Paramount Global : 2nd Quarter '23 Earnings Transcript

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EDITED TRANSCRIPT

PARA.OQ - Q2 2023 Paramount Global Earnings Call

EVENT DATE/TIME: AUGUST 07, 2023 / 8:30PM GMT

OVERVIEW:

Company Summary

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AUGUST 07, 2023 / 8:30PM, PARA.OQ - Q2 2023 Paramount Global Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Kristin Southey Paramount Global - EVP of IR

Naveen K. Chopra Paramount Global - Executive VP & CFO

Robert Marc Bakish Paramount Global - President, CEO & Director

C O N F E R E N C E C A L L P A R T I C I P A N T S

Benjamin Daniel Swinburne Morgan Stanley, Research Division - MD

Brett Joseph Feldman Goldman Sachs Group, Inc., Research Division - MD

Bryan D. Kraft Deutsche Bank AG, Research Division - Senior Analyst

Jessica Jean Reif Ehrlich Cohen BofA Securities, Research Division - MD in Equity Research

Michael C. Morris Guggenheim Securities, LLC, Research Division - MD and Senior Analyst

Richard Scott Greenfield LightShed Partners, LLC - Partner and Media & Technology Analyst

Robert S. Fishman MoffettNathanson LLC - Analyst

P R E S E N T A T I O N

Operator

Good afternoon. My name is Nadia, and I'll be the conference operator today. At this time, I would like to welcome everyone to Paramount Global's Second Quarter 2023 Earnings Conference Call. (Operator Instructions)

At this time, I would now like to turn the call over to Kristin Southey, Paramount Global's EVP, Investor Relations. You may now begin your conference call.

Kristin Southey - Paramount Global - EVP of IR

Good afternoon, everyone. Thank you for taking the time to join us for our second quarter 2023 earnings call. Joining me for today's discussion are Bob Bakish, our President and CEO; and Naveen Chopra, our CFO. Please note that in addition to our earnings release, we have trending schedules containing supplemental information available on our website.

Before we start this afternoon, I want to 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.

Some of today's financial remarks will focus on adjusted results. Reconciliations of these non-GAAP financial measures can be found in our earnings release or in our trending schedules, which contain supplemental information and, in each case, can be found in the Investor Relations section of our website.

Now I will turn the call over to Bob.

Robert Marc Bakish - Paramount Global - President, CEO & Director

Good afternoon, everyone, and thank you for joining us. Naveen and I are looking forward to walking you through Paramount's results for the second quarter and our views on the business.

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AUGUST 07, 2023 / 8:30PM, PARA.OQ - Q2 2023 Paramount Global Earnings Call

Before we get started, I want to touch on some exciting breaking news. Today, we announced an important milestone with our agreement to sell Simon & Schuster to KKR for $1.62 billion. Naveen will walk you through some of the details. But in short, we are thrilled with this transaction, which is an important step in our delevering plan.

With that, let's turn to today's business. Let me start by saying this, without question, there is an incredible amount of change happening across our industry. But what I've learned is that when you have a coherent strategy, strong execution and the ability to stay nimble, your business will be built to weather periods of change and transformation. That is our approach at Paramount, what we remain focused on every day.

And starting with a key part of the transformation, our direct-to-consumer business. This quarter, our D2C business continued to scale with increased revenue and engagement and an improvement in earnings. In addition, with 2023 being our peak investment year in streaming, we remain on track to deliver significant total company's earnings growth in 2024.

But let me zoom out a bit. I'll start with the vision we've laid out for Paramount, how we're making progress on it and how we are continually fine-tuning our execution to navigate market conditions. Then, Naveen will talk through the financials and provide additional color on the business.

Despite what's happening across our industry, at a fundamental level, what we do at Paramount is what we've always done: create high-quality content with mass popular appeal and monetize it across multiple platforms and multiple revenue streams. We do all of that with an unwavering focus on building a sustainable business model, one built for growth. Let me break that down further.

First, content. As Sumner Redstone famously declared, and as we often echo, "Content is king." And at Paramount, content is certainly what we do best. In fact, in Q2, we were the #2 in the industry in terms of total U.S. TV set viewership of our content across TV and streaming. It starts with our library, one that spans over 100 years and includes more than 200,000 TV episodes and 4,000 movies. That irreplaceable library is a critical driver of Paramount+, Pluto TV, linear and licensing. This is coupled with our production capabilities that span the world: from Hollywood to key global markets, including the U.K. and Australia; in scripted and unscripted; in animation and live action; in features and episodic; and in live, including news, sports and events.

