Good morning. My name is Nadia, and I’ll be the conference operator today. At this time, I would like to welcome everyone to the Paramount Global’s Q4 2022 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Anthony DiClemente, Paramount Global’s EVP, Investor Relations. You may now begin your conference call.

Good morning, everyone. Thank you for taking the time to join us for our fourth quarter 2022 earnings call. Joining me for today’s discussion are Bob Bakish, our President and CEO; and Naveen Chopra, our CFO. Please note that in addition to our earnings release, we have trending schedules containing supplemental information available on our website. Before we start this morning, I want to remind you that certain statements made on this call are forward-looking statements that involve risks and uncertainties. These risks and uncertainties are discussed in more detail in our filings with the SEC. Some of today’s financial remarks will focus on adjusted results. Reconciliations of these non-GAAP financial measures can be found in our earnings release or in our trending schedules, which contain supplemental information and in each case can be found in the Investor Relations section of our website. And now, I will turn the call over to Bob.

Good morning, everyone, and thank you for joining us. Today, I’m excited to provide our perspective on Paramount’s performance as we closed out 2022, and I’ll give you a preview of where we’re driving in 2023 and beyond. Let me begin by noting that almost one year ago, we announced that ViacomCBS would become Paramount, reflecting our determination to streamline operations and become a single integrated company. We’ve increasingly worked together as One Paramount with one vision: to make popular content, to make that content popular and to drive long-term value for our shareholders. And our One Paramount has had one approach: a multi-platform strategy that leverages our existing business, our distinct content strategy and our expansive relationships to evolve successfully through an industry-wide transformation. That approach is delivering, and as we’ll describe made 2022 a milestone year for Paramount with incredible momentum across our content and platforms. As planned, 2022 was also an investment year in our streaming business. Those investments, coupled with a challenging economic environment, including softness in the ad market, impacted earnings and cash flow. But it only sharpened our focus on delivering bottom line growth once we pass peak streaming investment this year. I’m incredibly proud of our progress, hitting and in most cases, exceeding the key streaming metrics we set out to achieve. The differentiated strategy we committed to is working, and we’re going to continue to execute on our plan. As we moved into 2023, we see a year of continued content and platform momentum ahead of us, a year of further scaling streaming as we hit the peak investment point, a year where we further harness the power of One Paramount, including importantly with our Paramount+ Showtime integration and a year where we look to the ad market to turn as we…

Thank you, Bob, and good morning, everyone. Q4 demonstrated earnings resiliency in our traditional business, along with robust revenue growth in our D2C business, the combination of which puts us on a path toward meaningful earnings and free cash flow growth in 2024 as we transition out of peak streaming investment in 2023. Today, I’m going to cover three things. First, I’ll provide additional color on a few elements of our Q4 results. Second, I’m going to address specifics of our Showtime-Paramount+ integration plan, including its contribution to future expense savings so you can better understand how it affects our financial model in 2023 and beyond. And third, I will explain how continued execution of our strategy delivers meaningful bottom line growth in 2024. In Q4, Paramount delivered total company revenue and adjusted OIBDA growth despite increased investment in streaming and a difficult macroeconomic backdrop. Today’s earnings press release includes a comprehensive review of key financial and operational results for the quarter. I’m going to focus my comments here on three items, which deserve specific attention: affiliate and subscription revenue, advertising trends and free cash flow. Affiliate and subscription revenue was a highlight in the quarter, growing 8% year-on-year, continued evidence that the ecosystem shift from pay TV to streaming yields net growth for our business. We benefited from record Paramount+ subscriber additions combined with ARPU growth, continued robust engagement and improvements in churn, resulting in 85% growth in Paramount+ subscription revenue and 48% growth in total D2C subscription revenue. In Q1, we expect similar levels of D2C subscription revenue growth, reflecting ongoing net subscriber additions and improvement in ARPU. At TV Media, we also expect the year-over-year trend in affiliate and subscription revenue to improve relative to Q4. Now let’s turn to advertising trends. The ad market continued to…

Thank you. [Operator Instructions] And our first question today goes to Bryan Kraft of Deutsche Bank. Bryan, please go ahead. Your line is open.

