$PARA Paramount Global Q2 2023 Earnings Conference Call

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. 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 and Schuster to KKR for 1.62 billion dollars. 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 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 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 number two 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 Plus, Pluto TV, linear, and licensing. This is coupled with our production capabilities that span the world from Hollywood to key global markets including the UK and Australia, scripted and unscripted, animation and live action, features and episodic, and 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 our 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 it became Paramount Plus's most watched global series premiere in its first 24 hours on the service. A new season of a fan favorite, The Challenge, 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 one billion dollars in revenue. Add to that popular originals such as Yellowjackets and some of the biggest 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 Plus, 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 Plus 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 Plus in the U.S., including Bargain, a Korean crime thriller that's already generating strong buzz, 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, based on all we've learned since Paramount Plus launched. 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 Plus favorites like SEAL Team, as well as pairing the British hit comedy Ghosts with CBS's 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 ad-supported services with Paramount Plus, 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 number one 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 Plus, and one of the most underappreciated contributions of CBS's 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 dollars 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 its pay-one films are the most efficient programming in driving acquisitions on Paramount Plus 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 Plus 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 a positive low to mid-single digits 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 Plus and Pluto TV. Three years ago we launched IQ, 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 IQ footprint now stands at more than 90 million full episode viewers domestically, and we expect to generate revenue approaching three billion dollars this year, rivaling the best and 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 Plus 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 58 and tentpole 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 one, or Pizza Hut, a key partner in the new Turtles movie, turned to our branded content capabilities to break through the clutter. This combination of strengths brings Paramount advertising key advantages for the long term and helps to mitigate any near-term challenges. 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 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 Plus with Showtime integration, which commenced on June 27th, is an example of pulling all these levers. Yes, it allowed us to secure consolidation-driven cost savings that extend across streaming and linear, more than 700 million dollars 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 Plus and Showtime apps in the market. Customers of that bundle consumed over 40 percent 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?

So on Simon & Schuster, we are very happy with this deal. It's a great outcome for our company. As we've discussed before, Simon & Schuster is a...

Fantastic asset, but from a strategic perspective it's not core or mission of creating and monetizing world-class video entertainment, and we think we found a very good home for SS with KKR. Importantly, this transaction checks all the boxes from a financial perspective. We're selling the asset at an equity valuation, and the deal will meaningfully help delever our balance sheet. As we've said, we're going to use the proceeds to pay down debt. So again, thrilled with this transaction. With respect to other assets, look, we're always looking for ways to maximize shareholder value. As we said before, that might involve divesting, acquiring, or potentially partnering on assets, all of which we've done. But other than that, I'm not going to comment on anything specifically.

Yeah, sure, Mike. Let me have Naveen talk about the first part. So on the bundling side, look, we've been believers in bundling for a long time. Bundling has been one of the tried and true methods of value creation in media, and certainly as we entered the streaming space, bundling is part of our strategy and we've really pursued it in different ways. We, for example, bundled Paramount Plus with Showtime originally as a price bundle, then sort of an upgraded tier. This predates obviously the integration, and we saw value creation there. When you look at the deals we do with distributors, particularly outside the United States with respect to the streaming product, we've pursued hard bundles — that is bundling Paramount Plus as part of an MVPD offer. We did that with Sky, we've done that with Canal, we've done that with some others. We more recently did another form of a bundle with Walmart, where Paramount Plus became the video service inside of Walmart Plus. That's another bundle. So we believe in bundling. We are continuing to look at incremental opportunities in this regard, and the only thing we know for sure is it'll be a growing part of what we're doing. As to the specifics of partnerships and timing, we'll see, but bundling is definitely a value-added element of streaming because it gives you access to consumer connections and allows you to penetrate a TAM, and it has certain attractive margining characteristics. So we like bundling.

