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Viacom (NASDAQ:VIAB)

Q1 2012 Earnings Call

February 02, 2012 8:30 am ET

Executives

James Bombassei - Senior Vice President of Investor Relations

Sumner M. Redstone - Founder and Executive Chairman

Philippe P. Dauman - Chief Executive Officer, President and Member of The Board of Directors

James W. Barge - Chief Financial Officer and Executive Vice President of Tax & Treasury

Thomas E. Dooley - Chief Operating Officer, Senior Executive Vice President and Director

Analysts

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

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

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Alan S. Gould - Evercore Partners Inc., Research Division

Anthony J. DiClemente - Barclays Capital, Research Division

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Richard Greenfield - BTIG, LLC, Research Division

Operator

Good day, ladies and gentlemen. Welcome to the Viacom Fiscal First Quarter 2012 Earnings Release Teleconference. Today's call is being recorded. And at this time, I would like to turn the call over to Senior Vice President of Investor Relations, Mr. Jim Bombassei. Please go ahead, sir.

James Bombassei

Good morning, everyone, and thank you for taking the time to join us for our earnings call for the quarter ended December 31. 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. I want to refer you to Page #2 in the Web presentation and remind you that certain statements made on this call are forward-looking statements that involve risks and uncertainties. These risks and uncertainties are discussed in more detail in our filings with the SEC. Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website. And now, I'll turn the call over to Sumner.

Sumner M. Redstone

Thank you, Jim. Good morning to all. I am pleased to once again also join Philippe, Tom, Jimmy to discuss Viacom's quarterly results. Despite a choppy overall economy, it was in fact another successful period on both the top and bottom line for Viacom as we continue to use our creative resources, our financial discipline to deliver for shareholders. Our Media Networks are highly in demand all over the world. The creative minds behind our brands are constantly evolving our private property to ensure genuine connections in our industry [ph], new opportunities for our business partners. Paramount Pictures continued to prove they have an unparalleled ability to market and distribute a great slate of motion pictures and ended the calendar year ranked #1 of all the United States box office, the #1 studio. We are indeed in a strong position [indiscernible]. Then, of course, is this possible with our outstanding leadership. Our experienced management team skillfully execute our plans to provide valuable creative content to audiences across the globe for the long-term benefit of our shareholders. Now I'd like to turn this call over to the leader of that team, a man who I appropriately call the wisest man I have ever met, my friend and colleague, Philippe Dauman.

Philippe P. Dauman

Thank you very much, Sumner. And good morning, everyone. I'm glad you could join us today. Despite headwinds in ad sales, Viacom ended the first quarter of our fiscal year with significant strength. Across the company, we have real momentum. Creative and operational excellence are showing through in every corner of our business and at this early stage, we are seeing ad sales improvement in the second quarter. We're continuing to invest in more and more original programming to strengthen our brands and their deep audience connections. It was true in 2011 and it will be true again in 2012. In fact, in our 2012 fiscal year, Viacom will invest about $3 billion in our Media Networks programming. As a result, our Media Networks attract the most desirable audiences, making Viacom a first-choice partner for marketers and distributors alike. This investment and those relationships will drive our success quarter-after-quarter and year-after-year.

We continue to see strong affiliate growth as both existing and emerging distributors turn to our brand to fuel their products and services. We expect our affiliate revenue to grow on an annualized basis in the high-single to low-double digit for the foreseeable future. As we unlock value for our content across platform, we're unlocking growth potential across global markets as well, expanding our footprint and margins internationally with our Media Networks and Paramount's rich film library. Creative success and operational discipline are hand in glove at Paramount Pictures, and the studio remains focused on its strategy of releasing a streamlined slate of franchise tentpoles and reasonably priced films with box office potential, supported by one of the industry's finest distribution and marketing organizations. And that strategy is clearly working as evidenced by Paramount's outstanding performance as the #1 studio at the worldwide box office in 2011.

Finally, by operating efficiently, managing costs and seizing every opportunity to monetize our content, we continue to generate significant free cash flow and to make good on our commitment to return substantial capital to our shareholder both in the form of stock buybacks and dividends.

This morning, I will briefly review our financial results for the first quarter and share highlights from our divisions. Tom and Jimmy will provide more detail, and then we'll gladly take your questions. Let's begin with the numbers.

Viacom's consolidated revenues grew 3% to $3.95 billion in the first quarter, driven by growth in both our Media Networks and Filmed Entertainment segments. Media Networks delivered 3% growth in revenues and a 7% increase in operating income on strong increases in affiliate revenues. Filmed Entertainment grew revenues by 4%, driven by higher theatrical revenues, but solid bottom line decline due largely to the comparison with the sale of Marvel Studios' distribution rights in the first fiscal quarter of 2011. Our net earnings from continuing operations decreased 5% to $591 million in the December quarter and diluted earnings per share increased to $1.06, up 4% over the first quarter of fiscal 2011. During the first quarter of fiscal 2012, we repurchased $700 million in stock and in the current quarter, we are on track to buy back another $700 million.

