Full Transcript of Viacom’s 3Q05 Conference Call - Q&A (VIAB)

Nov.14.05 | About: Viacom Inc. (VIA)

Here’s the entire text of the Q&A from Viacom’s (ticker: VIAB) Q3 2005 conference call. The prepared remarks are 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.

[Operator]

We will go first to Gordon Hodge with Thomas Weisel Partners.

[Gordon Hodge]

Good morning. Thanks for taking my question. Question is in the entertainment division, there has been concern about an industry slowdown in DVD sales. It doesn’t look like you are participating in that slowdown at all. I was just wondering if you could give us some specific home video growth numbers if you’ve got them. Thanks.

[Company Speaker]

Okay, home video at Paramount, it constitutes now about 60% of our revenue. We think the category is still strong, it is still huge. Worldwide you’re looking at a business that is still in double digits and domestically in high single digits. As a category I think projections pretty much are for the same thing for next year. Year-to-date for Paramount, we’re up 29% in this category and you’ve got to realize we were really late to the party on DVDs and we still have slightly less than 50% of our film library yet to be released and about 85% or so of our TV library yet to be released. We’re spending a lot of time and money building out our infrastructure and distribution system and feel really good about this part of our business. And also on the horizon in ‘07, we’re all looking at as an industry the advent of high def DVD.

[Gordon Hodge]

Terrific. Thanks.

[Operator]

And we’ll go next to Spencer Wang with JPMorgan.

[Spencer Wang]

The TV advertising growth across broadcast and cable is pretty strong in the quarter. Can you just talk about what you’re seeing in the scatter market for both cable and broadcast? And maybe talk specifically about first-quarter cancellation options? I think they were due in October.

[Company Speaker]

I will first talk about that and then I will turn it over to Tom to talk about cable. We are doing great in the scatter market. As reflected by our ratings, we are having a great opening of the year, as is ABC. I think we are taking the lion’s share of the scatter market. We’re seeing some numbers that are slightly above what the upfront was. There is plenty of activity. We are way ahead of where we have been with NFL sales; the NCAA tournament is way up. We sold slightly less of our inventory this past May than we had in previous years. So the strength in the scatter market because of ratings is proving to be very exciting. In addition in UPN obviously we have had better results than we have ever had before which shows that for the first time in many years with America’s Next Top Model and Everybody Hates Chris that people really want to buy. So we are anticipating continued great results. First quarter is looking very strong in terms of scatter once again. It is all performance based and we feel like there’s a great stability in CBS that is not seen in anywhere else and we are a good bet. Tom?

[Tom Freston]

On the cable side, we have seen a really terrific scatter market in the third quarter, up double digits. The trend we’ve seen in the last few quarters that money comes in hot and heavy, it just comes in later. But it does come in. As we look into the fourth quarter we’re up double digits again and we’re looking at unit rates pretty much across our portfolio. They are about 20% higher than the up front rates, which is certainly a good sign. And driven in part I think by the fact that most of our networks are at all-time ratings high. And our inventory is in good demand and the money is there.
[Spencer Wang]

Thank you.

[Operator]

We’ll go next to Jessica Reif Cohen with Merrill Lynch.

[Jessica Reif Cohen]

I have one question for Tom and one for Les. Tom, could you talk about the affiliate fee outlook? Is it in the same 10% range? I guess it’s a multipart about the affiliate fees. Was the 10% increase all in the U.S.? And what is the biggest driver there?

[Tom Freston]

Well, all of our deals which are long-term deals have built-in rate increases on an annual basis that drives up our revenue. But as big a piece is the fact that we’re increasing our volume as our digital networks like VH1 Classic or Noggin or in Nick Toons or LOGO continue to roll out and get full distribution on the digital tier. So those two things kind of keep us in that high single digits/low double digit range on a quarterly basis.

[Jessica Reif Cohen]

And then for Les, on retransmission consent, clearly cable you need to wait for the deals to expire but will the telcos like specifically Verizon, pay retransmission from the beginning?

