Paramount Global

Good day, everyone. Welcome to the CBS Corporation First Quarter 2019 Earnings Release Teleconference. Today's call is being recorded. At this time, I'd like to turn the call over to the Executive Vice President of Investor Relations, Mr. David Bank. Please go ahead.

Good afternoon, everyone, and welcome to our First Quarter 2019 Earnings Call. Joining us with today's remarks are Joe Ionello, our President and Acting CEO of Jim Lanzone, our Chief Digital Officer and CEO of CBS Interactive, and Chris Spade, our Chief Financial Officer. Following Joe, Jim, and Chris's remarks, we'll open the call up to questions. Please note that during today's conference call, results 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. Also 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. And with that, I'll turn the call over to Joe.

Thanks, David, and good afternoon, everyone. This was another very strong quarter for CBS, including a new all-time high in revenue and our 37th consecutive quarter of EPS growth. Once again, we were able to deliver these results while continuing to invest in our future as a global multi-platform premium content company. At a time when the whole industry is talking about pivoting to direct-to-consumer, We are proud to be among the first to have embraced it as a core strategy and, as a result, be one of the leaders in the space. This is why today we have invited Jim Lanzone to join us on the call. As Chief Digital Officer and the CEO of CBS Interactive, Jim will tell you more about the key drivers of our direct-to-consumer success and the evolving world of over-the-top. After Jim, we'll turn it over to Chris to give you some more color about our financial results. Now, let me get things started with a quick update on the first quarter. As you saw in our release, advertising revenue was up 18%, driven by the success of Super Bowl 53. Affiliate and subscription fee revenue also grew strongly and was up 13%. Overall, our total revenue was up double digits and EPS was up 2% to a new first quarter record, while we significantly ramped up our investment in our premium content, just as we said we would. This programming investment continues to lead to quarterly subgrowth across our company, both sequentially and year over year, where we just posted a high single digit increase here in Q1. The growth includes a combination of traditional distribution virtual MVPDs, as well as our direct-to-consumer services, which gives us the highest average rate per sub, the best ability to monetize our audiences through advanced advertising, and the most effective way for us to make better programming decisions. In the first quarter, our D2C subs were up 71% year over year. As everyone is aware, last month Apple announced it's launching a new streaming platform. Our two main services, CBS All Access and Showtime, will be anchors for this platform from the outset. We've already had great success offering our direct-to-consumer services on Amazon, Roku, Hulu, and others. And now with Apple getting into the game, we've added another distribution powerhouse that will make our content available to even more consumers which allows our services to grow even faster. So between our content investment and our expansion onto new platforms, we feel even better today than we did just a quarter ago about reaching our target of 25 million direct-to-consumer subs in 2022. It's important to note that our target of 25 million doesn't include subs from our international services where we continue to increase our footprint. We launched All Access in Canada a year ago, then followed it up with 10 All Access in Australia last fall. Next up, we will launch our direct-to-consumer services in Latin America and Western Europe, two regions where we see high growth potential and strong interest in our premium content. We have a proven track record for delivering some of the most watched shows around the globe. And we also have one of the world's largest television libraries. So with nearly 7.5 billion people living outside the United States, the international marketplace presents a huge opportunity for further long-term growth. Our goal of 25 million domestic subs also excludes the growth we're seeing at our ad-supported streaming services, CBSN, CBSN Local, CBS Sports HQ, and ET Live, which are a big part of our future as well. We will be launching our second local version of CBSN in Los Angeles this quarter, followed by Boston and San Francisco later in the year. So we are well positioned in both the SVOD and AVOD marketplaces, and we are expanding on platforms locally, nationally, and internationally. Whether it's entertainment or sports, original series or live events, local or national news, the driving force behind our direct-to-consumer services and our entire company is our premium must-have content. And we continue to increase our output. This year, we are on track to invest more than $8 billion in programming, which positions us competitively with any player in the marketplace. The benefits of this content-driven strategy were on full display at CBS All Access in the first quarter. Season two of Star Trek Discovery began in January, and the return of the good fight dropped in March. Add to that Super Bowl 53 and March Madness, and CBS All Access had its biggest quarter of sub-growth ever. The momentum continues here in Q2 with The Twilight Zone, which was the most watched original premiere on CBS All Access and which we just renewed for a second season. Up ahead, we'll have a dark comedy starring Lucy Liu called Why Women Kill from Mark Cherry, the creator of Desperate Housewives, as well as a true crime drama called Interrogation. And then we'll launch a whole new Star Trek series starring Sir Patrick Stewart as Captain Jean-Luc Picard, which will have a strong international appeal. Our programming investment is paying off at Showtime as well. We kicked off 2019 with the launch of a new comedy called Black Monday, starring Don Cheadle, as well as our new late night talk show, Desus and Mero, which is expanding to two nights a week for the summer. Billions returned with a terrific new season near the end of the quarter, which rolled right into the launch of The Chi here in Q2. Once again, all of this content is contributing to the significant subgrowth we continue to see. And the pipeline for Showtime is just as robust going forward, including several new shows with big names attached. In June, Showtime will premiere a new crime drama called City on a Hill, starring Kevin Bacon, an executive produced by Matt Damon and Ben Affleck. Later this summer, we'll have The Loudest Voice, which stars Russell Crowe as Roger Ailes. And some very promising new shows in pre-production as well, including Halo, the highly anticipated video game series, and Legal Thriller, Your Honor, which will star Bryan Cranston. In addition to producing more content for our own brands, Our studios are also creating more program than ever before for