CBS Q1 2007 Earnings Call Transcript

May. 3.07 | About: CBS Corporation (CBS)
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CBS Corporation (NYSE:CBS)

Q1 2007 Earnings Call

May 3, 2007 8:30 am ET

Executives

Marty Shea - IR

Sumner Redstone - Executive Chairman, Founder

Les Moonves - President, CEO

Fred Reynolds - CFO

Analysts

Jessica Reif-Cohen - Merrill Lynch

Victor Miller - Bear Stearns

Lucas Binder - UBS

Anthony DiClemente - Lehman Brothers

John Klim - Credit Suisse

Kathy Styponias - Prudential

Doug Mitchelson - Deutsche Bank

John Blackledge – JP Morgan

Ben Swinburne - Morgan Stanley

Presentation

Operator

Good day, everyone and welcome to the CBS Corporation first quarter 2007 earnings release teleconference. Today's call is being recorded. At this time I would like to turn the call over to the Executive Vice President of Investor Relations, Mr. Marty Shea.

Marty Shea

Good morning, everyone. Thank you for taking the time to join us for our first quarter 2007 earnings call. Joining me for today's discussion are Sumner Redstone, our Executive Chairman; Leslie Moonves, our President and CEO; and Fred Reynolds, Executive Vice President and CFO. Sumner will have opening remarks and then we'll turn the call over to Les and Fred for strategic and financial issues. We will then open the call to questions.

Let me note that statements on this conference call relating to matters which are not historical facts are forward-looking statements which involve risks and uncertainties that could cause actual results to differ. Risks and uncertainties are disclosed in CBS Corporation’s news releases and securities filings.

A summary of the CBS Corporation's first-quarter 2007 results should have been sent to all of you. If you did not receive these results, please contact Punam Visay at 975-3667 and she will get it to you. A webcast of the call, the earnings release and other information related to this presentation can be found on CBS Corporation's corporate website at the address of cbscorporation.com.

Now I will turn the call over to Sumner.

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Sumner Redstone

Thanks, Marty and good morning, everyone. Thank you for joining us. We now have five quarters of results from the CBS Corporation in the books. What is clear is that our traditional businesses are more than healthy. CBS continues to turn out superior professional content that attracts mass audiences and of course, we are highly aggressive, well ahead of the curve in the new interactive marketplace. By adapting our content for new platforms, forming strategic partnerships, investing in high-growth businesses, we have positioned CBS for the future; all the while we are generating strong free cash flow.

We're making prudent adjustments to our asset portfolio, but most important, through dividends and our previously announced share repurchase transaction we're making good on our promise to consistently return value to investors.

As our results this quarter demonstrate, Les and his management team are totally committed to being the very best at what they do. I have said this before: Les does everything right. He is a superb executive. As for me, I am more enthusiastic than ever about where this company stands today and where it is headed tomorrow.

Now to tell you more about that is Les.

Leslie Moonves

Thank you, Sumner and good morning, everybody. Once again, thank you for joining us. I'm really pleased with the results we are reporting today and with the direction of our entire company. This first quarter once again demonstrated the tremendous power of our industry-leading businesses. From some of the biggest events in broadcast television to new, innovative digital billboards to strong demand for Simon & Schuster's bestsellers, we are monetizing our unparalleled ability to attract mass audiences.

Of course, our position is only strengthening as we extend our hit content into the burgeoning interactive landscape.

This morning I am going to share some of CBS's financial highlights and then I'll tell you a bit of what is going across the company and at each of our individual businesses. Then I'll turn it over to Fred for more in-depth financial information.

So let's get started with the first quarter results. Revenues of $3.7 billion were up 2.3% from prior year with growth at TV, outdoor and publishing. Free cash flow grew 17% over last year to a very healthy $753 million. Net earnings from continuing operations was up 8% from first quarter of '06 and earnings per share was up $0.02 to $0.33 adjusted for radio station sales. During the quarter we closed on radio station divestitures in Kansas City, Columbus, Fresno, and Greensboro and will close on the remaining markets in the months to come.

We also returned significant value to shareholders during the quarter. As part of the share repurchase transaction announced at our last earnings call, we bought back approximately 47 million shares for more than $1.4 billion. If you include the 7.6 million shares we retired in connection with the sale of our Green Bay station to Liberty Media, we have reduced outstanding shares by 7% year-to-date, and that is good for all shareholders. We also increased the dividend for the fourth time since CBS became a standalone company last year, representing a total increase of nearly 60%; this time by 10% to $0.22 per share. Clearly the CBS Corporation is committed to delivering on our promises to shareholders.

Day after day, quarter after quarter, we're focused on creating and distributing our world-class popular content to the broad, attractive audiences that advertisers want to reach and increasingly, we're extracting more value out of the content we've already owned. Getting more revenue out of the same content is a recurring theme for us here at CBS.

The latest example of this is the money that we're making from our most recent retransmission agreements. As we said we would, we are now getting paid retransmission fees from a host of distributors, including several top 25 cable operators. When the biggest cable deals come due over the next several years, we expect retrans to become even more significant for us, a solid and growing new revenue stream from an existing portfolio of assets.

