Paramount Global : 3rd Quarter '22 Earnings Transcript

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PARA.OQ - Q3 2022 Paramount Global Earnings Call

EVENT DATE/TIME: NOVEMBER 02, 2022 / 12:30PM GMT

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NOVEMBER 02, 2022 / 12:30PM, PARA.OQ - Q3 2022 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

Anthony Joseph DiClemente Paramount Global - EVP of IR

Naveen Chopra Paramount Global - Executive VP & CFO

Robert Marc Bakish Paramount Global - President & 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 - Equity Analyst

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

Douglas David Mitchelson Crédit Suisse AG, Research Division - MD

JohnChristopherHodulikUBS Investment Bank, Research Division - MD, Sector Head of the United States Communications Group and Telco & Pay TV Analyst Michael C. Morris Guggenheim Securities, LLC, Research Division - MD and Senior Analyst

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

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

Operator

Good morning or good afternoon. My name is Adam, and I'll be the conference operator today. At this time, I would like to welcome everyone to Paramount Global's Q3 2022 Earnings Conference Call. (Operator Instructions). At this time, I would now like to turn the call over to Anthony DiClemente, Paramount Global's EVP, Investor Relations. You may now begin your conference call.

Anthony Joseph DiClemente - Paramount Global - EVP of IR

Good morning, everyone. Thank you for taking the time to join us for our third quarter 2022 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.

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. Reconciliation of these non-GAAP financial measures can be found on 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.

And now I will turn the call over to Bob.

Robert Marc Bakish - Paramount Global - President & Director

Good morning, everyone, and thank you for joining us. Today, I'll share some highlights from our third quarter and give you my perspective on the road ahead. Naveen will then take you through the numbers, and then we'll open it up for questions. In the third quarter, Paramount continued to execute on our differentiated strategy to deliver compelling entertainment experiences for the world's consumers while creating value for our partners and shareholders. That strategy is firmly grounded in 3 key strengths: first, our broad range of popular content; second, our unmatched array of platforms; and third, our truly global operating reach.

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NOVEMBER 02, 2022 / 12:30PM, PARA.OQ - Q3 2022 Paramount Global Earnings Call

I'm happy to report that our robust content engine fire on all cylinders in the quarter, producing a broad range of captivating stories with engaging characters and settings for lovers of content of all kinds. As the only media company with 5 different platforms, we've delivered this content to an exceptionally large consumer market. Our businesses include the #1 broadcast network, CBS; a portfolio of industry-leading cable networks, many of which are #1 across their respective demographics like Nickelodeon and BET; the #1 free ad-supported streaming TV service in the U.S., Pluto TV; a rapidly scaling subscription service, Paramount+; and a Hollywood studio with 6 #1 hits this year, Paramount Pictures. And for us, it's not just about the U.S. Our global operating footprint includes the largest number of broadcast homes in the world, content production capabilities across Latin America, the U.K., Europe, the Middle East, Africa and Asia Pacific, cable network reach in virtually every key market and deep commercial relationships. And once again, these assets delivered.

In the third quarter, we sustained our strength in TV, grew nicely in film and drove rapid growth in streaming around the world. That said, as I think everyone is aware, this is a complex environment and economic period, and our results for the quarter do reflect some macroeconomic headwinds that are affecting our industry. For us, however, managing through near-term volatility does not mean radically diverging from the strategy that is producing real momentum and positioning Paramount to win in the long run. As we execute, however, we are also taking aggressive precise actions to gain additional efficiency across our cable networks, streaming platforms, advertising sales, marketing and global operations. These will yield cost savings next year as well as long-term strategic benefits. And we're taking advantage of this current market to accelerate these efforts.

With that, let's take a closer look at the quarter and our plans ahead. It all starts with our world-class content with a powerful mix of scripted and unscripted originals, hit movies, news and live sports, we've got something for everyone in the household. Let's start with the incredible run at Paramount Pictures this year. I can't talk about producing great content without mentioning our theatrical releases, where Paramount Pictures has dominated with 6 #1 films.

That string of hits is led, of course, by Top Gun: Maverick. It's now the fifth largest domestic release of all time and the only film in history to be #1 on Memorial Day weekend and #1 on Labor Day weekend in the United States. It was the #1 title in the U.S. in digital home entertainment, its first week of release as well. And we know it will continue to draw big audiences once it comes over to Paramount+ later in the year.

And now our hard thriller, Smile, released at the end of September has hit it big as our sixth #1 box office film of the year. Made for just $17 million, it's now on track to gross over $200 million globally. Smile will also be the next example of our 45-day theatrical to streaming FAST follow strategy, which gives fans the chance to have the big screen experience before enjoying at home on Paramount+ and which gives us a very compelling return on investment.

