Paramount Skydance Corporation Class B Common Stock (PSKY) Q2 2007 Earnings Report, Transcript and Summary

Good day, everyone and welcome to the CBS Corporation second quarter 2007 earnings release teleconference. Today's conference is being recorded. At this time, I would like to turn the call over to the Executive Vice President of Investor Relations, Mr. Marty Shea. Please go ahead.

Good morning, everyone and thank you for taking the time to join us for our second-quarter 2007 earnings call. Joining me for today's discussion are Sumner Redstone, our Executive Chairman; Leslie Moonves, our President and CEO; and Fred Reynolds, the Executive Vice President and CFO. Sumner will have some opening remarks and will turn the call over to Les and Fred for strategic and financial issues. We will then open the call up for questions. Let me 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 news releases and security filings. A summary of CBS Corporation's second quarter 2007 results should have been sent to all of you. If you did not receive these results, please contact Punam Visay at 975-3667 and she will get it to you. A webcast of the call, the earnings release and any other information related to this presentation can be found on CBS Corporation's corporate Website at the address of cbscorporation.com. Now I will turn the call over to Sumner.

Thanks, Marty. Good morning, everyone and thank you for joining us. Halfway through 2007, CBS Corporation continues to deliver really strong operating results. At the same time, during the second quarter we made many smart strategic moves to aggressively position CBS for continued success in the burgeoning interactive landscape. And let's not forget that the healthy free cash flow generated by CBS's core businesses has allowed us to consistently reward shareholders with dividends, as well as a share repurchase program which we announced during the first quarter. I'm really pleased with everything we've done since we started this company just a year-and-a-half ago, and I'm as confident as ever in CBS' exceptional CEO, a man I have called and will continue to call the best executive in the media industry, Les Moonves. Now, to tell you more about CBS's second quarter results and even more, here's my friend, Les. Les, you're on.

