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Here’s the entire text of the prepared remarks from Viacom’s (ticker: VIAB) Q3 2005 conference call. The Q&A is in a separate article. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

Marty Shea, Senior Vice President of Investor Relations
Sumner Redstone, Chairman and Chief Executive Officer
Michael Dolan, Executive Vice President and Chief Financial Officer
Tom Freston, Co-President and Co-Chief Operational Officer
Les Moonves, Co-President and Co-Chief Operational Officer

Analysts:

Gordon Hodge, Thomas Weisel Partners
Spencer Wang, JPMorgan
Jessica Reif Cohen, Merrill Lynch
Victor Miller, Bear Stearns
Doug Mitchelson, Deutsche Bank
Doug Shapiro, Banc of America Securities
Kathy Styponias, Prudential
Michael Nathanson, Sanford Bernstein
Lowell Singer, Cowen Investment Bank
Anthony Noto, Goldman Sachs

Presentation

[Marty Shea, Senior Vice President of Investor Relations]

Good morning, everyone. Thank you for taking the time to join us for our third quarter 2005 earnings call. Joining me for today’s discussion are Sumner Redstone, Chairman and CEO; Tom Freston, Co-President and Co-COO; Leslie Moonves, Co-President and Co-COO; Michael Dolan, Executive Vice President and CFO; and Fred Reynolds, soon-to-be CFO of the new CBS Corporation. Sumner will have opening remarks and then we will turn the call over to Mike for some specific financial issues. We’ll then hear from Tom and Les for a discussion of strategy and operations and then open the call up to questions.

Standard disclaimer omitted.

A summary of Viacom’s third quarter 2005 results should have been sent to all of you. If you did not receive yours, please contact Maureen Kenney at 212-846-7536 and she will get it to you. A webcast of this call, the earnings release, and other information related to the presentation can be found on Viacom’s corporate website on the Internet under the address of viacom.com. Now I will turn the call over to Sumner.

[Sumner Redstone, Chairman and Chief Executive Officer]

Thanks, Marty. Good morning, everyone and thanks for being here. By now you’ve seen our results and know that Viacom has once more another more than a solid quarter and is on track to deliver its growth projections for the year. As most of you know, we filed our Form S-4 with the SEC on October 5, and updated the anticipated timing for completing the separation. We are now looking at the end of this year as opposed to the first quarter of 2006 as initially projected.

Now Mike Dolan, will give you an update on where we are in the process in a few moments. But let me just say that as someone who has seen his share of corporate reorganization, corporate consolidation, and now some for computation, I couldn’t be more excited about where we are headed with our Company’s realignment.

The new Viacom is well on its way to becoming a great growth story. Best-in-class brands, multiplatform content in the right businesses, a proven track record of creative innovation and growth, an impressive international foothold from which to expand around and encompass the world, a new Viacom’s singular and powerful vision is clear; to be the global multiplatform leader based on the power of its brand and its connection with the key demographic it serves.

CBS Corporation has an equally compelling story, although with a different plot. Led by its powerful mass media brands, CBS Corporation plans to continue to reinvest in its businesses to further financial growth, deliver strong operating results, generate significant cash flow, pay an attractive dividend, and most importantly provide stockholders with a consistent return on their investment. Tom and Les will provide some color on strategy, strength, and structures momentarily.

I don’t want to steal their thunder, but let me tell you these guys are ready to rock. In short, we will unleash these pure play powers on the opportunities that exist in this rapidly changing competitive environment.

Now, let’s look at the third quarter numbers. On a consolidated basis, revenues increased 10% to $5.9 billion from $5.4 billion for the same quarter which was last year led by growth of 54% in entertainment; 50% in cable networks as well as increases in outdoor and radio, revenues from advertising climbed 9% led by gains of 70% in the cable networks and 7% in television. The Company’s operating income for the third quarter rose 5% to 1.4 billion, paced by increases in nearly every segment including double-digit gains in cable networks, entertainment and outdoor.

It is important to note that we delivered these numbers despite some significant onetime items in the quarter. In addition to the 17 million of separation expenses, damage from Hurricanes Katrina and Rita cost us about 22 million in revenue and expenses principally in the outdoor television and cable networks. In the quarter we also recorded a onetime charge of $90 million related to the sale of two TV stations.

Overall, we continue to generate significant per-share growth for shareholders. Net earnings per diluted share for continuing operations in the third quarter increased 12% to $0.47 per diluted share compared with $0.42 per diluted share in the prior year. This reflected a 2% increase in net earnings from continuing operations to 735 million from 722 million for the same quarter last year.