I want to talk for a minute about that asset portfolio. Ever since we became a standalone company early last year, we have been fine-tuning our holdings, shedding slower growth, non-strategic assets. This strategy guided our divestiture of Paramount Parks, followed by the sale of smaller market radio and television stations. For several months now we've been redeploying a portion of this significant cash into higher growth online and interactive businesses that complement our core operations. This year alone our dedicated internal team has made 12 investments for a total of approximately $100 million.

As you know, we recently hired Quincy Smith not only to run our existing interactive businesses, but to help us find new ones as well. So far we have looked at about 140 companies. As you can see, my corporate development team has been very, very busy. Some of the deals we have already made have been outright acquisitions such as our purchase of MaxPreps.com, the leading national online high school sports network. MaxPreps is an excellent complement to CBS TV's college sports offering and gives access into what we believe is a large, untapped market with significant potential.

In other deals, we've made investments in companies whose services fit well with our traditional businesses like Electric Sheep, which builds the infrastructure in increasingly popular virtual worlds like Second Life. Additionally, we're redeploying resources to our CBS interactive business. There has been a dizzying amount of activity in this area since we became a standalone company last year.

The most significant developments since our last earnings call was the formation of the CBS Interactive Audience Network, which we announced last month. This new network features entertainment, news and sports content from across the CBS Corporation. It will feature both clips and full-length episodes across a whole slew of online distributors including AOL, Microsoft, C-NET, Comcast, Joost, to just name a few, and that is on top of our existing deals with Amazon, Apple, Yahoo!, and YouTube.

The strategy is clear: we are building our online audience at CBS.com and we are also putting our content where the audience already is; and importantly, all of these sites are ad-supported. We will get paid for them and they will all be part of our upfront sales later this month. Think about it. We have the number one TV network, the number one outdoor group in North America, and the number two radio group. Now, by building out the CBS Interactive Audience Network, we are positioning ourselves to be a top online video network as well.

This is part of a much broader transformation that is underway. Together with our investments and other partnerships, the CBS Interactive Audience Network is a key example of how we plan to thrive in the media marketplace of the future.

Now let's take a closer look at our operating performance by segment, starting with our television business. The CBS Television Network will finish the 2006/2007 season number one in prime time in total viewers and in adults 25 to 54. This will be the fifth year in a row that CBS has held the title of the most-watched network. It will also be the fourth consecutive year that CBS will finish first in adults 25 to 54. We will finish second in 18 to 49, up from third place last year, and for the third year in a row, we will finish first in $100,000 plus income households.

CBS's long-term record of success has been built on a foundation of across the schedule strength. The regularly scheduled CBS lineup is number one on five of seven nights. This includes the top drama CSI, the top sitcom in Two and a Half Men, the top new comedy in Rules of Engagement, and the top news magazine in 60 Minutes. This record of achievement gives us a solid schedule to build on, a weekly lineup with very few holes and strength on every single night of the week.

CBS's stability puts us in a unique position among all the networks with a great roster of hit shows that can protect any new program we bring on board. It also allows us to swing for the fences on nights where some changes are called for. That is just what we're doing. I have challenged our creative people to think outside the box this year, to come up with new ideas, new energy, new solutions for our prime time schedule. I usually don't talk about these things at this stage of the game, but I have watched a lot of pilots in the last few weeks and what I am seeing is very exciting, very daring and we're going to surprise some people in a really good way. So stay tuned for that.

As you know, after a strong fall season, the network collectively has faced some challenges in the last few months. But the fact is, a great deal of the problem is caused by one simple thing, the failure to count millions and millions of people who are watching hit programming on their DVRs. DVR penetration has grown to 16% of all Nielsen homes. It will be at 19% or 20% by September. More viewers are watching network programs in playback mode. As a result, approximately 7% of the 18 to 49 and 25 to 54 demographics are not being counted by advertisers this season. That is a big chunk of the viewing pie.

This year coming up, those people will be counted and we will be paid for them. For the first time, I am confident we will get paid for DVR viewing in this year's upfront, turning a current problem into a big and ongoing asset. That's 7% that will go right back into our numbers. Research shows that three-quarters of all DVR playback is broadcast network programming. Most people don't record lesser-known content. They use their DVRs for hits, which once again proves the value of CBS content.

Better still, the scatter market we're seeing right now has been extremely healthy. This demand for our inventory not only bodes very well for CBS's second quarter but for our performance in the upfront marketplace as well.

Meanwhile, the first quarter obviously was very active over at CBS Sports. As I noted back in February, nearly 193 million people watched all or part of our coverage of Super Bowl XLI which turned out to be the third most watched program in television history. After that came March Madness. Roughly 133 million people watched all or part of our tournament coverage, a gain of 3% compared with last year. On top of that, March Madness On Demand, our online coverage of out of market games brought in nearly $10 million, more than doubling revenues from last year while costs stayed relatively flat.

In TV production, CBS Paramount Network Television currently produces seven of the top 20 primetime series on the air and heading into the upfront, we have 19 pilots in contention across four networks with the majority being at CBS and The CW.

