Paramount Global (PARA) Deutsche Bank Media, Internet & Telecom Conference Call Transcript
Paramount Global (NASDAQ:PARA) Deutsche Bank Media, Internet & Telecom Conference February 28, 2023 8:50 AM ET
Company Participants
Naveen Chopra – EVP & CFO
Conference Call Participants
Bryan Kraft – Deutsche Bank
Bryan Kraft
Okay. I’m going to get started here on our next one. So I’m really pleased to introduce Naveen Chopra, who’s the Chief Financial Officer of Paramount. Naveen, welcome.
Naveen Chopra
Thank you. Thanks for having us, and thank you for your perfect timing. It’s snowing in New York today, I hear. So you guys — I mean, it’s perfect here.
Question-and-Answer Session
Q – Bryan Kraft
So maybe just start off with the strategy question. Where is Paramount today in terms of executing the streaming strategy? What are the major accomplishments that you guys have had so far? And what are you focused on over the next 1 to 2 years?
Naveen Chopra
Yes, sure. Look, I think it’s important to understand that we’re still relatively early in our streaming journey. A lot of people don’t realize this, but Paramount+ launched almost exactly 2 years ago. So we’re much younger than most of the other major global streaming services. But despite that fact, I think we have clearly proven over that relatively short period of time that we have very powerful consumer value proposition.
And that’s content driven. And it’s evidenced by the fact that if you look at what’s happened in the first 2 years of Paramount+, we have added more subscribers on an absolute basis than any other major streaming service. We finished 2022 with a revenue run rate for our direct-to-consumer businesses of $5.5 billion versus where we started a couple of years ago was significantly lower than that. And that included Paramount+ that is still growing at 81% from a top line perspective. So there’s no doubt that we got something that is very much working in the minds of the consumer, and it’s driving traction, engagement, et cetera.
Our focus now is going from that top line growth to starting to deliver on the path to profitability for streaming. And that means that we have to do a couple of things. Number one, we’re very focused on continued revenue and particularly ARPU growth. There’s a variety of levers that we will be executing against over the course of the next few quarters to drive that. I’m sure we’ll talk about some of those.
And then we’re also focused on the expense side of the equation and really starting to drive leverage against the investments that we’ve been making in content, marketing and the like. And that includes doing things like integrating Showtime and Paramount+, which unlocks opportunity, frankly, on both the top end and the bottom line.
So I think we’re very proud of what we’ve accomplished in the first couple of years, but we’re also very, very focused on ultimately turning streaming into a business that has profitability characteristics that we like.
Bryan Kraft
And Paramount has taken, I guess, a slightly different approach versus others when it comes to streaming. Now it appears others are evolving their streaming strategies. I think as an example, you’ve kind of had this multi-platform strategy all along, that windows content across your owned assets and also includes licensing. I think you guys were criticized for it for a while. Do you envision having to make any changes to the strategy going forward? Just any thoughts around that would be great.
Naveen Chopra
It’s a super interesting question because I think your observation is accurate. We had a different strategy when we started down the path with Paramount+. Some would have called it a contrarian strategy. And as you said, we were critiqued for it at the time. But it’s a strategy that was rooted in the fact that we didn’t have the luxury of unlimited financial resources with which to build out the streaming business. So our approach from the beginning was, yes, we’re going to invest in streaming but we’re going to have to do it in a way where it can ultimately deliver profitability and margins that we like in a reasonable period of time.
So how did we do that? Well, we had to do a bunch of things differently, right? Starting with, as you mentioned, really thinking about leveraging content across multiple platforms. Not everything had to be exclusive to streaming. You’ve seen us do that with our theatrical movies, you’ve seen us do it with some of our sports properties. You’ve seen us do it with original content, including content that may premier on streaming and then have a life — a second window life on some of our other platforms.
So that’s a big part of our strategy. We’ve always been a believer in the role of advertising. When we started that, a lot of people thought streaming is going to be all a subscription business and consumers aren’t going to put up with advertising. Well, the industry point of view has evolved a lot on that.
