Viacom's (VIAB) CEO Philippe Dauman on Q1 2016 Results - Earnings Call Transcript

| About: Viacom Inc. (VIAB)

Viacom Inc. (NASDAQ:VIAB)

Q1 2016 Earnings Conference Call

February 09, 2016 08:30 AM ET

Executives

James Bombassei - Senior Vice President of Investor Relations

Philippe Dauman - Executive Chairman of the Board, President and Chief Executive Officer

Wade Davis - Chief Financial Officer

Thomas Dooley - Chief Operating Officer,

Analysts

Michael Nathanson - MoffettNathanson

John Janedis - Jefferies

Alexia Quadrani - JPMorgan

Doug Mitchelson - UBS

Richard Greenfield - BTIG

Vasily Karasyov - CLSA

Barton Crockett - FBR Capital Markets

Brian Wieser - Pivotal Research

Operator

Good day, everyone, and welcome to the Viacom First Quarter 2016 Earnings Release Teleconference. Today's call is being recorded. 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 December quarter earnings call. Listening from Los Angeles is our Chairman Emeritus, Sumner Redstone, and joining us in New York are Philippe Dauman, our Executive Chairman, President and CEO; Tom Dooley, our Chief Operating Officer; and Wade Davis, 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 number two 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. Today's remarks will focus on adjusted results. 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 Philippe.

Philippe Dauman

Thank you, Jim. Good morning, everyone. And thank you for joining us to discuss Viacom's first quarter results.

First, I want to thank my colleague, mentor and friend Sumner who is listing on the phone for his vision, his guidance and his inspiration all of which will continue to energize us with Sumner as our Chairman Emeritus. I am honored to be the new Executive Chairman of Viacom and I will do my at most to continue to drive Viacom’s operations forward and restore stock to its proper valuation. But more on that later in my remarks, now let’s take a quick look at the numbers.

In the first quarter revenues declined 6% to $3.15 million. Adjusted operating income was $839 million and adjusted net earnings from continuing operations were $470 million. Adjusted diluted earnings per share from continuing operations declined 9% with $1.18 per diluted share.

2015 was a challenging year for Viacom as it was for many in the industry. However, it was a watershed year in which we took many important steps to position Viacom for the future. We reorganized and refocused our organization increasing both our Media Networks and Filmed Entertainment production pipelines. We also stepped up our investment in data measurement and marketing expertise and fuels our growth in the most attractive overseas markets. And we did all of this while delivering record earnings per share in 2015 and the highest Media Networks revenue in our history.

As we turn the corner into 2016, the hard work and investment is bearing fruit. Let me give you few of the highlights. We have dynamic new leadership in our business units and several of our major networks including MTV and VH1.

Viacom’s creative culture is stronger than ever. Our focus on original programming and rapid deployment is paying off. Existing hits such as Lip Sync Battle, Paw Patrol, Love & Hip Hop and exciting new programming like Game Shakers, Younger, Teaches and I love Kellie Pickler are continuing to attract valuable and devoted audiences.

In fact Viacom had seven of the top 20 cable series in the quarter. Most major networks have seen year-over-year rains improvement and that raining strength is driving advertising improvement. There will be more to come as the changes underway with Comedy Central and MTV kick in and the ad market continues to strengthen.

An enhance distribution ecosystem is coming together with strong upside for content providers. We are experimenting and reaping the benefits of increased consumer choice.

Our international business is a strong performer with great upside but remains underappreciated. We are expanding distribution, creating differentiated and popular content building on Channel 5 substantial success, launching the high margin Paramount channel its ever more territories and building our success in India’s high growth market.

And Paramount is into its rebuilding process with the movie pipeline improving and TV operations off to a strong start. Already, we’ve seen solid critical response in Box Office performance in the first releases and there is much more to come throughout the year.

Turing to the Media Networks, revenues declined 3% to $2.57 billion in the quarter including a 1% adverse impact of foreign exchange. Before we move on to discuss our advertising results in detail, I’d like to spend a moment to discuss the wide ranging and innovation agreement with Snapchat that we announced this morning.

The deal is important for a number of reasons, not the least of which is that it is indicative of the flexible of innovative approach we are taking to grow our digital and mobile expertise rapidly and at a global scale.

Despite of the deal, we will bring two new high profile channels to Snapchat discover, a Comedy Central international channel and an MTV channel in the U.S. These on top of our other successful discover channels make us one of the largest publishers on Snapchat discover. Importantly Viacom will also become the external ad sales representative for Snapchat’s advertising inventory giving us the chance to offer even more value to our client.

In addition, validating the continuing cultural influence of our programming, Snapchat will increase the number of the life stories it publishes tied to Viacom’s tent-pole events such as the VMAs, the EMAs, the BET awards and others.