Let's turn now to our Media Networks. Our portfolio of cable networks is the strongest in the industry, accounting for a far greater share of all basic cable viewing in the U.S. than any other programming group. We built equity with our audiences by knowing and understanding them better than anyone. We have a proven ability to translate consumer insights into compelling original programming, innovative multi-platform content and valuable connections through social media. We will continue to invest judiciously in original programming, research and marketing to keep our Media Networks thriving regardless of changes in the media landscape and economic environment.

As I indicated in December, we did see softness in the overall ad market during our fiscal first quarter. For the quarter, our advertising revenues decreased 3% domestically and 4% internationally. Domestic declines were driven by significant softness in volume in the scatter market, especially after Thanksgiving and previously discussed rating softness. We are seeing signs of recovery in the current quarter scatter with a number of buyers returning to the market. As they do, we are confident that our brands will capture their share of dollars.

Shifting gears to distribution. Worldwide affiliate revenues increased by 16%, driven by significant rate increases and the benefits of digital distribution. During the quarter, we successfully closed a number of affiliate deals and expanded existing agreements, including growing our HD footprint with several cable and telco providers. We also locked up additional distribution deals, including our launch with the debut of Netflix in the U.K. And next week, a new online partner will announce a deal we just signed that involves a wide selection of our library content. Partnerships like these are high-margin opportunities to monetize our content library. We see a significant opportunity for continued growth here.

We are also stressing our relationships with traditional distributors by fueling the expansion of their products and services, including increased offerings across VOD, authenticated websites and apps and ITV. As we continue to innovate and expand our partnerships with our existing distributors, we are constantly evaluating new distribution opportunities for our content, both long and short form.

International growth is a key priority for Viacom. Over the last several years, we have made it a strategic priority to streamline and strengthen our international organization, pursue strategic initiatives and partnerships and launch more channels and more original programming to drive ratings and revenue. We're seeing real progress. As we said on the last call, we are well on our way to achieving our goal of 20-percent plus margins internationally in our next fiscal year.

The first quarter of fiscal 2012 was a very strong quarter for Viacom International Media Networks, driven by affiliate growth and expanded efficiencies. We see our affiliate growth continuing and ad sales growth returning as we move forward.

Our priority channels for global expansion showed strong ratings growth. Internationally, ratings at Nickelodeon and Comedy were up substantially. The EMAs, MTV's signature international tentpole, saw ratings up 37% across global markets. We successfully launched new comedy channels in Holland, India and Africa and yesterday, in Latin America. We'll be announcing more comedy launches soon.

We have also begun a number of consumer products initiatives. Consumer products is another area with significant upside over the next several years. Our pipeline is rich with character-driven content in Nickelodeon and our new Paramount Animation label that will help drive consumer products growth in the long-term.

Moving to ratings highlights at our domestic Media Networks. The first quarter of fiscal 2012 was MTV's highest-rated December quarter in 4 years and the network's eighth consecutive quarter of year-over-year growth overall. MTV continues to assert itself as the cultural home of the millennial generation with a smart mix of original reality and scripted programming. Jersey Shore was the #1 show in MTV's target 12-34 demo every week it aired and returned this quarter with a premiere episode that attracted 7.6 million viewers. Teen Mom 2 was the #3 original cable series in the 12-34 demo for the quarter and new shows, Ridiculousness, Beavis and Butthead and breakout scripted-hit, Awkward, all placed among the top 25.

MTV also built on a social media dominance, finishing the first quarter as the #1 media network on Facebook, the #1 brand on Foursquare and Tumblr and the most social cable network of 2011 according to SocialGuide. In the current quarter, MTV will see the premieres of a new scripted series, I Just Want My Pants Back, which debuts tonight; the launch of a Jersey Shore spinoff with Pauly D; the return of pop-culture phenomenon, Punk'd and a new season of 16 & Pregnant.

Comedy Central continues to draw its core male audience with great original programming anchored by its dominant late-night block, which is stronger than ever with election 2012 gaining steam. The Daily Show with Jon Stewart turned in a historic performance in the 2011 calendar year, surpassing NBC's The Tonight Show as the #1 late-night show with viewers 18-49 for the first time ever.

For the quarter, The Daily Show and The Colbert Report were the highest-rated and most-watched late-night shows on all of television with male and total viewers aged 18-34. Newcomer, Workaholics, continued to build its fan base, finishing the calendar year as the #1 new comedy on all television with men 18-24. And finally, we renewed South Park through 2016, ensuring a milestone 20 seasons in a landmark animated series.

Comedy Central has great momentum in the current quarter as well. Just this week, we saw the strong season premiere of Tosh.0, which drew 3.1 million viewers as well as the series premiere of new sketch comedy show, Key & Peele, which drew 2.1 million total viewers, making it the biggest series launch on Comedy in more than 2 years.