Our free cash flow was $879 million, compared with $543 million for the same prior-year period and we used that cash to fuel our continuing buyback program. We have stepped up our program because we see great value in our shares during this period. Our shareholders pause to evaluate what we thoroughly understand, namely the separation you can count on. And you can count on us being extremely aggressive with our repurchase program.

For the third quarter 2005, we purchased 35 million shares of Class B Common Stock and the additional 14.9 million shares we purchased in the period from October 1 to October 20, 2005; we have acquired a total of $6 billion under the $8 billion program authorized last fall. Likewise Viacom returned approximately $110 million to shareholders in the form of dividends on October 1.

Looking ahead to the rest of 2005, we remain on track with our guidance of mid single digit growth in revenues and operating income and high, high single digit growth in earnings per share. This is an exciting and an extraordinary time for the Company as we embark upon this bold venture. These two companies will maximize our business performance and in turn their returns to shareholders. Both will have individually compelling stories; exciting stories that will unfold over time as these companies pursue their promising destinies. But there will always be one place where the plots of Viacom and CBS Corporation overlap and that is in their unwavering commitment to creating value for shareholders. As I used to say at Viacom, we have an unwavering commitment to excellence and we understand that for these two companies, nothing is impossible.

And with that, I will now pass it over to Mike.

[Michael Dolan, Executive Vice President and Chief Financial Officer]

Thanks, Sumner. Tom and Leslie will be covering the quarterly highlights, but before they do I would like to provide a quick update on the split transaction itself. First, as Sumner mentioned, we are in a great place as far as this spin-off is concerned. At this point we anticipate closing by the end of the year. Between now and then, though, there are several key steps in the process I would like to walk you through.

First, we are on track to update our SEC filings for third quarter results and mail the documents to shareholders by early December. Then at the discretion of the New York Stock Exchange, the stock for the new companies will trade on a when issued basis. As we said in our last call, CBS will absorb the current Viacom dividend and majority of the debt. New Viacom as a result will be significantly underleveraged. It is our intent to increase the leverage of new Viacom to a range of 2.75 to 3.0 times EBITDA. This capacity will be used for continuing substantial share repurchase program that Sumner mentioned and selective tuck-in acquisitions that Tom has talked about in the past. In preparation, new Viacom in December will request Board authorization for share repurchase program.

On the last call, I mentioned several cost reduction initiatives that we have underway and I’d like to briefly update you on these. We are finalizing at this moment the results of our overhead study and as you remember during the last call, I said that the overhead study that we are looking at includes not just the overheads at corporate Viacom but the overheads in the divisions as well. So it is the total overhead nut that we are looking at. And we are confirmed in our view that the total cost of the overheads of these companies will be less than the current consolidated costs.

We are also making good progress on a new corporate purchasing initiative and we’re now implementing the tax strategies that I referenced on the last call. All in all, steady progress and we look forward to seeing you in December.

I will now pass it over to Tom.

[Tom Freston, Co-President and Co-Chief Operational Officer]

Thanks, Mike, and good morning everyone. This is an exciting time for Viacom. I am happy to have this opportunity to talk you about our plans and our progress. Today I am going to walk you through the third quarter operational highlights for the businesses I oversee, the cable networks and the entertainment segment, which next year will be the new Viacom.

The third quarter is not only indicative of the strength of our businesses but it also provides a glimpse of our prospects as a public company. We are already working towards the strategic imperatives we outlined for the new Viacom and are making progress. From the beginning we intend to be a leaner and more focused Company with a strategic operational and financial flexibility to build on our positions of strength. The overarching strategic priority for the new Viacom is to be the best-in-class, consumer focused, branded global content Company. Knowing and understanding our audiences and in turn developing innovative content to meet their ever-changing pace and needs have been the key strategies for the double-digit top and bottom line growth our cable networks have experienced for over the last two decades; an ability to evolve with our audiences and to connect with them on every platform.

Our results validate this strategy. If you look at the new Viacom in the third quarter we grew revenues 26% and operating income 28%. Year-to-date new Viacom grew revenues 22% and operating income 18%. This is all on a segment basis.

For cable networks, revenues increased 15% for the quarter, driven by double-digit growth in all three principal revenue streams. Advertising increased 17% with gains across all MTV channels and at BET. Affiliate fees increased 10%, reflecting both rate and subscriber increases at the networks. Ancillary revenues were up 20% over the same prior-year period, which primarily reflect licensing and syndication fees for Comedy Central and consumer products at MTV International.

Operating income for cable increased 11%, reflecting the strong topline growth as well as the continued investment in programming and the new digital business initiatives to enhance our long-term growth prospects.

