Paramount Global

NASDAQ:PARA

Earnings Call Transcript 2018-Q1

[Operator]

Good day, everyone, and welcome to the CBS Corporation First Quarter 2018 Earnings Release Teleconference. Today's call is being recorded.

At this time, I would like to turn the call over to Executive Vice President of Corporate Finance and Investor Relations, Mr. Adam Townsend. Please go ahead.

[Adam Townsend, executive]

Thank you. Good afternoon, everyone, and welcome to our first quarter 2018 earnings call. Joining us with today's remarks are Leslie Moonves, our Chairman and CEO; and Joe Ianniello, our Chief Operating Officer. Following Les and Joe's discussion of the company's performance, 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 first quarter 2018 results are only adjusted to exclude $9 million of M&A-related expenses incurred during the quarter. 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.

The webcast of this call and the earnings release related to today's presentation can also be found on the Investor section of our website at cbscorporation.com.

Finally, I'd like to remind you that today's call is to discuss our results for the first quarter and we'll not be responding to any questions or comments about the process with Viacom.

With that, it's my pleasure to turn the call over to Les.

[Leslie Moonves, executive]

Thank you, Adam, and good afternoon, everyone, and thanks for joining us today. This was an especially outstanding quarter for the CBS Corporation. As you can see from our results, the strategy we have laid out for you is clearly working, and the good news is there is so much more to come.

Revenue grew 13% to $3.8 billion, a first quarter record. Operating income was up 8% to $781 million, an all-time high, and EPS shot up 26% to $1.34. That's not only our best quarter ever for EPS, but it's also our 33rd consecutive quarter of EPS growth.

CBS' consistent strong performance quarter after quarter, year after year is exactly what shareholders have come to expect from us, and we continue to deliver these results while constantly investing in our future as well. This includes the continuous creation of must-have content, the launch of new digital platforms and the recruitment and retention of some of the best talent in the industry.

Because at CBS, just as we've shown you, for the last 10 years, it's not enough to win now, we must also strategically position ourselves to win for many years to come. I want to make one key point right up front from here that truly illustrates our momentum. In an era where others are concerned about losing subscribers caused by cord cutting and other matters, CBS Corporation is growing its subscribers. That's right. When you combine all of our paying subscribers across traditional MVPDs, virtual MVPDs and our direct-to-consumer services, our overall sub base is growing at both CBS and Showtime.

We've now been up for 3 quarters in a row, whether you look at it sequentially or year-over-year. And that sub growth accelerated here in the first quarter, up mid-single digits from last year. At CBS, we've long said, we are prepared to grow no matter how consumer watches our content. And this cross-platform subscriber growth is the proof. Central to our success is the rapid expansion of our direct-to-consumer streaming services led by CBS All Access and Showtime OTT. Some of our key competitors are just now entering the space, and we are already nearly 2/3 away to our goal of 8 million subs between these platforms by 2020. Plus, by going over the top, we're achieving higher rates per sub than any other form of distribution, which means these services are becoming more meaningful to our bottom line all the time. And of course, they're attracting a younger audience as well.

In addition, we are just beginning to scale our OTT services by expanding All Access into the international marketplace. Last week, we launched All Access in Canada, where subscribers can get thousands of hours of our current and library CBS program. Also, our All Access originals and the ability to live stream CBSN, our digital news network.

By year's end, we plan to bring All Access to Australia using our acquisition of Network Ten as a gateway to launch in that market. After that, we'll add more and more markets every year, leading to tremendous upside to our overall direct-to-consumer strategy. And importantly, these international subs are incremental to our 2020 target that I just mentioned.

At the same time we scale our direct-to-consumer platforms, we're also expanding our CBS and Showtime subscriber base through virtual MVPDs like Hulu -- like Hulu, YouTube TV, DIRECTV NOW and others. In addition, we continue to grow traditional MVPD revenue as well. Quarter in and quarter out, we're successfully negotiating deals with distributors large and small at rates that better reflect the full value of our audience with plenty of more upside to go.

As a result, we now have more confidence than ever that we will achieve our goal of $2.5 billion in retrans and reverse comp by 2020.

So we're growing over the top. We're growing our skinny bundles and virtual MVPDs. And we are growing on traditional bundles. As audiences move from place to place, they're not leaving CBS, they're just transitioning to a new platform that actually pays us more than the old one. What's equally important is that as we grow our subscriber base, we're also generating a much higher average sub rate.

At CBS, first quarter rates were up nearly 30% from last year and our rate growth is accelerating at Showtime as well. This is because people are shifting to platforms that pay us more, and it's because we're resetting our existing viewers at higher rates.