[Les Moonves]

I don’t want to go into specific brands, but there are telco deals that are coming up that we expect to get retrans almost immediately. So we’re going to see some of that activity occurring very shortly and it bodes well for the future when the bigger cable deals come up as well.

[Jessica Reif Cohen]

Thank you.

[Operator]

And we’ll go next to Raymond Katz with Bear Stearns.

[Victor Miller]

Good morning guys, its Victor Miller. Les, a question about radio, there have been many changes in the radio business for your business this year in ‘05 and you’ve been able to grow the business 2% the last three quarters. So it has been very good in the face of all those changes. But for ‘06 you face a larger challenge replacing Howard Stern, there’s about $100 million associated just with his show which is almost 5% of your revenue. And, as you know, as well as a network guy, the patina of that strength of that show impacts other day parts. So, given the fact that radio has held changes well in ‘06, but given the reality of Howard Stern in ‘06, sorry, the changes in ‘05 and given the reality of Howard Stern in ‘06, can the radio actually grow its topline in your mind in ‘06? Thanks.

[Les Moonves]

You know what, Victor; I’m not going to deny that the loss of Howard Stern is not of slight concern to us. However, I must say, the margin on the Howard Stern show as we were going forward was not that great. Yes, revenues will be down but costs will go down significantly. I think we have announced certain changes and I think you have seen over the last year with the radio business with the addition of Jack and pod-casting and these recent announcements of the various people in the various regions some of which will work, some of which won’t work, we have proven to be very nimble on that. The affect of Howard Stern on another day part is not nearly as significant as it would be a hit show in television for instance. So we’re not even including that as a major significant hit to us. As I said, revenue might be down. Costs will be down, but margins probably will increase because of this and in radio that is the name of the game.

[Victor Miller]

And on the outdoor side, you talked about onerous contracts. What is the negative impact on some of those when you actually do -- if you do decide to pass on those? What is the EBITDA impact of those that you’re really not doing well on or no interest in resigning?

[Les Moonves]

The EBITDA impact, our EBITDA goes up. We were involved with some bad transit deals that have now gone away. If it is a dumb deal, we won’t make it. There were a couple of deals recently that street furniture deal in New York where Cemusa paid $1 billion; we were not even in the ballgame. We’re not going to do stupid deals anymore. Every new deal we do with the outdoor business has to have the appropriate margin and the appropriate revenue and EBITDA affect. Fred, do you want to add anything to it?

[Fred Reynolds]

Yes. The outdoor business is showing a lot of really good strength here in North America and to Leslie’s point, if we lose some of these very expensive contracts and we are bidding smart, our profit goes up and our revenue still goes up on other parts of outdoor. So you will see margin expansion.

[Victor Miller]

Thank you.

[Operator]

And we’ll go next to Doug Mitchelson with Deutsche Bank.

[Doug Mitchelson]

Thank you very much. You have talked on several occasions about leverage targets and to be fair you have been the only entertainment company to not just use free cash flow but also borrow to repurchase shares. At the same time at this valuation level, why not be even more aggressive now even 2X what you are doing? Also how quickly do you expect to ramp the new Viacom at the new Viacom to the leverage targets you outlined today? Is that a, as soon as possible target, a one-year target, a two-year target? When do you get to three times leverage at the new Viacom?

[Michael Dolan]

Doug, its Mike Dolan. Actually we’re buying now about as many shares as we can. We are limited in terms of the amount of shares we can buy. We’re pretty much at the maximum that we can buy. Our intention is to be in the market early next year with the new program and out of the gates from day one.

[Doug Mitchelson]

Have you considered at all, Mike or Sumner, a bigger share purchase plan in the form of a tender?

[Sumner Redstone]

We have not considered a tender. But you will see us in the market when we go in today as aggressive as the law permits.

[Doug Mitchelson]

Thank you.

[Operator]

And we’ll go next to Doug Shapiro with Banc of America Securities.