Snapchat’s immersive and extremely popular short for video platform aligns perfectly with our leadership in both premium long and short form story telling for these same audiences. This deal between Viacom and Snapchat is a major step forward in the evolution of the marketplace made possible by our shared focus on young audiences and Viacom’s content expertise, proprietary targeting, custom marketing solutions, industry leading sales force and our global strength. It’s a great partnership for both companies and it’s indicative of motivation to come.

Looking back on the quarter, domestic ad sales declined 4% in the quarter, a substantial sequential improvement from the prior quarter. Continued ratings games based on the content investment we made over the last few years across our channel groups are driving us positive momentum. Most of our networks are performing well and are making meaningful contributions as audience is build.

Excluding the performance of Comedy Central and MTV, our domestic television ad sales growth was solidly positive. Once ratings in MTV and Comedy Central turnaround and that work is well underway, the rebound will be even more clear. And the rebound will be fueled by Viacom’s continuing leadership in delivery of the most progressive and innovative solutions in the marketplace. We recently announced an update to our proprietary Echo platform which measures the effectiveness of custom creative social marketing campaigns will go to the upfront with expanding offerings in Vantage and clients are already embracing the new Velocity content network hardest saying Velocity’s creative and production resources to create data driven branded content program distributed across social platform for advertising partners.

Domestic affiliate revenues were substantially flat in the quarter with positive organic growth offset by the timing of content available to certain digital distributors. Absent that impact domestic affiliate revenues grew in the low mid-single digits.

With the majority of our distribution agreements locked into long term deals, we had no large renewals in the quarter. However, we continue to work closely with these partners to develop new avenues for viewers to enjoy Viacom programming.

To date, our syndicated site synapse which 75% of the subscriber universe and in the quarter, we launched robust Apple TV ads for Nickelodeon, Nick Jr, Comedy Central and MTV and apps on Roku for MTV and Nick Jr.

Viacom is currently in negotiations to extend our distribution agreement with Dish with whom we have a long and productive relationship. We have entered into a short term extension with them as we hammer out the details of our long term renewal. There may be short term hiccups along the way, but we firmly believe that we will ultimately reach an agreement that will be productive for both sides.

It has a strong quarter for many of our individual networks, each of which has become more flexible, more aggressive and more entrepreneurial. It was greater sharing of strategies and best practices across the house which enhances our ability to make the most of the unprecedented amount of high quality original programming really out of app [ph].

Original programming is a key to reducing view fatigue, provides greater opportunities for advertiser integration brings value in secondary markets and reinforces our network’s cultural impact at the virtual and the real work water cooler.

There is no better example of this in Nickelodeon our biggest brand. In the first quarter, Nick’s ratings improved over the prior year and in the current quarter, we are looking greater games. Nickelodeon is the 2 to 11 leader in total day ratings and has been its nearest competitor for 26 week straight in this demo. In fact, Nick’s lead over the competition continued to widen the quarter with Nickelodeon’s 30% ahead of Disney and 78% ahead of Cartoon Network.

We had the number one and number two kids series in the quarter. Nick’s newest preschool hit Blaze and the Monster Machines ranked number one across TV with kids’ two to five posting games of 47% from a year ago. Paw Patrol continued its strength in second place.

This year Nick Animation celebrates its 25th anniversary and its creative culture has never been more vibrant. In the quarter, Nick own the top three animated shows on TV with Kids 2 to 11. Alvinnn!!!, SpongeBob SquarePants and Teenage Mutant Ninja Turtles.

A new season of the Turtles kicked off last month and will have new episodes from SpongeBob, the Fairly OddParents, Alvinnn!!!, Harvey Beaks, Sanjay and Craig, Pig Goat Banana Cricket, Rabbids and Miraculous throughout the quarter. And next month, Blake Shelton will be hosting the Kids Choice Awards, Nickelodeon’s most important tent-pole.

VH1 is another turnaround story that we’re extremely excited about. Under new leadership, the network has reversed earlier ratings declines and that positive momentum is accelerating faster than any other Viacom brand. VH1’s first quarter primetime rating in the 18 to 49 demo were up 5% and in the quarter ranges were up a stunning 40%. VH1 is now the number one primetime cable network on Mondays among adults 1 to 49 and a top ten cable network overall in that demo.

Drive by the Love & Hip Hop and Black Ink Crew franchises, VH1 has four of the top 20 original cable series in the first quarter. And the network is expanding on this success increasing its output or original programming to an addition night per week.

TV Land C3 ratings were also up in the quarter, as smart acquisitions drover sequentially higher viewership each month. As we move to the current quarter, TV Land’s high quality original programming is already hitting with a season two premiers of younger driving 78% higher ratings in the season one series premier.

In addition, Teachers, new comedy has got an after solid start. As we move through the quarter, the network will debut the single comedy Lopez starring George Lopez and the final season of the Soul Man featuring Cedric the Entertainer and Niecy Nash.

