Yahoo Finance Paramount Global (NASDAQ:PARA) Q4 2023 Earnings Call Transcript
Paramount Global (NASDAQ:PARA) Q4 2023 Earnings Call Transcript February 28, 2024
Paramount Global beats earnings expectations. Reported EPS is $0.04, expectations were $-0.05. Paramount Global isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Nadia, and I'll be the conference operator today. At this time, I would like to welcome everyone to Paramount Global's Q4 2023 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Jaime Morris, Paramount Global's EVP, Investor Relations. You may now begin your conference call.
Jaime Morris: Good afternoon, everyone. Thank you for taking the time to join us for our fourth quarter 2023 earnings call. Joining me for today's discussion are Bob Bakish, our President and CEO; and Naveen Chopra, our CFO. Please note that in addition to our earnings release, we have trending schedules containing supplemental information available on our website. Before we start this afternoon, I want to remind you that certain statements made on this call are forward-looking statements that involve risks and uncertainties. These risks and uncertainties are discussed in more detail in our filings with the SEC. Some of today's financial remarks will focus on adjusted results. Reconciliations of these non-GAAP financial measures can be found in our earnings release or in our trending schedules, which contain supplemental information and in each case can be found in the Investor Relations section of our website. Now, I will turn the call over to, Bob.
Robert M. Bakish: Good afternoon, everyone, and thank you for joining us. There's no question that 2023 was a dynamic and in many ways challenging year in our industry. We saw two labor strikes, a tough macroeconomic environment and continued evolution in the media industry. But we stayed focused on a disciplined execution aligned with our strategy, adapting as needed. In doing so, we position Paramount Global to deliver significant growth in total company earnings and growth in free cash flow in 2024. On today's call, I'd like to spend a few minutes speaking to our ‘23 accomplishments. Then I'll provide more color on our ‘24 priorities, before handing it over to Naveen for a deeper dive on the financials. With that, let's start with ‘23, a year where our content clearly continued to deliver, driving every platform.
In fact, Paramount had the number one show on all of television and the number one broadcast network for the ‘22, ‘23 season, not to mention five Number 1 debuts at the domestic box office. And very importantly, we continue to scale streaming with Paramount+ and Pluto TV. Subscribers and MAUs grew nicely. In 2023, audiences spent nearly 40% more hours on our streaming platforms compared to 2022, which when combined with our mid-year Paramount+ domestic price increase delivered 37% D2C revenue growth. The disciplined execution of our strategy, including the integration of Showtime into Paramount+ led to a reduction in full-year D2C losses, and meant we had peak streaming losses in 2022, a year ahead of schedule, with further significant improvement expected in 2024.
Disciplined execution has been a theme across the entire company to deliver both impact and efficiency. And that obviously extends to managing our cost base as we continue to streamline the organization. That brings me to the year ahead, where we're focused on returning the company to sustainable profitable growth in 2024 and beyond. And know that, regardless of current market sentiment, we're convinced that the value of our assets today, combined with the execution of our strategy as we move forward, represents a significant value creation opportunity, and we are dedicated to unlocking that value. To do so, we will focus on three key priorities. First, we will continue to lean into content with the biggest impact. Second, we're laser focused on driving the direct-to-consumer profitability.
And third, we'll continue to unlock synergies across the company. Naveen and I will unpack these further. Let's start at the core, our content. As we say, ‘Popular is Paramount’. We create hits that the whole household, country and whole world love to watch, and that our partners need. That's the heart of our business. And in doing so, we've proven we can prioritize efficiency, while still achieving viewership and revenue goals. As we've discussed in previous quarters, we continue to sharpen our ability to maximize our return on content investment, which informs how we approach our content, programming and windowing. As we move into 2024, we're focused on producing content more efficiently and magnifying the impact of our slate. And, let me give you some examples to illustrate this.
In the film segment, we're improving ROI by lowering the average cost per title. This by balancing high budget tentpoles with more modest cost titles, like Mean Girls and Bob Marley: One Love, improving the financial return on the overall slate, and we're off to an excellent start on this. In TV Media, at CBS, we have an increasingly efficient and targeted development process. We prioritize lower cost formats like unscripted and those shot abroad, while maintaining our strength in franchises. NCIS, one of the world's most watched shows and one that has been licensed in over 200 markets worldwide is a great example of this. The latest iteration, NCIS: Sydney was produced in Australia at a much more efficient price point and was the most watched new show this season on any network in the U.S. until February's debut of Tracker, also on CBS.
