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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

Michael Morris - Davenport & Company, LLC

Jessica Cohen - BofA Merrill Lynch

Richard Greenfield - BTIG, LLC

Anthony DiClemente - Barclays Capital

Michael Nathanson - Sanford Bernstein

Andrew Crum - Stifel, Nicolaus & Co., Inc.

Barton Crockett - Lazard Capital Markets LLC

Drew Borst - Goldman Sachs Group Inc.

Douglas Mitchelson - Deutsche Bank AG

Viacom (VIA.B) Q2 2011 Earnings Call April 28, 2011 8:30 AM ET

Operator

Good day, everyone. And welcome to this Viacom's Second Quarter Earnings Release Teleconference for the Quarter Ended March 31, 2011. Today's call is being recorded. Now for opening remarks and introductions, I will turn the call over to the Senior Vice President of Investor Relations, Mr. Jim Bombassei. Please go ahead, sir.

James Bombassei

Good morning, everyone, and thank you for taking the time to join us for our earnings call for the quarter ended March 31, which is the second 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. And good morning, everyone. It is my pleasure to be with you this morning, and I am more than pleased to be joining my Viacom colleagues to report another quarter of truly outstanding results for the company.

In the second quarter, Viacom continued to deliver strong, strong growth on all fronts. By every measure, it was an extraordinary performance. Viacom once again set the standard for developing the world's most sought-after creative content by complementing already highly successful brands and continually introducing the most popular new television program and film titles. Now, make no mistake about it. Building this positive momentum in this still challenging economy is not an easy feat. However, Philippe and the Viacom team have taken exactly the right steps to prepare for and recover from the downturn with our laser focus on enhancing efficiency, on building financial strength and on continuing to invest in programs and content development. Thanks to their skill and their dedication, our creative outfit and our operational oversight has never been better. And the beneficiary of all this creativity, this superior institution, this exceptional management are of course Viacom's shareholders. We're seeing the value of their investments grow as the market recognizes and rewards our progress.

Today, Viacom is exactly where it needs to be making some of the most talked about television programming and bringing the most anticipated movies ever screened. The quality of our brands, the creativity of our employees, the expertise of our management are second to none, and I could not be more optimistic about where we are today, more excited about where we will be tomorrow.

So now I will turn this call over to my very good friend, one of the wisest men I have ever known, Philippe Dauman, our CEO.

Philippe Dauman

Thank you very much, Sumner. And good morning, everyone. I'm pleased you could join us today. This morning, Viacom reported outstanding results from every part of our company. Our momentum, which continues to build, has been fueled by our disciplined focus, our creative resurgence and our consistently strong execution, operationally and financially. The investments we've made in research and programming over the past several years are paying off in the form of strengthened brands and hit programming that are attracting growing audiences in the U.S. and around the globe. This entertainment content is also finding fresh audiences on a growing number of new platforms that carry our content, audiences that our advertising partners find increasingly difficult to reach. As we look ahead to the advertising upfront, we are very well positioned to capitalize on the tremendous ratings growth and compelling programming slates we have to offer, particularly on our major networks.

Paramount Pictures delivered markedly improved results in the quarter, helped in part by the strong film releases across several windows, and our summer blockbusters begin to premiere next weekend.

Innovation is a key ingredient to making all of our operations more efficient. New technologies and new ways of thinking about how best to operate in this highly dynamic media environment are changing our approach on everything from customer relationships to marketing campaigns, to content creation for different platforms. Some changes are small, others are substantial, but all are shaping Viacom into a more nimble, more connected and more responsive media company.

Today, I will review our financial results and cover the highlights from our divisions. Tom and Jimmy will provide more detail on our performance, and then we'll be happy to take your questions. We will speak to the adjusted numbers during our discussion this morning.

Viacom's consolidated revenues were $3.27 billion in the second quarter, up 20% driven by strong double-digit growth in both Media Networks and Film Entertainment. Media Networks' revenues increased 11% on solid growth in advertising, affiliate and ancillary revenues. Our Filmed Entertainment segment generated a 38% rise in revenues with double-digit increases in theatrical, home entertainment, TV licensing and ancillary revenues.

Viacom's adjusted net earnings from continuing operations grew 69% to $430 million in the March quarter on higher operating and equity income. And our adjusted diluted earnings per share were $0.72, up 71% from the $0.42 earned in the prior year. The strength of these results enabled us to accelerate our stock repurchase program, so we could return even greater value to our shareholders. During our second fiscal quarter, we repurchased $500 million in stock, which was $100 million more than we had previously planned. During the current quarter, we are on track to buy back $700 million of stock, and we now expect to complete the majority of our $4 billion buyback program by the end of fiscal 2011 and the remainder, no later than the end of the June quarter in 2012.

Next month, we will review the current quarterly dividend with our board, and we intend to ask for an increase, which assuming it is approved, would commence with the dividends to be paid on July 1. Viacom has never been stronger financially, and we are generating ample free cash flow to support both an accelerated buyback program and a more generous dividend, while continuing to invest in our business. We believe this is the right step for our shareholders.

