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Viacom (NASDAQ:VIAB)

Q2 2012 Earnings Call

May 03, 2012 8:30 am ET

Executives

James Bombassei - Senior Vice President of Investor Relations

Sumner M. Redstone - Founder and Executive Chairman

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

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

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

Analysts

Anthony J. DiClemente - Barclays Capital, Research Division

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

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

Richard Greenfield - BTIG, LLC, Research Division

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

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

John Janedis - UBS Investment Bank, Research Division

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

John Tinker - Maxim Group LLC, Research Division

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

Operator

Good day, everyone, and welcome to the Viacom Fiscal Year Second Quarter 2012 Earnings Release Teleconference. Today's call is being recorded. At this time, I'd like to turn the call over to the 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 March quarter earnings call. Joining me for today's discussion are Sumner Redstone, our Chairman; Philippe Dauman, our President and CEO; Tom Dooley, our Chief Operating Officer; and Jimmy Barge, our Chief Financial Officer.

Please note that in addition to our press release, we have slides and trending schedules containing supplemental information available on our website. I want to refer you to Page #2 in the Web presentation and remind you that certain statements made on this call are forward-looking statements that involve risks and uncertainties.

These risks and uncertainties are discussed in more detail in our filings with the SEC. Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website.

Now I'll turn the call over to Sumner.

Sumner M. Redstone

Thank you, Jim. Good morning, everyone. I'm very pleased to join Philippe, Tom, Jimmy to discuss Viacom's second quarter results. Viacom turned in another strong performance continuing to drive superior profitability despite the uneven overall economy. Underlying our success is the continual outstanding, strategic and operational oversight of our management team, as well as our singular focus on using all of our creative resources to enhance our audience relationships and to deliver greater value to our stockholders.

Our Media Networks are constantly reinventing and reengaging cementing their status as destinations of choice for all audiences all over the world and platforms of preference for a growing number of marketing partners. Paramount Pictures also continues to hone its skills in not only building powerful new global film franchises, but also creating targeted motion picture experiences for our passionate fans. This, along with the disciplined operational approach has put Paramount at the top of the industry. Paramount is the #1 studio in this time of year.

We are well positioned halfway through the fiscal year, and the long-term forecast is bright. All thanks again to the extraordinary strong management team at Viacom, led, of course by my friend Philippe.

Now I'd like to turn the call over to Philippe, a man who is probably the wisest man I have ever met, for an in-depth look at our performance.

Philippe P. Dauman

Thank you very much, Sumner, and good morning, everyone. Thank you for joining us today.

Viacom delivered yet another strong performance in the second quarter of our fiscal year. Across our divisions, we sharpened our focus on execution and efficiency, while continuing to invest in content that connects with audiences worldwide.

A few opening points. Consistent investment and content keeps our brands creatively vibrant and culturally relevant. This fiscal year, our Media Networks are launching and developing more original programming than ever across multiple formats, from reality to scripted, live action to animation. Our programming pipeline has never been more diverse or more tailored to the taste of our audiences. Our affiliate revenue is strong and growing, thanks to brands that remain must carry content for existing and emerging distributors alike.

We are seeing encouraging signs of a strengthening ad market as we enter the upfront season. Overseas, we continue to make great progress in pursuit of our ambitious targets for expansion and operating income growth, particularly as we increase our offerings for adult audiences with Comedy Central and with the new Paramount Channels, while continuing to expand the Nickelodeon brand. Paramount Pictures is cementing its reputation as one of the best run studios in Hollywood, capturing efficiencies even as it unlocks value from innovative and highly profitable releases, including the double insight of the second quarter.

Finally, by monetizing our content and our brands and tightly managing costs, we continue to maintain one of the best balance sheets in the business. Our consistent ability to generate substantial free cash flow reinforces our commitment to return capital to our shareholders.

This morning, I will give an overview of our financial results for the second quarter and review highlights from our divisions. Tom and Jimmy will provide additional detail, and then we'll open it up to questions.

First, the numbers. Viacom's consolidated revenues grew 2% to $3.33 billion in the second quarter, driven by growth in our Media Networks segment. Operating income increased 23% to $932 million. Our Media Networks delivered 5% growth in revenues and an 11% increase in adjusted operating income on strong increases in affiliate revenues.

Filmed Entertainment revenue decreased 5%, reflecting lower theatrical revenue due to a less widely distributed mix of releases in the same period last year, which featured significant hits, Rango, No Strings Attached and Justin Bieber: Never Say Never. Adjusted operating income in Filmed Entertainment increased 195%, driven by lower distribution costs, which more than offset lower revenue. Our adjusted earnings from continuing operations increased 24% to $535 million in the March quarter, and adjusted earnings per share increased to $0.98, up 36% over the second quarter of fiscal 2011.

During the second quarter of fiscal 2012, we repurchased $700 million in stock under our share repurchase program. We expect to buy back $700 million in stock again this quarter and are on track to purchase $2.8 billion in stock for the full fiscal year.

