Paramount Skydance Corporation Class B Common Stock (PSKY) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to today's CBS Corporation Third Quarter 2018 Earnings Release Teleconference. I'd like to remind everyone this call being recorded. And at this time, I'd like to turn the call over to Senior Vice President-Investor Relations, David Bank.

Good afternoon, everyone, and welcome to our third quarter 2018 earnings call. Joining us with today's remarks are Joe Ianniello, our President and Acting CEO; David Nevins, our Chief Creative Officer; and Chris Spade, our Chief Financial Officer. Following Joe, David, and Chris' remarks, we will 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. The third quarter and year-to-date 2018 results are adjusted to exclude costs related to certain corporate matters and certain benefits associated with tax law changes. 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.

Thank you, David, and welcome to our call. And good afternoon, everyone, and thanks for joining us. I want to take a minute and thank Adam Townsend for his outstanding years leading CBS Investor Relations. Showtime is in great hands with Adam as the CFO. As David Bank mentioned, with me here today is David Nevins, our Chief Creative Officer. In his new expanded role, David oversees all of the entertainment programming across the company. So, I thought it would be helpful for you to hear from him today. He obviously brings a wealth of experience to this position as well as a clear track record of success at Showtime. I'd like to also welcome Chris Spade, our new Chief Financial Officer. While Chris is new to this position, she joins us having been an outstanding CFO for Showtime, and she's been a key member of that business for more than two decades. I've worked with both David and Chris for many years, and I look forward to their contributions today and in the future. Now, let me tell you about our third quarter results. Revenue was up 3% to $3.3 billion, and EPS was up 12% to $1.24. This was our best third quarter ever in revenue and EPS. I am also pleased to tell you that we are reaffirming our outlook for 2018 with revenue growth in the high-single digits and EPS growth in the high-teens. Our success continues to be fueled by all the ways we are executing on our long-term strategy. We are driving new incremental and recurring revenue from a number of significant growth areas: retrans and reverse comp along with skinny bundles; our over-the-top direct-to-consumer streaming services; global content licensing; and our expanded audience monetization efforts. Combined, these growth initiatives will generate more than $4 billion in revenue this year, which is up nearly 75% from 2015. Going forward, as we continue to position CBS as a global multi-platform premium content company, we are confident that there is significant upside from here. Nowhere is the success of our strategy more evident than in the ways in which we are growing our subscribers across platforms. Quarter after quarter, our must-have content is driving increases at CBS and Showtime, pretty unique for a media company nowadays. In fact, we have now grown our company's – our total company subs every single quarter since we started discussing this metric. Whether it's large traditional bundles, smaller streaming packages, or standalone direct-to-consumer services, we are distributing our content in all the ways consumers want it and reaping the benefits. And as we grow our subs, we continue to negotiate deals with distributors that better reflect the fair value of our content. So, we are growing our ARPU or average rate per sub as well. In fact, as viewers move to smaller offerings, they are transitioning to new platforms that pay us more than the old one. Our sub growth is especially strong where we get the highest rates, on our direct-to-consumer streaming services, CBS All Access and Showtime OTT. And we are more confident than ever that we can achieve our new goal of 8 million subs combined from these services in 2019 a full year ahead of our original schedule. In addition, that total doesn't include the direct-to-consumer subs that we are just beginning to get internationally. All Access Canada is off to a solid start, and we continue to expand into new markets. Here in the fourth quarter, we are launching our Australian version called 10 All Access. This new platform will include local programming for Network 10 as well as our premium CBS content, further distinguishing us from other leading SVOD platforms. We will continue to expand into new territories in 2019, and we are confident that digital distribution on a global scale will be very lucrative for CBS. At the same time, we are also expanding our marquee brands on to ad supported OTT platforms, led by the success of CBSN, our digital news network. Thanks to a 24x7 news cycle and our increasing political coverage, CBSN is now averaging more than 1 million streams per day. And the average age of the CBSN viewer is 38, which is decades younger than the average broadcast and cable news viewer. We continue to expand CBSN on virtual MVPDs, including a deal we just announced last week to provide it as a standalone channel to all the subscribers on Hulu's Live TV services. Later this quarter, we will begin the next phase by launching local versions of CBSN, featuring content from our owned and operated stations across the country. We will start with CBSN New York, and then add other markets, including Los Angeles, in early 2019. CBS Sports HQ, our sports OTT service, also continues to grow as we feed the demand for more sports highlights, round-the-clock coverage, stats and analysis. Streams are up 25% from where we were at this point with CBSN. And just like all of our direct-to-consumer platforms, we are attracting new and younger viewers. Our latest direct-to-consumer service is ET Live. Launched just yesterday, ET Live combines the best of the Entertainment Tonight brand with a new platform to reach consumers all day, every day. All of these direct-to-consumer opportunities are only as successful as our premium content, and we continue to expand our programming pipeline. We are now producing an all-time high of 76 series across broadcast, cable, and streaming outlets. We are making more shows for CBS All Access, selling more shows to third-party distributors, and licensing more content