third parties. We are now producing 80 series across 15 broadcast, cable, and streaming outlets. That's nearly double the number of series and triple the number of outlets from just five years ago. And it includes a number of high profile projects as well. Tomorrow, our critically acclaimed series, Dead to Me, will drop on Netflix. This summer, we will begin filming Diary of a Female President, which will stream on Disney+. And in August, the highly anticipated reboot of 90210 will premiere on Fox. As we create more programming for third parties, we are growing our vast television library and generating lucrative licensing revenue today. But of course, the bulk of our development is focused on the most powerful media platform, the CBS television network. Right now, we have 11 primetime series delivering an average of over 10 million viewers each week, more than any other network. We have three of the top five programs on all of television and five of the top 10. We also have four of the top 10 new shows on television, which are FBI, God Friended Me, Magnum P.I., and The Neighborhood. all of which have been picked up for second seasons and all of which we have ownership in. So when the season ends on May 22nd, it's safe to say that CBS will be the most watched network for the 11th consecutive season and for the 16th of the last 17 years and will be number one whether or not you include the Super Bowl. No other network has that kind of reach, consistency, and stability. We are now in the middle of screening pilots for our new fall schedule, and soon we'll be adding a number of new shows to our deep bench of established hits. In two weeks, we will present our new prime time schedule to advertisers at Carnegie Hall, our first up front under the vision of Chief Creative Officer David Nevins. We look forward to showcasing our exciting new CBS shows along with all of the other outstanding multi-platform programming we are creating across our entire company. With the number one television network and a growing suite of ad supported CBS branded streaming channels, we offer our clients a range of opportunities that is unparalleled. We see big opportunities in advertising because of all the new ways we now reach consumers. And technological advancements in measurement continue to get us closer to realizing the true value of our audiences. For example, out-of-home viewing boosts our ratings meaningfully, and these viewers are not yet included in the C7 currency. But as we've seen time and time again, when we move from live to C3 to C7, it's fair to expect out-of-home consumption to be included. And it's only a matter of time that all consumption is measured. By the way, with all this talk about advertising, you may be able to guess which CBS executive is scheduled to be our surprise guest on our next earnings call. And if you thought winning in prime time for 11 straight years was impressive, in daytime, we are number one for 32 consecutive years. And in first-run syndication, we have eight of the top 10 shows, including Jeopardy!, which has been on a tear lately, thanks to the ongoing epic run by contestant James Holzhauer. We're also winning in Late Night, where Stephen Colbert is solidly number one. He's leading the competition by more than 1.3 million viewers. And for the first time, he's also winning in viewers 18 to 49, making Colbert the undisputed king of late night television. At CBS News, Susan Zirinsky is already putting her stamp on our esteemed news organization by going deep into big stories and building on CBS's longstanding legacy of excellence in broadcast journalism. And in its 51st year, 60 Minutes is a consistent top 10 performer. Some things just never get old. At CBS Sports, we are in the midst of one of the greatest runs in sports television history. We had the most watched media event of the year with Super Bowl 53 and the second most watched event of the year with the AFC championship game. We also had an exciting NCAA men's basketball championship that was up 23% from 2018. And Tiger Woods' incredible comeback at the Masters may be the greatest sports story of the year. And it was the most watched morning golf broadcast in 32 years. And now with Tiger's big win, the anticipation is building for CBS's broadcast of the PGA Championship, which for the first time has been moved into the second quarter, airing on CBS on May 18th and 19th. We're looking forward to a repeat of this marquee lineup of sporting events in 2021 when we bring back the Super Bowl to CBS in two years instead of the usual three. We'll have a presidential election year in 2020, the Super Bowl back on CBS in 2021, then another political cycle in 2022. This will lead to tremendous stability in our advertising revenue for years to come. All of the big tentpole events we air on the CBS television network also help fuel our results in our local media segment. leading to strong advertising sales at our TV stations both in the first quarter and here in the second quarter as well. And remember, local media is the home of retransmission consent fees, which will continue to be a steady growth driver into the future. Plus, with the legalization of sports betting in several states, we are just beginning to tap into this whole new advertising category. Premium content is also driving the success in publishing, where Simon & Schuster turned in a very strong first quarter. And we're proud that David Blight's book about Frederick Douglass was recently awarded the Pulitzer Prize for History. Here in the second quarter, we have a great lineup ahead, including titles from best-selling authors Cassandra Clare, Brad Thor, David McCuller, and his first new book since 1995, Howard Stern. So we're off to a great start here in 2019. Whether it's watching our CBS crime dramas on Tuesday or our comedy blocks on Thursdays, following CBS Sports HQ for highlights or CBSN for breaking news, binging early episodes of Billions on Showtime or streaming the latest Twilight Zone episodes on All Access, consumers choose us because of our differentiated must-have content, and we're giving it to them in all the ways they want it. We are confident that increasing our investment in premium content will continue to be the best way to drive revenue growth, led by our fastest-growing opportunity, direct-to-consumer streaming. We told you last quarter that we already hit 8 million subscribers combined across CBS All Access and our Showtime direct-to-consumer platform. And here in Q1, We just had our biggest quarter of D2C sub growth yet. And now with the emergence of a key player like Apple, along with more great CBS and Showtime content on the way, you can see why we feel very good about achieving our goal of 25 million domestic subs. And as importantly, that sub growth goes hand in hand with our financial outlook, which we are reaffirming today. But before we talk finance, Here to tell you more about our digital growth strategy is Jim Lanzone. Take it away, Jim. Thank you, Joe.