Thank you very much, Sumner, for the nice words. Good morning, everybody and thank you as always for being with us. I'm very pleased with the second quarter results we're sharing with you today. The underlying financial performance of the CBS Corporation is strong, with excellent adjusted EPS growth in the mid-teens, excluding a one-time gain from the sale of parks, as well as tax benefits that boosted last year's second quarter results. Our cash flow is continuing to be one of our great stories. I'm proud not only of our financial performance, but also of the key steps we took during the quarter that position the company for long-term growth. We continue to refine our asset portfolio, the majority of our small-market TV and radio station divestitures have closed; and the rest of the sales are just waiting regulatory approval, which should happen in the second half of the year. We are redeploying a portion of the cash into higher growth interactive businesses that complement our core operations. I will say more about those strategic investments in a bit, but first, let's take a look at the financial headlines for the quarter, and then Fred will give you more detail on these a little bit later. Net earnings from continuing operations were up 9% to $393 million, adjusting for tax benefits and station divestitures. As I noted, diluted EPS from continuing operations, also adjusted, were up mid-teens, 15%, to $0.54 a share. At the same time, the underlying revenue growth we achieved in the second quarter was on track with our business outlook. Free cash flow, which is the principal measure of our ability to return value to shareholders, continues to be strong. Free cash flow was up 4% to $571 million during the quarter, with our first half free cash flow up 11% to $1.3 billion. We are pleased with the significant amount of free cash flow we have produced so far this year, along with the proceeds from selling our smaller market TV and radio stations. Our healthy balance sheet has allowed us to invest not only in our core businesses, but also in new interactive initiatives as well, which, as you know, are quite important to our future. This includes the CBS Audience Network, which features online entertainment, news and sports content from across the CBS Corporation. It offers both clips and full-length episodes on a wide range of online destinations, including AOL, Microsoft, CNet, Comcast and Joost, among many, many others. With this new online network, we're following our audience. We're putting our content where they already are, giving it to them in a way that they want to see it. Importantly, all of these sites are ad-supported, tapping into that fast-growing segment in the Internet space. The revenue is still relatively small for now, but it has begun and will continue. We've also used a portion of our cash to make some attractive tuck-in acquisitions, focusing on areas that fit well with our existing strengths, whether it is music or sports, content or community, or all of the above. Most notable was our purchase of Last.fm, a global, community-based music discovery network with more than 20 million unique users and growing at a rapid rate. This transaction was completed during the quarter. Last.fm can potentially add a unique interactive extension to just about all of our existing properties. It's an innovative, well-run business with great management, whose central goal is to create communities around content. This makes it a great fit with everything we're doing at CBS. Even after this strategic investment and a few other smaller ones, we are still left with a very strong balance sheet. That is because our traditional businesses continue to throw off lots of cash. We are firmly committed to maintaining a healthy balance sheet and our team clearly knows how to manage our businesses. Let me turn now to what is going on at each of our business segments, starting with television. For the fifth straight year, CBS is once again America's most-watched network. In May, we finished the 2006/2007 season number one not only in viewers, but in adults 25 to 54 and we also achieved a competitive second-place in adults 18 to 49, up from third place last season. We're also leading the summer season for the third year in a row. CBS's long-term record of success has been built on a foundation of across the schedule strength, and this strength gives us some latitude to take more creative risks in five exciting new series that will make their debut on our fall '07/'08 lineup. Advertisers value CBS's track record for quality and consistency. Scatter prices in the second quarter were well up into the double-digits, bolstering our position and growing the entire broadcast advertising market. And in the upfront marketplace, we were able to achieve mid to high single-digit CPM increases for our primetime programming. Advertisers clearly believe in the power and value of network television. Another key factor in this year's strong upfront was the recognition by advertisers of millions of DVR viewers who watch CBS as well as the other networks. Research has shown that those who use DVRs spent 60% more time watching TV and what they are watching on those DVRs are primarily hits from broadcast television. As we've said before, technology is our friend. The key to all of this is clear. We are now getting paid for millions and millions of additional viewers that we didn't get paid for last year. Sports programming is also on a roll, where the marketplace is also very, very strong. The PGA Tour championship coming up in two weeks is completely sold out and is well ahead of last year's pricing. The U.S. Open Tennis is now 90% sold out, with dollar volumes up in the double-digits. The NFL is also very healthy, with the double-digit CPM increases over last year. In this past quarter, CBS's coverage of the Masters on the final Sunday was seen by over 41 million people. We're also extremely proud of the work that is going on at CBS News. CBS News had 19 nominations in the 2007 Emmy Television Awards unveiled recently, the most of any network in broadcast television. In the upfront as well, the CBS Evening News was able to achieve healthy CPM increases and solid volume growth. Our production company, CBS Paramount Network Television, continues to provide top programs to the broadcast and cable marketplace. After the development season, we emerged as the producers of eight of the top 20 primetime series across network television. In the current broadcast season, CBS Paramount Network Television will have 24 series on the air in primetime, making us the number one programmer/supplier in the world. About 70% of the shows that run on our own networks are produced by CBS Paramount Network Television Group, making them all the more profitable for us. On at the distribution side, CBS Television Distribution achieved an unprecedented feat by becoming the first syndicator to distribute nine of the top 10 rated programs during a May sweep. Second-quarter DVD sales were also very strong. Our top-selling titles included Charmed, Star Trek and MacGyver and along with the always successful CSI series, DVDs once again reinforces the value of our television library, both current and archival, which continues to deliver healthy returns. We're also really pleased with Showtime. During the '07/'08 season, we will have more original series in production than at anytime in the network's history and with shows like Dexter, Weeds, The Tudors and Brotherhood, they're attracting new audiences and driving increases in ratings and subscriber growth. We're really excited about a