internationally, where the demand for our programming remains strong. As an example, our brand-new crime drama, FBI, has sparked huge interest, and we have already licensed it in more than 150 territories around the world. Here in the U.S., now a little more than a month into the new season, we are very pleased that American households are watching more broadcast television for the first time in four years. Also, I'd like – there's a little known fact out there that we remain the number one network this season even without Thursday Night Football, and we have won the last ten years in a row. And when the dust settles, we'll finish this broadcast season as the most watched network once again, and that's with or without Super Bowl LIII. Speaking of football, NFL ratings are also up across networks. And here at CBS, we are up 3% so far this season, which is even higher than the industry average. This is also the first full season that viewers can watch our NFL coverage on all mobile devices, including on CBS All Access, and we are monetizing that viewing. Also during the quarter, we locked in a deal for the PGA Championship, extending it to 2030 and securing our position as the broadcast leader in golf. Importantly, the deal also includes expanded digital rights across all CBS platforms. In addition, the PGA Championship will now move to the spring where we expect higher ratings. All told, 2019 will be a banner year for CBS Sports, starting with the AFC Championship game to Super Bowl VIII, to the NCAA men's basketball tournament and Final Four, to the Masters, to the PGA Championship, to SEC Football, and back to the NFL again. Quite a year. At CBS News, our flagship programs continue to raise the bar in journalism. Leading the way is 60 Minutes, which remains the number one news program and a consistent top ten performer 51 years after its launch. And thanks to the continued strong performance of CBS Sunday Morning, we are number one on Sundays from dawn to dusk. In late night, The Late Show with Stephen Colbert, and The Late Late show with James Corden are widening their lead over the broadcast competition. And Colbert and Corden continue to be creative powerhouses that generate new shows for other platforms, including Carpool Karaoke on Apple, Drop the Mic on TBS, and Our Cartoon President on Showtime. So, by owning our two late-night shows, we are building new franchises that go far beyond late-night television. We're also leading the way in first-run syndication where CBS has seven of the top ten shows, and we just locked in three of those shows, Dr. Phil, Wheel of Fortune and Jeopardy to long-term deals. Along with our continued programming success, we are also using advanced data and technology both to deliver a higher ROI for our advertisers and to monetize our audiences more effectively. To that end, we are rolling out a proprietary new platform called DnA, which is short for Data and Audience. DnA allows advertisers to buy specific audience segments, so our advertisers can target people who like to eat out and drive SUVs rather than just buy the broad demographic of adults between the ages of 25 and 54. At the same time, we are also aggressively pursuing partnerships in set-top boxes and smart TVs to sell highly targeted addressable ads. And we are using the data we collect from our direct relationship with the viewers on our OTT platforms to optimize our dynamic ad insertion capability. So, as consumer habits change and technology advances, we are finding new ways to monetize our audiences and it's becoming more valuable all the time. Turning to Cable, Showtime had yet another great quarter. We have four of the top six hour-long scripted shows on premium cable. And our subs are now at an all-time high of more than 26 million, growing both in the linear MVPD universe and over-the-top. In fact, we are in the midst of our biggest year yet in Showtime OTT signups as we continue to reach new and younger viewers by expanding on to new distribution services. Showtime has also become the undisputed leader in boxing. So, far in 2018, we have had 12 marquee boxing events, featuring 26 world title fights, and we are generating the highest level of viewers since 2014. We'll finish the year in a big way with a pay-per-view event on December 1, when world champion Deontay Wilder faces British star Tyson Fury in the most significant heavyweight fight in the U.S. since Mike Tyson-Lennox Lewis 16 years ago. Premium content is also driving growth in our Publishing business. In its first week, Fear, by Bob Woodward, sold more than 1.1 million copies, which is more than any other title in Simon & Schuster's history. And here in the fourth quarter, we have several titles from some of our best-selling authors, including a new book from Stephen King, Elevation, which we just published this week, and one on the way from Mary Higgins Clark. In Local Media, political spending at our TV stations is up more than 25% compared with the 2014 midterm elections. And for the first nine months of the year, Local Media has seen its highest political spending for any election year. With a couple of significant ballot initiatives in California and competitive races in markets where we own leading CBS stations including Texas, New Jersey and Florida, we expect a very strong finish here in Q4. So, across our company, our businesses are solid, and our growth strategy is clear. We are increasing the amount of programming we produce. We are driving fee-based subscription revenue. We're using data and technology to better monetize our viewership, and we are capitalizing on the changing consumer behavior with our direct-to-consumer streaming services. As a result, we are hitting our numbers today, while building for a successful future down the road. Now, I'd like to take a moment to say how pleased I am with the way our employees have kept their focus on delivering the kind of results you see from us today. We have a very deep and stable management team that brings a combination of great experience and fresh ideas, and I am confident they will serve us well in the quarters to come. I look forward to their contributions as we continue to distinguish CBS as a global multi-platform premium content company. Now, I'd like to turn the call over to one of the key members of our management team, David Nevins, who will tell you more about our premium content. David?