Programming investment translated into rating success across our portfolio of networks. MTV scored its highest rated third quarter in its history in its key 12 to 34 year old demographic and maintained its leadership position for the 34th consecutive quarter as the number one rated 24 hour basic cable network among 12 to 24s.

Third quarter ‘05 was the number one quarter in BET history with viewership up 26% versus year ago. It was Nick at Nite’s most watched quarter ever among total viewers, finishing number one in adults 18 to 49, women 18 to 49, and women 18 to 34. Spike also saw its highest ratings in adults and in males 18 to 49 in prime time.

Nickelodeon remained the number one cable network for the tenth year in a row among total viewers and across all kid demos. And in addition to all of this, CMT, Comedy Central, TV Land and VH1 are all experiencing record quarterly or year-to-date ratings.
I want you to know we will never be complacent with the success of our cable networks. We have a desire to continually innovate and improve. That is the mindset we are now applying to our other high-profile business, Paramount Pictures. We are in the process of evolving Paramount Pictures into a new motion picture model that recognizes the changing realities of the film business, captures all the strengths of the studio, and leverages the unique capabilities of our worldwide cable networks. Our performance in the third quarter at the studio was excellent.

And looking at the entertainment segment overall, which includes Paramount Pictures and Famous Music, revenues increased 54% to $845 million from 549 million in the third quarter primarily due to increased worldwide theatrical revenues including continuing contributions from the War of the Worlds and the third quarter releases of Four Brothers and Bad News Bears, as well as higher domestic home entertainment and worldwide pay TV revenues. Operating income increased to 109 million from 5 million in the third quarter last year.

We also made good progress in the quarter against our multiplatform strategy. On last quarter’s call we outlined our twofold approach to the strategy. First, to extend our existing brand through every relevant digital platform; and second, to develop or acquire new businesses through targeted acquisitions to augment our current capabilities as needed.

By expanding our reach into new markets and onto new media platforms we will build an even deeper relationship with our audiences. In the last six months, we have built and launched innovative broadband networks for almost all are major cable brands. We launched MTV Overdrive on MTV.com, which gives viewers on demand access to short form video programming on a streaming and download basis. Nickelodeon launched Turbo Nick. VH1 launched V Spot. MTV launched mtvU Uber. And Comedy Central is launching their broadband channel, the Mother Lode today.

All these broadband networks will be great businesses for us going forward as the web continues to move from text to video. They are high CPM businesses and they allow us to really leverage our video production skills and our libraries on line.

Back in June, we acquired Neopets and we added another online acquisition this month when we acquired iFilm, a leading online independent video network. iFilm is the leading aggregator and distributor of user generated video content on line and has one of the largest libraries of short form entertainment on the web. It is a perfect fit for our Company.

In September we announced a global licensing agreement with the Warner Music Group for the use of their music videos and original mobile programming developed by MTV Networks. We expect to have 50 wireless deals worldwide internationally by year end and be in front of 750 million users worldwide with carriers from Verizon to China Mobil to DoCoMo.

Looking more specifically at our broadband networks, we see a three-part success story. First the products have gotten great reviews from our consumers, our competitors and the editorial community. Second, the product has been a home run with the advertising community where we are doing business at three times our TV CPMs and have seen the client list grow quickly to include a range of blue-chip advertisers. And finally, even without a significant promotional commitment to date, we have seen consistent and growing usage. We are really excited about our performance this year and for the prospects of the new Viacom going forward.

That said, I want you to know that we understand that separating ourselves into two companies is not the silver bullet that will guarantee new Viacom’s success. We know we need to both meet both our strategic and financial promises in order to earn your confidence and we are committed to doing that. With that in mind, we’ve put together a world class team at the top of our Company, a mix of insiders and outsiders including Judy McGrath’s announcement today naming Michael Wolf, the new COO of MTV Networks. Many of you know Michael as the leading entertainment industry strategist from McKenzie. We’re thrilled that he will be with us now to ensure that we execute and operate with excellence. We’ve also been spending time on the composition of our new Board and are looking for people who are world class and who bring strong expertise and points of view.

I’m looking forward to seeing all of you on the road in December. Thanks for listening and I’m going to turn now over to my partner, Les Moonves.

[Les Moonves, Co-President and Co-Chief Operational Officer]

Thank you, Tom. Unfortunately in a couple of months we won’t be partners but we will still be friends. Week 2, at CBS; I have exciting third quarter highlights that clearly demonstrate our operating strength of our steady progress. Under the CBS Corporation umbrella we have powerful mass media businesses with exceptional cash generation abilities which is a very important component in how shareholders will value CBS. We are extremely excited about the future of the new CBS Corporation, but first let’s talk about our businesses.