All of this helps to create, extend and localize enduring fan-favorite franchises and formats: from Transformers to Mission: Impossible, to last week's Teenage Mutant Ninja Turtles release; to unscripted hits like RuPaul and The Shores and to powerhouse CBS crime procedurals like the NCIS and FBI families; or the expanding set of Taylor Sheridan originals. In fact, Taylor Sheridan's newest series, Special Ops: Lioness, premiered a few weeks ago and became Paramount+'s most watched global series premiere in its first 24 hours on the service. A new season of fan favorite, The Chi, premiered this past weekend, and the highly anticipated season premiere of Billions is coming later this week.

Our franchises continue to grow in number and scale. We have a growing roster led by more than a dozen franchises that have grossed over $1 billion in revenue. Add to that popular originals such as Yellowjackets and some of the bigger sporting events in the world, including college football, where we'll soon have the debut of the Big Ten, plus March Madness, the PGA, UEFA and, of course, the NFL, with the Super Bowl coming in February on CBS, Paramount+ and, for the first time ever, on Nickelodeon with a kid-centric alternate telecast, something we and the league are very excited about.

I also want to note that given our international production capabilities, we have more than 85 international scripted and unscripted Paramount+ originals already produced, in production or greenlit, as well as more than 20 local versions of global unscripted formats slated to debut through 2024. In fact, we just announced a slate of internationally produced originals coming to Paramount+ in the U.S., including Bargain, a Korean crime thriller, that's already generating strong bus; and a number of British series like the gangster drama, Sexy Beast.

The breadth of our content serves an impressively large addressable market: within the household, across the country and around the world. That is the power and quality of our content engine, and that's a key competitive advantage for us.

Beyond quality, we continue to focus on being one of the most efficient content producers in the world and we expect to demonstrate continued gains in this area in 2024 and beyond. As part of that, as you will hear from Naveen, we are evolving our streaming content slate to super-serve key target audiences more efficiently. This based on all we've learned since Paramount+ launched.

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AUGUST 07, 2023 / 8:30PM, PARA.OQ - Q2 2023 Paramount Global Earnings Call

Speaking of content, I'd like to take a moment to address the issue that is top of mind for all of us: the ongoing writers' and actors' strikes. We're saddened that as an industry, we couldn't come to an agreement that would have prevented this. Our partnership with the creative community is critical to the health of our industry. So we remain hopeful for a timely resolution, and we are committed to finding a path forward.

At the same time, we have a responsibility to minimize disruptions to our audiences and other constituents. To that end, we've adjusted our CBS fall slate by leaning into the full power of Paramount's content capabilities. On top of a strong sports lineup, new additions to the CBS schedule include Paramount Network hits like Yellowstone and Paramount+ favorites like SEAL Team, as well as pairing the British hit comedy Ghosts with CBS' own popular version of the show, to name a few. The slate illustrates the strength of our global multi-platform asset base and strategy, and it's one of the ways we're staying nimble.

The second pillar of our strategy is using multiple platforms and multiple revenue streams to get the most value for our content. This allows us to monetize our content in more ways while giving us flexibility as markets, audiences and economics continue to evolve. That means accessing revenue streams across subscription and advertising and tapping into the very large global market of third-party platforms through our strategic approach to content licensing. And it means distributing our content across linear TV, theatrical and streaming, leveraging our powerful owned and operated assets, including the largest broadcast footprint in the world, one of the fastest-growing premium SVOD services with Paramount+ and the most widely distributed fast service globally with Pluto TV.

Let me give you a few examples of how this creates value for our company. Just look at CBS which, as you know, is the #1 network in all of television for the 15th straight season. What's lesser known is that CBS content accounted for nearly half of total minutes viewed on Paramount+. And one of the most underappreciated contributions of CBS' value to our company is its power in content licensing both domestically and abroad. To put a finer point on it, CBS-produced content accounted for over $600 million of licensing revenue in the quarter. This is an incredible asset.

Paramount Pictures, starting with its extraordinary library, also drives a significant multi-platform and multi-revenue stream advantage, and it's pay 1 films are the most efficient programming in driving acquisitions on Paramount+ in the U.S., a key asset as we continue to scale rapidly and move forward on the path to profitability.

And as you know, we've always embraced the combination of streaming and strategic licensing to third-party platforms, both in linear television and streaming, something that unquestionably produces economic value for us. In fact, over the past 18 months, the top 20 engagement drivers on Paramount+ also drove hundreds of millions of dollars in incremental third-party licensing revenue through windowing and secondary market exploitation.

And when it comes to generating revenue, I have to spend a minute on our strong position in the ad market. Paramount has seen sequential improvement in year-over-year advertising in Q2. And in the upfront we just wrapped, Paramount saw positive low to mid-single growth on volume. And in both cases, digital is a point of strength. Paramount is a leader in the digital video ad space, and I want to ensure you understand the extent and depth of our digital ad capabilities.

