VIAB
#Thanks, Bob
Good morning
We are pleased to report our financial results for the September quarter full-year fiscal 2017. The quarter and for the full-year, we saw revenue growth at both Media Networks and Filmed Entertainment as well as growth in operating free cash flow
First, I will discuss the consolidated results for the year
Viacom generated revenue of $13.3 billion, 6% increase over the prior year and adjusted operating income $2.7 billion that was flat with last year
Media Networks and Filmed Entertainment grew revenues
We generated adjusted earnings per share of $3.77, an increase of 2% over the prior year and we've generated $1.5 billion of operating free cash flow, which is up 26% over last year, demonstrating the durability of our cash flows
This represents operating free cash flow per share of $3.77, which translates to an operating free cash flow yield of 15%
Now moving to the results for the quarter
Viacom generated $3.3 billion of revenue and $578 million of adjusted operating income, up 3% and 7% respectively over the prior year
Both Media Networks and Filmed Entertainment grew revenues
Adjusted earnings per share of $0.77 for the quarter was up 12% year-over-year
As we previously announced, Paramount has secured a series of individual financing agreement, which replaces our prior slate financing deal and better aligned with the studio's new slate strategy, consisting of a mix of big broad audience films and more targeted flagship branded films
More flexible and tailored financing model will allow us to capture greater upside and more modestly budgeted titles were presently there is no third-party financing
Given the decision to end the slate financing deal with HuaHua and pursue alternative financing arrangement, we recorded a net $59 million negative impact on operating income in the quarter related to the write-off of amounts previously reported
Absent this impact, EPS would have been $0.88 in the quarter
Turning to our segments
Slide 4 of our web deck provides the financial overview of our Media Networks segment
Revenues for the quarter increased by 3% to $2.6 billion, worldwide advertising revenues increased 6%, and ancillary revenues were up 5%, while affiliate revenues declined 1%
Adjusted operating income declined by 8% to $693 million
Slide 5 of the web deck provides the breakdown of our Media Networks domestic and international revenue performance
Domestic revenues decreased 2% to $2 billion, while international revenues increased by 24% to $593 million
On organic basis, absent a four percentage point favorable foreign currency impact and 14 percentage point positive impact from the Telefe acquisition, international revenue would have grown 6% a quarter
At our Media Networks business, domestic advertising in the quarter improved sequentially to flat year-over-year, which exceeded our prior guidance
This compares to a year-over-year decline of 2% in the June quarter
In the quarter, ratings growth was largely offset by an overall decline in cable subscribers and our strategic reduction in unit load to improve the viewer experience
Domestic affiliate revenues decreased 3%
Decrease in the quarter was due to the lower revenues from SVOD and OTT agreement, decline in subscribers including continued flow through from Charter re-tiering and the transitional impact from rate resets associated with renewals
These factors were partially offset by mid single-digit contractual rate increases
12% decline in Media Networks domestic ancillary revenue to $76 million is principally due to lower consumer products revenues and lower revenues from our Teenage Mutant Ninja Turtles franchise ahead of its relaunch in 2018. Now turning to international
Advertising revenues increased 36% in the quarter
Absent a 3 percentage point favorable impact from foreign currency and a 26 percentage point favorable impact from the acquisition of Telefe, organic international advertising revenues would have been up 7%
The organic performance reflects strength in Europe
International affiliate revenues increased 12% including a 4 percentage point favorable impact from foreign currency and a 2 percentage point favorable impact from the acquisition of Telefe
Growth in the quarter reflects the impact of new channel launches, rate increases, and subscriber growth
21% increase in Media Networks international ancillary revenue to $105 million included a 7 percentage point favorable impact from foreign currency and a 7 percentage point benefit from Telefe
The organic growth benefited from our strategy to grow our off-network business driven by revenue from our recreational deals and higher consumer product license
Worldwide expenses increased 7% in the quarter and included a 4 percentage point impact from the acquisition of Telefe
In operating expenses, programming expense increased 12% driven primarily by the timing of original programming premieres and the acquisition of Telefe, while distribution and another expense declined 2%
SG&A expense increased 3% in the quarter which included a 3 percentage point impact from Telefe
Now turning to the studios results for the quarter
Filmed Entertainment revenues were up 2%, as increases in license fees and ancillary revenue were partially offset by decreases in Theatrical and Home Entertainment revenues
Slide 6 of the earnings presentation provides the breakdown of Filmed Entertainment revenues
Theatrical revenues decreased 43% to $115 million, principally reflecting lower revenue from our current quarter releases
Higher carryover revenues driven by Transformers, The Last Knight were more than offset by difficult comparison to the release of Star Trek Beyond in the September quarter of last year
License fees increased 30% to $423 million driven by higher Paramount Television production revenue as well as higher revenues from pay-TV and SVOD
Paramount Television continued its significant growth more than tripling its revenues in the fiscal year through breakout releases, including Shooter, 13 Reasons Why and Berlin Station, all of which were renewed for a second season
Ancillary revenues increased 33% to $61 million in the quarter
Filmed Entertainment generated an adjusted operating loss of $43 million in the quarter which included the $59 million negative impact related to our decision to end our prior slate financing arrangement
This compares to a loss of $137 million in the prior year, an improvement of $94 million
The improvement was driven by the increase in revenues and lower operating expenses
In term of taxes, the adjusted effective tax rate for the fiscal year was 30% as compared to 31.7% in the prior year
This was driven by the mix of domestic and international income
Components of free cash flow are broken out in Slide 11 of the earnings presentation
We generated $962 million of operating free cash flow in the quarter and 9% improvement versus the prior year
For the fiscal year, we generated $1.5 billion of operating free cash flow which is up 26% year-over-year