new show that premieres next month called Californication; yes, that it's real name; this is cable after all. CSTV, our college sports cable television and broadband network, is also growing and has doubled its distribution since we acquired it last year. In March, to complement CSTV, we bought MaxPreps.com, the nation's largest, most comprehensive and highly visible high school sports website. The site gets more than 2.5 million visitors per month during the school year, and is a terrific extension of our local sports franchise. Working with MaxPreps, CSTV is planning to create a first of its kind, on-demand channel dedicated to high school sports. In our TV station group, after divesting those small-market stations, we now have 29 owned stations, including 16 affiliated with CBS, 9 with the CW and four independents. All but one of them are in the top 25 markets. We are seeing marked improvement in many of these stations. Right here in the number one market in the nation, New York, WCBS is making some significant gains against its competition for the first time in decades across all newscasts, particularly at 5 pm, 6 pm and 11 pm. As we've said before, across the nation, we're anticipating an earlier start to the political spending due to earlier primaries in several key markets. This bodes well not only for the rest of the year, but also for '08 as well. Additionally, our television stations are aggressively adapting to the digital marketplace and have expanded in this area rapidly with HD and online capabilities. Users of CBS-owned TV station websites can now view, upload, share, rate, comment and search all kinds of video and text content. Moving on to radio. Our new president, Dan Mason, has taken the reigns in an impressive fashion. He has moved quickly to introduce programming changes. Dan is a programmer at heart and he's using that passion to deliver results station by station, market by market, starting in New York, where we can make the biggest impact on our numbers. Dan doesn't waste any time. At WCBS-FM, a return to the beloved classic format on July 12 was very well-received. K-ROCK2 returned to its much more successful rock format. FRESH, our new adult contemporary station that launched here in January, continues its upward trend in the ratings, taking market share from its closest competitor. Overall, thanks to these swift and decisive changes in the nation's number one market, ratings for the CBS Radio New York stations are up roughly 18% in just the past six months. New York is just the beginning. Across the country, we're moving to improve the markets and stations where we're not performing up to our expectations. Perhaps most encouraging is what were doing with Radio on emerging platforms. We now have more than 140 stations and custom channels streaming, and we're setting new record highs for total time spent listening online. Plus, 18 more stations began broadcasting in high-definition during the quarter, for a current total of over 100. Turning to Outdoor, our U.S. billboard business is still growing steadily, with 11% growth in revenues during the quarter. As you know, we elected to walk away from several marginally profitable transit and street furniture contracts last year, investing instead in high margin billboards. This shift away from transit weighed on our overall revenue comparison, but boosted profitability. Digital is really revolutionizing this business in both our domestic and international operations, attracting new advertisers to the media. As you know, the new digital technology makes it possible to change ads regularly, according to time periods. For instance, the new double-faced LED display at the Bay Bridge in San Francisco and The Cube, which officially launches tomorrow in Times Square, are expected to bring in three to four times the revenues that static boards would have delivered in these prime real estate locations. At the Mall of America during this quarter, we added 100 new digital screens. Large-format digital displays were also added in Atlanta and Orlando, and are soon coming to Los Angeles, Miami and many other markets. Overall, CBS Outdoor now has 257 digital displays domestically, and led by our new London Underground contract, more than 1,600 generally smaller displays in Europe. Over at Publishing, Simon & Schuster continues its incredible winning streak. 2006 was its best year ever and the growth continues midway through 2007, where Simon & Schuster had seven of the top 20 selling titles throughout the first half of the year -- that's number one among all publishers. Thanks to best-selling titles like The Secret by Rhonda Byrne and Blaze by Stephen King writing as Richard Bachman, Simon & Schuster's revenues were up 14% in the second quarter and OIBDA grew an impressive 90%. Like all of our businesses, Simon & Schuster is fully embracing digital opportunities, such as ebooks, audio books and print on-demand. Also during the quarter, Simon & Schuster launched a new book video channel called BookVideoTV, which creates Web videos to promote Simon & Schuster books and authors. So, those are our business segments; very healthy, very active, and very well-positioned. In every case, we are using our traditional businesses to enter the digital future. Once again, our second quarter performance is consistent with our expectations and we're on track with our business outlook. So, we're at the half point of the year; we're exactly where we said we were going to be. I'm very pleased with what we've accomplished so far in 2007, and I'm particularly proud of the fact that we continue to deliver on our promises. We said we would continue to refine our asset portfolios and we have, selling television and radio stations at attractive multiples, while investing in higher growth interactive businesses. We said we would move quickly to embrace new opportunities at all of our businesses, and as you've seen, new media and digital continue to grow and play a bigger role in every segment of operations. In Television, we have launched the CBS Audience Network and moved our world-class content out over a variety of ad-supported platforms. In Radio, we are now streaming nearly all of our stations online and building our HD capabilities. In Outdoor, we're building digital displays around the world, and in Publishing we continue to release digital versions of our books and explore the future of downloading. At the same time, we've made good on our promise to return value to our shareholders. This quarter, we continued to pay a sizable dividend, after raising it four times, almost 60%, since January of last year. Between dividends and our share repurchase program, we have returned more than $1.9 billion of cash to CBS shareholders this year, which translates into an annualized double-digit total return to shareholders. We are very pleased at the success of our share repurchase program. Returning excess cash to our shareholders has always been and will always be a primary focus for us. Even with all of this return, we still have $2.8 billion cash on our balance sheet, a portion of which we believe today is in excess of our investing needs. We will be discussing with our board the best way to return this excess cash to our shareholders, of that I assure you. Living up to our commitments is a big part of how we have defined this company since we started a year-and-a-half ago, and we fully intend to keep it up for the rest of '07 and on into '08. Thank you, everybody, and now I will turn it over to our terrific CFO, Fred Reynolds, who will give you our financial performance in much more detail.