Hi, good morning. Some of your peers are revisiting elements of their streaming strategies, whether it’s the amount and types of content they’re making, backing off from exclusivity and doing more licensing or resetting their approach in international markets. Are there any adjustments that you’re looking to make to Paramount streaming strategy? Or is the current course the one that you plan to stay on from here? Thank you.

Yes. Sure, Bryan. So look, I’d say two main things here. First, I’d note that our streaming investment and differentiated approach is clearly producing returns at the consumer level. I mean, Paramount+ is going at the top end of the industry. It’s clearly taking share. Our content on Paramount+ is on the rankers. People are talking about it. And really, in less than two years, Paramount+ has become a service to be reckoned with. And that’s because it’s a compelling product for the whole household across the country and really around the world. And remember, we’ve always approached this space with a plan that was based on building a profitable streaming business, one with TV Media-like margins over time. And that gets me to my second point. Because we didn’t have unlimited resources, we went at this differently. And in doing so, I note that many of these things, things we’ve been doing all along, are now being embraced by others. So, what does that include? Multi-platform, the power of films crossing theatrical and streaming of shows being what I call dual illuminated networks and streaming, clear advantage. Franchises, the power of IP that people know, an IP that you can grow on a multiyear basis. That gets you a superior content ROI, including in streaming. Advertising, both FAST, i.e., Pluto and lower-priced ad-supported tier, i.e., Paramount+ essential. It unquestionably grows the TAM, and you’ve seen other people start to move in that direction. Partnership, we believe in the power of partnership. It’s a powerful element in leveraging their consumer connection. You see that in the performance of our hard bundles, channel stores and then add in D2C, it’s a powerful combination. International discipline. We never believed in a one-size-fits-all model. We believe in country-specific execution, including at the limit joint ventures as we’re doing with Sky Showtime. And finally, content licensing. We never took all our content and put in a walled garden. We continue to strategically monetize content outside our owned and operated ecosystem. And that drives incremental return and frankly, drives incremental awareness. Those elements are all important because they drive a mix of cost and revenue advantages that we’ve long pursued on the path to profitability because those advantages translate into lower aggregate investment levels and superior long-term strategy margins. So, we continue to execute. We’re very happy with our momentum to date. We see the light at the end of the tunnel. And sure, others are seeing some of the things we saw early, but we’re continuing to execute, because we are going to be a profitable scale player in the streaming game, and it’s exactly what’s beginning to happen.

Thanks, Bryan. Operator, we’ll take our next question please.

Thank you. The next question goes to Michael Morris of Guggenheim. Michael, please go ahead. Your line is open.

Hi, thank you guys. Good morning. I wanted to follow-up a little bit on the subscriber component on this path to profitability. You guys are at about 56 million Paramount+ subscribers as of year-end. You had a number of market launches in 2022. How many subscribers does the Paramount+ product need to get to scale? And how does the growth trajectory for Paramount+ compared to the prior outlook you had for 100 million-plus combined subscribers by the end of 2024? And if I could also just on free cash flow. As you think about 2023 in the investment year, can you give a little more color around how much cash investment you expect in 2023 before you inflect into 2024, and whether that has any impact on how you think about your dividend payout? Thanks guys.

