Paramount Global (PARAA) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the CBS Corporation Third Quarter 2017 Earnings Release Teleconference.

Today's call is being recorded.

At this time, I would like to turn the call over to the Executive Vice President of Corporate Finance and Investor Relations, Mr. Adam Townsend.

Please go ahead.

Good afternoon, everyone, and welcome to our third quarter 2017 earnings call.

Joining us with today's remarks are Leslie Moonves, our Chairman and CEO; and Joe Ianniello, our Chief Operating Officer.

Following Les and Joe's discussion of the company's performance, we will open the call up to questions.

Please note that during today's conference call, the third quarter and year-to-date 2017 results where EPS and net earnings will be discussed on an adjusted basis, unless otherwise specified.

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

Please note that statements on this conference call relating to matters, which are not historical facts are forward-looking statements, which involve risks and uncertainties that could cause actual results to differ.

Risks and uncertainties are disclosed in CBS Corporation's SEC filings.

A webcast of this call and the earnings release related to today's presentation can also be found on the Investor Relations section of our website at cbscorporation.com.

With that, it's my pleasure to turn the call over to Les.

Thank you, Adam, and good afternoon, everyone.

I'm pleased to tell you that CBS has delivered solid third quarter results.

Revenue was up 3% to $3.2 billion and EPS was up 6% to $1.11, marking our 31st consecutive quarter of EPS growth.

So we're on our way to completing another strong year with an even better 2018 on the way.

As always, the heart of our continued success is our content.

The only thing that's changing is the way in which viewers want to consume it.

The good news for CBS and its shareholders is that we've been anticipating these changes for a long, long time.

And because we see change as opportunity, we've moved early to set up even better success, both now and in the years ahead.

Because as the industry has changed, we've often been there first.

We were the first broadcaster to get fair compensation for our content for retrans and reverse comp from our affiliates.

We were the first network to launch its own SVOD service.

Most recently, we've been a pioneer in skinny bundles as well.

No matter how people want to watch us, we've made sure to be there.

The implications of this are clear and may make us different than virtually any other company in the media space.

Where others worry about cord cutters, we don't.

We are ready for them.

We welcome that.

In fact, where others are losing subs to cord cutters, we are growing.

This is significant.

When you put together our traditional bundles, skinny bundles and our over-the-top services, we have more subs today at both CBS and at Showtime than we did a year ago.

That's right, our subs are growing unlike those of most other media companies.

Best of all, as consumers cut the cord and switch to skinny bundles or go over-the-top, the economics get better for us.

So not only are we growing subs, but we're also growing our rates as well.

Let me explain.

At CBS, when a consumer switches from a traditional to a skinny bundle, we get double the fees.

If they move to CBS All Access, that revenue sometimes tripled from what we get from traditional distributors.

At the same time, our base is growing and retrans with each new deal that we do and that's not to mention the advertising, which is sold at a higher rate on these platforms.

This dynamic is also benefiting Showtime where we are now a 25 million subs across traditional and digital platform.

Here, once again, over-the-top is a more profitable business model with a sub rate that is more than substantially higher than what we get from Showtime's MVPD distributors.

So let me say this again because it is very important.

Not only are we not affected as others are by cord cutting.

It has real measurable upside for us.

This is what sets CBS apart from the pack.

As the industry moves ahead to more viewer choice and newer subscription models, there will continue to be a widening gap between the haves and have-nots and clearly, we are on the right side of that divide.

Plus, at the same time that we're seeing growth in rates in subs, we're also very pleased with the consistency of our advertising revenue, which is strong and steady year after year.

Consider this, in each of the last 5 years, we've generated a very consistent $4 billion in network advertising and that doesn't even include the Super Bowl, which is in addition to that total.

When 2017 is complete, we expect, once again, to be just north of that number.

So even though advertising is now a smaller part of our revenue, only 40% year-to-date, our total is still very steady.

And as we look ahead, we're beginning to capitalize on new opportunities to grow our advertising in significant ways.

These opportunities are developing because there's technology advances.

Our analytics become more sophisticated.

Taking a page from our friends in the digital space, we are now moving beyond selling solely based on a viewer's age and increasingly reaching them with strong data on what products and services they want to buy.

This is significantly more valuable to our advertisers, and it gives us much more revenue per impression.

And we have more impressions to sell all the time.

Thanks to delayed viewing.

Many of our shows are seeing a lift of 3 million, 4 million and even 5 million additional viewers in the 7 days after they first air, and in many cases, as much as 50% over the original viewing number.

And these extra viewers are increasingly coming to us via digital platforms where we're getting paid even more.

To seize this opportunity, as we told you about during our last call, we recently took a big step forward by combining all of our network in digital sales.

We brought in the top executive of domestic sales from Facebook to work with our terrific network sales team.

This will fully combine the benefits of targeted, high CPM digital sales with the unparalleled reach of broadcast television.

Now, virtually every network sale has a digital component and vice versa.

To build on that effort, just yesterday, we announced the hiring of Radha Subramanyam, who is one of our industry's leading experts in data analysis.

Going forward, Radha will work alongside the incomparable David Poltrack, giving us the best research team in the business.

And we are able to attack this opportunity with the #1 watched network in all of media.