Our Media Networks remains strong and creatively vibrant, with our nearly $3 billion fiscal year investment in content, yielding a greater output of new, original, wholly-owned content than at any time in Viacom's history. In this age of time-shifting and on-demand viewing across platforms, the value of fresh and compelling original content is greater than ever.

All of our networks are tapping rich development pipelines set by strong brand filters and deep consumer insights. As we pop out more content, we continue to innovate how we market, distribute and build experiences around programming across platforms. Our brands are well out in front in experimentation and advances in social networking applied to television content.

In ad sales, we began to see signs of recovery in marketplace. We were able to capitalize on this improvement and return to growth domestically. For the quarter, our domestic advertising revenues increased 1%. Worldwide advertising revenues were flat at $1.07 billion for the quarter. We remain encouraged by what we're seeing and we expect to capture new opportunities in the market as we head into the upfront season.

I want to point out that for our fiscal third quarter, there are 2 event timing issues that will reduce year-on-year domestic ad sales quarterly comps by a total of about 3 to 4 percentage points. This year, the Nickelodeon Kids' Choice Awards took place in the second quarter and the BET Awards will air early in the fiscal fourth quarter, both aired in the third quarter last year.

Distribution continue to be a strong and steady driver of revenue for Viacom. Worldwide affiliate revenues increased 17%, driven by higher revenues from digital distribution agreements, as well as rate increases. During the quarter, we successfully closed a number of digital distribution deals, including an agreement to provide library content to Amazon for its Prime Instant Video service. We also increased distribution with our existing affiliates, with a particular focus on gaining distribution for our HD simulcast. In particular, we made significant gains in carriage of TV Land HD. For our 2012 fiscal year, we expect to grow affiliate revenue by 10%.

Our Media Networks remain first choice partners for distributors as they test in market new products and technologies. We continue to build on our strong VOD offering by striking agreements to provide additional library content, as well as current episodes from some of our most popular brands and franchises. We remain committed to supporting our distribution partners multi-platform efforts, with authenticated sites offering on-demand content for MTV, Comedy Central, Nickelodeon, VH1 and SPIKE. A BET-authenticated site will launch soon.

We're also exploring opportunities to connect with consumers through tablet devices. A recent study by our strategic insights and research group uncovered that tablets have surpassed laptops as the second screen of choice among consumers. Currently, we partner with Cablevision to make linear feeds of our networks available through its in-home streaming tablet app. As we strengthen our existing partnerships, we are aggressively pursuing new distributors for both our long- and short-form content.

Internationally, we're moving ahead decisively in our drive to expand our reach in revenue around the globe. Viacom international media networks turned in another strong performance, powered by affiliate revenue growth in both organic and visual distribution and excellent cost management. We set ambitious goals for our international operations. As I've said on prior occasions, we're aiming for margins exceeding 20% in the next fiscal year and OI growth at a 30% compounded rate over the next 5 years. I'm pleased to report that we're very much on track to achieve these goals and we expect to exceed that OI growth rate this year.

Our growing adult-focused business will be a key driver of this growth. We made great progress in the second quarter. Ratings of our international Comedy Central channels were up 35%. In the last 6 months, we've launched 5 new comedy channels, most recently in Russia, which now puts the network in 5 continents and more than 40 countries.

We debuted our first-ever Paramount Channel in Spain at the end of the second quarter, opening a new chapter in our international expansion strategy. Based on audience share during its first month, the Paramount Channel is the most successful digital terrestrial television channel launched in Spain in the past 12 months and the country's second most successful DTT launch of all time. The channel premiere on March 30 with titles including The Godfather trilogy, Breakfast at Tiffany's and American Beauty. We're on target to sign 80 advertisers for the free-to-air channel in each of its first 2 months of operation. With one successful launch under our belt, we're looking to move quickly on future launches in additional markets.

Even as we expand to new markets, we're strengthening our presence in existing ones. We had a very strong quarter in the U.K., one of our most important markets. Ratings were up 21% at MTV U.K., thanks to Jersey Shore, which just concluded its second season as the highest-rated series ever for the channel. Comedy Central ratings are up 67%, thanks to strong U.S.-based acquired programming and our local original comedy, Threesome. Finally, Nickelodeon U.K., as well as the Nick brand in many markets around the world, saw ratings gains, driven by iCarly and Victorious, with a strong pipeline in the current quarter as well.

Turning now to ratings highlights from our domestic Media Networks. MTV remains strong with its millennial audience. The network was #1 with its core 12-34 demo in its key 10-spot prime time slots, where it beat its closest competitor by nearly 50%. For the quarter, MTV had 3 of the top 10 cable series in its core demo, including the returning champ, Jersey Shore, along with Teen Mom 2 and Challenge: Battle Of The Exes. We expect MTV's ratings for the current quarter to grow year-on-year.

MTV also continued to prove its expertise in moving content across platforms, reaching its audiences in innovative new ways through digital events, franchises, social media and mobile. MTV achieved a rare milestone in the second quarter when it surpassed 100 million likes, that's 100 million likes on Facebook according to social media tracking firm, Trendrr. Add to that, it's nearly 6 million Twitter followers and it's top ranking on Foursquare, Tumblr and Instagram, and MTV is the #1 most social TV brand.