Despite the measurement issues we mentioned on last quarter's call, Nickelodeon finished the fiscal quarter as the #1 cable network with both kids and total viewers for the 67th consecutive quarter, highlighted by the launch of Kung Fu Panda and the second installment in the Fred TV movie franchise, which averaged 7 million total viewers. On Nick at Nite, our third annual HALO Awards, honoring teens for their commitment to service, delivered the tentpoles' highest ratings ever with teens and tweens.

This fiscal year, Nickelodeon will premiere more than 500 episodes of original programming, more than ever before, and we will keep layering on new shows to rebuild our rating. The current quarter has been full of live-action premieres, including iCarly, which has attracted more than 4 million viewers in each of its 3 episodes this quarter and grown ratings in key kids 6-11 demo with each episode. House of Anubis ratings are also climbing steadily with ratings improving 10% in the week following its January premiere. Last Saturday, the premier of Victorious was the #1 program on cable, attracting 3.9 million viewers.

This Saturday, we premiere How to Rock, staring Cymphonique Miller and in March, we'll debut a new TV movie from Big Time Rush, who along with Fresh Beat Band, were 1 of 2 Nickelodeon kids music act to sell out a nationwide concert tour last quarter. Additionally, Nickelodeon and Nick Jr. will have new episodes of their gold standard preschool educational programming such as Dora the Explorer and the Bubble Guppies and will launch new series, Mike the Knight and a new CG version of Franklin and friends. Nickelodeon will conclude the quarter with the Kid's Choice Award, hosted this year by Will Smith on March 31.

BET continued to roll as the network built on its lineup of original scripted series with Reed Between the Lines, which ranked in the top 5 among new scripted series on basic cable. The BET Hip Hop Awards 2011 premier in October drew in 4.1 million viewers, making it the most-watched edition of the franchise tentpole in its 60-year history. The current quarter saw the return of Let's Stay Together, which attracted 3.5 million total viewers with its season premiere and smash hit, THE GAME, which debuted its fifth season last month with a premier that attracted 5.3 million viewers, thanks in part to a dynamic social media marketing strategy.

VH1's ratings momentum picked up steam in the first quarter with ratings in primetime up 42% year-over-year and 72% in the key women 18-34 demographic. The current quarter saw the return of hit series, Mob Wives, which attracted 2.4 million total viewers in its premiere broadcast. The 2011 VH1 DIVAS Celebrates Soul broadcast, featuring Mary J. Blige, Kelly Clarkson and Jennifer Hudson, scored the franchise's highest rating since it returned in 2009, doubling ratings over last year's show.

Spike continued to broaden its appeal with men of all ages through original hits, including Auction Hunters and Flip Men. The original comedy, Blue Mountain State, delivered its highest-rated season to date, up 20% in the key men 18-34 demo. This quarter, Spike very successfully launched INK MASTER, the Dave Navarro-hosted tattoo competition, which is building into a bona fide major hit.

TV Land continued to cement its standing as the home of the sitcom on cable with the return of Hot In Cleveland and the premiere of The Exes. In fact, Hot In Cleveland just won the People's Choice Award for favorite cable TV sitcom and star, Betty White, won the Screen Actors Guild Award for outstanding Performance by a Female Actor in a Comedy Series. TV Land also picked up a Hot In Cleveland spinoff starring Cedric "The Entertainer" and Niecy Nash.

CMT continues to grow its offering of original programming, delivering 4 original series in the first quarter of fiscal 2012, including Sweet Home Alabama. In the current quarter, CMT launched 3 new series, including Bayou Billionaires and My Big Red Neck Vacation, which debuted as the highest-rated original series telecast in CMT history.

Let's turn now to Filmed Entertainment. Paramount, which proudly celebrates its 100th year in 2012 as the oldest studio in Hollywood, ended the calendar year with a record $5.17 billion at the worldwide box office, including its first $1 billion franchise, Transformers. The first fiscal quarter of 2012 was highlighted by the blockbuster performance of Mission: Impossible Ghost Protocol, which reinvigorated the Tom Cruise-starring franchise under the guidance of director, Brad Bird and producer, J.J. Abrams and is now the-highest grossing Mission: Possible; the successful release of Paranormal Activity 3, which continued the phenomenal profitability of that franchise and the outstanding distribution of Hugo and DreamWorks Animation's Puss In Boots. In the current quarter, we released The Devil Inside, another highly profitable title for us with franchise potential from our Insurge label.

Our original and distributed films also scored a number of Acadamy Award nominations led by Hugo, which scored 11 nominations, including Best Picture and a directing nod for Martin Scorsese. Our very own Rango, as well as both DreamWorks Animation films were nominated for Best Animated Feature Film.

Looking ahead, Paramount with Fox will rerelease TITANIC digitally remastered in 3D, thanks to a painstaking conversion helmed by director Jim Cameron. Paramount will also release The Dictator, starring Sacha Baron Cohen and directed by Larry Charles, the team behind Borat; and G.I. Joe: Retaliation, the next film in the global franchise starring Dwayne "The Rock" Johnson and Channing Tatum. And the studio will build value by supporting our international division's launch of Paramount television channel, the first of which will debut in Spain in the coming months.