The CBS television network has the top 2 shows, 3 of the top 5 and 6 of the top 10, including Young Sheldon, which had a premiere episode that has been the most watched show on all of television so far this season and which comes back on the air tonight.

Along with Young Sheldon, we have 2 of the 3 top new series this fall, most notably, SEAL TEAM, which is produced by our CBS television studio and was just picked up for a full season order.

Every new own hit we launch goes into our content value chain that we can monetize for years to come.

For example, just a few weeks ago, we announced a series of multi-platform syndication deals for Madam Secretary where we were able to license the show at a higher combined rate than in the old world where we would've sold the shows to just one buyer.

In addition, we are currently in a number of active negotiations for NCIS: New Orleans, so expect an announcement imminently.

These are just 2 of an all-time high 65 shows that our in-house studios are creating for 11 broadcast cable and streaming outlets.

That's more than doubled what we produced in-house just 5 years ago.

And it includes all kinds of content, whether it's the massive deal hits we created for CBS prime time or the ultra-premium series we do for Showtime or CBS All Access or the content we create for more niche audiences at CW and POP or our industry-leading first-run syndication programming.

We do it all, and we do it well, and owning this much content allows us to sell it in more and different ways all the time.

We can choose whether to keep a show in-house or license it to an outside partner like we just did with our highly acclaimed new series, American Vandal, which we're producing for Netflix, and which we just picked up for second season and also, like we did for Carpool Karaoke and Drop The Mic, which we developed with Corden and recently launched on Apple TV and TBS, respectively.

Corden, by the way, continues to be a big hit for us across all digital and linear platforms.

And of course, Stephen Colbert, continues his terrific run as well.

Outside of the '09, '10 season when Conan O'Brien replaced Jay Leno mid-season, we are #1 in late night for the first time in 20 years, and we're winning by a large margin.

Colbert is also the only late-night talk show that's up in all key demos, including a 25% increase in viewers from last year.

Turning to sports.

While NFL ratings have been up and down this season, it is still the best game in town.

There's no better way for advertisers to reach a mass audience and it still provides the best promotional platform to us to launch our new shows.

It's also been great to see Tony Romo become a true sensation for us in the broadcast booth working alongside the great Jim Nantz.

Over at CBS News, we had another very welcome addition to our talent ranks this fall, when Oprah Winfrey joined 60 Minutes.

Thanks to Oprah and the entire 60 Minutes crew.

This show has continued its dominance in its 50th season.

In 3 of the last 5 weeks, 60 Minutes has been a top 10 show, including 1 week where it reached #2.

Last week, we named Jeff Glor as the next anchor of the CBS Evening News.

Not only does Jeff have the experience we were looking for, but as an original anchor on our streaming news service, CBSN.

He represents the next generation of anchors that will carry CBS News into the digital age.

Meanwhile, nearly 3 years after its launch, CBSN continues to grow at a rapid clip.

With the first 9 months of the year, streams are up 37% over 2016, which is all the more impressive when you consider that, that was a presidential year.

Even as we continue to invest in it, CBSN has become profitable for us in a very short time.

As we look ahead, we're just beginning to take the next step for this asset by distributing it as a stand-alone channel in skinny bundles and virtual MVPDs.

And we look forward to replicating its success with a new OTT sports service called CBS Sports HQ that will launch in the coming months.

But the big story for us in over-the-top is our 2 major services, CBS All Access and Showtime OTT and our premium content is key to the success of both of them.

At All Access, we are benefiting from the one-two punch of a full season of the NFL, and the launch of Star Trek: Discovery and the results have been phenomenal.

Star Trek: Discovery, in particular, has been a game changer.

The U.S. premiere episode led to new records for the most All Access sign-ups in a single week and then the show's second week, we topped that record once again.

Internationally, the show has been a huge hit in many key territories.

As a result of this terrific performance, we've already renewed Star Trek: Discovery, for what we know will be a great second season.

In addition, this month on All Access, we'll be launching a new comedy [from] and featuring Will Ferrell called No Activity.

It will premiere right after the season finale of Star Trek: Discovery and also be produced by CBS Studios.

Then next year, we'll have the return of The Good Fight, along with the new drama from Ridley Scott called Strange Angel and more on the way.

And now another important announcement.

Today, we are pleased to tell you that All Access will be the home of a new version of the one of the most iconic television shows of all time, The Twilight Zone.

We're sure that we will dramatically boost subscribers once again.

And that's not all.

With Star Trek and now Twilight Zone, we've just begun to tap the intellectual property we have at our disposal for future series.

And once again, all of these new shows for All Access are being produced by our own television studio.

So All Access has grown into a remarkably powerful platform for us, and we're now gearing up to scale the service in a whole new way overseas.

We have seen the success the other streaming services have had globally, and we think this is fertile ground for All Access, too.

So we will begin to expand into the international marketplace, starting with Canada next year, followed by Australia.

Australia is a natural extension for All Access.

Thanks to our pending acquisition of Network Ten.

In addition to owning one of the big 3 broadcasters in Australia, this acquisition will also give us control over our content across all forms of distribution in that market.

So we will combine the reach of a major television network with an emerging streaming service playing right into our expertise.

Sound familiar?

The combination of traditional and new is also key to our success at Showtime, which continues to have some of the best original series on television.

As we mentioned at the top, sub and rate growth at Showtime has been a great story for us, and it's all driven by our premium content.