Now let's move on to the performance of our divisions in the quarter. The results generated by our Media Networks segment improved across nearly every metric. We remain focused on nurturing and fine-tuning our core brands and developing programming that reflects those brand attributes. As a result, our hit ratio is up and our pipeline of development projects is full and still expanding. This work is never complete. Audiences change and we must evolve with them. Driven by our proprietary research, we've done this successfully many times with several of our brands, and we will do so again. Our track record of success makes our network some of the most highly valued brands by distributors and marketers alike across all platforms. And we are firmly committed to getting our content, under appropriate terms and conditions, into the hands of our audiences whenever they want it and wherever they happen to be.

So in addition to our long-term partnerships with traditional distributors, we have our own branded websites and apps, and we work with the innovative platforms and tools created by others. With these devices and partnerships, we are engaging our audience on their own terms and forging deeper connections between them and our content. At the same time, we are monetizing our content on these new distribution platforms in ways that provide us with incremental growth. For example, fans love our new relationship with Hulu, and we've made more library content available on Netflix from Nickelodeon, TV Land, MTV, and Comedy Central.

We are continuing to expand our portfolio of apps, which allow our audience to experience our content in new ways. One of our most recent offerings is BET's launch of its new 106 & PARK app. This is the first app to fully integrate a realtime mobile user audience with a live TV show, which happens to be the #1 music variety show on cable.

In addition, our affiliate group continues to expand the availability of next-day, video-on-demand to partners who disabled fast-forward. Last quarter, Verizon FiOS launched MTV's and Nickelodeon's authenticated sites, providing filed subscribers with access to a selection of the channel's most popular current programs, as well as library content. The program offerings will soon be expanded to include content from Comedy Central.

Our advertising revenues continue to grow with our worldwide revenues up 12% in the quarter and domestic apps sales rising 11%. Domestic growth was driven by strong upfront volume, as well as strong double-digit scatter premiums. Spending in the Movie category was up significantly, and we continue to be pleased with the growing interest from non-endemic advertisers. For example, we had solid growth in spending from the automotive companies, as well as the insurance and candy categories.

All of this was achieved without the benefit of the Kids' Choice Awards. The event and the ad dollars that go with it took place in our fiscal third quarter this year, so we will see the impact of that spending in the June quarter results when we expect to deliver another quarter of sequential improvement in our domestic ad revenue growth rate.

Also, our international advertising revenues bounced back this past quarter with a double-digit increase driven primarily by our businesses in the U.K. and Latin America.

Let me provide a few observations about the upfront season. First, the kids' upfront. It's under way and the market is robust. Categories such as toys, movies, games and even autos are showing strong interest and actively buy. We expect to build on the progress we made last year in growing our business from adult categories at the kids' upfront.

Season to date, Nickelodeon has grown its ratings among adults between 18 to 49 by 3% and its tentpole events such as the Kids' Choice Awards and iCarly and SpongeBob movie events have delivered both broadcast and top tier cable networks in terms of ratings. At this point, we have already sold substantially more volume than we had at the same time in last year's kids' upfront.

Second, the adult upfront. We are looking forward to significant year-over-year gains in both volume and pricing. At this time last year, we had solid ratings, but we were not in a position to monetize the phenomenal ratings we garnered in recent months, particularly the broadcast size audiences we've delivered for several of our top-rated programs. And now we can. And we intend to do so for future seasons of those shows.

Now a few programming highlights from our networks. MTV is hotter than ever. It just closed out its highest-rated quarter in 5 years, growing its audience by 25%. The network's ratings improved in every daypart with the biggest gains in the valuable 10:00-hour where ratings were up 91%. Jersey Shore, MTV's highest-rated series ever, was the #1 series across all television, cable and broadcast with 12- to 34-year-olds. And it ranked #7 among series across all television among adults 18 to 49. Next month, Snooki, The Situation and the rest of the gang head to Florence, Italy to begin filming Season 4.

MTV's success extends beyond the shore. The network had 2 additional top 10 original cable series with Teen Mom 2 and Real World: Las Vegas. Teen Mom 2's ratings were up 57% over the show's first season. These top 10 hits were joined by the second seasons of My Life As Liz and Hard Times of RJ Berger, both of which are outperforming their first seasons.

The audience for Comedy Central continues to grow and Tosh.0 has firmly established itself as another ratings juggernaut for the network. In its third season, Tosh.0's ratings climbed more than 50% among adults and it was the most-watched show during its time slot on all of television among Comedy's key male demos. And Tosh's stand-up special, Daniel Tosh-Happy Thoughts was the highest-rated stand-up premier in Comedy Central history among its core demos.

But Tosh wasn't doing all the work. The Comedy Central Roast that Donald Trump was its most-watched comedy roast ever among young men. Both The Daily Show with Jon Stewart and The Colbert Report delivered ratings growth with Jon firmly positioned as the #1 late-night talk show host with young viewers on all of television. And the network's newest tentpole, The Comedy Awards, reached an unduplicated audience of nearly 17 million viewers, not a bad start.

Story for Nickelodeon just keeps getting better and better. This network continues to turn out hit after hit, nurturing the existing ones, while developing new entrants. Its newest preschool show Bubble Guppies debuted last quarter and is already the #1 preschool series on TV. Nick boasts 4 of the top 5 preschool series on all of television. Nickelodeon's major live-action shows, iCarly, Big Time Rush and Victorious all delivered strong performances.

