Thursday, February 09, 2017

Viacom Reports First Quarter Results and Provides Strategic Update

Quarterly Revenues Return to Growth, 5% Increase Driven by Domestic Affiliate Performance, Continued International Strength and Theatrical Revenue Gains


Operating Cash Flow Increased to $159 Million, Improvement of $285 Million


Company Presents New Strategic Plan, Including Focus on Six Priority Flagship Brands and Deeper Integration of Paramount Pictures


Viacom Inc. (NASDAQ: VIAB, VIA), the parent company of the Nickelodeon brand, today reported financial results for the first quarter of fiscal 2017 ended December 31, 2016 and provided an update on strategic priorities.


Bob Bakish, President and Chief Executive Officer, said, "Today we share a strategy that will enable Viacom to realize the full potential of its premier global portfolio of entertainment brands. Building on our leading domestic and growing international footprint, this strategy will expand the depth and reach of our flagship brands across multiple platforms and around the world, while also providing for more competitive differentiation and increased adaptability for our business overall. There is much work to be done, but we are confident we have the plan and people to take our brands to greater heights and build a bright future for our company.”

“Viacom’s first quarter results reflect improvement in our core businesses, with increases in revenues and operating cash flow, continued strong international performance, including initial contributions from the acquisition of Telefe, and a return to positive growth in affiliate revenues. We are already benefiting from changes made early in the second quarter and seeing green shoots in our strongest businesses, as well as those that are poised for a turnaround. As we implement our strategy across the company, we believe we can drive significant value for shareholders.”


Revenues in the first fiscal quarter were $3.32 billion, an increase of 5%, or $170 million, compared to the previous year. This increase reflects improved theatrical revenues, a return to growth in domestic affiliate revenues, continued strength internationally and ancillary revenue growth. Operating income declined 16% to $706 million, and adjusted operating income declined 11% to $748 million. Reported operating income reflects restructuring costs related to executive severance incurred in the first fiscal quarter. Net earnings attributable to Viacom declined to $396 million, and adjusted net earnings attributable to Viacom declined to $413 million. Diluted earnings per share for the quarter declined to $1.00, and adjusted diluted earnings per share to $1.04.

MEDIA NETWORKS

Media Networks revenues increased 1% to $2.59 billion. Excluding the adverse 2% impact of foreign exchange, worldwide revenues increased 3%, including a 1-percentage point favorable impact from the acquisition of Telefe. Domestic revenues remained flat at $2.06 billion, while international revenues grew 5% to $534 million.

Affiliate revenues improved 2% to $1.14 billion, with domestic and international affiliate revenues increasing 2% to $985 million and 3% to $159 million respectively. The increase in domestic revenues reflects rate increases and the impact of SVOD and other OTT agreements, partially offset by a modest decline in subscribers. The increase in international revenues reflects the impact of rate increases, subscriber growth and new channel launches, as well as SVOD and other OTT agreements. Excluding an unfavorable 9-percentage point foreign exchange impact, international affiliate revenues increased 12%.

Advertising revenues declined 2% to $1.29 billion, as a 1% increase in international advertising revenues was more than offset by a 3% decrease in domestic advertising revenues. The decline in domestic advertising revenues reflects softer ratings at certain networks, but were positively impacted by higher pricing. Excluding a 15-percentage point unfavorable impact of foreign exchange, international advertising revenues increased 16%, driven by the acquisition of Telefe and growth in Europe.

Ancillary Revenues increased 20%, to $151 million in the quarter. Domestic ancillary revenues increased 10%, principally driven by higher home video sales. International ancillary revenues increased 33%, reflecting growth in consumer product revenue.

Media Networks reported adjusted operating income of $987 million, compared to $1.06 billion in the first fiscal quarter of 2016, representing a decline of 7% and reflecting increased programming expenses.

Performance highlights:


* Nickelodeon extended its winning streak in all major kids’ demos (#1 with kids 2-11 and kids 2-5 for six quarters), taking the #1 spot with ages 6-11, its best performance in this demo in five years. Nickelodeon’s performance this quarter was buoyed by the launch of more than 140 new episodes of new and returning series and specials

* MTV closed the quarter with a strong December, showing its first ratings growth since 2014

* At Comedy Central, The Daily Show wrapped the year on a ratings high for Trevor Noah, driven by debate and election coverage. The show was #1 with millennial men for the 5th consecutive quarter and ranked #2 with all millennials for the first quarter

* Affiliate revenues returned to positive growth with increases both domestically and in international markets

* Domestic advertising revenue performance improved 500 basis points versus Q4 2016

* International revenues increased 5%, with gains in advertising, affiliate and ancillary revenue

FILMED ENTERTAINMENT

Filmed Entertainment revenues grew 24% to $758 million. The increase was primarily driven by improved theatrical revenues of $192 million, an increase of 104%. Domestic theatrical revenues increased 128% and international theatrical revenues increased 73%. Foreign exchange had a 3-percentage point unfavorable impact on international theatrical revenues.