Hey Mike, it’s Naveen. There’s a lot in there. So, I’ll try to take those in order, starting with the questions on subscriber growth. So as you pointed out, 2022 was a very, very successful year for Paramount+ in terms of subscriber growth, and we’re enthusiastic about what’s coming in 2023 as well. I would point out that the dynamics around subscriber growth in 2022 [ph] will be a little bit different. On the P+ side, that growth is going to come from two main buckets. First is organic sub growth, both in the domestic markets and internationally. Domestic piece will be driven by a lot of the same drivers that we saw in 2022: content, partnerships, churn improvement. Internationally, this year, we’re going to focus on growing within the flagship markets that we launched in 2022. And then the second big bucket of growth for Paramount+ will be the migration of Showtime subs later this year. And as I mentioned in prepared remarks, that’s not a one for one. There’s a little bit of overlap there. We can take you through the details of that in the future. So there are definitely a lot of moving pieces on the sub front in terms of where we see that going long term. We’re increasingly focused on D2C revenue. And so when you look at the goals that we’ve outlined there in the past, we – our goal was to hit $9 billion of D2C revenue by the end of 2024. There’s some puts and takes there. The advertising marketplace has obviously been a little soft. But on the other hand, when we look at the trajectory on Paramount+ growth, we’re extremely happy with that and I think have exceeded our expectations on that front. So that’s kind of the story…

Great. Thanks, Mike. Operator, we’ll take our next question.

Thank you. The next question goes to Ben Swinburne of Morgan Stanley. Ben, please go ahead. Your line is open.

Thanks. Good morning. Maybe two. Bob, could you talk a little bit about the outlook on film with Paramount? You have a big slate for 2023. And obviously, you had a lot of success last year. Can you just talk a little bit about the film strategy at Paramount and how you see that feeding Paramount+ growth over time? And then, Naveen, maybe just to try to finish the sort of 2023 conversation. You guys gave us some helpful guidance for Q1 OIBDA. Any help for the year on overall OIBDA versus 2022 just so we can think about the right free cash flow comparison as well? Thank you, both.

Yes. Sure, Ben. So the first part of your question, obviously, 2022, extremely successful year for Paramount Pictures, six number ones at the box office in the U.S. on an eight-picture slate, which gave us really a better hit rate certainly than the industry average. No question, our film investment is paying real dividends. As you know, we both monetize it in the theater and on Paramount+. And so we were early to that strategy, and others are sort of moving in that direction. When you look at Paramount+, movies are top performer on the service, extremely efficient, particularly on a cost per start basis. So we feel great about that. As we look forward to 2023 and 2024, we’re very excited about what’s going on in Paramount Pictures. You look at the slate, it’s increasingly franchise-oriented. We believe in franchise, as you know. Talk about titles. Scream, which is coming this month. It’s New York located. A lot of buzz on that. We got our first Dungeons & Dragons movie. We’re excited about that. Next Transformer movie. When we released a trailer, that blew up the Internet. Next Mission Impossible movie, which is totally out of control and a thrill ride, probably be the biggest Mission Impossible yet. The next Turtles movie. And the next PAW Patrol movie, which I don’t know if you hang out with any preschoolers, but they love PAW Patrol. And then there’s more to come. So we’re very, very excited about what’s going on at Paramount Pictures. And again, leveraging it both in the theatrical side and on the streaming side to great effect. Naveen, the second part?

Yes. So Ben, with respect to 2023 OIBDA, we’re not providing any sort of specific numerical guidance today, but I can give you a few additional notes to help you model the year. If you think first about the D2C segment, as we’ve made clear, this is the year of peak losses. So you should think about it as really reflecting the full year impact of investments that we made in 2022, most of those related to content and market expansion. On the TV Media side of the business, we are looking to ad recovery in the back half of the year. I think TV Media will also reflect the impact of a number of the cost savings initiatives that we started talking about on our last call as well as some of the benefits that we’ll unlock from Showtime and Paramount+ in the back part of the year. And then on the Filmed Entertainment segment, we do expect slightly lower OIBDA on a year-over-year basis there, just given the timing of our film slate, which is a little more back-end loaded in 2023 relative to 2022. And then, of course, we’re comping against 2022, which included Top Gun, which was obviously a very large contributor.

Great.

Thanks, Ben. Operator, we’ll take our next.

Thank you. Our next question goes to Rich Greenfield of LightShed Partners. Rich, please go ahead. Your line is open.