Growing subs and rates at the same time is a powerful combination that is made possible by the strength of our must-have content and the new ways we're delivering. We're also launching a number of direct-to-consumer services that build up our core strength in news, sports and entertainment. Two of these over-the-top services are already successful, and the third one based on our hit show Entertainment Tonight is on the way. The first of these, of course, is CBSN, which led CBS News to another streaming record in the first quarter. Once again, the average age of the CBSN viewer is 38, which is decades younger than the average news viewer on cable or broadcast.

We followed up the success of CBSN by launching CBS Sports HQ during the quarter. As successful as CBSN has been, CBS Sports HQ already had 60% more streams than CBSN did at this point in its launch with significant spikes in viewers during our major sporting events.

Next will be our new 24/7 Entertainment Tonight streaming service, which we plan to launch in the fall. This will allow us to cover breaking entertainment news in a way we couldn't before. ET continues to dominate in its category as the most recognized name in the entertainment news and won another Emmy in that category just this week. We're confident that extending this brand in this way will attract younger viewers while giving us another vertical that is right in our wheelhouse.

All of these streaming services allow us to sell advertising to highly targeted audiences at premium CPMs. And as we move forward, they will play a key role in our subscription strategy as well becoming more and more integrated with CBS All Access and becoming a key component of our international OTT strategy.

These new platforms that I just mentioned have something else going for them. They are next-generation extensions of the biggest and most far-reaching media platform in the world, the CBS Television Network. Whether you're launching a hit show or a direct-to-consumer service, having the power of the most viewers in media is a clear competitive advantage. And at CBS, we continue to dominate primetime like no one else.

Since the Super Bowl, Olympics and Oscars, we have now won every single week of the season. That's 8 weeks in a row at #1. And we've seen each week -- we've won each week by more than 1 million viewers and several of them by more than 2 million. In 2 weeks, we will announce our new primetime schedule once again at Carnegie Hall. In addition to an exciting slate of new shows, we'll be returning 17 of our hit series as well as 3 new freshman hits, Young Sheldon, SEAL TEAM and S.W.A.T. And there's no better time to be getting into the upfront marketplace than when scattered is as strong as it is right now with pricing up well more than 20%.

In addition, we're confident that the unparalleled reach and trusted brand of CBS will prove to be an especially attractive landing spot for marketers this year as they continue to assess some very well-publicized concerns about digital advertising.

Next season's primetime lineup will also generate new licensing opportunities. We own 12 of the 17 shows that we've renewed, plus we have ownership in 14 of the 18 pilots that [ we've ordered ]. All of our own shows, all of our own hits go into our pipeline of shows that could be monetized in a market where there is a great demand for premium content. This includes continued healthy increases in the international licensing of our program -- programming, which is a key pillar of our long-term growth strategy.

Owning more of our shows also means that we have more content to license domestically, which continues to be an unheralded part of our business. We know that streaming services like Netflix, Amazon and Hulu are finding success with originals. But in addition to that, what people don't know as well is that some of the highest-rated programs on these services are off network programming such NCIS, Criminal Minds and Blue Bloods. Series like these also still do extraordinarily well on cable television, where CBS shows are the bread-and-butter for TBS, USA, Hallmark and others.

So no matter the platform, digital, cable or broadcast, the shows with the broadest appeal are the ones that syndicate the best. Meanwhile, CBS Studios continues to expand its output by creating content for platforms inside and outside our company at the same time, including a dramatic spike in production for streaming services.

As a result, our studio has evolved to become an industry leader in cross-platform production. In just 3 short years, we went from creating 0 series for premium cable and streaming platforms to 14, including 4 series for Netflix, such as American Vandal, which just recently won a Peabody award. And all of this production for streaming services is on top of all the shows we're also creating for broadcast and cable networks.

Meanwhile, late-night continues to be a terrific story for us as well. Stephen Colbert's lead over the competition is bigger than ever. The Late Show posted its best first quarter audience in more than a decade and is now well more than 1 million viewers, 1 million viewers ahead of its closest competitor and the gap is widening. In fact, one of Stephen's recent broadcast beat the combined ratings of its 2 late-night competitors by more than 1 million viewers.

We also continue to benefit from the extraordinary talent of James Corden, whose Late Late Show is up 4% year-over-year, and we know what a huge impact he's having on streaming platforms.

At CBS News, no program is firing on all cylinders better than 60 Minutes. Now in its 50th year, 60 Minutes is not only the #1 news program, but it's also been a top 10 show 19 out of 24 weeks so far this season, including each of the last 9 weeks. It even reached #1 for a week in March, delivering more than 22 million viewers, the largest 60 Minutes audience in nearly a decade.

In sports, we're coming off from the most exciting times of the year with the NCAA Men's Basketball Tournament and the Masters, more than 100 million viewers watched all or part of the tournament and CBS's coverage of the Kansas-Duke game was the highest rated regional final in 13 years. The Masters is up 18% from last year and overall so far this season, our golf coverage is up 13%.