[Doug Shapiro]

I was wondering if you could give a little bit of detail on the expense growth at the cable networks just in terms of how much of that is tied to the new digital initiatives and how much is just normal development spending? And then the second part of that is whether you are able yet to start to quantify some of the contribution of all the digital initiatives, I guess specifically at MTV Networks?

[Company Speaker]

Okay well, if you look of our expense growth, first of all we’re not looking at our margins on a quarterly basis and we have at the cable networks increased our margins over the years. This year we projected we would be flat year-to-year, sort of in the low/mid 40s and we are on line to do that. This quarter due to some timing issues we’re not there. In this quarter alone, we’ve probably got $30 million in new business initiatives that account for the expense growth. That would include things like the full inclusion of Viva on a year-to-year basis. It is a lower margin business. We acquired it last year. That alone is about one margin point. We’ve got startup investments in LOGO, our gay/lesbian service; Nickelodeon Germany; other international networks; acquisition of various digital rights that we need to fully prepare ourselves for what we want to do in the digital world; startup and broadband services like MTV Uber, Comedy Central’s Mother Lode which I alluded to; MTV Overdrive and so forth. We have invested in a company in Japan called Flux that we started. It is entirely involved in wireless content creation and distribution. Put some money into Neopets. And so you can see the lion’s share of our incremental spending is going into these digital businesses and these are businesses where we see huge growth rates. Seen our advertising businesses in this category are up over 50% year-on-year and we are trying to create more avenues for content where advertisers can connect with our audiences. So we think it is probably the best place we can put our money and we are able to do so with a relatively small impact in terms of our margin.

[Doug Shapiro]

In terms of quantification, I think early in the year you said that something like the total revenue contribution was a triple digit millions number and I was wondering as Bob Bakker said at a conference, at what point can you update on how that’s progressing?

[Mike Dolan]

I think when we, this is Mike Dolan. When we talk to you in December, Tom and I will be out visiting with a number of you and I think we will update you more specifically on that at that point.

[Doug Shapiro]

Okay, great. Thank you.

[Operator]

And next to Kathy Styponias with Prudential.

[Kathy Styponias]

Hi thanks, my question is for Les. Les, you articulated that your company has kind of, been positioned as the slower growing one certainly relative to Viacom. But yet you have talked about reinvesting in new growth areas and I was just wondering if you can give us a sense either quantitatively or qualitatively where that investment might go? And also whether or not there are any assets that you might be interested in divesting of? Thanks.

[Les Moonves]

Well, you know what, the, yes we, in comparison to the new Viacom we will be the slow growth company. It is obvious the cable channels do grow considerably faster and higher than we do and we are the value company and that will continue to be a goal of ours. In terms of looking at acquisitions, we’re not looking for major investments; however we are looking for new media companies that potentially fit with what we are trying to do with our core businesses. As I mentioned before, everything that we do will stem from our content. So as we go out to look at certain acquisitions and most of them will be tuck-in acquisitions, you’re not going to see a major transforming acquisition at any point. We are looking toward our future and how do we expand the businesses that we are already in. In terms of divestitures, right now in terms of the profile of our new company, there is no great need to look to divest anything. The businesses all fit with what the profile of our company is and that is where we are right now.

[Kathy Styponias]

Thanks.

[Operator]

And next to Michael Nathanson with Sanford Bernstein.

[Michael Nathanson]

Thanks. I have two. One for Les, two part (indiscernible) to next Mike Dolan. I just want follow-up on Kathy’s questions. You recently said at a conference, Les that you’re interested in cable networks and there is a report that you’re interested in college sports. So, is cable networks part of the acquisition plan going forward? To kind of, pin you down on that?

[Les Moonves]

You know what, we are looking at everything. We look at everything. I don’t see us competing with the other side of the family. I don’t see us buying a music channel or a kid’s channel. If there is something that fit with some of the businesses that we are already in, we certainly would consider that. The cable business is a very good business and we like it. So we’re looking at everything that fits into what we do.