Thank you, Joe, and hello, everyone. I am excited to take on this new role at the Corporation and to have the opportunity here to talk about the outstanding content we are creating across our company. Taken together, the CBS Television Network, CBS All Access and Showtime form a powerful programming powerhouse, one that not only fuels the financial engine that drives this company, but it also makes the CBS corporation one of the most attractive places for Hollywood creatives to bring their best work. As you heard, we are significantly ramping up our investment in programming. The 76 series that Joe mentioned are up from 65 a year ago, and more than double what we did just five years ago. By producing more shows, we have more content to license, particularly in the international marketplace. And we also have more content to roll out on our owned platforms, which in turn is accelerating the growth of new subscribers to Showtime and All Access, and increases retention of our existing subs. The bulk of our production comes from our CBS Television Studios, where our strategy is to look at individual shows as global brands. And our philosophy has been to sell a project wherever it has the best chance to thrive. As a result, we have ramped up our output, so much so that we have expanded our production capabilities with a new state-of-the-art facility in Toronto. Just to give you a sense of some recent highlights, CBS Studios has four series at Netflix: Insatiable, Dead to Me, American Vandal, and Unbelievable. A great example of how we're able to use the strength of our various platforms to attract top talent is the new three-year deal we've just made with proven hit makers, Robert and Michelle King. They created The Good Wife for CBS, The Good Fight for CBS All Access, and shortly, they will begin production on a new drama for Showtime called Your Honor. More and more, the combination of powerful outlets and strong, experienced creative leadership makes the CBS Corporation one of the most attractive homes for talent in the entire entertainment business. Joe told you about the success of our programming on the CBS Television Network, where we own 80% of our primetime schedule, including five of our six new shows. Without a doubt, the CBS Television Network is the best place to launch and sustain hits that feed the monetization pipeline throughout the world for years to come. Already, we've picked up four of our new series for the full season: FBI, God Friended Me, Magnum P.I. and The Neighborhood. And we have ownership of all four. Beyond the fall of our ten mid-season series, we have ownership in eight including the scripted drama, The Red Line from mega executive producers Greg Berlanti and Ava DuVernay, and starring Noah Wyle. We're just not just building assets on our own network. A Million Little Things just received a full season pickup at ABC. We're attracting great talent in the unscripted area as well. We will capitalize on the huge Super Bowl VIII audience to launch a new global competition series, The World's Best. James Corden will host and executive produce with big-name talent judges Faith Hill, Drew Barrymore and RuPaul. It hails from two of the most successful unscripted executive producers in television history, Mark Burnett of Survivor and The Voice; and Mike Darnell of American Idol. We are also incubating Million Dollar Mile, a 10-episode high stakes competition series that challenges every day athletes' physical and mental toughness. Million Dollar Mile comes from brand-new Laker and superstar producer LeBron James, along with the executive producers of Big Brother. And we're really excited about Love Island, a dating competition series coming this summer that is adapted from the most popular program in the history of Britain's ITV network. It has not only garnered huge ratings, it has also driven huge social and cultural conversation. And with the back-end interest in each of these shows, the more success they have, the better it is for us in the long run. In development, we continue to make significant content investments with several pilots and series commitments lined up in preparation for next season. Here again, we prioritized being in business with the best and biggest creatives in order to develop a broad range of diverse and inclusive programming that builds upon our loyal core audience. Complementing the deep roster of shows in the broadcast network is the increasingly robust CBS All Access slate. Last year, we began to offer original series at All Access. We have upped that steadily quarter-by-quarter, expanding the offering of original content that subscribers want. We just dropped Tell Me a Story, a psychological thriller from screenwriter Kevin Williamson, which premiered quite appropriately on Halloween last night. Our latest CBS All Access green light has gone to Why Women Kill, a dark comedic drama from Desperate Housewives creator Marc Cherry and Imagine Entertainment. We're also pursuing franchises with global appeal, including an exciting new version of The Twilight Zone, which boasts 2018 Oscar winner Jordan Peale in the Rod Sterling role of executive producer and host. Jordan reinvented the horror genre in Get Out with an infusion of social awareness. And we are thrilled to see what he'll bring to an iconic franchise like the Twilight Zone. All Access will continue to be home to all things Star Trek. And we are expanding the franchise in a big way. Star Trek: Discovery was an international sensation, and we'll be launching season 2 on January 17. In addition, we'll have a new separate Star Trek scripted series starring the legendary Patrick Stewart, who will reprise his role as the beloved Captain Jean-Luc Picard; also, a new Star Trek adult animated series called Lower Decks, which has landed in CBS All Access with a two-year pickup. And we expect to have more Star Trek announcements coming shortly. Obviously, it should come as no surprise, I'm also pleased to tout the accomplishments of Showtime. As Joe noted, Shameless, Homeland, Billions and The Chi give us four of the top six hour-long scripted series in premium cable. And we expect the just-premiered Ray Donovan to join that group of most watched shows shortly. Looking ahead, Showtime will be making some major waves over the next three months. The limited series, Escape at Dannemora directed by Ben Stiller, and starring Oscar winners Benicio del Toro and Patricia Arquette, and Golden Globe nominee, Paul Dano, has every signs of being an inner circle awards contender. In addition, Shut Up and Dribble executive produced by the aforementioned LeBron James and narrated by Jemele Hill is a powerful inside look at the changing role of African-American athletes in this fraught political environment through the lens of the NBA. In 2019, Showtime will continue to increase our output with the launch of several high-profile shows, including Black Monday, a 1980s Wall Street set comedy starring Don Cheadle whom we're thrilled to have back on Showtime, along with Andrew Rannells and Regina Hall. Next year also brings our new drama series, City on a Hill, starring Kevin Bacon and Aldis Hodge; and a limited series about the rise and fall of Roger Ailes that stars Oscar winner Russell Crowe, Oscar nominee Naomi Watts, along with Seth MacFarlane and Sienna Miller. Overall, CBS is strongly positioned to continue rewarding shareholders through the development, production, distribution and licensing of premium content. Each success we have breeds more success with increased revenue leading to more investment. And to offer more specifics on that and our overall financial picture, I'm happy to pass this call over to my friend and colleague, Chris Spade.