Hey, thanks for taking the question. I got a couple of sort of big picture questions for Bob and then a quick financial one. So I’ve heard that there was credible multi-billion dollar offers for Showtime. Curious sort of how you thought about the value accretion of collapsing it into Paramount+ versus just selling it for cash? Disney then – I think Iger, if you listened to him on my earnings call and certainly on CNBC, he’s backing pretty far away from general entertainment content. Hulu’s clearly for sale. Wondering, one, do you have interest in buying Hulu? Could that be an interesting asset for Paramount? And related to that, how do you react to sort of the – what I guess he called undifferentiated general entertainment programming not being a great place to be? And then the financial housekeeping is just on the free cash flow, are you committing to positive free cash flow in 2024 or just an improvement in losses in 2024? I wasn’t sure how to take what you said. Thanks. I know that’s a lot.

Sure, Rich, a three-parter. So on Showtime, look, we think there is enormous value to unlock with the integration of Showtime and Paramount+. Both Naveen and I talked about that some today. So relative to that, if we were to divest the asset, it would have to create more value than our own operating plan. And as steward to shareholder value, we’ll always listen. But frankly, that bar is pretty high. So beyond that, I don’t think anything to say. Moving to Mr. Iger and undifferentiated, et cetera, look, differentiation matters. And the general entertainment space may not make sense for everyone, but general entertainment clearly makes sense for us when you look at our asset composition and really the nuances of our content engine. And when we went to market with Paramount+, well, actually before we went to market, we thought a lot about this question because we knew we needed to be differentiated because we weren’t first to market. For us, news, sports and amount of entertainment was a clear route to differentiated position and one that we knew or at least strongly believed would resonate with consumers and appeal to the whole household. And that’s across this country and really around the world. And when you look at Paramount+’s consumer traction, including having the most ads of any SVOD service in the U.S. since launch and the most ads in Q4 combined with 81% revenue growth, look, that positioning is clearly working. You look under the covers at what’s driving it, it’s the combination of Paramount films, CBS hits, Nickelodeon franchises, and our P+ originals, things like 2023 and Tulsa King, Criminal Minds, Wolf Pack, Star Trek: Strange New Worlds, I could go on, plus sports and news. So there’s no question that our content engine is delivering against our position. And with respect to the cost of general entertainment, which you didn’t specifically ask but certainly was built into that conversation that you’re referring to, look, our multi-platform strategy and franchise focus ensure we can build a differentiated content slate and simultaneously create a compelling content ROI. So again, general entertainment, it totally works for us in general and streaming, and maybe we’re different because of our asset composition and strategy, but we’re leaning into it.

And Rich, with respect to your financial question, thank you for giving us a chance to clarify that. Our plan is to deliver positive cash flow in 2024.

Thanks, Rich. Operator, next question please.

Thank you. The next question goes to Jessica Reif Ehrlich of Bank of America. Jessica, please go ahead. Your line is open.

Thank you. I just wanted to maybe a clarification on some of the things you said about pricing. Can you give some color on the economics of the partnership and how you would account for Delta in your sub numbers? But more specifically on the pricing, like how much – what’s the amount that you’re thinking of raising prices and the timing? And on the impairment charge, what’s included in that $1.3 million plus?

Yes. Sure, Jessica. I’ll take the first piece of that. Look, we’re super excited about the Delta partnership we did. It was a competitive process and obviously we won, it provides Sky members access to Paramount+ in the air and for a limited period on the ground. So you can think of it as promotional in nature. Importantly, the subscriber numbers will not be in our sub count. So they will only – what they do is they put in their frequent flyer mile, and that gives them temporary access. But it’s only if they actually become a real subscriber that it will start to go to our sub count and drive revenue and all that. But we think it’s an awesome promotional platform. And I know the Delta folks are really excited about it today could – really showcases what they’ve done in broadband and their planes in the air. And we think it’s going to be a nice plus for Paramount+.