Next, we'll move to broadcast and CBS. 2022's #1 broadcast network, whose fall season is off to a strong start. On the entertainment side, we have 7 of the top 10 shows and more shows in the top 30 than all other broadcast networks combined. This performance is seen in returning favorites were close to 11 million viewers tuned to the season 2 premiere of Ghost, for example, and is seen in new shows like Fire Country, the season's #1 new show.

Fall also means football. And for us, that means the NFL on CBS and on Paramount+. The 2022 season kicked off in September with viewership off to its best start on CBS since 2015, and its best start ever on Paramount+. College Football is off to a strong start as well. And in August, we announced Paramount will air big 10 football games on CBS and on Paramount+ that will kick off next season. That means the biggest and best in college sports will continue to call Paramount Home through the end of the decade.

We don't just have American football. We've got European football, too. In August, we extended the rights to air the UEFA Champions League keeping this marquee property on Paramount+ and CBS for the next 8 years. And I'm thrilled that we did. As so far this season, Paramount+ had dramatic growth in average audience in streaming minutes and in total households. So the outlook is strong, and we are excited that some of the best soccer in the world will keep kicking it on Paramount+ with more games and an expanded playoff format, the deal creates an even more efficient investment for many years to come.

Paramount+ also saw a strong acquisition in the quarter from our slate of original series like SEAL Team and from movie releases, including the psychological horror film, Orphan First Kill; and the triumphant return of our favorite losers in Beavis and Butt-Head Do the Universe.

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NOVEMBER 02, 2022 / 12:30PM, PARA.OQ - Q3 2022 Paramount Global Earnings Call

This powerful array of popular content is the fuel that continued to drive growth in subscriptions across our streaming platforms in the third quarter. Total global direct-to-consumer subscribers rose to nearly $67 million in the third quarter. And the key driver here was once again, Paramount+, which attracted 4.6 million new subscribers, reaching 46 million total subscribers for our flagship streaming service. In fact, year-to-date, Paramount+ has led the industry in U.S. sign-ups and gross subscriber additions according to Antenna's September 2022 report. Year-over-year revenue from Paramount+ grew 95%.

Importantly, these third quarter numbers only begin to reflect the impact of the exciting first-of-its-kind partnership with Walmart. As you probably know, we have a decade-long relationship with Walmart in merchandise and consumer goods. So when the world's largest retailer was looking to enhance its Walmart+ package with a streaming offering, we are thrilled they saw a natural fit with Paramount+. Starting in September, Walmart+ members could begin opting into a Paramount+ essential streaming plant at no extra cost.

Early results have been very encouraging. Paramount+ has great potential to accelerate Walmart+ growth and retention, and we expect the partnership to grow as the marketing program ramps up including an in-store presence for the more than 100 million retail customers who pass through Walmart in the U.S. every week. Innovative partnerships like this are an important element of our pursuit of the largest total addressable market and it's a strategy we've taken global.

In the third quarter, we joined forces with powerful partners to debut new streaming offerings in several international markets. We celebrated the Italian launch of Paramount+ in September in partnership with Sky Italia. And later this year, we'll introduce Paramount+ in Germany, Austria and Switzerland with Sky Deutschland; and in France with Canal+, and we continue to strike these kinds of innovative partnerships.

In the U.K., we are pleased to announce a new multiyear, multifaceted distribution agreement with Virgin Media. Under that agreement, Paramount+ will debut on Virgin TV in 2023. And Pluto TV will be more widely distributed on Virgin TV 360 and stream service. In the third quarter, we launched Sky Showtime, our joint venture with Comcast in Denmark, Finland, Norway and Sweden. For us, this partnership represents a capital-efficient way to go after smaller markets. For the viewers, it means access to the best entertainment from the entire Paramount family as well as from NBC and Universal Studios.

Pluto TV, already the top free ad-supported streaming TV service in the U.S. also continues to go global. In September, we announced that Pluto TV will launch in Canada on December 1. Here, too, we have joined forces with another long-standing partner, Corus Entertainment, who bring local content Canadian audiences love and a powerful local ad sales channel to drive monetization. Of course, we are all aware of the ongoing macroeconomic pressures that continue to affect our industry and the ad market in particular.

As we navigate this period, Paramount will continue to rely on the fiscally disciplined approach that has been our advantage in good times and bad. We have always been mindful of cost management as a company, and we are now taking additional steps to improve efficiency across our organization.

For example, we recently announced our intention to reorganize Showtime networks, Showtime OTT and Paramount Television Studios into other parts of the company. This will further align our studios network and streaming operations in ways that enable significant cost reductions and advance our strategic agenda. We're also doing work with respect to international operations, marketing and ad sales.