And we are excited to announce today that the NCIS franchise will expand further with the first original for Paramount+ U.S. expected later this year. By the way, you will see us leaning even further into offshore production for our global franchises, including the upcoming London installment of Billions, the new Ray Donovan origin story with The Donovans, as well as new series like The Department from George Clooney. This benefits both TV Media and D2C. Finally, we're focused on magnifying the impact of our content, including through our combination of best-in-class sports and entertainment here in the U.S. Look no further than Super Bowl 58, a blockbuster event, one that capped off a record breaking NFL season. The game broke almost every record imaginable, most watched telecast in television history, most streamed Super Bowl ever, the first alternate telecast with Nickelodeon and a new high watermark for gross ad sales.
The Super Bowl is the clear benchmark of the power of sports. But for us, it is more than that, because we know that Paramount+ subscribers who come into the service for live sports will ultimately spend nearly 90% of their viewing hours on non-sports content. Think about that as a nine times sports multiplier. That's the power of an integrated sports and entertainment strategy, which is why we use the Super Bowl, one of the world's biggest stages to showcase a whole range of our content with highly engaged fans, including launching the new CBS schedule and promoting our upcoming film slate. The results speak for themselves, with Bob Marley: One Love recently crossing an incredible 120 million worldwide after only 12 days at the box office.
And viewership for the CBS slate got off to a turbocharged start with audiences jumping 32% over last year on the network and 83% on streaming. Magnifying content extends well beyond the Super Bowl and leverages our entire ecosystem, like how we use CBS to drive new audiences to Yellowstone, or we brought 1883, a Paramount+ original, to new audiences on linear cable as a second window, among other things, making 1883 the most watched new series on cable last year. And looking ahead, we're excited to add the first season of Tulsa King to the CBS slate, ahead of its Season 2 premiere on Paramount+ in the third quarter. So, that's where we are and where we're going with our content. And that brings me to our second related priority, driving to D2C profitability.
Here, we have already made meaningful progress. In 2020, our D2C revenue was $1.8 billion. In 2023, that number is $6.7 billion. Scaled revenue matters. And as I've said, we passed pre-streaming losses a year ahead of schedule. Perhaps more important, I'm pleased to say that we now expect Paramount+ to reach domestic profitability in 2025, a significant and exciting milestone in the company's transformation. While Naveen will get into more detail, I want to preview the two parts of the story, domestic and international. Domestically, increases in engagement, reduction in churn and continue to add monetization as well as the flow through impact of last year's subscription price increase will continue to drive revenue growth, all of which will be done on a more efficient slate.
Add to that, the benefits of the Showtime Paramount+ integration, all driving meaningful D2C earnings improvement, as we continue to gain operating leverage in the model. Internationally, it's become unquestionably clear that Hollywood hits are the biggest draw for our audiences and partners around the world, which means there's a clear opportunity to lean into our CBS slate, Paramount+ Originals and Paramount Films, while slowing spend on local content and associated marketing, though the specific execution of this will vary by individual market as one size does not fit all. Of course, we also recognize that sustainable growth requires the continued transformation of our cost base, which leads me to our third priority, unlocking synergies across Paramount.
There was a lot of collective power behind Paramount Global, and we're unlocking that by aligning our assets to increase impact and drive greater efficiencies. On the efficiencies front, we'll continue streamlining the business to transform our cost base, which Naveen will discuss in more detail shortly. At the same time, we're excited about the potential to unlock more impact from this company across content, marketing, partnerships and more. And speaking of partnerships, advertising is a great example of where we're working to capture the power of One Paramount. Yes, the ad market was challenging in 2023 and still isn't exactly where we want it to be. But we're encouraged by some signs of stabilization, including healthy scatter premiums.
At the market level, many people are talking about increased supply and competition in the digital ad space. But what's not being discussed enough is the opportunity to grow the demand side of the equation, which is a big focus of ours. In addition to our focus on tapping into small and medium business budgets, something that historically was not accessible at the national TV level, we're now excited about being able to go toe-to-toe in bringing retail media to Connected TV, where we can incorporate purchase data from large scale retailers to target and measure the impact of media investment on business outcomes. This is fundamentally reshaping the marketing landscape, drawing budgets to Connected TV previously reserved for other formats like those associated with consumer and trade promotion as well as social media.