Meanwhile in syndication, shows like Wheel, Jeopardy, Oprah, Dr. Phil, and Entertainment Tonight continue to make us a syndication powerhouse. We now have an unprecedented nine of the top 10 shows in syndication, including the only new hit of the season, Rachael Ray. Rachael Ray just won its 30th week in the row as the top syndicated rookie series of the year and CBS Television distribution has renewed her program through the '09/'10 season including clearances in 23 of the top 25 markets.

At our television stations group, we continue to gain share in key markets. First quarter sales were up 7% over last year. Even though it is early, '08 political money is coming into play this year. So far 29 states across the country including New York, New Jersey and California have moved up or have filed to do so, the date of their primary election to February. This means more revenue in '07. The race appears to be wide open on both sides, without a presidential or vice presidential incumbent in the race for the first time since 1952. As a result, our early conversations with the political ad agencies indicate that money will appear in the fourth quarter this year and maybe even the third.

In premium cable television with Showtime, we said we would up the ante with regards to original programming, and we have. Last month's premiere of The Tudors brought our highest series debut in three years, outperforming both the successful Dexter and Weeds premiere. Creatively, Showtime is quickly earning its stripes as a real contender with that other premium cable outlet that will remain nameless. Most importantly, subscriber numbers and subscription fees are on the rise and we are very, very pleased with the direction Showtime is headed in both creatively and financially.

Finally in our cable universe, CSTV has more than doubled subscribers since we acquired it last year and now has more than 20 million subscribers and is available to more than 60 million homes. With CSTV and MaxPreps becoming big players in college and high school sports, CBS Corporation now has leading television and broadband properties in professional, college, and high school sports. I expect great things here as we consider the ways we can take advantage of our unmatched collection of local television and radio station, and their websites.

Moving to radio, I am very pleased that we have retained Dan Mason to serve as president of the division. Dan is a well-known and respected leader within the company and the entire industry and most important, he has an impressive background in programming. He is a content guy and was part of acquiring many of the stations he now runs. Right now he and his team are focused on finding and creating the programming that audiences want to hear and delivering it to them the way they want to hear it. He has got plenty of solid building blocks to work with.

Jack FM, Rhythmic Contemporary Hit radio in Spanish formats grew high single and low double digits in the first quarter. According to winter 2007 Arbitron ratings, CBS was the only radio group to post year-over-year share gains among adults 25 to 54 in the top three markets: New York, L.A., and Chicago. Dan will build upon this progress by pursuing a very local strategy, improving stations market by market, program by program, and then monetizing them.

What is most encouraging in radio right now is what we're doing on emerging platforms. We have 130 stations online and more than 80 stations broadcasting in high-definition with more than two-thirds of those stations multicasting. Traffic on our station websites is over 220% in the past year-and-a-half and the monetization has begun. In the first quarter of this year, we made nearly half of what we made all of last year.

One of the companies we have invested in is a small advertising platform called TargetSpot that allows marketers of all sizes to easily create and buy online radio advertising from a website. As this sort of thing takes off, it'll only help our stations monetize their Internet programming by tapping into a whole new set of local advertisers.

Moving to outdoor, outdoor continues to be a terrific business. We made the right decision last year to walk away from low margin, transit and street furniture contracts in both New York and Chicago. This may have affected revenue growth, but more importantly it helped boost our profits. It also allowed us to focus on higher growth, higher margin opportunities. Right now billboards are driving our North American business, where first quarter revenues were up 8% and OIBDA was up 16%.

This quarter we also appointed Clive Punter to run our European and Asian operations. Clive has been a top executive with the company for 12 years including heading up our sales efforts in Europe. He is a phenomenal talent and already this quarter we're seeing strong pacing under his leadership.

Both domestically and abroad, the most exciting development in outdoors is what is happening digitally. Next week we're launching two digital walls in the Mall of America in Minneapolis followed by 100 42-foot plasma screens the next week. Over in San Francisco, we've just launched the 20 foot by 60 foot LED billboard at the Bay Bridge. Right now it rotates messages for six advertisers, giving them a much more powerful message while significantly reducing our labor costs. By the third quarter, we will also launch large format digital signs in Los Angeles, Chicago, Detroit, Atlanta, Miami, Tampa, Phoenix and Nashville. Here in New York City, we plan on adding another 40 urban LED displays by next month. By the end of '07, we plan to more than double our number of digital billboards in the U.S.

We are building out our digital properties overseas as well. In London alone, at the Underground we now have 66 larger format digital panels and more than 1,250 small displays. We are experiencing strong demand for digital signage and we are currently negotiating inventory both regionally and nationally to blue-chip advertisers around the world.

Finally, Simon & Schuster had an incredible quarter with revenues up 27% and OIBDA up more than fourfold. Most notably, The Secret has emerged as an international phenomenon, creating unprecedented demand. They have been running the presses non-stop and there are now more than 5 million copies in print worldwide. Other best-sellers during the quarter included the Best Life Diet by Bob Greene and 19 Minutes by Jodi Picoult. We continue to embrace digital opportunities such as ebooks, print on demand, and audio book. With a backlist of 17,000 active titles, Simon & Schuster stands to benefit greatly from the ongoing conversion to digital.