Thank you, David, and good afternoon, everyone. It is an honor and a privilege to take on my new role as the Chief Financial Officer for CBS Corporation. I am pleased to be on the call with you today. As you heard, our creative success continues to lead to financial success. We turned in record revenue and record EPS, and we grew EPS for the 35th consecutive quarter, even as we invested an additional $100 million in content in Q3. We believe that in the case of our company's trajectory, past is prologue and our passive investment and innovation will continue to yield growth and strong return on investments. Now, let me give you some more details about our third quarter results. Revenue for the quarter was up 3% to $3.26 billion. Affiliate and subscription fees came in at $1 billion compared with $1.15 billion last year, when Showtime had the Mayweather/McGregor pay-per-view boxing event. Our ongoing affiliate and subscription fee business increased 14% led by our direct-to-consumer streaming services and virtual MVPD, which together grew 79%. And we continued to see strong gains in retrans and reverse comps as well. Content licensing and distribution revenue was up 8% to $933 million for the third quarter. On a year-to-date basis, content licensing grew 10% to $3 billion, as our higher content investment gives us more programming to license across platforms and around the world. We also had a solid quarter in advertising, which grew 14%, driven by our Network 10 acquisition. Here in the U.S., advertising grew 4%. And at the CBS Television Network, advertising was comparable on an underlying basis for the quarter and year-to-date. And we remain on track to achieve about $4 billion in network advertising for 2018, which is consistent with prior years. Also, during the quarter, operating income came in at $736 million compared with $729 million a year ago, reflecting our higher investment in programming and technology for our new direct-to-consumer platforms. And as Joe said, EPS was up 12% to a record $1.24. On a year-to-date basis, we delivered record revenue and record EPS. Revenue for the first nine months of the year was up 7% to $10.5 billion, driven by retrans and reverse comp, which is up 22% year-to-date, and EPS was up 15% to $3.70. Now, let's turn to our operating segments. Entertainment revenue for the third quarter came in at $2.2 billion, up 19% with strong growth across our key sources of revenue. Advertising and content licensing revenue were each up 16%, and affiliate and subscription fee revenue rose 32% driven by growth in reverse comp, CBS All Access and virtual MVPD. Entertainment operating income for the third quarter was up 8% to $377 million even as we ramped up our programming investment. Year-to-date we have produced 12% more hours of programming for both our own platforms and for other networks. Third quarter Cable Networks revenue came in at $569 million compared with $840 million last year when we had the big pay-per-view event. As you heard, we now have more than 26 million subs at Showtime. And we continue to benefit from the growth of Showtime OTT as we expand with new distributors such as Spotify, which targets the college market. Cable Network's operating income came in at $248 million compared with $296 million last year due to the timing of licensing revenue and our higher investment in programming. This includes the production and marketing of two new and successful owned shows, Sacha Baron Cohen's Who Is America?, and Jim Carrey's Kidding. Switching to Publishing, revenue reached $240 million in Q3, a 5% increase as Simon & Schuster delivered higher print and digital sales. In particular, digital audio continued to grow strongly and was up 17% during the quarter. In addition to Fear by Bob Woodward, other third quarter bestsellers included Whiskey in a TeaCup from Reese Witherspoon; and Bread War by Vince Flynn. Publishing operating income of $51 million grew 9% in the third quarter, driven by higher sales. And our Publishing operating income margin was a solid 21%. Third quarter local media revenue rose 9% to $434 million fueled by both strong growth in retrans revenue and by an increasingly heated market for political advertising as the midterm elections approach. Other particularly strong categories during the quarter were entertainment and health care. Local Media operating income increased 17% to $124 million, and our Local Media operating income margins expanded 2 points to 29%. Turning to cash flow and our balance sheet, free cash flow for the first nine months of 2018 was up 31% to $1.1 billion. We are using our cash to invest in content and much of the increase in free cash flow is driven by growth in affiliate and subscription fees and lower tax payments. During the quarter, we repurchased 1.8 million shares of our stock for $100 million and we remain on track to repurchase approximately $800 million of our stock for the year. Now, let me tell you what we see ahead. In Advertising, we expect a strong finish to the year, thanks to the midterm elections. Local Media revenue is pacing to be up in the high teens. At the Network, scatter is about 20% to 30% across day parts, and we're seeing a lot of excitement surrounding World's Best which as you heard will air right after the Super Bowl. In content licensing, we currently have nearly 800 episodes of hit shows that we can bring to the domestic marketplace, which we will be monetizing this year and in years to come. And all of the new series we just launched at CBS, Showtime, CBS All Access and The CW will continue to add to our content pipeline. In affiliate subscription fees, we expect retrans and reverse comp revenues to surpass $1.6 billion for 2018. And next year, we will have more than 30% of our footprint in both retrans and reverse comps coming up for renewal. In over-the-top, as Joe said, we expect to reach 8 million subscribers combined at CBS All Access and Showtime OTT next year, and that does not even include subscribers from international expansion. So in summary, as 2019 approaches, CBS stands in an enviable position. We are set to achieve our 2018 outlook of revenue growth in the high-single digits and EPS growth in the high teens. Our unique asset portfolio, the number one network on television, a leading television studio, a rapidly growing premium cable network, and our deep library and scalable platforms provide a strong foundation for more growth long-term. And we are excited about the significant growth opportunities we see before us from our direct-to-consumer streaming services, retrans and reverse comp, skinny bundles, global content licensing, and our expanded audience monetization efforts. So, we remain confident in our future, and as we execute on our long-term growth strategy, we will continue to deliver for our shareholders. With that, Greg, we can now open the line for questions.