Licensing revenues grew 3% to $245 million in the quarter. Domestic licensing revenues increased 41%, primarily driven by the release of television product, while international licensing revenues decreased 17%.

Home entertainment revenues increased 2% to $243 million in the quarter. Domestic home entertainment revenues increased 12% on strong holiday sales, while international home entertainment revenues decreased 14%. Foreign exchange had a 6-percentage point unfavorable impact on international home entertainment revenues.

Ancillary revenues increased 86% to $78 million. Domestic ancillary revenues increased 109%, driven by the impact of a film slate co-financing agreement signed in the quarter. International ancillary revenues increased 10%.

Filmed Entertainment reported an adjusted operating loss of $180 million in the quarter, a decline of 23%, largely due to the timing of marketing expenses for fiscal 2017 theatrical titles.

Performance highlights:

* Revenue growth extended across all business units: theatrical, home entertainment, licensing and ancillary

* Unprecedented three-year strategic agreement closed with Shanghai Film Group and Huahua Media to co-finance approximately twenty-five percent of the value of Paramount’s slate of films for a three-year period, with an option for an additional year

* Paramount Television continues its strong growth with 14 shows ordered to production and over 50 projects in development

* Strong recognition for Paramount’s films included 18 Academy Awards nominations, three Screen Actors Guild Awards and a Golden Globe

BALANCE SHEET AND LIQUIDITY

At December 31, 2016, total debt outstanding was $12.30 billion, compared with $11.91 billion at September 30, 2016. In October 2016, the Company issued $400 million in aggregate principal amount of 2.250% senior notes due 2022 and $900 million in aggregate principal amount of 3.450% senior notes due 2026. A portion of the proceeds was utilized in November 2016 for the redemption of all $400 million of the Company's outstanding 2.500% senior notes due December 2016 and all $500 million of the Company's outstanding 3.500% senior notes due April 2017. The Company’s cash balances were $443 million at December 31, 2016, an increase from $379 million at September 30, 2016. Operating cash flow grew to $159 million in the quarter, an increase of $285 million compared with the prior year.

STRATEGIC UPDATE

Today Viacom also provided an update on the Company’s strategic priorities following a comprehensive review of its operations and performance. Going forward, Viacom will be focused on a five-point plan to:

1. Put the full power of Viacom behind six flagship brands: BET, Comedy Central, MTV, Nickelodeon, Nick Jr. and Paramount

2. Revitalize and elevate approach to content and talent

3. Deepen partnerships to drive traditional revenue

4. Make big moves in the digital world and physical world

5. Continue to optimize and energize the organization

Viacom’s flagship brands will be the company’s highest priorities and will benefit from significant and increased resource commitments. These six brands each have compelling, valuable and distinct brand propositions. They serve diverse, substantial audiences with largely-owned content, have global reach and distribution potential across linear, digital, film, and consumer products, events and experiences. Viacom’s other brands - some of which hold strong positions in their categories and maintain diverse and loyal followings - will be realigned to reinforce the six flagship brands.

The company has also identified opportunities to bring the best of Paramount to the network business, and the best of the network business to Paramount. Paramount’s film slate will now include co-branded releases from each of the flagships, along with Paramount branded films focused on franchises, tentpoles and other projects. In an initial step, the company today is announcing a commitment between Nickelodeon and Paramount to move forward on a slate of four films. The first of these films, Amusement Park, will premiere in theaters in summer 2018 and will launch a TV series on Nickelodeon the following year.

Additionally, Spike will be rebranded in early 2018 as The Paramount Network, and will serve as Viacom’s premier general entertainment brand. The Paramount Network will take Spike’s strong and growing programming expertise and amplify it with the globally-recognized Paramount brand - an iconic symbol of cinematic production with a history of rich, compelling storytelling. The network will leverage the very best in Viacom original scripted and non-scripted programming, and incorporate even more high-quality original and third party programming.

Viacom today announced plans to invest in new content experiences, and will establish its first ever dedicated short-form content unit, building on existing programming as well as all-new original IP. In addition, the company plans to further extend the reach of Viacom’s brands through live experiences and consumer products - creating valuable new channels for marketing, talent development and connecting with audiences.

