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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

Michael Nathanson - Sanford Bernstein

Richard Greenfield - BTIG, LLC

Alan Gould - Evercore Partners Inc.

David Miller - Caris & Company

Douglas Mitchelson - Deutsche Bank AG

Tuna Amobi - S&P Equity Research

David Bank - RBC Capital Markets, LLC

Viacom (VIA.B) Q3 2011 Earnings Call August 5, 2011 8:30 AM ET

Operator

Good day, everyone, and welcome to the Viacom Third Quarter Earnings Release Teleconference. Today's call is being recorded. At this time, I would like to turn the call 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 June 30, which is the third 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. I'm very pleased once again to join Philippe, Tom and Jimmy to discuss another quarter of truly outstanding results for Viacom. We continue to prove that we have the right strategy, the best possible management team for executing our plans. Our Media Networks are creating hit after hit, sought after by both audiences and advertisers and Paramount Pictures is putting together a truly unprecedented year of broad profits as shown. Viacom has found its stride, fueled by creativity, discipline and vision and expertise. Each day provides new opportunities to deliver additional value to our investors, which gives me great confidence that Viacom's string of successes are still years and years and years ahead of us. Now I would like to turn the call over to my close friend and colleague, Philippe, about whom I've previously said is one of the wisest, if not the wisest man, I have ever met in my life. Philippe?

Philippe Dauman

Thank you so much, Sumner, and good morning, everyone. I'm pleased you could join us today. There is no question that Viacom is at the top of its game and we're pushing the bar higher. From a creative standpoint, we are developing more original programming for our Media Networks and our branded digital properties than ever before, all driven by the research we performed to ensure that we know and we understand our audiences better than anyone else. These efforts are fueling our growth in the U.S. and around the world. Many of our most successful programs in the U.S. have grown into regional and even global hits, and we are continuing to develop new brands and properties in international markets that can be introduced in a variety of countries around the world including the U.S. These creative successes continue to attract new marketing partners who want to reach the engaged audience as we deliver.

At our film studio, Paramount Pictures, we remain focused on developing strategic film slates based on a foundation of proven franchises and branded films. This approach is working, and will continue to be a valuable guide as we expand into the animation genre. Throughout the company, we also continue to drive greater operating efficiencies, work that will continue into the future so we can invest more of our resources in the content that appears on all of our screens and improve our margins.

This morning, I will review our financial results briefly as well as a few highlights from our divisions. Tom and Jimmy will provide more detail in our performance, and then, we'll be happy to take your questions. We will speak to the adjusted numbers during our discussion this morning.

Consolidated revenues were $3.77 million in the third quarter, up 15% driven by double-digit revenue growth in both Media Networks and Filmed Entertainment. Media Networks revenues increased 16% on solid growth in advertising, affiliate and ancillary revenue. Filmed Entertainment revenues grew 13%, principally driven by double-digit increases in TV licensing and home entertainment revenue. Viacom's adjusted net earnings for continuing operations grew 35% to $583 million in the June quarter on higher operating and equity income. Our adjusted diluted earnings per share were $0.99, up 39% from the $0.71 earned in the prior year.

During the quarter, we announced a substantial increase in our quarterly dividend, up 67% to $0.25 per share. This action was taken in addition to our stock buyback program. Consistent with what I said during our last call, we purchased $700 million in stock in the June quarter and we intend to buy back another $900 million in this quarter for a total of $2.5 billion by the end of fiscal 2011. The pace of our buyback reflects Viacom's strong free cash flow and our commitment to returning cash to our shareholders while also investing in the long-term growth of our business.

Now let's talk about how our divisions performed during the quarter. Our Media Networks are thriving. Our decision to increase our investment in original programming is continuing to bear fruit. Across the board, our networks have introduced a multitude of hits and there are many more in various stages of development. This creative journey is leading to more program sharing among our networks and it is helping to fuel our expansion in international markets. As a result, our base of marketing partners is also expanding, which in turn is translating into higher advertising revenues. This quarter, our ad revenues were up 14% worldwide and 12% in the U.S. Our domestic ad sales benefited from solid increases in scattered demand as well as double-digit growth in scatter pricing. While there were notable spending increases in several categories such as movies, toys and autos, the growth was fairly widespread. During the quarter, we saw year-over-year spending growth in more than 20 different categories. Looking ahead, we are targeting double-digit growth in domestic ad revenues in our fourth fiscal quarter.

In October, we'll begin our new fiscal year and begin to reap the benefits of the strong upfront completed in June. We added the upfront season with strong ratings and impressive portfolio of programming slates, and the market responded. During the past quarter, we continue to expand the reach of our content through traditional and emerging platform partners. Our domestic affiliate revenues reflect a substantial front from the expansion of incremental revenue associated with new and renewed digital distribution agreements, which involve library content across our networks. These digital deals come with very high margins, and fortunately for us, there was a lot more room for incremental growth from these types of deals both in the U.S. and internationally. We are talking with a number of new partners who are entering the digital distribution arena by making a long-form and short-form content available on their emerging platforms. As a result of these new deals, we have set a new higher base for affiliate revenues this year and we expect to continue to increase those revenues from this higher base and a high single to low double-digit annual rate every year for the foreseeable future.

