Paramount Global (PARA) 2019 Q4 法說會逐字稿

Good day, everyone, and welcome to the ViacomCBS Conference Call.

Today's call is being recorded.

At this time, I'd like to turn the call over to Executive Vice President of Investor Relations, Mr. Anthony DiClemente.

Please go ahead, sir.

Good morning, everyone.

Thank you for taking the time to join us for our fourth quarter and full year 2019 earnings call.

Joining me for today's discussion are Bob Bakish, our President and CEO; and Chris Spade, our CFO.

Please note that in addition to our press release, we have trending schedules containing supplemental information available on our website.

We also have an accompanying slide presentation that you can use in order to follow along with our remarks.

I want to refer you to the second slide in the 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.

Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website.

Now I will turn the call over to Bob.

Good morning, and thank you for joining us for the first ViacomCBS earnings call.

It's been less than 3 months since we completed our merger, and I'm pleased to say we're making significant progress integrating and transforming ViacomCBS as we move quickly to unlock the full power of this now unified company.

This includes organizationally, where we've built a best-in-class management team and consolidated structure; operationally, as we've started executing as a combined entity in a meaningful way, including through sales force consolidation or streamlined groupings of networks as well as integration of digital assets and capabilities; and financially, where cost synergies are already being realized, and our target is being increased from $500 million to $750 million in annualized run rate cost savings.

Importantly, this progress is not reflected in Q4, which, given the timing of our close, is a transitional one and overwhelmingly reflects 2 separate companies executing on separate strategies.

Chris will cover our Q4 and full year results in detail, but let me highlight a few things.

First, there are, as you'd expect, a significant set of merger-related items that were a headwind for expenses and cash flow.

Second, at the operating level from a revenue perspective, certain lines reflect the impact of challenges that will be mitigated in the combined company.

Affiliate is an example here while others, such as ad sales, provide insights into the potential of the company to perform more strongly as we extend capabilities across the portfolio.

Lastly, our operating results reflect the impact of legacy content investment decisions at some business units.

As I will explain in a few minutes, here we are evolving our strategy to significantly improve content ROI and free cash flow.

I'd now like to discuss our strategic vision and priorities for ViacomCBS and what we're going to deliver in 2020, a year where we anticipate delivering revenue growth in the mid-single digits, adjusted OIBDA of $5.8 billion to $6.1 billion, and free cash flow, excluding integration costs, to achieve of $1.8 billion to $2 billion for 2020 with an additional $500 million in free cash flow benefit in 2021.

Let's start at the top.

ViacomCBS is one of the largest content producers and providers in the world.

And that is an incredibly exciting and valuable place to be at a time when both consumer and commercial demand for premium content is only growing.

We have an unrivaled ability to create value through the media ecosystem and to serve the largest addressable audience globally.

We do this by operating our own platforms and by supplying others.

Taken together, we believe ViacomCBS can be the most important content partner in the industry.

Why?

Because first and foremost, we have and make an incredible volume of content through our globe-spanning production capabilities, depth of IP ownership and talent relationships and underpinned by our library of more than 140,000 television episodes and 3,600 film titles, all continually refreshed and grown by over $13 billion annual cash content investment.

In fact, we make content across every genre and format, including news, sports and entertainment, both scripted and unscripted.

And our television reach extends across 4.7 billion cumulative homes in over 180 countries.

And we don't just make content.

We make hits as evidenced by our #1 positions across broadcast and cable viewing in all key audience demographics and our #2 ranking in tubular social media video views in the media and entertainment category, another clear indicator of the power and appeal of our IP.

We also have the ability and flexibility to monetize all this content in a variety of models across both owned and third-party platforms, which we believe is a distinct and important competitive advantage.

And by serving the largest addressable audience across every segment and platform, we're aggressively creating new opportunities to bring our brands and IP to more audiences, extend franchises and grow revenue streams.

Now let's talk more specifically about our 3 priorities for 2020: first, maximize the power of our content; second, unlock more value from our biggest revenue lines; and third, accelerate our momentum in streaming.

First, content.

Our content strategy isn't about spending more.

It's about better aligning the combined company spending with growth potential and maximizing the value of our content, IP and franchises across our now larger asset base.

That means putting the full power of the company behind our biggest priorities.

This includes the massive promotional platform that we can exploit for our own benefit.

Our leadership on and off linear TV, including the largest broadcast footprint in the world and more than 1.5 billion social fans and followers, provides an incredible opportunity to maximize the impact of our biggest priorities from franchises to football, a platform we look forward to deploying, including in support of Super Bowl LV taking place next February.

But it's more than promotional impact.

It also includes focusing on global cross-company franchise management to get the most out of our powerful IP across our brands and platforms.

Take Star Trek as an example, a globally enduring franchise that we will make even bigger.

On the heels of Picard on CBS All Access, which broke all records for total streams and subscriber sign-ups, we're now taking the Star Trek franchise and extending it across the house.

Building on Discovery and Picard, we now have 2 additional series in production at All Access and Nickelodeon and 2 more series in development, plus a series of Picard novels being rolled out at Simon & Schuster and a highly anticipated new Star Trek feature at Paramount.

Very importantly, we're also maximizing the power of our content by applying more rigor to managing our content mix, investment and returns.

In fact, we see this as a significant opportunity to improve some of the cash softness you saw in Q4 and full year 2019.

In 2020, that means prioritizing content investment in streaming and studio production, both of which are growth areas.

At the same time, our linear TV content spend levels will remain consistent with last year, and effectiveness will increase as we shift the mix within networks and increase cross-company utilization to improve ROI.