We’ve always embraced the idea of a balanced licensing approach as long as — as well as keeping content for use on our own platforms. Again, we never thought everything had to be exclusive to Paramount+. We took a different approach to international markets. We never said we’ve got to have a fully owned and operated service in 100 different markets around the globe. That’s a very expensive proposition from our point of view. We focused on some key flagship markets, and then we’ve taken more of a partnership approach in others where we don’t have the same sort of local assets.
So there’s multiple examples of this. Our franchise focus, that’s something that is also a key part of our equation that you’re now seeing others start to embrace as well. So I think many other folks have now woken up given that there’s more of a profitability focus across the industry, and they said, wow, all these different things that we happen to have been doing, they make sense. And they are ultimately important parts of the equation for how you build a profitable streaming business.
Bryan Kraft
Yes. Let’s talk about content. Paramount+ had great success in 2022 with titles like Top Gun and Tulsa King and 1923 to name a few. How does the content slate look for 2023? And how do you expect it to drive Paramount+’s sub growth over the course of the year?
Naveen Chopra
Well, like you said, ’22 was an incredible year for us in terms of sub growth, revenue growth, and it was all content driven. And some of the examples that you mentioned are notable because that content represents the diversity of what we call different content lanes, right?
So we had success with original content, the 1923, and 1883 examples, as you mentioned. We’ve had success with our theatrical movies, not just Top Gun but things like Smile, Orphan: First Kill, et cetera. And we had a lot of success with our sports properties. The NFL, UEFA continue to be big drivers on Paramount+. So it is very broad, and it’s about having something for everybody in the household.
And ’23, I think, is going to be even bigger and better. And that starts with more of the favorite original content that our consumers have clearly gotten very enthusiastic about. So new seasons of 1923, we just launched the latest season of Star Trek: Picard. We’ll have another season of Mayor of Kingstown. So those will continue to deliver.
We will also be adding new original content, more than I could catalog here and now, but there’s — we’ve got a very exciting thriller called Rabbit Hole that stars Kiefer Sutherland. That will be launching shortly. We’ve got another Taylor Sheridan series called Lioness that includes Nicole Kidman that we’re very excited about. And we’ll be actually revitalizing some well-known Paramount IP. We’ve got a series based on the iconic Fatal Attraction movie that will be coming to Paramount+. So that will be a fun one as well.
So in addition to that, our theatrical slate in ’23 is unbelievable. We’re talking about a new Mission Impossible movie. We’ll have another Transformers movie. We’ll have Dungeons & Dragons. We will have the next PAW Patrol movie. We’re going to be relaunching the Teenage Mutant Ninja Turtles franchise. So it’s a killer movie slate, and that will ultimately come to Paramount+.
And then, of course, we’re going to be integrating Showtime with Paramount+ this year. And so that means a lot of the well-known Showtime franchises, whether that’s the next season of Billions or the origin story for Dexter will all now have a home on Paramount+. So you put all that together and the slate for ’23 looks even better than what we had in ’22.
Bryan Kraft
Yes. It sounds great. Wow. You mentioned the integration of Paramount+ and Showtime. Can you explain just the timing, why now and also walk through the benefits you expect from integrating those 2 products?
Naveen Chopra
Well, I think ultimately, integrating those 2 services is kind of just the next leg in the journey for Paramount+. And it has benefits both to consumers and to our financial model. So I’ll touch on each of those for a moment.
From a consumer perspective, we’ve actually had bundles with Paramount+ and Showtime in the market for a little while. And then outside the United States, we’ve already had Showtime integrated in Paramount+. And what we’ve learned from those data points is that, that integrated content offering is highly accretive from a customer engagement and retention perspective. So that’s something that we’re obviously excited about leaning into because we know customers like it, and they spend more time with our service.
We’re also excited about what the integration will allow us to do from a content perspective, and you’ll see us, I think, reinvigorate the Showtime content slate. I mean it’s a phenomenal studio. And what we will be able to do with franchises like Dexter, Billions, Yellow Jackets and then thinking about how we take some of the historical showtime audiences and create new franchises for them, I think, is going to be really exciting. So from a consumer perspective, there’s a lot to love.