And I’ll jump in on the questions related to how we’re thinking about pricing. We – there’s some, obviously, we have put a lot of thought into since the launch of Paramount+. That includes conducting a variety of conjoint analyses and also really studying some of the historical price increases that you’ve seen in the industry more broadly. What we learned from that was that Paramount+ remains an incredible value proposition for consumers, particularly given the upward trajectory that you’re seeing with pricing across the industry. And of course, that value proposition will get even stronger with the addition of Showtime content into the premium tier of Paramount+. We also learned that the headwind from price increases tends to fall more on new subscriber acquisition and less so on churn. And that’s something that has certainly guided our thinking around the price increases. So just as a reminder, the price on the premium tier Paramount+, which will now include Showtime, will go up by $2, so from $9.99 to $11.99. We’ll have a $1 increase on the essential tier from $4.99 to $5.99. And we think that makes sense because effectively, what we’re doing is tying a bigger price increase on the premium tier to a significant expansion of content while keeping an easily accessible entry point on the essential tier. And we’ll continue to take advantage of promotional pricing, annual plans and bundles as a way of both maintaining the funnel for new customer acquisition while optimizing churn and growing ARPU. So we’re excited about the contribution from pricing. And from a timing perspective, that will kick in when the new service launches in early Q3. And then I think the last part of the question was on impairment. The impairment charge, which will come in Q1, is really all about content. And it’s driven by the fact, as I said, that when we combine Showtime and Paramount+, we don’t need the kind of content that you would need if they were operating on an independent basis. So that will provide a benefit in terms of reduced amort on a go-forward basis.

Thanks a lot, Jessica. Operator, next question please.

Thank you. The next question goes to Doug Mitchelson of Credit Suisse. Doug, please go ahead. Your line is open.

Thanks so much. Just a few cleanup questions. One, on the price increases, how does that function with the partnerships? I’m just trying to figure out kind of what percentage of subscribers I apply that price increase to or how I think about the magnitude of the benefit to ARPU. The second piece is on that impairment charge, could you share how that impacts 2023 EBITDA? Or how that kind of feathers in over time in terms of improving the content amortization? And I guess these are all for Naveen. Sorry, Bob. I think the last sort of big one is, can you help us understand when does the cash content spend and the content amortization equalize? So I understand it’s going to improve in 2024 in particular. But can we look out, pick a number of three years and say, okay, we don’t have a working capital burn related to content cash cost versus amortization? Thank you very much.

Thanks, Mike. And I say that on behalf of Bob, so let him…

Doug.

Doug, excuse me, Doug. But thanks for letting Bob off easy. I’ll take those in order. With respect to how the price increases applied to partnerships, a couple of things. The price increases will take effect across both our direct channels and all of our third-party platforms. So that includes channel partners like Amazon, Roku, Apple, et cetera. With respect to the bundles that we have with commercial partners, the timing of price increases in those relationships will be determined on a case-by-case basis. And obviously, we’re not going to comment publicly on each of those deals. Your question on the impairment charge and its impact in 2023, I think the way you should think about that is that in general, content on our streaming services has an amortization period of roughly four years, plus or minus, depends a little bit on the type of content. And so you’re going to get the benefit over that period of time. It’s going to be a little greater in 2023 and then start to decrease a bit because there’s more amort to roll off in the first year than in subsequent years. And then I think your last question was about when we start to see sort of neutralization of the working capital drag on – between cash and OIBDA. I think the answer there is we’re going to move for the next couple of years into this mode where the growth rate in cash content spend is going to be much lower than the growth rate that you’ll see on the P&L. And then beyond that point in time, you’ll start to see them move much more in line with each other.

Thanks, Doug. Operator, next question please.

Thank you. The next question goes to Phil Cusick of JPMorgan. Phil, please go ahead. Your line is open.

Hi, thank you for squeezing me in. Bob, first, can you expand on your comment about stabilization in advertising? How should we think about indications for the current quarter and how you think about deeper in the year comping versus the fourth quarter? And then second, can you expand on the contribution from international from – for Pluto? Thanks very much.