To demonstrate this strategy at work, I'd like to focus on Showtime, a powerful and important brand with culture-defining hits, but a business that consumed significant working capital in 2019.

Make no mistake, high-end scripted programming enhanced by Billions, Shameless and Homeland will continue to be a key pillar of the brand.

But by shifting some of the content mix, including through new uses of ViacomCBS brands, we can attract subscribers in a more cost effective way.

Take VH1's RuPaul's Drag Race, for example.

With a large and loyal following, we believe this franchise will be additive to Showtime subscriber dynamic, which is why we will air a special new season of RuPaul's Drag Race All Stars on Showtime on a first-window basis.

We're also confident this move will further improve the already strong ROI of this franchise.

And we see an even bigger opportunity to grow Showtime subs by making better use of its plex channels, some of which are currently underutilized.

To that end, we will be rebranding and relaunching Showcase as SHO*BET this summer, featuring African-American scripted series from Showtime and BET as well as popular movies and specials.

We see this as a compelling value-creation play that will allow us to benefit from the growing demand for premium African-American content across platforms.

This brings me to our second strategic priority for 2020, unlocking more value from our biggest revenue lines.

With the expanded ViacomCBS asset base, we see a significant opportunity to drive growth of our own platforms, benefiting affiliate and ad revenue.

This larger asset base, combined with the licensing pullback of some of our competitors, also sets the stage for growth in our content licensing and studio production businesses.

Take distribution.

ViacomCBS, with leading broadcast and entertainment brands and strength in live local news and sports, is a must-have for any distributor.

And by working with partners to deepen and extend our relationships through advanced advertising, broadband products and more, we can continue to grow share, a strategy that will drive growth in the face of macro trends within the industry.

In fact, we've already seen the benefit of our combined portfolio with the recent renewal of our carriage agreement with Comcast, which, by the way, brings CBS All Access to set-top boxes for the first time.

And it's not just TV.

With a diverse and growing theatrical slate from Paramount, we are critical to theaters and the broader film distribution ecosystem too.

Q4 may have been soft for Paramount, but it came after 8 consecutive quarters of year-over-year improvement.

And just look at the huge opening of our current film Sonic, which did approximately $70 million last weekend in the U.S. and Canada alone, and became the biggest opening ever for a video game adaptation.

And we couldn't be more excited for Q2's upcoming and highly anticipated titles, including A Quiet Place Part II, Top Gun: Maverick and the next SpongeBob Movie: Sponge on the Run.

So ViacomCBS is a must-have partner for all types of distributors.

No question.

We're also a must-buy for advertisers.

Our leadership in U.S. reach across linear and digital combined is clear.

Our advanced advertising capabilities continue to scale.

They are in high demand and were a key driver of our domestic cable networks ad growth in Q4 and 2019.

Among other things, this sets us up for a strong upfront, especially as we apply Viacom's advanced ad business across CBS' massive audience reach and as we continue to expand our premium digital video inventory, which is already amongst the largest in the industry.

In content licensing too, ViacomCBS is a critical partner.

I mentioned before, the extensive library of IP we now have.

And importantly, with a single content licensing sales force now in place, we can extract incremental benefit through the packaging of film and television, tailoring offerings to better meet client needs, helping take share while simultaneously being able to support our owned and operated platforms in both linear and streaming.

In content licensing, we're also focused on continuing to unlock the value of our quickly scaling third-party studio production business.

While there are some working capital headwinds in this business in 2020, this is a fundamentally profitable business that we expect to deliver $1.3 billion in revenue for the year with double-digit margins and virtually no risk.

It also allows key franchises to reach more consumers and serves as a component of a multi-faceted franchise development and growth strategy.

And since most of this business is essentially a rental model versus a sale, it also enables us to grow our content and IP library for the long term in an economically efficient way, which means we're also building asset value.

Put it all together, and you'll begin to see why we believe ViacomCBS can become the most important content partner in the media ecosystem.

Finally, our third strategic priority for 2020 is to accelerate our momentum in streaming.

Let me explain how we're approaching the opportunities in the space.

Very importantly, it starts with building on the unique and strong foundation we already have in streaming.

In ad supported, we have the leading free streaming TV service in Pluto TV, with over 22 million monthly active users in the U.S., up 75% year-over-year.

And we expect to exit 2020 with approximately 30 million MAUs domestically.

In pay, our subscription offerings account for more than 11 million domestic subscribers, up 50% year-on-year.

And we expect this to grow to approximately 16 million subscribers as we exit 2020.

The growth we've achieved so far is overwhelmingly in the U.S., but we're making early strides to expand internationally.

Pluto is already in the U.K., Germany, Austria and Switzerland, and it's launching in Latin America next month.

On the pay side, All Access is available in Canada and Australia, and our Paramount Plus and Noggin products are also live in numerous territories.

But our streaming foundation is not just usage, it's also financial.

In 2019, our domestic streaming and digital video business, which includes subscription revenue and digital video advertising, had approximately $1.6 billion in revenue.

We see this as a key metric for ViacomCBS and anticipate it growing between 35% and 40% this year with relatively modest incremental operating expenses.

Of course, the opportunity is much, much larger.

And in pursuing that opportunity, ViacomCBS will take a differentiated approach that builds on our running start, plays to our strength and fulfills unmet audience and partner needs.

Our going-forward approach to streaming is rooted in the belief that the streaming world will evolve similarly to the linear world.

That means it will have free, broad pay and premium pay segments.

And just like in the linear world, we'll have streaming product for each.

By having robust offerings in each segment, we will also have the ability to migrate consumers across them through promotion and bundling, which creates advantages in subscriber acquisition, retention and lifetime value.