We just greenlit a fifth season of iCarly, which will roll out in 2012. iCarly's recent episode premiere, iOMG, drew 7.4 million viewers, which made it the top telecast with all kid and tween demos on all television and basic cable's top kids' telecast with 12 total viewers.

Five of Nick's newest imports, House of Anubis, ranked as the #1 show on TV with kids and tweens in its time period and now fans can look forward to a second season. The network has also enjoyed a strong start with Power Rangers, which is the top-rated show with kids, boys and total viewers in its Sunday time period, as well as a new Supah Ninjas, which launched a couple of weeks ago. And on Nick at Nite, we're looking forward to the launch of Friends, one of the most popular series of all time, which will begin to air in September.

BET celebrates its best quarter ever, that means the best in more than 30 years. Record-breaking hits, THE GAME and Let's Stay Together joined perennial favorites, CELEBRATION OF GOSPEL, BET Honors and Rip the Runway to grow the BET audience by another 5% in the quarter. In its recent upfront presentation, BET announced plans for another original sitcom, Reed Between the Lines starring Malcolm-Jamal Warner of the Cosby Show fam and Tracee Ellis Ross, formerly of Girlfriends, as well as new seasons for THE GAME and Let's Stay Together. BET will also introduce a new music docu-series called, The Message, which will explore the world of hip-hop music. The network also unveiled plans for several new scripted web originals that will run across all BET digital platforms.

Finally, we're continuing our work to reinvigorate VH1 and Spike. At VH1, we are developing several new shows to cultivate a stronger female audience. For example, Mob Wives debuted 2 weeks ago, and is delivering solid ratings. Later next month, we will also launch Single Ladies, a comedy series from Queen Latifah's production company.

SPIKE's second season of Blue Mountain State is finding its audience with the ratings up 30% over its first season. New shows Auction Hunters and Cool are both performing well. Importantly, we have several new projects in development that will better reflect our key target demos.

Our international operations are continuing to make solid progress. Two recent strategic moves have helped to boost our ratings in the key markets of the U.K. and Germany. In the U.K., we were able to move MTV to a more widely distributed tier on Sky, which resulted in an 85% lift to the network's ratings. We also reconfigured our channel portfolio in Germany. As a result, the Viva delivered its strongest quarter in more than a year with ratings up 19%. Both Nick and Comedy Central turned in their highest ratings ever in the territory.

Looking at the rest of the world, MTV's overall ratings were strong with notable gains in Spain, Canada and Australia. Nickelodeon continues to gain share in several territories and expand into new ones. And ratings for Trefis continues to grow, up double digits for the quarter opening up both short and long-term Latino-oriented advertising sales for us.

As I've said in the past, we expect our international operations to grow at a faster rate than our domestic businesses and we remain focused on continuing to expand our International operating margins.

Now let's move on to Filmed Entertainment. Paramount Pictures delivered strong results across the board in our second quarter. Four months into the calendar year, Paramount is #1 at the domestic box office. The studio's Theatrical results reflected strong performance in a film that opened in the previous quarter as well as our Q2 titles: No Strings Attached, MTV Films' Justin Bieber: Never Say Never and Nickelodeon Movies, Rango. All of these films did well at the box office. And in the case of Justin Bieber: Never Say Never, it now ranks as the #1 concert teen movie of all-time in the U.S. This is supported by a brilliant marketing campaign, and Paramount took a unique step of releasing a second version of the film, the Director's Fan Cut for a 1 week limited release just 2 weeks after the film had opened wide. The Director's Fan Cut included 40 minutes of additional footage. And as expected, the fans turned out for more Bieber.

The studio also had a strong slate of home entertainment releases in the quarter, 9 in all, which increased our revenues by 38% over the prior year. Next weekend, we premier the first of our many summer blockbusters, Marvel's Thor. We have an incredibly robust slate of films coming out over the next few months. Following Thor will be DreamWorks Animation sequel, Kung Fu Panda 2, J.J. Abrams' Super 8, our threquel spectacular Transformers: Dark of the Moon in 3D and Captain America: The First Avenger, another Marvel film.

To conclude, every part of Viacom is in great shape. Creatively, we've never been stronger. We will continue to invest in our future by feeding our development pipeline and by continuing to enhance our brands and franchise properties. Operating efficiently is now our modus operandi and it's another area that requires tremendous vigilance but the benefits are recognized by all. We will continue to return significant capital to our shareholders. We have a tremendously talented team working hard throughout this company and their collective contributions will help us to maximize the opportunities ahead for Viacom.

And now I'll turn it over to Jimmy.

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 March quarter, which is the second 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 this year's March quarter, the charge associated with the tender offer of our 6.25% senior notes, which was $87 million on a pretax basis and $54 million after tax.