In order to drive the scale, market strength and financial flexibility Viacom needs to be successful, the company is refocusing its approach to partnerships and is committing to deeper, more client-centric relationships with distribution and advertising partners. These partnerships may include working with distributors to create new and improved pay TV experiences or broadening advertising offerings to include unmatched cross-portfolio access.

These strategic priorities will be discussed in greater depth on today’s investor call.

About Viacom

Viacom is home to premier global media brands that create compelling television programs, motion pictures, short-form content, apps, games, consumer products, social media experiences, and other entertainment content for audiences in more than 180 countries. Viacom's media networks, including Nickelodeon, Comedy Central, MTV, VH1, Spike, BET, CMT, TV Land, Nick at Nite, Nick Jr., Logo, Nicktoons, TeenNick, Channel 5 (UK), Telefe (Argentina) and Paramount Channel, reach over 3.9 billion cumulative television subscribers worldwide. Paramount Pictures is a major global producer and distributor of filmed entertainment.

For more information about Viacom and its businesses, visit www.viacom.com. Viacom may also use social media channels to communicate with its investors and the public about the company, its brands and other matters, and those communications could be deemed to be material information. Investors and others are encouraged to review posts on Viacom’s company blog (blog.viacom.com), Twitter feed (twitter.com/viacom) and Facebook page (facebook.com/viacom).

Cautionary Statement Concerning Forward-Looking Statements

This news release contains both historical and forward-looking statements. All statements that are not statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements reflect our current expectations concerning future results, objectives, plans and goals, and involve known and unknown risks, uncertainties and other factors that are difficult to predict and which may cause future results, performance or achievements to differ. These risks, uncertainties and other factors include, among others: the effect of recent changes in management and our board of directors; the public acceptance of our brands, programs, motion pictures and other entertainment content on the various platforms on which they are distributed; the impact of inadequate audience measurement on our program ratings and advertising and affiliate revenues; technological developments and their effect in our markets and on consumer behavior; competition for content, audiences, advertising and distribution; the impact of piracy; economic fluctuations in advertising and retail markets, and economic conditions generally; fluctuations in our results due to the timing, mix, number and availability of our motion pictures and other programming; the potential for loss of carriage or other reduction in the distribution of our content; changes in the Federal communications or other laws and regulations; evolving cybersecurity and similar risks; other domestic and global economic, business, competitive and/or regulatory factors affecting our businesses generally; and other factors described in our news releases and filings with the Securities and Exchange Commission, including but not limited to our 2016 Annual Report on Form 10-K and reports on Form 10-Q and Form 8-K. The forward-looking statements included in this document are made only as of the date of this document, and we do not have any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances. If applicable, reconciliations for any non-GAAP financial information contained in this news release are included in this news release or available on our website at http://www.viacom.com.

You can read Viacom's press release announcing the company's Q1 2017 quarterly earnings in full, including tables of Viacom's statements and balance sheets, here on BusinessWire.com.

As Viacom reports their Q1 2017 earnings today, it’s fair to say that Viacom brands are killing it.

Behind smash hits such as Henry Danger, The Thundermans and The Loud House, Nickelodeon has spent 79 consecutive weeks at the top spot in its core demo.

South Park, sharp and loud as ever in its 20th season, led all of TV in its time slot among male viewers, while Trevor Noah racked up his most-watched quarter since he joined The Daily Show behind his biting coverage of the presidential election and beyond.

BET’s Hip Hop Awards and Soul Train Awards were the top two cable award shows for the quarter.

Flip through the deck below to see what’s happening with all of Viacom's brands, from newly acquired Argentinian giant Telefe to Paramount Pictures to a surging MTV. Viacom's also included clips from some of the upcoming projects they're most excited about. For more business results, visit Viacom's Investor Relations page on viacom.com.



Check out Viacom Q1 2017 programming highlights with this interactive calendar!:



Below is Viacom's Q1 2017 Results Earnings Call Transcript, in which Viacom Management discusses the company's Q1 2017 Results, featuring the bits about Nickelodeon, from Seeking Alpha:

Viacom's (VIAB) CEO Bob Bakish On Q1 2017 Results - Earnings Call Transcript

[...]

Jim Bombassei

Good morning, everyone and thank you for taking the time to join us for our December quarter earnings call. Joining me for today’s discussion are Bob Bakish, our President and CEO; and Wade Davis, 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 number two 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.

Today’s remarks will focus on adjusted results. Reconciliation for non-GAAP financial information discussed on this call can be found in our earnings release or on our website.

And now, I’ll turn the call over to Bob.

