Paramount Global (PARA) Goldman Sachs Communacopia & Technology Conference (Transcript)

Paramount Global (NASDAQ:PARA) Goldman Sachs Communacopia & Technology Conference Call September 6, 2023 6:05 PM ET

Company Participants

Bob Bakish - President & Chief Executive Officer

Conference Call Participants

Brett Feldman - Goldman Sachs

Brett Feldman

Welcome, everybody. We're going to go ahead and get started with our next session here. Excited to welcome back to the Communacopia + Technology. Bob Bakish, the CEO of Paramount Global. Bob, welcome back to conference.

Bob Bakish

Great to be here, Brett.

Brett Feldman

And you are wrapping up our big media blocker today. So you get the last word. So whatever it is you want to say no one else can come in here. I always like to start off with you at a higher level. It's been a pretty big year of execution for Paramount. You've integrated Paramount+ with Showtime, you've agreed to sell Simon & Schuster. You have worked on streamlining costs in your linear networks and you've been doing all of this in a tough macro advertising environment.

How do you believe all of these developments set up Paramount for stronger positioning as the media landscape evolves? And what are your top priorities here as you sort of work to finish the year and get ready for 2024?

Bob Bakish

Yes, sure. So it's certainly been a busy and dynamic year. We're very pleased with the continued progress we make in the company's transformation. You look at what we're doing on the call it, the TV media side, where we continue to get deals done without going dark, by the way. We've been refining our programming mix. We've been using product in different ways, including in second window ways to the improvement of economic fundamentals and we're going to do some interesting things in the fourth quarter now with the strike. We continue to streamline the organization, have made a whole set of moves on Paramount+ and Showtime side, consolidating Showtime into the basic cable organization.

And by the way, news, we now have singular leadership in stations, syndication in news. So a lot going on in the traditional side as we elongate those important earnings simultaneously on the DTC side, we very much continue to build a scale set of networks. I say set of networks is both free with Pluto and Pay with Paramount+, now Paramount+ Showtime and progress down that path to profitability which is so important to demonstrate in this transforming media landscape.

And you see what we're doing with bringing great content to the screen, you see fans out there? I don't know, special ops line if anyone just finished strong, if you haven't seen it, check it out. You see what we're doing in terms of expanding the partnerships on the marketing side, I love what we're doing with Walmart now for you writing flying Delta, you see Paramount+ on those aircraft and there's much more to come. And of course, on the economic side, whether it's through consolidation or continuing to increase the effectiveness and efficiency of the organization. And as we're doing all that, we continue on our mission to focus the company, streamline it, dispose of noncore assets, including a recent agreement to divest Simon & Schuster which we're very happy about, all in the pursuit of continuing to fuel our most important priority which is content and drive the business forward.

So it's been a busy year, dynamic year but we're feeling good about it.

Brett Feldman

All right. Let's dig into some of those things. I'm going to start with the integration of Paramount+ and Showtime. The objective there is to create a stronger product with lower churn that could support a higher price point and ultimately help drive cost savings across the platform. I know it's recent but how has this integrated product performed so far? Whether it's engagement, people's acceptance of the higher price point or just the cost efficiencies?

Bob Bakish

So we're very excited about Paramount+ with Showtime. It is, as you say, early days, we introduced that to the market on June 27. So we really only have about a month of data in terms of the actual metrics. But I can tell you that it is totally performing on plan. We believe it was the next step in our broad thesis. That's what Paramount+ is, new sports and mountain of entertainment and we believe that uniting Showtime programming and Paramount+ programming would create further consumer engagement, help bring in new subscribers, manage churn, etcetera.

And by the way, it enabled price increase which is something the whole industry continues to pursue. As we did that, again, we are coming on plan. I think very importantly, it is an example and I'm sure we'll get into this more as we progress. But it is the definitive multi-platform product in the entertainment space today in the U.S. You can get it on linear, you can get it on streaming. We're working with our distribution partners on both and again, early days but we're very happy about what's going there. So I encourage you to check out the product if you haven't. But it is an important industry development and we will continue to drive the company forward with it.