So that is our segment information and it is a very good story. The CBS Corporation is off to a strong start here in the first quarter. We've made a lot of progress. We have refined our portfolio, selling slower growth assets at attractive multiples and investing in higher growth businesses that complement our core operations. We've formed strategic partnerships to launch a whole new distribution network for our core content on the Internet. And in the meantime, we're delivering high levels of operating performances at our traditional businesses so that over the long term we will continue to produce low single growth in revenues, mid single-digit growth in operating income, and high single-digit growth in earnings per share. And all the while we are returning value to our shareholders. In fact, since the start of the year we have returned almost $1.6 billion of cash.

So thanks, everybody and now I'm going to turn it over to Fred to cover our financial performance in more detail.

Fred Reynolds

Thank you, Leslie and good morning. Let me add some additional information on our first quarter of 2007 to provide highlights of our operating performance, cash flow and balance sheet and to focus on our underlying performance in light of several large items which affected the comparability between our reported results in the first quarter of 2006 and the first quarter of 2007.

So revenues for the first quarter totaled $3.7 billion, up 2.3% over last year. As you know, in the first quarter of 2007, we aired the Super Bowl and the NCAA Basketball Final Four games. Last year, as you may recall, the Final Four and the college championship game both were aired in the second quarter. The revenues from these two major sporting events partially offset the following items, which benefited revenues in the first quarter of 2006, but were not present in the first quarter of 2007. These non-comparable items were: the absence of syndication revenues from the licensing of the second cycle of Frasier, which we did in the first quarter of '06. Also, the loss of revenues due to the fact that we divested 39 radio stations. Then there was the absence of revenues from the UPN Network, which as you know, shut down operations in September of '06. Finally, as Leslie mentioned, the loss of revenues from the non-renewal of low margin transit and street furniture contracts in New York and Chicago.

Taking into account the revenues from the Super Bowl, the NCAA Basketball Final Four games and these non-comparable items from both years, revenue growth in the first quarter of 2007 would have been up an additional couple of percentage points. Television, outdoor and Simon & Schuster led our revenue growth in the first quarter of this year with Simon & Schuster up a very strong 27%, as Leslie just mentioned.

Now turning to operating income before depreciation and amortization, or OIBDA, and operating income, our OIBDA for the first quarter of 2007 totaled $636 million, up very slightly from the first quarter last year. Operating income totaled $521 million, down $7 million from the first quarter of last year. However, we believe our underlying performance was actually much stronger. If we take into account the profit impact of the following non-comparable items which affected the first quarter of 2006 -- which were the profits from the syndication of the second cycle of Frasier, the operating results of the 39 divested radio stations, the losses that we incurred last year in the first quarter for the UPN Network, and the non-renewal of the transit and street furniture contracts in New York and Chicago -- we believe our first quarter operating income before depreciation and amortization and operating income would have grown several percentage points higher than our reported results, and consistent with our outlook for long-term growth of operating income of mid single-digits growth.

Let's turn to interest expense, which was $101 million for the first quarter of '07, $31 million lower than last year as our strong operating cash flow, combined with higher cash balances reduced our net interest expense versus last year.

In other items net, you'll note that we had a pre-tax gain of $3.4 million on the sale of those 17 radio stations which closed in the first quarter of this year. Our provision for income taxes in the first quarter came in at a very high 48.7% of pre-tax income. Now, 10 percentage points of the first quarter tax provision had to do with the taxable gain on the radio stations which we closed in the first quarter. Now while we had a pre-tax gain of $3.4 million on the sale of these radio stations, due to their very, very low tax basis, we provided for income taxes of over $43 million on this transaction. Excluding the impact of the sale of the radio stations, our tax provision in the first quarter of '07 would have been 38.6%.

Net earnings for the first quarter of 2007 totaled $213 million or $0.28 per diluted share. Excluding the divestiture of the radio station, net earnings would have been $254 million, up 8% over last year and EPS would have been 33%, also up 8% from last year.

You will note from our earnings release that our weighted average shares outstanding at March 31 on a diluted basis was 765 million shares, down only 1.5 million shares from the end of the year, despite our buying back over 47 million shares on March 6. This is due to the effect of a weighted average. The reduced shares outstanding were factored in only 24 of the 90 days in the first quarter so at April 30, our most recent look at the shares outstanding, they totaled less than $720 million, which reflects not only the shares that we retired in the accelerated share repurchase transaction, but also the shares we received from the sale of Green Bay. So the second quarter will have the full impact of having the reduced number of shares outstanding in the weighted average.

Turning to free cash flow, totaled $753 million, up 17% over last year. As you know, in the first quarter last year we prefunded a $50 million contribution into our qualified pension plan, while we did not prefund any pension contribution this first quarter. Of the 17% increase in free cash flow over last year, five points of the increase was due to the absence of a prefunding of a pension contribution.

During the first quarter, CapEx as you'll note totaled $95 million, up from $46 million last year at this time. Higher CapEx spending at outdoor and TV stations drove this increase. TV station capital spending is related to completing the replacement facilities for previously-sold stations. Spending on the station facilities will decline significantly in the second half of this year. Now outdoors capital spending was driven by building out our new and expanded digital inventory, largely for the London Underground.