Bob Bakish

Thanks, Jim, and thanks to everyone for joining us today. It’s early days in our effort to chart a new course for Viacom, but I’m happy to say, we made solid initial progress financially and operationally in the first quarter, and we made excellent progress on our go forward strategy.

Financially, we generated good momentum in the quarter including a return to revenue growth in our Media Networks and Filmed Entertainment segments. An increase in affiliate revenue and strength in our international operations drove top line growth in our Media Networks, while a stronger slate at Paramount drove greater returns at the box office. Of course, we still have work to do. Operating income declined in the quarter due largely to increased programming expenses at the networks and marketing costs at Paramount.

Operationally, we’ve quickly made strides against our most-immediate priorities in my first two months on the job. First, and broadly speaking, we’ve done a lot of work strengthening the management team. With important new leadership announcements across Paramount Pictures, our domestic networks Viacom International Media Networks and U.S. distribution. Second and speaking of U.S. distribution, beginning the work of strengthening our distribution partnerships has been a key area of focus. I’ve been spending time with a number of these clients and the team under new leadership is already at work pursuing broader, more forward thinking partnerships that reinforce the value of the pay TV ecosystem and our brands, and the take advantage of some assets that previously were not part of the equation.

Third, MTV has been a key focus where already our new leadership is making progress. The new team is working quickly to stabilize the grid and provide a stronger foundation from which to launch new series as it continues to jump start the development pipeline. Fourth, over Paramount, our new COO is now in the lot and we completed an important agreement with Shanghai Film Group and Huahua Media, giving Paramount two new strategic partners in China and a deal that we estimate could bring as much as $1 billion of slate funding to the studio. On a related note, I would like to extend a well-deserved word of congratulations to the studio for receiving 18 Oscar nominations for seven of its 2016 releases.

That said, the financial performance of the studio in that quarter was a significant disappointment. But nevertheless, we will continue to be very focused on strengthening Paramount, particularly as we evolve our strategy; more on that in a bit. Finally, we rapidly unlocked value from our Telefe acquisition, boosting rating significantly with the new Nick Jr. block, driving MTV up in the rankings with a hit new series that airs daily across MTV and Telefe, and bringing a major new consumer product to advertiser to our pay networks.

As we strengthened our team and attacked our media priorities, I also engaged dozens of our top leaders around the Company to develop an overall go forward strategy for Viacom, a strategy that captures the opportunities we see to better harness the power of our portfolio, strengthen our relationships with our partners, and enhance our ability to create great content, and one that will strengthen the Company overall and return us to growth.

We presented to and received resounding support from the Viacom Board on that strategy earlier this week, and I want to share with you the highlights today. But before I do, let’s turn it over to Wade for a look at the financials.

Wade Davis

Thanks Bob, and good morning. We’re pleased to report our financial results for the December quarter of fiscal 2017 which are highlighted by our progress along certain key operating metrics and initiatives. In the quarter, we returned to revenue growth at both Media Networks and Filmed Entertainment and we saw significant improvement in free cash flow generation. We also took steps to extend our near-term maturities to enhance our liquidity profile, and we entered into a multiyear slate financing deal which helps derisk Paramount’s current and future slate and reduce the capital we deploy in the film business.

In addition, on slide five of our earnings presentation, we have provided a breakdown of Media Networks domestic versus international revenue. So, we hope you find the additional disclosure helpful. With that, I’ll turn to our operating results.

In terms of consolidated results, Viacom generated revenue of $3.3 billion, a 5% increase over the prior year, and adjusted operating income of $748 million. We generated adjusted earnings per share of $1.04. Our return to top line growth was driven by growth in domestic affiliate revenues, continued strength at our international operations, and robust theatrical revenues. We also generated operating free cash flow of $113 million in the quarter, an improvement of $265 million versus the prior year.

Slide four of our web deck provides a financial overview of our Media Networks segment. Revenues for the quarter increased by 1% to $2.6 billion while adjusted operating income declined to $987 million. Worldwide advertising revenues declined 2% while affiliate revenues increased 2% and ancillary revenues increased 20%. Excluding a two-percentage-point unfavorable impact from foreign exchange and a one-percentage-point positive impact from the November acquisition of Telefe, worldwide revenues increased 2%.

Slide five of our web deck provides a breakdown of our Media Networks’ domestic and international revenue performance. Domestic revenues largely flat at $2.1 billion, and we had another strong quarter at our international operations as revenues increased by 5% to $534 million. On an organic basis, if we exclude a 13-percentage-point unfavorable foreign currency impact and eight-percentage-point positive impact from the Telefe acquisition, international revenue grew 10%.