Thank you very much. And first, from JPMorgan, we have Alexia Quadrani.

Hi. Thank you very much. My question is on the content production of third-party content. A few years ago, I think, when you gave guidance at your Investor Day for content sales, I think production of third-party content wasn't that big of a deal back then. Today, it seems like a huge opportunity for you as one of the most successful TV studios. I guess how incremental could this opportunity be to your targets or just in general? And my follow-up will be on Showtime. We saw HBO go dark today on one of the distributors. Any update on how Showtime is positioned in general distribution?

Okay, Alexia. It's Joe. I'll take the first part and David will take the second part. Look, I mean, you're seeing us double our content production output over five years, and that's what gives us the confidence when we put in the content licensing as one of our growth pillars a few years ago, monetizing that content as we sell that content in windows, that really comes back and really affords us the ability to sell it over and over and over again. And so, we keep producing quality content that third-parties want, because their consumers are telling them they want it, and so that's a really good thing. So, we produce for ourselves, but as you point out, we're producing for others. So, we have been ramping that steadily, and we have capacity to do a lot more. David, do you want to take the second part?

Yeah, I mean, we have good relationships with our distributors, our MVPD distributors, and we have great confidence in the quality and the desirability of our programming. So, we take that into every negotiation.

Okay. Thanks, Alexia. Can we take the next question?

Thank you.

Yeah. Next, from Bank of America Merrill Lynch, we have Jessica Reif (sic) [Jessica Reif-Cohen] (35:54).

Thank you. The first question, I mean you guys have found it incredibly stable. I'm just wondering, given the changes that you've had within the organization, are your priorities changing in any way, whether they're operating or capital structure? Will there be further management changes throughout the organization? And then, a second topic, since David's on, on Showtime specifically, you're now at 26 million subs, which – I mean, you've had amazing growth over the last few years, but relative to other SVOD services at this point, it still seems like there's a lot of upside. Can you give us color on how you see the next few years shaping up for Showtime subscriptions?

Okay. Jessica, I'll take the first part, and again, David will take the second. Look, we've certainly made some changes here at the company, but I think Chris and David have been with the company for several years, and any other changes, these are seasoned veterans, very talented and deep bench, and I think we're demonstrating that. As far as our priorities are going, our priority is always to first and foremost reinvest in our business, and what that is that's content creation, because the success we're having is driven by the content pipeline that we were just highlighting. And so, I don't see any focus change in that philosophy. It's always been that way. So again, down the road, I mean, I don't see any other significant changes. Like I said, I'm pretty proud of the team we have assembled here. And I want to give them exposure to Wall Street, so you all can see how deep and talented they are. David?

So, Jessica, is your – your question about what is the ceiling for Showtime. I – look, here's how I look at it. We're in 26 million households; 115 million, 120 million households in the U.S. That's 20% – that's 22% penetration. I see a lot of desire and upside from where we sit. The good news for us is we've gone from being a – you had to pay the $120. We're now accessible at multiple price points. So, I think we become much more accessible to a broader range of consumer. And that's just talking about the domestic piece. Internationally, I think there is also great demand for what Showtime is. And the brand is getting stronger and stronger around the world. So, I'm optimistic.

Okay. Thanks, Jessica. Can we take the next question?

Next, we have Mike Morris with Guggenheim Securities.