Our free offering is Pluto TV, and our premium pay offering is Showtime OTT.

To complete our portfolio, we will take CBS All Access and expand it to be a robust and compelling offering to serve the broad pay streaming segment.

This offer will reaffirm and expand the value of entertainment, news and sports content through on demand and live experiences for audiences around the world, built on the foundation of CBS All Access, including the technology, content and subscriber base, adding substantial content assets in film and television, plus the power of world renowned brands to create, in effect, a combined House of Brands product.

More specifically, we will add significant content from Nickelodeon, Comedy Central, MTV, BET and Smithsonian, in addition to popular films from the Paramount library, and we will do this at scale to the tune of approximately 30,000 episodes of TV and up to 1,000 movies.

This differentiated offering will provide the powerful combination of live linear via over 200 local CBS stations plus on-demand content spanning news, sports, films, drama, reality, kids and more with a global platform and infrastructure from which to market and scale it.

Importantly, know that we have designed this offering to be compatible with the evolving distribution landscape.

We see it as a value-creating opportunity to further broaden our partnerships with traditional distributors akin to our recent Comcast relationship expansion to CBS All Access.

And we also see it as a robust offering for distributors in the broader OTT space, including mobile.

Obviously, we'll be sharing much more information in the months ahead, but we're already hard at work across tech, content, branding, marketing and more to bring this evolved product to life, and we will soft launch the product later this year.

As we execute on each of our priorities for 2020, maximizing the power of our content, unlocking new value from our biggest revenue lines and accelerating our momentum in streaming, we are positioning ViacomCBS to deliver significant shareholder value.

At the same time, we're making nonoperating moves to unlock meaningful value.

These include the divestiture of noncore assets like the sale of Black Rock, which we are in the market with as we speak, in addition to other opportunities we're currently evaluating.

The proceeds of these transactions will be used to delever our balance sheet, buy back stock and further strengthen the financial position of the company.

With that, I'll turn it over to Chris to report on our fourth quarter and full year results and to provide detailed 2020 guidance.

Thank you, Bob, and good morning, everyone.

It's great to be here for our first ViacomCBS earnings call.

As you know, our merger was effective December 4. So our fourth quarter and full year 2019 results largely reflect what Viacom and CBS would have delivered as a separate company.

2020 will express the power of our combination with some of the greatest assets in media and an efficient growth strategy underway, we are strongly equipped to capitalize on our position as a preeminent global content company.

And by maximizing free cash flow from our traditional businesses while prudently investing in our growth areas, we will create long-term value for our shareholders and our stakeholders.

First, I'm going to outline our reporting segments and key revenue types.

Then I will give you more details about our fourth quarter and full year 2019 results.

Finally, I will provide further context about our 2020 guidance and capital allocation strategy.

As you can see in our earnings presentation, ViacomCBS comprises 4 business segments: TV Entertainment, Cable Networks, Filmed Entertainment and Publishing.

We are also presenting 5 key revenue types: advertising, affiliate, content licensing, theatrical and publishing.

And we are providing a breakdown of revenue by type within each of our business segments.

In addition, given the increased prominence of our streaming services, we are giving greater visibility into their performance by providing domestic revenue, subscribers and monthly active users for our fast-growing streaming and digital video business.

Now let me give you more details about our fourth quarter results.

Q4 of 2019 was a transitional quarter.

As a result, we had several merger-related adjustments.

They include $589 million in programming charges, resulting from an evaluation by new management of our content strategies for the now combined company; $268 million in restructuring charges related to our synergy initiatives; and $191 million in other merger-related costs.

In addition, our fourth quarter operating results were primarily affected by several items, including declines in the pay TV universe and legacy Viacom rate resets, lower political spending following our record results in 2018, investments in programming and the timing of content licensing sales.

Importantly, as Bob mentioned, we believe these areas of impact will be substantially mitigated in the combined company as we evolve our strategy to benefit from our collective asset base.

We also delivered growth in a number of key areas during the fourth quarter.

Affiliate revenue increased 1% despite declines in the pay TV landscape.

The growth was driven by retrans and reverse comp, which was up 25% and our subscription streaming revenue, which included a record quarter for subscriber growth at CBS All Access and a record month in December for streaming sign-ups at Showtime.

At the same time, our domestic Cable Networks advertising revenue was up a strong 9%, benefiting from Pluto, which is an integral part of our advanced advertising offering.

So you can see the advantages of our streaming strategy across our company as these services continue to scale.

On a full year basis, our 2019 revenue showed healthy gains.

We delivered total revenue growth of 2% with increases in advertising, affiliate and content licensing.

Advertising was up 2%, driven by CBS' broadcast of Super Bowl LIII and the NCAA Final Four and championship game as well as strong growth in digital advertising, led by Pluto and CBS All Access.

This growth was somewhat offset by FX headwinds as well as lower political advertising.

Affiliate revenue grew 3%, benefiting from a 20% increase in retrans and reverse comp as well as strong growth in subscription streaming revenue, which offset linear declines in the pay TV ecosystem.

And content licensing was up 5%, driven by growth in production for third-party streaming platform from our CBS and Paramount television studios as well as the licensing of our library programming.

In addition, our domestic streaming and digital video revenue in 2019, which includes subscription revenue and digital video advertising, increased approximately 60% to $1.6 billion with growth across Pluto, CBS All Access and Showtime OTT.

Our solid end-of-year performance across these 3 key services is a strong starting point for 2020 and provides the necessary momentum to scale the future growth of these businesses.

Turning to free cash flow.

