary about secondary revenue and trends, can you talk a little bit about content monetization, how you're thinking about things like Netflix or Avalon's new streaming service? What windows will you sell your content to? How much of an opportunity is it for CBS?

Leslie Moonves

Jessica, we obviously spend a lot of time talking about this, and there are a lot of new platforms out there, and it's a topic of conversation among many companies, and different companies have different attitudes towards it. Advertising on our network is our number one priority, and secondary is the syndication valuable domestic and internationally, which are all in the numbers of billions of dollars. We are looking at some of these platforms, and we're determining what will augment those two forms of revenue, first and foremost, without in any way hurting what we're doing. Our syndication operation is at full tilt, and obviously, with this kind of upfront, as well as scatter marketplace, the numbers that are coming into the network are truly remarkable. So we're not going to do anything to damage that. At the same token, we have the largest television library in the world. So we have many assets and many ways of looking at things. So what's great about these assets, we're still selling I Love Lucy along with CSI. So we're looking at these new platforms, and on a case-by-case basis, we're judging what will help us and what won't hurt the core business and what won't hurt the family jewels. The great news is all these platforms want and need our content, and they're offering us phenomenal deals and we will make some of these deals.

Jessica Cohen - BofA Merrill Lynch

And then just on Radio, you guys are way outperforming the market. Is that all from your ratings or format changes? And can you talk about what your top 10 markets did in terms of revenue growth in the fourth quarter?

Leslie Moonves

I'll take the first half, and I'll give the second half to Joe. Yes, we changed the formats in 25 Radio stations. In 23 of them, their ratings are up at least double digits. So Dan Mason and his team have done a remarkable job of changing it. We've straightened out the cost structure. We've restructured our Radio groups, and they're just performing at a remarkable rate, and as you said, they've outperformed the marketplace, and that's partially from programming and partially because of efficiency.

Joseph Ianniello

Yes, and Jessica, it's Joe. The top 10 are definitely leading the way in terms of the revenue growth. So again, total group was up 14%, so you should just assume the top 10 performed better than that.

Operator

And for our next question we'll go to Anthony DiClemente with Barclays Capital.

Anthony DiClemente - Barclays Capital

From a big picture standpoint, it feels as though TV has got a tremendous amount of momentum, and the ad dollars are coming in the door at a very robust rate. I'm just wondering, from your seat guys, if you could comment on how much of this is share shift from other forms of media? And if you just kind of give us an update on Television advertising's place within the overall U.S. advertising landscape? So how much of it is really the pie growing versus TV's piece of the pie growing within it? That would be great to hear, kind of an updated perspective.

Joseph Ianniello

Anthony, it's Joe. Look, it's probably a combination of both. Clearly, obviously, there was a recession a couple of years ago, so I think the total pie is growing. But I do think there is a share shift in the Television category, whether it's coming from print and other kind of advertising category. So that section is growing, and we're taking share within that category. So again, its content that's performing is growing and they're getting the incremental dollars and you're seeing that. So I think there's truth to both of that.

Leslie Moonves

In addition, once again, content remains so important, and the big events are so important. So you look across the landscape, every network that had the NFL did extraordinarily well. Those numbers were way up. Every major event over the last year, the Academy Awards, the Grammys, et cetera, have all done exceedingly better than the previous year. American Idol is not dying, as people predicted it would. Network Television is still unbelievably strong, it never went away. All the doomsayers about, "Oh, the new media's going to take away." New media's great. It augments broadcast, but broadcast is still the place where you can reach 111 million people.

Anthony DiClemente - Barclays Capital

One more on the topic of new media, which would be -- you did mention in your prepared remarks that online display ads were up in the mid-teens. I'm just wondering, can you give us an update on what percentage is total network ad revenues that would represent? And sort of order of magnitude of how much of the growth that online display is driving?

Leslie Moonves

Yes, it's very small. Obviously, the segment just for the quarter's total revenue is $2 billion. So network, we said network advertising was up 8% and the total revenue for this segment was up 11%. So that gives you a sense of the size, and obviously, we've been reporting historically the Interactive revenue for a full year basis in the $600 million range on a full year basis. So again, it's not driving it. It's certainly growing faster, but network advertising is by far driving the shift.

Operator

And for our next question we'll go to Doug Mitchelson with Deutsche Bank.