From a financial perspective, it helps us both top line and bottom line. On the top line, obviously, improvements in engagement, customer retention, et cetera, help drive revenue growth. But it also helps support what we want to do from a pricing perspective. We’re going to be increasing the price of Paramount+ later this year and the fact that we have Showtime content integrated there, and we know that customers are willing to pay for that is encouraging. In fact, since we’ve had the Showtime bundle in the market, even though it’s at a higher price than the base Paramount+ service, we’re seeing an increasing percentage of our new customers take that bundle. So it’s a pretty sizable chunk of new customer adds today.
So clearly, that combination helps drive pricing. And then from a cost perspective, it’s going to unlock our ability to find significant savings on both content, marketing and operations. I mentioned on our earnings call, we think there’s about $700 million of future expense savings that we can capture by integrating Paramount+ and Showtime. Some of that will happen later this year and then the rest will realize over time.
And that’s heavily content driven. You need less content to program one SVOD service than you do the program 2 services. And as you reduce the amount of content, you also get to take down the marketing investment because that tends to be title related. And our strategy is to lean more into franchises, which are just fundamentally more efficient from a marketing perspective because you don’t have to build as much awareness as you do with entirely new IP. And then ultimately, once we bring the apps and all the different platforms together, there’ll be some savings from a technology and an operations perspective.
So we’re excited about all that. And both that top line and expense opportunity are important ingredients in that path to profitability that we’re obviously focused on.
Bryan Kraft
And you mentioned the price increases. So I think you’re planning $1 on the Paramount+ Essential tier and $2 on the Premium tier that will include Showtime content. I think most other streaming services have also recently raised price or are planning to, so pricing power, clearly a focus. How much pricing power do you think you have with Paramount+? And how do you think about price elasticity of demand for the product?
Naveen Chopra
Yes. Well, it’s obviously something that we’ve studied very carefully. We got — I’ve been getting questions since the launch of Paramount+ about, when do you guys think you might do something with price? And I always said, we’re going to do this very thoughtfully.
And so we’ve done a bunch of analysis, conjoint analysis and the like with our own subscriber base, with people outside of our subscriber base. We’ve studied some of the historical trends from other streaming services that have executed price increases. And we learned a couple of things.
Number one, we learned that Paramount+ has an incredible value proposition relative to our competitors. And I think that will likely be enhanced by, as you pointed out, the sort of general upward trajectory of pricing in the industry. And then the integration of Showtime content into Paramount+ will further add to that value proposition. So we feel very good about that.
We have also learned that once consumers experience our content, they tend to get very sticky. We look at this data quite frequently in terms of what is the churn rate for a customer that watches 1 show versus a customer who watches 2 shows versus a customer who watches 3 shows. And the slope of that line is pretty steep. So once we get people into even a couple of our shows, we really, really like the churn characteristics of the business.
So what that says to us is the risk in pricing is less about churn, because we know that if we can get people into the service and get them to sample our content, that most likely, they’re going to stick around for a long period of time. So that means we do have some pricing power with respect to the installed base. And then when you think about a price increase, it means you just got to figure out a way to make sure you still have healthy volume at the top of the funnel in terms of new customer acquisition.
And that’s where we have a lot of different mechanisms that we can bring to bear, our partnerships, our bundles. We use introductory pricing, we have annual plans that — we have a lower cost ad-supported plan. All of these things ensure that it’s still relatively frictionless for a consumer to experience Paramount+. And then once they do that, they tend to become very sticky.
So that’s how we’re thinking about it. And I said I think the value proposition will still be very, very strong. And the impact of all that on our financial model, particularly around ARPU and revenue growth is tremendous.
Bryan Kraft
Regarding your guidance, how will the Showtime integration with Paramount+ impact the preexisting guidance that you have out there for $9 billion in D2C revenue and over $6 billion in content expense in 2024?
Naveen Chopra
Yes. So I’ll talk about each of those. With respect to our 2024 D2C revenue goal, there’s kind of some puts and takes in terms of how things are evolving. There’s no doubt that the weakness in the macro advertising environment, has created some headwinds around revenue growth. Advertising is a meaningful component of our D2C growth strategy. But on the other hand, we’re ahead of our plans when it comes to Paramount+ revenue growth, and that’s driven, frankly, by both better-than-expected subscriber growth and better-than-expected ARPU. So that’s obviously a tailwind against those goals.