Comedy Central continues to connect with its core male audience with a diversified slate of originals, specials, stand-up comedy and the unstoppable late-night tandem of Stewart and Colbert.

Tosh.0 recently concluded its winter season as the #1 show on Tuesday nights on all of television with the networks key men 18-34 demo.

The network launched another original hit in the second quarter with sketch series Key & Peele which won its timeslot with men 18-34 in its debut season. Key & Peele will return for a second season in the fall, boasting with many, including the President himself in a recent interview believe to be the best President Obama impersonation on television.

In late night, The Daily Show with Jon Stewart and The Colbert Report achieved the distinction of being the only late-night talk shows to notch year-over-year growth with adults 18-49. The Daily Show is the #1 late-night talk show in the demo, beating all broadcast and cable competition.

Nickelodeon retained its top spot in the second quarter as the #1 cable network in total day. SpongeBob was the #1 animated program on all of television with kids 2-11, while iCarly was the #1 kid's program among total viewers. The second quarter also saw the return of the Nickelodeon Kids' Choice Awards which, in its 25th year, reached 15 million total viewers and generated a record 223 million votes online, hosted by Will Smith and featuring performances by Katy Perry and One Direction, the KCA's made the leap into a truly global juggernaut this year, earning its highest ratings ever by a wide margin in key markets, including the U.K., Germany and Australia.

The upcoming launch of the reinvented Teenage Mutant Ninja Turtles franchise in the fall is just one element of Nickelodeon's largest slate of original content ever. More than 650 episodes of returning hits and new series overall in 2012, 2013 season.

In the second quarter, Nick introduced How to Rock, starring Cymphonique Miller, which debuted as the #1 new show of 2012 with tweens 9-14. FRED: THE SHOW, which successfully expanded the Fred Figglehorn franchise as the #1 new live-action show with kids 2-11, and Big Time Movie starring Big Time Rush, which attracted 26 million total viewers over its telecast.

In the current quarter, Nickelodeon debuted animated series The Legend of Korra to 4.5 million total viewers successfully channeling the cult following of Avatar: the Last Airbender to create a breakout hit.

Korra is Nickelodeon's most-watched animated series premiere in 3 years. Also coming this quarter are new episodes of iCarly, Victorious, SpongeBob and the new original TV movie Rags starring Keke Palmer, and we will continue to pilot on. Nickelodeon is poised to become bigger and better than ever and continues to be an important locomotive of our international and consumer products expansion.

BET continued its reign as the #1 ad-supported cable network for African-Americans 18-49. In the second quarter, the network showed further proof of its prowess in launching buzz-worthy tentpole. The 2012 BET Honors were the #1 BET Honors broadcast of all-time, up 69% over last year's show, with 2.5 million total viewers. The show is a big social driver, with more than 20 separate artists-related topics trending on Twitter during the broadcast. The network's original sitcoms also continued to perform well. For the calendar year-to-date, THE GAME and Let's Stay Together are the top 2 sitcoms on ad-supported cable among African-American and total viewers.

Throughout our history, our networks, all of our networks have demonstrated an uncanny capacity for reinvention. Across our brands, we've enhanced our ability to develop creative content through a systematic approach, conduct relentless consumer research and refined brand filters based on the evolving tastes and needs of the audience.

VH1, SPIKE and CMT, 3 networks we've earmarked for evolution in recent years, continue to build strong momentum behind this approach. VH1 is shining again. The second quarter was VH1's highest-rated quarter in 2 years, with ratings up 37% in prime. The network's third consecutive quarter ratings growth was highlighted by its performance in Monday prime time, where it was tops in all cable among women 18-49. The original T.I. & Tiny: The Family Hustle attracted on average 2.4 million total viewers an episode, the highest-rated debut season on VH1 in nearly 3 years, while Love & Hip Hop 2 scores the network's highest-rated series in more than 3.5 years.

VH1 also affirmed its status as pop-culture bellwether, with of the moment specials including Whitney Houston: Death Of A Diva and Greatest Women In Music, as well as new episodes of behind the music, which scored strong ratings.

VH1 should continue to roll this quarter with the premieres of new series, including Mob Wives: Chicago and Couples Rehab and the return of scripted-hit series, Single Ladies.

SPIKE is making great progress as it broadens its appeal with men through more original programming. In it's first quarter with a new USC programming, the network retained its connection with the MMA community through the launch of MMA Uncensored Live, TV's highest-rated MMA news program. SPIKE also committed to a multi-year extension of its strategic partnership with TNA Entertainment's IMPACT Wrestling.

SPIKE's line-up of original programming gained ground in the second quarter. Breakout hit INK MASTER continued to perform well and new series of American Digger, starting Ric Savage, premiere to 1.2 million viewers, making it SPIKE's most-watched half-hour reality premiere in more than 3 years.