Because CTV is not just the top of the funnel awareness generator like its linear predecessor, it is also a one-to-one vehicle that can deliver the full funnel to the living room, expanding the use case and addressable market for Paramount Advertising. We're testing these capabilities with Paramount+ and Pluto. In fact, we're now partnering with Walmart Connect to bring the power of their data to streaming. And the early results show this combination significantly enhances ad effectiveness. We're excited about the potential of the opportunity, and more importantly, clients are too. And stepping back, I'd note that we love our multifaceted partnership with Walmart, a partnership that continues to evolve and grow, including by adding Paramount+ subscribers and improving viewer engagement through our Walmart Plus relationship.
In closing, these three priorities, maximizing our content, driving the D2C profitability and unlocking Paramount synergies give us a clear roadmap. They balance revenue growth and cost management, all while demonstrating the power and efficiency of our content engine. And speaking of that content engine, I can't help but highlight the incredible momentum we have as we kick off 2024. That includes the Golden Globes up over 50%, the Grammys with their largest audience since 2020, a Super Bowl that was record breaking on every level. The hugely successful debut of the new CBS slate, where multi-platform viewership across broadcast and streaming soared double-digits. The return of Jon Stewart to the Daily Show, which is driving ratings, revenue, streams and the cultural conversation, and our two-for-two start at the domestic box office, with both Mean Girls and Bob Marley opening Number 1, significantly exceeding Box Office expectations and both soon to be hits on Paramount+.
All of that in just the last eight weeks. With that, I'll hand it over to Naveen. Thank you.
Naveen Chopra: Thank you, Bob. Good afternoon, everyone. As Bob mentioned, our full-year 2023 results reflect a year of continued execution. In my comments today, I'll provide insights on key elements of our Q4 results. Additionally, I'll discuss how we're making notable progress in scaling our D2C business, which will result in significant earnings growth for the company in 2024 and drive Paramount+ to reach domestic profitability in 2025. Let's begin with our Q4 results. Paramount delivered total company revenue of $7.6 billion and adjusted OIBDA of $520 million. Despite navigating a variety of challenges posed by the strikes, we were able to deliver strong performance in our direct-to-consumer business and stable operating margins in TV Media.
As always, you'll find a comprehensive review of our financial results in our press release. Let me walk you through a few areas of note, starting with advertising. In Q4, direct-to-consumer advertising delivered strong growth of 14%, benefiting from a 27% increase in total viewing hours across Paramount+ and Pluto TV. This viewership is monetized through our IQ platform, already one of the largest premium digital video advertising platforms in the United States, and its value continues to grow as engagement expands and as we evolve our digital advertising capabilities to attract new sources of demand. In linear advertising, we saw strong demand in sports due to a record NFL season and incremental Big 10 inventory. Other components of linear advertising were negatively impacted by the strikes, a decline in political spend and unfavorable FX.
On a total company basis, advertising declined 11% in the quarter, including a 400 basis point headwind from the decline in political advertising. Looking forward, as Bob mentioned, we're seeing some signs of stabilization in the ad market, including healthy scatter premiums. And based on what we've seen to date, we expect to report low to mid-teens advertising growth in Q1, including the benefit of the Super Bowl. Next, let me turn to affiliate and subscription revenue, which grew 13% in Q4. As I've often noted, growth in total affiliate and subscription revenue illustrates that our multi-platform strategy, combining traditional and streaming, yields net growth for our business. In TV media, affiliate revenue declined 1%, reflecting a continuation of the trends we saw in the first three quarters of 2023.
D2C subscription revenue, on the other hand, grew 43% in the quarter. And that's in large part due to the impressive momentum at Paramount+, where subscription revenue increased nearly 80%, thanks to subscriber growth and global ARPU expansion. Paramount+ continues to reach new audiences, adding 4.1 million subscribers in Q4 for a cumulative total of 67.5 million subscribers globally. Additionally, ARPU for the quarter grew 31% over the prior year, reflecting a full quarter of our domestic price increase and the addition of international subscribers in higher ARPU markets. Q4 also benefited from strong performance of our Paramount+ with Showtime tier. The expanded content offering on our premium tier led to an increase in hours of engagement per subscriber.