Thank you, Leslie and good morning to all of you. For the second quarter of 2007, our businesses produced another strong underlying operating performance and we particularly are pleased with the increase in our free cash flow in the quarter versus last year. Before I provide you some additional information on the second quarter, let me highlight two important items which affect the comparison of the second quarter of 2007 with last year. First, in the second quarter of 2006, we recognized $129 million tax benefit as a result of the settlement of prior-year income tax audits. The tax benefit added $0.17 to last year's second quarter earnings per share. Also, as you may recall, at this time last year we closed on the sale of our Paramount Parks business. We recognized in the second quarter of '06 an after-tax gain of $292 million, or $0.38 share. Now this gain was reflected in net earnings from discontinued operations. Adjusting for these two significant items, for comparison purposes, our second quarter of '07 net earnings from continuing operations as adjusted was up 9%. Our earnings per share, reflecting fewer shares outstanding, was up 15% over the second quarter of '06. Free cash flow in the second quarter of '07 totaled $571 million, up 4.4% over last year's second quarter. Once again, we were able to produce strong free cash flow growth despite a ramp-up in CapEx spending versus year-ago. CapEx spending increased $45 million to $112 million in this quarter, driven by higher spending at our Outdoor segment. Overall, our revenues for the second quarter of 2007 totaled almost $3.4 billion, down about 3% from the second quarter of last year. Now this decline in revenues is due to the airing of the Final Four NCAA basketball games in the first quarter this year versus the second quarter of last year; the loss of revenues due to the shutdown of UPN in the third quarter last year; and finally, the divestiture of 39 radio stations and nine TV stations since this time a year ago. Taking into account the impact on reported revenues from the shift of the airing of the Final Four in the first quarter of this year, the shutdown of UPN, and the divestiture of stations resulted in a negative effect on our revenue growth versus last year by over 5 percentage points. Our operating income before depreciation and amortization, or OIBDA, for the second quarter of 2007 was $859 million, up very slightly from last year. Included in OIBDA was stock-based compensation expense of $31 million, which is $12 million higher than it was in the year-ago quarter. Operating income for the second quarter of '07 totaled $750 million, comparable to the second quarter last year. However, our operating income margins increased in the second quarter of '07 to 22.2%, up from 21.5% in last year's second quarter. Interest expense of $146 million was up about $5 million from last year, due to the timing of the issuance of our $700 million of 6 3/4 debt, which we issued on March 27th of this year, and the redemption on May 1st of the $700 million of 5 5/8 senior notes and the higher interest rate on our new debt. Interest income in the quarter was almost $34 million, up significantly from a year ago, due to the strong cash flow from our operations and the proceeds from divesting businesses. Other items net include the gain from the sale of our Green Bay TV and our San Antonio radio stations, both of which closed in the second quarter. Turning to income taxes for the quarter, our tax rate was 36.4% versus 19.3% in the second quarter of '06. As I mentioned at the outset, last year's tax rate was reduced by a $129 million benefit from previous years' tax settlements. Excluding the benefits from tax settlements, last year's second quarter tax rate would have been 40.4%. Now going forward, based on the tax strategies that we have put in place, we would expect our 2007 tax rate to be approximately 39%, which will be lower than last year's rate on a comparable basis. Net earnings from continuing operations, adjusted for the gain on the stations' divestures and the tax settlements, was $393 million, up 9% over last year's second quarter. Earnings per share on an adjusted basis was $0.54, 15% higher than last year. Higher net earnings coupled with fewer shares outstanding drove our earnings per share. Our 2007 second quarter benefited from the full impact of repurchasing over 47 million shares of our common stock under our accelerated share repurchase program. Now let me turn to the segments and give you a few highlights by our businesses. First, our largest segment is television. Revenues in the second quarter for the television segment totaled about $2.2 billion, down about 4% from the second quarter last year. Again, the absence of the UPN, the shift of the Final Four games to the first quarter, along with the divestiture of nine TV stations, reduced revenues by almost 7 percentage points compared to the second quarter last year. Our second quarter time period ad sales at the CBS Network were flat to the second quarter last year, again taking into account the fact that we shifted the airing of the Final Four tournament to the first quarter. The television segment's OIBDA was $550 million, up approximately 3% over last year. Higher home entertainment revenues, led by our Star Trek franchises, Charmed and a library of DVDs, the absence of the UPN shutdown costs, and a favorable mix of higher-margin ad revenues led to our increased profits in the second quarter of '07, more than offsetting a $6 million increase in our stock-based compensation expense in this segment. Operating income margins for the Television segments in the second quarter of '07 were 23.4%, up 1.6 percentage points from last year. Turning to radio. Revenues for the second quarter of '07 for radio were $463 million, down 11% to a year ago. However, 6 percentage points of the drop in our reported revenues were due to the divestiture of stations, as the same-station revenues declined 5% from last year. OIBDA for radio was $187 million. It was affected by this drop in same-station revenues, and was down 18% to the second quarter of 2006. Turning to outdoor, second-quarter revenues for outdoor in total was $554 million, up 4% over a year ago. North America's revenues were flat to a year ago, despite our billboard revenues being up over 11%. The non-renewal of the New York and Chicago transit and street furniture contracts offset our strong U.S. billboard business growth. Europe and Asia's revenues were up 12%, as the weak U.S. dollar versus the euro and the pound drove 8 percentage points of our revenue growth versus second quarter last year. OIBDA for outdoor totaled $168 million, up 5% over last year's second quarter. Our North American second quarter OIBDA totaled $144 million, which was up 12% over the year-ago quarter, led by our high margin billboard business and the absence of low margin transit and street furniture contracts. North America's operating income margins improved in the second quarter of '07 to 28%, up 4 percentage points from last year's 24% in the second quarter a year ago. Europe and Asia's OIBDA of $25 million declined by $7 million due to the higher transit fees for the London Underground. Now, our London Underground business is quickly gaining revenue momentum as incremental displays come onstream. Our second quarter UK revenues in local currency were up 6%, and we expect to see revenues growing above this pace in the third quarter. Simon & Schuster had another terrific quarter, with revenues up 14% to $200 million and OIBDA, as Leslie just said, up 90% to $20 million over last year's second quarter. Simon & Schuster is on pace to have a record-setting financial performance for the full year 2007. Finally, turning to our outlook for 2007, as you'll note from the earnings release, we ended the first half with a very solid financial performance and we expect to remain on track to deliver our full year outlook. So with that, we would like to turn over the call for questions. And so operator, if you would open the lines, that would be terrific.