CMT delivered a strong performance in the second quarter, featuring the 2 highest-rated series debuts in networks history, by Big Redneck Vacation and Bayou Billionaires. The network earns its best ratings in prime time since the fourth quarter of 2009, its highest-rated original film in 3 years with Whiskey Business and the highest-rated Crossroads episode in 7 years, featuring Steven Tyler and Carrie Underwood.

TV Land continues to build the best lineup of original sitcoms on cable. With the show in it's third season, Hot in Cleveland's Betty White won her second consecutive SAG Award for Outstanding Performance in a Comedy Series. The Soul Man, a Hot in Cleveland spinoff, starring Cedric "The Entertainer" and Niecy Nash, will debut in June, along the with The Exes, starring Kristen Johnson, Donald Faison and Wayne Knight.

Meanwhile, Logo posted its highest-rated quarter ever, thanks to the ongoing success of RuPaul's Drag Race now in its fourth season.

Let's turn now to Filmed Entertainment. Paramount entered its milestone 100th year of operation to resounding critical recognition in Hollywood. Paramount sales were nominated for 18 Academy Awards, winning 6, good for second best among all studios. Martin Scorsese's Hugo won 5 Oscars, tied for the highest number of wins for a single film, while Gore Verbinski's Rango took home the award for Best Animated Film.

In terms of theatrical releases, Paramount again showed its ability to launch highly profitable original franchises with The Devil Inside from the studio's Insurge label. The film far exceeded box-office expectations, earning more than $100 million worldwide to date. In the current quarter, Paramount rerelease James Cameron's TITANIC in stunning 3D. The 3D film has achieved more than $300 million worldwide box office to date and continues to attract new and long-time fans alike. This month, Sacha Baron Cohen's The Dictator invades theaters, followed June by G.I. Joe: Retaliation, starring Dwayne "The Rock" Johnson, Channing Tatum and Bruce Willis.

Paramount also announced this quarter that it will release KATY PERRY: PART OF ME, which will bring Katy to the big screen for the first time ever in 3D on July 5. In Insurge and MTV film, PART OF ME is a great example of the type of low-cost, quick-to-market films that combined with Paramount's franchise-centric film to create the studio strategically balanced and focused release slate.

Beyond the big screen, Paramount continues to add value across Viacom, not only in its partnership of our international division and Nickelodeon, but also through EPIX which continues to increase in value.

To close, the second quarter of our 2012 fiscal year was another strong one for Viacom. We, again, demonstrated our consistent ability to deliver great financial results and strong returns for our shareholders. We will continue to invest in content to develop the most compelling programming, networks and films for our audiences. As we do, we'll manage our operations for maximum effectiveness and efficiency. This year and over the next several years, our strategy is to drive continued top line and bottom line growth, with particular acceleration in the international arena. And over the next several years, we will continue to implement our commitment to return significant capital to our shareholders.

With that, I'll turn it over to Jimmy.

James W. Barge

Thanks, Philippe, and good morning, everyone. I hope you've all had a chance to review our earnings release and Web presentation, summarizing the results of our March quarter. Our 10-Q will be filed shortly.

This morning, I'm going to take you through our operating results in more detail. My remarks will focus on adjusted results from continuing operations. Adjusted results for this year's March quarter exclude a loss associated with the redemption of our 6.85% senior notes due 2055, which was $21 million on a pretax basis and $13 million after tax, as well as $66 million of discrete tax benefit. Last year's March quarter excluded the charge associated with the tender proportion of our 6.25% senior notes due 2016, which was $87 million on a pretax basis and $54 million after tax.

Now let's take a look at our segment results. At our Media Networks segment, revenues increased 5% to $2.2 billion in the quarter. Both domestic and international revenues were up 5%. Foreign exchange had a 1 percentage point unfavorable impact on international revenues. Page 10 of our Web deck provides a breakdown of our Media Networks revenue performance.

As Philippe mentioned, domestic advertising revenues grew 1% in the quarter. International advertising declined 9%, with foreign exchange losses impacting the growth rate by 4 percentage points. The decline in international ad sales was primarily due to fewer production and promotional events in the quarter.

In terms of affiliate revenues, domestic revenues increased 15%, while international revenues increased 24%. The growth in domestic affiliate revenues was driven by the availability of programming associated with digital distribution agreement, as well as by rate increases.

Excluding the impact from the digital distribution agreement, domestic affiliate revenues grew high single digits in the quarter. International affiliate growth reflects revenues from digital distribution agreement, rate and subscriber increases and new channel launches. Worldwide ancillary revenues declined 19% in the quarter, principally due to lower Home Entertainment revenue.

Media Networks' adjusted operating income of $893 million in the quarter increased 11% over last year. The operating margin of 41% improved approximately 200 basis points over the prior year. The improvement in the margin was driven by top line growth of 5%, partially offset by a 2% increase in expenses.

Within expenses, programming expenses grew 8%, while SG&A expense declined 5%. The decrease in SG&A expense was primarily due to lower accrued incentive-based compensation expense and savings from our 2011 restructuring, partially offset by higher advertising and promotion expense.