And by the way, we have gotten very substantial cost savings along the way, whether that's through organizational consolidation, technology as we go to a singular platform, there used to be 2. And, of course, content and marketing as we now have a self-reinforcing slate across both of those products. So thrilled with where we are and look to continue to push it in the marketplace.

Brett Feldman

You've made this point many times in the past, how the breadth of content that you can offer to your viewers is a real point of differentiation but another conversation that we've been having with investors for a while now is the focus on driving more efficiency out of content spend. There was a period where it seemed like too much money was being spent poorly. How are you assessing when it makes sense to lean in and invest into premium differentiated content and when you don't need to be involved?

Bob Bakish

Yes. So look, it really does start. And then with content, some that said a long time ago, content is king. It really is why you watch platforms, etcetera. So we spend a lot of time. And whether we get better at it with the more data we create every day and we look at that. We're pulling from the whole company, whether that's Paramount Pictures, where Paramount pay 1 product, i.e., the film, continues to drive acquisition and engagement. We're pulling from CBS, where CBS is totally integrated to Paramount+ and its programming slate performs very strongly for us.

If you look at the rankers an aggregate consumption on Paramount+ CBS figures prominently. We're pulling from our cable networks, in particular, libraries which serve specialized audiences, including kids and family. And of course, we're doing signature originals which bring people to the service in very large numbers. So as we do all that, again, we believe in a broad thesis, we believe these lanes, if you will, would reinforce each other. We certainly see that the case. Now we have sports coming back at scale. Sports performs very strongly for Paramount+. Obviously, NFL season starts this week. We couldn't be more excited about that. And we couldn't be more excited about our expanding roster of college where all the stuff intersects in a beneficial way on the platform.

And because it's not only cross-platform on Paramount+ but it also largely rides in a linear ecosystem we can get further economic synergies from that. So broad is good, broad works in the marketplace. Again, Paramount+ with Showtime is the next example of that -- current example of that. And we will continue to push that agenda as it becomes truly a cornerstone service for American and ultimately, the world's consumers.

Brett Feldman

So I want to talk a bit about your pricing strategy for Paramount+. One of the interesting takeaways from your second quarter call was you provided an expectation that you're going to see 20% growth in your global Paramount+ ARPU next year. Some of that will be the result of recent price adjustments you've already made, just as well as a mix shift that, that's favorable. How do you think about what the pricing strategy for the service should be both when you look at what competitors are charging and what you're trying to achieve in terms of balancing subscription growth versus ARPU growth?

Bob Bakish

Sure. So if you look at just the mathematical expression of the top line of Paramount+, you obviously have subscriber growth, you have churn reduction, you have ARPU growth, ARPU growth driven by price and ad sales. And what you've seen through '23 and you'll continue to see in '24 is growth in all of those levers, if you will which has a multiplicative event. And if you look -- effect. And if you look at the second quarter, you have Paramount+ north of 60 million homes, you have Paramount+ revenue growing 50% in the quarter and you had actually, for the first quarter, a reduction in operating losses. So we're very excited about that. With respect to your question on pricing. Look, we all know that streaming represents -- continues to represent an extraordinary value proposition for consumers. We're not unique to that. Everybody knows that. The whole industry has been raising price. As we said, we just effectuated our first price increase.

It is very much performing according to plan. There was some question out there. If it would adversely affect churn in a significant way that sort of bring down subscriber acquisitions. And the fact of the matter is we're not seeing that. So that proves that we have pricing power in the marketplace, given the content we're bringing to there on the platform. Our plan is to raise price. Again, this isn't our only price increase. Whether we do that in '25 or we do that in '24, we'll see. Again, early days as we evaluate the, call it, impact of the price increase but we believe there's a lot of room to run there. And again, that's not the only ARPU driver. You talked about 20% ARPU growth in 2024. That also includes continued ad ARPU growth which we're feeling very good about our digital ad business.

Brett Feldman

And part of that is the mix, meaning that you're going to -- you're expecting more growth in your business in markets outside the U.S. where you have higher ARPUs, whereas recently, maybe they've been skewing a little lower. What have you learned through your early experience as an international streamer about which markets you're getting the best returns and traction with the product? And maybe which markets you want to adjust the strategy to maybe work with partners or just do licensing?