Thanks, guys. Good afternoon. A couple questions about your digital services. Wondering if you can share how most of your customers are accessing your services from a device perspective? Is it connected TVs, mobile devices, et cetera? And how are they using it? Are they watching an increasing amount of live content? Is it mostly on demand? And does it matter to you either how they come on board or what they watch with respect to your ability to monetize from an advertising perspective? And then, I have another one on distribution.

Okay. Mike, I'll take it. It's Joe. Look, I mean, we're finding they're definitely accessing it differently. I think mobile is showing certainly the biggest growth that we're seeing. I think live is certainly growing as part of that, but also the original series. And so, they're watching – an All Access subscriber watches twice as much content as those who watch it on cbs.com. So, that tells us again that they like it when they're in the environment. We're also – we have direct-to-consumer offerings, but we also do it through other partners. Showtime is distributed on Amazon and Hulu. And so, we're seeing the subscribers use those other types of bundles as well. And so, what David just mentioned just on the previous point, right, the buy-through is very different that $100-some-odd cable buy-through is now lower, if they're buying a Hulu or an Amazon Prime subscription. So, we have nice diversity in terms of the consumption of the content, but they're watching it more. And that's why we're putting more originals on both of these services because it's really driving again the intent to subscribe and it's reducing churn. And those are the two things we're really toggling back and forth as we make these investments. What's your second question, Mike?

Yeah, just on that, is the targeting – it seems like it's easier to target and perhaps you can get the higher CPM in like a VOD viewer versus trying to target on a live stream. Is it – I guess the question is, what's the balance of that like now? And have you been able to push the CPMs up through specific targeting?

Yes. Obviously, you're referring to CBS All Access, because Showtime obviously isn't – there's no...

Showtime is agnostic about when people watch.

But I think also to point out, CBS All Access subscribers, a third of them are now ad-free as well. So, just as we're seeing that kind of growth. But your point on the one where there are ads, yes, we're seeing CPMs significantly higher than comparable broadcast networks. And obviously, you have more attractive demos, but you have with it, as you call it, specific targeting. So we're rolling that out. And that's why I said more and more as we're using this data to be smarter and be more effective for our advertisers, it's a really big opportunity. But I would say we're really still in the early innings of that. But we're laser focused on capitalizing on it.

That's the concept of the DnA platform that – the advertising platform that Joe described is you can target in VOD and linear.

Thanks. And just if I could on the aggregators and Amazon channels in particular, there's a little bit of concern that you're pushing back on the economic relationship with the channels they're displaying. Is that something that you have experienced with them? And sort of what is your view on the importance of those aggregators and what those relationships look like going forward economically?

We just renewed with Amazon on very comparable terms. So, we have not found that. The value they're finding out at Showtime where there is – they're making money off of Showtime. So, it's been a win-win.

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

Next is Doug Mitchelson with Credit Suisse. Douglas Mitchelson - Credit Suisse Securities (USA) LLC: Thanks so much. Look, I think 2018 is probably 10-plus-percent EPS growth ex-tax reform. And investors I think generally think of CBS as being capable of putting up that kind of growth going forward. And, Joe, I'm wondering – you talked a lot about investing in content and investing in digital. How are you balancing driving earnings growth versus investing in content for digital and Showtime and third-parties? And then, my unrelated follow-up, since we have a lot of Showtime experts on the call, there's been a lot of questions at Showtime, but I want to get to the heart of it, which is you've had a lot of content success and you've been investing in content. I think profitability has been relatively stable the last few years, not a ton of revenue growth at Showtime. So, you've solidified your position in an increasingly competitive environment, but is there a story behind driving sort of margins or profitability at Showtime next year or the next few years? I'd love to hear it. Thanks.

Okay. Doug, I'll take the first part, and Chris will take the Showtime piece. Doug, look, we're constantly balancing the investment and looking at the profitability. But we're building asset value here for sure. So, we're not managing the company for margin. I think what you're seeing in our results, right, we're maintaining our margin because some of these initiatives of very high margin dollars offset by incremental investment into more content and the OTT platforms. So, I think you're seeing us able to do that consistently, and obviously, with tax reform, we have a lower – forget about the P&L for a second, book tax rate but a lower cash tax rate. And so, we're reinvesting those back into the business, and that again is the highest return on investment for shareholders and it continues to be the case. So, we are not betting the company. We're seeing proof points before we took up our All Access and Showtime sub count. We put originals on it. We saw it was working. We saw the consumers wanted more. So, we're putting more on it. We've raised the targets. We've accelerated them. So, we're going internationally. So, I think we've been good stewards of capital as we've been allocating this and growing our business steadily for the future. If we would have done that a few years ago, we wouldn't have been ready to capitalize on it, because we didn't have the infrastructure or the capabilities of doing that. And so, I think it's been a really win-win for investors really as we reallocate that capital. But first and foremost, always a priority, build asset value. Chris, do you want to take the second part?

