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Viacom aims to build studio production into $1B business in 2020

Buoyed by the growth of Paramount TV and the demand for global programming, Viacom Inc. is ramping up content production with an eye toward making this a $1 billion business in 2020.

Viacom President and CEO Bob Bakish told analysts on the company's Aug. 9 earnings call that revenues at Paramount TV have grown from zero a few years back to more than $400 million expected in fiscal 2018.

"Paramount TV's rapid revenue growth is clear evidence of the insatiable demand for premium episodic video content, but we now see a much larger opportunity and have set our sights on building studio production into a $1 billion business by 2020," Bakish said.

As part of this initiative, Viacom has established studio production units at Nickelodeon, MTV (US) and Viacom International Media Networks, with Comedy Central (US) and BET (US) coming online shortly.

In May, Viacom International Studios debuted, using production capabilities at Telefe International (US) and comedy brand Porta dos Fundos in Brazil with Viacom's Latin American brands. The entity is looking to accelerate content creation and distribution capacity around Spanish and Portuguese language content worldwide.

The mandate is to create new original content for third-party customers, leveraging Viacom's intellectual properties. Bakish pointed to Nickelodeon/Nick At Nite (US)'s licensing of 59 new episodes of animated series "Pinky Malinky" to Netflix Inc. in a multiyear deal as an example.

On the advertising front, Bakish said Viacom enjoyed its best upfront sale season in five years, registering pricing growth in the mid- to high-single digits. Volume was down in the low-single digits, as the company sold less inventory internationally.

"We aggressively tiered our lower-paying business because we wanted to ensure we have inventory to monetize in scatter," Bakish said.

The company's Advanced Marketing Solutions, or AMS, portfolio was also an upfront factor. It generated a 33% revenue gain in third quarter, en route to anticipated full-year revenue of $300 million.

Viacom also announced 21st Century Fox Inc. has become the first media company to license the Viacom Vantage targeting product to enhance linear content optimization.

Those positives aside, domestic advertising declined 3% in the third fiscal 2018 period, flat sequentially owing to fewer linear impressions, driven by lower ratings at Nickelodeon and Paramount Network (US). CFO Wade Davis said that audience deficiency units were down significantly in the quarter. "Nick was the only place that we entered any sort of growth in ADUs, and that was only up less than $10 million," he said.

Davis projected a similar U.S. ad sales rate in the fourth fiscal quarter, before upfront growth, continued momentum with AMS and improved ratings at Nick coalesce to trigger a return to growth in fiscal 2019.

Total revenue for the quarter ended June 30 totaled $3.24 billion, a 3.8% decline from $3.36 billion in the prior-year period.

Media networks revenue dipped 2% to $2.50 billion. U.S. and international revenues both decreased 2% to $1.99 billion and $509 million, respectively.

As noted, U.S. ad revenue was off 3% to $922 million. Domestic affiliate revenues fell 3% to $978 million, a 100-basis-point sequential improvement from the prior quarter. Excluding the impact of subscription video on demand revenues in the quarter, domestic affiliate revenues were flat.

Internationally, ad revenues decreased 4% to $269 million, hampered by the unfavorable exchange rate. Affiliate revenues declined 2% to $175 million in the period.

Filmed entertainment revenues declined 9% to $772 million in the third fiscal quarter, despite a 20% domestic increase to $464 million, which was countered by a 33% international plunge to $308 million.

Theatrical revenues decreased 21% to $208 million, owing largely to lower carryover revenues. Domestic theatrical revenues surged 58%, led by "A Quiet Place" and "Book Club." Internationally, theatrical revenues plummeted 58%, facing tough comparisons from "Transformers: The Last Knight" and "Ghost in the Shell" the prior year.

Licensing revenues increased 35% to $404 million, primarily due to the release of Paramount Television product, notably the second season of "13 Reasons Why." Domestic licensing revenues were up 122%, but international decreased 8%.

Viacom reported fiscal third-quarter net earnings attributable to the company of $522.0 million, or $1.29 per share, a 23.6% year-over-year decline from net income of $683.0 million, or $1.70 per share.

The decline stemmed in part from a gain on the sale of the company's investment in EPIX in the year-earlier period. Adjusted to exclude various one-time items, net earnings from continuing operations increased 1% to $475 million, or $1.18 per share.

The normalized S&P Global Market Intelligence consensus estimate for the quarter was $1.07 per share.