And then on the cost side of the equation, the integration of Paramount+ and Showtime does mean that I think we will spend less than we previously anticipated in D2C content expenses in that period of time. So we haven’t issued any new guidance or updated or anything of that nature, but it kind of gives you a little bit of a sense of some of the puts and takes in that equation.
Bryan Kraft
So the $6 billion, assume that they remain separate services and nothing has changed…
Naveen Chopra
Exactly.
Bryan Kraft
Okay. Great. And I guess just maybe to talk about costs for a moment. You talked about the $700 million in Showtime related cost savings. What else are you doing from a cost perspective this year? Are there other opportunities you have to shrink the cost structure?
Naveen Chopra
Yes. I mean we’re always doing things to unlock new efficiencies. I wouldn’t want anyone to think that the Showtime cost savings is sort of the full extent of what we’re doing. We’ve talked about different elements of this over the last few quarters, quite frankly. We’ve done some significant kind of restructuring our approach to marketing, where we have unlocked savings both in labor and nonlabor, we’ve centralized more of that function. We’ve figured out how to leverage our owned and operated platforms even more so that we’re less dependent on having to buy outside media. We’ve done some restructuring in our ad sales organization.
So that’s now driven around key holding companies as opposed — advertising holding companies as opposed to individual teams for each of our different advertising platforms. There’s some significant savings that’s unlocked there. We’ve also — we’re still in the process of realigning our international organization. We used to have, quite frankly, kind of small little companies in each of our different markets. And we clearly were not getting leverage on a global basis in a lot of functions, whether it’s programming, marketing, et cetera. So there’s a lot of opportunity there that we’re unlocking.
And on the traditional linear side of the business, we’ve also been, I think, quite innovative in thinking about how we program linear channels, how we change the mix of programming, how we create more cost-effective formats, how we change the cost of producing content which is all critical to maintaining the earnings and cash flow generation from that part of the business.
So all of those are ongoing. They’re all material and they’re incremental to what we’re doing with Showtime.
Bryan Kraft
Okay. Maybe let’s shift to international for a moment. How is the shift from a single tier to multiple tiers in international markets going to drive success in that business?
Naveen Chopra
Yes. That’s, I think, an exciting opportunity for us. We’ll be starting to do some of that in 2023. There’ll be more in subsequent years. And just for those who are not familiar, we have — to date, had basically a single tier in our — for Paramount+ outside the United States, whereas, obviously, in the U.S., we have both an ad-supported tier and Premium tier Paramount+, and we’ve historically had Showtime bundle as well.
Outside the U.S., it’s all one at a single price point. And we will start to evolve that later this year. It will be a little different in each market. So we will be adding lower-priced tiers in some cases, ad-supported tiers, in some cases, mobile tiers. We will be increasing the price of sort of our base tier. And we will be adding premium tiers.
And again, not every market will have all 3 of those things because it does depend on the local market dynamics as well as our content offering in each of those markets. There are markets where, for instance, we have premium sports and there are markets where we don’t. And so in the markets where we have premium sports, there’s more of an opportunity to drive higher ARPU on premium tiers, et cetera.
And going from single-tier to multi-tier has 2 big financial benefits for us. Number one, it allows us to serve a much broader audience, particularly with the addition of lower-priced tiers that we have not had historically. Number two, when you put that together with increases in sort of the base price and the addition of premium tiers, our expectation is that blended ARPU in most of these markets will actually grow. So more subs, higher blended ARPU, obviously, a good formula from a revenue growth perspective.
Bryan Kraft
Okay. And you mentioned ARPU, I mean, aside from price increases, can you talk about all the levers that you see driving Paramount+ ARPU growth going forward?
Naveen Chopra
Sure. I think it’s probably helpful to think about that — think about ARPU in the domestic market and the international market independently, only because the levers are slightly different. In the domestic market, I think of kind of 3 key levers that will help drive ARPU, one, you mentioned pricing. But in addition to pricing, I think there is benefit from mix, particularly as we integrate Showtime and Paramount+. We think that will create even more appeal at a higher price point for Paramount+ than what exists today.
And then we expect to see continued advertising growth on the platform. Paramount+ advertising has actually continued to grow at a very healthy clip, and I expect that will continue, particularly as the ad market starts to recover.