Now let's take a look at our segment results. Media Networks' revenues increased 11% to $2.1 billion in the quarter. Domestic revenue increased 10% and International revenues increased 11% in the quarter. Foreign exchange had a 2 percentage point favorable impact on International revenues. Page 9 of our web deck provides a breakdown of our Media Networks' revenue performance. As Philippe mentioned, domestic advertising revenues grew 11% in the quarter. International advertising increased 19% with foreign exchange improving the growth rate by 2 percentage points. International ad sales in the quarter benefited from strong ad markets in both Europe and Latin America and from new program launches, as well as improved channel positions in the U.K..

In terms of affiliate revenues, our domestic revenues increased 9%, while international revenues increased 6%. Foreign exchange favorably impacted the international growth rate by 2 percentage points. Approximately 80% of the growth in domestic affiliate revenues was from rate increases with the remainder driven by an increase in subscribers. Internationally, 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 increased 10% in the quarter, principally reflecting higher TV syndication and consumer product revenues. Media Networks' adjusted operating income of $806 million in the quarter was 13% higher than last year. The operating margin of 39% improved 70 basis points over the prior year. The improvement in the margin was driven by strong top line growth, partially offset by a 9% growth in total expenses. Within expenses, programming expenses grew 8%, while SG&A expense grew 12%.

The growth in SG&A expense was primarily due to higher advertising and promotion expenses and, to a lesser degree, increased accrued compensation expenses. The increase in advertising and promotion expense, related to the launch of new and returning series, which contributed to our strong ratings success in the quarter, as well as to the marketing of new channel positions and certain international territories. The increase in accrued compensation expenses related to higher operating profit and ad sales.

Now turning to Filmed Entertainment. Revenues in the quarter increased 38% to $1.2 billion. Page 11 of the web presentation provides a breakdown of Filmed Entertainment revenues. Worldwide, Theatrical revenues increased 50% to just over $400 million in the quarter. The Theatrical results benefited from strong carryover revenues from our December quarter releases as well as the performance of the current quarter's slate of Rango, Justin Bieber's Never Say Never and No Strings Attached.

Worldwide Home Entertainment revenues increased 38% to $410 million. The increase reflects a greater number of Home Entertainment releases in the current quarter as we released 9 titles compared to 1 title in the March quarter of last year. TV license fees increased 30% to $336 million. The increase in TV license fees in the quarter was principally due to higher network TV and syndication revenues. Overall, Filmed Entertainment generated adjusted operating income of $39 million in the quarter as compared to a loss of $83 million last year. This $122 million improvement in operating income principally reflects the performance of our Home Entertainment releases in the quarter as well as the growth of TV license fees.

During the quarter, certain Paramount releases were made available to our EPIX pay-TV joint venture. Accordingly, Filmed Entertainment recognized $20 million of revenues and $2 million of operating income in the quarter related to these releases.

Now moving below operating income. Total company equity income from investments was $15 million in the quarter. The income principally relates to our investment in EPIX. Our adjusted effective tax rate in the quarter was 35%, reflecting 170 basis point improvement over the prior year rate. Reduction in the effective tax rate was primarily driven by an improved international versus domestic mix of taxable income from our operations.

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

Thomas Dooley

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

For the quarter, we generated $812 million in operating free cash flow compared to $351 million last year. Page 5 of the web deck presentation provides the components of free cash flow. The increase in operating free cash flow was principally due to higher operating income, a favorable working capital variance and lower cash taxes. The favorable working capital variance was impacted by the timing of annual incentive compensation payments related to the change in our fiscal year end. And these payments were made in the December quarter of this year whereas last year, they were made in the March quarter.

As for our debt, for the most part, it is fixed rate with an average cost of 5.8%. To the extent we have incremental borrowings, we are funding this in the commercial paper marketplace at an annual rate of approximately 35 basis points. We had no variable rate borrowings outstanding at the end of the quarter.

During the quarter, we took advantage of attractive rates in the public markets to improve our debt maturity profile, as well as the issue incremental debt. We successfully tendered for $582 million of our 6.25% senior notes that are due in 2016. That leaves $918 million of that series of notes outstanding. In conjunction with the tender, we issued $500 million of 4.5% senior notes due 2021. By doing this, we pushed out a portion of the debt that was coming due in 2016, improving our maturity profile at attractive rates. In addition, given the current level of rates in our earnings growth, we issued an incremental $500 million of 3.5% senior notes that are due in 2017.

In terms of leverage, we ended the quarter with $7.2 billion of debt and capital leases outstanding, and we had $1.6 billion of cash and cash equivalents, which reflects excess operating cash and the proceeds from our recent bond issuance. Our leverage ratio at the end of the quarter was 1.96x, which is below our target level. The only financial covenant in our bank revolver requires that interest coverage for the most recent 4 fiscal quarters be at least 3x. At the end of our quarter, our interest coverage ratio was 9x. In terms of returning capital to shareholders, between our buyback and dividend programs, for the first 6 months of our fiscal year, we have returned a total of $1.1 billion of capital back to our shareholders. Looking ahead, we are on pace to purchase approximately $700 million of our stock in the June quarter. So for the first 9 months of the year, we will have returned a total of approximately $1.9 billion to our shareholders.