Sure. Hi, Doug. It's Chris. So, that's a great question about Showtime. I just want to make sure first for the quarter that it's clear to everyone that, for the quarterly revenue, we did have the non-comparable item of the Mayweather event that skews the results when you look at last year. So, when you take that out, the results for Cable Networks is relatively flat, but there's two things going on. There's the underlying affiliate subscription fee revenue did grow, but that's being offset by the timing of content licensing. So, for Showtime in terms of looking ahead at our affiliate and subscription fee growth, it's a strong business and it's going to just continue to get stronger. In terms of looking at how we manage the profitability for Showtime, I mean, the world of OTT now has opened up so many options with what we can do with data analytics and really unlock and target our marketing. So, two years into it, we have a lot of great uses of the data, but even as we get further educated and learn even more about our consumer, the scale of the business is huge. So, really the important thing right now is that we have to manage our expense investment and make sure that we're not leaving revenue on the table, and I don't think we're doing that right now. So, it is a balance, but I think we have a lot of intelligence in our favor.

Okay. Thanks, Doug. We'll take the next question.

Next is Michael Nathanson with MoffettNathanson.

Thanks. I have one for David and one for Joe. David, let me start with you first. How do you think longer term about international? I know in some markets like Europe and maybe in India, you've decided to license your content to other third-party networks versus go it alone. So, as those deals come up, how are you thinking about taking the Showtime brand globally in maybe some markets that already are proving positive that there's demand for OTT content?

Well, we are building the brand. The brand of Showtime is starting to mean something outside the U.S. It certainly does in Canada, particularly the English-speaking world in the UK, Australia, even in France, where I spent a couple weeks this summer, people are starting to know what a Showtime show is. And as these deals come up, we're always going to be evaluating what is the maximum monetization possibility? Do we – we're going to be looking – going forward, we're going to be looking at more of a mix of licensing and subscription revenue. And we're not going to say here, which markets we might go first in launching a subscription business. But there will be a lot of finesse required to figure out. We don't want to turn off the licensing pipeline. It's been very effective for us. But we feel like there's a lot of potential in the global subscription business, so we're making those decisions tactically as deals come up.

Okay. And then, Joe, along the same lines for you with All Access, how do you decide or think about licensing off-network CBS shows to maybe SVOD companies that don't show advertising versus moving that same content to All Access? So, how are you thinking about that decision you have to make?

Yeah, sure, Michael. Look, I think we think about them individually as individual assets or franchises. So, for instance, we're going to have Twilight Zone here, and we can keep it on All Access or – domestically, which is – that's going to happen. Internationally, we can use it to grow our OTT business internationally, or we can license it. And so, we're going to do an analysis. It's going to be really simple. What are the offers in the marketplace for licensing, and how many subs do we think we can get in these countries? And we're going to look at that and we're going to see what's in the best interest. Because some of these things, again, as David was really alluding to, if we're not ready to capitalize on the subscription business, we might as well take the money to reinvest it and do more with it. And so, we don't have a one-size-fits-all like some of our other competitors. I think we look at it by each piece of content on what it's going to do individually. And so, we know at the end of the day, there will be more content in the CBS Showtime offerings, no question about it, but it's okay to sell our content to third parties as well.

I just want to point out one thing.

Yeah.

To add to what Joe was saying, what we've learned is that the more we build the tech of our own platforms and the strength and brand of our own platforms of All Access and Showtime, the more optionality we have as to where to monetize. So, to the extent that we can monetize on our own platforms, that's great, and that gives us optionality when we're making licensing decisions. And that's one of the reasons why we have been so focused these last couple years on building up our own platforms.

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

Next question is from Bryan Kraft with Deutsche Bank.

Hi. Good afternoon. I'm hoping to better understand how the expansion of your OTT services to international markets will impact the trajectory of the financials. So, what are the key things that you need to do when you enter a market with All Access? What are the big challenges that you've found? And how significant are the costs to enter and operate in a new country? If you could maybe just talk about that at a high level to help us try to understand that, that would be great.

Yeah. Sure, Bryan. Look, I think that's why we did Canada first. We wanted to see the incremental cost. I think, again, a lot of the costs are fixed. So, it will be scalable, that infrastructure. So, I think again incrementally, it doesn't make sense if all we were going to do is just to be in Canada. So, we are absorbing I would think about it in the tens of millions as opposed to the hundreds of millions for the infrastructure. And again – and then the content, I think we just talked about that from the last question on how we're obviously going to have to put enough content in the offerings to drive the sub count. And I think as we're doing more originals, as we have CBS library and Showtime library of product in there, I think we're making the value compelling to the consumer. This is driven by consumer demand. This isn't driven by because we think it's a nice way to distribute it. This is the way consumers want it via broadband, at the touch of a button, willing to pay a subscription fee, and it doesn't matter, it's borderless. We don't have to be confined to the United States. And so, really that's the way – and I think again I'd look at 2018, Bryan, as the example, right? We just – you're seeing us with a steady margin, enter into a couple of different countries, doing a lot more shows. And the reason we're able to do that like I just said is because the other revenue, the retrans and reverse comp, the licensing are very high margin. And that's being offset. You have two things, kind of, going on there, and we're pretty proud that we're able to do that and not reset the P&L in order to ramp up investment.