On the traditional side, we continue to expand the availability of our networks in HD, which is increasingly important as audiences tend to spend more time within the HD neighborhood. And as I have mentioned in prior calls, we are also responding to affiliate interest in bringing some of our international channels to the U.S. This month, AT&T will launch Africa COLORS, our Indian Channel and MTV Arabia. The total day ratings at a few of our networks add somewhat in the quarter but there were significant programming highlights across the board. Particularly noteworthy is the expanded world of scripted programming is playing the growing success of several of our networks, including MTV; BET; TV Land; and most recently, VH1.

At MTV, what really stands out is its depth of strong programming. Even without Jersey Shore on air, MTV's ratings increased year-on-year, and it was again the #1 full day ad support cable network in its target demographic. The network aired 7 different series of specials that averaged a 1.0 rating or higher, and MTV was home to 4 of the top 5 cable telecast in the quarter, excluding sports. This quarter, MTV will debut 6 new series and bring back 5 proven winners, including last night's tremendous premier of Jersey Shore Season 4 from Italy.

At Comedy Central, The Daily Show with Jon Stewart and the Colbert Report once again ranked as the 2 most watched late night talk shows among young men, and The Daily Show topped all of its competitors among the key audience of the adults 18 to 49. In addition to South Park and the continuing growth of Tosh.0, Comedy also had the best original series launch on cable this year among its core male audience with Workaholics, which has already been picked up for its second season.

Nickelodeon continues to be the top-rated cable network amongst kids and total viewers for the 65th consecutive quarter, a record no network has come close to. In the U.S., Nickelodeon has 4 of the top 5 preschool series on TV, cable's top 3 animated series and 3 huge live-action hits whose stars are casts Miranda Cosgrove of iCarly, Big Time Rush and, Victoria Justice of Victorious all have released music albums.

In fiscal 2012, Nickelodeon will launch 500 new episodes of programming. It will also continue to expand its retail presence. Over the past year, Nick has acquired the rights to select properties that each posses strong potential for consumer products growth, including Winx Club for young girls, Teenage Mutant Ninja Turtles for boys and Beatrix Potter for the preschool set.

Across our networks, the hits keep growing. BET celebrated this year's BET Awards with 7.7 million viewers, making it the #1 award show on cable year-to-date among adults 18 to 49. Capitalizing on the fact that African-Americans are more active in social network than the general population, BET found the wave of social media buzz in anticipation of the big event. For premiere telecast, BET captured 9 of the top 10 trending topics worldwide on Twitter and it there were 7.5 million BET-Awards-related tweets on the day of the show. As a result, social media tracker trender ranked BET as the most social cable network for the month of June.

TV Land has another hit on its schedule with Happily Divorced, which has delivered solid ratings in its freshman season. This latest program joined Hot in Cleveland and Retired at 35, both of which were recognized with Emmy nominations.

VH1, which has continued to refine its brand filter and programming slate, launched 2 new hits last quarter. Mob Wives found its audience quickly, and the show has already picked up for a second season and Single Ladies, an original comedy series, is facing as VH1's highest-rated new show in 2 years and the network's highest-rated scripted series ever. These shows have fueled a resurgence in VH1's audience, which in the first 5 weeks of the current quarter, has grown 6% over the prior year period. Incidentally, Spike has also grown its audience during the first 5 weeks of the quarter by 8% over last year's comparable period fueled by Auction Hunters and Repo Games.

As I mentioned upfront, all this programming success is helping us to expand our international footprint. One example is House of Anubis, which originated in the Netherlands and is the first Nickelodeon series to be filmed overseas. After generating strong ratings in the U.S., U.K. and Australia, where it was the #1 live-action show among kids, House of Anubis is now gearing up for a second season.

I'll remind you that we own the large majority of our programming, which allows us to introduce audiences around the globe for Jersey Shore, Hot in Cleveland and even SpongeBob home in Bikini Bottom in a very cost-effective way. Ownership also allows us to take a proven concept such as Jersey Shore and localize it for a new audience. Over the last several weeks, Geordie Shore on MTV U.K. has been the highest-rated show in the channel's history.

And we're taking a new approach in our expansion of BET International. We have introduced a block of BET programming on nearly 30 different MTV channels worldwide, reaching nearly 160 million households. This move is allowing us to change the perception of BET as the niche brand in the eyes of our audience and will put up new opportunities for growth. Last month, we launched a new brand, Viacom Blink, the new premium entertainment brand for women in Poland. We intend to use Viacom Blink to capture more of the adult audience and the ad revenue that follows. We are looking forward to rolling it out into new markets over time.

