Paramount Global (NASDAQ:PARA) Q2 2023 Earnings Call Transcript

Paramount Global (NASDAQ:PARA) Q2 2023 Earnings Call Transcript August 7, 2023

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: 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.

Bob Bakish: 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 & 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 UK 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 Paramount+’s most watched global series premiere in its first 24 hours on the service, a new season, a fan favorite to 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 10, plus March Madness, the PGA, UEFA and of course, 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 green lit, 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. 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 Ghost 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 market, 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 number one network in all of television for the 15th straight season. What’s let her 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 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 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. 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+ 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 will now turn it over to Naveen. Naveen?

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Naveen Chopra: 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 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.

The year-over-year change in TV media advertising was similar to Q1. In the national domestic market, we are seeing strength in key categories, including pharma, retail, movies and travel. That said, we see linear advertising recovering more slowly than digital and we expect the Q3 rate of change for TV media advertising will be relatively similar to Q2 with improvement in Q4. Moving on to Filmed Entertainment, quarterly revenue and OIBDA were down year-over-year, reflecting the tough comparison to Top Gun: Maverick, which was released in the prior year period as well as the timing and mix of other releases. OIBDA of $5 million was better than expected due mainly to the timing of licensing deals, which benefited Q2. As we’ve noted in the past, licensing in any given quarter can be somewhat lumpy based on deal timing and the schedule of content deliveries.

Turning now to cash flow. Free cash flow was a use of $210 million in the quarter, which included modest impact from the strikes. We anticipate continued delays in production for the duration of the strikes. And as such, we estimate free cash flow in the back half of the year will be significantly higher than previously expected. Next, I’d like to touch on leverage. The $1.62 billion transaction we announced today to sell Simon & Schuster to KKR is an important step in our delevering plan. We expect the transaction to yield approximately $1.3 billion in net proceeds, resulting in a roughly 0.5x improvement in net leverage when the deal closes following regulatory review. We expect to use the proceeds from the sale to pay down debt. The transaction demonstrates significant value capture for Paramount.

Between the $1.62 billion sale price, the $200 million termination fee paid by Penguin Random House and the cash flow we received during the pendency of the deal process, we will realize approximately $2.2 billion of gross proceeds. In addition to the impact of the S&S sale, we expect leverage will further benefit from the dividend reduction and significant total company earnings growth in 2024. Now I’d like to shed more light on our path to profitability and streaming. Earlier, Bob described the 3 key pillars of Paramount’s operating strategy, our strong content, our multi-platform and multi-revenue content monetization and our commitment to deliver long-term growth. In 2024, improved streaming economics will be key to delivering earnings growth and will be accomplished through a combination of continued subscriber growth, healthy ARPU expansion and significant improvement in the efficiency of Paramount+ investments.

Let me dig a little deeper into that combination, starting with ARPU expansion. In 2024, we expect to deliver more than 20% growth in global Paramount+ ARPU. As you know, we implemented our first domestic price increase this quarter, and we’ll see a full year benefit in 2024. Internationally, we will also be rolling out new tiers and revised pricing in certain markets. ARPU will also benefit from increasing D2C penetration in Western Europe, Canada and Australia, where new subscribers are being added at a significantly higher ARPU than our existing international subscriber base. Paramount+ with major Hollywood movies, top-tier sports and world-class entertainment remains an incredibly attractive value proposition relative to other SVOD services and to other forms of recreation.

This compelling value proposition, plus the stickiness of Paramount+ content gives us confidence in our ability to further improve ARPU over time. We also see an opportunity to drive ARPU higher through enhanced ad monetization. As Bob highlighted, this year, EyeQ will generate digital advertising revenue approaching $3 billion across our business, a size and scale that are comparable to best-in-class peers in the domestic connected TV advertising market. And the opportunity to enhance ad monetization extends beyond the United States. We’ve just begun to scale our international ad-supported streaming business, having now launched Pluto in over 35 markets. We also plan to launch ad-supported tiers of Paramount+ in certain markets and monetization will benefit from expanded local partnerships and deeper integration with our own free-to-air broadcast stations.

Today, we’re growing our digital advertising platform faster than many peers, as demonstrated by the 21% growth rate we’ve achieved in DTC advertising in Q2. Similarly, we saw 35% growth in total viewing hours across Paramount+ and Pluto. The combination of rapid inventory expansion and broad integration with leading buy-side ad tech platforms, means we are now growing DTC advertising not just as a replacement for linear, but as a compelling video alternative for the long tail of advertisers who have historically relied on social media and short-form video advertising. Why is this important? Simply put, it means that TAM for connected TV advertising is much larger than typically imagined, and we’re proving it by giving a whole new class of advertisers the ability to tell their story on the TV glass.