Yes. Sure, Phil. So in terms of the ad market, you look at Q1, which is probably the most timely we’re on the market. And as we said, we believe our domestic national ad sales growth will improve in Q1 relative to Q4. You look at what’s going on in the categories, there are some bright spots for sure. Categories that are really working at the moment are food and beverage, pharma, travel and increasingly auto. So we like that. The strength really is much more so on the direct side of the business, and that’s a place where Paramount has a real advantage. In fact, we’ve recently reorganized our ad sales force around specific teams aligned with holding companies to kind of streamline access for them, make it more turnkey. And that’s been very well received. So direct side of the business is a place where we’re advantaged. The indirect, really the programmatic side, is still soft. And we’re looking for that to turn as the market improves. I’d also say in Q1 related to it, the local – underlying local ad business is improving as well. It’s not just a national thing, although when you look at local, obviously, you don’t have the same political in Q1 that you had in Q4. So that’s a bit of a headwind. But net-net, we – relative to Q4, we like what we’re seeing kind of right at the moment in Q1. And that does make us optimistic on this second half recovery. And by the way, the second half recovery, when we said it’s all about the growth rate, we believe there will be improvement in growth rate as the year goes on. And it is worth noting that the comps ease a bit moving forward. And so mathematically, that helps. But it’s really the underlying tone that we think has stabilized, and we think that – we know that’s the first step before you get the real improvement, which again look into the back half of the year four.

There was a question about Pluto international.

You want?

Yes, I can take that if you like. Pluto in the – excuse me, the international markets is certainly at an earlier stage of development and monetization than where we are in the United States. But it’s grown at a nice rate. So, we’re enthusiastic about that. We saw a decent chunk of the MAU growth in Q4 was international, including in Canada, where we launched an exciting partnership with Corus. And from a monetization perspective, as I said, it’s still relatively small scale internationally, but very compelling growth rate. So, we’re looking forward to it being a bigger contributor over time.

Okay. Thanks a lot. So operator, we have time for one last question. Thanks.

Thank you. The final question goes to Kutgun Maral of RBC Capital Markets. Kutgun, please go ahead your line is open.

Great. Good morning and thanks for taking the question. I wanted to follow-up on the international DTC outlook more broadly. Paramount has had a differentiated rollout strategy abroad whether we’ve gone at it alone, leaned on third-party distributors or have partnered with the likes of Comcast or Reliance in a fairly unique way. Some of your peers are exiting certain markets, and others have talked about plans to take a harder look at where they operate as they reset the economics. How do you see the opportunity abroad evolving? And are there any changes Paramount is looking to make in the strategy to best capitalize on the future of international streaming? Thank you.

Yes, sure. Kutgun, let me take that. And suffice to say, I was schooled in international, spent better – well, really spent a decade running our businesses. And so that’s certainly informed what we’re doing here. Start with the fact that streaming is definitely a global opportunity, and thus the international markets are an important piece of the equation. And just to level set, as we come out of 2022, we’re obviously active in all Latin America, Western Europe as well as Canada, South Korea and Australia. And then we got our Sky JV, which is in Eastern Europe and the Nordics and the Netherlands, but not consolidating our numbers. So we’re pretty well penetrated, and we’re going to really focus 2023 on deepening our participation in those markets. But to your point, I believe in a global strategy, but local market execution. And you have to look at the nuances of the market as you go forward. I also believe in the power of partnership. That led us early on and really first to this hard bundle concept where we use existing relationships with what you could think of as MVPDs [ph] to kind of turbocharge our market entry. We do that in the UK. We do that in Germany. We did that in Italy. We’ve done that a bit in Latin America. And that’s all about getting a large chunk of subscribers out of the gate at zero acquisition cost. And then now, as Naveen said, it really also was intended and in fact, has catalyzed demand for channel stores and the more direct business, D2C O&O, which we really like what we’re seeing in the trend lines there. And that will certainly continue to play out in 2023. So, we are very much looking at this market-by-market.…

Thank you. This now concludes today’s call. Thank you so much for joining. You may now disconnect your lines.