Bob Bakish

Yes, it's a great question. So obviously, we've been bringing Paramount+ to international markets, starting with the U.K. in the summer of last year and really -- or that's our Western European launch. As you said, the mix shift of folding Western Europe into our international business which historically was started with LatAm and Brazil. That in turn raises ARPU because ARPUs in Western Europe are higher than in Latin America. That's not a surprise. You can just look at economics and see that. In terms of what we're learning, we've learned and I'd say, we believed in and we're confirming the power of partnership. As you probably know, when we launched in the U.K., when we launched in France, we did that in partnership with major distributors introducing Paramount+ to a whole tier of their subscribers in what we call a hard bundle.

Now we didn't do that exclusively. We use that as a launch mechanism to rapidly add subs at zero acquisition cost and build awareness which then we could follow on with, call it, DTC growth which is exactly what is happening. So we've learned that we were right on the value of partnership. I'd say what we've also learned is that we probably have an opportunity to lean more in that direction. When we look at the Paramount+ product, where we have customers like Canal ingesting the content into their platforms and merchandising as Paramount+. That gives them a further incentive to drive the business in an economically beneficial way for both of us.

So as we look at expansion beyond the markets we're already in and we're in essentially the top 12 streaming markets of the world. When we look at expansion beyond that, I believe partnership will figure more prominently because it enables a more attractive economic expression. It reduces the need for local content. It reduces the need for local marketing. It reduces the need for sort of custom platform expense and it really gets a powerful local partner engaged in driving the business. So that's probably learning that there's more road to run there. But again, early days for P+ and international and we are seeing great consumer traction with that mix of Paramount films, CBS and Showtime series, signature originals, etcetera.

And in fact, I was at lunch with one of our key partners yesterday in New York from the international distribution space. And they remarked how important our global slate of content was to them that it really was cutting through and they wanted to do -- find a way to do more with that. And so again, that speaks to the opportunity, broadly speaking, of doing more with international partners in the streaming space which I believe you will see us do in '24 as we continue to scale the business and accelerate our profitable expression of streaming.

Brett Feldman

Well, let's talk more about that path to profitability. You've said that you expect this to be the peak year of investments or the peak year of losses in the DTC business. But that eventually not only will you turn towards profitability but that those margins can reach similar levels to what you've seen in the TV media segment. When I talk to investors about this, they'll say, yes but hold on, the streaming business has cost that your traditional linear business didn't. You're doing a lot of distribution, a lot of advertising. Where are the efficiencies, where are the offsets? Where do you see more operating leverage in your DTC business over time?

Bob Bakish

So a set of points worth making with that regard. One is, we are very focused on profitability. We always were focused. Sure, we're in a streaming investment phase and it happens through the '23 which we said over 2 years ago would be our peak investment. We saw that again last year, we said that again last quarter and that is very much tracking out to be the case. And it's a byproduct that what it means is '24 is a year of significant streaming loss improvement and significant total company Paramount earnings growth which is obviously important to valuation and also to leverage. So that is the path we see as to why and how we're doing that. Start with the fact that it really -- the all components of the P&L are contributing. So it's subscribers, churn, ARPU, again, ad ARPU plus price ARPU. Add to that the bottom part of the P&L, content expense which we're getting more efficient and the recent consolidation with Showtime furthers that efficiency because of the mutual reinforcement point, marketing, a related benefit to content and one that partnership allows you to further hone organization.

We've done some more consolidation. And on the tech space, we continue to look at ways to -- really, that's about slowing the growth. But you put all that together and again, remember, DTC revenue growth in the second quarter was 50%. And you have built in -- built in is next year but ARPU growth of 20% even before subscriber additions and churn, both of which subscribers will grow, churn will go down. So the arc of profitability improvement is very predictable and we feel very good about it. As we -- yes, build a business and scale a business that becomes a significant contributor to our reach and ultimately, the earnings of our company.

Brett Feldman

The investments that you've been making in the DTC business, our reason why leverage has moved up, obviously, as that investment cycle comes to an end and you start to trend towards profitability, that will help. What are some other things that you're doing to help bring down the total leverage of the company?