Following the success of Twin Peaks in the second quarter, we brought back Ray Donovan in the third, when, of course, we also had the Floyd Mayweather/Conor McGregor fight.

Thanks to this event by the way, we've now had the 3 highest grossing pay-per-view events in history with Mayweather's fights against McGregor, Manny Pacquiao and Canello Alvarez.

Up ahead, we'll have a new season of our murderer's row of hit series, including this weekend's return of Shameless, Showtime's #1 comedy, followed by 2 of our biggest hits, Homeland and Billions in January.

Along with Showtime, publishing also had a terrific quarter, driven by a strong slate of titles from well-known authors across several genres.

In fact, during the last full week of the quarter, we had the #1 titles across 8 different New York Times bestseller categories.

These include the #1 in hardcover fiction, The Cuban Affair by Nelson DeMille; the #1 in hardcover nonfiction, What Happened by Hillary Clinton; and the #1 how-to book by Tom Brady, The TB12 method.

Turning to local media.

Our TV stations also performed well for us.

During the quarter, with total nonpolitical revenue up mid-single digits.

Our stations continue to benefit from the strength of our prime time schedule and live event programming, including the Emmy's, which set a sales record for us during the quarter.

Local media becomes, obviously, really important when covering crucial breaking news in all of our communities.

In that regard, I'm particularly proud of the programming and information we provided during the hurricanes in Texas and Florida, where we own stations, and the $10 million, our entire station group raised for hurricane relief.

So yes, we are in a time of great change across our industry.

But at CBS, as you have seen, we have been anticipating these changes for years, and we have been actively innovating and investing in our businesses to stay ahead of them, and what distinguishes CBS is how time and time again, we've turned change into new growth opportunities.

First, it bears repeating that you should not think of us the same way as you think of other media companies.

Thanks to the combination of traditional bundles, skinny bundles and OTT, our subs are growing at both CBS and Showtime.

So cord cutting is an opportunity here at CBS.

And in advertising, advances in digital will make our #1 content that much more valuable.

If people want to watch our programming live or a month after it airs, we are on a path to monetizing all viewing in increasingly lucrative ways.

And in terms of licensing our content, whether we sell our programming to the leading SVOD services or to linear cable and broadcast networks, we're constantly expanding the capabilities of our prolific CBS Studios, both domestically and around the globe.

All of these opportunities will drive our success into the future, and we look forward to updating you along the way.

And with that, I'll turn it over to Joe.

Thanks, Les, and good afternoon, everyone.

At CBS, our philosophy has always been that change brings opportunity.

So we have a strategy in place to take advantage of all the changes underway in media.

As Les said, consumers have more choices than ever before in how they watch content, and we have positioned our company to give them the content they want in any way they want it, meaning in traditional big bundles, smaller skinny bundles or direct-to-consumer.

And as more consumers shift from traditional distribution to newer platforms, we are growing our subscribers with a business model that is much more favorable to us.

So our key growth pillar that we laid out for you previously, appear to be bigger than we expected.

And as we continue to execute on our strategy, we are consistently validating that we have the right plan in place for long-term future success.

Now, let me give you some more details about our third quarter results.

Revenue for the quarter was up 3% to $3.2 billion.

Affiliate and subscription fees were up 52% aided by the Mayweather/McGregor pay-per-view event.

In addition to the sub games and strong rate increases from our over-the-top and skinny bundles that you heard about, retrans and reverse comp continued to be a terrific story, and were up 27% in Q3.

We have now made nearly as much in retrans and reverse comp for the first 9 months of this year as we did all of last year, and we still have a quarter to go.

Content licensing and distribution came in at $860 million for the third quarter.

And as you know, licensing revenue varies from quarter-to-quarter due to the timing of content availabilities.

And if you look at content licensing on a year-to-date basis, revenue came in at $2.8 billion, which is comparable to what we did in 2016.

As Les said, we recently did a multi-platform deal for Madam Secretary, and you will see the contribution from that in our Q4 results.

Advertising for the quarter was down from last year when we had record political spending, and we also had one less Thursday night football game this year in the quarter as well.

Underlying network advertising was down 2% in Q3 and on a year-to-date basis, it was down 1%.

As Les said, for all of 2017, we expect network advertising to be steady and consistent with prior years, even though it's becoming a smaller percentage of our overall business.

In addition, third quarter operating income of $707 million came in for the third quarter and our operating income margin was 22%.

Also for the quarter, EPS was up 6% to $1.11.

On a year-to-date basis, we delivered revenue and EPS growth as well.

Despite comping against the Super Bowl and record political spending, revenue for the first 9 months of the year was actually up 1% to $9.8 billion.

And EPS was up 7% to $3.21.

What's important to note here is that we continue to grow our EPS even as we are increasing our investment in our content and distribution platforms.

Now let's turn to our operating segments.

Entertainment revenue for the third quarter came in at $1.82 billion compared with $1.95 billion in 2016.

Affiliate and subscription fee revenue grew strongly across the board and was up 35%, driven by gains in reverse comp, All Access and skinny bundles.

Entertainment operating income for the third quarter came in at $345 million compared with $348 million last year, and our entertainment operating income margin expanded 100 basis points.

Thanks to the mix of our higher margin affiliate and subscription fee revenues in 2017.