Our 2019 adjusted free cash flow was $1.24 billion, which excludes $366 million of restructuring and merger-related payments.

These results were affected by higher content investments across our businesses, including more original series produced for our own platform as well as for third parties and the expansion of our film fleet.

In addition, we had higher cash taxes of $437 million in 2019, including $260 million that was driven by tax regulations finalized in 2019 and the absence of a cash tax benefit that we had in 2018.

Now let me go into more detail about our 2020 outlook.

As you heard, in our first full year as ViacomCBS, we expect to grow across key metrics with total revenue up mid-single digits, adjusted OIBDA in the range of $5.8 billion to $6.1 billion and adjusted diluted EPS from continuing operations in the range of $5.15 to $5.50.

Our 2020 outlook also assumes the realization of about $250 million of our $750 million of cost synergy target before consideration of onetime costs to achieve them.

Our new target came after 5 months of detailed work on our integration program.

We now see that we will achieve more than the $500 million that we identified during our due diligence period from incremental opportunities across areas where Viacom and CBS have the most overlap, namely duplicative organizational areas, vendor sourcing and, to a lesser extent, real estate consolidation.

We expect to achieve our cost synergy target over 3 years, with an incremental $350 million in 2021 and the balance of $150 million to be substantially realized in 2022.

For 2020 adjusted free cash flow, we have line of sight to significant improvement, which will enable us to achieve adjusted free cash flow in the range of $1.8 billion to $2 billion.

The growth in free cash flow will be fueled by the key revenue drivers we see this year, including retrans and reverse comp as well as political advertising from the presidential election.

We will also drive free cash flow by strategically reprioritizing our content spending to high growth areas across our businesses, which will substantially improve our working capital.

And we anticipate a cash benefit of approximately $200 million from the $250 million in cost synergies that we expect to deliver this year.

In 2021, there are several items that will drive approximately $500 million of additional free cash flow.

They include the tailwind from continued strategy-driven working capital improvements, further realization of merger integration synergies and the benefit of having the Super Bowl, partly offset by the absence of political.

Now let me give you more detail on our 2020 revenue drivers.

We expect to deliver increases across all 4 of our segments and all 5 of our revenue types in 2020.

In advertising, excluding the Super Bowl and political spending, we anticipate domestic advertising revenue to grow in the low single digits as we go-to-market with expansive U.S. reach across linear and digital platforms, scaled advanced advertising and ease of buying across our portfolio.

In addition, political spending is shaping up to be a record, which will further lift our results.

In affiliate, we expect our domestic revenue to grow in the low single digits as we go-to-market with our unified broadcast and cable portfolio.

We see continued strength in retrans, reverse comp and our subscription streaming services on a combined basis, which will more than offset pay TV pressures.

In content licensing, 2020 is shaping up to be a good year.

We will benefit from our deal to license South Park, and we will see more opportunities to leverage our vast library, bundle our film and TV programming for domestic and international licensing and ramp up production for third parties, backed by the growing capabilities of our studios as others pull back from the marketplace, leading to greater demand for premium content.

In theatrical, we're thrilled with Sonic, and we feel great about our upcoming expanded film slate.

And in Publishing, we have a strong lineup of titles from best selling and big name authors, including Stephen King, Jerry Seinfeld and Ruth Ware.

Looking at metrics beyond our reported financials, we are guiding on domestic streaming and digital video revenue, which we expect to increase by 35% to 40% in 2020 off a base of $1.6 billion in 2019.

This assumes domestic streaming subscribers reach approximately 16 million and domestic Pluto MAUs reach approximately 30 million by the end of the year.

It is important to review our 2020 quarterly cadence.

This year's first quarter will be compared against last year's results, which included the Super Bowl.

In the second quarter, we will realize the licensing revenue for South Park.

In the third quarter, affiliate renewals that we've already completed will take effect, which will give a lift to our revenue.

And in the fourth quarter, we anticipate we will have what is already looking to be a record performance for political advertising.

Turning to capital allocation.

We ended 2019 with $18.7 billion of debt.

When you take into account the $750 million of full run rate merger-related cost synergies, our debt-to-adjusted OIBDA ratio calculates to 3x.

Excluding the synergies, it was 3.4x.

Looking forward, we remain committed to our investment grade rating with a target of achieving a leverage ratio of 2.75x taking these synergies into account.

As Bob noted, we continue to make progress on the sale of Black Rock.

We have completed the initial preparation work with CBRE and are in the market.

We anticipate the sale to close in 2020, and we expect to use the proceeds from this transaction for a mix of debt reduction and opportunistic share repurchases.

Since the merger closed, we have declared a quarterly dividend of $0.24 per share and repurchased 2.5 million shares of our stock.

As the year progresses, we will continue to evaluate the use of excess cash for opportunistic share buybacks.

In regard to M&A, we remain focused on our transformational ViacomCBS deal, and we'll only consider acquisitions that are accretive and tightly linked to our strategy.

This disciplined approach is exemplified by our agreement to buy a 49% stake in MIRAMAX for $375 million, which gives us exclusive long-term distribution rights to MIRAMAX' catalog of 700 titles, including a number of award-winning films and will enable us to further maximize our programming library.

So in summary, ViacomCBS is well positioned to grow for the long term.

We are maximizing cash flow from our legacy businesses while driving growth in streaming and expanding our reach to new audiences.

We now have an even stronger position in the pay TV landscape as well as in advertising, particularly in advanced advertising.

And in 2020, we will begin to reap the returns from the investments we have already made, especially in film and our streaming offering.

So as we continue to execute on our growth strategy, we will grow free cash flow, capitalize on the benefits of our combination and create value for shareholders.