BET also benefited from the steady investment distinctive contact. It continues to build momentum and exhibit strong ratings growth. The network has reversed significant challenges in 2015 commutating a double digit ratings growth in the first quarter. BET is now the number 16 ad supported cable network among adults 18 to 40 up from number 20 a year ago. And is the only network among the top 20 to post double digit ratings gains over the last year. BET remains a number one cable TV network amount African Americans.

We’re proud of what the BET team has done and how quickly they are reaping the rewards of the targeted investments in programming if may. The best is yet to come at BET and we are looking forward to continue growth as the network continues its evolution.

Spike has a solid first quarter with premiers of Ink Master drawing higher ratings and the Bar Rescue franchise showing continued strength and growth. Spike sees its second season of Lip Sync Battle with its first holiday special which delivered almost two million viewers and was the number one entertainment show of cable with all viewers 18 to 49 as well as women 18 to 49.

Joseph Gordon-Levitt’s performance of Rhythm Nation has become a pop culture sensation now at ten million views on YouTube and growing.

Moving to the current quarter, the official season two premier of Lip Sync Battle shared ratings and digital records for the network. The one hour special to 4.7 million viewers making it the most watched original series episode in Spike history. The season two depute is a number one rank show in all of television on the timeslot with adults 18 to 49 and adults 18 to 34 as well as women 18 to 49 and women 18 to 34. The season two premier has been viewed over 55 million times on various digital platforms.

To date, Lip Sync Battle content overall secured has the billion views across all platforms. Lip Sync Battle is without a doubt a global phenomenon. The U.S. version of the program can now be seeing in the 120 countries and territories worldwide, the format also under license in more than 30 territories, most recently deputing in China where 30 million people viewed the program online in its first weekend.

In addition, we have already launched the format on Channel 5 in the U.K. to great success where it’s averaging a 22% share among viewers 16 to 34.

Comedy Central remains a force with men 18 to 34 with four the top 25 cable entertainment series in the quarter. South Park showed continued strength and ranked number two in that demo and a daily show of Trevor Noah was the most watched late night talk show for this valuable audience as well as with adults 18 to 24. The story of the daily show is strong with three consecutive months of growth with total views and video consumption including a robust three million full episodes starts each week across digital platforms.

Trevor Noah has proven to be a star and he will continue to build on a strong start especially with valuable young audiences across multiple platforms. Historically, the daily show sees double digit increases in a presidential election year, so we believe even better results are ahead.

On the soft spot in the schedule and ongoing consumption shifts to under measured platforms resulted in channeling radiance overall, but I have great confidence Comedy Central will overcome these issues. The recent renewals of Inside Amy Schumer and Broad City are continuing evidence of the network is on solid creative fitting and remains the first choice for today’s hottest comedy talent.

We are already seeing a rebound, ratings in the second half of the quarter began to improve led by a new season of Workaholics and the series premier of Idiotsitter. In addition, tonight, Comedy Central will kick off a new season of Tosh.0 and premier and Not Safe with Nikki Glaser a new and very naughty and very funny series from a popular comedian.

Despite several bright spots, MTV experience a difficult first quarter overall, scripted original still ranks at the top of their time periods but ratings were lower than expected. As MTV moved into the second quarter, two of the network’s best performance franchises Teen Mom and Teen Wolf return to strong live plus three ratings on the premier of the epic fantasy series The Shannara Chronicles to 7.5 million of viewers across all telecasts.

MTV’s development process didn’t adapt quickly enough to the shifting preferences of its audiences. We’re fixing that by accelerating its development pipeline and returning its best series in faster cycles. The network’s new management is deep in a turnaround plan and has already green led several new series with fore slated for fiscal 2016. I have complete confidence that MTV is heading in the right direction.

Outside the U.S., our footprint continues to grow with launches of TeenNick in Italy, BET in France and Comedy Central is the Chez Republic and Norway. In addition, Viacom International Media Networks will be launching the Paramount channel in Italy at the end of the month.

Paramount channel continues to be a good, strategic business for us. It is already profitable and allows us to further monetize owned content and minimal incremental cost.

As you know, India has been an area of great focus and thoughtful investment for Viacom. It is the world’s leading growth market and a country where we are growing our revenues and growing our share. In the mass entertainment category Colors has now established itself as a top ranked urban channel in India. MTV is number one in the youth journal, Nickelodeon is number one with kids and VH1 is a number one English entertainment network.

Our India channels are quickly building large dedicated audiences and are very exciting opportunities to come.

Paramount closed the first quarter with two December releases that have exceeded expectations. Daddy's Home staring Will Ferrell and Mark Wahlberg has already earned more than $210 million of the global Box Office and the five time Academy Award nominated The Big Short continues to win accolades including top honors at the Producers Guild Awards.