Now let's move on to Filmed Entertainment. The combination of great content, innovative marketing and an increasingly efficient operation is generating the right results at Paramount Pictures. The studio currently ranks #1 in its domestic box office and it again was the first studio to cross the $1 billion threshold in domestic box office in 2011. Earlier this week, we announced the Paramount had surpassed $2 billion at the international box office, 5 months earlier than its prior record for this feat. Paramount has delivered an industry record 6 $100 million domestic box office hits in a row and it is on track to deliver record box office results for the year both domestic and foreign.

The strong performance of last quarter's releases, Marvel's Thor, DreamWorks Animation's Kung Fu Panda 2, J.J. Abrams Super 8 and the global sensation, Transformers: Dark of the Moon, will help to drive our home entertainment revenues later in the calendar year. Transformers, which set box office records over the July 4 holiday weekend and has already grossed over $1 billion globally, was released at the end of the quarter, so we will see the lion's share of that film's theatrical revenue in our fiscal fourth quarter results. The movies debuted in China shattered box office records by a wide margin generating more than $40 million in receipts in its opening weekend, nearly 80% more than the previous opening mark in that country.

Paramount also had a strong slate of home entertainment releases in the quarter, which increased our revenues by 33% over the prior year. We're currently enjoying the strong performance of Marvel's Captain America: The First Avenger. Looking ahead to the December quarter, we're going to have a great finish to the year with MTV Films' Footloose; the third installment of Paranormal Activity; DreamWorks Animation's Puss in Boots; Martin Scorsese's Hugo; the highly anticipated Mission: Impossible The Ghost Protocol; and Steven Spielberg The Adventures of Tintin, which will be distributed under the Nickelodeon Movies label.

Finally, I want to note our announcement last month that Paramount is launching its own animation division. First off, the timing is right for this move. The studio's is in great shape with a very focused strategy, a renewed level of fiscal discipline and abundant created vigor. Paramount animation will produce high-quality family CGI animated films with budgets of up to $100 million per picture. The Nickelodeon Movies label and its intellectual property will play a key role and we intend to capitalize on merchandising opportunities tied to all Paramount Animation releases. The first film in this division is currently planned for 2014.

In conclusion, Viacom's creative firepower is producing more original programming than ever before and a distinctive lineup of films, and that content is invigorating our brands and resonating with audiences around the globe. We will continue to capitalize on the evolving digital landscape and growing international media opportunities to find new ways to monetize our brands and our content. At the same time, we will continue to adapt our organization to take advantage of the evolving content creation, distribution and marketing models. Creativity, focus, discipline and resourcefulness, this is how we will grow and how we will fulfill our commitment to return substantial capital to our shareholders.

Now I will 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 of our June quarter, which is the third 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 $14 million of onetime items from this year's June quarter.

Now let's take a look at our segment results. Media Networks revenues increased 16% to $2.4 billion in the quarter. Domestic revenue increased 14% and international revenues increased 27% in the quarter. Foreign exchange had a 10 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 revenue grew 12% in the quarter. International advertising increased 30% with foreign exchange improving the growth rate by 12 percentage points. International ad sales benefited from strength in Europe and Latin America as well as from integrated marketing events in the quarter. In terms of affiliate revenues, our domestic revenues increased 20%, while international revenues increased 16%. Foreign exchange favorably impacted the international growth rate by 9 percentage points.

The growth in domestic affiliate fees was driven by the availability of programming associated with digital distribution agreements as well as by rate increases from traditional distributors. Excluding the impact from the digital distribution agreement, domestic affiliate revenues grew high single digits in the quarter. Approximately 75% of this growth was from rate increases with the remainder driven by an increase in subscribers. International affiliate growth for the quarter was driven by a combination of rate increases and increased subscribers.

Now moving to ancillary revenues. Worldwide ancillary revenues increased 13% in the quarter, principally reflecting higher consumer product revenues, partially offset by lower home entertainment revenues. Media Networks adjusted operating income of over $1 billion in the quarter was 27% higher than last year. The operating margin of 43% improved 390 basis points over the prior year. The improvement in the margin was driven by top line growth of 16%, partially offset by 8% growth in total expenses.

Within expenses, programming expense grew 7% while SG&A expense grew 14%. Foreign exchange negatively impacted the growth rate for programming expense by 2 percentage points and the growth rate for SG&A expense by 3 percentage points. The growth in SG&A expense in the quarter was due to higher advertising and promotion expense related to the marketing of new and returning original series and specials, as well as increased accrued compensation expense, primarily due to stronger operating performance.