Meanwhile, we're gearing up for a key year with the NFL with the AFC championship back in primetime and the Super Bowl back on CBS. And this fall, SEC football will look to become the highest rated football package for the 10th consecutive year. Remember, we have all 4 of these major sports franchises locked up well into the next decade and in the case of the NCAA Men's Basketball Tournament, through the year 2032, and I'm looking forward to that negotiation already.

Sports is also a key driver of CBS All Access during the week of the NCAA tournament. New sign-ups to All Access doubled from the same week last year. And for the Masters, they were up more than 170%. Our entertainment content is leading to new subscribers as well. This season finale of Star Trek: Discovery, the return of The Good Fight and big events like the Grammys led Q1 sign-ups to be 100% year-over-year.

The next level of success with CBS All Access will be achieved by increasing our investment in original content. In addition to The Good Fight and Star Trek: Discovery, which just began production of season 2, next month, we'll premiere our new drama, Strange Angels, from same director and producer, Ridley Scott. After that, we'll launch the psychological thriller from Kevin Williamson called Tell Me a Story. We'll also have a return of the Will Ferrell comedy, No Activity. And in addition to all of this, our studio is developing a limited series for All Access called 8 Fights – The Life of Muhammad Ali, produced by Oscar winner Morgan Freeman. And of course, we'll also have the highly anticipated reimagination of The Twilight Zone from Academy award winner, Jordan Peele.

The same strategy of investing in premium content is driving our growth at Showtime. In the first quarter, we grew by 1 million subs year-over-year with that increase coming from both traditional distribution and Showtime's over-the-top streaming services. That sub growth was driven by a string of key programming successes during the quarter. It started in January with the launch of another new hit series, The Chi, which quickly became one of our top dramas. Also in January, Showtime's #1 comedy, Shameless, ended its 8th season with its best ratings yet, averaging nearly 8 million viewers. February brought the return of our #1 drama, the amazing Homeland, which premiered to an audience that was up double digits from 2017. And in March, our #2 drama, Billions, launched with its highest-rated premiere so far. In fact, so far this year, Shameless, The Chi, Homeland and Billions are the top 4 hour-long scripted series in all of premium cable.

Great content is also driving our success in publishing, where we have a very strong release schedule, ahead with new titles from Stephen King, Brad Thor and Ruth Ware, as well as the new memoir for Senator John McCain. [ Year 2 ], we continue to attract the younger, digital audience with audiobooks, where nearly half of all listeners are under the age of 35.

In local media, we set up for a strong back half of the year in political advertising with the primary this summer and the midterm elections in November. As we know, there are some very significant races going on out there in both the House and Senator up for grabs. And as is often the case, there will also be a number of ballot propositions in California, where we own 6 stations.

So across our company, CBS is operating from a position of great strength. We have well documented long-term strategy that produce record results here in the quarter will lead to record results for the year where we'll produce extremely compelling results right through our 2020 targets and beyond.

We're growing our subscribers. We're expanding internationally. We're launching new streaming services. And most importantly, we're creating and producing multi-platform premium content on a level we never have before. And that content is fueling growth across our company in ways that are just beginning to benefit our shareholders. We look forward to updating you on our progress as we build on the success of the CBS Corporation in the days ahead. In the meantime, thank you for joining us. And here's Joe.

[Joseph Ianniello, executive]

Thanks, Les, and good afternoon, everyone. As you heard, we turned in a terrific first quarter with record revenue and profits. These strong results make us that much more confident we will deliver the 2018 outlook that we provided for you on our last call. Our success is the result of the strategy we put in place 2 years ago to proactively capitalize on the changes taking place across our industry.

We saw a shift in the consumption habits of viewers, who wanted to watch our content on demand and outside the home. We also saw bigger opportunities for our content, particularly in the international marketplace. So we aligned our businesses to better monetize these trends by launching new distribution models, creating more premium content and expanding the ways we get paid for our programming. That is what's driving our results today.

Our nonadvertising revenue grew 17% during the quarter, and now makes up about 54% of our total revenue. As part of that, our growth in content licensing is driven by long-term contracts and output deals for our CBS and Showtime programming, which provide us with a steady, highly visible revenue stream.

And in terms of affiliate and subscription fee revenue, as you heard, we are growing our paying subscriber base. And importantly, we are increasing the average price per subscriber that we receive. This gives us a much more powerful business model, and we are still in the early innings of this growth story. That is why we're so excited about our future.

Now let me give you some more details about our company's first quarter results. Revenue is up 13% to $3.8 billion with healthy gains across all 3 of our key revenue sources. As I mentioned, affiliate and subscription fee revenue continues to be a strong and steady growth driver and was up 16%. This was led by retrans and reverse comp, which was up a robust 25%. And revenue from skinny bundles and our direct-to-consumer services nearly doubled, another indication of the shift in media consumption.