It’s a good start to an important year for Paramount, wonder we will once again make full use of our exceptional infrastructure and talent. Coming up this weekend, Paramount will be releasing the highly anticipated Zoolander 2 which has been generating great buzz for months. Later in the quarter, we have Whiskey Tango Foxtrot featuring Tina Fey and producer J.J. Abrams 10 Cloverfield Lane. Looking through the end of 2016, Paramount will be releasing Star Trek Beyond also from producer J.J. Abrams. Teenage Mutant Ninja Turtles Out of the Shadows from producer Michael Bay and the reimaging of the classic Ben-Hur.

I next fiscal year, Paramount’s full flat will include all new Jack Reacher starring Tom Cruise, Paramount Animation’s Master Troughs and an epic thriller directed by Robert Zemeckis and starring Brad Pitt.

Paramount Television this quarter also started out strong with a life production of Grease on Fox. The telecast was a hit with critics and audiences and delivered more than 14 million life plus three viewers in the U.S.

Paramount is a very valuable and significantly undervalued part of Viacom. Its library of hit films, generate significant recurring income year after year. It has been from a historical standpoint and a brief income slump due impart to a recent low number of theatrical releases, which reduces the positive waterfall impact of prior year film releases. This will change, no that we are back on track to release approximately 15 high quality releases a year including numerous tent-poles.

At the same time, what is now a low cost startup television production operation will ramp up the profitability over the next few years. Once we get through this rebuilding process and related investment, we expect Paramount to pump out significant operating income and free cash flow in the years to come. At the same time, its content will provide the fuel for epics in the U.S. a growing number of Paramount channels outside of the U.S. and will serve as an important source of television content our media networks including Nickelodeon, Spike and MTV.

In conclusion, I want to address the speculation about Viacom and our future. Our outlook and the facts have been distorted and obscured by the naysayers, self-interested critics and publicity. We will not be distracted or deterred as we built for the bright future ahead of us. As Executive Chairman and CEO, I will continue to work tirelessly to secure that future and will leave no stone unturned at a tactically or strategically. Sumner and I have a more than 30 year history side by side building his media empire. He and the Board of Viacom believing in my abilities and my character have been trusted me with weighty responsibilities none of which are inconstant or incomparable.

My singular objective is to protect and build value for all of Viacom shareholders and in doing so for all the beneficiaries of Sumer’s trust not only include that the sadness of this daughter but also those of her brother.

And finally let me be absolutely clear, I could not be more focused on getting Viacom stock price back to the much higher level and enjoy my leadership toward short time ago. No one should doubt my resolve or the resolve of our entire management team to making that happen.

And with that, I’ll turn it over to Wade.

Wade Davis

Thanks Philippe. Before I take you through our operating results, I want to note that our earnings release and web presentation summarizing the results for our December quarter are available on our website.

Now let’s take a look at our segment results. At our Media Network segment, revenues in the quarter were down 3% compared with the prior year. Domestic revenues decreased 3% and international revenues declined 4%. Excluding a 7% unfavorable impact from foreign currency, international revenues were up 3% reflecting growth in advertising and affiliate revenues.

Page nine of our web deck provides a breakdown of our Media Networks revenue performance. In terms of advertising, worldwide revenues declined 3% in the quarter. Domestic revenues were down 4% and international revenues were down 2%.

Excluding foreign exchange which had an 8 percentage point unfavorable impact, international advertising grew 6% drive by growth in Europe.

In terms of affiliate revenues, worldwide revenues were down 1%, domestic revenues were substantially flat in the quarter, while international revenues declined 6%.

Domestic affiliate revenues were unfavorably impacted by the timing of product available under certain distribution agreements.

Foreign exchange had a 9 percentage unfavorable impact on international affiliate revenue growth.

Ancillary revenues were down 19% driven by lower consumer products revenue reflecting comparisons to Teenage Mutant Ninja Turtles merchandize sale in the December quarter of last year, as well as a decline in television syndication revenue.

Expenses decreased 3% in the quarter within operating expenses; programming expenses were down 3%, while distribution and other expenses decreased 4%.

SG&A expense decreased 2% in the quarter. The decreases in programming and SG&A costs were principally due to the savings from our strategic realignment last year.

Media Networks adjusted operating income was down 4% for the quarter and the adjusted operating income margin was 41%. The decline in operating income was driven by the revenue decline of 3% partially offset by the 3% decline in expenses.

Moving to Filmed Entertainment, revenues were down 15% in the quarter principally due to decreases in the theatrical and home entertainment revenues partially offset by an increase in license fees. Foreign exchange had a 3 percentage point unfavorable impact on Filmed Entertainment revenue growth.

Page 12 of the web presentation provides the breakdown of Filmed Entertainment revenues. Theatrical revenues declined 44%. The decline in revenues was due to lower carry of the revenues give the difficult comparison to the strong performance of Teenage Mutant Ninja Turtles in the December quarter of last year, as well as lower revenues from our current quarter releases.