Our continued focus on the balance sheet and working capital, with particular attention on accounts receivable collections, drove our free cash flow growth in the first quarter of this year.

Let's turn briefly to the balance sheet, which you'll note in the earnings release our cash at quarter end totaled almost $3.4 billion. Now I would also point out that our debt is up $700 million from the end of last year, as we issued $700 million of 6 3/4 senior notes which will mature in 2056. Earlier this week, we redeemed a $700 million in 5 5/8 senior notes, which matured on May 1st. Our leverage ratio using gross debt remains strong at 2.2 times.

Let's turn to the segments quickly. Television segment, revenues were $2.6 billion, up 2.3%. The airing of the Super Bowl and the Final Four games, as you would expect, helped '07, but that was largely offset the absence of revenues from the close-down of the UPN and the syndication revenues for the second cycle from Frasier. We did not have any major titles to syndicate in the first quarter this year, and as we discussed in the past, our two major titles available for syndication this year, NCIS and Cold Case, will occur in the fourth quarter of 2007.

Our TV stations revenues were up high single-digits and our primetime revenues at the CBS network were down 5% in the quarter. Showtime subscriber fees were up 4% over last year's first quarter. OIBDA for the television segment was $399 million, down from $424 million in first quarter of 2006. OIBDA was down despite the absence of last year's UPN losses as lower margin sports revenues this quarter replaced very high margin syndication revenues last year.

We also had higher stock-based compensation expense in the first quarter of 2007. Our stock-based compensation expense in the television segment was $10 million, up from $6 million last year.

Turning to radio, revenues were $393 million, down 9% from last year on a reported basis, but on a same-station basis, again excluding these 39 radio stations that were divested, revenues were down 4%. Radio's OIBDA of $164 million was down 4% from the first quarter of last year as lower sports programming costs, primarily the NFL, and lower overhead expenses offset some of the revenue decline. In fact if you look at operating income margins for radio for the first quarter of '07, they were 39.4%, up 2 percentage points from last year's first quarter.

Outdoor's revenues for the first quarter totaled $462 million, up 2% over last year's first quarter. As you'll note in the earnings release, we have provided additional information on our North America and Europe and Asia businesses. North America's revenues were down 2% in the first quarter versus year ago as the loss of the transit contracts and the street furniture contracts in New York and Chicago, as Leslie mentioned, offset an 8% increase in our U.S. billboard business. Strong billboard revenue growth in the first quarter drove North America's OIBDA up to 16% to $93 million and our revenue growth was doubled into profit growth. So our 8% revenue growth excluding the lost contracts translated into 16% OIBDA growth.

Europe and Asia's revenues in the first quarter were up 9% in dollar terms. However, we were down 1% in local currency as the weak U.S. dollar drove all of our revenue growth in the first quarter. OIBDA in the first quarter for Europe and Asia was down $11 million to $7 million as soft sales in the UK and higher transit fees associated with the new London Underground contract hurt our OIBDA results.

Simon & Schuster had a terrific first quarter, again revenues up to $229 million and profit up almost fourfold to $24 million.

Finally residual costs which relate to pension and retiree medical costs from divested businesses was $24 million in the first quarter of '07, down from $35 million last year as lower pension costs due to a decrease in amortization of actuarial losses, a higher discount rate, and additional pension funding lowered our residual cost.

As we noted in today's earnings release, we are comfortable with the full year outlook for 2007. We continue to see underlying strength in our business, stripping out all of the non-comparable items from both 2006 and 2007. This underlying strength of our businesses drives our growth in revenues and our operating income, which in turn generates strong free cash flow for us. We have used that free cash flow over the past 15 months to return a sizable amount of cash to our shareholders through dividends and most recently, the one-time share buyback.

So thank you, and now we would be more than pleased to take your questions. Operator, if you would open the line.

Question-and-Answer Session

Operator

(Operator Instructions ) Your first question comes from Jessica Reif-Cohen - Merrill Lynch.

Jessica Reif-Cohen - Merrill Lynch

I think you said that leverage at the end of the first quarter was 2.2 times, which is below your target leverage. Could you just talk about how you get to your target leverage? Your acquisitions so far seem to be very focused on high-growth online, but they have been relatively small. So could either of you discuss what kind of acquisitions you would consider?

As a sideline to that, the efforts that you've made so far online and driving your programming online, what impact do you expect that to have ultimately on your ratings and when?

Leslie Moonves

Let me deal with the general thing and, Fred, you can deal with the leverage. Obviously we are looking at online and this is a time of transition for us. While we are operating our businesses as effectively as we can, we have one eye on the future and what we're doing there. Revenues are growing substantially; however, we think that will continue and within a few years it will be a significant number on what we're doing in terms of revenue. Right now it is not.

How large an acquisition? Right now we have been relatively minor in what we've purchased and what we've invested in. They are all things that have fit within our businesses. We're looking at all sorts of acquisitions that would in fact be with new media and content possibilities. But once again, nothing that would be earth shattering and nothing that would be substantial in terms of dollar amounts.

Fred Reynolds

Clearly, we do not see an acquisition that is going to change our leverage ratio at this point. We look at a lot as Leslie said, we looked at over 140. We look everything that is out there but we are also very prudent on that.