At our domestic Media Networks business, we saw return to growth in affiliate revenues as well as strong growth in ancillary revenues. The growth of 2% in domestic affiliate revenues reflects rate increases and the impact of SVOD and OTT agreements, partially offset by a modest decline in pay TV subscribers. The 10% increase in domestic ancillary revenues was driven by higher home video revenue.

Domestic advertising declined 3% in the quarter, consistent with our guidance of 500 basis-point sequential improvement. International advertising revenues increased 1% in the quarter. Organically, if we exclude a 15-percentage-point unfavorable impact from foreign currency and a 10-percentage-point positive impact from the acquisition of Telefe, international advertising revenues grew 6%, reflecting the continued strength in Europe.

International affiliate revenues increased 3%. Excluding a 9-percentage-point unfavorable impact from foreign currency, international affiliate revenues increased 12%. The growth reflects the impact of rate increases, subscriber growth, and new channel launches as well as higher revenues from SVOD and OTT arrangements.

International ancillary revenues were up 33% due primarily to strong growth in our international consumer products business as well as program sales resulting from our acquisition of Telefe. Growth in consumer products was driven by the strength of our kids’ brands, including Paw Patrol and Blaze and the Monster Machines.

Worldwide expenses increased 6% in the quarter; within operating expenses, programming expenses up 6% while distribution and other expense decreased 3%. SG&A expense increased 9% in the quarter. Excluding a 2-percentage-point increase attributable to Telefe, worldwide expenses increased 4%. The increase in programming expense in the quarter was principally driven by our investment in original programming. The increase in SG&A costs was principally due to the higher incentive compensation accrual.

Overall, we are pleased with the progress we’re making at Media Networks. With the changes we’ve made so far as well as the strategy for the brands that Bob will outline, we believe that our Media Networks are well-positioned for future growth.

Now, turning to Paramount. As I mentioned earlier, we have taken steps to derisk the 2017 slate and enhance cash flow through our slate financing. It is a three-year agreement with an option for a fourth with Shanghai Film Group and Huahua Media to fund 25% of our slate. This agreement will help us to derisk the entire 2017 slate since it’s retroactive to the beginning of the fiscal year. The agreement also provides for the potential co-production of Chinese films.

Now, turning to our results for the quarter. Filmed Entertainment revenues increased 24%, principally driven by gains in theatrical and ancillary revenues. Slide six of the earnings presentation provides the breakdown of Filmed Entertainment revenues. Theatrical revenues increased 104% or $192 million due to our current quarter releases, including Jack Reacher: Never Go Back; Ally, Arrival, Office Christmas Party and Fences. Ancillary revenues increased 86% to $78 million, driven by the impact of the film slate financing in the quarter.

Filmed Entertainment generated an adjusted operating of loss of $180 million in the quarter, reflecting higher print and advertising costs related to the release of our Q1 fiscal 2017 theatrical releases.

Now turning to taxes. The adjusted effective tax rate was 30.8% compared to 32.8% in the prior year. This is driven by the mix of domestic and international income. Slide 10 of the earnings presentation provides the components of free cash flow. For the quarter, we generated $113 million of operating free cash flow, a $265 million improvement versus the prior year. The improvement in free cash flow versus the prior year was principally due to lower working capital utilization, reflecting the timing of film and programming spend.

Now, looking at our debt on slide nine. It remains principally fixed rate with an average cost at quarter end of 4.5%. We had $12.3 billion of total debt and $443 million cash and cash equivalents. At the end of the quarter, our leverage ratio was 4.1 times.

During the quarter, we took several steps to address our near-term maturities and liquidity needs. In October, we issued $400 million of 2.25% senior notes due 2022 and $900 million of 3.45% senior notes due 2026. The proceeds were used to redeem $400 million outstanding of our 2.5% December 2016 notes and the $500 million outstanding of our 3.5% April 2017 notes. One of our top priorities is to strengthen our balance sheet and optimize our capital structure to support our long-term strategic initiatives. Accordingly, in terms of capital allocation, we plan to use our excess free cash flow and other actions to delever in order to preserve our investment grade rating.

Now, let’s turn to some of the factors impacting the remainder of fiscal 2017. In terms of advertising, we continue to see strong demand in the scatter market, which bodes well for the upfront. Looking forward, we expect the shift of the Easter holiday into the June quarter of this year will have a negative impact of around 100 basis points on the March quarter domestic ad sales performance. Excluding this impact, we anticipate March quarter domestic ad sales performance would be similar to December quarter.