In sum, despite some early headwinds, Viacom is off to a strong start in fiscal 2012. As we move forward, our consistent focus on content and brand building will drive creative momentum across the company in the full freight of original programming launching across our network and in the focus and franchise-centric releases from our studio. We will seek out and seize every opportunity on every platform to monetize our content both in the United States and internationally. And our disciplined operation and management for top and bottom line growth will give us the continued flexibility to invest in content and return substantial capital to our shareholders for many years to come.

With that, I will turn it over to Jimmy.

James W. 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 December quarter. Our 10-Q will be filed shortly. This morning, I'm going to take you through our operating results in more detail. Before I do that, I'd like to note that discontinued operations in the December quarter of this year reflects the $383 million charge related to the earn-out dispute with the former shareholders of Harmonix. In this regard, I would note that we have filed a lawsuit seeking to compel consideration of arguments and evidence that we believe were inappropriately excluded from the dispute resolution process.

Now, let's take a look at our segment results. At our Media Networks segment, revenues increased 3% to $2.4 billion in the quarter. Domestic revenue increased 3% and international revenues increased 2% in the quarter. Foreign exchange had a 1 percentage point unfavorable 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 declined 3% in the quarter. International advertising declined 4% with foreign exchange losses impacting the growth rate by 1 percentage point. The decline in international ad sales was primarily due to the timing of event-driven programming.

In terms of affiliate revenues, domestic revenues increased 16% while international revenues increased 18%. The growth in domestic affiliate revenues was driven by the availability of programming associated with digital distribution agreement 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. International affiliate growth reflects revenues from digital distribution agreement, rate and subscriber increases and new channel launches.

Worldwide ancillary revenues declined 13% in the quarter, principally due to lower home entertainment revenue. Media Networks' adjusted operating income of $1.1 billion in the quarter increased 7% over last year. The operating margin of 46% improved 190 basis points over the prior year.

The improvement in the margin was driven by revenue growth of 3% and a 1% decline in expenses. The decrease in expenses was primarily due to a 2% decline in programming expense, resulting from the timing of new program launches as well as the timing of event-driven programming in the prior year.

Now moving to Filmed Entertainment. Revenues in the quarter increased 4% to $1.6 billion. Page 11 of the Web presentation provides a breakdown of Filmed Entertainment revenues. Worldwide theatrical revenues increased 37% to $570 million in the quarter. The increase in theatrical revenues was principally due to the strength of our current quarter's releases, including Mission: Impossible Ghost Protocol, Paranormal Activity 3 and Puss In Boots. Worldwide home entertainment revenues declined 6% to approximately $600 million. The decrease primarily reflects lower revenues from third-party distribution titles, partially offset by the performance of Transformers 3 in international market.

TV license fees increased 9% to approximately $300 million. The increase in TV license fees was due to higher pay-TV revenues, partially offset by lower network TV revenues, resulting from a fewer number of titles available in the quarter. Ancillary revenues declined 46% to $92 million. Ancillary revenues faced difficult comparisons as the prior year benefited from the sale of the distribution rights to Avengers and Iron Man 3 to Marvel. Partially offsetting this were higher consumer products and digital revenues.

Filmed Entertainment generated an adjusted operating loss of $31 million in the quarter as compared to income of $68 million last year. The decline in operating income principally reflects the difficult comparison to last year's sale of distribution rights to Marvel as well as the timing of P&A expense related to the theatrical release of Mission: Impossible, partially offset by the international home entertainment performance of Transformers 3.

Now moving below operating income. Total company equity income from investments was $10 million in the quarter. The income in the quarter principally relates to our investment in EPIX, which was partially offset by losses at our Viacom 18 India TV venture that reflect cost associated with our investments in new channel launches. The effective tax rate in the quarter was 34.5%. And with that, I'd like to turn the call over to Tom.

Thomas E. Dooley

Thanks, Jimmy, and good morning, everyone. Let's talk about our cash flow, our debt profile, the return of capital to our shareholders as well as the seasonal factors impacting our 2012 fiscal year. In terms of free cash flow for the quarter, we generated approximately $600 million in operating free cash flow in the December quarter compared to approximately $700 million last year. Page 4 of the Web deck presentation provides the components of free cash flow. The decline in operating free cash flow was principally due to higher working capital utilization, partially offset by lower cash taxes. The working capital used in the quarter was primarily due to the timing of theatrical releases, including Mission: Impossible III.

As for our debt, for the most part, it is fixed rate with an average cost at the quarter end of 5.5%. To the extent we have incremental borrowings, we are funding this in the commercial paper marketplace at an annual rate of approximately 40 basis points. We had no variable rate borrowings outstanding at quarter end.

During the quarter, we took advantage of attractive rates in the public markets to refinance certain of our higher coupon notes, as well as to maintain our leverage at our target level. We issued $600 million of 3.875% senior notes due in 2021 and $400 million of 2.5% senior notes due in 2016. In conjunction with this, we called the $750 million of outstanding of our 6.85% senior notes due in 2055. The notes were callable at par and were redeemed on January 9. The combination of these actions will lower our interest cost by approximately $20 million on an annual basis.