Now moving to Filmed Entertainment. Revenues in the quarter were down 5% to $1.2 billion. Page 12 of the Web presentation provides a breakdown of Filmed Entertainment revenues.

Worldwide theatrical revenues decreased 19% to $326 million in the quarter. The decrease in theatrical revenues was principally due to a less widely distributed mix of releases in the current quarter as compared to the releases in the March quarter of last year. This decline was partially offset by higher carryover revenues from the December quarter slate, which included Mission Impossible IV. Worldwide Home Entertainment revenues increased 1% to $415 million in the quarter.

TV license fees were down 6% to $317 million. The decrease in TV license fees in the quarter was principally due to the availability in mix of title. Ancillary revenues increased 41% to $111 million in the quarter, primarily due to higher digital revenues.

Filmed Entertainment generated adjusted operating income of $115 million in the quarter as compared to income of $39 million last year. The increase in operating income principally reflects lower print and advertising costs.

Now moving below operating income. Total company equity income from investments was $5 million in the quarter. The income in the quarter principally relates to our investment in EPIX. The adjusted effective tax rate in the quarter was 34.5%.

Now with that, I'd like to turn the call over to Tom.

Thomas E. Dooley

Thanks, Jimmy. I'm going to focus my remarks on our cash flow, our debt profile and the return of capital to our shareholders. I'll also talk about the seasonal factors impacting the remainder of our fiscal year.

In terms of our free cash flow for the quarter, we generated $869 million of operating free cash flow in the March quarter compared to $812 million last year. Page 5 of the Web deck presentation provides the components of free cash flow.

The increase in operating free cash flow was principally due to higher operating income, partially offset by an unfavorable working capital variance and higher cash tax payments. The unfavorable working capital variance in the quarter was impacted by increased participation payments primarily related to Mission Impossible IV and Transformers 3.

As for our debt, for the most part, it is fixed rate, with an average cost at quarter end of 5.1%. This compares to an average cost of 5.8% 12 months ago, so we are making great progress on lowering our average cost of debt. To the extent we have incremental borrowings, we are funding these in the commercial paper marketplace at an annual rate of approximately 40 basis points. We had no variable rate borrowings outstanding at quarter end.

As we noted in our last call on January 9, we redeemed at par the $750 million outstanding of our 6.85% senior notes due in 2055. During the quarter, we also took advantage of the attractive rates in the public markets to maintain our leverage at our target level. We issued $500 million of 1.25% senior notes that are due in 2015 and $250 million of 4.5% senior notes due in 2042.

In terms of leverage, we ended the quarter with $7.8 billion of debt and capital leases outstanding and approximately $1.1 billion of cash and cash equivalents. At March 31, our $2.1 billion bank revolver was undrawn. Our leverage ratio at the end of the quarter was approximately 1.9x. The only financial covenant in our bank revolver requires that interest coverage for the most recent 4 fiscal quarters be at least 3x. At the end of our quarter, our interest coverage was approximately 11x.

In terms of our commitment to return capital to shareholders between our buyback and dividend programs, we returned a total of $837 million of capital back to our shareholders in the March quarter.

Looking ahead, we are on pace to purchase approximately $700 million of our stock in the June quarter. So for the first 9 months of the year, we will have returned a total of approximately $2.5 billion to our shareholders.

Now I'd like to talk about some of the factors impacting the remainder of our fiscal year. In terms of affiliate revenue, given that revenue recognition on some of the digital deals is tied to product availability, quarterly affiliate revenue growth will not be as linear as it has been in the past. Accordingly, in the June quarter, we expect affiliate revenue to be down slightly compared to the prior year. However, affiliate revenue will return to double-digit growth in the September quarter.

As Philippe mentioned, we have some timing factors in terms of advertising. The Kids' Choice Awards benefited the March quarter and the BET Awards will benefit the September quarter of this year, whereas last year, both of these events benefited our June quarter. These factors in combination with the lapping of strong digital revenues in the prior year will result in slightly lower Media Networks revenues in the June quarter. However, this should set us up nicely in terms of revenue growth for our September quarter.

At this point in the year, we have a fair amount of clarity on our programming expense at Media Networks and expect it to grow mid-single digits for the full year. Given the pace of programming expense in the first half of the year, we anticipate that programming expense will grow in the high single-digit percentage range for the back half of the year.

Given our ongoing expense management, we expect to grow our margins at Media Networks for fiscal 2012. In terms of the back half of the year, given the timing of revenue that I just spoke about, margin expansion will occur in the September quarter.

For 2012, we are forecasting a book tax rate of 34.5%, and we expect that cash taxes will mirror book taxes for the year. As for our stock buyback program, we are on track to repurchase $2.8 billion for fiscal 2012.

Looking ahead at the studio slate and development pipeline in May, we will release The Dictator, which stars Sacha Baron Cohen, and Paramount will also be distributing DreamWorks Animation's Madagascar 3 in early June and in July, they will release Katy Perry movie, PART OF ME, in 3D.