Now I'd like to talk about some of the factors impacting the remainder of fiscal 2011. In terms of advertising, the scatter market remains strong and we have had ratings success at a number of our core channels. In addition, in the June quarter, we will have a couple of timing benefits, the Kids' Choice Awards on April 2 of this year whereas it aired in March of last year. Also, Easter fell later in April of this year. Accordingly, as Philippe mentioned, in the June quarter, we anticipate that we will have sequential improvement in our domestic ad sales growth rate. We also anticipate that international ad sales will grow double digits as we continue to see strength in Europe and Latin America.

At Media Networks, at this point in the year, we have a fair amount of clarity on our programming expense growth, and we expect it to grow in the range of 7.5% to 8% for the full year. As we look from now to the end of the year, we continue to see opportunities to grow our margins.

Given our current estimate of our domestic versus international profitability mix, we are forecasting a book tax rate of 35% for the fiscal year 2011. We are in great shape as we head into the back half of the year. At Media Networks, we've had breakout ratings performance for several new and returning series that we have launched. We are seeing stronger volumes in several key advertising categories, including strength in studio spending with a number of summer films releases targeting kids and young adults. We have also made progress in growing several non-endemic categories.

At Paramount, we are looking forward to our summer slate with the June 10 release of the J.J. Abrams directed Super 8 and the July 1 release of Transformers 3 in 3D. In addition, we are distributing Marvel's Thor and Captain America, as well as DreamWorks Animation, Kung Fu Panda 2.

Looking ahead at the studio releases, we are looking forward to sequels to Mission: Impossible, Star Trek, G.I. Joe and Paranormal franchises, as well as Madagascar 3 and Steven Spielberg and Peter Jackson's Adventures of Tintin, a remake of the movie, Footloose, under the MTV Films label and Hansel and Gretel: Witch Hunters, which will star Jeremy Renner.

In terms of free cash flow, in the back half of the year, we anticipate generating higher operating free cash flow than the comparable period in the prior year, with cash flow being weighted largely to the September quarter. The timing of P&A cash spend and participation payments will impact the June quarter, while the September quarter will benefit from theatrical receipts on our summer releases, including Transformers 3. Given the growth in earnings that we see as we progress throughout the year, we now anticipate purchasing an excess of $2 billion of our stock in fiscal 2011.

In summary, the strategic initiatives that we have put in place over the past couple of years and the capital allocation decisions we have made are paying off and putting Viacom on a path towards strong top and bottom line growth. At Media Networks, our focus on research and understanding our audiences as well as our investment in original programming is translating into improved ratings and advertising growth. And our cost discipline has enabled us to improve our core margins for the last 8 quarters.

At the studio, we continue to develop and grow our slate of franchise film, and Paramount is a leader when it comes to developing innovative marketing campaigns. We are managing the business with financial discipline, reducing our overhead and improving return on invested capital. We are focused on growing our businesses organically and using our free cash flow and the incremental capacity generated from our balance sheet to return capital to our shareholders.

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'll go first today to Michael Nathanson of Nomura Securities.

Michael Nathanson - Sanford Bernstein

I have a couple. One is, you've all said, all 3 of you said that Europe has been strong for you, and you mentioned a couple of things that you've done differently in Europe on the advertising side. And I wonder, we have been hearing reports that Europe advertising is actually getting softer. So can you tell us if you think the changes that you've done are helping you take share? Or is the market more better for cable nets and broadcasting? So a little bit more on the kind of the undercurrent within Europe, and whether or not there's a share gain in store for you. And then I have one on the U.S.?

Philippe Dauman

Michael, the European strength has been largely driven by improved ratings in our key territories. As I've mentioned, the U.K. MTV ratings are gangbusters. I mean they've practically doubled in the last few months since we made the change in positioning of the channel. Similarly, we made some changes in Germany, which is an important territory, which has boosted our ratings. And both of those are translating into higher ad sales. But we're also seeing strength in various countries like Poland and countries in Southern Europe. So we're experiencing good growth, which is continuing into this quarter. And Latin America has been a very strong part of the world for us as well. You have a second question, Mike?

Michael Nathanson - Sanford Bernstein

Yes, second question being, in the past, I know you've sold lighter networks for MTV run or schedule. You mentioned that you're looking for this upfront. Can you talk a bit about how maybe selling show by show or time period could actually -- what impact would that have on your ability to get on to CPMs and volume. So can you talk about that, Tom? I know some of you guys have focused on.

Thomas Dooley

Yes, I think overall, we're looking -- we're delivering ratings that are equivalent, better. We're better than some of the broadcast ratings on critical nights. Thursday night is one of our strongest nights. We're delivering one of the sweetest audiences that you can get out there so we're looking for pricing, and we are modifying some of the ways we sell and working with advertisers and innovative ways to package our advertising portfolio to get the most value out of it for us and provide the most value to the advertisers who want to buy into those shows. So we are shifting it around. We haven't dramatically changed the way we sell, but we are working with different advertisers in different ways to maximize revenues for us and the benefit for them.

Operator

We'll take our next question from Doug Mitchelson from Deutsche Bank.