In addition, during the quarter, we amended our bank line by improving the pricing and extending the maturity date to December 2015, further enhancing our liquidity. In terms of leverage, we ended the quarter with $7.8 billion of debt and capital leases outstanding and approximately $1.1 billion of cash and cash equivalents.

At December 31, our $2.1 billion bank revolver was undrawn. Our leverage ratio at the end of the quarter was 1.95x. As I just mentioned, we redeemed our 6.85% senior notes on January 9. If you pro forma for the redemption at quarter end, our debt and capital leases outstanding would be $7 billion and our leverage ratio would be 1.8x. 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 our commitment to return capital to shareholders between our buyback and dividend programs, we returned a total of approximately $840 million of capital back to our shareholders in the December quarter. Looking ahead, we are on pace to purchase approximately $700 million of our stock in the March quarter. So for the first 6 months of the year, we will have returned a total of approximately $1.7 billion to our shareholders.

Now I'd like to talk about some of the factors impacting our 2012 fiscal year. In terms of our affiliate revenue, on an annual basis, we continue to see revenue growth in the high single-digit to double-digit range based on 2011 affiliate revenue base, which includes incremental digital agreement. Given that revenue recognition on some of the digital deals is tied to product availability, quarterly affiliate revenue growth will not be as linear as it has been in the past. In the March quarter, we expect the affiliate revenue growth to be in the low-teens. Our expected growth rate for Media Networks programming expense remains mid- to high-single digits for fiscal 2012. Accordingly, given the pace of programming expense in the December quarter, we anticipate that programming expense will grow in the high-single to low-double-digit percentage range for the remainder of the fiscal year.

Our ongoing expense management will enable us to continue to grow our margin as we invest in our brand. Paramount has achieved global box office success with its latest sequel to the Mission: Impossible franchise. And accordingly, Paramount should see healthy growth in profit in the March quarter as it benefits from the performance of Mission: Impossible as well as from lower print and advertising costs. We continue to expect to realize approximately $100 million in cost savings this year related to the restructuring charge we took back in the September quarter.

For 2012, we are now forecasting a book tax rate of 34.5%. In terms of cash taxes, given the sunsetting in December of tax benefits related to accelerated deductions of films and TV production, we expect cash taxes to mirror book taxes for the year. As for our stock buyback program, we are on pace to purchase approximately $700 million of our stock in the March quarter, and we expect to repurchase at least $2.5 billion for the fiscal 2012 year.

Looking ahead at the studio slate and development pipeline. In April, Paramount and Fox will rerelease James Cameron's TITANIC in 3D and in May, the studio will release The Dictator, which stars Sacha Baron Cohen. Paramount will also be distributing DreamWorks Animation's Madagascar 3 in early June.

In addition, the studio has a number of sequels to existing franchises as well as new franchises in development. This summer, the studio will release G.I. Joe 2 and in the fall, they release the fourth installment of Paranormal Activity. Paramount is working on World War Z, which stars Brad Pitt and One Shot, starring Tom Cruise, which is based on the best-selling novel and Jack Reacher business book series, and J.J. Abrams is currently in production on the next installment of Star Trek.

To wrap up, we continue to operate with the focus on pursuing organic opportunities in our core businesses. And we remain committed to investing in our brand and strengthening their competitive position. This focus on organic investment, combined with disciplined management of our core structure, will enable us to drive earning per share and drive free cash flow. We are encouraged by the incremental opportunities we see to monetize our brands and franchises. The addition of new distribution partners on digital platforms, the opportunity to grow our international business and profitability and the ability to develop franchises with consumer products appeal will enhance our long-term growth. In addition, we remain committed to an aggressive capital return program of share buyback and dividend, which we believe will drive value for our shareholders over the long-term.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Michael Nathanson from Nomura.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Let me have just one general on advertising for anyone who wants answer, then one on Philippe on Nickelodeon. So on advertising, people definitely going to focus on the minus 3 domestic number, and I want to get a sense of how much of that minus 3 was driven by the Nickelodeon problems in the quarter. So what would the growth be? What range of growth would be in advertising, taking out Nickelodeon for the quarter?

Philippe P. Dauman

Michael, if you -- if we haven't had the Nick ratings issue, our advertising sales would have been a growth for the quarter, would have been up rather than down for the quarter. The other factor that impacted ad sales during the quarter was weakness in the scatter market. And looking at individual advertisers, we saw several advertisers that appear to have hold into the upfront some of the scatter money that they would otherwise have spent. So that was something that's hard to measure until we got to the quarter. So we saw people that focused in advertisers that increased their upfront buy and then had a corresponding decrease in their scatter buy in the quarter.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Philippe, would it be safe to assume low-singles, taking out the Nick problems, is that kind of the range of growth?