Content licensing and distribution was up 18% as our strategy of investing in premium content and monetizing it internationally across multiple platforms continues to pay off. And as we add more content to our pipeline, we are set up for continued growth in the future as well.

And total company advertising revenue increased 8% in the first quarter. This growth was driven by Network Ten in Australia as well as a solid performance at the CBS Television Network, which was up 1% despite competing against the Winter Olympics.

In addition, we also turned in our best ever results in profits. Operating income was up a solid 8% to $781 million. Net earnings from continuing operations was up a healthy 20% to $580 million and EPS was up 26% to $1.34, which once again was a new all-time high for us.

Now let's turn to our operating segments. Entertainment revenue for the quarter was up a strong 16% to $2.7 billion. Affiliate and subscription fee revenue led the way with a 39% increase. And we grew across distribution platforms with gains in reverse comp, CBS All Access and skinny bundles.

In addition, advertising was up 11% as we continue to benefit from our accretive Network Ten acquisition. At the CBS network, advertising accelerated in the fourth quarter and -- from the fourth quarter and the demand for broadcast network advertising continues to be strong as we head into the upfront.

Entertainment operating income was up 22% to $492 million. And we grew our operating income even as we increased our investment in content and our direct-to-consumer services, including the launch of CBS Sports HQ and the expansion of CBS All Access into Canada.

First quarter Cable Networks revenue was up a healthy 12% to $609 million. As you heard, we added 1 million more subscribers with increases in both our traditional and direct-to-consumer distribution platforms. And this growth was aided by our strategy of releasing a new Showtime hit series at least once a month.

Just to give you some perspective, over the last year, we have added more than 100 hours of Showtime original programming, including the 4 hit series that premiered in Q1.

Cable Networks operating income for the quarter came in at $230 million compared to $250 million a year ago as a result of the strategic investment into our content, which will drive future growth.

Turning to Publishing. First quarter revenue came in at $160 million, which was even with last year. Best-selling titles in the quarter included I've Got My Eyes on You by Mary Higgins Clark and The Last Black Unicorn by Tiffany Haddish. As you heard, digital audio continues to be a strong growth area and was up 43% in Q1.

Just like our other segments, publishing is driven by quality content and technological advances, which are leading to higher consumption and lower production costs. Plus, publishing operating income grew 7% to $16 million for the quarter, mainly due to the more efficient business model I just mentioned. And the operating income margin expanded by 1 percentage point.

In local media, first quarter revenue was up 1% to $415 million, which is consistent with the low single-digit pacing we told you about on our last call. And in our top 10 markets, revenue was up a solid 4%. Local media operating income for the first quarter came in at $118 million compared with $124 million last year due to the changing revenue mix.

Turning to cash flow and our balance sheet. Operating cash flow came in at $717 million, up 6% from last year. Once again, we achieved these results while investing in both our premium content and our direct-to-consumer services. Also during the first quarter, we repurchased $200 million worth of our stock. And at the end of the quarter, we had $2.9 billion remaining under the current repurchase program. Now let me tell you what we see ahead.

Local media revenue in the second quarter is pacing to be up low- to mid-single digits. And as you heard, scatter pricing at the network remained extremely strong. It's up well over 20% across multiple dayparts, which bodes well for us as we head into the upfront.

Looking beyond the second quarter, we expect 2018 to be a very good year for advertising, driven by midterm elections, which will benefit our results in the back half of the year, particularly in the fourth quarter.

Also for 2018, retrans and reverse comp are set up for continued strong gains. As we sit here today, we have deals in place with some of the largest distributors going through 2020, and all executed in line with our $2.5 billion revenue target for 2020. So we see a clear path ahead toward achieving that goal, which once again is driven by the premium content that CBS delivers year in and year out.

I'd also like to give you some more color about the tremendous success we're having in our direct-to-consumer businesses. At All Access, subscribers can choose between services with ads or without. Whichever the consumer chooses, we are agnostic from a revenue perspective. What we are seeing, however, is that even though the commercial-free version launched much later than the one with ads, 1/3 of all of our All Access subscribers have now shows in the ad-free option. So combined with Showtime OTT, this means that more than 2/3 of our total direct-to-consumer subscribers are using a commercial-free service.

Now that we've launched the ad-free version of All Access internationally, this number should only increase. All of this will serve to grow, diversify and reduce the volatility of our revenue. We're also set up very well in content licensing. Currently, we have more than 800 episodes of hit shows that we can bring into the marketplace, some of which we will be monetizing this year. And we continue to add to our content pipeline.

In 2 weeks, we will be unveiling new shows that will be part of the CBS primetime lineup. Plus, we are producing content for The CW, Showtime and other streaming and cable networks. So we have plenty of licensing opportunities before us, especially in the international markets.