Now turning to Filmed Entertainment. Revenues in the quarter increased 13% to $1.4 billion. Page 11 of the Web presentation provides a breakdown of Filmed Entertainment revenues. Worldwide theatrical revenues declined 9% to $588 million in the quarter. As Philippe mentioned, we continue to extend the strength of our film slate, releasing 4 solid titles in the quarter, each of which has gone on to exceed $100 million in domestic box office. Revenues from the current quarter's slate exceeded those from last year's June quarter slate. However, this performance was more than offset by the benefit from carryover revenues in the prior year's quarter. The current quarter slate included Super 8, Kung Fu Panda 2, Thor as well as Transformers 3, which was released at the end of June. While the prior year's carryover revenues benefited from How To Train Your Dragon. Worldwide home entertainment revenues increased 33% to $331 million. The increase primarily reflects the performance and number of our current quarter releases as well as carryover revenues from titles released earlier in the year. Releases during the quarter, included True Grit, Justin Bieber: Never Say Never and No Strings Attached.

TV license fees increased 36% to $416 million. The increase in TV license fees in the quarter was due to higher pay TV, foreign syndication and network TV revenues. Ancillary revenues increased 57% to $72 million, primarily due to higher digital revenues. Filmed Entertainment generated adjusted operating income of $49 million in the quarter as compared to income of $69 million last year. The decline in operating income principally reflects lower theatrical result, which were impacted by the timing of theatrical releases and P&A spend, including the late June release of Transformers 3. The decline was partially offset by higher profits in home entertainment of revenues and TV license fees.

During the quarter, certain Paramount releases were made available to Epix pay-TV joint venture. Accordingly, Filmed Entertainment recognized $15 million of revenue and $7 million of operating income in the quarter related to these releases.

Now touching on corporate. Expenses increased $13 million in the quarter, the increase related to higher incentive compensation cost as a result of our improved operating results and the appreciation of our stock price. Moving below operating income, total company equity income from investments was $12 million in the quarter. The majority of the income relates to our investment in EPIX.

And our adjusted effective tax rate in the quarter was 35%, reflecting 160-basis-point improvement over the prior year adjusted rate. The reduction in effective tax rate is primarily driven by an improved international versus domestic mix of income from our operations.

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

Thomas Dooley

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

In the quarter, we generated $369 million in operating free cash flow in the June quarter, compared to the $370 million that we generated last year. Page 5 of the Web deck presentation provides the components of free cash flow. Higher operating income was offset by higher working capital utilization related to the timing of theatrical releases, including Super 8 and Transformers 3 and by an increase in cash taxes paid related to the higher pretax income.

In terms of 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. We had no variable rate debt outstanding at quarter end. As for our leverage, we ended the quarter with $7 billion of debt and capital leases outstanding and $955 million of cash and cash equivalents. During the quarter, we paid off the remaining $193 million of outstanding of our 5.75% senior notes when they came due on April 30.

At June 30, our $2 billion bank revolver was undrawn. Our leverage ratio at the end of the quarter was 1.8x, 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 the quarter, our interest coverage was approximately 10x.

In terms of returning capital to our shareholders, between our buyback and dividend programs for the first 9 months of the fiscal year, we have returned a total of approximately $1.9 billion of capital to our shareholders. We increased our dividend by 67% to $0.25 per share beginning with the dividend payment we made back on July 1.

Looking ahead, we are on pace to purchase approximately $900 million of our stock in the September quarter. So for the fiscal year 2011, when you consider dividends and share repurchases, we will return a total of $2.9 billion of capital to our shareholders. That is a return of 11% based on this morning's market cap.

Now I'd like to talk about some of the factors impacting the remainder of our fiscal year. In terms of advertising, our upfront base provides a solid foundation for our ad sales next year. Philippe discussed our expectations for the domestic ad sales growth in the September quarter. In terms of international ad sales, the June quarter benefited from integrated marketing events, which have become an important and growing part of our international ad sales model. In the September quarter, we will not have as many of these events, and this will result in a somewhat lower growth rate when compared to the June quarter's 30% rate of growth.

As for affiliate revenue, we feel very good about our ability to grow these revenues and the incremental opportunity to monetize our content with fast-growing digital distribution partners provides further upside. On an annual basis, we continue to see affiliate revenue growth in high single-digit to double-digit range based on this year's affiliate revenue base, which includes incremental digital agreement revenue. However, given that the recognition on some of these deals is tied to product availability, quarterly affiliate revenue growth will not be as linear as it has been in the past.

At Media Networks, we continue to expect that our programming expense will grow in the range of 7.5% to 8% for the full year. 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.

Now turning to the September quarter. We like how the quarter is shaping up. As of now, the advertising marketplace remains solid and we are launching a number of new and returning series, including Season 4 of Jersey Shore, which premiered last night. At Paramount, the release of Transformers 3 has achieved global success and has already exceeded $1 billion in box office sales. The studio should see strong growth in profit for the quarter as it benefits from the performance of Transformers 3 and the pay television availability of other theatrical releases.

As we look ahead at the studio's development pipeline, there are a number of sequels to our existing franchises, including Mission Impossible: Ghost Protocol, which comes out December, as well as sequels to Star Trek, G.I. Joe and Paranormal Activity. The studio's also currently shooting World War Z, which stars Brad Pitt, and they are working on a sequel with the Jack Ryan series with Chris Kline in the lead role.