Philippe P. Dauman

Yes.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Okay. And then on scatter versus scatter volume, how much was it down, putting aside Nick? When you mentioned the upfront commitments, but just scatter versus scatter volume for you guys for the quarter, how much was that down?

Philippe P. Dauman

Well, it was -- I don't want to quantify it exactly, but it was down significantly and particularly at the end of the quarter, and we believe that, that was a reflection of the general market environment. We believe that there were a number of companies that were pulling back on their expenses as they were closing out their year. And we see some of those very same advertisers coming back in this quarter, which leads us to that conclusion.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Okay. Are we -- in terms of rate, would you say teens-like in -- teens-types of volume changes?

Philippe P. Dauman

Yes.

Michael Nathanson - Nomura Securities Co. Ltd., Research Division

Okay. And then last one would be, you're starting to some press articles about possibly linking Netflix and Netflix' kids product with Nickelodeon's ratings declines. And I wonder now you have more time to look at -- you've had some more time looking at the Nickelodeon rating issues, what can you say about the availability of Nickelodeon content on Netflix and what's -- what that is doing to Nickelodeon ratings?

Philippe P. Dauman

Well, we look at that very closely. And we don't think that the availability of the limited amount of Nickelodeon library content that we have on Netflix has had a significant impact on the ratings. Again, remember, the Netflix universe is a rather small fraction of the overall television household numbers, number one. And number two, yes, we do get data on our streams and the both the number of Netflix subscribers and the number of Nickelodeon content streams were pretty much the same between the summer and the fall. So there was no real change that accounted for the fall drop, which we did not see in the summer. So there could have been some minimal impact, but it certainly does not account for the range drop that we saw. We -- as I said on the last call, we believe there was some ratings systemic issues. Again, I don't want to belabor it because we did in the last call. But the pretty extensive set-top-box data that we have does in no way reflect what we're seeing in the Nielsen measurement. That being said, that's the environment we're operating in and we're going to attack it as we always do, and which is to go after our audience. And we'll go after that new Nielsen sample and we'll -- the programs will appeal. And I'm confident that as the year progresses, you will see improvement in Nickelodeon's ratings. And again, finally, on that point, it did impact last quarter's ad revenues in a significant way. But as I said again on the last call, that was the significant quarter, where that has a big impact. In the remainder of the fiscal year, we have a low proportion of ad sales that are tied-in to Nickelodeon, and we have more unit availabilities in the quarters than you have in that multi-week period leading up to the holidays in the fourth calendar quarter, our first fiscal quarter.

Operator

And we'll take a question from Alexia Quadrani from JPMorgan.

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

Couple questions just on the health of the advertising market. Could you comment? You said things are getting better in the March quarter. I guess could you comment on how you're seeing scatter trend versus the upfront? And any comments on cancellations for the June commitment? I think we're in that period right now. And then secondly, to your point that you have less of a headwind, less of a concentration of Nickelodeon revenues in the March quarter and you said things have picked up a little bit, I guess, any framework on how we should see advertising revenue for the March quarter will be helpful.

Philippe P. Dauman

Alexia, the scatter pricing, for what it's worth, is holding up well. We see scatter-to-scatter pricing up and it's up in the -- I would say now about the mid-single digits and healthy double digit over upfront pricing. Our level of cancellations is probably lower than normal and very low single digits. Again, it reflects people buying, companies buying in the upfront. It's the prices that were attractive compared to the scatter market. And in terms of the framework for the quarter, it is -- our earnings release is quite early in the quarter and given what happened last quarter, I'm going to say it's going to be better and we think it'll be positive. I think it's too early to put a framework on it. But as we get later in the quarter and I'll have opportunities to address investors in a public forum, I'll be able to put a little more boundary around it as we get further along the quarter.

Operator

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

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

For Philippe, I think there's a perception that kids sometimes don't care whether a TV show is an original or a repeat and you've been emphasizing the record number of original episodes coming. I was hoping you could provide an empirical solution to that debate. Is there a material difference in ratings between the original episodes and the repeats? And if you have a sense of how much that difference is, that would be helpful.

Philippe P. Dauman

Yes, and when we premiere a new episode, it's substantially higher than the repeat. So I gave you some of the numbers on fresh episodes of iCarly and Victorious as an example. We haven't had fresh episodes of SpongeBob recently, but we will be coming on with those. So clearly, whenever we have new material, it draws a substantial viewership. That's why as we layer on more of these new episodes of existing series and we layer on new series, those are the building blocks for building Nick ratings whatever environment we begin with. We start from the base that we have and we will build it up.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

When you mentioned 500 episodes of originals, you don't have handy the similar number from last year, what kind of growth that is year-over-year?

Philippe P. Dauman

It's about 1/3 more than we had last year, something in that neighborhood, about 30% or low-30s.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

And if I could just squeeze one in for Tom. Your guidance for cable network margin expansion for fiscal '12, I'm just wondering what level of cost flexibility you have to achieve that if advertising proves disappointing at all? Or put it another way, if advertising does remain soft the rest of the year, can you still achieve margin expansion in cable networks?