Our direct digital revenue is up by strong double digits year-over-year, powered by the premium content offerings on Paramount+ and Pluto TV. 3 years ago, we launched EyeQ, our digital ad platform, as a simple and effective solution for advertisers to connect their brands to consumers at scale. Since then, it has seen incredible growth. The EyeQ footprint now stands at more than 90 million full-episode viewers domestically, and we expect to generate revenue approaching $3 billion this year, rivaling the best -- the biggest players in digital video.

And we're building upon that strength internationally as well. We've just announced that we're expanding the global Pluto TV footprint with our launch in Australia. And we'll be launching ad-supported tiers of Paramount+ in certain international markets as we move forward.

Importantly, the strength of our proposition is not just digital. Our portfolio of sports, including Super Bowl LVIII and tent-pole events like the GRAMMYs, are differentiators for advertisers; as are our industry-leading capabilities in branded content. Simply put, world-class brands want to be part of Paramount where advertisers like Dodge Ram who's been ingrained in the fabric of Yellowstone since Season 1, or Pizza Hut, a key partner in the new Turtles movie, turn to our branded content capabilities to break through the quarter. This combination of strength brings Paramount advertising key advantages for the long term and helps to mitigate any near-term challenges.

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AUGUST 07, 2023 / 8:30PM, PARA.OQ - Q2 2023 Paramount Global Earnings Call

Finally, I want to speak to our hyper focus on creating a sustainable business model built for growth, an achievable goal and one that powers our entire mission. As we've said over the past quarters, there are a few key levers we're focused on here: first, revenue growth through continued subscription growth, price increases, ad monetization and more; second, cost and operational efficiencies, with a big focus on content and marketing spend and improving our operating leverage.

While Naveen will speak to our efforts to build a sustainable model in more detail, I do want to touch on how Paramount+ with SHOWTIME integration, which commenced on June 27, is an example of pulling all of these levers. Yes, it allowed us to secure consolidation-driven cost savings that extend across streaming and linear, more than $700 million, in fact. It also enabled price increases to further drive streaming ARPU. Perhaps, most importantly, it is creating a stronger product for consumers and our partners, one that is more engaging with less churn. Consider this, for the last year or so, we've had a bundle of the Paramount+ and SHOWTIME apps in the market. Customers of that bundle consumed over 40% more titles. So we have clear predictive data that the integrated product will deliver enhanced consumer engagement in streaming and soon in linear.

In closing, let me take this opportunity to say how proud I am of this company and the incredible team at Paramount who continue to power us forward. Our strategy, underpinned by compelling content and powerful platforms, is working. And our approach, fine-tuned to navigate the realities of the market, is focused on efficiently maximizing our business. We're doing all of this, of course, with driving shareholder value as our highest priority.

With that, I'll now turn it over to Naveen. Naveen?

Naveen K. Chopra - Paramount Global - Executive VP & CFO

Thank you, Bob. Good afternoon, everyone. .

Our Q2 results reflect strong momentum in our D2C business and continued focus on company-wide expense management. In my comments today, I'll provide additional insights on key elements of our Q2 results and discuss our expectations for the remainder of 2023. Then, before we take your questions, I'll share some more color on our path to streaming profitability and improved financial leverage.

In Q2, we delivered total company revenue of $7.6 billion and adjusted OIBDA of $606 million. In our press release, you'll find a comprehensive review of our key financial results.

What I'd like to focus on today are 4 important areas: affiliate and subscription revenue, advertising trends, filmed entertainment results and free cash flow.

Let's start with affiliate and subscription revenue, which grew a strong 12% in Q2, demonstrating once again that the combination of traditional and streaming yield a net growth for our business. We delivered strong D2C subscription revenue growth of 47%, largely driven by Paramount+ where we benefited from subscriber additions, improvements in ARPU and reductions in churn. Paramount+ net adds in the quarter reflected seasonal softness as well as a strategic shift of content releases to better align with the launch of Paramount+ with SHOWTIME. Looking ahead, we expect healthy levels of year-over-year affiliate and subscription revenue growth to continue.

From a subscriber perspective, we expect Paramount+ growth will be higher in the back half of the year than the first half. The quarterly cadence of net adds will reflect the timing of our content slate and the rollout timing of Paramount+ with SHOWTIME with our third-party distribution partners. In addition, Q3 net adds will reflect the loss of just over 1 million subscribers relating to the restructuring of a unique legacy Latin American hard bundle deal, which will have an immaterial impact on revenue.

Now let's turn to advertising. Year-over-year revenue performance improved 150 basis points compared to Q1. D2C advertising growth accelerated to 21%, fueled by subscriber growth and strong engagement across Paramount+ and Pluto, along with improvements we are seeing in direct programmatic buying activity. Looking ahead, we expect to see continued acceleration in D2C advertising growth in Q3, and we're also bullish about the long term, which I'll speak more about in a moment.

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