[Michael Nathanson]

Okay, and then following up if you could just isolate for me if you take out in this quarter syndication, which I know is a onetime and Showtime which is inclusive first time and a write-down, what would the core profitability be at television on kind of a steady-state basis?

[Les Moonves]

Let me throw that over to Fred.

[Fred Reynolds]

Yeah, I think if you take those out obviously the lumpiness of a syndication gain like on CSI is enormous. My guess is you would see us up at least 5 to 10 margin points higher, fairly significant particularly with the write-down of the two stations which we don’t expect to have that happen very frequently. Just on that point, we said a while ago that we were going to buy in key markets like Sacramento, which we are glad we do now because of California and we sold four stations. So just on the TV stations alone, our revenue will be about the same but our profits will be up probably $25 million by adding one station and selling four. As far as the syndication games, in ‘06 we have some coming up again with Star Trek Voyager, we hope to do well on that, second title of Frazier. So it’s just hard to pick which quarter they will be in, but clearly the quarter to strip out all the onetime stuff from ‘04 or the negatives ‘05, we’d have been much, much stronger.

[Michael Nathanson]

Fred, do you think you could change the reporting that way, basically maybe give us stations separately from syndication or network separately from syndication?

[Fred Reynolds]

No, I don’t think so. I think what we will try and do is illuminate the issues each quarter, so you’ll see the positives and the negatives, because unfortunately there is so much interconnection between the network to the production side to the TV station side that you have to look at it in total. That’s how Leslie manages the business in total. He looks at the total flow of revenue and the cost to get that revenue. It’s like the NFL, it’s like to get comp, all the other things that we do in the programming. So I hope to be able to give you a lot of clarity as to when there are these onetime pluses and minuses each quarter, and hopefully we can help you get back to the underlying base growth. I’d just end on the third quarter; it is much stronger if you strip out all the onetime.

[Les Moonves]

To add to what Fred was saying, it is real important that Paramount Television is now the major supplier for UPN and CBS. In addition, our syndication companies are feeding our stations and when you figure out deficit financing, you include what the cost is to the network as well as the cost to the production company as well as your future syndication revenues. So the models in television are very different than they were even five or six years ago.
[Michael Nathanson]

Okay, and then can I just ask Mike on free cash flow in the quarter, it was pretty impressive year-over-year. What was the source of the improvement? And is there any likely reversal in that quarter ahead?

[Michael Dolan]

Well, yeah, in fact, Michael, I think it was extraordinary and we are delighted but a lot of it is timing related. And we think that we are targeting somewhere between 2.7 and maybe 2.8 for the full year.

[Michael Nathanson]

Okay, thanks so much.

[Operator]

And next to Lowell Singer with Cowen Investment Bank.

[Lowell Singer]

Thanks. Question for both Tom and for Les. Tom, can you talk a little bit about your outlook for cable network margins over the next couple of years? And Les, you talked a little bit about network scatter. I wanted to ask more of an industry question which is how you expect overall inventory to be as we progress through the season, particularly with regard to NBC and what they might do with the make good situation they are most likely in? Thanks.

[Tom Freston]

You know, if you look at the margins of our cable businesses, if you lump together MTV Networks and BET, it is really a basket of markets in a whole bunch of different types of business. On one hand we’ve got networks that are a bit more mature like MTV and Nickelodeon in terms of where their margin is. We’ve got several services that still have a lot of head room on the margin side, Comedy Central, VH1, CMT, Spike TV and so forth. There’s all our digital businesses that are growing at a very high rate that currently have very small margins. But I would say if you put the whole basket together and as we look at it over time, we’re looking at our margins being pretty much in the same range that they are now, sort of in the low to mid 40s. I don’t see any huge margin improvement over that. We’re not really focused on margins as a key driver of our business. We like to keep them in that sort of pocket if you will but that’s sort of the story. I don’t know if you want to add to that at all, Mike?