Of our more significant releases, the Big Short and Daddy's Home were both released in December of this year compared to Interstellar which was released earlier in last year’s December quarter.

Home entertainment revenues declined 24% reflecting lower carryover revenues due to comparisons to Transformers Age of Extinction in the December quarter of last year.

Revenue from license fees increased 25% primarily driven by the licensing of certain titles and subscription video-on-demand and television.

Filmed Entertainment generated an adjusted operating loss of $146 million in the quarter, as compared to a loss of $60 million last year. The decrease in operating results reflects the timing in mix of the current quarter releases as well as lower contributions from prior period releases.

And moving beyond the segment results, the other items line reflects a gain of $2 million versus $18 million loss in the December quarter of last year. Last year’s loss was principally due to foreign exchange.

In terms of taxes, the adjusted effective tax rate was 32.8% reflecting a 50 basis point increase as compared to the prior year.

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

Thomas Dooley

Thanks Wade. I’m going to our cash flow, our debt, as well as the seasonal factors impacting our 2016 fiscal year that I’ve already been discussed. In the quarter, we had a cash use of a $152 million which compares to $57 million of free cash flow in the December quarter of last year.

Page five of the web presentation provides the components of free cash flow. The decline in free cash flow versus the prior year was principally due to higher working capital utilization and lower operating income. Working capital was negatively impacted by the timing of film receivables from home entertainment and television.

Moving on to our debt, it remains principally excrete with an average cost at the end of the quarter of 4.6%. We ended the quarter with $12.6 billion of total debt and $327 million of cash and cash equivalents. At the end of the quarter, our leverage ratio was 3.2 times. We have $368 million remaining outstanding of our 6.25% senior notes which mature on April 30th. We plan on paying these notes off.

Now let’s turn to some of the factors impacting fiscal 2016. In terms of affiliate revenues, quarterly affiliate revenue will fluctuation according to the timing of transactions and the recognition of revenue related to certain distribution agreements which are tied to product availability. With the fiscal year 2016, we expect growth in affiliate revenues to be in the low mid-single digit range.

For the full year, we expect that Media Networks programming expense growth rate will be in the mid-single digits.

In terms of taxes, for 2016, we are forecasting a book tax rate of approximately 32.5%. We will refine this as we go through the year and get a better sense of the domestic international profitability mix.

At Paramount, we are excited about the upcoming slate including our summer tent-pole’s Teenage Mutant Ninja Turtles 2 and Star Trek 3. For fiscal 2016, we expect profits to be weighted to the back half of the year as the studio benefits from their summer releases.

Looking ahead of the studio’s production and development pipeline, Paramount has just wrapped production on Jack Reacher 2. This month, this studio is commencing production on four major films. Scarlett Johansson's will star in Ghost in the Shell which is in partnership with DreamWorks. Baywatch starring Dwayne Johnson and Zac Efron a new chapter in Vin Diesel’s action franchise XXX 3 the Return of Xander Cage and the romantic thriller setting World War II which is directed by Robert Zemeckis and stars Brad Pitt and Marion Cotillard.

In the spring, the studio starts production on Academy Award winning film maker Alexander Payne’s next movie called downsizing starring Matt Damon.

In summary, while last year, we experiences broad ratings weaknesses which have organizational and creative steps to address those challenges. The progress we began to see at the end of fiscal 2015 is continuing.

In the December quarter, six of our top ten networks are growth in ratings. In March quarter to date, we are seeing ratings growth for our overall portfolio of Media Networks. At Paramount, they have started the fiscal year with several successes at the Box Office. And we look forward to the summer tent-pole releases.

In terms of our international media networks, we are benefiting from our investment over the past several years and anticipate strong double digit growth in profit this year. The acquisition of Channel 5 has been an unqualified success and the continued launch of new networks in Europe, Latin America and Africa has enabled us to build and grow our scale in the most important developing and developed markets.

With that, I would like to turn the call over to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Michael Nathanson with MoffettNathanson.

Michael Nathanson

I was wondering if Tom following-up and then I want Philippe. Tom, I think in the last earnings call, Philippe stated that you guys expected high single-digit affiliate fee growth this year domestically, now you are moving to mid-single-digit, what factors drove that change in outlook and how impactful is S5 your change and thinking?

Thomas Dooley

Philippe is going to take that one Mike.

Philippe Dauman

Michael, good morning.

Michael Nathanson

Good morning.

Philippe Dauman

There is several different facts, there is availability of product for S5, we have a one off item this year which without going into it’s a terms which I can’t do, which involves harmonization of the AT&T rates to DirecTV as part of our end of last fiscal year or early this fiscal year renewal of the AT&T agreement. As I said that’s a one off item and that’s a factor in there. So as we turn into next year, I think we’ll get to a more normal growth rate in affiliate revenue.