It's great to be here to talk about CBS's massive footprint and incredible recent growth in the digital space. Everyone knows CBS is the number one broadcast network, but not everyone knows that CBS operates a top 10 internet property right alongside of it. It's been my team's job to build and run that business for the past eight years while leading the digital transformation of CBS along the way. With over 178 million unique users in March, CBS Interactive is now the number seven ranked property in the United States, according to Comscore, a number that does not yet include our large and growing connected TV audience. You're likely familiar with CBS All Access and our Showtime Directed Consumer Service, which are the focal points of our digital transformation. What you may not know is that most of our brands are also leaders in their categories, including CBS Sports Digital, the second ranked and fastest growing online sports property, with over 70 million unique users per month. CBS News Digital, a top 10 general news property, also with over 70 million unique users per month. CNET, which has been the number one property in the lucrative technology category for over two decades, with over 60 million unique users per month. And Entertainment Tonight and TV Guide, which combined to form the number two entertainment news property with over 50 million unique users per month. From our headquarters in Silicon Valley, CBS Interactive operates as a center of excellence for all things digital at CBS, from product to technology to online marketing. Not only does this enable efficiencies in digital operations, but it also ensures an entrepreneurial drive and product expertise not seen in the digital divisions of most traditional media companies. This has led to some of our most important innovations, especially in the high-growth, direct-to-consumer, and OTT space, such as CBS All Access, CBSN, and CBS Sports HQ, years ahead of our competitors. It's also given us the ability to produce online streams of the largest live events on the Internet, such as the Super Bowl and the Grammys, all on our own tech platforms, managed by our own team, without a hitch. We have operated internationally for years, with teams and brands in Europe, Asia, and Australia. And from a revenue perspective, we have one of the largest direct sales divisions on the Internet, selling the most in-demand inventory online, premium, addressable video. while leading the way in the transition to both programmatic and advanced advertising. CBS All Access is perhaps the best-known result of our unique approach to digital. Historically, CBS Interactive experienced success with several pioneering subscription offerings, from March Madness on Demand to College Sports Live, which streamed 20,000 live games per year, to the Big Brother Super Pass, which offered 24-hour live viewing of the Big Brother household. Meanwhile, tens of millions of people visited CBS.com each month to catch up on in-season programming, and we gained deep product experience serving them. It became clear to us that a meaningful percentage of our fans would be eager to pay for access to even more CBS content in more places if we offered it to them. And so we launched CBS All Access in October 2014 to serve our super fans with roughly 5,000 episodes from past and present broadcast seasons, a portion of our library, and live feeds of our owned and operated stations. Fast forward to today, and we've grown all access to over 10,000 episodes, including full seasons of all current CBS shows, nearly everything in the CBS library, nationwide coverage from our CBS stations, with our affiliate partners joining the ONOs, full integration of our NFL Sunday lineup, a slate of live OTT channels in sports, news, and entertainment, and a defining lineup of exclusive originals, including Star Trek Discovery, The Good Fight, and The Twilight Zone, with many more on the way. Showtime's direct-to-consumer product debuted shortly after All Access in July of 2015, again using internally developed technology, seamlessly serving millions of viewers with hits like Homeland, Billions, and Shameless, as well as its deep library of movies and one-of-a-kind sporting events anywhere, anytime. Combined, our two services reached our 8 million subscriber target earlier this year, nearly two years ahead of schedule. And yet, this is still less than 10% of the paid TV households in the U.S. today, making our long-term goal of 25 million subscribers a very reasonable target. Meanwhile, our internal surveys suggest that nearly 70% of All Access subscribers have multi-channel TV packages in addition to All Access, meaning the vast majority of our subscribers to date are not cord cutters, but rather people who use the service as a premium add-on to their local cable or satellite packages. We also enjoy broad and balanced distribution of All Access, with direct subscriptions comprising the vast majority of subscribers to date alongside strong growth from third-party channel partners like Amazon and platform partners like Apple, Android, Roku, and more. In terms of user behavior, Q1 saw a 63% increase in minutes spent on all access year-on-year, jumping to 76% in March. We see a well-balanced viewing pattern across those minutes with a healthy mix of consumption of our exclusive originals, catch-up viewing for CBS broadcast shows, live streaming of local CBS stations, and CBS library viewing. On average, our audience is 20 years younger than broadcast, and it's split roughly 50-50 between men and women. Two-thirds choose the limited commercial option, with one-third choosing the commercial-free option. Churn is in line with industry norms, and we have been happy to see many lapsed users coming back to All Access upon the seasonal return of their favorite content. We think of these users as pausing their membership rather than canceling it in the traditional sense, and the data suggests that our investment in content across CBS will be our most effective tool for eliminating or reducing the pause cycle for these users, as well as deepening their engagement. We see similar behavior with Showtime OTT, where originals account for over 80% of consumption. Taken together, this constitutes a striking difference between user behavior with our SVOD products and those of other services, which rely heavily on library content for most of their consumption. While CBS was an early innovator in SVOD, we have also been ahead of the game in AVOD, starting with the 2014 launch of CBSN, the first 24-7 OTT news channel, followed by the 2018 launches of CBS Sports HQ, ET Live, and CBSN New York. These products have in turn enhanced CBS All Access, weaving seamlessly together to form the streaming network of the future, a multi-layered nesting doll of services that users can unpack 24 hours a day according to their entertainment, sports, or news needs. A great example just occurred in April when over a million people streamed the Nipsey Hussle Memorial via an ET Live broadcast delivered simultaneously on CBSN and All Access. CBS Sports HQ, meanwhile, saw a 10x spike in usage during Super Bowl week and never looked back, moving into record-breaking coverage of March Madness and rolling right into the Masters, which saw 60% growth over our previous record with over 1 billion minutes consumed online. Since CBS Interactive delivers premium video content with the data targeting of digital, our AVOD channels were launched to meet the growing demand among advertisers for premium video inventory. This is another benefit of our deep relationship with over 178 million users per month across our proprietary network. Not only can we use data to enhance our products and content decisions, but we consistently generate higher CPMs than traditional broadcast. And thanks to the demand for premium OTT video, we are consistently sold out. Our network and digital sales teams go into every sale together, offering the full power of our multi-platform company in every way. In addition, as a premium content company, we truly believe that CBS has the ability to partner with almost everyone in this dynamic space, from technology companies building their own content platforms, to MVPDs that are moving to a multi-platform future right along with us, to sports leagues who want to address younger, more digitally savvy audiences without sacrificing the reach of broadcasts, to international distributors looking for the best content, to affiliates who want to evolve to a sustainable future. Given the right financial and data terms, we're doing business with all of them. Just a few examples historically include our partnership with Netflix and international territories for Star Trek Discovery, our participation with virtual MVPDs such as Hulu Live and YouTube TV, our channel deals for All Access and Showtime with Amazon, Roku, and Apple, our partnership with the NFL for CBS All Access, our Emmy Award-winning Snapchat Discover Show starring James Corden, our Facebook Watch partnership for Colbert and Corden Content, and so many more. There's one more thing I'd like to note about the digital transformation of CBS. Everything we've done, including our innovative new ventures, has always been underpinned by rigorous business planning and financial discipline. And while we are ramping up our content investments to meet consumer demand, we do not believe doing so requires us to turn our business upside down in order to compete. We believe the combination of 30-plus shows per season from the number one CBS television network, 11 shows per year and growing from all-access originals, the power of the award-winning Showtime lineup, our 10,000-plus episode library from Cheers to the Good Wife, our increasingly popular AVOD channels, our live local feed of over 200 CBS stations, and the dozens of premium live sports, news, and entertainment events throughout the year combine to give us a powerful offering for consumers who want more from CBS. As a pure content company, serving over 100 million households over the air and nearly 200 million users domestically online, we have the clarity of mission and purpose for competing in this space while possessing the experience and expertise to compete digitally with anyone. We will be a consistent, growing force in this valuable market for many decades to come. So with that, I'll hand it over to Chris.