[Michael Dolan]

We have a lot of conversations about this and I think to be kind of overly focused on margins may be the wrong approach to take. We would gladly trade off a decrease in margin for extraordinary growth in revenues that produced extraordinary growth in earnings and free cash flow. So I think you have to look at all the variables, revenue growth, margins, earnings growth, free cash flow as a piece rather than focus on just one item in the mix.

[Company Speaker]

Let me, I will talk about your scatter question. Specifically regarding NBC, it is sort of hard to tell right now. As I said, ABC and CBS are off to great starts for the fall season. Fox it’s too early to tell because they always have baseball that sort of comes in the middle so you can’t really tell where they are at until a little bit later in the season. NBC is a bit more complicated this year because they have the Olympics. And all sorts of scatter results involve the sale of the Olympics and when make goods are done and how they are doing it. So it is sort of impossible for me to comment on where they are in terms of that because I don’t know exactly where they are in terms of their Olympics sales.

[Lowell Singer]

Okay, thanks.

[Company Speaker]

We have time for one more question.

[Operator]

And our final question will come from Anthony Noto with Goldman Sachs.

[Anthony Noto]

Thank you very much. Tom, my question relates to the entertainment business. It looks like the business is on track to have a record year in both operating income and EBITDA, depending on how the fourth quarter obviously goes. And that reflects the dual benefit of the library and home video as well as strong theatrical performance. As we look into 2006, I was wondering if you could shed a little bit of light on both of those factors? We are assuming you can potentially grow your home video business in the mid teens where for most studios we have no growth and that is predicated on two things, one maintaining your box office share; and two, continued sizable releases from the library. So, if you could comment on your slate so we can get a perspective on the box office share and also the number of releases you’ll have in ‘06 versus ‘05 from the library in terms of units? Thanks.

[Tom Freston]

Okay, Anthony. We are looking at, turning around the studio takes a bit of time. We’re probably looking at a total amount of releases from Paramount next year in the 12 to 13, maybe 14 range, lower than usual. But we have got some great titles in the mix. We have got of course Mission Three that is going to open in May with Tom Cruise, Mission Impossible Three. We’ve got the still untitled World Trade Center project with Oliver Stone. It stars Nick Cage about the last two policemen to be taken alive out of the World Trade Center on September 11 and it is really a great, compelling story. I think it is going to connect very well. We’ve got a CGI animated movie called Barnyard that’s directed by Jim Oedekerk. Charlotte’s Webb, which stars Dakota Fanning and has Julia Roberts. We’ve got a comedy, it will be for a summer releases called Nacho Libre, which is about a cult of Mexican wrestlers. It stars Jack Black. So there is a range of titles. We are hesitant to really increase the size of the slate just to put movies out there for the sake of it. The slate is going to be pretty much back-loaded to the last three quarters of the year and what that means is that in terms of our home video business while we see great growth in terms of the category and we still have a lot of titles to release, our DVD business for the first half of the year anyway is not going to be probably everything we want it to be. But the studio is very much on a track for this reinvention I talked about. We’re moving towards this multi-label strategy there and feel very, very confident that we are on the right road at Paramount.

[Anthony Noto]

Great. Then, if I could ask one other additional question. Both Les and Tom, you commented on the ad environment for cable networks and broadcast television as well as TV stations being very positive. And then I look at the guidance for a full year and you’re still guiding to mid single digit growth, which applies in the fourth quarter just around 7, 8% growth. Why not be more bullish about the fourth quarter outlook given the visibility it sounds like you have?

[Michael Dolan]

This is Mike. I guess we are at this point just trying to be a bit conservative and to really make sure that we deliver the goods. And at this point the early signs are good, but I think we’re happy with the guidance that we have given.

[Anthony Noto]

Great, thank you.

[Company Speaker]

Thank you all very much for joining us for our last conference call as the old Viacom and we look forward to talking to you as separate companies next year. Tim and I will be around for questions.