As for domestic affiliate revenues, in terms of March quarter, we expect to see revenue growth in the low single digits. For the full year, we continue to expect that the growth rate for Media Networks programming expense will be in the mid to high single digits including factoring in the impact of the acquisition of Telefe.

For the full year, Media Networks SG&A expense, we expect the organic growth rate will be in the mid single digits. However, including the acquisition of Telefe, reported SG&A expense will grow in the high single digits primarily due to onetime integration costs. Media Networks performance in the December quarter benefitted from the growth in revenues as well as the timing of expenses as certain show launches moved out of the quarter. Accordingly, given the timing of shows coming on air as well as the onetime cost associated with the integration of Telefe, we anticipate programming and SG&A expense growth to be weighted to the March quarter.

At Filmed Entertainment, our December quarter benefitted from slate financing and the box office performance of certain of our releases. In the March quarter-to-date, some of the box office performance has been somewhat soft; so the benefits we saw in the December quarter will not flow through for the year.

In terms of taxes, for 2017, we’re forecasting a book tax rate of approximately 31%. We will refine this as we go through the year and get a better sense of the domestic versus international profitability mix.

Looking forward, we are excited to execute on the strategic plan that Bob will be outlining for you. Changes at Media Networks are already starting to generate early returns. We are focused on returning key revenue streams to growth, improving our earnings, and driving free cash flow generation. We expect to continue to see improvement as we execute on our strategic plan.

With that, I would like to turn the call back over to Bob.

Bob Bakish

Thanks, Wade. Now, let’s get into the strategy. Having undertaking a comprehensive review of our business, we arrived at four underlying needs for Viacom. We need more focus. We have to align the Company against areas where we can have the greatest impact. We need to be distinct. Our brands, content and culture must truly be unique and differentiated. We need to unlock the benefits of our scale. We need to better harness the power of our portfolio and grow our competitive strength. And finally, we need to be more adaptable. We need to flex the market shifts, create new opportunities, and strengthen partnerships.

With these in mind, we’ve established a new five-point strategic plan. We will, one, put the full power of Viacom behind six flagship brands; two, revitalize and elevate our approach to content and talent development; three deepen partnerships to drive traditional revenue streams; four, make big moves in the digital world and the physical world; and five, continue to optimize and energize our organization.

First, let’s talk about flagship brands: A strategic shift we are making to better allocate resources and capture broader opportunities for our brands with the biggest upside. So, what constitutes a flagship brand? A flagship brand must have a compelling, valuable and distinct brand promise; it must resonate with the target audience or in a genre that is big enough to matter; it must have a rich offering comprised largely of wholly-owned content; it must be global; and it must have the ability to deliver at for points of distribution, linear television, digital, off channel, and theatrical. So, here are the flagship six: Nickelodeon, Nick Jr., MTV, BET, Comedy Central and Paramount. I am excited to say, we will bring a set of our TV brands to film and our film brand to TV in a major way.

With regards to the first part, TV brands to film. We plan for each of our flagship brands to contribute 1 to 2 cobranded films to the Paramount slate each year with the brand and the studio working collaboratively to source and develop projects for the studio to ultimately green light. As we do all this, note that a significant part of the slate will remain under the Paramount brand with the focus on franchises and tentpoles among other projects.

Let’s look at this approach through the lens of Nickelodeon, a case study of what a flagship brand looks like when firing on all cylinders. The network has firmly established its dominance on TV with kids, finishing the 2016 calendar year as a number one network for kids and basic cable’s top entertainment network. Nick was number one in the December quarter with every major kids demo, 2 to 11, 2 to 5, and 6 to 11 where it notched its first win in more than five years, and it shows no signs of slowing down, with the content pipeline of more than 650 episodes a year, almost entirely wholly-owned, highly exportable content across live action, animation and pre-school. All of that IP sees a multi-billion dollar consumer products business at retail and a growing stable of live tours and events. And as part of our new strategy, I am pleased to announce that Nickelodeon and Paramount are moving forward on a new slate of four films through 2020 that will leverage existing and introduce new Nickelodeon IP.

The first of these films, Amusement Park, an animated feature with Jennifer Garner and Mila Kunis will premier in theatres in summer of 2018 and it will get a TV series on Nick, the following year. And there are additional films including those associated with existing Nickelodeon franchises right behind it.

So, the strategy is not just an idea, we are already moving on it, and know that we are currently putting a structure in place to operationalize this approach across our flagship brands and the studio.

I am also excited to announce that we will be bringing the Paramount brand to TV in a big way by rebranding our U.S. Spike Network in 2018 as the Paramount Network. Adopting the Paramount name and fortifying its programming is a natural way for Spike to strengthen its position as a major general entertainment network which will enhance our adult audience delivery and enable us to grow this important sector of the ad market.