Thank you, Jim, and good afternoon, everyone. As you heard, the powerful combination of premium content and technology is at the center of our success at CBS Corporation. It's given us a competitive advantage, particularly in direct-to-consumer. It's helping to drive the financial results you see today. And it's the key to our long-term success as a global, multi-platform premium content company. So as we remain fully focused on allocating resources to areas that generate the highest return on investment, namely our must-have premium content and our direct-to-consumer services, we are confident we will build upon our leadership position and continue to significantly scale new revenue growth in 2019 and the future. Now, let me give you some more details about our first quarter results. Revenue for the first quarter was up 11% to an all-time high of $4.2 billion, driven by the success of Super Bowl 53. Our underlying business also grew largely from higher affiliate and subscription fees As you heard, advertising led the way with an 18% increase. At CBS, advertising remained strong and consistent, with underlying network advertising up 1% for the quarter. And even without the Super Bowl, we are on track for $4 billion in network advertising revenue for all of 2019, which is in line with prior years. Affiliate and subscription fees were up 13%. Retrans, reverse comps, and virtual MVPDs continued to show strong and steady increases and were up 20% during the quarter. And content licensing and distribution came in at $963 million compared with $995 million last year. Content licensing can vary from quarter to quarter, and in last year's first quarter, we had several licensing renewals, including a significant deal for our hit Showtime series, Dexter. Given the changing landscape, we see upside ahead in future quarters as others pull back and reduce the supply available for third parties. Also for the quarter, operating income grew 2 percent to $793 million, and EPS also grew 2 percent to $1.37. Both of these were first quarter records. Our first quarter results included three adjustments. We accounted for a one-time tax benefit related to the reorganization of our international operations, We recorded a gain on the sale of TV City, and we recorded charges associated with cost savings initiatives. Now let's turn to our operating segments. Entertainment revenue for the first quarter was up 15% to $3.2 billion. Affiliate and subscription fees grew 26%, driven by subscriber growth at CBS All Access, as well as increases in reverse comp and virtual MVPD. Advertising was up 19%, mainly as a result of Super Bowl 53, and content licensing grew 3% as we continued to produce more shows for third-party outlets. Entertainment operating income of $530 million grew 9%, even as we ramped up our investment in premium content and expanded our direct-to-consumer streaming services. At our cable network segment, Revenue for the first quarter was $552 million compared with $571 million in 2018, when we had several licensing renewals, including a significant one for Dexter that I just mentioned. Showtime subs continue to grow across traditional and digital platforms and were up 8% year over year. Cable networks operating income was $175 million compared with $236 million last year, mainly reflecting our higher investment in content and marketing. Illustrating this, in the first quarter, we aired 30% more episodes of programming on Showtime than we did a year ago. Turning to publishing, first quarter revenue increased 3% to $164 million, driven by higher print book sales. Digital audio also continues to grow and was up 7%. Several of our top-selling titles in the first quarter benefited from media tie-ins, including two titles that were released as films, Five Feet Apart by Rachel Lippincott and Pet Sematary by Stephen King, as well as Salt, Fat, Acid, Heat by Samin Nasrat, which is now a Netflix series. And publishing operating income for the first quarter grew 6% to $17 million. In our local media segment, first quarter revenue of $457 million grew 10%, driven by higher advertising revenue from Super Bowl 53, as well as 11% growth in retrans. In terms of advertising categories, auto, entertainment, and healthcare all posted solid increases. Local media operating income for the quarter was up 17% to $138 million, and the segment operating income margin expanded two points to 30%. Turning to cash flow on our balance sheet, Free cash flow was $411 million for the quarter, compared with $687 million last year, reflecting our strategy of increasing our investment in content and our direct-to-consumer services. In Q1, we spent approximately 25% more on programming than we did last year. Also, during the quarter, we issued $500 million of senior notes and used the proceeds to retire debt. Additionally, we unlocked value from non-core assets through the sale of excess real estate. Together, these actions significantly improved our net leverage ratio to 2.7 at the end of the first quarter. We continue to believe the highest and best use of our cash is to reinvest in our company. We have identified $175 million in efficiencies that we expect to recognize in 2019, and we are reinvesting all of it back into our high-growth businesses. Now let me tell you what we see ahead. At the CBS Television Network, scatter is up more than 25% in prime time from our upfront pricing, and even more in late night. So we feel very good about our ability to increase pricing and volume in this year's upfront, which will benefit us in the fall. And our local media segment, revenue for the second quarter is pacing to be up low single digits. When you include all the big sporting events we had to start off the year, From Super Bowl 53 to March Madness to the Masters to the upcoming PGA Championship, we expect 2019 to be a record year for advertising. In content licensing, we continue to increase our investment in programming for our own brands, even as we produce more content for third parties. As you heard, we are now creating 80 series for 15 outlets, an all-time high. And in two weeks, we will announce our new fall schedule for both CBS and the CW, which will add even more shows to our growing pipeline. All of this gives us more content to monetize, particularly in the international marketplace. And we will continue to ensure that we are maximizing the value of all of our programming, especially as others choose to forego this opportunity. In affiliate and subscription fee revenue, we have about a third of our footprint coming up for renewal, in both retrans and reverse comp this year. We continue to negotiate fair value for our content with each new deal we do. So we expect strong and steady increases for this revenue source to continue. In addition, we are already seeing the impact of our strategy to ramp up our content investment to grow our direct-to-consumer services. And as you heard from Jim, with our in-house expertise and cutting-edge infrastructure, along with our partnerships with third-party distributors, such as Amazon and Apple, we are well-positioned to scale our direct-to-consumer services, and our 25 million sub-target for 2022 is very much within our reach. So in summary, we are one quarter into our three-year outlook, and we are off to a strong start. Our subs are growing across all platforms, with those from our direct-to-consumer services growing the fastest. This early success will propel us forward as we continue to grow these services and our leadership position in this space. Given the strength of our Q1 accomplishments and our strong OTT momentum, we feel very good about our long-term growth strategy and our ability to achieve our three-year guidance of revenue CAGR in the high single digits and EPS CAGR in the double digits. With that, James, we can open the line for questions.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow us to not reach our equipment. In the interest of time, please limit your questions to one question and one follow-up question. Again, press star 1 to ask a question. And we'll take our first question today from Ben Swinburne with Morgan Stanley.