Michael Nathanson

Okay, and then Philippe, follow-up on the news of your appointment as Executive Chairman, we wonder if there will any change to strategies now that you’ve combined CEO and Chairman, any change of strategies or leadership of the company or any asset mixes that may change with the change to you as Chairman?

Philippe Dauman

Look, yeah Sumner and I have been in harmony and how we pursue our strategy going forward, obviously as we all kwon, the world is changing, our specific industry is changing. We have taken a significant number of steps which I outlined in my remarks, I won’t repeat it, to move into the future, to build the existing ecosystem, we finalize our brands grow internationally, grow on multiple platforms the Snapchat deal that we announced this morning is an indication. You will see more deals to come. As I said in my remarks, I will leave no stone unturned, I never have and I never will.

And our objective is to build value. We are building value for the long term. We are building value with a few to getting our - a better valuation of our stock in the short term. But we will not take actions that undermine that value and we believe there was consistency in leadership, consistency in purpose, driving our content around the world, across multiple platforms, finding new source of revenues in licensing, consumer products and other areas. We will get by come back to the growth that we all want to stay.

Michael Nathanson

Okay, thank you.

Operator

And we’ll go to our next question, sir, from John Janedis of Jefferies.

John Janedis

Thank you. Philippe, in the past you’ve talked about the line of site to flat ad growth, I just wanted to ask, based on what you are seeing today, has your confidence level changed and have you see a change in the matter of tone in the marketplace given the recent macro headlines?

Philippe Dauman

We’re seeing strong demand in the scatter market and strong pricing. We are seeing pricing in the scatter market over the last upfront in the neighborhood of 20%. So that builds very well for the upcoming upfront with builds particularly well for us as the great progress that we’re making across most of our networks which I believe will turn into virtually all of our networks in short order. We are seeing a great appetite for our leading Viacom Vantage, Viacom Echo and Viacom Velocity products. We are determined to get back to ad growth. We’ve also looked at having a healthy environment for our marketing partners. As you know, we have taken down our ad load in several key time periods across several of our networks and that to some extend might have suppressed some of the short term advertising growth but it is healthy for us and will lead to very healthy return to ad growth as we improve over the back half of the year and into next year.

John Janedis

You talked about this on your prepared remarks, I mean in the under measured platforms, where is the industry in capturing rating in this platforms and are you still on target for the non-Neilson based advertising at 50%?

Philippe Dauman

Well that will be a particular driver on getting shall we say supplemental or differentiated currency for us. We’ll be as we go into the upfront, we have a lot of as I said before, we have a lot of advertiser clambering to get involved with these products and we’ll be able to engage with them more deeply. As you know in this year, we had ramped up to an 11 major advertisers, I said in the last earnings call, we expect that number to triple thereby representing a large portion of our advertising revenues as we go into next year as a result of the upfront discussions we’re having. We’re able to offer reach into other platform like Snapchat which we announced this morning. And we’re also seeing some moves by Neilson to improve its measurements. We are seeing some competition coming up with the comScore and track combination, so all of these together will move toward better capturing the actual reach that our networks have.

John Janedis

Thank you very much.

Philippe Dauman

You’re welcome John.

Operator

And now we’ll go to our next question from Alexia Quadrani of JPMorgan.

Alexia Quadrani

Hi thank you. Just my first question just following-up on your comments just now on the advertising market given the strength of the scatter you just stated in the fact that I believe you have more inventory available in the March quarter versus the December quarter I guess, any color of how we should think about sequential, further sequential improvement in domestic ad revenues in March?

And then my follow-up question is just on any update on the buyback given upcoming maturities, how should we think about use of cash?

Philippe Dauman

Thank you, Alexia. Yeah as far as the ad market again we’re looking at the general health of our networks. You’re quite right, we’re seeing improvement. We do have some work to do in our Comedy Central and MTV networks, MTV in particular will take a little more time because the new managements programming will be kicking in later and that’s going to be significant. It’s still early in the quarter, we expect this quarter to be in the vicinity of where we are going to see some meaningful progress in the back half of the year with our objective by the end of there to be poised for growth and sustainable which is what we are looking for sustainable growth in advertising revenues.

As far as the buyback is concerned, you’re right, now we’re focused on strengthening our operations, we’re paying down debt as Tom mentioned, we are not refinancing where we’re paying off an upcoming maturity. We are committed to our investment grade rating. And in due course, as we have availability within that framework, we will move forward at the appropriate time in the future to utilize the capacity that we have in our buyback program.

Wade Davis

Like, just from that point of view, it’s important to note that as we’ve reduced unit loads at certain networks, the full benefit of the ratings up with that we’ve realized gets offset by some of that unit load reduction. As soon as we get to a more comparable period, the benefit of the ratings increasing will start to flow through. And I think as we said, bring into positive ad sales growth.

Alexia Quadrani

Thank you very much.

Philippe Dauman

You’re welcome.

Operator

And we’ll go next to Doug Mitchelson of UBS.