So in summary, our outstanding first quarter results provide numerous proof points of our success of our strategy and show how we are on the right trajectory to deliver on both our 2018 financial outlook and our longer-term growth targets as well.

And with that, Gwen, let's open the lines for questions.

[Operator]

[Operator Instructions] And we'll go first to Ben Swinburne with Morgan Stanley.

[Benjamin Swinburne, analyst]

I want to come back to the over-the-top and All Access strategy, Les, which is obviously you're seeing success there. And you're investing behind it, which makes sense. How are you thinking about your content strategy as you look out over the next kind of 1 to 2 years? Are you seeing a sort of a rational to have more regular new content on All Access to drive customer sort of the way you've implemented that strategy at Showtime? And then from a distribution perspective, are you thinking about bundling All Access, whether it's with Showtime or with services like Hulu or even thinking about working with cable operators, where you might be able to work that -- the churn levels lower? I'd love your thoughts on both those topics.

[Leslie Moonves, executive]

Yes, let me deal with content first. Obviously, we're expanding the number of originals we're doing on All Access. We're expanding the number of originals we're doing on Showtime as well. Plus, we're producing for a lot more outlets. So our studios have something like 65 shows in production right now, which is a big increase from what it's done before. And when we analyze our shows, by and large, they're all profitable before we begin. So even though we're producing content for All Access, and obviously, the goal is to get our subscribers up, there is a great international play on them as well, like we did with Star Trek, where we got many millions of dollars for originals there. So on virtually every show, we have a strategy and we have a plan for monetizing it, and there are a very, very few shows we don't go into where we're not making a profit off the bat, whether it's for CBS, whether it's for All Access, whether it's Showtime or whether it's an outside service that we provided for. In terms of the bundling, we're already selling All Access with Showtime OTT. So we're already doing that. And we're obviously exploring all sorts of other ways of distributing it. As you know, we're very pleased with where we are [ with the number of services ]. And like some of the other streaming services that are bigger than us, they've made a variety of deals, we're also looking at them and we're not adverse to any ideas there.

[Benjamin Swinburne, analyst]

That's helpful. And then just along those line maybe for Joe. As you think about the investment in content and also marketing of all these OTT services over the next couple of years, does that still allow for margin expansion in the overall CBS business as we look through your kind of 2020 objectives?

[Joseph Ianniello, executive]

Sure, Ben. Yes, look, I think, yes, we're demonstrating that. Because just year-over-year, we're spending hundreds of millions of dollars more on owned content and you see us managing the margin to kind of flattish. And so we're able to see that because, as Les pointed out, the turnaround time to turn the cost into revenue is pretty quick. And so with the international marketplace, when we create a franchise, we're looking to maximize that franchise. And so it's not a one-size-fits-all. So we're able to definitely maintain margin while we continue this investment. So I think really, that's the key here. What we're talking about because usually, you have to step backwards when you're making long-term investments. And here is we're able to maintain and -- like, and still set us up for better growth in the future.

[Operator]

We'll go next to Jessica Reif with Bank of America.

[Jessica Reif Cohen, analyst]

I have 2 questions. First one is on advertising. I mean, with parts of the industry in turmoil, not you, agencies, the rating system, viewers changing the way they're watching. Could you just talk about how different or what you're doing to change your approach to advertising in general, especially as we're going into the upfront? And kind of as a sideline, on the OTT advertising, as you mentioned the higher CPMs, is there any seasonality? Are there any particular categories that, that platform lends itself to? And then I have a different topic.

[Joseph Ianniello, executive]

Okay, Jessica, let me tell you, on the agency ratings measurement. Look, we've always said best content wins. And so whether you're doing that direct to the clients, which more and more clients are doing that direct business, and they just want to make sure that we're delivering. So whatever the measurement system is, whatever the rules are, we're comfortable with that. Our job is to produce quality content that appeals to mass audiences. And I think when you stack us up against our competition, we stand out. And so as long as we have that and we're able to demonstrate that, that consumption, the monetization will follow. So clearly, it's changing. I mean, we're setting ourselves up, the organization, differently. Digital advertising are clearly going to have higher CPMs. Direct-to-consumer, we're expanding the advertiser base. So we're doing all of those things not to be relying on intermediaries that stop us from maximizing our revenue. On the OTT front, they are at higher CPMs because they're more effective. They're more targeted. And so -- and we have the data to support that. And it's more valuable to the advertisers. So as we -- as more and more of that consumption, it becomes more and more acceptable to the advertisers and they see the effect, I think it's just become standard. But we're not seeing any particular seasonality to the consumption. It's more of driven on the release schedule and the stuff that's in the pipeline as opposed to seasonality or time of day.