As a core part of its strategy, the studio continues to develop a number of new franchises, as well as sequels to existing franchises. On June 29, the studio releases the G.I. Joe 2 and in the fall, they'll release the fourth installment of Paranormal Activity. In December, Paramount releases One Shot, starring Tom Cruise, which is based on the best-selling novel and Jack Reacher book series. And in the summer of 2013, we are looking forward to the next installment of Star Trek, which is in 3D, and the release of World War Z, which stars Brad Pitt.

Looking further out, Paramount is developing a Nickelodeon branded live-action movie based on the Teenage Mutant Ninja Turtles franchise, which is scheduled to hit theaters in December of 2013 in conjunction with the significant consumer product initiative. In addition, the studio is working on a CGI-animated SpongeBob movie, and they recently announced the sequel to Anchorman, where they will reunite the original cast of Will Ferrell, Steve Carell and Paul Rudd.

Wrapping up, we remain focused on the levers that drive long-term value. From an operational standpoint, we are investing in organic growth initiatives, including expanding our international businesses, developing franchises with consumer products appeal and investing in our brands in order to strengthen their competitive position.

There are incremental opportunities to monetize our brands and franchises on a worldwide basis, as we continue to see demand for our content from new distributors on digital platforms. We remain disciplined in managing our operating expenses and driving the efficiencies throughout our businesses in order to enhance our margins, and drive earnings per share and free cash flow.

In addition, we are committed to an aggressive capital return program of share buyback and dividends, which we believe will create significant value for our shareholders over the long term.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to the line of Anthony DiClemente with Barclays.

Anthony J. DiClemente - Barclays Capital, Research Division

I have one for Tom and one for Philippe. Tom, just I guess the simple question would be your ratings have been down quite a bit but your ad revenues really hung in either. I was wondering if you could expand on the reasons why ratings performance has been so uncorrelated with domestic ad revenue. And then for Philippe, in your opening comments, you mentioned the growing value of EPIX. And I think that your online exclusivity of your EPIX deal with Netflix expires in September. It's been reported that you guys have been in talks with Apple on different possibilities. I'm just wondering if you could help us with how you think about the trade-off between exclusivity and non-exclusivity in online distribution for EPIX.

Thomas E. Dooley

Yes, Anthony, we're seeing a strengthening in the overall tone of the ad marketplace in terms of the volumes that are coming into the marketplace, and that has offset the impact of the ratings efficiencies that we've had, primarily on one of our larger channels, and that would be Nickelodeon. The ratings efficiencies on other channels have not had a significant impact on our ability to either attract or satisfy the demand that we have for the channels ad inventories. So it's working out very well and we continue to see that in this quarter. Philippe?

Philippe P. Dauman

Anthony, as it relates to EPIX, we're blessed that EPIX has an extremely strong movie lineup. We talked about the success of Paramount, Lionsgate, of course, has a great pipeline that now includes Hunger Games and MGM is preparing to release the next James Bond movie. So we have a particularly compelling lineup, which is drawing a lot of value to current EPIX distributors and a lot of interest for potential distributors. As it relates to Netflix, they're obviously a great partner and has been a great partner for EPIX. We will continue to be on Netflix under any circumstance. Not surprisingly, there are other companies interested in the content, but EPIX will announce what it's going to do as time progresses. But again, we have a very good and strong relationship with Netflix. Operator, we'll take our next question.

Operator

That will be from the line of Doug Mitchelson with Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

For Philippe and/or Tom, can you just give us an update on how investors should think about how kids might be changing their viewing habits as content becomes increasingly available on VOD and online? And how do you balance the revenue you're receiving from licensing content online versus any cannibalization you might be seeing from traditional viewing? That'd be helpful.

Philippe P. Dauman

Okay, I'll take that, Doug. Well, there's been a lot of people putting out series on Nickelodeon ratings issues. There is no silver bullet. There has been a lot of focus lately by a particular analyst, which has reverberated elsewhere about the Nickelodeon having some library content on Netflix in particular. Just a few stats on that. And by the way, we are getting nice revenues through these SVOD deals. Netflix is present in less than 1/4 of television households. And since we get the streaming data on our content, I can tell you that the time spent on Nickelodeon content on Netflix is approximately 2% of the time spent on our Nickelodeon channel. So even if you view that as being completely kind of ballistic, which is, of course, is not, it serves our customers in places where they might not otherwise be able to watch television, and it thus serve some promotional value. It would have a minimal impact here. So our approach is to address the issues that we have. As we have In the past, BET and MTV, for example, which subsequently reached all-time high in their history ratings, is to approach it with content, research, marketing and building up the brand, clearly, there's some ratings measurement issues we've just talked about in prior calls, but we're going to focus on ways in which we can affect the Nickelodeon brand positively. And as I mentioned in my remarks, Nickelodeon continues to expand, create value for our distribution and marketing partners alike in United States and around the world. So we feel very, very good about the direction of the pipeline, it's extremely strong. We're developing more new shows of our popular series and more exciting new series. And of course, we're particularly excited about the revival of the Turtles franchise. Operator, we'll go to our next question, please?