And speaking of ad sales, we know that advertisers see us as a cornerstone marketing solutions provider in the U.S. They want to be where the top hits are and even more so in complex economic times. And our combination of the #1 broadcast network, a rapidly growing streaming service and the #1 free ad-supported streaming TV service offer a reach and frequently proposition that no one else can match. In the end, what matters most to our advertisers is the same thing that matters most to our viewers, the product on the screen. That's why we couldn't be more excited about the sensational content coming to Paramount+ and our other platforms in Q4.

Of course, there is the much anticipated return of the biggest hit on television, Paramount Network's, Yellowstone. And through coordinated cross-platform marketing, we will capitalize on the excitement around the premier of the fifth season to help boost the launches of 2 new Taylor Sheridan creations on Paramount+. None other than Helen Miron and Harrison Ford will lead 1923, the next installment of the thrilling origin story

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NOVEMBER 02, 2022 / 12:30PM, PARA.OQ - Q3 2022 Paramount Global Earnings Call

of the Yellowstone Saga, and Sylvester Stallone is premiering in Tulsa King about Mafia Capo building a crew far really far from his old mob family. We're also excited to premier the revival of the popular FBI drama Criminal Minds this quarter, exclusively on Paramount+.

With the help of several members of the beloved original cast, we are looking forward to activating the franchise's large existing fan base, which we see paying big dividends for Paramount+. As I mentioned earlier, our big theatrical hit Smile and Top Gun: Maverick will come to Paramount+ in the fourth quarter. And everywhere Maverick goes, it just crushes. So we think that will be a big draw on Paramount+ as well.

All in all, we expect all these new titles and highly anticipated events will entice more and more subscribers to Paramount+ in the coming months. In closing, by delivering extraordinary experiences for our consumers, we will continue to demonstrate the long-term value of our broad multi-platform model. At the heart of it, that's the real proposition behind our strategy. And with the momentum we're seeing in the year and the quarter, it's clearly working. With that, I'll turn it over to Naveen to walk you through a more detailed look at our third quarter results, and I look forward to continuing the conversation in our Q&A.

Naveen Chopra - Paramount Global - Executive VP & CFO

Thank you, Bob. Good morning, everyone. Our third quarter results demonstrate continued execution of our long-term strategy to create broad content for diverse audiences across multiple platforms on a global basis. It's a strategy that offers significant incremental opportunity relative to our traditional business in 3 important dimensions.

First, as we've noted previously, streaming offers a total addressable market, which is more than twice the size of linear, excluding China and India. And the incredible ease of consumption with a vast array of content available at home or on the go, in whatever format you want, ad-free or ad-supported means we can connect more consumers with Paramount content than ever before. Second, we expect streaming to be accretive to ARPU over time. In fact, streaming ARPU already exceeds linear ARPU in some international markets. For example, in the U.K. P+ ARPU in the current quarter is over 20% higher than our U.K. linear pay TV ARPU, and our total reach has grown relative to the linear-only world.

In the United States, it's worth noting that there are streaming services in the market today with ARPU comparable to or higher than the monthly revenue we generate per linear household. And we believe Paramount+ will achieve these levels of ARPU over time with the implementation of price increases and continued growth and engagement and advertising monetization. Third, we believe long-term operating margins in streaming will approach TV media margins as the benefits of our multi-platform strategy play out.

This strategy yields significant efficiencies in marketing expense where our linear networks provide a great promotional platform for Paramount+ and in content expense, where we monetize content like movies and sports across multiple platforms.

Our streaming content expense also benefits from a wealth of fully owned library content and world-renowned franchises that are a highly efficient driver of acquisition and retention. These cost efficiencies do not exist in a pure-play streaming business model. Of course, our investment in streaming does impact near-term profitability. But given the combination of a bigger market opportunity, incremental ARPU and compelling margins, we believe there is significant long-term shareholder value to be created, and we remain committed to this strategy despite the impact of near-term cyclical advertising headwinds.

Now let's get into our third quarter results, which reflect strong D2C growth and box office success, but also macroeconomic conditions and FX impacts on advertising revenue growth. Total company revenue grew 5% in the quarter. Affiliate and subscription revenue rose 8%, continuing to demonstrate that the ecosystem shift from Pay-TV to streaming yields net growth for our business. Theatrical revenue was also a significant contributor to total company growth in Q3. Licensing revenue declined 1% and advertising revenue declined 2%. FX was a headwind to advertising revenue in the quarter, resulting in a 300 basis point impact on the advertising growth rate.

On a constant currency basis, advertising revenue grew 1% in the quarter. In direct-to-consumer, we added 4.7 million global subscribers, which drove 59% subscription revenue growth. As of September 30, we had a base of 66.5 million global D2C subscribers, including 46 million Paramount+ subscribers. Paramount+ added 4.6 million global subs in the quarter. Note that our quarter end total subscriber count reflects the elimination of 1.9 million Paramount+ subs in the Nordics, following the launch of Sky Showtime in September, which replaced Paramount+ in that market.

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