Thank you. Good morning. I want to touch on the direct-to-consumer streaming stuff and obviously take advantage of Jim being on the call. First, Jim, could you talk about the AVOD opportunity? I mean, we all know CBS All Access and the subscription businesses you've been building are doing quite well with Showtime, but AVOD, there's a lot of focus on that marketplace today. I thought it was interesting that you said you're basically sold out all the time. So just talk about what you're doing to try to drive that business. I don't know if you'd be willing to size it for us in terms of ad revenue or What kind of growth rates you're seeing and how do you create more impressions beyond just driving engagement? And then just to broaden out the question across direct-to-consumer maybe for yourself and Joe, when you think about going to Europe and Latin America, Western Europe and Latin America with all access, how do you think about that product strategy change? versus what we've seen here in the U.S., if it differs at all, particularly on the content side, because obviously you guys license a lot internationally. I'm just curious how you think about rolling that out strategically and how it might be different than here, if at all.

Guys, I'll start on the AVOD one. Yeah, I mean, obviously it is a big opportunity. It is the most premium advertising online because it is not only the power of video, but it is you know, very targeted. And so that's what drives the higher CPMs. You know, going back to that 2011 to 14 time period where we were conceiving of and building all access and, you know, at the same time, CBSN was being built, you know, specifically as an AVOD opportunity because we knew we needed to expand that inventory. At the same time, we had this amazing opportunity using our product infrastructure and journalists to create that product. So then last year, you saw us come out of the gate hot, right, with, you know, three more of these services with sports, entertainment, and then the local version. We have two more coming. And, you know, if you're just kind of asking me generally in the category, I definitely believe AVOD is here to stay. You have just even within all access, as I said, two-thirds of the subscribers are choosing the limited commercial option. So even within all access, it's a big opportunity. And then I think you will see us continue to try to press our advantage in launching into potentially more categories or more services.

Yeah, and Ben, it's Joe. On your international question, Look, it's a market-by-market, country-by-country analysis, the way we look at that. Obviously, we're balancing licensing it. Our strategy here in the U.S. was we still license it, but we didn't license it exclusively. We said exclusively except for our own services. So while our services are small, we're not really competing with them as we're building that. And so we're going to look at that. And so really what we're focused on in each country is what is the offering, making sure it's robust to really drive the subscription. So we'll continue to roll out. So that's why when we look at it, and I use the metric of the amount of people that live outside the United States and the amount of mobile devices that they all have, as far as I'm concerned, they're all potential customers. And so we're going to need to reach them in new and improved ways with the advancements in technology. So I think that provides a lot of opportunity for us as we see how to maximize it. But it's country by country and franchise by franchise. I don't think we're kind of saying anything now or in the future that we're not going to license content to third parties because sometimes if they can pay you more money because they have a better infrastructure to monetize it, We'll take that money and reinvest it back into our businesses.

So presumably your revenue guidance captures whatever licensing path you sort of take is baked into that guidance.

Absolutely.

Got it. Thank you both.

Thanks, Ben. We're going to take the next question now.

Certainly our next question will come from Jessica Reif-Ehrlich with Bank of America Merrill Lynch.

Thank you. I have two questions, one on distribution and one on advertising. On distribution, can you talk about Apple as the new entrant, what the pricing is versus existing distributors and how long that contract or their commitment is? What's the tone of conversations with traditional MVPDs for Showtime and for Retrans given their own sub losses, which this quarter, I mean, you can see what's happened in the last quarter. And could you tell us how long your current Netflix deal goes? And then on advertising, I'm just switching gears. Obviously, scatter pricing is amazing and should point to a good upfront market. Besides, CPMs may be chasing reduced ratings, so pricing being helped by money-chasing eyeballs. What else is going on? I mean, do you see anything new on the advertising category? Is money coming in from digital? Just talk about the undercurrents of what's going on.