Bob Bakish

So operating earnings improvement is the most powerful lever in delevering the company. And we see that in spades in '24 and we are pursuing it. It is not the only lever. Add to that, what we've done in terms of noncore asset dispositions when we close on Simon & Schuster, those proceeds will go to delevering the company. This a significant volume of proceeds. Add to that, the multiyear effect of changing our dividend policy which, again, in 1 quarter doesn't change leverage radically, certainly on a 2-year basis, it begins to add up. And then lastly, a lot of talk about the strike and how long it's going to be to settle and all that and anyone that tells you they know the answer, you shouldn't believe because nobody knows. But in the short term, that is beneficial to cash. And that, in turn, is a delevering -- another delevering element. And by the way, on a 2-year basis because you got to look at it as a strike unwinds itself, we see that as more cash flow over 2 years than we saw going in by virtue of some of the things we're doing.

So there are multiple delevering elements at play. We are cycling through peak streaming investment losses and therefore, leverage is peaking. But we are very much projecting to come out the other side and you will see that meaningfully occur as we transition to '24 and beyond.

Brett Feldman

I want to pivot to the -- back to the Networks business and really touch on it through some of this recent news flow we've seen this dispute that's emerged between Charter and Disney. And in expressing their opinion around why they've gone to this point, Charter has said that they think the video ecosystem is broken in part because they believe programmers have devalued their content in the way they've made it available on their streaming platforms. And they've also stated that the models that they are proposing at Disney is the model that they are going to pursue with all their programmers going forward. How do you see the relationship between Paramount and Pay-TV providers evolving? And ultimately, what do you see as the win-win model going forward?

Bob Bakish

Yes. So obviously, Friday was a notable event in the industry. I'd say it was notable simply by virtue of the fact that $15 billion in market cap evaporated from the media ecosystem as people reacted to that news and whether those were investors or traders, who knows. But nonetheless, it was interpreted as a negative. But what you need to understand is all companies are not in the same point of view. When we saw this happen, this did not surprise us. We didn't know it was going to happen Thursday night. But the fact that something like this would happen was not a surprise.

And in fact, we started thinking about the evolution, transformation of our company going back 7 years probably. And working with distributors in that regard to modernize the way we do business. And I'd point to a couple of things. One, we have co-marketing agreements with every major distributor in the United States for streaming products which -- and I say products because it's largely speaking, both Pluto and Paramount+, they have different financial expressions but it gives them an incentive to transition and ride that migration of consumer behavior from, call it, traditional set-top box linear to broadband. It gives them a very much an incentive in that game, point one. Point two is, if you look outside the U.S. and I mentioned it briefly, we've actually taken on a step further with the creation of these hard bundle models where we are providing streaming apps to traditional distributors, big distributors like Sky, like Canal, there are some others, where they are providing a whole tier of their subscribers like the Sky Cinema subscribers tier in the U.K. or Italy or Germany with Paramount+.

And for us, that means zero subscriber acquisition cost, yes, slightly lower ARPU. And -- but for them -- and by the way, churn with the tier, not a la carte churn. But for them, it provides them with additional value for their subscribers and we like the financial expression of the business; three, Charter Spectrum skinny bundles, like Charter Spectrum Essentials, I'm sure you've read about it, heard about it, etcetera. We're in Spectrum Essentials; we like that business. That has been a growing sector of the video ecosystem, the more attractively priced skinnier entertainment bundle [indiscernible] entertainment-only bundle. That's good.

And then lastly, what we were talking about a little bit earlier, Paramount+ with Showtime. Why does that matter? It matters because it is the definitive multi-platform product.

As you go forward, if you're a consumer and you want that product on linear, you can get it that way. Showtime is being rebranded, Paramount+ with Showtime. And of course, you can get it over the top. I think what's important about that for this conversation is that we now have in place today multiple deals with some of the largest MVPDs and vMVPDs in the United States, whereby their linear Showtime subscriber at the rebranding will get access to app credentials.