In terms of films that leverage our Media Networks brands, paramount is developing a Nickelodeon-branded wide-action movie based on Teenage Mutant Ninja Turtles franchise, which is also being developed as an animated TV series on Nick. MTV-branded films will include a remake of Footlose, which comes out this October as well as Hansel and Gretel: Witch Hunters starting Jeremy Renner, which comes out -- comes in theaters next year. In addition, Paramount's recent announcement to launch an animation division will add one CGI animated franchise per year to the slate starting in 2014.

In summary, we continue to be excited about the strategic position of Viacom, our creative momentum and our long-term growth prospects. At Media Networks, our investment in research and original programming have strengthened our brand and their connection with consumers. The leverage we are getting from this investment is translating into improved ratings and ad sales performance, including our recently completed upfront. We have also secured long-term growth in our affiliate agreements. The addition of new distributors on digital platforms is an indication of the power of our content and the incremental opportunity to monetize our brands. Paramount has achieved great success at the box office this year. They continue to develop and grow their slate of franchise films without requiring incremental capital. And with their recent decision to launch an in-house animation division, Paramount will develop franchises with consumer product opportunities that leverage the Nickelodeon brand.

Our overall focus on organic growth and capital allocation has enabled us to drive both top and bottom line results, while enhancing our margins and increasing our returns to shareholders. We will continue to invest in our programming and in our brand and we will continue to drive incremental efficiencies across all of our operating business.

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] And we'll take our first question from Richard Greenfield with BTIG.

Richard Greenfield - BTIG, LLC

A couple of questions. First off, when you look at Digital, it looks like it added about $70 million in the quarter to your affiliate fees. I'm just wondering how much of that is kind of onetime library availability for the fiscal year? And how do we think about the recurrence of that? And then I have a bigger picture question for Tom. When you talked about capital strategy, you talked about a 1.8x leverage ratio given what I think is going to be robust growth in Q4. It looks like you're going to end the year even with that $900 million at just above 1.5x leverage. It seems with the increasing growth rate of your business that you should be levered closer to 2.5 if not 3x and I'm just curious how you kind of -- what do you do with the cash? It seems like you're outgrowing your leverage strategy given how good the business is doing. And is there a point where you think about something to reset leverage at a higher level, whether it be special dividend or your ramp in buyback, et cetera?

Philippe Dauman

As far as the digital revenues, as I indicated in my remarks, a lot of the deals that we've been doing do relate primarily to library product, and obviously, the accounting requires us to recognize revenues that relate to products that are available. There are refresh obligations over the course of these agreements, so not all of it is available on the existing agreement. In addition to which, there will be some additional agreements that we'll be entering in to. We are in a number of discussions right now. So that gives us the runway to be able to say that we expect on this higher pace we set this year to continue to grow in high single-digits, if not double-digit rates, every year for the foreseeable future as far as I can say. I'll let Tom talk a little more about our capital strategy, but it is good news that we are continuing to generate free cash flow. We're able to ramp up our return of capital to shareholders. We've managed to increase our dividend, we're increasing the pace of our buybacks and we're doing it in a progressive measured way and we expect to continue to provide great returns to our shareholders for quite some time.

Thomas Dooley

Rich, just going to the onetime notion of the digital revenues, there's more, it's not really just a onetime phenomena even in the deals that we have struck, there'll be additional revenue that comes into the company based on the product that has been purchased, when that product either becomes available or when it becomes produced and made available to those digital partners. So it's not a onetime event. However, as I noted in my comments and remarks, it's lumpy or it will be in one quarter, it might not be in the next quarter and then it will come in the following quarter because its driven by availabilities of products for those markets and those windows.

Richard Greenfield - BTIG, LLC

So if you were $70 million this quarter, it's fair to say that the overall number is well over triple figures for the year?

Thomas Dooley

We're not breaking out the number but it is a significant amount of money that will come in over the next several years. And this is not the only part of it. It will be significant in every year and into the future. The leverage ratio of 2x is a target that we have set for ourselves as a leverage ratio that we're going to stick to and be committed to. From a capital markets point of view, we think it's very important for us to run the company with that. And we also think that given the cash flow generation capabilities of Viacom, we'll be able to buy a significant amount of shares back well within -- while maintaining that leverage ratio. So given how we see the cash flow dynamics of Viacom on a go-forward basis, we're going to buy back a lot of shares at these bargain prices.

Operator

And we'll take our next question from Doug Mitchelson with Deutsche Bank.

Douglas Mitchelson - Deutsche Bank AG

I was also particularly interested in the comments regarding sustainable growth in digital licensing revenue. I think we are all trying to figure out what multiple to put on that profit stream. So I understand what might drive the revenues in the short-term fiscal '11, fiscal '12. But you detailed confidence in multiyear growth. Can you just show share with us the specific drivers that give you confidence that there will be growth well off into the future?