(Operator Instructions) Your first question comes from Anthony DiClemente - Lehman Brothers.

Fred, on your strong free cash flow, it seems as though some of the upside was driven by a bigger working capital benefit in the first half of '07. Just wondering why that is, and if there is any reason why your working capital change in the second half should be much different than it was last year? A second question for Les, specifically we'd be interested in your updated view, specifically on social networking, the value of social networking in the U.S. How much, Les, do you think that social networking would help you distribute your TV content in the U.S. and get to that younger demographic? Is it something that you think you'd be more likely to pursue a buy or a build strategy with here in the U.S.?

On the working capital, as you know, the first half of the year we tend to have higher working capital, particularly as we bleed off the receivables at the end of the year. So we're collecting the receivables from last year. Also, we've done a great job on lowering our days sales outstanding as we continue to focus on that. As you know, that has been something that we are pretty proud and we've got a ways to go on that. Secondly, I think versus last year at this time, we had some big syndicated programming that hit the numbers last year, with Frazier and Without A Trace. This year we have less, so we're really collecting that cash in. Third quarter, we tend to use more cash. I mean, I still think we will do fine on cash flow, but this is where we start up production and then the fourth quarter, we tend to generate cash again. So what you are seeing now is not something you can double by just saying, well, if we did $1.3 billion in the first half, then we will double that; it's just not the way it works. We use more cash in the third quarter; and the fourth quarter as sales start to build again. So again, hopefully, those two things, collecting receivables, less syndication this year, so we're collecting the cash; and seasonality helps drive the first half cash flow.

Anthony, on the question regarding social network, obviously Last.fm was our big acquisition in the quarter and it's something that is very important to us. We think it is great. We look at social networking in two different ways: (1) as a potential for revenue, obviously, with Last.fm. We've begin the process through our audience network and through Last.fm of selling ads on the Internet. Secondarily, we love the fact that our content is getting out there, that people are using our content in different ways, commenting on our content, exchanging information about it. We think that ultimately will help us not only get revenue, but get more and more eyeballs, and new eyeballs, watching our content across the board. So we're a big proponent of it and we think the future looks very bright for it.

Your next question comes from Victor Miller - Bear Stearns.

Sumner, if I could ask you a question, you did a recent interview with Maria Bartiromo where you said the fact of the matter is that we like these companies the way they are. But you also said, now having said that, we would consider going private at some time in the future; we consider all alternatives. Could you talk about what would trigger that decision in terms of looking at those alternatives? For Fred, when do you expect your accelerated share repurchase to wind down, and what should we look for in timing of when you'd like to revisit the next foray in how you would like to give money back to the shareholders, return capital to the shareholders? Thanks.