Okay. Thanks, Bryan.

Can I just have one follow-up?

You bet.

The EU requirement for 30% local content, is that going to in any way slow your plans in Europe? Or is that something that's fairly easy to...

No. You see what we just did with obviously Network 10. We think having local content is actually valuable. I don't think we have to buy and do a strategic deal to do that. I think we can do a commercial deal, but we do like the offering of having live local content in the market plus premium CBS and Showtime, plus library. That seems compelling for under $10 a month. So, you should assume on some of these markets wherever there are local restrictions, we will partner with some of our local friends to make it again a compelling offering.

Okay. Thanks, Bryan. Next question, operator.

Next is David Miller with Imperial Capital.

Yeah, hey, guys. Hey, Joe, just a couple questions. As you take over leadership of the company, do you see any change at the margin regarding how many series on the broadcast network you own, how many you sell to third-parties, and then how many series you, let's call it, rent from other production entities? Les used to say that it was all about having the best shows on the network regardless of source. I'm talking about the broadcast network, of course, but just curious if you see a change in that. And then, a separate question. How much of a priority is potentially acquiring additional stations, assuming the capital is ever relaxed? If memory serves, I think you would have at least three Republican votes on the docket, once the FCC hears the case formally. So, appreciate your thoughts there. Thank you.

Yeah, sure. I got it, David. Look, I think from a network perspective, I think we're always looking for the best content. I think we're open for business for other studios. That said, as we sit here, more than 80% of the schedule we have ownership in. So, I don't really see it changing really dramatically from there. But again, the network has limited shelf space. The good news is for All Access, that really kind of changes the complexity, because if we have a good CBS show from our studio, we certainly can put it inside of CBS All Access. And if it's a great Warner Brothers show, we can certainly monetize it on the CBS network. So, the fact that we have different outlooks I think only increases the outputs, if you will. But we definitely are in the business of putting the best shows on the network. I think that's very important. As far as local stations and acquiring them, look, I think we certainly have room within the cap. If the cap gets lifted, we have more room. As you know, we look to be opportunistic there. And so, we'll always look at it, as you just point out, is it a political market, what's the size of the market, is it an NFL market. So, if we can find some stations at values that make sense, we're always in it, in the market. But if we're not, we still get our value. And so, that's why I say it's very opportunistic. It's not like we need to own that station because we're going to get our value vis-à-vis reverse comp. And so, from our vantage point, the content is what's driving the value, but if we can own the license and have local programming in that market, it's only additive. But we're going to always look at it through that lens.

Okay. Thanks, David. Greg, we're going to take one more question now.

All right. In that case, our final question will be from Steven Cahall with RBC Capital Markets.

Yeah. Thank you. Just a few on advertising. I was wondering if you could elaborate a little more on your D&A strategy. Do you have a targeted amount of inventory that you think you can capture on this? And relatedly, would you be willing to do something in live linear Dynamic Ad Insertion? I think Nielsen ratings have really been a challenge to networks converting to anything on live linear. And then, I have just a quick follow-up on local advertising.

Yeah, look, we haven't set targets on what we're going to do. And, look, I don't think we're going to – the live linear really kind of do – because obviously we're monetizing C7, and we're selling that inclusively. And so, I think what we're doing is we're watching the data that we're getting on the consumption. So, like I said earlier, Steven, we're really in the early innings. So I think you're going to see us really target the VOD, the Video-on-Demand inventory. And we're going to certainly do it on our own platforms first. And we're going to be smarter about it. We're going to see it works for our advertisers, and then we'll expand from there. But it's going to be a slow and steady rollout. But like I said, the demographics and the capabilities are really encouraging, but I don't want to get ahead of ourselves on this.

Great. And then...

Did you have a follow-up?

Yeah, Chris, thanks for the pacing on local advertising in Q4 with political. I was wondering if you could just give us a sense of what local advertising is looking like ex-political. Thank you.

Let me take that. Let me take that, because Chris is still getting the...

I'm still getting my feet wet. For me, I know it's all about the...

I thought she might have felt left out.

...strength in the political, but I'll let Joe handle that, Steve.

Look, Steven. As you know, it's very hard to do that because political is taking up all of the inventory. These next five days, I mean, I think we have a chance to have a record-setting year even in the presidential one which we set in 2016, and so a lot of the regular categories are really being pushed outside after November 6. And so it's a little bit distorted right now. What I think Chris' point is high teens, it's pacing up high teens. And obviously for the fourth quarter, we only have political really for one month out of it, because after November 6. So I think that's all factored into her guidance there. But it's really distorted, because it's the same number of units year in and year out. It's just a massive demand that's really pushing others around the edges and stuff. But it's going to be a hell of a year for local political advertising.

Yeah, also we did see strength in entertainment and health care. So, there was strength in those areas.

Thank you.

Okay. Steve, thank you.

Thanks, Greg. This concludes today's call. Thank you, everyone, for joining us. Have a great evening.

Once again, ladies and gentlemen, that does conclude our call for today. Thank you for your participation. You may now disconnect.