We are poised for a strong year in 2020, which will deliver growth across our unified company and set us up for consistently strong performance in the years to come.

With that, we can open the line for questions.

(Operator Instructions) And our first question will be coming from the line of Alexia Quadrani with JPMorgan.

Just 2 questions.

First, looking at your guidance for 2020 that you provided, I'm curious about how much conviction you have in those numbers?

I mean, you've had a little bit of time since the merger closed.

And I'm wondering if you feel that this is really a conservative number.

And just trying to get a sense if we're at the bottom here for the estimates for 2020?

And then I have a follow-up.

Yes, sure, Alexia.

This is Bob.

We've done a lot of work since the close, and we have absolute conviction in our guidance.

As Chris articulated in her prepared remarks, as we look at 2020, we see specific catalysts as the year unfolds.

So yes, we feel very good about our guidance on the top line, on the earnings side and on the adjusted free cash flow side.

And then just a follow-up on your comment about investment spending, content spending in general.

You have, obviously, a lot of assets that you're investing in with CBS All Access, Showtime.

Just really focusing more on Showtime, I guess, how do you balance where you're going to put the content spending or investment spending in?

And how are you thinking about Showtime specifically in terms of what's the right amount of content spend for that service?

Yes.

So as you said, that's actually 2 part -- that makes a 3-part question.

But let me take Showtime and then talk about the general question.

Look, over the years, Showtime has made strong progress elevating its brand, deepening its original programming lineup, expanding its reach through OTT.

That said, it was a working capital headwind for the company in '19.

And the time is right to improve ROI by evolving that programming mix.

To be clear, Showtime will continue to be an important home of scripted shows like Billions, Homeland, The L Word, Penny Dreadful.

And the investments we made in 2019 will clearly pay dividends in 2020.

At the same time, Showtime does have traction in other format, shows like Desus and Mero and Circus, and we see an opportunity to lean more in this direction.

And there are new ViacomCBS assets to bring to the table, starting with RuPaul and with more to come.

Also, Bellator's alignment is a natural fit with Showtime's combat sports positioning, and I believe a compelling value-creation opportunity in its own right.

And the SHO*BET plex rebranding that we talked about, we think that's a home run in attracting incremental subs.

So it's really a multifaceted approach to improving content ROI here.

Beyond that, it is worth noting that there are some market dynamics in '20 which should be positive for Showtime.

As you know, some competitors have lost key distributors.

That should help Showtime take share, particularly in linear.

As we mentioned, OTT momentum has been picking up, strong sub growth in the past 2 months.

And slightly longer term, ViacomCBS' broader streaming strategy will be additive to Showtime subs over time as it introduces a new consumer funnel.

So we're excited about the next leg of journey of this culture-defining brand, and we look forward to it growing its contribution to ViacomCBS.

Now just quickly in terms of how we decide where to put the product.

Let me start with a high-level reminder of what our strategy is and that's to maximize the value of our content by reaching the largest addressable audience.

And that's across every segment of platform using our assets and others.

There's 4 reasons why this is the right strategy for ViacomCBS: first, it makes the most of our greatest strength, which is our content engine and our place in the content industry, which is an industry that's growing; second, it allows us to build on our leadership positions across segments, including genres, demos, formats, while giving us new opportunities to grow brand, franchises and audience; third, it allows us access to the largest potential revenue pool, and that's key to balancing adjusted free cash flow delivery and asset value creation; and fourth, it gives us flexibility to adapt as the market and consumer habits continue to evolve.

So how do we decide what goes where?

Let me start with a key fact.

The depth and strength of our talent base means we make must-watch content for all platforms.

That said, we do have to decide where things go, and we have 3 filters that guide that.

We look at financial impact, we look at strategic impact, and we take into account some partnership considerations.

Now as you think about that, there's several other things I want you to keep in mind.

That starts with where we have strength, whether it's a franchise, maybe Mission: Impossible or a genre like procedurals, you'll increasingly see us not license exclusively to third parties in the U.S. We do look at these things across the house, and we have a content council in place to help evaluate opportunities and make recommendations.

And we look at every content decision as just one window in time.

These are assets we own, and we expect to monetize them in different ways, in different places over time.

Quickly, an example, Nickelodeon.

You know it's the #1 kids brand, big hits like SpongeBob.

The reality is our linear platform only reaches 40% of kids today, but we can reach beyond that.

So what we're doing as an example with Nick is we're putting spin-offs of SpongeBob on Netflix.

That will drive direct earnings, but also connect these characters with new fans, benefiting the franchise and related businesses like consumer products or future theatrical films.

And ultimately, the IP reverts back because remember, it's a rental, not a sale.

So look, we give a lot of thought to this.

We feel great about our strategy, both specifically for Showtime and in general, and you'll see us deliver value in it in 2020 and beyond.

The next question is from the line of Jessica Reif Ehrlich with Bank of America Securities.

I have 2 questions.

So the first one is on advertising, which you both alluded to as a growth area.

So it now has Jo Ann Ross, who's one of the best, if not the best advertising executives in the business.

And then just can you give us more color on how different is your approach to market with all the networks under one advertising umbrella, as you said, selling across traditional and targeted advertising?

And are you confident you can accelerate advertising growth over time?

Sure, Jessica.

Look, I'm extremely excited about our domestic ad picture.

Let me start by commenting on the market.

As you know, it remains very strong, both in Q4, now in Q1.

We're seeing scatter premiums in both broadcast and cable of 25% to 35% above upfront.

Broadly speaking, the issue remains supply, not demand.

And related to that, we're also seeing strong and growing demand for premium digital video.