Third quarter cable networks revenue of $840 million was up 40%, driven by the pay-per-view boxing event.

Excluding that event, affiliate revenue was up a strong 6% at Showtime and our Cable Networks operating income grew 3% to $294 million.

Turning to publishing.

Revenue of $228 million was up 1%, driven by print book sales and digital audio sales, which grew 37% in the quarter.

In addition to the titles that Leslie mentioned, IT, by Stephen King, was a strong performer.

Thanks to the recent release of the movie.

Simon & Schuster benefits from books made into movies or television series.

We saw this in the third quarter from releases of The Glass Castle and American Assassin, which was produced by CBS Films.

So like our other operating segments, great content drives our results at publishing, too.

Publishing operating income for the quarter grew 5% to $46 million, and the publishing operating income margin expanded 1 point to 20%.

Third quarter local media revenue came in at $397 million compared with $409 million last year when we had presidential election spending.

Nonpolitical revenue was up 6% for the quarter, led by healthy gains in retrans.

And entertainment and financial services were 2 top advertising categories for the quarter.

Local media operating income for the third quarter was $105 million compared with $122 million last year when we had strong political spending.

Now let me give you a quick update on our radio transaction.

We launched an exchange offer to split off our Radio business as part of our agreement to merge it with Entercom.

We now have clearance from the DOJ for the merger, and we expect to close the transaction in about 2 weeks.

The separation of Radio will further diversify our business and center our company even more around premium video content.

And as a result of this exchange offer, we expect to retire about another $1 billion of our stock.

This is in addition to the more than $1 billion we've repurchased year-to-date, including $250 million we used to buy back 3.9 million shares during the third quarter.

We expect to end the year with $3 billion remaining on our authorized repurchase program, representing about 14% of our current market cap.

Going forward, we plan to repurchase about $800 million to $1 billion of our stock in 2018, which is consistent with the pace of our most recent quarter.

But as always, reinvesting in our content and distribution platforms remains our #1 priority.

Turning to cash flow and our balance sheet.

Free cash flow for the first 9 months of 2017 came in at $823 million compared with $1 billion for the first 9 months of 2016 when we had the Super Bowl.

This year's cash flow also included $100 million discretionary payment to prefund our pension plan.

Here in the fourth quarter, we plan to take 2 additional actions related to our pension plan.

These initiatives are purely opportunistic and will serve as a means to reduce pension-related costs going forward.

First, we plan to contribute about $500 million to the pension plan to increase the funding status to over 90%.

This contribution is tax-deductible and will be funded with corporate borrowings.

Second, we have entered into an agreement to permanently transfer over $800 million of our pension liability to an insurance company.

By taking these 2 steps now, we are able to capitalize on attractive interest rates while benefiting from lower insurance premiums.

This is an effective way to reduce future cost and will be accretive in 2018.

Now let me tell you what's going on in Q4.

For the fourth quarter in local media, total nonpolitical revenue is pacing to be up mid-single digits, which is consistent with Q3.

At the network, scatter pricing is up double digits against upfront pricing.

C7 is now the standard currency, and we are starting to sell beyond 7 days as well.

In addition, we are monetizing the growing audience of our emerging digital platforms like CBS All Access, CBSN, cbs.com and our new OTT channel, CBS Sports HQ.

All of this gives us more targeted and valuable impressions, so we feel very good about our ability to monetize more delayed viewing and viewing on digital platforms.

And looking ahead to 2018, we have 4 significant drivers that are poised to grow in excess of $100 million each over the next year.

First, in advertising for 2018, our local media segment will benefit from mid-term elections.

And at the network, we will continue to monetize impressions beyond 7-day viewing as well as through digital extensions like CBS All Access, CBSN and CBS Sports HQ.

Second, retrans and reverse comp, we will reprice about 20% of our traditional MVP -- MVPD base and about 10% of our TV station affiliate base.

So this revenue source will continue with steady, strong increases.

Third, in over-the-top and skinny bundles for 2018, All Access and Showtime OTT are poised for continued strong subscriber growth, and we are seeing great traction in skinny bundles as well.

Lastly, in international content sales for 2018, as you heard, our studios are producing 65 shows, which is more than double what we did 5 years ago.

In addition, we continue to expand our Showtime brand overseas, and we are gearing up to launch All Access internationally as well.

So in summary, as we said at the top, we continue to grow our business by embracing the changes underway in our industry and turning them into opportunities.

As a result, our subs at CBS and Showtime are both up, and the growth is being driven by skinny bundles and our OTT services, which have better economics for us.

Add to that, the 4 $100 million plus revenue drivers that we just highlighted.

And you can see why we're so confident about our ability to grow in 2018 and beyond.

And with that, Don, let's open the line for questions.

(Operator Instructions) We'll take our first question from Ben Swinburne with Morgan Stanley.

Les, I have 2 questions for you, one around the NFL and the other around how you're thinking about programming, All Access versus the network.

There's obviously a lot of focus on NFL, ratings and product and the ad units and dilution of games, and you're very close to the league.

And you have your Thursday Night Football deal up at the end of this season.

I'm just wondering if you could help us understand the kind of things, the league or CBS is thinking about to make the product better, to make it more palatable for advertisers, whether it's shorter spots, et cetera, whether you think the Thursday Night package should continue.