Thomas E. Dooley

Well, it depends on how you define soft. But right now, we feel pretty confident that we'll be able to improve margins on a year-over-year basis with the flexibility that we have and our ability to really control the costs quite well. And I think we've demonstrated that in the past and I think we'll be able to roll that forward into the future unless there's a really horrible ad market.

Operator

We'll take a question from Alan Gould from Evercore Partners.

Alan S. Gould - Evercore Partners Inc., Research Division

Two questions. First, with respect to the ad revenue in the March quarter, Philippe, I think the Kids' Choice Awards this year are March; last year, that was April, so that should improve the quarter, I think, about 2 percentage points, and then you've got the less Nick seasonality. So doesn't the 2 of those events get you to a positive number in the March quarter before we even consider an improvement in scatter pricing?

Philippe P. Dauman

Alan, yes, as I said, I do expect that we'll have positive ad sales growth performance in the quarter. But it's just too early in the quarter for me to go beyond that, how far positive they will be.

Alan S. Gould - Evercore Partners Inc., Research Division

Okay. And the second question is last year, you started talking about the incremental research that you were doing which was helping the ratings. What's happening with the research now? And how is that impacting the programming and the ratings?

Philippe P. Dauman

Well, we continue to invest in research and understanding our audiences better and how they use new platforms, and it's informing our selection of programming on different networks. We have a continued orientation to increasing original programming across many of our networks. In my remarks, I cited a number of examples that really cuts across almost every one of our networks. And in particular, with the youngs-viewing networks, we want to understand how the sensibilities evolve. We are also more and more creating associated content on multiple platforms and creating new features such as WatchWith, which MTV adopted to allow people to get more information on the shows like Jersey Shore while they are watching it and interact with our characters and live tweeting and all of these things. So it's really a funnel, what we're doing now and helping us plan for the future as we develop programming not just for the television screen but across multiple screens.

Alan S. Gould - Evercore Partners Inc., Research Division

Well, outside of the measurement issue, how do you explain the remainder of the ratings decline? Was it just more repeats, not enough original programming in the quarter?

Philippe P. Dauman

Well, look, there are a number of factors. We -- some of our competition laid in a lot more new shows at a time when we didn't have that many. And obviously, we need to have a competitive response to that and we will. And the -- I mean, the biggest part as far as we can tell is just a discrepancy that we see. There will be some soft adjustment even within the Nielsen universe, given the churn that occurs within the 20,000 households, which constitute the Nielsen household. So there'll be changes there and again, we'll do what we know how to do, which is to -- when we have a ratings issue, we tackle it with more research, more programming, better programming and marketing. And we will make sure that our audiences are aware of our new series launches and our new shows and we'll do it through our own channels, off-air. As I mentioned, a couple of our shows are music-based. They have successful concert tours. So we'll use every weapon in our arsenal and we know how to do this, and we've had issues with various networks. We always turn them around.

Operator

And we have a question from Anthony DiClemente from Barclays Capital.

Anthony J. DiClemente - Barclays Capital, Research Division

Just to kind of continue along the line of questioning on pricing and volume. I think assuming, Philippe, that scatter volume was down in the teens in the December quarter, I just wonder what's the improvement? What's the continuation of that churn in the March quarter on volume setting aside price? I think you spoke to that already.

Philippe P. Dauman

Well, again, we are very early in the quarter, I want to stress that, but volumes are improving. And yes, we'd love to provide more specificity, but we don't want to -- I don't want to get some extrapolation this early in the quarter. We're encouraged by the tone out there in the market. And as we get further along in the quarter, we'll be able to put more meat on the bones there, [indiscernible] market evolve.

Anthony J. DiClemente - Barclays Capital, Research Division

Okay. And then just taking a step back more broadly, I mean, Viacom is both a seller and a buyer of advertising, given Paramount. I just wonder if you could talk a little bit about -- are you seeing anything from your customers? Are you seeing anything in the marketplace that would indicate that display advertising or social media is soaking up any demand out there either in terms of volume or in terms of volume as index to price? Just generally when you look at the marketplace and what advertising buyers are really focusing on these days.

Philippe P. Dauman

Well, as a buyer of advertising through Paramount, we certainly view that television is the most effective way to build the brand quickly. And of course, when we launch a movie, we want to build that brand quickly. Clearly, we supplement that with social media. But studio spending, there were a lot of titles in the quarter. Studio spending was strong in this past quarter. That was really not an issue. That's not where the demand problem resided. As far as display advertising online, there's clearly -- within that digital marketplace, there's clearly a lot more availability. You saw the Facebook numbers and how they're growing their display advertising numbers. It's certainly taking the wind out of some of their online competitors in display advertising. And it's certainly impacting pricing display advertising in that there's a much larger availability. There's almost unlimited availability of that kind of advertising as opposed to the somewhat tighter or much tighter television market, where there is scarcity for advertisers who want to be on the top shows, the top networks and the ones where viewers have an affinity to the brand and pay more attention than they do with much of display advertising.