The increase in full-year operating free cash flow was principally driven by improvements in working capital at Filmed Entertainment, including lower film spend, partially offset by higher cash taxes
Turning to Slide 10. Since we announced our strategic plan on February 9 and our commitment to reducing leverage and maintaining investment-grade metrics, we have made meaningful progress, reducing gross debt by approximately $2 billion or 15%
In terms of our debt, at quarter end, it was principally fixed rate with a weighted-average cost of 4.9%
We had $11.1 billion of total debt outstanding cash equivalents increased $1.4 billion
If you take into consideration, the equity credit we received on our hybrid securities, our adjusted gross debt at quarter end was $10.5 billion
I want to echo Bob's commitment to strengthening our balance sheet and maintaining investment grade metrics
Over the course of fiscal 2018, we will continue to pursue opportunities to delever
Looking ahead to fiscal 2018 transitional impacts from our renewed distributor relationships will continue to flow through our results, particularly in the first half of the year
The near-term, we anticipate pressure on domestic affiliate revenues driven in large part by rate resets, lower SVOD revenues and the subscriber declines, which are amplified by a lag in the penetration improvement associated with our recent Charter renewal
Domestic affiliate revenues will show high single-digit declines in Q1 and Q2 with these declines improving in the second half, resulting in a mid single-digit decline for fiscal 2018. Importantly, we expect that the momentum we gained in the back half of 2018 will set us up to return to domestic growth as we get into fiscal 2019, we benefit from regaining Charter distribution, flat renewal rate resets and fully benefit from contractual rate increases
This guidance reflects the transitional impact of our successful efforts to stabilize the distributor base and position us to drive new opportunities for future growth with our distributor
As of international affiliate revenues in fiscal 2018, we anticipate continued growth
Turning to the ad sales, in the December quarter, we expect to see overall growth driven by continued strength of International, a low single-digit decline on the domestic side due to some ratings softness
We expect domestic performance to improve over the year with positive growth in the back half due to new original programming coming on air, as well as greater carriage benefits and contributions from digital initiatives
Turning to Media Networks fiscal 2018 programming expenses, we expect the growth rate will be in the low to mid single-digits and continue to invest in our flagship networks, while benefiting from a shift in mix to non-scripted programming
Network from our programming expense, we see the opportunity to reinvent our cost structure to drive margin and profitability
Based on the plan we have constructed, we project cost savings approximately $100 million in fiscal 2018, as well as hundreds of millions of dollars of additional run rate savings, most of which will be realized by fiscal 2019 and will drop to the bottom line
Accordingly, fiscal 2018 Media Networks SG&A expense will improve by low single-digits driven by these cost initiatives
Moving to the Studio, Paramount Pictures new management team has moved quickly to begin production on a 2019 slate and find cost efficiencies in production and marketing to enhance the bottom line
For fiscal 2018, we anticipate hundreds of millions of dollars operating income improvement
Finally, for fiscal 2018, we forecast a book tax rate of approximately 31%
We will refine this as we go through the year and get a better sense of the domestic versus international profitability
With that, I’d like to turn it back to Bob
And with respect to margins and growth for Media Networks, so as we said we're very focused on efficiency for the Media Networks business
Bob did highlight some of the headwinds we have in the first half of the year, but those headwinds are substantially unwinding in the second half of the year
We do expect to see significant margin enhancement in the second half of the year
And as it relates to overall OI growth for the year that’s largely going to be a function of the timing of some of the cost savings that we see come online, but you can expect it to be essentially flat or growing depending on the timing of that
But definitively the overall company will grow operating income
And as it relates to free cash flow, we had a very good year from a cash tax standpoint in 2017. So whether or not we will grow free cash flow in the aggregate, is going to be a function of cash taxes which obviously for everybody is a little bit up in the air in terms of tax reform and for us is going to be a function of domestic and international mix
But fundamentally the operating part of our business, Media Networks, corporate Filmed Entertainments, we will grow cash flow out of those areas
So whether or not overall free cash flow growth for the company is going to be a function of cash taxes but it will grow out of the operating elements of the business
Sure
So first I'd like say with respect to our strategy in changing the nature of our affiliate relationship, so we did announce in February that we’re focused on really reinventing the nature of these relationships to become much more multifaceted and allow us to strengthen the overall value proposition of the pay-TV echo system with our distribution partners
And so you saw that in our – you’ll see it again in Charter where in addition to the core content licensing
We've also introduced content co-production as well as an innovative approach to advertising an advanced data that allows both of us to grow our revenues associated in these two areas
As it relates to the co-production part, this is a great place where in the Charter, example we're creating value for both companies
Charter gets the first window for the exclusive content in their footprint and then we get a second window of exclusive airing nationally
And this is also going to be produced by Paramount, it’s going to grow revenue for Paramount TV, it’s going to grow library value for Paramount and continue to fuel this important area of growth for us
As it relates to ad sales, it’s a separate agreement between us and Charter outside of affiliate agreement to collaborate on advance data and advertising opportunities that are going to accelerate the penetration of dynamic ad insertion into the TV infrastructure
This creates new valuable and probably most important differentiated pools of inventory for both Charter and Viacom similar to Altice
And as far as we know we're the only company in the space that's kind of leading this transformation of the nature of these relationships to include these multiple facets
Over the course of 2017 we decreased the load about 7%
It’s among the factors that Bob indicated that are going to fuel the growth in domestic ad sales over the course of 2018 will be lapping that in addition to the other factors that Bob indicated