I guess I would say to you as we did this year, if we see that there is no use for this cash and it builds up, then we're going to return it to shareholders in a smart and efficient way. I have said before that we're at the low, low end of our leverage ratio and we keep producing tremendous amounts of free cash flow, which is a good thing. So far we have been pretty good at returning the excess cash to shareholders. As Leslie mentioned, about $1.6 billion in four months. That is the plan right now.

Operator

Your next question comes from Victor Miller - Bear Stearns.

Victor Miller - Bear Stearns

Les, you mentioned obviously the controversy over the viewing currency that we might see this year, talked about DVR viewing. I don't think you talked too much about what we're seeing in out-of-home viewing increases. Maybe you want to mention a little of that.

How does this all play out, in terms of you said the scatter market being good? How does it all play out in what your expectation is for the upfront this year?

Secondly, obviously Clear Channel recently announced a deal with Google. News Corporate NBC announced a YouTube-like competitor. Could you just give us your comments on these industry moves and any other ones you think that are interesting? Thanks.

Leslie Moonves

First of all, out of home, it is rather early to say but for the first time they are now starting to measure colleges, campuses and they're starting to mention sports bars. When you think of the NCAA Basketball Tournament where we never got any credit for a single person on a college campus, it is fairly substantial. The same thing with sports bars with our NFL as well as the NCAA Basketball Tournament and sports is an important part of our portfolio. We look at all these out-of-home measurements as a real positive for us and we think it should be strong.

The upfront expectations, once again, with scatter market being at double-digits, that is usually a very good sign, an indication that more and more advertisers will come into the market at the upfront since if they waited for scatter, it would cost them a bit more. So we're looking at the upfront as being up. I'm not going to make predictions. I don't do it this early in the ballgame. We do expect it to be up. We are bullish about how we're looking at the upfront marketplace and every indication says it is going to be a strong upfront. I think we can look forward to that.

In terms of what we have done with the new media, we applaud News Corp and NBC for doing what they did and everybody has a different strategy. We felt it was far better to set up our own network, which gave us the ability to (a) not be part of joint ventures, which are always difficult; and (b) take our content and not be exclusive to one place or the other. So we have formed a number of partnerships which we find the terms are very attractive to us and we think this strategy is going to work well for us.

By the way, that is not ruling out that we may continue to do some business with the NBC and News Corp venture and put some of our product there as well. The great news about the way we have to go is the non-exclusivity, so we will have lots of partners and lots of ability to monetize our content.

Operator

Your next question comes from Lucas Binder - UBS.

Lucas Binder - UBS

Fred, you mentioned that free cash flow, where we saw significant increase, you've been very effective in managing the working capital. Do you think there is still a lot more room for further tightening of accounts receivables and is there further working capital opportunity?

With so many of the one-time items hitting the first quarter, when we look out to the second between the management and talent changes, between outdoor and radio, could you give us a sense of what some of those impacts will be on the second quarter?

Fred Reynolds

On working capital, it was a big driver of our free cash flow as you can see from the statement of cash flows. There is still more to go. We are still not collecting as fast as we can. We keep driving down our days sales outstanding. It is a huge focus of all our divisions. It is a significant part of their short-term incentive to deliver cash flow and we are pretty aggressive. When Leslie sets the targets, they're not easy targets. So I would tell you, Lucas, I see this as not a one quarter phenomenon but this will continue to be an important part of our ability to get a faster asset turnover and turn assets into cash quicker. I do not see it ending anytime soon.

On one-time items, as Leslie said and I tried to articulate, and Sumner mentioned it at the outset we're really transforming the company. So as you know, in the second quarter we will have a couple less TV stations. We'll probably close on a few more radio stations. So each quarter over this next year, there is going to be some non-comparable items, both good that benefit '07 and ones that benefited '06.

I will try and we will all try and make sure that we highlight it like we did today, because we really want to look at, as we look at the business, the underlying performance when you strip out all the sort of ins and outs. Syndication in the fourth quarter will have a big syndication pop because of NCIS, which we own almost all the show. We will certainly highlight that so you see what is recurring underlying business and then the timing.

So yes, I see more happening, more TV stations as we will close on the other nine will happen, more radio stations, and some of these one-time items.

You referred to sort of the changes in talent at radio. At this point, we don't expect to see any detriment to our performance due to that, but again, it is still early. Hopefully that answers your question.

Operator

Your next question comes from Anthony DiClemente - Lehman Brothers.

Anthony DiClemente - Lehman Brothers

You mentioned your strategy on the portfolio of assets. Just turning to outdoor, if the company can sell the outdoor division for $10 billion, which would basically put it in line with some other publicly traded multiples, why wouldn't you do that as a way to create shareholder value with your stock trading at less than 9 times? If you could elaborate on how outdoor fits in, clearly a highly coveted asset, but how does it fit in? What are the revenue and cost synergies at this point, and strategic synergies with the television broadcast network? Thank you.

Leslie Moonves

We look at outdoor and synergies is not the operable question. It is, how is the outdoor business growing? As we get into digital, it becomes a more and more attractive business. When we look at a board like the Bay Bridge, where we have been able to just about triple revenues in the first month that it is an operation, it is a very exciting business for us.