Anything you can help us to understand why you remain presumably very bullish on the NFL and what you think the league might be able to do to sort of address some of the controversies around it.

And then on the programming side, I'm just curious, how do you figure out what to put on the network versus on All Access?

Obviously, All Access has great economics, but you also have some pretty big retrans deals with some pretty big distributors coming up.

I'm sure you want the best stuff on CBS, the network.

So just a little peek into your thinking on how you just make those decisions.

Sure.

Sure.

Thanks, Ben.

Look, the NFL, obviously, there's been a lot going on.

The ratings are down a bit this year.

There's been a lot of talk on it.

Obviously, there were political issues that came up about kneeling during the anthem, and it became very controversial.

Look, the product, as I said before, it's still the best thing on television.

The ratings are still extraordinarily high.

I think all the networks are very happy.

They have the product and you see when you compare it to other things, live events are still working phenomenally well.

Yes, there's a lot of experimentation going on with these shorter ad spots.

There's been experimentation with -- this year, there are 4 pods per half versus 5, which is slightly longer.

So there are all sorts of things that are being tried in addition to the challenges that the coaches have.

They are being shortened and the game is trying to be expedited.

There's a lot of product there.

There's no question about it.

I think everybody's looking at everything.

We've had Thursday Night Football for the last 4 years.

There are a lot of real values to it in terms of being a promotional vehicle and having those 5 Thursday Night numbers are still very, very strong for us.

I think everybody's going to take another look at what's going on as we proceed forward.

But once again, we're still happy we have the NFL.

It's still a great product.

Regarding programming, it's a very interesting question, and it came up when we started talking about Star Trek.

Every division at this company wanted Star Trek.

Showtime wanted it.

The network wanted it.

If you remember earlier versions of Star Trek were even syndicated, from station to station, we felt as we were doing our planning for All Access.

We said we need something extraordinary.

We need something that people really feel is worth paying for outside of the norm, and we said that's the perfect place for it.

It's a very expensive program, as you know.

Fortunately, Netflix covers a lot of the cost by the international rights.

So the kinds of programming that's on All Access will probably somewhat be more premium, let's say, than it would be on CBS.

We're spending more on the product.

We don't need as mass an audience as we may do on CBS, but it needs to be more specialized.

It needs to stand out quite a bit.

As I said earlier, I am blessed since I'm a content guy with having Showtime and All Access and CBS and CW.

We do all sorts of different kinds of programming, and we have different development units at each division and in certain cases, like the Star Trek, there's a jump ball, and I will generally make that decision.

And for this one, we felt we're launching a very important new product.

The good news is the bet is paying off.

And Les, just on the NFL, are you seeing any advertiser hesitation?

I mean, there's this whole Papa John's commentary this week.

I'm just curious if you're seeing anything impact the ad sales side of the equation.

No.

I don't know of one sponsor that's pulled out of any spot that they had.

I don't think it's affecting advertising of their desire, one iota.

We'll go next to Jessica Reif with Bank of America Merrill Lynch.

I have 2 topics, maybe a multipart question, but on the over-the-top, a couple of things.

On the All Access economics, can you give us any color on the contribution to profitability and what the sub composition looks like?

Meaning how many subs takes $6 versus -- you pay the $6 versus the $10 advertising-free?

And is there any difference between the 2 offerings in terms of contribution?

And on the sports, the coming sports OTT product, how do you think about the addressable market?

And the price point, the potential price points?

And then I'll get to the second question.

Joe, do you want to answer it?

Yes.

Jessica, on your -- I'll start with the OTT piece.

Just on the take rate between the ad, the $6 product and the $10 product, we're seeing about 20% of our subscribers take the ad free product.

And so from a contribution margin, we're really indifferent, and that's why we priced it that way because we're basically making essentially $4 of advertising.

So we're indifferent.

But let me be clear is that we're not managing All Access for margin.

We are growing the -- and we're making investments and putting more and more series on it because again, the long-term ROI is very, very, very attractive.

Meaning, as Leslie just said, we just announced again The Twilight Zone coming.

So we have a slate, if you will, of original series that, by the way, sometime in the future, we might choose to monetize again.

So obviously, that will have a lot of margin to it because the cost will be sunk.

So our litmus test is, is the product that we're putting on growing subs?

And as long as it continues to grow subs, we're going to kind of feed it.

On your sports question, this is going to be pre-ad-supported service like CBSN.

So basically, what we see is an appetite of demand for consumers that want news and highlights of sports where we see a void in the marketplace and they want it on their terms, on their time.

And so we're going to give that to them and again, we think it's attractive, but we think the demographic is very attractive for advertising, and we will tuck it in as part of All Access as well to bolster that offering in addition to CBSN, which will be also part of All Access.

And the second topic was just on kind of on a traditional business.

On the rating system, there's still such a major lag.

But Les, you were talking about the big lag you get on C7, and so there's still such a major lag and a discrepancy in rating versus what everyone thinks the viewing is.

Do you expect the rating system?

Or do you -- how will you guys and the industry address this over time?

It is a very good question and there is a long lag, and frankly, we're not getting in all the numbers and you often have to wait literally 3 to 4 weeks before you see the results.

So anybody who's basing anything on overnight ratings is either 20 years behind or crazy.

So putting the different pieces together and how we're selling it and how we're measuring it is changing so rapidly that we have to look at new systems.