Monthly churn for these subscribers also improved both quarter-over-quarter and year-over-year, and we're seeing higher than expected cost synergies from the combination. In fact, Q4 marked the third consecutive quarter of year-over-year improvement in D2C OIBDA. And on a full-year basis, we grew Paramount+ revenue over 60% in 2023, while content marketing and other expenses grew at a significantly lower rate. Said differently, as we approach the third anniversary of the domestic launch of Paramount+, we're capturing operating leverage in streaming faster than expected, and we intend to build on that momentum. Paramount+'s value proposition is strong, cornerstone, original and library content and top tier movies and sports in an integrated package.
This proposition allows us to continue to grow subscribers and drive revenue by deepening engagement, improving retention and increasing monetization. And we continue to believe that the key to deeper engagement and retention is savvy programming execution and a stable volume of original content. It's about smartly combining acquisition drivers like the NFL, blockbuster films and our slate of hit Paramount+ Originals with lower cost library and affinity program. This strategy proved effective in 2023, where average monthly viewing hours per domestic sub grew 8% and helped us implement a price increase while also reducing average monthly churn by 70 basis points. Outside the United States, we are similarly honing our Paramount+ strategy by leaning into our global slate and identifying markets where we can slow investment in local streaming content and marketing.
We've learned that Paramount+ subscribers outside the United States spend nearly 90% of their time with our global Hollywood hits, meaning we can keep them engaged while rightsizing our investment in content that does not travel around the world. In some cases, this change will result in slower international subscriber growth. But given what we now know about viewing behavior in certain international markets, we're confident the shift will be highly accretive to our D2C P&L. Domestically and abroad, we are finding ways to enhance engagement, reduce the cost per hour of viewing and unlock greater marketing efficiency. By executing on these initiatives, we expect Paramount+ to deliver more than 20% global ARPU improvement in 2024, while programming expense will grow at a significantly lower rate.
Ultimately, the ability to drive deeper engagement and ARPU growth, while slowing the rate of growth in content expense, is the path to profitability in streaming. In addition to improving the profitability of streaming, we remain committed to optimizing the cost structure in other parts of our business. Programming for our TV Media segment is the single biggest line item in our expense base, so it deserves particular focus. As you've heard, 2023 presented an opportunity to experiment with alternative lower cost entertainment programming across our linear networks. The performance we saw gives us confidence we can continue to reduce costs going forward while also delivering a consistent volume of high-quality content. And that's enabled by lower production costs, evolving format mix and optimizing and sharing content across linear and streaming.
As Bob noted, we're also focused on using the collective power of Paramount Global to unlock synergies more broadly. This mindset enables headcount cost reductions, including the action we announced earlier this month, which eliminated nearly 750 domestic positions or about 5% of our domestic employees and represents approximately $200 million in annualized run rate cost savings, the majority of which will benefit TV Media and corporate expenses. And, we will continue to optimize our compensation expenses throughout the course of 2024. As you now heard, we're making a variety of important changes to our global workforce and content strategy. These moves reflect decisions we've made to transition our business and enhance our future value proposition.
They will also result in a programming and restructuring charge in Q1, which we currently expect to be approximately $1 billion. I'll close by sharing some guidance on how all this translates to our financial expectations for the current year. As you've now heard, we're executing against numerous initiatives designed to not only navigate ongoing ecosystem changes, but also build operating leverage in our streaming business. This means significant OIBDA growth in 2024, largely driven by improvements to our D2C P&L, which also position Paramount+ to reach domestic profitability in 2025, a significant milestone in our streaming journey. In addition, we're highly focused on continuing to reduce balance sheet leverage. We finished 2023 with an approximately half turn reduction in net leverage relative to Q3, following the sale of Simon and Schuster.
Leverage in 2024 will benefit from material OIBDA growth and positive free cash flow. In fact, we expect free cash flow to grow in 2024 versus 2023, despite an increase in cash content spend as we restart production that was impacted by the strikes. Despite a dynamic environment, our commitment to shareholder value remains paramount. We have conviction that the value of our assets today and even more so with the benefit of strong ongoing execution represents a significant value creation opportunity. And as Bob said, we are dedicated to unlocking that value. With that, operator, let's open the line for questions.
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