You asked me about three or four questions. I will try. First, as I said, Les Felipe, Tom Dooley and I like the companies the way they are. We think there's an enormous amount of growth in them without any great strategic change. However -- and I'm very clear on this -- we do consider all alternatives. There's been a lot of discussion inside and outside about taking one of these companies private. What I can say is, I've said it before, it's not on the front burner but you can rest assured it will receive the consideration it should, as we always consider what is good for these companies. I think you had another question.

Sumner, this is Fred. Victor was asking about the conclusion of our stock repurchase program.

Well, let me put this way. First, as you know, in the case of CBS, the main return has been through dividends. As you know, the dividends have increased quarter after quarter after quarter. The increases have been terrific and I agree with all of them, of course. We have a unique stock buyback going on right now, as you know; it involves a repatriation of money from overseas. Whether there will be another stock buyback or not of a more traditional form will be decided by the board. Les and I and others have been talking about it. It's not a foregone conclusion, but I think I'm right in saying it is under consideration.

Victor, to your point on the current share repurchase program, we would expect it to end at the end of August. That is when it is scheduled to be completed, by the end of August.

Your next question comes from Jessica Reif-Cohen - Merrill Lynch.

Les, you talk about repositioning the assets and it's clear you have started the process. But I'm just wondering if you could elaborate over the next three to five years, is it really just transitioning existing assets to digital or do you expect a real change in the mix of assets? Just following on the question about the buyback, do you need to wait for the end of August to finish the existing buyback before you can actually announce something else? Completely switching gears, on TV advertising, can you discuss third quarter advertising trends, scatter market and how the other day parts fared in the upfronts? Thanks.

In terms of repositioning the assets, look, we wanted to trim down, get all our station groups to only have major market assets. We've invested in a number of companies, mostly small investments. We think there is a transition going on. I still am very bullish about the power of network television being the primary focus for our content and our advertising. The Internet is going to grow in leaps and bounds, but the majority -- the vast majority -- of our money still comes from the network and our station groups and the way we are currently configured. I think what is great about our company is we are prepared for today; we're also prepared for tomorrow. But I don't think this is a revolution; I think this is an evolution in terms of that. In terms of the buyback program, once again as Fred mentioned, it is over at the end of August. We are going to be talking to our boards about different ways of looking at what we do with our cash in the near future. Our programs, both increasing the dividend as well as the one-time only share buyback worked extremely well for us. We're very pleased with how it has all worked out and that we are a dividend-paying company, and we look for these great opportunities. The scatter market continues to be very strong in the third quarter, Jessica. As you know, heading into the upfront it was up nearly 30%, which clearly helped the CPM growth that was not only experienced by CBS but most of the other networks as well. CW, I know that for a fact it did extremely well also with high-single-digit CPM growth. So we are very pleased with how advertisers are now looking at network television. We knew we were never gone, but now they've acknowledged that we're never gone. What was great about this year is the DVR pushback totally disappeared. The C3 system fell into place rather easy, rather quickly, and we think that benefits us greatly.

You asked about the other day parts. We did equally well across the day parts on CPM increases. Daytime and news were up equal to prime, if not a little bit stronger.

Exactly. All the talk about the evening news, it did very well, did very well. Daytime did very well, so we are very pleased.

Your next question comes from Doug Mitchelson - Deutsche Bank.

The Home Entertainment revenue increase was very strong. Can you remind us what the increase was in the first quarter and why was there such a big bump in the second quarter, and should we expect that to continue, or is this just a big shipment quarter, and why? Separately, can you remind us the CBS retrans deal timing for your major distributors? There has been some differing dates given by your customers. I just want to make sure we true that up.

I will give you the second question first, and then Fred will do the first one. Our retrans deals, Time Warner is up in 2010 and Comcast is up in 2011. We do have some major ones coming up next year. However, just to comment on this for a moment, we are consistently signing up new ones; we have now have eight of the top 25 MSOs signed up, and are paying us money for our retrans. So it is going very smoothly. You don't hear a lot about it, because we are making these deals successfully. But the big ones aren't up until 2010 and 2011.

Just to kind of follow up on that, Les, is the transition to digital in 2009, does that change the relationship with distributors in any way that gives you an opportunity to open up those deals?

You know, in certain cases it does. It is not significant as of yet, but Charter and Cox are up at the end of '09 and EchoStar is up at '09 as well. So the digital transition will in fact affect some of our negotiations on these deals.