And that is along the lines of what Charter was talking about. Again, we thought about this a while ago. We are doing business that way, not specifically calling out Charter, I'm talking about the concept. And we see that as accretive to our call it, financial model and we see it as a natural evolution of the business to give consumer choice and work with key distribution partners such that they're able to offer the product in both and we're pretty indifferent as to how a subscriber gets it.

By the way, while we didn't build in our plans, I bet you we get -- we grow linear share versus some key competitors because of that. And I'm sure, given what we've seen in early statistics that we will continue to grow the OTT business with Paramount+ and Showtime. And again, I think that's an example taken with all the other ones, of how we've been working to transform our assets, strategy and relationships over many years to fit this changing consumer landscape.

And I would argue that not everyone is doing that. And so when you look at what's going on in the marketplace, you should ask yourself that question.

Brett Feldman

I start to talk to you -- spend a little bit time talking about advertising. So on your last earnings call, you had noted some bright spots in the market, including the acceleration in your DTC advertising growth rate. You also acknowledged that linear advertising would recover more slowly than digital and we've heard similar commentary from your peers -- can you give us any update on the current demand in the scatter market? And how is that reflected in your advertising outlook for the remainder of the year?

Bob Bakish

Sure. So what I'd say -- look, the advertising market is a bit of a complex animal. It certainly has a number of moving pieces in it. That said, When we look at it, one of the things people continue to talk about is cyclical. Where are we with respect to the economic cycle? How is that affecting advertising? We have said, including on the second quarter call, that we see differences in key categories, some being better than others. And I'd say the most recent example of this which we are very happy to see is the auto category has gotten much more healthy. It was up in the upfront and it's up much more strongly in third quarter scatter. So that's a good thing. Now not all the categories are sorted yet but directionally, that's an important development, point one.

Point two is, if you look at sectors of the advertising market, sports. Sports continues to be very strong. Again, happy the NFL is starting this week and also happy that -- and this turned out to be a bit of luck, quite frankly but we actually have more sports product, including in the fourth quarter, this fourth quarter than we did in the comp quarter and that's because we've added the Big Ten. When we added it, we didn't know that the strike but having a bunch of extra Big Ten games with sports being as strong it is in advertising is a great thing.

Third point, we talked about a lot on our call, digital. Our digital business is very strong. We see agencies and their advertising clients continuing to grow their commitments to our digital products, probably up 20-plus percent in the third quarter. Quarter is not closed yet but it's going quite well. So that's all good. Is the ad market perfect? No, the ad market is not perfect. We could use some more categories. We can use local to get a bit better. We could use some elements of international to strengthen. But in general, we feel very good about the ad business. In particular, the ad business as we look longer term and we really take advantage of the scale position we've built in digital.

Our DTC business is now running at $3 billion. Our IQ product which is really the wheelhouse of that, 90 million monthly reach in the U.S., all wrapped around premium content and increasingly infused with data. So we like where that's going, add that to leadership positions in linear, number one broadcast network in the U.S. and CBS and everything doing around the advanced space and the integration space. So as we look to '24 and I heard David talk about heating the fourth quarter is super strong. Great. We feel very good about the business.

Brett Feldman

I'll spend some time talking about sports. So there's a variety of major sports rights coming up for renewal over the next couple of years, the NBA, WWE, the college football playoffs. And you continue to invest in sports rights. You mentioned the Big Ten. As the value of sports rights continue to escalate, how do you assess whether or not they should continue or should be added to your portfolio?

Bob Bakish

Yes. So I'll start with we like sports, point one. Point two is sports for us is a multi-platform thing, i.e., we like sports on CBS. We like sports on streaming. In general, we're cross-collateralized off both. That's good, particularly for long-term deals. Point three is our deals are locked through past 2030, all our key deals. So we are secure. Point four is we believe in the sports entertainment hybrid. We actually are at a point where our sports balance is right. And then therefore, we don't need to play in any more auctions because they will continue probably to be frothy. And -- but yet we're at the point where our sports properties are driving our linear business, driving our streaming business.

And now it's really more about this hybrid, including entertainment and leveraging that. So we feel good about sports. We feel great about our position. We're very happy that we own the rights we own in the fourth quarter, particularly given what's going on in the marketplace. And we're equally happy that we're insulated from further bidding activity with respect to the marketplace.