And then on the international side of the business, the dynamics are a little bit different. We talked about one, which is the introduction of multiple tiers. So that will benefit ARPU. There’s also a geographic mix component to it. To date, a heavy proportion of our subs have been in markets that have lower ARPU relative to some of the more developed markets, whereas you look at places that we’ve launched in 2022, the U.K., France, Germany, Italy, et cetera, those tend to be higher ARPU markets. So in ’23, more of our subs will be coming from those markets than in the past. So that will be beneficial to ARPU.
And then we also have sort of a channel mix benefit internationally. Because in a lot of these markets, as you know, we really embraced what we call hard bundles as a strategy for accelerating our launch in these markets. And that has the benefit of driving awareness, relatively fast subscriber growth, but there is a bit of a compromise from an ARPU perspective. As we move forward, the whole point of that strategy is you use those hard bundles to catalyze growth in the more traditional direct-to-consumer channels, we’re already starting to see that happen. And so that also has an ARPU benefit in international markets.
So multiple different drivers there, but ultimately, we like the trajectory on ARPU, both domestically and internationally.
Bryan Kraft
Okay, and last year included a lot of expansion for Paramount+ through wholesale relationships, including the hard bundles you did in the Sky, CANAL+, Walmart and others. Is there still more work to do on the distribution side, whether it’s domestic or international? Or is the distribution footprint essentially complete now?
Naveen Chopra
Well, we’ve always believed in what you’ve heard us describe as ubiquitous distribution. It’s another part of that kind of differentiated strategy that we really believe in. There are a lot of folks not that long ago, who were questioning, does it actually make sense to have all these sort of partner-oriented distribution channels? We’ve always believed they’re valuable. They’ve definitely been a driver of the growth that we’ve seen to date. That includes things like the partnership we have with Walmart here in the U.S. We continue to be very happy with that. That was certainly a contributor to the growth that we saw in Q4 and we have even bigger expectations for that going forward.
And we’ve continued to supplement with other interesting partnerships. You may have seen, we announced a partnership with Delta at CES, where Paramount+ will become kind of the featured streaming service on Delta’s new high-speed, in-air WiFi. That will be launching relatively soon, and I think that’s going to do wonders in terms of driving awareness and sampling of Paramount+. So we’re very excited about that.
And internationally, our distribution strategy has — as I said, it’s been different from market to market. In some markets, we’ve taken an approach where we said we’re going to rely very, very heavily on partners or almost exclusively our partners. And sometimes that’s taken a JV form, sometimes it’s more of a commercial licensing relationship. And then in other markets, we’ve had more of an omnichannel approach, where we’ve said we’re going to have a direct business as well as partnerships, and that’s true in the U.K. It’s true in many other, both European and Latin American markets.
And when I look at ’23 and beyond, I think it’s really continuing to exercise against that strategy, which is to say, it’s less about kind of lighting up new markets and really about now starting to build and monetize within the markets that we launched in 22, many of which actually launched relatively late in the year.
And so we’ll be capitalizing on those hard bundled launches, the partnerships, the marketing, new content slate and really driving both subscriber and ARPU growth as we talked about. So that’s really kind of our focus for the near term.
Bryan Kraft
Beyond content, is there a lot of opportunity to sort of go back into these countries now and really hone the model in order to create value?
Naveen Chopra
No doubt. I mean there is opportunity. As I said, I mean growing ARPU is a huge focus for us in these markets as well as, I think, getting even more efficient on the content side of the equation because much like we have in the U.S., we’re learning what works. And we’re increasingly thinking about our slate on a global basis. So we’re combining what we learn about what’s working in the United States with what’s working internationally. And we’re finding content where we can get the most global appeal because obviously, that maximizes ROI on the content investments that we’re making.
It’s not to say local content is not important, it still has a very critical role. But the more that you can do with global content, obviously, the more powerful your financial model can be. So that’s definitely an opportunity that we’re focused on.
Bryan Kraft
Okay. Churn is obviously something that’s a big focus in streaming services, tends to be higher than traditional Pay-TV services. How far away is Paramount+ churn rate from the level at which you think it needs to be in order for the service to really scale in a way that positions it to be able to replace the secular declining linear TV business over time?