Internationally, we’ve been very successful in capitalizing on the marquee Paramount brand to offer general entertainment channels that feature high-quality programming, movies and documentaries. In fact, the Paramount channel is already the largest ad supported movie channel in the world.

Now, I want to be clear that Viacom has some very important and high-performing brands beyond the flagship six, branded networks that hold strong positions in their categories and maintaining diverse and loyal followings. They will not go away, but they don’t necessarily have global or theatrical potential, and they won’t benefit from an increased resource commitment. We see these as reinforcing brands. And VH1, Logo, TV Land, and CMT have already been realigned within our organization to reinforce the flagship six.

Moving to our next strategic point, maximizing our approach to content and talent development. Historically, Viacom’s brands were set up and operated in a very distributed siloed manner. In the past decade, we’ve inched towards a more holistic approach, but have never fully committed to it in the way we must to be successful in this environment. So, we are going to change that, beginning by prioritizing investment to the flagship six, then sharpening creative filters and program and to make sure the brands remain distinct and complementary, accelerating global opportunities and implementing a more holistic approach to scheduling, marketing and digital. As we do that, we will increase the volume of originals and push more aggressively into new format and life. And we want to share ideas more aggressively across borders for our flagship brands. Nickelodeon is already very established in this model, and MTV is moving quickly with MTV U.S. now developing several MTV U.K. formats.

We also need to transform the way we work with talent. We need to do a much better job of keeping our homegrown talent in the Viacom ecosystem, creating new opportunities for our starts across networks and at Paramount with our new branded film slates. Comedy Central is launching 10 new series this year, more than it ever has, representing the biggest influx of new talent to the brand since it introduced the likes of Amy Schumer and Key & Peele.

We are acutely focused on providing divorce opportunities for this talent to create and grow their careers under our roof. Trevor Noah is a great example. The daily show lapped the year on a ratings high with its most watched and highest rated quarter ever for Trevor among total viewers and adults 18 to 49. We are collaborating across our portfolio to drive greater growth to Trevor, harnessing greater support from our domestic networks and localizing the format internationally.

Our third strategic area of focus is deepening partnerships to drive traditional revenue streams. To drive the scale, strength and flexibility we need, we need to emphasize partnership more than this Company ever has. With the traditional MVPDs, we are focused on cultivating true strategic partnerships that reposition our brands and push the industry forward, rather than the transactional relationships restricted to zero sum economic negotiation. To that end, we are focused on leveraging our data, products, ad sales, and marketing expertise to help grow their businesses. We will also reinforce the pay TV ecosystem by being highly selective in striking agreements with over the top distributors, confining those deals to largely library content. We do want to support the success of virtual MVPDs, as we have with partners like Sling and DIRECTV Now, and embrace their roles as catalyst for innovation.

In ad sales, we’ll build up our leadership in data-driven products and branded entertainment, but we will also create more value through tighter alignment across the portfolio. For instance, we are heading into the upfront with the most comprehensive cross-portfolio package Viacom has ever offered, a product we call Epic. It spans 9 networks, 20 tentpoles and 60 returning series.

Moving on to the fourth point, we are going to make big moves in the digital and the physical world. In digital, short-form video has clearly emerged as a dominant medium. And because it is video, it is an area where we have inherent strength and capabilities. But like another areas, our lack of a holistic unified approach to short-form content development and distribution, has held up back. To fix this, we are creating a new business unit focused on producing short-form content, both original IP and leveraging our brands. We will aggressively grow short-form output at our flagship brands for distribution by both our owned and operated, as well as third party platforms. This will allow Viacom to better serve increasing demand from our advertisers for this kind of inventory and better support our brands.

We also want to create more and stronger expressions of our brands in the physical world. This is a necessary and valuable tool for marketing, talent development and extending our consumer connections, and it is an incremental business. Take MTV outside the U.S. for example. Last year, over 1 million people went to an MTV event. That’s great for the brand, and we made money doing it, and we’re working to expand and grow this business.

Comedy Central in the U.S., for example, will enter the festival space this summer in partnership with Superfly, the company behind Bonnaroo. This is a big opportunity for Comedy Central to grow its standing as a dominant comedy brand in the U.S., and it creates greater opportunities for Comedy Central’s roster of emerging standup comedians, many of whom moved into our development pipeline with new series.

We also think there is a big opportunity to grow Bellator. And rebranding Spike to the Paramount Network will help us capitalize on that. Taken together, we believe these digital and physical opportunities represent important incremental revenue streams, and they reinforce our brand and IP.