Brett Feldman

I'm going to spend just a bit of time here on film. So you've got a pretty solid film slate this year, particularly around a lot of franchises that you're known for screen -- Transformers, Mission Impossible, Teenage Mutant Ninja Turtles. When we look at the box office this year, broadly speaking, it's been kind of mixed in terms of what established franchises have been able to do. How are you thinking about the right balance of continuing to invest in and exploit the major franchises you're known for versus investing in new storylines?

Bob Bakish

Yes. So start with the fact that Paramount Pictures is an incredibly valuable asset in our company, whether it's new production or it's essentially priceless library which dates back over 100 years. We are privileged to own that. It drives traditional businesses like theatrical it drives streaming and it really drives broader business. You mentioned Turtles; I mean, Turtles is working for us as a film in theatrical. It will definitely work in streaming and it's driving over $1 billion business at retail this year. So we like film. And importantly, we believe in it, we believe in theatrical but the benefits of film are far beyond the theatrical window. They really drive total company performance, both in revenue and there it's great in terms of creating consumer awareness and marketing.

Do all franchises work? No, it's a film. Some work better than others. But fundamentally, the franchise business is lower beta. We like it. And again, if you look at it over time, it clearly delivers for us. Do we also believe in new story lines? Absolutely, we do. And we'll continue to do that. It's really about balance. And we got a pretty cool Bob Marley movie as an example, coming out in January. We're distributing Killers of the Flower Moon in October for Apple. We're excited about that. We were part of the sort of creation product process there.

And we got 2 franchises coming. And we're still writing Turtles and we got PAW Patrol coming next. So it's really about mix and it's really about driving the whole company. And again, we are thrilled to be in the Paramount Pictures business. And really see that as a continued differentiator for our company which, by the way, is worth way more than the earnings power in the film P&L. The benefits are much more significant.

Brett Feldman

All right. So I'd squeeze in one last question here, kind of a big picture question. There's a lot happening in the media landscape right now. So in the streaming market, many of your peers have seen real deceleration in their subscriber growth. You've been a notable exception in terms of how durable your growth has been? Everyone seems to be raising price. Investors are unsure if this market can support so many streaming services and just the number of independent companies that are out there, what do you think needs to happen or might happen with the landscape? And what role do you think Paramount may play in reshaping the industry through either partnerships or M&A?

Bob Bakish

Start with, you've got to have a differentiated streaming offering. Ours is differentiated in its breadth and its collection, again, new sports and a mountain of entertainment, whether it's Paramount pay 1 film, CBS primetime, sports, tent-pole originals, including those from Taylor Sheridan, etcetera. So you've got to have that. Point two is again, we believe in the power of partnership. You've seen us do and David mentioned bundles, people who mentioned bundles. We've been doing all kinds of bundles. Walmart+, that's a bundle. Sky, that's a bundle.

What we've done and even more at the marketing space, like if you flew out here on Delta, you saw Paramount+ on the plane. It's another form of bundle. It's more a trial-oriented bundle. But they all give us access to essentially third-party consumer relationships which in turn drive acquisition, help of retention, etcetera. That road has further to go. And whether that's in the U.S. or it's ex U.S., you will see us continue to experiment and expand our partnership.

And that's sort of, call it, virtual restructuring of the industry because it doesn't involve equity changing hands. So you'll see that. And then more broadly, I mean, look, there's possibility of people joining forces in other ways. But it all starts with do you have a compelling offering for consumers? And the answer with Paramount+ -- Paramount+ with Showtime is we do. And when I look at the slate that's coming stuff that's already in the can, by the way, that's definitely coming.

And then longer-term stuff that might be delayed by the strike, we'll see. We feel very good about Paramount+ continuing to scale. And importantly, because of the asset configuration and what we're doing on a multi-platform basis drive very nicely to being a profitable contributor to our company. And that, again, return the company to earnings growth in 2024 and set us on a path to delevering as we come out the other side of this peak investment phase.

Brett Feldman

That's a great place to end. Bob, thank you so much for being here.

Bob Bakish

Thank you, Brett. Appreciate it.

Question-and-Answer Session

End of Q&A