[Jessica Reif Cohen, analyst]

Okay. And then the last question, the second question. On -- it's about premium content. I mean, obviously, you guys scaled up dramatically. But some of all these other, not just traditional players, but the other players. And I just -- can you talk about the impact it had on your programming, whether it's on cost, on talent, it's the buyers, et cetera?

[Leslie Moonves, executive]

Yes. No, it's a good question. Obviously, with Netflix doing something like 75 or 80 original series, and Amazon and Hulu also investing in original content. Apple is doing it. YouTube is doing it. There is a lot more competition out there. Obviously, they are more competitive with All Access and Showtime. And there are certain cases where we will not pay the kind of money that they will. We'll have more discipline with that. But fortunately, over there, we've got David Nevins and a bunch of phenomenal developers. And as you see their content, you know more about Showtime content than just about any other premium service that's out there. So the quality of our development internally, we have to work hard. And once again, translating it to our other services. Obviously, the CBS Television Network and The CW network. It's sort of the same as it's been in the past. Yes, there is a lot more competition for writers and actors. And the price of poker, in certain cases, has gone up when you go after talent, when Netflix can go after a Shonda Rhimes or a Ryan Murphy, who are the top people who are out there and give them hundreds of millions of dollars. But we have something else to offer at CBS Network. We get visibility with your show and something called the back end. So there's a guy named Chuck Lorre over at Warner Bros. whose had Big Bang and Young Sheldon, who's made a lot more than a couple of hundred billion dollars on the back end of his shows on the CBS Television Network. So there's a give and take on that. And you know we're pretty competitive in everything we do. And I think we do every form of content really well and no matter what the competition is.

[Operator]

We'll go next to Michael Morris with Guggenheim Securities.

[Michael Morris, analyst]

Two topics, one on programming and one on subscribers. So on programming, one genre where I would argue that you're the lightest is kind of the kids, young adults, family type of programming. And my question is if you -- as you look at both your linear portfolio and also your over-the-top products, is that a genre you would like to be bigger in? And when you look at potentially investing in that, what are kind of the factors you're thinking about in terms of trying to fuel your strategy going forward? And then I have one on subs.

[Leslie Moonves, executive]

Yes, I mean, I mean, you're absolutely right. It hasn't been an area we've been focused on. Kids don't watch CBS. There's an FCC rule that says we have to put on 3 hours a week of acceptable programming. I think we have 10 to 15 children watching every Saturday morning on CBS. So it is an area we are not particularly strong in. As we see some of the success that Netflix has had with younger programming, obviously, it's something that we are looking at as we head to the future, to invest more in that. So you may see us doing more of that right now.

[Michael Morris, analyst]

And then, Les, you did mention the subscribers growing across your business, which is healthy. But if I think specifically about your station subscribers with your traditional MVPDs and the virtual MVPDs, with the launch of some of the new MVPDs over the last quarter or 2, have you seen an improvement in that trend as a standalone? Or what are you seeing there at this point?

[Leslie Moonves, executive]

Yes, I think the virtual MVPDs are growing. You see growth on some of them. And as we said earlier, the more they grow, the more we grow because they are paying us better rates than we're getting from the traditional MVPDs. So we encourage that. And I think some of the results are very encouraging at some of them. So that's one of the points that we continue to make. The newer the service, the more we get paid for. So these shifts are good and they are becoming substantial.

[Michael Morris, analyst]

Okay. Great. And are there -- I mean, can you help us at all with whether or not they've actually been additive sort of the ecosystem in general since kind of the launch of YouTube and Hulu virtual MVPD services?

[Joseph Ianniello, executive]

Yes, Mike, it's Joe. It's hard to say that for us, it's been clearly additive. And we don't have stations across the country willing to cover 1/3 of the country. And as you know, the deals we have with our affiliates are really cash license fees. So we can't kind of just comment and say that. But what we can say is in the markets where we are, there, it's absolutely additive.

[Operator]

And we'll go next to Alexia Quadrani with JPMorgan.

[Alexia Quadrani, analyst]

I have a question on the advertising and really sort of the traditional TV platform. I mean, given that advertisers really value the really strong demand for TV because it is a mass reach and really, it's not able to replicate that mass reach elsewhere and] [ they have a media ]. Is there any concern that as viewership continues to fragment even if you're keeping or even gaining share across all your platforms in aggregate that it become an issue and advertisers maybe a little bit less willing to pay those premiums that are -- for your top programming and sports? Or is that really years away and not -- and given where pricing going, clearly, not on the table right now?

[Leslie Moonves, executive]

Alexia, it's been a question for years and years, as viewers are shifting, how come CPM has continued to go up. Because in a universe of 1,000 channels, the network, numbers become even more and more important. So I've been doing this a long time. I think I've only seen CPMs go down once in like 20 years or something like that. So the top events, the sporting events, the live events are still going to produce huge numbers. They're still the hottest thing in town even as ratings go down somewhat or appeared to go down because they're watching it on different platforms or different times. Network advertising is still the best game in town. That's the reason scatter is up so much. And that's the reason we are looking forward to the upfront very much.