Yeah, Jessica, let me start, and Jim and Chris, just chime in. I'll start with your second one on scatter. You know, yeah, I mean, look, I know you'd say it's, you know, the price is chasing less eyeballs because ratings are down. You know, I think our research, you know, confirms consumption is up. And, again, they're watching different ways. The example I use, you know, over 10% or 10 million viewers watch the Super Bowl outside their homes. And so unless that's in the currency, we're leaving money on the table. So when you add all of these things in, it has to be in the currency. And so that's why it's so important for us to go from live to C3 to C7 to C8, C9, C10. Our job is to deliver the advertiser, the consumer, with our product. And if we do our job, we expect to be paid fairly. And so I think as you're seeing the shift in the consumption habits change, you're seeing the monetization trail. So when we go to market, we're selling mass reach with this targeted capabilities with our OTT offering. So we think, again, there's going to be a lot of emphasis on how to reach consumers, not just based on purely demographics. So I feel very good, and it's all about the upfront in the next couple of weeks, as you know. A lot of networks are going to be putting on some nice shows, and ours will be the best of the bunch. And then our ad sales team go to work in the month of June, and we would expect to lead the market once again in terms of our pricing. As far as distribution, look, Apple is just another player. It's a similar model we have with our other partners that I ran through and mentioned. It's a multi-year deal we have for CBS, All Access, and Showtime. And so, you know, the MVPDs understand that there are competitors in the marketplace, virtual MVPDs, selling them direct. So, you know, that's been the marketplace for quite some time. You know, Apple just is entering it, and so there just may be more, you know, consumers. But that's why seven quarters ago we started giving a stat that's saying what our subs are. Our subs are up. You add in, you're saying if there's court cutters, court shavers, court nevers, whatever you want to call them, put them together with virtual MVPDs and direct-to-consumer services. For seven quarters in a row, we have grown subscribers. And so they have the choice, they have the flexibility to choose that. And so we feel really good and proud about that statistic because there's not a lot of companies that can do this.

We're also seeing growth in the traditional subs at Showtime next. So we are seeing that premium content is a differentiator and drives growth. Okay.

Thanks very much, Jessica. I'm sorry. All right. Thanks very much, Jessica. I think we're going to take the next question now.

Certainly. We'll hear from Alexia Quadrani with J.P. Morgan.

Thank you so much. I just want to circle back on your comments where you highlighted selling some content to third parties, which we knew about, but it just seems like you've got such a strong TV studio here. And I'm wondering sort of the age-old question about how you're producing these potential hits for third parties. You've got your direct-to-consumer products with Showtime and CBS All Access growing so strong, and obviously your linear business. How do you balance it? I mean, sort of, I guess, what are the puts and takes in trying to decide what goes where? And then my follow-up is sort of a bigger picture question maybe for Jim is sort of, who do you really see as your competition on the DTC side with CBS All Access or Showtime? Is it the broader universe? Is it more of a niche player like HBO? I'm curious how you guys view the market.

Okay, let's see. It's Joe. I'll go first, and then Jim will take the second part. Look, I mean, that's what we're doing with every franchise we create, and so we're balancing – Obviously, we know what the show costs per episode. We know what we can sell it for. We put it through an analysis of how many incremental subs will it drive at all access. And we bring it to market. And so there is a lot of demand for our premium content. So I think we approach it with that opportunity. But clearly, we look at that in-house first. Obviously, we're having a pretty buzzworthy show drop on Netflix tomorrow. The good news is, again, we own the underlying intellectual property rights. So that's going to be really good for us. So we can't put everything through our platform, I think, and generate the type of returns that we can by selling it. So we're going to continue to be nimble and keep evaluating it. Again, like I said, franchise by franchise, we don't have the holistic Some outlets have particular tastes and particular type of content, and we're serving that. But we really are looking at this holistically. Jim, you want to take the second part?

Yeah, I mean, you've heard Reid call our competitors sleep and Fortnite. I'll leave another comparison like that to him. But for us, we look at two main players in the marketplace. There are platforms and there are pure content players. On the platform side, you know, one of the great things about being a content player is that we can partner with anybody and whereas they sometimes tend to not do deals together because it's competitive. And, you know, look, obviously kind of behind your question is there are more competitors coming into the marketplace. You know, and to that I'd just say two things. One is We definitely don't view it as a zero-sum game. There are a certain number of seats in this rocket ship that are taking off in our space. It's not an infinite amount. There aren't that many people who spend $8 billion plus per year on content and do it as well as we do. And if we play this right, there's definitely a seat for us in that ship. The other thing I'd say is You know, we've already been at this since 2014, so we've already been competing against the, you know, Netflix, Hulu, Amazon, YouTube, HBO, this entire time as we've been, you know, building our service and exceeding our, you know, expectations on sub-growth. So, you know, we definitely have a position in that market that's unique, and we, you know, definitely feel good about it regardless of who's coming into the space.

Thank you very much.

Okay, thanks, Alexia. We'll take the next question now.

Next, we'll hear from Michael Nathanson with Moffitt Nathanson.

Thanks. I have one for Joe Jim and then one for Chris. So let me ask you a sacrilegious question. I know the success of All Access has been great, and you've done it for four or five years. But given the competition, why not combine Showtime and All Access into maybe a tighter bundle or a different package? So why run two separate S5 products, given the rising competition you see right now? And then one for Chris.

Okay. Well, I'll just say on the back end, again, from a cost perspective, it's very efficient, and that wouldn't be a reason. It would be a front-end reason with our user base. I point out we already offer these as upsells to each user base, so you can already get one service as part of the other. And just so far to date, the user bases are differentiated somewhat. It's not that they couldn't come together in the future. They could, and we could add more content to that internal bundle of our own. But they are differentiated enough as are somewhat the business models to date. So we are looking at it. It's something to consider for the future, but as So definitely nothing has held us back by any means on subgrowth.