Operator

And we'll take our next question from Jessica Reif-Cohen from Bank of America Merrill Lynch.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Just going to switch gears and ask you about international and hopefully, you can give us some more color on your strategy in growing areas like India, Germany and Latin America. How meaningful will the growth be? Several of your competitors have cited a goal of doubling operating income over the next 2 to 3 years.

Philippe P. Dauman

Thank you, Jessica. International is a really significant opportunity for us in the long term. I was asked in a December conference to look forward for the company over the next 5 years with the framework, I was asked. And what I said then and I would reiterate today is last year, we did about $200 million of operating income in our international Media Networks. And I expect that to at least triple to quadruple over the next 5 years. And you -- we've reorganized our operations to be much more effective in developing networks and creating revenue opportunities. The digital opportunity international is really significant and opens up avenues for us that were previously closed, where it was more difficult to distribute our content. India is a very successful joint venture. We had great success with the existing networks. We are investing. And as we indicated in our remarks in the last quarter, we -- it was not -- had we just stuck with our existing networks, it would have been a profitable quarter for India, but we chose to invest and build on our strength to launch several networks, and we think we're going to create huge value there. Latin America is a market with a lot of opportunity. We just launched the comedy brand in both Spanish and Brazilian Portuguese. So we launched comedy yesterday. We have a lot of opportunities around the world. I think very rapidly in the next 2 to 3 years, you will see in many, many, many countries Paramount channels. The first will be in Spain. We have several others lined up. There's a lot of demand for the library movie channels and of course, Paramount is an exceptional library and brand. So I see a lot of opportunity in emerging markets with opening them up and opportunities in existing markets to launch more of our brands.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

And again, switching gears, could you give us an update on your thoughts on distribution for DreamWorks Animation?

Philippe P. Dauman

Well, the update is that we're looking forward to the last 2 movies, the last 2 new movies under our deal with Madagascar and Rise of the Guardian at the end of the year. We have valued very much the relationship, thus far, with DreamWorks Animation. Even after the -- these last 2 release of theaters, we will have a long-term continuing relationship as we'll continue to be a distributor for all the movies that have been -- that we have distributed to-date in various windows. It goes for -- I believe, it's 16 years after the release of each movie initially theatrically. And we have many other facets of our relationship with Nickelodeon and the rest, so we have a very powerful lineup going forward. DreamWorks Animation is a successful company, well-led company, and I continue to wish them great success as they move forward from our existing -- the existing nature of our relationship.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

And then one last thing, a very specific advertising-related question. What is auto advertising as a percent of your total advertising? And what are you seeing in auto in the March quarter?

Philippe P. Dauman

Well, auto is a low -- has been a low percentage for us historically. Happily, it is growing at a healthy percentage for us. For us, we have the benefit of the industry, in general, going to smaller car models, appealing to younger consumers. That is our strength. So we're -- we see opportunity in this quarter that we see the auto category growing for us in this quarter and going forward. We think it will grow for -- it will be a continually growing category for us from a low pace. So for us, it's a share opportunity.

Operator

We'll take our final question from Richard Greenfield from BTIG.

Richard Greenfield - BTIG, LLC, Research Division

Quick question or 2-part question. First on the upfront, just in terms of with Nickelodeon's ratings issues and it sounds like you're still struggling year-over-year in the early part of calendar Q1, given the Nielsen issues. How does it position you? Or what is -- how does it make kind of the upfront in terms of that process, as I know you're obviously going to start kicking off that process over the next few months? And then two, there was a deal signed this morning between Lionsgate and Starz to basically repurpose their movies after the EPIX window, I presume, onto Starz. Curious what your ability to do something similar with Paramount films in a post-EPIX window. I don't think that's something people have really put a lot of thought towards historically versus keeping them on EPIX for the foreseeable future.

Philippe P. Dauman

Nickelodeon, of course, has a -- an overwhelming share of the kids ad market, given that the second position kids network does not sell advertising. So we have sort of the upfront in a position of strength. As I've said, we have a great show lined up for Nickelodeon with more coming, including the Teenage Mutant Ninja Turtles, which are soon to launch. We actually had a good event relating to toys there coming up this week. So we're going to have a lot of promotion around that. So our advertisers love Nickelodeon. They see how advertising in Nickelodeon moves their product, and I think that's a good understanding of what the issues are out there. So we expect a strong upfront for Nickelodeon. As far as exploiting our film library, yes, Paramount, yes, of course, and Lionsgate both very committed to EPIX and some of our older library titles. So we are available to license on other paid services and we have been doing well competitively there. This is -- so the Paramount library, which is of extraordinary quality and continue to build on quality with the new films we're releasing is -- will be a mother lode of opportunity for Paramount for many, many years to come and will be the foundation for building some very valuable assets, EPIX in the U.S. and the Paramount film channels around the world, and we continue to look for more opportunities to monetize those film. They are the ultimate form of content, and we look forward to it being our piggy bank for many years to come.

James Bombassei

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

Operator

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.

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