Douglas Mitchelson - Deutsche Bank AG

Hey, at this point I'm just trying to figure out what can go wrong Philippe. So I'm curious on your philosophy and budgeting regarding cost. When revenue comes in better than expected and companies have success with their investment spending as you've had with your programming spending, the next thing we often see is the view that investment spending should accelerate, right? The more of a good thing philosophy that we like to call cost creep. So as you look at your budgets the rest of the year and start thinking about next year, is the philosophy on spending changing at all?

Philippe Dauman

Doug, no. We believe in investing in what drives our business, which is the research and programming. So our target, as we look forward into next year, is to continue to grow programming spend in the mid-single-digit territory. In other areas of cost, we continue to look for efficiencies. That's both domestically and internationally, and in our Film division, as well as our Networks division. We're watching for headcount creep. That doesn't mean that we don't hire people, but we want to make sure we hire people for the right evolution of the marketplace as technologies and distribution platforms evolve, and just keep good controls to run our business. So we do pride ourselves on continuing to drive efficiency as we go forward.

Operator

We'll go next to Drew Borst with Goldman Sachs.

Drew Borst - Goldman Sachs Group Inc.

Just a question on U.S. advertising. Some participants in the market have mentioned that CPG and food advertising was a little bit weak in March. Was that something that you guys saw, particularly at Nickelodeon where you have a lot of exposure to that? And I have one follow-up.

Thomas Dooley

Drew, advertising in Nickelodeon and advertising demand is really exceptionally strong. The endemic categories are very strong and toys are strong. There are many, many films that are coming out this summer to address the family audience, which is very good for us. And as we mentioned in our remarks, the non-endemic category growth has been accelerating. So now in the overall marketplace, we continue to see some very strong scatter demand. Obviously, there's some pockets or individual companies. We're looking at the environment more cautiously based on their individual circumstances. But what we're seeing is that their competitors are stepping in to grab market share. So we really have seen continued strength in the marketplace as we are positioning ourselves for the upfront discussions.

Drew Borst - Goldman Sachs Group Inc.

That's really helpful. And then just shifting gears to international. And I was wondering if you could talk a little bit more about the margins that you had in international in the first quarter? Obviously, we could see that total Media Networks margins improved in the quarter. How much of that was attributable to the international side? And could you just reiterate what sort of your near-term objectives are for getting margins up internationally over the next 12 months?

James Barge

Well, international margins are continuing to improve both, and that's both a result of good vitality and advertising growth that we're seeing now looking at efficiency as we go forward. On a full year basis, we expect our international margins to grow in this year into the low teens territory or low to mid-teens territory. And as we go forward, over the next 2 to 3 years, we are well on track to grow our international margins to the 20%-plus territory, which is our near-term objective.

Thomas Dooley

And while the international margins improved on a year-over-year basis, Drew, because of the magnitude of the numbers, they provided a little bit of lift, but not much lift on the overall margin improvement.

Operator

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

Anthony DiClemente - Barclays Capital

First one for Jimmy or Tom. Question's on Netflix and Hulu dollars into the consolidated model. I think that you have Hulu dollars coming in that are split between your affiliate and advertising lines in the Media Networks segment. And so I'm just wondering is there any way that you can get more granular on how Hulu and Netflix dollars I think you have library content dollars coming into ancillary, but it's just hard for us to model it without any sort of guidance on order of magnitude. And then I have a follow-up for Philippe.

Thomas Dooley

Yes, Anthony. Right now, the magnitude is not that significant so we're not going to break it out. It is benefiting advertising and ancillary at this point in time. As it becomes more significant, we will give some color on how it's impacting the thing. But at this point in time, it's just that not significant to break out. But next quarter and the quarter after that, as those numbers become more significant, we'll give some more color on that.

Anthony DiClemente - Barclays Capital

Okay, and just along that theme for Philippe, can you just talk about your level of focus on potential future broadband deals be it with Facebook or other broadband platforms in addition to your current agreements with Netflix and Hulu?

Philippe Dauman

Yes, I think we're very focused on gaining our content out there. By the way, around the world, there's a lot of opportunity on a global scale right now. And as you know, Netflix has expanded into Canada. It's the first territory, and we recently announced a Paramount deal in the pay window. With Netflix in Canada and it's looking at other foreign territories, there a number of players in different parts of the world. And domestically, there is a growing interest by the number of players in our content, as well as other media companies' content. But we are in discussions with many of those players, and you can expect over time more licensing agreements. We obviously want to wait to make sure that we get the right value in the right terms and make sure that the revenues that we are repaying are largely incremental. So we're pleased with the deals that we've made so far this year. There are more to come, and you will see the revenues and profitability accelerate as quarters go forward.

Operator

We'll go next to Barton Crockett with Lazard Capital Markets.

Barton Crockett - Lazard Capital Markets LLC

I wanted to ask for a little bit more discussion of the ad trend, the change in March over December domestically, an improvement to 11% from 10%. It was nice to see a 1 percentage point. But with the audience strength, we might have expected a bit more. And I was wondering if you could talk about why we couldn't see more acceleration. Perhaps you could quantify the Kids' Choice impact. Also talk about maybe the delay in being able to fully monetize some of the audience gains you've had.