How does it fit with radio and television? We are primarily an advertising-based business. The idea of how the outdoor business is growing, the new clients that are coming in, how we look at progress, there is one client in fact that shall remain nameless, where we are going to have six or eight large digital boards throughout the country that they are going to operate from their own headquarters and constantly change the message and it's going to be a deal that will be north of $5 million for us.

So when you look at it, the idea of selling outdoor is not attractive to us because we think it fits terrifically. It is an essential part of our portfolio. We love the growth potential of the business.

Operator

Your next question comes from John Klim - Credit Suisse.

John Klim - Credit Suisse

Les, in your view has the value of certain types of programming increased or decreased as we have moved into an on-demand media world? If yes, what programming types have seen value increase or decrease? Thanks very much.

Leslie Moonves

It is very interesting to look at who is getting the most DVR usage, which shows. Obviously as I mentioned before, it is the top shows. People are not recording the marginal shows. They're recording the best shows. What we have seen is when you put a Grey's Anatomy against a CSI, those are two of the most highly coveted shows because they are up against each other.

We look at the universe now in a very different way than we used to, because now it is original, repeat, DVR usage, home video, DVDs, etc. and online.

Obviously in terms of direct repeat performance, the procedurals do extremely well. They do better than the serialized dramas per se in terms of normal repeats. However on DVR usage, once again you are seeing the shows like Grey's Anatomy or Lost getting a lot of attention there as well.

I think the good news is we're dealing in an era where it is going to be about measurements more than performance because once again, the audiences are still there. They're just getting their content in different ways and our job now, we are going to start getting paid for it in this upcoming season.

Operator

Your next question comes from Kathy Styponias - Prudential.

Kathy Styponias - Prudential

Fred, I just actually want to confirm one thing that you said with respect to the network's performance. Did you say it was down 5% in prime time ex sports in the first quarter?

Fred Reynolds

Yes, the CBS Network prime time schedule excluding sports was down, revenues down 5%.

Kathy Styponias - Prudential

I think your ratings were down probably high single-digit, low double-digit ex sports during the first quarter. I just want to make sure that I am thinking about it the right way so as we progress to the second quarter and your ratings ex sports are down about 10% or so, if scatter trends are stronger now, we shall expect the revenue ex sports in prime time to improve? Is that correct?

Fred Reynolds

Well, I'm not going to get into the second quarter but in the first quarter, that is true. We had very strong pricing, which offset some of the ratings decline, which is why you have the difference in net effect on revenues. I don't know if there is a lot of prime time sports other than the championship games in the second quarter.

Leslie Moonves

That is correct.

Fred Reynolds

I think that's the only one which would have been that Monday. So again, as Leslie said, scatter has been very attractive. It has been all year, all season, and we love high scatter prices. It's awesome.

Kathy Styponias - Prudential

The second question I had was from a cash flow statement perspective. When do you actually pay the sports rights owners? When do you actually write the checks for the sports programming that has been showed? Does it occur in the same quarter typically or is it before or after with respect to NFL and NCAA?

Fred Reynolds

The NFL is throughout the season. Super Bowl, that is a higher amount when you have a Super Bowl in that season. On the NCAA, it is pretty close, although I think, yes, it goes pretty much in the quarter, so we made payments in the first quarter and payments in the second quarter as the games sort of straddle both this year versus last year, they were all in one quarter. But it pretty much follows the quarter in which the event aired.

Kathy Styponias - Prudential

So there was no benefit in this particular quarter as for the free cash flow was concerned from adding back the amortization for the sports rights, yet the check is not being written until some point later or earlier? There was no benefit from that?

Fred Reynolds

Yes, I guess there could have been a slight one on the NCAA just because of the final four games, but we do have a big payment; I don't think it is significant one way or the other.

Operator

Your next question comes from Doug Mitchelson - Deutsche Bank.

Doug Mitchelson - Deutsche Bank

Fred, the $21 million of revenue growth in home video was interesting. How big is that business annually either gross or net, if you can give us a ballpark on what kind of margin contribution this generates?

Les, in all the talk about distributing TV shows, I have a question on VOD. Network cable is having a lot of success with an on-demand service called Start Over, as you know, where viewers can restart programs already in progress. The fast forward functionality is disabled, so commercials have to be watched. When I talk to the cable companies, many of them would love to have more of your prime time programming to offer on their video on demand service and they would be more than willing to disable the fast forward function there as well.

I understand that you feel that you are going to start getting paid more for DVR viewing, but would it not be even better if the viewing was shifted to a DOD platform where you know ads are being watched?

Secondly, to the extent you are in VOD discussions, can you tell us since they are already distributing your TV products pretty broadly online, what is holding you back from cutting VOD deals that include more of your prime time and day programming?

Fred Reynolds

I will go first on the DVDs. Doug, we're not going to get into margins of DVDs because we don't break out that, but the DVD business is a high $300 million, $400 million a year revenue business. As you can see this year, it was growing, although a little bit unfair because we went to a third-party distribution last year. So there was a lagging effect last year by about a quarter by the time we got our payments. But we had nice growth, which we said we would. As we said last year, we thought the back half of the year, the DVD revenue would catch up and it sort of did and now we are on an equal keel. But it is a large, large business, high $300 million, $400 million in revenues and I'm not going to give you the margin.