In order to drive accelerated earnings growth, we’re focused not only on revenue, but also on delivering captivating consumer experiences while using innovation to improve efficiency. In streaming, we’re focused on optimizing spending in content and marketing, the two largest expense categories in our streaming P&L. As Bob pointed out, there’s no question we make great content, but it matters just as much that we do it efficiently. And when it comes to streaming content, we’ve learned a lot from Paramount+ subscribers over the past 2.5 years, what attracts them to the service, what keeps them there. And therefore, what we want to invest in. And we’ve learned that success is not purely a function of content volume. It’s having the right content for the right audience at the right time.

For example, we know that if a Paramount+ subscriber watches 4 hours or more of content in a month or engages with more than two different series, they are over 30% less likely to churn from the service. With these types of learnings, we’ve carefully defined specific audience segments and have evolved our programming strategy to super serve them in an even more efficient manner. Our programming slate is designed to ensure that each key audience segment has compelling content to enjoy throughout the year, not too little, but also not too much. The content charges we took in the first half of 2023 reflect this go-forward targeted programming strategy. The benefits are already apparent in Paramount+’s content efficiency ratio or the services content expense relative to Paramount+ revenue.

In the first half of 2023, we have seen nearly 10 percentage points of year-over-year improvement in this ratio. The integration of Paramount+ with Showtime, together with an optimized programming strategy, will continue to drive this ratio lower and will be a key driver of the margin improvement we expect to realize in D2C over the next several years. Beyond content, we also see room for efficiency gains in our marketing spend. The approach I just described, a targeted programming strategy also allows us to focus our marketing on key audiences and fewer shows. And when it comes to marketing, we also leverage our huge O&O linear and digital footprint to promote our content at scale. In fact, in the United States, our O&O platforms have contributed over 30% of incremental Paramount+ starts since 2022.

As a result, we also expect to see significant improvement in marketing spend as a percentage of revenue in 2024. In closing, I want to underscore what we have said previously that we expect 2023 to be our peak year of D2C investment with significant growth in consolidated earnings in 2024. We remain confident that the strategy we put in place will enable us to maximize earnings from our traditional networks while successfully building a profitable streaming business. Moreover, successfully navigating this transition positions Paramount for long-term growth and shareholder value creation. With that, let’s open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question today goes to Jessica Reif Ehrlich of Bank of America Securities. Jessica, please go ahead. Your line is open.

Jessica Reif Ehrlich: Thank you. Hi, everybody. You – since you talked about a lot, but just focused on asset sales. With the sale of Simon & Schuster, you said you’d pay down debt. Can you give us an update on other potential asset sales, including BET or anything else? It just feels like this is time where industry assets may move around. Other companies have talked about maybe doing stuff with their sports portfolio, linear assets. Can you just talk about where you see your assets in the next couple of years and what you would do with the proceeds?

Bob Bakish: Yes. Sure, Jessica. Let me take that. 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 to our mission of creating and monetizing world-class video entertainment. And we think we found a very good home for S&S with KKR. Importantly, this transaction checks all the boxes from a financial perspective. We’re selling the asset at an accretive valuation and the deal will meaningfully help de-lever our balance sheet. And 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.

And 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.

Kristin Southey: Thank you. Operator?

Operator: The next question goes to Michael Morris of Guggenheim. Michael, please go ahead. Your line is open.

Michael Morris: Thank you. Good afternoon. I want to ask you maybe a couple of questions about the direct-to-consumer business. I appreciate all the details you just gave us. First, so your subscription revenue growth in the second quarter outpaced your subscriber growth. So it seems like you’re already seeing that ARPU benefit or ARPU acceleration. Can you talk about what drove the acceleration in the second quarter. And then as we look to the back half of the year, I know this year is – you’ve guided us to peak losses, but given these top line drivers and the fact that you’re already pretty similar year-over-year in your level of losses, what’s going up on the cost side in the back half of the year that’s making you think that 2023 will be peak losses instead of ‘22?

And maybe if I could just ask lastly, strategically, Bob, there is some discussion about potentially seeing different media companies looking to possibly bundle their streaming services in the future for consumer benefit. Do you see that on the horizon? Is that something that you think could happen? Thanks.

Bob Bakish: Yes. Sure, Mike. Let me take the second part and then have Naveen talk about the first part. So on the bundling side, I mean, 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 enter the streaming space, bundling is part of our strategy. And we’ve really pursued it in different ways. We, for example, bundled Paramount+ with Showtime originally as a price bundle than 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 pursued hard bundles, that is bundling Paramount+ in as part of a, if you will, peer that an MVPD might offer.