Philippe Dauman

Well, first of all, we're pleased that we continue to I believe it's the fifth consecutive quarter of sequential domestic ad growth improvement. So we are in a mode right now of continuous improvement. We sold -- as I mentioned, a good strong portion of our inventory was sold in the upfront. And that we cannot get the benefit of higher ratings in some of our shows as to that inventory. So it's been limited to our scatter pricing. The Kids' Choice Awards shift accounted for close to 200 basis points, the shift from 1 quarter to the next, so that's really a factor. And then we are working on the improvement and they've stabilized so far. The ratings of Spike and VH1, so that's an increasing opportunity for us as we go forward as our major brands continue to build on their strength. So we're very much looking forward not just to continued strength in the scatter market as this year continues but a really great opportunity for us as we're able to get a lift in the upfront volume and pricing for the next year.

Operator

We'll take our next question from Richard Greenfield, BTIG.

Richard Greenfield - BTIG, LLC

I just was curious at one point on DreamWorks Animation. I think on their conference call the other day, they made the comment that they don't expect any update on The Situation until potentially as much as a year from now. And we're just thinking in terms of how you think about dating your films and the release slots that they occupy. Can you actually wait a year to make this decision? Or do you actually have a sense of this a lot sooner than that in terms of slotting your own films especially with your slate seeming to be improving pretty dramatically? And then two, on Spike and VH1, I was just hoping Philippe I heard what you just said, could you just elaborate a little bit? It seems like those are still drags on your overall growth. And how much opportunity do you see over the next year? How much new programming? What are the things we should be looking for in terms of a major content that's coming to each of those networks to really move the needle to get them to where you've seen some of your other networks like BET and MTV really improve year-over-year?

Philippe Dauman

Thank you, Richard. As far as DreamWorks Animation, our studio is working very hard and looking forward to the upcoming release of Kung Fu Panda 2. We also have later in the calendar year at the beginning of our next fiscal year Puss in Boots, which will also be a big title. We have a strong relationship with DreamWorks Animation. It's a multifaceted relationship. Our networks, notably the Nickelodeon family of networks, have been enthusiastic supporters of the film releases, as well as the Penguin shows we air in Nickelodeon, and we have an upcoming Kung Fu Panda 2 we show in Nickelodeon. So we value the relationship, and I know Jeffrey values the relationship as well. As you point out, our development pipeline is strong. We have many franchises, and we're very pleased with the strategic direction of the studio. We also have picked up some additional distribution opportunities notably the Martin Scorsese movie, Hugo Cabret, which we are, a 3D movie we're distributing at Thanksgiving. And there are more distribution opportunities emerging. So it's really -- we'd be pleased to extend the relationship. We think that we can accommodate it, but that's not until 2013. We will be distributing 2 DreamWorks Animation films in 2012. And we sure we will both do well, in the one scenario or another. So we'll be happy to entertain discussions when Jeffrey feels it's appropriate. I'm sorry?

Richard Greenfield - BTIG, LLC

There's no specific timeframe that you're looking for that you need to make a decision?

Philippe Dauman

Well, we plan our own strategy. We obviously start beginning to plan our 2013 and '14 release slates, and we can accommodate having the DreamWorks titles in or out. And it's really -- it'll really be up to DreamWorks Animation's to make the decisions that it feels it's appropriate for itself. As to a Spike and VH1, I'm pleased with the progress that we've made, the work, the research work and development of the brand direction has -- it's very well advanced so that we now have our development pipeline functioning through the brand filter with a strong focus on women for VH1. I mentioned some of the shows that have just launched that we have many more shows coming. The ratings, which are down year-on-year, have stabilized. And I expect we'll see improvement as the year progresses and we believe we have a good story to tell our advertisers in terms of the program direction of new shows coming into pipeline there, as well as for Spike. I'm very pleased that we're increasing the level of original programming that we have at Spike. Spike was actually a network that had very little original programming. And well, you will see over the next year or 2 a very significant increase. And that's been the driver of improvement at some of the other network turnarounds that you're seeing.

Thomas Dooley

And like all the networks, Rich, it's a couple of shows that develop strong and positive ratings growth. That builds momentum. That's a great promotion vehicle and that's how those networks build upon their own success. The good news is that the audiences that Spike and VH1 and the shows that we put on there are right in the core audiences that we want to attract back to the network. So it's a good initial start in bringing those people back to the networks. And the momentum there is something we feel very positive about.

Richard Greenfield - BTIG, LLC

And Philippe, can you talk about a substantial increase in programming expenses, is that being offset by scaling back the purchased syndicated programming? Or is it an overall big step-up for those 2 in overall expenditures?

Philippe Dauman

I think in general, across our networks, obviously we apply, we target mid-single digit increase in our programming investment. Yes, that's not applied uniformly across our networks, that's a blended average. But the direction that we're going in is to shift some dollars that we spend for acquired programming into some of this original programming. In today's environment, our audiences are looking for fresh original programming and less programming they've seen before or can find anywhere else on the dial. And we also believe that original programming serves our brands better and more distinctive and associated with our brands, and we are very much focused on continuing to grow the strength of our brands generally, again both in the U.S. and around the world.

Operator

We'll take our next question from Jessica Reif Cohen with Bank of America Merrill Lynch.