Doug Mitchelson - Deutsche Bank

So is that 20% type revenue growth that we saw in the first quarter sustainable?

Fred Reynolds

Is it sustainable? Again, it is very title specific. I don't know if I can say it is 20% a year, year in and year out. I don't know that is how the DVD category is growing so I don't think we would be different other than if we have more titles in one year or we tap the library different. But it is going to grow faster than our normal revenue growth.

Leslie Moonves

When you talk to most of the major studios, by the way, just to talk about that, television is the one area in DVD that is growing faster than the rest of their businesses on DVD, so that is very encouraging for our library and our current shows.

Doug, in terms of the VOD, we're talking to everybody. Some of these cable operators obviously there is some question about whether it will be beneficial to us. As you know, we have said this. We are open to our content being everywhere as long as we get paid appropriately for it. We are looking at every possible combination thereof. Once again, the advertising model has worked better for us than the pay-per-view model. But if a cable operator comes to us with a situation where we feel it is equitable, we of course will listen to it. As yet, that has not been presented to us.

Doug Mitchelson - Deutsche Bank

If I could just follow up on the DVD comment, can you give us a sense then if it is released based, how much of your library do you feel you have monetized and how much might be left to be released?

Leslie Moonves

I can't tell yet. We still have a lot of titles that have been untapped. Every year we have come out with seven or eight of them and we still have a very, very large and expansive library. So I can't quantify how much we have got left.

Operator

Your next question comes from John Blackledge – JP Morgan.

John Blackledge – JP Morgan

Can you remind us how Showtime's output deals, when they are up and if you are negotiating for new deals?

Also, Leslie, if you can just provide some detail on the newer feature film unit, how many films per year negative cost per film if you're thinking about co-financing or giving up rights in certain windows?

Fred, CapEx more than doubled in the first quarter. I'm just wondering if that is a good run rate for the rest of the year? Thank you.

Leslie Moonves

In terms of Showtime, John, the three deals we have, the Paramount deal is up at the end of this year. Lionsgate and MGM are up in the end of next year, the end of '08. We have had preliminary discussions with all of them. We're looking at different models for how the films should work on pay cable and that is all I will say about that.

In terms of our film unit, we have hired exactly two people, an executive and a secretary. The wheels are starting in motion. We're setting up the operation. There is a lot of financing money that is there. We've been offered some very, very attractive financing. The gentleman we've hired is Bruce Toby, who is an excellent former Paramount executive who we like very much; a very smart, capable guy. We're looking for our creative executives. We're talking to everybody.

The game plan still remains to do four to six movies a year in the $10 million to $50 million range. That is our game plan right now. If all goes well, our first movie won't be out for 18 months from today. That is sort of what we're looking at.

Fred Reynolds

On your CapEx question, I think the first quarter is going to be a little bit heavier. As we gave guidance at the start of this year, we said our capital spending would be somewhere in the $450 million to $500 million range. Last year as you will recall, we were a little south of $400 million at $396 million, something like that. I think the first quarter is a little bit heavier particularly as we build out the station. About half of the growth had to do with station facilities and those should be completed by the end of the second quarter for the most part.

I think you'll see the run rate, you won't see a doubling of over last year but we are stepping up because the shift will be into outdoor with the digital spend and the digital build out, but again, we're still comfortable with the outlook of $450 million to $500 million capital spending for '07, which should be more of a high watermark for us. After that, we should start to drift back down to the low 400s or high 300s.

Operator

Your next question comes from Ben Swinburne - Morgan Stanley.

Ben Swinburne - Morgan Stanley

Let me go back to the radio side, we haven't touched on that much today. Les, can you elaborate a little more on the new management team's strategy to improve revenue growth in that business? Specifically, you talked about the lack of sports contracts in the quarter helping drive margins higher, but you could argue that new investment in programming is going to be necessary to drive a better top line story.

So how do you think about margins in radio going forward? Is there a period of time where Dan is going to push margins down as he invests in new programming and then it will benefit long term? How do you think about that?

Leslie Moonves

I think equating new programming with bad sports contracts is the wrong way to look at the radio business. We were in sports contracts that literally were breakeven or worse over the last number of years and we're very happy to be done with them. We have renegotiated a number of them and we have gotten out of a number of them.

In terms of new programming, that will not affect the margins at all and the way Dan is doing it. You know, the cost of programming has never really affected margins in a great way unless you're dealing with certain high-priced talent, per se.

Look, Dan has brought a new lease on life to the radio group. He is an exceptional leader. He is well liked within the business. I'm not going to talk specifically about what he has done. He started about three weeks ago. He is making certain changes in terms of how the group is organized, certain sales methods that are being used, and how he's looking at the programming.

Put it this way. I'm very excited over the things that I hear. I can't be any more specific than that, but I have a lot more confidence that the radio group is going to be doing much better this year.

Marty Shea

Thank you very much for joining us. Deborah and I will be around for the rest of the day for questions. Have a good day, everyone.

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