On the DVD, now that we are a third-party distributor, we're sort of on a one-quarter lag. So the reason that the second quarter this year was so strong is it is really our Christmas DVDs that were shipped that we're now recognizing now. So the second quarter was probably twice as strong as the first quarter, because just to make it confusing, the first quarter really reflected third-quarter shipments in '06. So this is really the Christmas season DVDs, which is a big part of the DVD retailing calendar.

Great, thank you.

Your next question comes from Lucas Binder - UBS.

Les, when you talk about Last.fm and the other small acquisitions that you've made, what holes do you think you are missing? What are some of the areas that you want to focus on? I know you've talked about in the past developing some of your own movies and whatnot so I wanted to see about that. Fred, there's been a lot of talk about Don Imus coming to some sort of settlement with you guys. Have you taken any charges associated with that in the second quarter? And if not, will you take some charges in the third quarter, and any sense of the size of that?

You know, in terms of what we are looking for Lucas, Last.fm fit as we said, because it is basically a community around content. That is our primary goal. Are we continuing to pursue our small movie company? The answer is yes. But once again, let me reiterate, we have Showtime, we have CBS-TV. It will be a small movie company and nothing to worry about. Anything that we acquire, anything that we deal with will have to be an extension of our content. That basically is because we feel that going forward, those who own content are going to be able to monetize it in many, many different ways. That basically is our goal when we're looking at any new space that we're going to get into.

You know, obviously this is an area of dispute and I don't think it would be appropriate to comment specifically but I would tell you we are very comfortable with all of the accruals we have and we think we are very conservative in our approach to any of these kind of disputes. So without saying more, that is where I think you could take comfort in that.

Your next question comes from John Klim - Credit Suisse.

Two questions, one on interactive and then one on TV. If we aggregate your online or your interactive revenues, what percent of total revenues would they comprise today? If you could remind us what portion of the total you believe interactive could comprise over the next five years or so, that would be helpful. On the TV side, given the concern surrounding the potential impact of DVRs on viewership, do you feel that the value of sports has increased for advertisers over the past year or so? If so, would CBS be interested in acquiring additional sports rights? Thanks.

Well, John, on the digital, we don't break that out yet, as you know. It is a very small part of our business, but growing very rapidly; growing in kind of the 50%, 60% range, anchored by SportsLine, which is actually a nice business. It's a nice, healthy size business. But we don't break it out separately, at least we haven't at this point. As you know, and we've discussed this in the past, we're looking at some point in the future, whether it is next year we will, as we've added Last.fm and others, it is getting more significant. But right now, it is not a significant part. I think down the road, we would expect it to be 5%-plus of our overall revenues. Again, starting with a $14 billion base of revenues, that would be a big business, and importantly, high margin business. These are very, very high margin businesses. But I guess to sum up, the digital is growing very rapidly; SportsLine is the biggest single segment of it; and we really don't break out the details at this point.

You know, the value of sports obviously continues to be very, very strong. Does the DVR age affect that? I don't know. DVRs affect primetime more than anything else, from primetime programming, where it's a positive. We really love the hand that we have right now. The NFL, as I said, is up. I think all four places that had the NFL games last year did extremely well. We are extremely pleased with the marketplace that we are seeing there. As we said, U.S. Open tennis, we are way ahead of where we were before. Having the NFL, having the NCAA basketball tournament, being the largest provider of golf, having U.S. Open Tennis tournament, we feel like our complement of sports is exactly where we want it to be and we're doing very well with all of it, and we're pleased with where it is going.

Your next question comes from John Blackledge – JP Morgan.

Is CBS Outdoor through with its heavy investment in the London Underground or can we expect continued investment and resulting operating declines internationally in the second half of the year? Just wondering if scatter was up for all the networks in the second quarter? And then what you guys guarantee for ratings on the upfront, if you guarantee down X percentage? Thank you.

I will take the London Underground. We still have a build out program that will last the rest of this year. But I'm hopeful, and obviously Leslie and our team over in the UK is, that it won't result in down margins and down profits. I mean, the displays are coming onstream. They're never coming on fast enough. It's an eight-year contract, as you know. But we will still have some capital spending at an accelerated pace for the balance of this year with the London Underground. As I've tried to articulate, we see the revenue starting to pick up nicely. Obviously, it has to keep growing, because we are paying a bit higher fees. But so far, we are really pleased with what we see. The UK and the London economy is terrific, still growing well, particularly the ad segment. So again, we think this is a good investment. A couple of quarters here have been a little bit tougher on margins, but we should see that pick up as we sense our expectation at this point.