Philippe Dauman

Doug, let's start with -- we have affiliate revenue in the so-called traditional distribution arena. And by the way, I say so-called because many of the traditional distributors are, by the way, interested in getting incremental digital rights as we go forward and some of those discussions are taking place as well. And under the so-called traditional agreements we had in place, these are generally long-term agreements. We know what the increases are in those agreements. We don't have any year going forward where more than 20% of our revenues are up in our traditional sort of revenue streams. So we have a lot of visibility there in the, what you would now call, the pure digital distribution players and that the number of players continues to increase, there is great demand for our content for obvious reasons. We own a lot of content. The content skews young. These are people who use these distribution platforms and it provides us with great opportunity, not just in the U.S. but internationally where you will see much more business being done in that arena. Some of the deals we're doing, they tend to be shorter term than the traditional deal, but they're starting again to be 2-year type of deals and so forth. And as they become more established, they could get longer. There's just a lot of demand, a lot of visibility and our content resonates particularly in all parts of distribution. So we have a lot of confidence in what we see ahead. The high single-digit rate of growth that we are talking about should be relatively easy to achieve and that's why we talk about high single digit to low double digit, which as that form of distribution grows could become more and more of a reality for us as we go forward.

Thomas Dooley

Doug, an interesting statistic that supports the popularity of our programming in both the new digital distribution world and in, more importantly, in the existing digital distribution world and cable operators free video on demand distribution from January 2011 to June 2011, Viacom product was downloaded 581 million times, which is a phenomenal number but it indicates the popularity of our product and the popularity of our product within cable system. So we think there's great opportunity to continue to use these new models to distribute our content to consumers.

Douglas Mitchelson - Deutsche Bank AG

If I could just do a quick follow-up, I think this is implicit in your comments but do you see more competitors in the U.S.? Or are you negotiating with more distributors in the U.S. than just Netflix and then Amazon has already started to sign deals? Do you see more than just those 2?

Philippe Dauman

Yes, Doug. The answer's yes. There's a lot of interest in this arena, and it's -- but we've always thrived on competition in the distribution arena and there's now more competition than there's ever been and it's growing. And again, I want to stress it's not just in the U.S. There is increasing competition, we see it in Canada, Latin America, Europe and we expect to see more in Asia as well.

James Barge

Very healthy for the price points of product overseas.

Operator

We'll take our next question from Michael Nathanson with Nomura.

Michael Nathanson - Sanford Bernstein

I have a couple for either Tom of Philippe. Can you give a sense of what are the incremental costs associated with doing the digital deals? What type of margins are we talking about for licensing this content?

Philippe Dauman

The margins for us are an excess of 75%.

Michael Nathanson - Sanford Bernstein

Okay. And then, Philippe, there's talk of DreamWorks walking -- animation walking away. What can you do to offset that loss profit associated with that relationship at Paramount on starting animation?

Philippe Dauman

Yes. There's been what I consider to be a surprising amount of attention on this particular issue. Let me answer it this way. Let's start with the vibrancy of Paramount from both a creative and marketing distribution standpoint. We've had 6 $100 million box office films in a row, including Kung Fu Panda 2 as 1 of the 6. We appreciate Jeffrey's kind remarks last week about how well Paramount distributed Kung Fu Panda 2. We look forward to distributing Puss in Boots in the fall and the 2 pictures remaining next year under our deal. DreamWorks Animation has indicated it's not prepared to address its distribution agreement until next year. In the meantime, we are currently greenlighting and sliding releases for the 2013 release year at Paramount. So given that situation, and the fact that we have a large number of franchises that Tom indicated in his remarks and I indicated in my remarks, we are proceeding on the operating assumption that we will not be extending the DreamWorks Animation deal beyond next year. So we will have a vibrant pipeline of films. Over the long term, our slate will be dictated by our strategy of focusing on our franchises, our brand and it will be supplemented by some third-party distribution products, which I can say would be more tactical. For example, later this year, we're releasing Hugo, the Martin Scorsese movie, which is a distribution film. So those will continually come up and Paramount will do just fine under any scenario, and DreamWorks Animation will be to just fine under any scenario. So we're happy to be in business with them through the studio, through the other parts of our company, and that relation will continue in one form or another.

Operator

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

David Bank - RBC Capital Markets, LLC

First off, you gave us some interesting disclosure in terms of the sources of domestic affiliate growth -- that high singles number with about 25% coming from sub-growth it sounds like. So if you kind of look at the commentary around what we've heard that distributors talk about, you guys would know better than we would what the exact growth is of overall subscription, but it sounds like the majority of the growth would be coming from the increased distribution of existing channels to subscribers as opposed to kind of new overall subscriptions. So could you talk about like are there any platforms that are driving that more than others, expansion of distribution of channels that kind of stand out and the sustainability of that? And then second question is just any commentary around cancellation activity? Have you seen it relatively stable? Given the macro, has there been any change?