Now if you look more at our performance, particularly in Q4, which I think is helpful to give you insight into where we see this going, overall, ad revenues, domestic ad avenues were flat.

Now that's driven in part by the fact that there was not a lot of political ad spend in the fourth quarter versus the fourth quarter of '18.

That was a midterm election year.

And of course, we have a little decline in impressions but very strong pricing.

But the real thing to look at is domestic cable at 9% growth with Pluto.

That is the strategy we've been pursuing over the last 1.5 years.

It's a strategy of combining linear with our advanced marketing solutions.

It's really resonating in the market.

And as promised, it's delivering robust growth despite impression headwinds.

It's allowing us to dramatically outperform all cable competitors.

And it's worth noting that AMS is now almost 1/5 of our revenue in the quarter, including with CBS.

So this is a real piece of business.

Looking forward, it's why we're so excited about our position in the market as ViacomCBS.

We are now the clear #1 leader.

We're #1 on every demo in linear.

And our AMS offering is even larger as we add CBS branded digital video, including CBS All Access, CBSN, which is growing super fast and more, which means our combined linear AMS cell, something we know how to bring to market, is even more robust.

And as you pointed out, Jessica, our ad sales integration is moving very quickly.

I'm thrilled with Jo Ann's leadership.

John Halley is the COO, who knows the advanced ad space.

I spent last weekend with the senior team.

They are totally pumped and with a bunch of clients.

And I'm confident we are going to be extremely well received in this next upfront.

Next question is from the line of Michael Morris with Guggenheim Securities.

Two questions, one on streaming and then one on the cable affiliates.

First, on streaming, Bob, you talked about the expanded service and a little bit of a time between now and when that will be available to consumers.

Can you just talk about sort of what the hurdles are to having that up?

And also, just any sense of urgency in terms of time to market, given how competitive that space is becoming over the course of the year?

And then second, on cable affiliates, in the fourth quarter, revenue was down about 8%.

Can you break down for us a little bit of what the drivers were there?

There's a number of pieces with Showtime and the legacy Viacom networks.

You used to have some content in there, some VOD relationships.

Maybe just help us with what the apples-to-apples comparison is?

And how to think about those drivers into the new year.

Sure.

Let me take the first one, and then Chris will take the second one.

So look, on streaming, again, we're very excited about our strategy.

We believe this combination of free, broad pay and premium pay is where the market will go.

And the fact that we have product in 2 of them, which is free and premium and very quickly, we'll get in the market with the third, rather the middle one, we think, makes a lot of sense.

In terms of what we need to do, the reason we're so excited about this is it's not vaporware.

We're building from a position of strength.

As we said, we have about $1.6 billion in domestic streaming and digital ad revenue in '19.

That's up 60% from 2018.

We have MAUs at the end of '19 at 22 million, actually more than 22 million, and over 11 million domestic subs in pay.

So that's a real foundation.

And we're taking that, and we're building on the experience we already have.

We have the benefit in terms of lesson learned in subscriber acquisition, in churn management.

We understand what gets consumed in free and pay because we've been looking at it for a while.

We're not launching something new, to your question on tech.

We are working off of proven platforms and models, and we know how to work with partners, both in the traditional and OTT space.

So when we look at our plan for 2020 and our guide of 30 million MAUs for Pluto domestically and approximately 16 million subs for our U.S. pay offerings with streaming and digital revenue growing 35% to 40%, we feel very good about that.

And again, we're in the market today, and you're going to see us get deeper into the market as the year goes on.

So make no mistake, ViacomCBS will be very much in this game.

Mike, it's Chris.

Thanks for the question.

So relative to the performance for cable affiliate revenue, Q4, we did see some pay TV headwinds, and we saw legacy Viacom rate resets.

Looking ahead, for 2020, we're going to market with our combined cable and broadcast portfolio.

We're seeing strong streaming performance, and especially in Q1, we have Homeland and we have Star Trek: Picard out there.

We also have new retrans and reverse comp deals coming up later this year.

So we feel very good about 2020.

And we also have the headwinds that we expect and the market expects to happen in our 2020 guidance.

The next question is from the line of Ben Swinburne with Morgan Stanley.

Bob, can you -- if you sort of step back, help us think about the programming cost growth or the content investment appetite the company has over a longer period of time?

And I'm asking because I can't tell.

But I think last year, the combined company's cash spend on programming looks to be up, I don't know, 15%, 20%, something like that.

I'm not sure if that's exactly right, but it was up a lot.

I know you're talking about reallocating, reprioritizing, maximizing content ROI.

But can you just help us understand if you look at the entire company over a multiyear period, what is the right level of investment growth you think the business needs to achieve your goal?

So I think that would help the market understand sort of where the longer-term cash flow opportunity is in the business.

Yes.

So thanks.

So our strategy is about taking advantage of this now larger portfolio of assets to improve content ROI and ensure that we're investing against growth opportunities and maximizing share and margins in more mature businesses.

You see that split in terms of linear television, where, as I said, our cash content spend is essentially flat 2019.

But through grouping of networks, through shifting of mixes, we're going to get more effect in the side of that.

And again, we have a proven team that's getting more responsibility in that space.

So I feel very good about that.

At the same time, we are prioritizing investments in places where there's clear growth.

That's in streaming, that's in Paramount this year as we continue to ramp the slate of it and in the third-party studio business, which is a significant business with growth, essentially risk-free and long-term asset value.

So that's how we're looking at it overall.

And it's the combination, particularly managing the mature businesses much more tightly, that allows us for much more modest cash content expense growth as on a going-forward basis, certainly, '19 to '20 and then onward than you've seen in the last couple of years.