Naveen Chopra
Yes. Look, I think I’m very encouraged by what I’ve seen in churn with Paramount+. And what I mean by that is the trend lines are exactly where we want them to be, which says churn has improved on both a year-over-year basis and a sequential basis pretty consistently since the launch of Paramount+. And therefore, Q4 was yet another record-low churn, which is what you like to see as the service continues to mature, content slate expands and we get better and better at both attracting and programming the service for consumers.
And we expect that trajectory will continue. I think there’s a lot of opportunity there. I would not say that we’re sort of at steady-state churn but I think it is going to continue to improve as the content slate continues to expand, as we do things like integrate Showtime and Paramount+, I think we’ll continue to see major benefits there.
And as a streaming service continues to mature, your revenue growth obviously starts to shift from being driven by new sub acquisition to being driven by improvements in ARPU and churn. And so that’s very much part of how we think about the focus and how the business is going to have to evolve. And as I said, the slope of those lines is very encouraging.
Bryan Kraft
I think a lot of people would love to kind of hear an update if there is one on the ad market. I think a couple of weeks ago in your earnings call, Bob Bakish indicated that you’re seeing some green shoots in the ad market in some major categories as well as in local. What are you seeing in the ad market now? And has anything changed at all since your earnings call?
Naveen Chopra
Well, the short answer is not a whole lot has changed since the call was only 2 weeks ago, so there’s not a lot of new information per se. I think as has been well discussed among the industry, the domestic scatter market continues to be kind of slow. I don’t think that’s really news to anybody.
But as Bob pointed out, there are some categories where we’ve seen some relative strength, things like food and beverage, pharma, travel, auto. And I think that a lot of that is probably related to kind of post-pandemic dynamics, right? You’ve got supply chain starting to open up, you’re seeing inventories with cars starting to build, consumers continue to have a pretty voracious appetite for travel.
And so those dynamics, I think, are starting to show up in some of these categories. All that being said, I don’t think it changes the fact that we think we’re still going to be looking at the back half of the year before there’s a noticeable recovery in the marketplace on a broad basis.
Bryan Kraft
Right. Maybe let’s talk about free cash flow and dividend for a second. Some market participants have concerns about lack of free cash flow generation currently and your leverage ratio being elevated as you’re investing. And that includes some concerns over the sustainability of the dividend. Can you just maybe address these concerns, talk about liquidity, the outlook for improvement in free cash flow and also how the balance sheet will de-leverage from here?
Naveen Chopra
Yes. Well, thank you for asking that question because I think it’s really important that people understand the drivers of the free cash flow trends in our business, because that tells you a lot about both the future trajectory and our strategy for sort of the short term, if you will.
So if you think about what has been happening with free cash flow for Paramount, it’s overwhelmingly driven by 2 things: number one, the investments that we’ve been making in streaming; and number two, the broader advertising marketplace. And what is important about both of those things is they are fundamentally short term in nature, right? The streaming investment as you well know, we’re now at our — or ’23, I should say, will be our year of peak losses in D2C.
So that means as we come out of ’23, we will see growth in both earnings and cash flow. And in fact, I think the growth in cash flow will be larger than the growth in earnings because of the dynamics around content amortization. So we’ll see a nice recovery there. And then on the ad marketplace, that is a cyclical thing. We’re a few quarters into a downturn, and we continue to look to recovery in the back half of this year. So the combination of those 2 things is really what gives us the confidence that we’ll be able to deliver meaningful growth in earnings and free cash flow in 2024 and beyond.
Now at the same time, we do pay attention to our balance sheet. We care about our credit rating, we care about being. And when I look at that lens, we’re in a good position. We’ve got — we finished 2022 with over $3 billion of cash on the balance sheet. We have no near-term debt maturities, and we got a $3.5 billion revolver that remains completely undrawn.
So to the extent that we have to bridge anything in the short term, we’ve got the flexibility to do that. And we continue to be very thoughtful about capital allocation and making sure that we’re balancing all of those objectives in a way that makes sense.
Bryan Kraft
Okay. All right. Great. I think that wraps it up for us. We’re running out of time. So thanks very much, Naveen.
Naveen Chopra
Well, thanks again for having us, Bryan. Appreciate it. Good to see you.
Bryan Kraft
My pleasure.
Naveen Chopra
Take care.