Philippe Dauman

Okay. On the first question, on the source of domestic affiliate, the traditional source of traditional affiliate growth. Just to clarify, it's 75% based on rate, 25% based on sub-growth. The sub-growth is a combination of the fact the universe is expanding. We do get delayed data, but based on the data that we have, which covers April and May for the quarter, there has been overall growth in MVPD subs in the universe, so some of that sub-growth is general industry growth. And then, some of it is the fact that we still have some of our networks are increasing their distribution footprint. Some of our networks are fully distributed, others, not. So that's -- on the cancellations, what would that relate to?

Thomas Dooley

The cancellation, I'm assuming you're referring to options, people taking options in the advertising marketplace?

David Bank - RBC Capital Markets, LLC

Yes, exactly.

Thomas Dooley

Any increase of that level of activity whatsoever at this point in time.

David Bank - RBC Capital Markets, LLC

Great. Just one quick follow-up, I'm sorry. Philippe, are there any -- in terms of increased distribution, are there any that stand out in terms of the channels that may be increasing distribution?

Philippe Dauman

Well, you have Centric as an example of a channel that has room to grow. You have a number of our digital networks, whether it's Nicktoons, which is of course very, very successful; TeenNick. So Nickelodeon family channel, Logo, Tr3s. So in the aggregate, we have a number of channels which are enjoying great ratings success in the family and are becoming more and more desirable to both consumers and our distributors.

Thomas Dooley

And we brought new channels in from overseas that get distribution that add to the equation.

Operator

Our next question comes from Alan Gould with Evercorp Partners.

Alan Gould - Evercore Partners Inc.

I've got 2 questions. First, Philippe, can you give any sense on the length of the time of some of these digital distribution deals? I believe a lot of CBS best deals are 2-year deals? And second, can you address the upfront ad sales? How much higher were they? I know their north of 10%, but how much higher were your rates and what sort of volume did you sell out this year?

Philippe Dauman

As far as our digital -- again as a general matter, and I addressed that in the previous question. The digital distribution deals tend to be shorter than the traditional deals for now as the marketplace evolves. You hit on 2 years that seems to be the next sort of the average or the median, however you want to call it, deals being done out there, some people are doing them a little longer now. The 3 years are a little shorter. So that's currently the case that might evolve over time. As far as the upfront, we're very satisfied both on pricing and on volume. The average unit pricing that we achieved was in double digits across our portfolio of networks. And as far as the volume growth year-over-year, we were in the teens, in mid-teens in terms of volume growth. So we're very pleased with the platform that gives us as we enter into our new fiscal year in October.

Operator

We'll take our next question from Ben Swinburne from M.S.

Benjamin Swinburne - Morgan Stanley

I guess I wanted to ask about your digital strategy which sounds like it's continuing to evolve and I would agree with you, the number of new entrants is going to increase. As you mentioned, Philippe, most of the sales have been around library content and I'm wondering how you feel about selling your channels on a linear basis to an online distributor? So just to sort of make up a hypothetical, if Google were to come to you to launch a YouTube product, subscription product that included all your channels and paid you I think it's $350 a month per sub or so which is what you're getting traditionally. Is that a deal you'd consider or do think that gets us too far sort of over the edge on putting the existing model at risk?

Philippe Dauman

Well, Ben, I don't like to deal with hypotheticals and nor do I like to negotiate in public, but let's look back at history. Yes, we -- historically, we dealt with one distributor, Ben, and that was the local cable company. And then, satellite distribution emerged and we did -- and we established a model with satellite distribution and Telco Distribution established a model. The digital distribution model right now is very differentiated. The Google+ model is different from the Netflix model is different from the Amazon model. So they made different ways of selling their content. Some of it is analogous to syndication, some of is more analogous or closer to traditional ways, VOD. But we're open to different models as long as they generate incremental monetization opportunities both short term and long term, we do think about the long term for our content and our brands, and we are very thoughtful about it and we differentiate among the different types of content that we have. I'll show you an example, and I've used this example before, we will air online Daily Show and Colbert earlier than we would some other shows because there is a new episode every day and we have found that the digital distribution, the prior day show will help drive the marketing on our traditional channels for those shows. So that might not be the case for other shows, which repeat more on our air. So we're getting increasingly sophisticated as we go forward in how our digital distribution strategy should evolve.

Operator

And we'll take our next question from David Miller with Caris & Company.

David Miller - Caris & Company

Philippe, not to beat a dead horse here, but just another question on DreamWorks Animation. It just seems to me, and this is my personal opinion, feel free to disagree, that these DWA movies could emerge from their deficit situations a lot quicker in the global theatrical frame if the print and advertising number was significantly less. And I believe, correct me if I'm wrong, that the P&A number for Rango was materially less than your sort of typical generic P&A number for the DWA movies. Do you agree with that, number one. And number two, has that been in any way kind of a bone of contention between you and Jeffrey and a source of the notion that you guys could be cutting DWA loose?