Jessica Cohen - BofA Merrill Lynch

Most of the excess cash seems to be going to buybacks. So I'm just wondering are there areas that you are interested in making acquisitions? And are there, as part of that question, are there opportunities for new channel launches? You seem to have done extremely well in India. Can you add more channels there or in other areas? And is that included -- when you talk about the margin outlook for international, is that contemplated?

Philippe Dauman

Jessica, we're very much focused on organic growth. We see a lot of opportunity to grow our brands. While we do make some modest acquisitions, they are far and few between and low in price. We are talking about the international arena, we have the opportunities to expand many, many of our brands that we already own. India has been a very good and interesting market for us. That is a joint venture, as you know. So it appears in our equity line and the callers channel we launched there continues to be very successful. Our MTV, Nick and VH1 channels are successful. And yes, we are looking to launch additional channels in India. We see some opportunities there. Our joint venture owns an Indian film studio, so you can expect for us to look at opportunities to launch a film channel and other channels in India. In general, over the long term, some of the significant emerging markets present very interesting opportunities for our brands, and that will fuel our growing asset value outside of the U.S.

Thomas Dooley

But in terms of capital allocation, Jessica, those new channels would not be significant investments given the scale of Viacom.

Jessica Cohen - BofA Merrill Lynch

And can I just ask one Paramount more question. With Marvel distribution rolling off and it sounds like you're adding others, are there better ways that you can scale Paramount's overhead? I mean is there a plan to increase your own production?

Philippe Dauman

Well, as we come off deals like Marvel, we have our own franchises kicking in. And Tom mentioned a number of them in his remarks. But it's actually a question about overhead. We are continuing to improve our overhead structure. We are reducing the overhead expense at Paramount. We are looking for opportunities to get efficiencies and partnerships or otherwise in several international markets. We've been able to do that in a few territories, and we're in discussions in other territories. So we are driving continuing improvement in overhead. At the same time, we are looking to benefit from our own franchises as, for example, the Marvel deal rolls off.

Operator

We'll take our next question from Drew Crum with Stifel Nicolaus.

Andrew Crum - Stifel, Nicolaus & Co., Inc.

Philippe, I wonder if you could comment on the Home Entertainment performance. It was quite strong. And if you separate the performance of the new releases, how did the business perform? And I would just like to get your thoughts on the overall market? And then I would like a comment on the strategy around CG animated films? And are there any plans to sequel Rango given the success that you had with that film?

Philippe Dauman

Yes, Drew. In general, the Home Entertainment market, the DVD marketplace, used to be soft particularly for catalog title. The titles that do better are the franchise titles, the family entertainment, and that is our overall film strategy. So we are playing in an area of home entertainment strength. I don't expect that on an overall basis, the DVD market will strengthen from here, but I do expect that you will see a growth in the digital streams. And as we go through that transition, we think we'll get a good place again, especially for the kinds of titles that we are producing. As far as animation, we are pleased with our first entry there. We are looking to develop our animated business with the Nickelodeon movie brand. We have some opportunities with some of the franchises that we already have on Nickelodeon's slot, and we're looking for original story ideas. So over time, this will be an area that we will develop at Paramount, and it will fit in well with our strategy of growing our brands, in this case, the Nickelodeon brand.

Operator

Our final question today, will come from Michael Morris with Davenport.

Michael Morris - Davenport & Company, LLC

Two questions on areas that seem to be potential opportunities, one on the international network business. Affiliate growth remains low, and I know you said that's the business that you think can grow at or above domestic. So can you talk about the outlook for the affiliate growth profile there and whether or not that has potential to accelerate? And then over on the Film business, great revenue quarter. Margins are still somewhat low around 3%. What's the outlook? You just talked a little bit about being able to rationalize the cost going forward continuing on that. But what's the outlook for where those margins ultimately can get to? Can it get up high single digits or up towards industry average?

Philippe Dauman

Michael, the international affiliate fees are growing. They're growing at a lower rate at this point, The domestic fees as we -- there are many countries where affiliate fees are not available, so that dampens the growth. But as we develop and as we focus more and more on the opportunities out there that this is one of the areas that we are focusing on, and by the way, I'm personally focusing on. And so over time, we expect not just advertising fees but affiliate fees to grow internationally as we expand our footprint. As far as the Film business margins, I'll let Tom get that up.

Thomas Dooley

The Film business, obviously one of the big drivers of the margin and that's the success of the films in the quarter. You'll see the Film business margin improve dramatically towards the back half of the year. And as we've been showing year after year after year, you have to look at this business on at least a trailing-4-quarter basis to get a sense of the progress we've made. But we've taken it up over the last several years and as we look forward, we're going to try and get 5% to 6% margins and then move from 5% and 6% margins over the next several years to the higher margins, the higher single-digit margins. But the caveat of that is going to be a function of those movies being profitable movies that we released. As I've mentioned in the comments, the lineup of franchise features, which for us have tended to be highly profitable feature films -- we would at iCarly, that type of margin growth would be release of those kinds of films as we move forward. So we're optimistic that we can get there, but the films have to be successful.

Philippe Dauman

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

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's Viacom conference.

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