Yeah, look, Michael, before you ask Chris or whatever, look, the consumer wants optionality. We're giving the consumer optionality. They can certainly today buy them together for a discount, and we offer that to them. But some who don't want to spend in the teens of dollars and only want to spend $5.99, we're going to give them that choice. Consumers want choice, convenience, and control. Those are the three things we are satisfying with consumers. So we're serving that up to them, and they will decide. And so if we combine them, we think we actually could have less subscribers. I think this actually provides, by the way, totally different offerings, right? With CBS, you're getting live events, catch-up viewing, library, originals. Showtime, you're getting edgy, niche, highbrow product with movies. And so very complimentary, but that's why we offer them as a choice if they want to do that. But we really like the offering.

Okay.

I thought I'd ask it.

So Chris, to you. Chris, you mentioned that you had 3% more episodes in Showtime this quarter. Given the push at Showtime, will you help us think about how the whole year looks? Is this Is this front-end loaded on episodes, or is this the type of increase over the years?

I just want to make sure. You cut off a little bit. You said 30%, right? Right. 30% more. Yeah, okay. I thought I heard you say three. I just want to make sure we had that right. No, 13. Zero is important. Yeah, the zero is important. So it's a good question because the first quarter is a bit front-loaded from the standpoint when you look at what we're spending and the timing of when we're spending it. When you look at cable networks for the first quarter with the licensing revenue variation for Dexter not being there in 19, and then the greater programming investment in Q1, we are going to expect to see that the trends will normalize and be solid over the course of the year.

Yeah. Think about it, Michael, as a front half, back half. You know, front half, I just listed all the shows we're doing. Obviously, the subs come and stuff like that. So I would look at that as it improves over the year. But think about it as, you know, first half, back half.

Yeah.

Okay.

Thanks, guys. Okay. Thanks, Michael. We'll take the next question now.

Michael Morris with Guggenheim has our next question.

Thank you. Good afternoon. Two questions. First, on your plans to expand Latin America and other markets with the direct-to-consumer product, can you talk about the content investment to fuel that product? You referenced library content that's in demand, and I guess my question would be, how much of the You know, the mix of content would be library that's really no incremental cost, how much is kind of maybe foregoing some licensing, and how much is new content that you need specifically for those markets. And then second, on retransmission consent, the growth rate that you saw in the first quarter, I think we're expecting it to pick up over the course of the year. Can you talk a little bit about what that pacing looks like and maybe if you are seeing any negative impact or more significant negative impact in the subscriber environment right now? Thanks.

Sure. Mike, I'll take the first, and then Chris will take the retrend. Look, the content offering, again, it's going to be very little incremental investment. The incremental investment is if we really want a couple local content. In some countries, as you know, there are some quotas you have to have in these services. And so, for example, in Australia... Because we own Network 10, we have a lot of local content. But basically, you can have library. And then again, it's the dial back of what you just really highlighted. It's what do we sell? What do we license the content for if it wasn't exclusive to that distributor and it was exclusive except for our own service? And so that would be the pullback on what it is offset by the growth of the subset. And so, but we want to make sure the offering has all three of those, current content, library, and local live. And if we can have that, we're seeing that as the right mix to really drive the, you know, where the appetite is for the demand. So we're really balancing those three, but it's not going to be a lot of incremental, you know, cost initially. Chris, on the retrans.

On the retrans side, we didn't have any big retrans renewals in Q1, but we have some coming up, as you know, later this year. So you'll see more of an increase in the back half of the year. And according to the sub growth, you know, we'll see more monetization from the subs that we added on later in the quarter, later this year. So there's no unusual trending going on there.

Okay, thank you. Thanks, Mike. We'll take the next question.

Next, we have Dan Salmon with BMO Capital Markets.

Good afternoon, everyone. Maybe for Jim or Joe to start, just to return back to the Latin American and Western Europe expansion plans. Anything you can add a little bit on timeline? Presumably this starts this year. Are you thinking of it as sort of an initial wave of countries, like an arc that sort of plays out over a period of time and then you slow down? Or is this sort of the beginning of a long, slow march that goes right into 2020 and beyond. Any color on that would be great. And then, Jim, for you specifically, once again, you talked here about CBS developing a lot of their own technology for these products. Could you maybe just take us a layer deeper there and talk about sort of front-end, back-end development and how you decide between being proprietary or not and then where you may use some partners for just capacity, cloud, CDNs, things like that, and just help us understand that just one layer deeper. Thank you.

Again, Joe, I'll go first. Look, we're taking our time with international. We're being methodical. We went Canada first, learned some lessons, seeing a lot of customer data, what's working, what's not working, went to Australia. So we don't really want to put a timeline on it and then be caught up to say if something is behind or not behind. We're going as quickly as possible. but thorough, again, focused on making sure that the offering to the consumer is robust. And that's really going to be what it is on content availabilities and things of that nature that's there. So that's really the constraining factor. But we're committed to rolling this out into 200 countries around the world. And those are just going to be the regions where we're going to be pursuing next. But believe me, the team knows how important this is. And again, as I said, it's probably single-handedly the largest opportunity

front of us yeah yeah I mean again obviously I can't speak too much about the proprietary nature of our stack but just to take you back I mean one of the great things I was at an event last night with a bunch of my peers in the industry and we're kind of talking shop about this and one of the differences with us is that going again all the way back to you know in some cases 15 years and Our division invented a lot of SVOD and online streaming event video with things like March Madness on Demand, a lot of the big events over the years, and services that we offered. And so we, over time, built this stack to handle what we were doing. That included, in 2013, our first Super Bowl. We've now just streamed our third Super Bowl. So by the time we did all access, it was very natural to do it on our own stack. And now when we're launching these new AVOD services, we roll right from CBSN, that team and that stack, you know, helps the CBS Sports HQ team and theirs. And look, so how we decide what to build internally, and we have a great team and a big team on that, but it's what's truly strategic and what's core to us, right? In some ways, it's things like our CMS is core to us, and video absolutely is. And then there are other things, obviously on the CDN side, cloud, and other certain facets of our subscription service that we will use third parties where we don't deem it to be core and we just use best of breed, you know, third party. Also helps us, you know, on the cost side to keep certain parts of it variable. So we're always analyzing that. I'd say everybody in the industry is working off of an internal, external stack, comprised stack in some way, and we're no different. I think it's more that we've known what we've been building over time, we know that it works, and we know we can rely on it.