Philippe Dauman

First, let me stress that Jeffrey and I have a very good strong relationship. We have a deep relationship between our companies. It's not just a Paramount relationship, it's a Viacom relationship. And by the way, I'm a big believer on the A part of the P&A spending. Advertising does work and drive the motion pictures and other products around the world. And we've certainly done I think a great job in marketing the DreamWorks Animation films. We've done it in close coordination between Paramount and DreamWorks Animation, and our people are very committed to doing a great job on those shows. So...

Thomas Dooley

And -- I mean, Jeffrey is a person who is really intimate with the details and the distribution of all this product and works with Paramount hand in glove to set those targets. So there's nothing being done there that he's not in total accord with and it proves very successful in terms of the overall worldwide distribution of those films.

Philippe Dauman

Yes. I mean, as I've said, in the notion, there's been any kind of friction in connection with distribution of the films under this arrangement is fantasy because the relationship is very good and the only issue is what DreamWorks Animation wants to do strategically happens to expire and how that fits in with our own strategic objectives. And that's all there is to it.

Operator

We'll take our next question from Tuna Amobi with Standard & Poor's equity group.

Tuna Amobi - S&P Equity Research

[indiscernible] as well. So on the deal that you did with Netflix in Canada, I believe that was due to the legal restrictions in that market. So as you think about other regions, are there -- would that be a strategy that you might want to adopt to do an exclusive pay TV window kind of deal in markets, other markets that such restrictions might also be applicable? China comes to mind. Or even in other markets where there are no such restrictions, would you be willing to do those kinds of exclusive pay TV window deals with Netflix? And then the second question, if I may, just kind of going down memory lane. As I think about 5 to 6 years ago when the 2 companies were separated, right? So Viacom and CBS and Viacom being positioned as the growth company and CBS as a value of company. Clearly, both companies have been tremendous well since then, so that's a good thing. But it seems like in the investors' minds at least the lines between the 2 are becoming more and more blurred, so both companies now paying dividends and share buybacks that I know since the separation, and you guys launch Epix and CBS launching the studio, you're doing the same digital deals with the Netflix and Hulus of the world. So the question is now, now that this line is blurring and investors are really curious to know, what is it that really separates these 2 companies? I mean, what is the core kind of thesis for both Viacom and CBS now that there seem like there's kind of content convergence on both sides? So any color on that would be helpful from Philippe or perhaps Sumner might also want to chime in.

Philippe Dauman

I'll address both questions. As far as the pay window for our films outside of the U.S., yes, we did do an exclusive deal with Netflix in Canada at a very attractive price compared with the incumbent alternative. We are in -- we have been having discussions in other parts of the world with Netflix and other players as well as traditional distributors. Again, it is injected either opportunity, as you point out, in some countries where the pay market is not so robust or competition with incumbents, and we are driven to attain the best modernization we can for the pay window. So I do expect that you will see more of these deals with not just Netflix, but potentially other players. I would mention LOVEFiLM film as an example in Europe. As far as the split, that's going to be ancient history at this point. I and our management team are focused on Viacom. We have a great strategy focused on our content. We are 100% focused on our content and our brands. That strategy and our focus are playing out really well and we see growth ahead in our business as we've discussed this morning, and we are also happy to be able to return a lot of capital to our shareholders both in the form of dividend and buyback given our cash flow generation and our complete focus on organic development of our brand.

Tuna Amobi - S&P Equity Research

Any comments on China?

Philippe Dauman

China is I hope a long-term opportunity for our company. It's been a limited short-term opportunity for some of our films like Transformers that we have great domestic box office performance, but in our Media Networks business, the environment continues to be fairly restrictive. To the extent that digital distribution opens up opportunities in China, I have had some discussions with a couple of the emerging players there and that could perhaps be an entry point into China. But I don't see China as a big short term in any of that opportunity for us as compared to markets like India, for example.

Thomas Dooley

The film market there is growing nicely and Transformers 3 has done remarkably very well.

Operator

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

Jessica Cohen - BofA Merrill Lynch

I was just wondering if you could comment on international margins. I mean, given a -- where they are now and also, it seems like the long-term opportunity if anything has gotten better, given the growth in subs and advertising and the corresponding affiliate fees. So could you just comment overall where you think that can go?

Philippe Dauman

Yes, Jessica, I think it's a great long-term opportunity for our company and an area of great focus for us right now. Our current margins have grown to mid-teens. We are well on track to achieving our previously announced goal of getting to the 20-plus percent margin territory within the next 2 to 3 years, probably closer to 2 years in our international media business. That's going to be done through a combination of growing our brands there, getting more focused operationally. We have specific plans to do this region by region, country by country and I'm very pleased with the success that we're enjoying. And increasing our reach through the Paramount brand, the BET brand, the new Blink brand that we launch in Poland, that will help us get there.

James Bombassei

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

Operator

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

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