[Alexia Quadrani, analyst]

And then just a follow-up for Joe, if I can, on the comment about content sales. I think you said the pipeline was robust, I mean, clearly saw some nice benefit in the quarter. I guess, any more color? Are we -- expect to see some of the content tails maybe the back half of this year? And is there any coming from sort of U.S.? Or is it really driven by the big demand internationally?

[Joseph Ianniello, executive]

Yes, I mean, look, I'll just give you a couple of hit titles that we haven't brought to market. Scorpion and Ray Donovan is just 2 successful shows that we have on the air for multiple years. So that's the type and quality that we feel like we have to decide when and how to bring that to market domestically. But clearly, on the international [ markets ] , it's a little different as we sell those shows earlier. So the 800 hours I was referring to on -- in my comments were really domestic.

[Operator]

And we'll go next to John Janedis with Jefferies.

[John Janedis, analyst]

A couple of questions for me, too. One is, look, this earnings season there's been deflation in ARPU at the MVPDs and it feels like increasingly premium cable network promotions are being used to drive subs. So understanding there's a mix in terms of how you guys get paid, can you talk about the mix of paid Showtime subs coming from traditional players relative to the Amazon and to the other OTT players and your confidence around average rate per sub growth? And then, I guess, on a related topic, I know it's early, but is there evidence that increased originals you spoke to are leading to lower churn?

[Joseph Ianniello, executive]

Yes, John, it's Joe. Look, I think the new distribution platform, it's a higher ARPU for Showtime. And so that split or that business model is much better for us as more and more people subscribe that way. So again, if they switch, it's better for us. If not, we just try to get in the rate. And what was the second part of your question?

[Leslie Moonves, executive]

Yes, I'll take that. There's no question that more original programming creates much less churn. The reason it changed is Showtime airing pattern, where we used to put on 2 shows or 3 shows per quarter. Now we will do one per month. One brand new show per month, which has helped the churn a great deal. All Access, as you know, we've only had, like, 2.5 shows on. That's going to be increased to 7 or 8. We expect the churn to go way down on that and we're going to continue to do originals, and that's sort of a proven number.

[John Janedis, analyst]

And Les, one other quick question is, look, as you know and you talked about this, there's been a lot of concern about content pricing on the licensing side. And so can you explain more on your comment in the release related to growth from renewal periods for licenses of library programming? To what extent was that a domestic comment? And can you talk about your confidence level that, that current, I guess, the demand or trend continues?

[Leslie Moonves, executive]

Yes, look, it's both domestic and international. And I think, look, it's just driven by the content that we have available. And that's why we're producing more and more. We sell it and then we sell it over and over and over again. And we license it to multiple platforms. And so the windowing, John, becomes very, very important on how we window it. And so we want to be very strategic on how we're making our content available. And so that will continue as long as we keep building the pipeline.

[Leslie Moonves, executive]

As we said earlier, when we have an original programming, we already have its life laid out for. Whether it's over and out in 10 episodes or hopefully it turns into 150 episodes. But even in the base case, we have it worked out where we know what we're going to get internationally within the range. We know where the domestic possibilities are. And as a result, before we even greenlight anything, we basically know the range of profitability, which is why I'm able to say, there are a very, very few shows that loses any money, even some that are abject failures.

[Operator]

And we'll go next to Bryan Kraft with Deutsche Bank.

[Bryan Kraft, analyst]

I want to ask you 2 questions. First, some of your peers are producing a fair amount of content to put on other companies' platforms, participate in ad share models whether it's Facebook or Snap or YouTube. As far as I can tell, you focused a lot more on using your content to build your own subscription services and then licensing, of course, to other platforms. What are your thoughts on these third-party platform ad share models? Are they good business models for content creators? And do you plan to do more on that front? And then I had a separate question. If you were to merge with another media company, any media company that has international cable networks, would that international cable network presence be more of a positive or a negative factor in determining your success in launching direct-to-consumer services in international markets? And how would it impact the go-to-market strategy?

[Leslie Moonves, executive]

Bryan, the second question, we're not going to answer, for obvious reasons. The first question is, yes, we do some of those deals with ad sharing. Each deal that we do is very different. There are certain deals on our digital content, digital streaming sites that we do. We do ad sharing where we'll sell some of the ads, they'll sell some of the ads. I think what -- today, content is marked by a no-rules basis. In other words, you can't say you won't do a deal like such and such because you have to be open to virtually any kind of deal that's available with different streaming services, different cable services, et cetera, et cetera, and that's sort of the mantra that we live by in selling our content.