And fifth and finally, we are continuing to optimize and energize our organization. We are rethinking our operations to allow for better collaboration across our portfolio as well as more holistic relationships with our partners. And as we do this, we have the opportunity to realign the organization to build future growth.

We are also very-focused on culture, and establishing a shared vision and values that elevate the very best of what Viacom has offered in its proud successful history. It’s a history that I am confident we will build on. By staying focused as a portfolio but flexible in our approach to the market, we will build scale, be even more competitive, and evolve Viacom into the premier portfolio of global multi-platform entertainment brands.

As we do, we’ll be focused on driving growth and earnings and free cash flow as key metrics of our progress, and on delivering value for our shareholders. Thank you for your continued support.

And with that, let me turn it over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take our first question from Doug Mitchelson with UBS.

[...]

Doug Mitchelson

If I can just follow up with how long do you think before you believe the Company will really hit to stride over this plan?

Bob Bakish

What I’ve been focused on since day one is forward movement in the Company, and that will absolutely remain a focus. Now some things can happen relatively quickly, some things take a little more time. For example, a film from the day it’s conceived to the day it releases, you look at it like 2, 2.5 years. So that does take some time. Thankfully, we have some Nickelodeon products already in the pipeline that we could all get behind and move on. Other things will happen more quickly. I continue to be pleased with the MTV U.S. journey for example. And if you look at what’s going on there, clearly, we’ll be talking about a whole new slate in the upfront; that we’ll be launching in the fourth fiscal quarter. So, that is a much more nearer term opportunity. But again, overall, you can think of that as a steady march towards a revitalized Viacom, and you will see continued progress.

Doug Mitchelson

Thank you, very interesting.

[...]

Operator

We’ll take our final question from Anthony DiClemente with Nomura Instinet.

Anthony DiClemente

Thank you very much. I just wanted to ask about, again, the flagship six, kind of a follow-up on that strategy, and the implications for that in terms of negotiations with your distributors. Bob, you said it a second ago that it’s not a light switch for those to be kind of shutting down. But, over time, over a longer period of time, is the idea that as the value proposition improves for the flagship six, that affiliate fees for those networks specifically will go up? It’s, I guess, hard to argue that affiliates use per network for like a VH1 will go up, if you’re deemphasizing that. So, I just wanted to get the long-term economic implications of the flagship six strategy with your affiliate agreements.

Bob Bakish

Yes. So, look, it’s very early days to get into a very specific financial discussion around how components of the P&L may evolve over the next X years. Suffice it to say, we believe the strategy strengthens Viacom’s position across a range of considerations on a going forward basis. We believe it will, among other things, benefit our distribution clients by making these brands stronger and having their consumers serve even better. And by the way, by having these non-television attributes, it also provides us opportunities to work with our distribution clients in different ways. For example, as Nickelodeon has this increasing life in the physical world, there is an opportunity for subscribers to MVPDs, either on a Sweepstakes or some other basis to enjoy those experiences. As you get into film business, there is opportunities for consumers of pay TV to get some unique experiences. So, there is a variety of opportunities that are a function of this strategy. And again, our overall focus with respect to distribution -- and that seems to be at the core of your question, is now working to broaden and strengthen our partnership with these very important clients.

Wade Davis

Just to follow up on the economics. Historically, we’ve really always gotten paid for the portfolio. And this is a move that’s designed to strengthen the portfolio. These networks, as Bob said, are not going to go away; they are going to move into supporting roles, helping to strengthen the flagship six which we think again is going to strengthen the portfolio and create more opportunities. And just to reference what Bob said earlier, as we move potentially towards entertainment packs and products like that, this will be a must have element, cornerstone of the entertainment viewership in the pay TV landscape. So, again, it’s really about the portfolio as a whole, portfolio management, and we’re confident that that’s going to be a better value proposition overall.

Bob Bakish

And just to add one other sort of element to the discussion, a number people have asked me, why did CMT and TV Land move under Spike, now the Paramount Network? And the answer is very simple which is all three of those networks have pretty balanced male, female audiences targeted adult demographics and therefore, we believe can benefit in terms of co-management. And that’s another example of our assets being a way to support the flagship six. It doesn’t necessarily mean all the other things get rebranded to flagship six. I don’t want anyone to think that. But it means, working as a portfolio to reinforce an overall strategy that will strengthen our position, again, across a variety of dimensions.

Jim Bombassei

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

Bob Bakish

Thank you.

Operator

This does conclude today’s conference call. Thank you all for your participation. And you may now disconnect.

--Ends--

Additional source: Blog.Viacom
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