Obviously, Nielsen is still a very big player and an important player, and they're adding more and more services, but there are other players getting into the marketplace, and measurement and our dealings with advertising agencies become much more complex than ever before.

As you know, only a few years ago, we began C3.

Now it's C7.

Now we're selling some up to C35.

There are all sorts of numbers that are coming in from DVR playing, from VOD, et cetera, et cetera.

So it's very complicated.

I don't quite understand it.

I don't get the same thrill as I used to when I put ER on the air, and I saw a 40 share in the overnight ratings.

Now I have to wait a month to get my thrill.

So it's a very different ballgame, and it's rapidly changing.

So it's a very valid question.

We'll take our next question from Alexia Quadrani with JPMorgan.

On CBS All Access, on your decision sort of on programming, you had The Good Fight in terms of exclusive programming.

Star Trek, now Twilight Zone, I guess how much are you trying to broaden your audience in terms of demographic?

And perhaps any color you can share in terms of what the typical demo looks like?

How much overlap you have on subscribers, maybe with your linear viewers?

And then sort of a second question sort of staying on CBS All Access, I think you mentioned that you're on a path to monetizing all viewing.

I guess any color you can provide on really what has to happen before we can really see a notable uptick in sort of the advertising opportunity on the digital platform.

Yes.

Let me talk about the demographic.

Obviously, as I said before in terms of the programming, we are looking to distinguish it from CBS, from regular CBS.

Obviously the demographic, well, we've noticed, it's approximately 20 years younger than our average viewer, so we are getting a younger demographic, which is really good.

As I said, it doesn't have to be as broad.

It could be much more niche.

We started out with Good Fight, which obviously brought a lot of -- a great deal of the female component over from CBS because it was a very female skewing show.

Star Trek is more male than female and also, as you would expect, a younger demographic as well.

Star Trek will continue to expand it.

We're looking the good news about All Access.

We don't care whether you're 8 or you're 80.

We're bringing in people from all over the place and different people are watching for different reasons.

Some to get old library product, some to get catch-up on our current series and obviously, a lot of people that are looking to see the new product.

So it's very interesting.

It's very exciting, and we're going to be adding new content all the time.

And Alexia, for monetizing it, obviously, we are monetizing it, but as we reach more scale, you'll see that number obviously move heavily.

Again, as Les said, the demographics are younger, which getting away from selling demographic and selling behavior.

We know if you're in the market for a car or pet food, and so the return on investment for advertisers are much higher.

So -- but that said, we still have to get millions more into CBS All Access is why we're making that investment to grow that.

But we do see the -- the opportunity there, but that's not -- let me be clear, that's not in a Nielsen rating.

And so that's where you're going to see the advertising really kind of distinguish itself because, again, we're selling that on different metrics.

We'll go next to Michael Morris with Guggenheim Securities.

A couple of questions on content.

Joe, I appreciate the context of looking at the 9 months instead of the 3 months with respect to the content revenue this quarter.

I'm wondering if you can give us a little more detail on the categories that saw timing shift between the first -- kind of the first half of the year and the third quarter.

I mean, we don't have too much insight into digital versus sort of traditional syndication, domestic, international, et cetera.

So maybe help us up understand that.

And outside of the big items like Madam Secretary and NCIS: New Orleans, which we know about, is there anything else that maybe is a fourth quarter item that last year would have been in the third quarter?

And then along the same lines, you mentioned the 65 shows.

You guys mentioned that a couple of times.

And I think that, that's an even bigger number in terms of the number of shows produced that we discussed last quarter.

How should we think about the pipeline sort of the backlog for syndication sales going forward in the context of that number?

Mike, it's Joe.

So look -- On the category, look, in Q3 of last year, we had 2 sales.

We had a Penny Dreadful sale and a renewal of our library with Netflix, and so that occurred last year in the third quarter.

That's why again, we always say over a longer period of time, you take out the lumpiness of that.

Obviously, we're looking at a strong fourth quarter in content sales because again, Madam Secretary is done and Les alluded to active negotiations for NCIS: New Orleans.

Look, we look at it and on platforms really SVOD and cable are still -- still need the content.

They still need that for ratings, for certainly basic cable.

We sell them off of the broadcast television.

So the marketplace is there, domestically, but international continues to be the best growth story that we have.

Again, as we're doing that, we just -- we sold Dynasty, which is going to be a CW show and we're able to license a product to Netflix, in this case, or Amazon again.

So we're able to do global deals much more effectively in today's marketplace because of the global nature of some of these SVOD services.

That said, is there a lot of local SVOD players that are very competitive and so we just want to make sure that, that dynamic in the marketplace continues.

As far as the 65 shows goes, just to give you some context, that's up 14% just -- from quarter-over-quarter.

We're doing 14% more hours.

So that a -- that's an investment choice we're making because again -- because we see the returns.

So as we keep pushing this snowball downhill, as we said, we have more than 600 episodes domestically that we haven't sold and every day that goes by, it's more and more.

And by the way, all this will also feeds All Access as well.

So you can kind of see where you get the trifecta benefit from producing great content.

Yes.

And let me just add onto that.

The 65 comes from -- we started out #1 Showtime CBS, obviously, producing more content for ourselves.