Great. Thank you both.

Thanks, Dan.

Thanks, Dan. We'll take the next question.

We'll hear from David Miller with Imperial Capital.

Yeah, hey guys. A question for Joe and also a follow-up for Chris. Joe, was there any other motivation to switch Super Bowls with NBC other than the obvious reason, which of course is that NBC wanted the property for airing the same year as its Winter Olympics? I'm just wondering if there was another reason other than the obvious reason. And then, Chris, we have you guys being extremely free cash flow generative in the back half of the year as a lot of the investments that you've talked about on this call clearly bear fruit in Q3 and Q4. Could you talk about your priorities for share repurchases in the back half? I don't think that was included in your scripted comments. Appreciate the comments. Thanks.

Thanks, David. It's Joe. I'll take the first one. Look, I think, you know, from NBC's vantage point, that they probably looked at it exactly, you know, that way. The NFL probably didn't want, you know, the Winter Olympics competing against the Super Bowl, not knowing when, you know, that would start, the Winter Olympics would start. And for our vantage point is, you know, having the Super Bowl earlier was a fantastic opportunity. opportunity for us. So I think it was win-win-win all the way around. Our analysis is simple because I laid out the flow of advertising revenue and as you know how that works, that really is a big driver for us and to have that back in two years it was a lot of upside. So I don't think there was anything other than that on its surface was, you know, kind of the way we approached it, and I assume the way NBC approaches it, as you suggest, and why the NFL benefits from that as well. So it kind of just made sense. Okay, Chris.

Yes, thanks for the question, David. So on the share repurchases front, we continue to believe that the highest and best use of our cash is back in the business at the moment. So we'll be opportunistic about it later in the year. which is consistent with what we said in Q4.

Okay, wonderful.

Thank you.

Thanks, David.

Thank you.

We'll take the next question.

Our next question comes from Doug Mitchelson with Credit Suisse.

Oh, thanks so much. Jim, if I handed you a blank check, what else would you, you know, just pretend Joe's not in the room? What else would you spend on to accelerate growth even further? What else would you spend on to accelerate growth even further for CBS All Access? Is it more and more scripted content? Do you need to expand to new genres like, say, kids or content for teenagers? And then I guess, Jim and Joe, is there an argument to be had that you should go for share on CBS All Access, lower the price, it's well, well above? your retrans, reverse retrans rates. You know, you've got good advertising, as you've talked about, rates on CBS All Access. Is there an argument to go for, you know, lower price and drive share and then try to walk up the ladder later? Thanks.

Yeah, Doug, I'll take the second one, and then Jim will give you the first one. Look, we think the price is pretty low already. We think it's a hell of a value proposition for consumers. Again, for $6, you're getting live television, new sports entertainment, big events, right, catch up viewing, full stack, library, original series. So, you know, I hear you. So if we weren't seeing the success and the growth rate, and again, this quarter was our fastest growing quarter of subs. So we feel really good. Just again, just last quarter, we told you we tripled, we tripled our sub growth from 8 million in 2020 to 25 million in 2022. And we've already passed the eight. And so we feel really good about it. So it's really happening. So could we go lower? Could we go faster? I mean, we can debate that. But, you know, quite candidly, we think it's a value proposition and consumers are voting. Jim?

Yeah. And look, I'd say... What do you want to do with your new bill? I mean, well, Joe will tell you. I mean, we actually, from the very beginning, have never come in asking for a blank check. I mean, we absolutely made our own fuel in how we... as a company, funded these two services originally and the AVOD services. And while we definitely think there's a lot of room to grow and we know that more content, not necessarily just original. To your point, there are other categories, there's other types of content, and we get pretty balanced usage across all of them. But building behind those as we go forward and building into strength, we will spend more on that content, but we don't need to spaz out and just see what we can throw against the wall to in hopes of growing, we're getting that growth. We know exactly how we're getting it, and we know how we increase engagement. The last thing I would just say is, again, you talked to David Nevins, it's not, you know, not everybody can make this much great content this consistently with such a high batting average. And so, you know, building these strengths up over time is a much smarter way to go.

Great. Thank you. Okay. Thanks, Doug. I think we have time for one last question.

Our final question will come from Marcy Ryvaker with Wolf Research.

Thank you. Two quickly. Chris, you said Q2 local is pacing up 2%. Can you tell us what the underlying advertising component is that to that plus two and how that may compare to the underlying advertising in the first quarter? And then, Joe, you mentioned $8 billion to be spent on content in this year. How has that figure changed over time and how will that change over time?

Sure. I'll go first, Marcy. So last year we spent a little over $7 billion. And so now we're saying we'll spend over $8 billion. Just directionally, you can see that. Obviously, we have the Super Bowl this year and stuff. So we are significantly ramping up. On the last call, we said we were going from seven shows on all access to 11. Showtime was increasing their original production by 30%. So you're really kind of seeing us put those dollars to work, which is really what's driving the sub growth, which in turn is driving the revenue growth that we have in our financial outlook. So we feel really good about the spend. And I say spend, but we really mean invest, because as Chris will point out, it is our best return on invested capital is to make more. And look, as we were just discussing, If we could make that same quality sooner, we'd even do more. So we're balancing the quality, the storytelling, and all of that stuff with the growth. But it's a significant amount of money. And like I said, I put our spend up against anybody. Chris?

Thanks for the question, Marcy. So relative to local advertising, the second quarter growth, as I said, we're currently pacing in the low single digits. I also want to just point out that our first quarter results, we said we were going to be in the high single digits of growth, and we came in at about 10%. So we feel really good about where the underlying trends are facing right now.

Does that include retrans?

No, it doesn't.

Got it. Thank you.

Okay. Well, thank you, everybody, and this concludes today's call.