So that's how we're thinking about it.

Again, I look at the combined asset base of this company, we have more than enough resource base to work with, and we are absolutely going to get more out of it.

The next question is from the line of Michael Nathanson with MoffettNathanson.

I have 2, one similar to Ben's question, which is at CBS legacy, there's a big source of pride about the number of original shows they make every year.

You talked about 94 shows last quarter.

That's a doubling from like 5 years ago.

And I wonder now that you're one company, is there a different financial lens you're bringing to it?

Because you don't see the benefit of all that expense growth in the CBS P&L.

So I wonder, now that you're in from outside, what are you doing differently financially to assess the ROI of that massive increase in spending at CBS?

Yes, thanks.

So you really got to -- when you looked at the CBS studio, as an example, there's really 2 components of it.

There's product that's making for its owned and operated network, in that case, CBS.

And there's product that's making for third-party clients, which were a range of different clients.

The expense growth in cash obviously covers both.

As we look at it on the CBS network side, I think it is worth noting that in Q4 and continuing, #1 most watched network in prime, 5 of the top 10 programs, 5 of the top 6 freshman series.

So the network continues to perform strongly.

That said, I was with Nevins last week, and we were talking about CBS, and they're actually spending less on pilots this year because they feel very good about where the network is, and therefore, are able to be more prudent.

At the same time, whether it's the CBS studio or the Paramount studio, we continue to have ramping demand in that third-party studio production business.

Yes, that consumed some cash, certainly in '19, and it's a bit of a cash headwind in '20.

But I want to reiterate, it's a different business.

It's fundamentally profitable.

It's low risk, and we do build long-term asset value.

So on a cash basis, we are continuing to invest a bit in that, but it is really a separate business.

So -- but rest assured, in general, we're looking at everything.

We've talked about Showtime.

We're looking at CBS.

We're doing a lot of work on the linear cable side.

And as we're doing all that, we see a lot of opportunity on the streaming side, and we are focused on improving content ROI and getting more out of this asset, and that is what we will deliver in 2020.

And then second one...

Also, Michael, I just wanted to supplement that, that if you look at the TV Entertainment segment, our new segment, which is largely the CBS-branded businesses, we did grow high single digits for the full year, '18 to '19, 8%, which is a strong performance.

So from the standpoint of as we think about the CBS businesses going forward under the umbrella of the combined company now, we will just even be further able to monetize our programming investments.

Okay.

And then one on, Bob, internationally, you mentioned Pluto on the expansion.

But what are you thinking about broadening out the subscription-based businesses internationally?

And when will you have a decision on that?

Sure.

So look, streaming is clearly a global priority, and our global operating footprint, which includes linear reach, content ownership, on-the-ground resources and relationships, are unquestionably a valuable go-to-market advantage.

We are today in the early stages of entering international streaming.

On the free side, Pluto is already launched and growing rapidly in U.K., Germany, Austria and Switzerland.

Earlier this month, we announced that Pluto will launch in Latin America, Spanish-speaking Latin America at the end of March, Brazil later.

And we will offer 80 channels in Latin America by year-end.

Likewise, Noggin is also up in Latin America, and we just announced that Apple is launching it in 40 international markets.

CBS All Access is already in Canada and Australia, and we have a Paramount Plus service streaming in parts of Europe and Latin America, where it has both TV and film.

So we're early days, but we are absolutely working the international space, and we'll update you as that plays out later in the year.

The next question is from the line of Rich Greenfield with LightShed Partners.

I've got a couple of questions and a couple of follow-ups.

First, your peers are -- have been doing some uneconomic deals if you look at what ESPN just did for the SEC and UFC.

Wondering as you think about kind of the NFL negotiation that will play out this year, sort of are you prepared to do something that is "uneconomic?"

Two, on Nickelodeon, I think your ratings were down somewhere around 20% last year.

And it looked like it got a lot worse in Q4 and into early 2020 since the launch of Disney+.

Just wondering kind of what could you tell us about kind of your plans for the Nickelodeon network?

And that sort of ties into the Charlie Ergen question, which is DISH was pretty clear yesterday in their call that if your ratings are down sharply, they are going to look for reductions in rate or they're going to simply drop programming, which they've been doing at a more -- at an increasing rate.

Just wondering kind of how you think about the negotiation with DISH, which I think is coming up pretty shortly.

And then, Chris, I think on the question that somebody asked about cable affiliates being down 8%.

You kind of talked about what was in the press release, but could you give some clarity of like what were subs down?

What was the rate reset?

Just adding some actual numbers to the decline would be helpful.

I think that's what the follow-up was trying to ask.

A lot in there, Rich, but all right, let's do this quick.

So on the NFL, the NFL and CBS are long-standing partners.

As a combined company, ViacomCBS is even better positioned to deliver value to that franchise.

You know the NFL values our broadcast reach and high-quality production.

And you know that the combined company adds young adult reach, both linear and streaming as well as international capabilities, both of which are key to NFL development and thus, important to the league.

We are going to do some stuff around the NFL in the months ahead as we prep for Super Bowl LV, leveraging our platform.

That's obviously a February 21 event.

And to be clear, as a combined company, we absolutely have the financial resources to get a deal done.

And we do believe it's important to the company, and I feel good about getting a deal done.

When it gets done?

I don't know.

We'll see.

That's really more the NFL's call on timing.

With respect to Nickelodeon, if I look at our domestic cable portfolio overall, we actually have pretty solid audience performance.

13 of our networks grew share in Q4, including Comedy, BET, Paramount Networks, Smithsonian.

Actually, we see sequential improvement.