Operator

We'll go to Alexia Quadrani with JPMorgan.

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

My comments just following up on your color on the advertising market. Could you please give us a bit more color on what you're seeing in scatter versus the upfront right now? And given your commentary about the ad market getting a bit stronger and your optimism that MTV ratings in the June quarter but also taking account the headwinds you also highlighted, is it possible to see positive advertising, domestic advertising growth in the quarter?

Philippe P. Dauman

Alexia, this is Philippe. Well, we feel very encouraged. We've seen the tone improved. We've gone through some very successful upfront presentations by our major networks and good meetings by other networks. Our partners are very excited by the programming lineup across the board and our commitment to investing in programming. The pricing remains good. The scatter pricing environment is good. There had been some volume issues, which we highlighted at our last ratings call and yes, we're encouraged by what we're seeing now as we head into the upfront. So we're not -- we do have just the timing issues of the event, which otherwise would have met 3 to 4 percentage points of positive impact in the quarter. But we're encouraged at this stage and we'll continue to drive our ad sales as we go forward.

Operator

We'll go next to Richard Greenfield with BTIG.

Richard Greenfield - BTIG, LLC, Research Division

A couple of questions. One, could you just talk from a housekeeping standpoint domestic ad revenues x the Kids' Choice Awards, and even more importantly, what were domestic ad revenues x Nickelodeon in total since that seems to be kind of the key group that people are focused on being a problem for you ratings-wise. And then two, Philippe, you mentioned this comment about 2% of time spent on Nick coming on Netflix, and I presume Amazon, if the Netflix number is that small, I assume Amazon's a tiny fraction even of that. How do you feel about the fees you're getting paid for that programming right now by Netflix and Amazon relative to the amount of time being spent on that programming?

Philippe P. Dauman

Thank you, Richard. Well, as far as the Kids' Choice Awards helps the previous quarter, when we mentioned the cumulative impact of the Kids' Choice Awards moving out of this quarter and the BET Choice Awards moving out into the fourth quarter, the total is 3 to 4 percentage points. Think of it as being about evenly split between the 2 events, so you can do the math. We don't breakout ad sales among networks as to your second question. And as far as the percentage that I mentioned, it's obviously impactful for our distribution partners, but our Nickelodeon viewership is so strong that's why the percentage is low. And we're getting good value, we always root for all of our distribution partners to grow over time. And as they grow, we grow with them. And this is part of the reason that we can confidently plan on having affiliate revenue growth to continue at over a number of years at the high single-digits rate of growth, which, of course, we have been exceeding the last several years for the foreseeable future.

Operator

We'll go next to Michael Nathanson with Nomura.

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

I have 2, one for Philippe and one for Tom. Philippe, the ratings at Nick have fallen to levels that you've never seen before, down 30% or so. And if it's not Netflix based on what you're looking at, just give me 1 or 2 top reasons why you think it's down so much, because it's never been down this much before?

Philippe P. Dauman

Yes, look, we've seen this -- as I said earlier, we've seen this level of ratings impact on some other major networks in the past, and we've overcome it. Yes, the Nick issue is complicated. There are ratings measurement issues, there's certainly has been some compelling programming that exists on some of our competitors which we can clearly address. We will do what we always do. We research our audiences, we review our development pipeline, add more diversity in our programming, more genres. Nickelodeon is really stepping up to the plate in a major way with the creative community, with its own programming teams. I'm very pleased more importantly, our marketing partners are very pleased with what they're seeing. And that was a very good reaction to the Nickelodeon upfront presentation. It's a very exciting lineup as we go forward. So this is what we do. This is what our teams do and we expect over time as we accumulates the program, as we market these new shows not only in our own platform but elsewhere, that we will gradually build on our ratings. And as I've said, we will not stop until Nickelodeon continues to get to bigger and better places. And clearly, all of our partners are very happy to be with Nickelodeon.

Operator

We'll go next to Jessica Reif Cohen with Bank of America.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Two questions. First on film, can you -- I know you went through some of Paramount's schedule, but how confident are you that you can make up for the loss of DreamWorks Animation distribution next year? And can you talk a little bit about international growth, where are you seeing the most growth? What markets are the drivers penetration, or are there any markets where your ratings are particularly strong? If you can just give a some color on some of the markets, that would be great.

Philippe P. Dauman

Sure, Jessica. Well, we've had the opportunity at Paramount to plan our development slate, obviously, over the long term. We've known for a long time that our distribution agreement as it relates to new releases, ends after the 2 releases we're involved with this year, so we've got time to plan for it. And we've talked about all the great franchises. Obviously, we're going to have -- after next year, we're going to start our own animation releases. There'll probably be an additional on development, some distributed titles. We are given the success of our team at Paramount. There are several film makers who are -- would like to see Paramount in film distribution in their films for a fee. So we'll do just great. And Paramount has really managed through the strategically and tactically extremely well. As far as international growth, clearly, there's some weakness in a number of European markets economically, which has some impact on the ad revenue category, of course. But we're seeing nice growth as you can see in affiliate revenues, and that really is due to our ability to expand our brands in more and more countries to get ratings success. Comedy, Nickelodeon has been particularly successful; U.K., we've had great success across the board; and this Paramount Channel is going to add a lot of momentum. I expect that the Paramount channel will be distributed over the next 2 to 3 years across a very wide base of our distribution, across many, many countries. I've never seen as much receptivity to a brand as I've seen as I travel around the world for Paramount Channel. With the -- the movies resonate, they work well around the world, and that'll drive affiliate revenue and ad sales. So I think we have a very clear path ahead for the kind of margin improvement and operating income growth at very high levels that we've talked about.