Doug Mitchelson

Thanks so much. I think one for Philippe, one for Tom. And Philippe, you mentioned a short term extension with this, so maybe short term hiccups and I wasn’t sure to how to take that comment, so whether in Viacom or close or far part in perception of value of the networks, any further commentary there would be appreciated.

And Tom, just sort of following-up on the comments of the balance sheet and maybe would Philippe would jump on this. But give sort of the back and forth with some of the debt ratings, the environment the debt markets right now and the trends for the business, you start to rethink you know what a good target leverage for the company should be, as we thought to figure out when the company can go back on often, so share purchases, do we use sort of the prior guidance for balance sheet goals or should we think about it more conservative in the future sort of given the events for the couple of years? Thanks.

Philippe Dauman

Doug, if you could appreciate, I want to address in remarks that this issues given that’s been so much in the public domain and I wanted to bring all of your up to date where we are. But beyond that I don’t want to go beyond that because what’s important is for us to negotiate constructively and productively and price it until we get to a deal. And there is always give and take and the negotiations and so I wouldn’t take anything more than that for what I said in my prepared remarks.

Doug Mitchelson

When we think about you know trying to figure out what our own affiliate revenue estimates should be, should we look at your updated guidance for affiliate revenue as including something you sort of different for this or if you know once the Dish deal happens then maybe it will be feel sort of a further update on affiliate revenue?

Philippe Dauman

We are comfortable with the update that we - that Tom mentioned.

Doug Mitchelson

Okay.

Thomas Dooley

Doug, on our leverage target you know look, we want to be solidly investment grade as a company. As you remember back in 2008, 2009, we delivered the balance sheet relatively quickly that’s due to the company’s very strong free cash flow generation capability. We think we can get down into the ranges that leverage some of the rating agencies are looking for companies like ours operate within. And we’ve had a stated target of 2.75 to 3.0 and we’re going to operate within that metric and perhaps at the lower end of that metric and then we’ll look from there where the operations are and the opportunities to buy back shares at that point.

Doug Mitchelson

Alright, thank you both very much.

Philippe Dauman

You’re welcome Doug.

Operator

And our next question comes from Richard Greenfield of BTIG.

Richard Greenfield

Hi thanks for taking the questions. I’ve got two. The first one for Philippe, I just wanted to follow-up on what you said at the end of your prepared remarks, you know given the exceedingly poor performance of Viacom over the past several years on an absolute basis and even looking relative to your peers and what appears to be some significant management turnover. Just wondering if you could give us color on why that you are the Board’s choice to be both Chairman and CEO, like what was it trade wise that the Board looked in you and said that was why, that was the right decision for Viacom?

And then two, looking at Comcast, they shifted several of your channels to a tier. You said I think publically that that was a violation of the contracts they had with Viacom, have you sued Comcast and is that a risk that other distributors could try to tier some of your channels? Thanks.

Philippe Dauman

Rich, first of all as far as the performance of Viacom, let me just challenge what you indicated. Viacom’s performance was at the top, in fact we have five consecutive years of begin significantly beating the S&P and our stock performance. Clearly we have from that a lot in the last two and especially last year. Some of the decline was extenuated in the recent pass by a lot of noise that existed around us. And I think some people who have been buying the stock in that period are have the fore site to see through a noise. And I think we have outlined the steps we are taking, the forward looking steps we are taking and the progress we are making in several aspects of our operations.

And then I level it to the Board, I am gratify that the Board overwhelmingly supported me for the position. They know me, they know what our plans are strategic plans, they know what our operational plans, they endorse them, they have confidence and I will repay that confidence by producing the results without sharking our obligation to make the changes that are necessary to make Viacom the leading content company of the future. That is our objective.

As far your question relying to Comcast, yes, they have violated our agreements and we are going to not sit back, we have not filed a lawsuit against Comcast but we will preserve our rights as we go forward.

Richard Greenfield

And Philippe, could I just follow-up. I really appreciate your answers for those questions. What was the noise that you specifically are point out that obscures the underlying results, what are the key noise elements that we should all be focused on?

Philippe Dauman

Well, if you haven’t been listening, you don’t know what the noise is. I think it’s obvious to everybody what the noise is.

We’ll go to our next question operator.

Operator

And we’ll go next to Vasily Karasyov with CLSA.

Vasily Karasyov

Thank you. Philippe, you were talking about MTV and Comedy Central returning back to growth and I understood that was advertising revenue growth. So I was wondering from the rating standpoint, do we just need for the comps to get easiest on when the May, June time period or do you expect recovery before that and what were the tag, do you have enough programming to do that?

Philippe Dauman

Thank you, Vasily. Look, we are - let me take them in two parts. As far as Comedy Central goes, clearly we have a great creative output there, that’s resonating with our audiences. We have a number of returning series that are coming on stream to add to what’s already there. So I think we have a healthy pipeline of Comedy Central and I think overtime that will take care of itself. And it’s very attractive programming that reaches young audiences attractive to advertisers.