Then you add in the CW, where either Warner or we are producing or coproducing together.

Then you add in All Access, which is obviously only produced shows and then suddenly, as you heard us mention, we're selling to 11 different services with the aftermarket being as strong as it is.

In terms of both domestic and international syndication, the idea of selling to all sorts of different people has become very, very lucrative, which is why virtually every time we invest in a new show, we already know it's going to be profitable from day 1. So when we sell a show to Turner or we sell a show to Netflix or we sell a show to anywhere, to Apple, we already know these are going to be in profit before day 1 of production.

And that means that we're going to continue to increase that 65 number to a lot more.

Our next question from John Janedis with Jefferies.

Les, maybe a bit of a follow-up, but given your positioning for the network in the skinny bundles and the MVPDs, can you talk about maybe to what kind of traction or growth you're seeing in the marketplace, understanding it's early.

And longer term, there's been some concern in the market that the premium economics you're seeing will erode upon renewal as distributors reach scale.

So I wanted to ask if you see this as a real risk looking out a couple of years.

The skinny bundle, it is way too early to judge on the success or not success of what they're doing.

I think the concept of skinny bundles is a smart one.

It's based on the idea that people really want to pay for what they're watching, and that they're paying the huge amount of money for 12 to 15 channels that they watch, and they're getting 180 channels.

So I think they are absolutely viable.

Will they all succeed?

I don't know.

By the way, the technology on them, they're pretty cool devices to use and they're pretty.

They make it easy to watch the content and watch what you want to see.

I don't think, as I said to you, the success or failure of various skinny bundles, once again, doesn't matter to us because when people cut their cord, they're not going nowhere.

They're going somewhere.

So they either go there on a traditional bundle or 1 or 2 of the skinny bundles or All Access.

So if people are going to -- we don't view people as trying to squeeze us for price because we're going to be must-have television.

Every deal that we make, we are convinced that bundles will not work without CBS on them.

You've seen us make a few deals in the last few months, and I think it's proven that you can't have a complete bundle without CBS.

Maybe a quick one for Joe as a follow-up on All Access.

Joe, as you roll out into the new markets, can you talk about the incremental cost into the new markets?

Are you able to leverage maybe your existing presence of the syndicated programming to help market the offerings?

Yes, John.

Sure, we are.

Look, obviously, as we expand internationally, we go kind of -- there's a fixed cost base that as it scales, we're going to get more and more benefits of that, but clearly, we're making an investment in people and systems and infrastructure to do that, but we're also, again, we're going to use content that we have in our library to help that.

We're going to use our news product.

We're going to use our sports product, wherever we can kind of bolster the offering, we are going to do that, and so there's clearly an investment we're making, but clearly, we can leverage the fixed cost base over multiple countries as we expand.

We'll go now to Vijay Jayant with Evercore.

Just following up, Joe, on your comments about those 4 drivers into 2018 in excess of $100 million.

If you -- it does seem to be all pretty good margin increment, so it's sort of implies that you're sort of suggesting operating income could grow mid-teens, just based on that.

I just want to confirm, if that's the sort of triangulation we can come to.

And second, just obviously, tax reform is now taking a new life.

I just wanted to understand, given your revenues that is disproportionately domestic even though the mix is probably shifting more international as you grow.

Can you help us understand if the current form becomes real, what kind of free cash flow conversion benefits can we see?

Yes, Vijay, look, I mean, we don't give guidance, so -- that's why we pointed out these opportunities.

So clearly, they're high-margin opportunities, but again, we are investing and growing and expanding our content in the pipeline.

So we're not going to get into predicting what the OI margin is going to grow by in 2018, but clearly, that's why we wanted to highlight these things that are very significant to our top line.

So we'll manage that.

We're managing the company to growing the top line and stuff, and so if we wanted to manage for margin, clearly, as Les said, we could have sold Star Trek to Netflix and we could have increased our margin in 2017.

But we're looking at this as a long-term investment.

Second, on tax reform, most of our income is domestic, so we're not anticipating a whole lot of change and certainly in our book tax rate.

Obviously, it's a little higher so that would go down a little bit, but then we got to factor in what happens with state deductions or not.

So we're going to monitor this closely.

We don't think, it's again, it's going to be a huge driver one way or the other for our cash flow, our GAAP earnings.

But we'll stay close to this to make sure we're maximizing our after-tax cash flow, whatever the rules are.

We'll take our next question from David Miller with Loop Capital Markets.

I have 2 questions for Joe.

Joe, just with the action in media stocks today kind of top-of-mind in most, with most investors, could you just reiterate your retrans guidance?

I believe it's $2.5 billion in retrans and reverse comp fees by 2020.

I just want to make sure I have that correct because I just think it bears -- it's worth accentuating that bogey just in light of what happened today.

And then also for you, Joe, is there any reason to suspect that the deadline on the radio exchange might be extended beyond November 16?

Or do you feel pretty good about that November 16 deadline?

David, I appreciate your point at that.

First of all, it's a flaw in my remarks.

I should have said at the top and the bottom that $2.5 billion by 2020, as you said it, and we're crossing the halfway point this year.

And you saw it year-to-date, retrans and reverse comp is up 27%.

And so continue to kind of do that, I will reiterate that on our calls.

So we feel very good about that.

And again, I just want to say that, why?

Why do we feel good about that?