Yeah, sure, Rich. Let me take the sports part and Naveen on the Pluto side. So a couple things on sports really embedded in your question. One, on the announcements over the weekend, look, we view that as a very additive development for the Big Ten and Paramount in particular. Meaning our Big Ten deal looks even better today than when we did it. In terms of specific impact, there'll be no change in the fees that we pay or the volume of the games that we get for CBS and Paramount Plus, but the expansion of the Big Ten clearly enhances the quality of the games portfolio that we have to pick from and then we carry. So essentially it increases the quality of our deal. And I'd add that we very much look forward to beginning our partnership with the Big Ten in the fall, and frankly, given everything else going on, timing couldn't be better. So that's part one. Part two is sports is integral to our strategy. It's really a component of both CBS and Paramount Plus from a content offering. We like that. We find sports working very well for us, driving distribution, attracting viewers and subscribers, enabling strong monetization in the ad market, providing powerful promotion and schedule lead-ins. And we're in a great place because that works, and our schedule is essentially stable. Our deals are all locked through the end of the decade, so we're not in a place where we need to do anything. And if you look at what we have, we have broad and top-tier quality sports. We don't need or frankly want to do anything incremental. Sports intentionally, as I said, are part of the equation, and we do view sports and entertainment as a synergistic mix both in streaming and on linear. We spend a lot of time thinking about how to connect sports viewers with other types of content, including our original slate, to maximize the ROI for both. So for us, the marketplace is what it is, but the answer is not more sports. We're in a great place from a mix standpoint. Instead, it's about continuing to focus on maximizing the impact of these highly valuable rights that we already have. And again, we have stability; we're locked through the end of the decade. Naveen, on Pluto?

But Brett, just to jump in, I think it also goes to the fundamental premise behind our thesis, and that is broad. We talked about Paramount Plus as news, sports, and a lot of entertainment. And the fact of the matter is, when we look at the data under the covers, we are seeing conjoint analysis of sports viewers watching entertainment programming. And to Naveen's point on efficiency, for example, we probably need to do less for that viewer who's an NFL viewer in the fall and do more for that viewer outside the fall because we can rely on the NFL. That's an example of fine-tuning our strategy. And really, that also goes to why we're doing Paramount Plus with Showtime again — that broad product, which we're seeing 40% more titles consumed when you bundle Showtime and Paramount Plus. It's all about studying the data and leveraging this combination of sports and entertainment, not doing either naked. That is, I believe, the path to success because among other things it helps you lower your churn, but it has broader benefits as well in ad monetization, subscriber acquisition, engagement, etc.

Yeah, Robert. So on the advertising side, you're right, we see a combined impact of cyclical and secular. On the cyclical side, look, rates are coming down a bit, things are marginally improving, but what we've really been focusing on is the secular side. And you see that in terms of how we're participating and really driving the digital ad market. For us, direct digital is very strong, and it wouldn't be had we not configured our product line to prosecute it basically. And we're going after that with IQ, which is a combination of course of Pluto TV and Paramount Plus. We are seeing direct digital strong, and we are seeing improvement in programmatic, and we expect both of those things to continue. So that's all about secular. And as we roll forward through the year, in Q3 we expect to see a slight improvement overall on a year-over-year basis, but that will be driven by DTC, so back to a secular piece. And then as we get to Q4, sports are going to be a key driver, including the NFL, the Big Ten — that timing has turned out to be great for us — as well as our modified CBS slate, which is strong and has plenty of scripted programming. That should add meaningful benefit on the linear side. And hopefully we continue to see some cyclical improvement, but we are very much focused on this secular trend, and we think we are extremely well positioned given the impression scale we have in the marketplace with IQ and the revenue growth trends we're seeing. So we're very excited about the road ahead.

Yeah, sure, Bryan. Look, as I think it's, we're all disappointed as an industry that we could not get deals done with the writers and actors to avoid the situation we're in. And I'd reiterate that our partnership with the creative community is critical to the health of the industry, so we remain hopeful for a timely resolution. That said, with respect to our film slate, the good news is we have a significant number of films for which production is complete. That includes Killers of the Flower Moon, Bob Marley, John Krasinski's IF, as well as A Quiet Place: Day One, and Dear Santa with Jack Black. We also have a Mean Girls musical for Paramount Plus. Strikes do present some marketing challenges, something we're working to assess with respect to our lead strategy, but again, we're well stocked. And you heard the commentary on the CBS alternate schedule; that too draws from our global multi-platform asset base and is very strong. So from a content perspective, we're in pretty good shape. Again, it all comes down to duration, and I want to reiterate that we're hopeful that we can solve this as an industry sooner rather than later because we'd all like to get back in the content production business. But in the near term, we're working to mitigate the impact to our consumers and other constituents.

Yeah, and I'll just add in closing, I want to emphasize that we remain focused on executing our strategy. That means continuing to scale streaming while maximizing our traditional business to deliver significant total company earnings growth in 2024 and create a more sustainable growth model in the process. Through it all, we will be nimble in navigating the current environment in the near term while focusing on creating shareholder value for the long term. And with that, thank you everyone. Be well, and we'll talk to you soon.