Let me start with television, where despite some tough comps on the syndication sales side due to last year’s record-setting sale of CSI, we continued to post study advertising revenue gains driven by 11% ad sales growth at the CBS and UPN Networks.

So far in the new television season, CBS has been dominant. This season is only six weeks old. We have won each of the first six weeks in households and viewers by a large margin, a first for any network since 1988. We have won the most recent four weeks in adults 25 to 54 and CBS has finished first in each of the past three weeks in 18 to 49. Season-to-date, CBS has five of the top 10 shows, as many as all the other networks combined. And we are number one on five nights of the week in regularly scheduled programming.

We are also cleaning up in key demos. We are number one in adults 25 to 54. And at 18 to 49, we’re ahead of NBC and Fox and trail NBC by .01 of a rating point and obviously over the last three weeks, we’re gaining momentum, having been first for the last three weeks. And for the first time in 20 years, CBS is dominating Thursday night, the most important and by far the most lucrative night in television. We are number one in each of the three hours in all categories including 18 to 49. There are huge dollars up for grabs on Thursday, the night advertisers love most, and we are now getting the lion’s share of that money. And that is going to continue.

Between CBS and now UPN at 8:00 with what is considered one of the hottest and certainly the most talked about new show on television this fall, Everybody Hates Chris, we reign on Thursday nights.

Before I shift to UPN, I do want to address a recent development at CBS I couldn’t be more excited about. Last week’s announcement that Sean McManus will head our news division in addition to the sports division he currently overseas. Sean is a superb broadcaster whose success in our sports division is exactly what we hope to see with our news department. His ability to spot and get good talent and bring big events and great production values to the screen every single week have taken CBS Sports to the number one position in its field, which is exactly where we know our news organization has the potential to be. It is a big job, but Sean is the perfect person for the position. He is a fierce competitor who like me is never satisfied with being in third place.

Now getting back quickly to UPN, which also continues to climb this season in key demos, we had a strong up front with significant year-to-year gains and growth in our target demos, which is adults, 18 to 34. I already mentioned the success of Everybody Hates Chris, which is up 50% in adults 18 to 49 and 60% in adults 18 to 34 versus the same time period last year. Meanwhile America’s Next Top Model, UPN’s number one program, continues to grow, up 9% in 18 to 49 and 15% in adults 18 to 34, season-to-date.

Moving on to syndication, where we have King World and Paramount, the two best brands in the world of syndication. While television license revenue decreased, this was due to pure titles available for syndication compared to the same quarter last year when we brought our juggernaut hit CSI to the syndication market for the first time. Lapping a hit like CSI is the kind of high-class problem we don’t mind having. CSI is a phenomenal franchise for us. For example this brand alone of CSI, the profits may total more than $1 billion from network, syndication, DVD, games, Internet, and publishing sales.

In syndication, we currently have seven of the top 10 shows including the top two talk shows, Oprah and Dr. Phil; the top two game shows, Wheel and Jeopardy; and let’s not forget our top entertainment shows, Entertainment Tonight and The Insider. We expect these shows to be around for a long time and to continue to produce solid revenues for us. In addition we have lucrative off network deals with Everybody Loves Raymond, and as I said, CSI.

Over at Paramount Television, we’re producing many of our hit shows including CSI and the potential game changer Everybody Hates Chris. But we’re not only producing shows for CBS and UPN but also for NBC, HBO, and USA. And we have ownership interests in almost all the CBS and UPN primetime hours with back-end debt benefits that will clearly pay off in a variety of ways. But, more about that later.

We’re also excited about Showtime, which as part of CBS will be in a better position to bolster its strategic plans built around original programming franchises such as Weeds and the upcoming Sleeper Cell. We believe that Showtime has the ability to generate incremental revenue.

Moving onto the television station group which outpaced the industry in the quarter, while the market was down 8.5% for the quarter, we were up by 0.6 and for September the industry was down by 4.3 while we were up 6% for the month. The rating success of CBS and UPN have in turn translated into huge success for our stations. For example in the October sweep, 13 of our 16 stations were number one in primetime. Our local newscasts are also reaping the rewards of our primetime success as we saw the combined ratings of our late local newscasts increase 9% over the same period last year.

The station group outperformed despite some significant onetime items in the quarter that Sumner mentioned including approximately a $19 million impact from the sale of two television stations. The good news is that is behind us and 2006 is looking even better for our station group.