John, in regard to the marketplace, number one, we never mention the rate at which we sell our product at. But the world is going to be a very different place, and so we look at it very differently. You know, with commercial ratings and DVR ratings, it is like the same old game has changed quite a bit. The fact that scatter was up consistently over the last quarter is a very positive trend for us. And any [ATUs] that were necessary are being covered by the strong scatter market. As we head into the new season, we think broadcast is going to be very strong because of the new rating system.

Your next question comes from Ben Swinburne - Morgan Stanley.

Fred, if I could just back, a point of clarification. You said the network was flat year-over-year, including the impact of the NCAA timing. Could you give us the year-over-year station revenue at the station group, if you pro forma out the station sale? A question for Les, on the TV studio. Seems to be a trend in the network business to use more and more of your own television studio content on the network. I'm wondering how you think, both positively and negatively, that impacts your studio revenue stream going forward, if you expect some of your partners, or I should say your customers on the studio, to try to buy more internally, and if CBS will look to do the same?

Ben, on the stations for the second quarter, they were down slightly, on a same-station basis versus last year as we had some political last year. Again, the timing of the NCAA obviously affected the stations; if you take out the NCAA, they were sort of flat in the second quarter. But they sort of tracked with being kind of flat to down, if you take the NCAA and put it in.

Regarding the TV studio, obviously, the network will buy the best programming from anybody, and we do. We have shows on the air from every single studio. Having said that, it is great to be able to control your own destiny, being able to sign the producers you want to be in business with. Our group has a great reputation and a great track record in terms of producing content long before we came to CBS. So the fact that we are in partnership on most of our content, and when you look at the CSI's and the Without A Traces and the Cold Cases and all those shows that we are part of the production group, I feel a lot better knowing that our people are doing it. Having said that, we do have a lot of business with everybody else. It's good to control our own destiny, and as more and more studios own networks, it is always good to have that card to be able to know that your guys can produce the best content for your network.

Your next question comes from Marci Ryvicker - Wachovia Securities.

Have you had any discussions or further discussions with Google on the radio or television side in terms of inventory sharing? Secondly, can you remind us how much political revenue you typically get outside of your TV station business, such as on the CBS Network and in radio? And do you anticipate seeing more than usual on these avenues due to the fact that there are so many early primaries?

Marci, in terms of the first question, we're in discussion with everybody over everything all the time. There had been a potential deal with Google to sell some of our Radio inventory before. Those discussions are ongoing; they get hot, they don't get hot, you know. As always, we've said with all our partners, we will get paid for doing what we do. But, yes, those conversations do continue.

Marci, on the network, as you may know, we do not take advocacy ads. So the network gets no political ads at all for candidates. Radio, as we may have talked about, had a little bit of political in '06, less than $20 million. That is certainly the area of focus for Dan and his team, because we think radio is a terrific local medium for candidates, and we hope to see that go up significantly. Outdoor gets virtually none either, at this point. Hopefully with digital displays, we will be much more able to get political, because we can change the message around real quickly. So the lion's share of it comes from the TV stations.

Your final question comes from Alan Gould - Bleichroeder.

Les, I have two questions for you. You said that the old world is changing. How do the C+3 ratings compare to the live program ratings? I mean, what you gain on the +3 do you lose in the C versus programming? Second, if you can give a quick comment on what impact the Guild strike may have? I realize it may be a year off or so.

C+3 is going to be very interesting. Obviously, the +3 is very significant for us. The fact that 90% of the people that use DVRs do it within the first three days, so that means we are going to be getting the lion's share of those people. Not only that, as I said earlier, those are the people that watch 60% more television. The commercial ratings are going to be a lot more specific than program ratings. They will be slightly down. However, in an overall universe, the commercial ratings favor broadcast television, which is also a positive for us. So we are looking at the world as a better place with this new measurement system specifically. The Guild strike, as you know, everybody is well prepared for it. We've begun the negotiations with the Guild. You probably won't see anything until June, which is when Screen Actors Guild contract is up. The Writers Guilds are up November 1st, but we think that they probably will wait before any action is taken. As you can see, the movie studios, their production is up almost 30% in advance of a strike. We have sat down and had strike meetings, and frankly have a full schedule laid out for a year from now if, God forbid, that should be the case. So we are well prepared. We have plenty of reality, we have plenty of news magazines, we have plenty of game shows, as do all the networks, we have a great library that we can use. And I hope it doesn't come to that, but everybody, both the movie studios and the television networks, are well-prepared.

Thank you very much, everyone, and I will be around for the rest of the day to answer any further questions.