Q1 to date, the whole portfolio is up about 4%.

Nickelodeon continues to be a work in progress.

It is far and away #1 in the space.

But that is also why -- and we do feel good about the slate of shows coming, but we have pivoted to a multi-platform variant of Nickelodeon as part of building that brand for the future.

That combines what we're doing in the linear network, what we're doing in our, call it, over-the-top space, what we're doing with third parties and then how we're monetizing that broader audience, including through things like consumer products, and for that matter, film.

So we are really attacking the Nickelodeon opportunity in a multifaceted way.

I feel good about the progress Brian Robbins and his team are making, I feel good about the partnership with Paramount, with the next SpongeBob movie coming in Q2.

By the way, we did a preview of that movie, SpongeBob Out of Water (sic) [Sponge Out of Water], last weekend, and people are feeling very good about the film.

Obviously, the Nick Network and our consumer products team are totally behind it.

So Nick has a bright future.

And finally, I'd say back to the streaming discussion in our broader pay product, that's a House of Brands.

Nickelodeon is going to feature prominently in that.

That's going to be good for the streaming product, and it's going to be good for the Nickelodeon brand.

Largely, I'm not going to comment on any particular renewals other than to say we have a track record of getting deals done.

We have a stronger portfolio than ever, including levers we haven't pulled with some of our clients.

And therefore, I feel good about our position.

And then, Chris?

Richard, thank you for the follow-up.

So for the cable affiliates, the additional thing I'll point out is that what we saw happen in Q4 for cable affiliate trends was similar to what the industry experienced.

The other thing I'll point out in general is that as we look at Viacom and CBS as 2 separate companies then unifying to ViacomCBS, the pay TV landscape has been a headwind.

But when we look at how our quarters will build, Q4, we had a tough quarter.

As we head into Q1 and we think through Q2, our momentum will build.

So Q1, we are going to see some more of the affiliate headwinds we've experienced.

We also will have some timing of licensing considerations.

And we do, as I alluded to earlier, have some big shows in Q1 like Star Trek: Picard and Homeland that are strongly performing for streaming in Q1.

But then as we go toward Q2, we'll have the licensing delivery of South Park, and momentum will build from there.

So again, we'll see the full power of ViacomCBS in 2020 and beyond.

And I harken back to Alexia's question that we have strong conviction in the guidance, all of this is contemplated in the guidance, and we will see momentum build as we go into 2020 and beyond.

The next question comes from the line of John Hodulik with UBS.

Just a couple of follow-ups to those questions.

First, I guess, for Chris.

And maybe you just answered it, but the 2020 guidance contemplated inflection in that U.S. cable affiliate trend.

And if so, does it include any new carriage from the virtual distributors?

And any update there you can provide?

And then maybe for Bob.

You talked about modest increases in expenses as you launch the new broader D2C platform.

I mean, obviously, you guys are starting from a different place, but there's been usually some real dilution that comes with these type of launches.

Any additional color on the size or maybe the categories of spending you might have there?

Thanks, John, it's Chris.

So for 2020 guidance, we do assume, similar to the industry, the headwinds continuing.

But from the standpoint of our guidance, we are expecting momentum to continue.

So relative to what we're seeing, back to your vMVPD question, those deals don't come up until later in the year.

So the effect on 2020 will not be that big.

It would really be an impact to 2021.

And we feel very good about our positioning as we go to look at renewing those deals.

Let me add to that and then hop to your streaming question.

So look, if you look at the U.S. affiliate landscape, there's no question that ViacomCBS is among if not the most important supplier to linear.

Remember, we are #1 on every demographic in linear.

We have must-see content in news, in sports, in entertainment.

And we have a model that gets deals done, including having a range of partnership levers, whether that's in advanced ad sales, doing more and more working with them in the broadband space.

We started that with Pluto and Comcast, just did that with All Access, set-top box too.

So we have a lot to work with there.

There may be winners and losers in this space, but we feel good about taking share and getting deals done.

And again, you will see that track out in the year.

We've already had a positive experience with one very large MVPD, who's not a walk in the park to negotiate with.

On to streaming.

Two things I'd say in relation to your question.

One is, remember, we are in this business today, both in free and in the various pay segments.

We have been putting original content.

You look at what All Access did with Picard.

So it's not like we're ramping from nowhere.

In fact, we're building momentum and in particularly, as we do that, and this is definitely true on the Pluto side, remember, Pluto is very capital efficient.

That is essentially a rev share model, not a invest in content and build it out.

So as we launch in places like Latin America, you don't have this big working capital headwind.

You have a model that scales with the business.

So I'm very excited about our streaming plan.

The financials are absolutely built into the guidance, and the incremental capital is modest certainly by standards of what some other folks are doing.

And with that, we're kind of running a little over.

So I want to thank you for your questions.

In closing, we couldn't be more excited about the road ahead, one where we will continue to unlock the power of this incredible combination, capitalizing on our position as one of the largest content producers and providers in the world, we believe, becoming the most important partner in the media ecosystem, creating valuable new businesses.

We have the assets.

We have the plan.

We have the team.

We will execute and we will deliver for you.

As we do, know that we're 100% share -- focused on shareholder value creation.

We're committed to providing the transparency and disclosure you need to understand and track the value we're creating.

And before I sign off, I also want to thank the employees of ViacomCBS, who have brought this company together in under 3 months and who will power our exciting future.

And thanks to all of you for joining today.

Thank you for your support.

We look forward to talking to you soon.

Thank you, everyone.

That concludes our earnings call.

Thank you.

You may now disconnect your lines at this time.

Thank you for your participation.