As far as MTV goes, MTV is in more of a rebuilding mode. We have a new Head of MTV that started just a very few months ago, who has rehabbed his team, has as I mentioned in our remarks, Green let new series. We needed and need more programming on MTV. That will start kicking in overtime. We are accelerating the hearing of the shows that are already in production so that we can fill the schedule better. We are going to add new shows and that will just build on itself over the next several months and quarters. So it’s a little bit of different exercise but I think the energy that’s being applied to it, the new enthusiasm for it, the reaching out to more programming sources and more relevant programming sources is very encouraging and I feel very good about the future there.

Vasily Karasyov

Thanks so it sounds like Comedy Central is this fiscal year event and MTV probably just go ‘17?

Philippe Dauman

Well, I expect to see some improvement in MTV before we get to fiscal ‘17, but we can see the full impact of the changes into fiscal ‘17.

Vasily Karasyov

Thank you.

Philippe Dauman

You’re welcome Vasily.

Operator

And we’ll go to our next question from Barton Crockett of FBR Capital Markets.

Barton Crockett

Okay, great, thanks for taking the question. I wanted to, focusing on one of the assets you said was undervalued and that is the film studio. You know if you look at the independent kind of smaller film studios that are publically traded, kind of premium multiples I think impart based on people’s view of the value for library and you get some good disclosures there from people like Lionsgate run by a former colleague of yours which takes about $500 million of library revenues, nearly $200 million of library EBITDA, could you guys give us a sense of the library revenues in cash flow at Paramount presumably it’s bigger and could you give us any way to kind of get a handle on the value and the cash flows from that?

Philippe Dauman

We don’t breakout that kind of information, we haven’t in our history also we have a different level of materiality for Viacom that it is for a Lionsgate. I think it’s clear that there is a lot of value there and as I’ve indicated before, we’ve also used a library to build assets in our case using our channel distribution capability. I mentioned epics in the U.S. And the Paramount channels are really adding scale a new demographic reach for us in many, many countries around the world and still growing as the race performance is really strong. And it is really helping to accelerate the growth on our international business which is a really underappreciated story as I mentioned.

We are building very significant value there and you can even breakdown components of our international business notable India and see the important value creating that’s taking place.

So Paramount as other studios have at various stages has had a little slumping in output on current production, but I have confidence in the team there. I like what I see in terms of development. And that will improve the overall results and of course add to the impressive library that Paramount has as we mentioned.

Barton Crockett

Okay, great. I’ll leave it there. Thank you.

Operator

And then we’ll to our next question from Brian Wieser of Pivotal Research.

Brian Wieser

Thanks to taking the question. I actually wanted to dive in a bit into the Snapchat relationship. I was curious if you could providing more details around how you are thinking about using the relationship, we’d be selling Snapchat independent sales of TV of relate inventory as well or is it meant to be a more of a value add sales and how long do you expect this relationship to continue with them?

Philippe Dauman

As we discussed a multiyear relationship, we believe we are great fit and they believe they are great fit for us. We will be flexible and how we use the inventory either selling it direct, whatever it generates better value for both partners in this relationship is what we will do.

I don’t want to tutor on horn but I think they saw in us by the most forward looking at sales organization out there, one with the kind of reach live events and other attributes of that marry well with what they are trying to do. And we look forward to being a very fruitful relationship for both of us.

Wade Davis

I just add to that Brian, it’s a great deal for Snapchat, it’s a great for Viacom but most importantly it’s a great deal for the advertisers that we deal with because it provides them with a suite of products that will reach a very hard to reach audience and we’re able to help Snapchat bundle together with our inventory to reach that audience and help advertisers reach that audience. I think it’s a win, win, win for all three parties in the ecosystem.

Brian Wieser

Thank you very much.

Philippe Dauman

Operator, we have time for one more question.

Operator

And we will go to [indiscernible].

Unidentified Analyst

Great. Thank you very much for taking my question. So going back to Michael Nathanson’s question earlier about through the affiliate sort of compensation, do you expect S5 in the fiscal year to be up, down, flat, maybe some magnitude you can give us?

Philippe Dauman

Now, I won’t give guidance on that, but overall that S5 is a better growing part of our distribution ecosystem with of course radicchios and what we license, what the windows are in licensing. As you know we have content that moves around, has moved on historically among the various S5 providers, there are other that are immerging, we are talking to new potential entrance into the field and that’s both domestically and internationally. So mange it all in a holistic way and we see that as one of the factors in driving our affiliate growth revenue going forward.

Unidentified Analyst

Great, thank you very much.

Philippe Dauman

Welcome. We want to thank everybody for joining us for the call.

Operator

And that does conclude the conference. We would like to thank everyone for their participation today.

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