Historically, even numbered non-presidential election years are our best performing and we are already seeing the benefits of ‘05 political dollars pouring into the third and fourth quarter. Between the New York Mayor election, the New Jersey governors race, and the upcoming ballot initiatives in California where we happen to own a sixth stations, we are seeing significant increases in political ads in the fourth quarter, where pacing is up in November over last year. The flow of political dollars will continue into ‘06 and we have the momentum to realize significant gains next year.

Turning to radio, this is the third consecutive quarter of revenue growth for Infinity as revenues increased 2% to 542 million from 529 million, reflecting both local and national advertising gains, a sign of building momentum in the radio ad market. Not only that but we’re outperforming the market this year. In Infinity’s 40 markets, spot sales are up 3.6 versus the industry’s 1.6. In the top 10 markets, Infinity is up 4.7 compared to the industry’s 2.8.

We’re also continuing to see our investments in programming and marketing pay off. For example we have now launched 11 Jack stations including Sacramento just last week. Out of the first 10 Jack stations launched, nine have had tremendous ratings gains and we continue to innovate. Last week we announced the launch of Free FM, a bold new format. When Howard Stern goes to pay radio, we will wish him goodbye. We will offer 10 different shows including rock legend, David Lee Roth and media personality Adam Carolla. We’re excited about this next generation of FM stations and about the other innovations we are embracing, including streaming, podcasting, wireless, and HD.

Like radio, outdoor continues to convert significant revenues into solid operating income contributions. During the third quarter we saw operating income gains of 14% in the segment on 3% revenue growth, led by growth in our North American market. As we exit from onerous transit contracts, our margins will continue to improve. Again, the outdoor number includes about $12 million of onetime charges related to Hurricanes Katrina and Rita.

We continue to pursue a global strategy for outdoor. We just announced our acquisition of Magic Media, a Beijing based company that has the primary rights for advertising on the city’s bus system. Beijing happens to also be the 2008 Olympic host city, giving our outdoor division a tremendous boost with a valuable region. Asia-Pacific, especially China has been the world’s fastest-growing region for outdoor advertising revenue. As well we continue to expand our presence in Europe. As an example, we recently signed key contracts in Italy that strategically position us as the leading provider of advertising throughout the Italian railway system.

Outdoor is also exploiting emerging digital platforms specifically by experimenting with digital signage and changeable messaging. These new technologies give us tremendous potential for organic growth in this business. Our goal is to take the content and use it any way we can.

Turning to parks and publishing, operating income for the quarter increased 6% overall, driven by higher revenues at the parks division. For the new CBS Corporation, our job is twofold. First, we will focus on making these best-in-class mass media businesses perform better and better quarter after quarter, year after year. And second, we will grow our brands and extract even more value from them, multiplying and expanding the revenue streams that flow from the valuable content we have. We’ll keep our eye on delivering the kind of business development that will keep our investors excited about more than just our dividend.

This is a big part of our digital strategy. Our ability to continue to ad revenue streams is a significant and underappreciated opportunity for us. CBS News.com is a perfect example. By using our existing news staff; to manage our online news flow and minimizing additional costs while maximizing new dollars. CBS Sports Line is another model we want to replicate, creating new revenue streams by dominating emerging categories. In this case the increasing popular paid fantasies sports category where we have seen healthy growth in sales and profits over last year.

We are tapping every single new area of revenue potential for our brands. From blogging to Apple’s iTunes on CBS pop pod-casting platform to the burgeoning world of ring tones and of course DVD sales. It is all about content. Like we said at the start, CBS’s content is the #1 in the broadcast business and that means we reach more people and now more young adults than anybody. Our programming will move across platforms and help us grow. You can look forward also to important deals in these areas in the near future.

And of course we are looking for new ways to generate cash in more traditional areas. A few years ago, we paid hundreds of millions of dollars in affiliate compensation. Today that expense is disappearing and the business model in the network business is drastically altered as a result. The same is true for retransmission. The fact is, we have not been paid for what our signal is worth, but that will change soon. We will be paid for our signal and once again the business model will shift and revenue will flow our way. It is fair. It is common sense and it is on the way.

That said, our strategic priority will be to continually return money to our shareholders while maintaining a solid investment-grade balance sheet. As we have announced, going forward we expect to pay a dividend in the range of $450 million annually, no less than what Viacom will pay in 2005. That is just the starting point; with our cash generation ability you can expect us to increase our dividend over time. Our team is great. We’re ready for the future. Thanks again, for joining us today and now we will be happy to take your questions.

Proceed to the Q&A.

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