Because the ratings, the audience that CBS is delivering is 5x the amount of retrans and reverse comp fees we are receiving.

So we are way, way, way over indexing on what we deliver.

So until that's a 1:1 ratio, I will not rest.

So that's the first point.

The second point on the deadline.

Look, it's a little bit out of our control because there are obviously other customary approvals we have to go through, but we fully expect to be closing this transaction in about 2 weeks.

I can't -- I don't want to predict the exact day, but certainly, we feel good about it.

We think the offer to CBS shareholders is fair.

We priced it to complete it, and that's what we fully expect to happen in a couple of weeks.

We'll go next to Dan Salmon with BMO Capital Markets.

Les, can you talk a little bit about your mid- to long-term view on programming cost?

We spent a lot of time talking about how many more own shows you have in feeding the syndication pipeline, but it would also seem that, that gives you a much higher degree of control or at least visibility into programming cost, which would seem like a relative advantage in an industry where inflation continues to be the norm as players like Netflix and Amazon keep pushing into original programming.

So I recognize that's not the only thing, but would love to hear your view on the mid- to long-term for that.

Yes.

Look, Netflix and Amazon are throwing a lot of money at a lot of products out there.

And there's no question it makes the marketplace more competitive.

Having said that, once again, we have been fairly diligent in that we know how to produce shows for the maximum value.

Obviously, each platform has a different price point.

Shows at Showtime and All Access generally cost more than shows at CBS, and shows at the CW cost somewhat less than CBS shows as well.

But by the same token, we take that into account.

We know what our international output deals are.

We know what our domestic syndication probably is.

We also, once again, can regulate what the back-end participation is for our producers here and there is a real upside for them for coming here versus Netflix or Amazon where oftentimes, they will be giving their rights away.

But every show that we do, we do ultimate.

So if we're spending more like on a Star Trek, we know a, what Netflix is going to pay for the international rights.

We also know what it's going to mean to CBS All Access.

Before we greenlight a show on the CBS television network, we sort have an absolute based on, as I said, international output deals or international deals in general as well as the domestic potential.

So as costs may go up somewhat, a, we're able to control them better; and b, we know we're going to be profitable in every single one of the shows.

So the outlook for us is good, and that's why we will invest in more programming and that 65 number, very well could turn into 80 within a couple of years.

We'll go next to Doug Creutz with Cowen and Company.

I know it's still a bit early, but we are about halfway through the NFL season, I was just curious how your experience with the viewership on CBS All Access may or may not impact how you view the importance of having the digital rights to the NFL in addition to linear rights?

There's no question.

The NFL, as we may have told you, you may remember, we only have the last 2 weeks last year of the NFL season.

So having it this year certainly helped the subscribers, probably helped more by Star Trek, but having those 2 things both go on in September, October, has certainly launched a number of subscribers.

As you know, we're not giving the numbers, but it definitely has helped.

And then every Sunday, we do see a spike in the numbers of sign-ups.

So I think it's really important.

As we look down to the next big contract in 2022, obviously, digital rights will be an important part of it.

We expect that some of the larger players will be involved, but who knows?

We may get all the digital rights ourselves at the same time.

We'll take our final question from Bryan Kraft with Deutsche Bank.

I had a few quick ones.

First, Joe, you mentioned the pension change and it will be accretive in 2018.

Wanted to see if you could just clarify what you mean by that?

Are you just talking about reduction in operating expenses and can you put any numbers around that to help us quantify it?

Secondly, I wanted to ask if you could provide some color on what you're seeing in the scatter market as far as pricing, demands, any comments on category strength and weakness.

And then lastly, it was reported recently in the press that you're exploring a sale of Television City studios.

Just wondering if that's accurate.

And if so, how you're thinking about that opportunity and when you might make a decision on it?

I'll take the last question first.

TV City was formed in the '50s.

It was a production facility.

It's on very valuable real estate.

We're in the very preliminary stages.

We have received an offer from one of the people in the neighborhood, and so we hired somebody to explore the possibility.

It's -- as I said, it's very expensive real estate.

It may be money that could be used better elsewhere, but it's at the very preliminary stages.

I'll turn the rest to Joe.

And Bryan, scatter price, scatter pricing is up double digits over upfront, and up double digits over scatter last year.

So the demand is very strong, and it's across a broad array of category.

So we're feeling very good about the advertising climate, and so we're monetizing the ratings points or the consumption, we should say, of all of the ways consumers now watch the content.

So that's our focus.

In terms of the pension, look, it's slightly accretive because it's obviously there's interest cost on the borrowings offset by the premium savings on the insurance premiums.

And so net-net, given where the interest rates are and the cost of what we're paying for underfunding just made no sense.

So it's not going to move the needle a whole lot.

It's just accretive, and it's why we did it now.

And so it was opportunistic.

We looked at it.

It's a no-brainer.

It reduces risk and volatility going forward, and it's at a lower cost, so seem like a no-brainer.

And that will be funded in '18, you said, Joe?

No, it's going to be funded in Q4.

It will be funded in Q4, and again, and then that liability, that over $800 million will be transferred to an insurance company, thus, off of our books by the end of the year.

Thanks, Bryan.

And thank you, everyone, for joining us tonight.

Have a great evening.

That does conclude today's conference.

Thank you for your participation.

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