Operator

We'll go next with John Janedis with UBS.

John Janedis - UBS Investment Bank, Research Division

Philippe, you mentioned that you've had the upfront presentations. Obviously, you've been in front advertisers on Nick as well. How is the ratings issue impacted those conversations and to what extent would it impact your CPM growth relative to peer networks?

Philippe P. Dauman

Our partners have been very supportive. Of course, Nickelodeon is the place to be if you want to reach kids. There aren't too many advertising outlets to go after kids. One of our major competitors, of course, does not sell advertising. And we have the ability to -- particularly as we continue our multi-platform outreach, we have the ability to work with our partners in a way that's very, very unique to Nickelodeon, particularly as we have all these new live stars who are also taking advantage of some branding opportunities with some of our clients. So discussions have been good. We have -- the majority of conversations have been promising. And as I said, they like our commitment to programming, our commitment to building the brand and I believe we'll do quite well in the kids upfront.

Operator

We'll go next to Barton Crockett with Lazard Capital Markets.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

I think one of the very positive things in the quarter was obviously the margin trends in cable networks, and a lot of that is predicated on your expense controls. But I'm wondering about the sustainability of that. I mean, you're ramping up tons of content on Nickelodeon but growing programming costs mid-single digits, SG&A downwards, some cost-cutting initiatives. As we look past this fiscal into the next fiscal, should we assume a step-up in expense trends or there's some more leverage you can pull to keep the kind of cost controls that we've been seeing like recently?

Philippe P. Dauman

Barton, we're committed to managing our business efficiently. We are also committed as we have been over the last several years, including through the recession, and increasing our investment program We do call it investment even though it appears on an accounting standpoint as an expense. And as we've said, we're going to do it consistently across our portfolio at mid-single digits rate, which is what we target. Now that means because we have so many networks, that we can grow it a little more for particular networks where needed and a little less in other networks where it's not needed. We're also changing the mix of our program. We've been coming off some expenses, third-party licensing deals and we are shifting those dollars, which were not very efficiently deployed, given the lower resonance of generally speaking of off-network programming. We've been able to deploy those dollars to relatively inexpensive original programming, which speaks more to our brands. So that -- those 2 factors combined will allow us to increase our investment programming, but do it in a way that doesn't damage our margins as we go forward. And as far as other expenses, we'll continue to keep a tight lid on them. And more importantly, we're going to focus on growing our revenues. And we have a lot of opportunities to do it. We have, of course, the affiliate revenue line that I talked about over the next several years; we expect to grow our consumer products revenue; our international revenues will grow; and our ad revenues as the market and ratings in certain areas continue to improve. So we feel that we'll be able to continue to maintain and improve our margins as we go forward.

Operator

We'll go next to John Tinker with Maxim.

John Tinker - Maxim Group LLC, Research Division

Just a question on the share buyback. I think, Tom, you mentioned you're paying 40 basis points now to draw down. Would you ever think accelerating that?

Thomas E. Dooley

At this point in time, I think we're sticking with the guidance that we've articulated for the Street. Philippe's articulated what we think we can purchase over the longer term focus, and I think we're on our way to accomplishing that and continue on that path.

Philippe P. Dauman

Operator we have time for one more question.

Operator

All right, that will be from Vasily Karasyov with Susquehanna Financial Group.

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

Tom, when you were talking about the trajectory of advertising revenue in the U.S. for the remainder of the year, I was wondering if that assumes continued year-on-year declines in Nickelodeon until the lap when the decline started. And then can I ask if you expect the audience delivery to stabilize after starting next fiscal year?

Thomas E. Dooley

Yes, we think Nickelodeon is putting in place actions that will help stabilize the audience delivery, and that will drive Nickelodeon's both ratings, audience, delivery and advertising back up to the place that it had been and its dominance in the marketplace. If you look at Nickelodeon's penetration both on the traditional television screen and across the many new platforms, which are unmeasured out there, Nickelodeon is in fact very strong in reaching lots and lots and lots of kids, and our programming is probably being consumed more today than it ever has been before. We need measurements to capture that and measurements once that occurs will be followed by significant monetization. So we're quite confident in the future that Nickelodeon has in terms of its relationship to the kids' marketplace and our ability to generates advertising there.

Philippe P. Dauman

We want to thank everybody for joining us for our March quarter earnings call.

Operator

Thank you, ladies and gentlemen, for your participation. This will conclude today's conference call.

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