[Operator]

And we'll go next to Steven Cahall with Royal Bank of Canada.

[Steven Cahall, analyst]

A couple for me. Maybe first on the international launches. Like I know in Canada, you had the licensing agreement with Bell. So when we think about this international All Access launches, are you calling back content from those existing licensing deals? Or does All Access just sit next to those and give the customer a couple of different options for content?

[Joseph Ianniello, executive]

Steve, it's Joe. The way we're doing that is in conjunction with the partners. Meaning, they have it exclusive except for All Access. Over time, obviously, we'll revisit that. But for now, what seems to be working best like we did in the U.S. is we just want a little carve-out as we grow our own distribution service. But again -- it's so -- but it's obviously tiny relative to the partners' reach. So we still are providing tremendous value to our partners. So it's a slow and steady kind of rollout, but the opportunity is real and it's big.

[Steven Cahall, analyst]

Got you. And then just as a follow-up. Cable margins are -- were -- kind of defied gravity against the industry for many years, above 40%. We saw them dip down a little bit this quarter. I know the business is very strong, but just -- so that we're setting expectations. Should we expect the margins there to just be a little more modest going forward even if the earnings growth is still quite strong?

[Joseph Ianniello, executive]

Yes, look, we're increasing our investment in content and promotion. And so as we said we premiered 4 shows. It's not only the production cost, but it's also the marketing. So, the margin came in at 38% for the quarter. So anything around the 40% margin in any industry is a pretty darn good margin. So I think again, we're maintaining that. But again, the goal for us is really to invest and grow the subscribers. And if that means we sacrifice half a margin point, we're certainly going to look at that holistically. But I think we've been managing it consistently. And I would, Steve, look at margins on an annual basis. Again, at quarter, sometimes it swings up or down. But over time, I think, if you look at it consistently, it's still a very, very healthy margin business.

[Operator]

And we'll go next to Laura Martin with Needham.

[Laura Martin, analyst]

Les, I want to ask a content question. So in answer to Ben's question, you said you had 65 series in production and on your prepared comments, you said 14, of which 4 were for Netflix. So I'm really interested in, as a content superfan, are the nature of content changing? When you look at what you're doing for cable versus over-the-top, versus your own broadcast network and Showtime, is the nature of content changing? How do you see content differing over these different channels -- different platforms?

[Leslie Moonves, executive]

Yes, it's a very good question. And the one of the things we pride ourselves in is being able to do different times [ and different usual work ] , the nature of content is very different for Showtime and All Access, which is obviously super premium content that costs more and done without any advertising. And then the next level is the CBS Television Network, which is also premium content, but obviously, we do 22 or 24 episodes of that. Once [indiscernible] to demand a bigger audience like The Big Bang Theory is the #1 comedy and NCIS is the #1 drama on television. They need to have a much broader audience than you will find on Showtime or on All Access and then you move to Netflix. We have a variety of different shows depending on their needs, moving further, further on different levels. The CW, obviously, is a different cost structure at a different demographic base. And then you move into our daytime and syndication shows, which we do a lot of game shows, we have the top game shows in Wheel and Jeopardy and we do Entertainment Tonight. We also do soap operas. So as I said, whether it's Ray Donovan or Homeland to The Price Is Right, we do them all well. We do them all well, and we do them for whomever needs them. So we're good salesmen and we're good producers.

[Laura Martin, analyst]

Okay. I thought the most interesting stat I heard, I think, Joe gave it, the -- 1/3 of your subs have chosen the ad-free option for All Access. That shocked me. What I -- my question then is are you thinking about rethinking pricing on all these ad-driven over-the-top services because it sounds like there's a clear consumer niche market that doesn't want ads.

[Joseph Ianniello, executive]

Yes, look, Laura, I mean, that's exactly why we kind of made the point. I mean the point is, we have millions and millions of subscribers. A lot of our revenue is paid through third parties, meaning, advertisers or distributors. But when the consumer is making the choice and electing to pay $10 a month, that speaks volumes. And that gives us a lot of strength when we go into those negotiations because we know the consumer has said knowingly elected to pay that. Not being subsidized by advertising or not being subsidized in a big bundle and a cable package. They chose to do that. And so that certainly gives us a lot of confidence as we head into those -- those revenue negotiations.

[Laura Martin, analyst]

Right. But I'm asking about sports and news. You guys are launching all these ad-driven over-the-top services. Does it make you want to offer an option to not have an ad driven?

[Joseph Ianniello, executive]

Yes, Laura, think about that as a feeder service. What they're doing is we're getting them used to the consumption outside the home and on demand with, kind of, product that's timely for news, or sports or now entertainment news, and that's going to be a subset of All Access. So you like the product, and we're going to upsell you to a paid subscription service. So this is part of getting people used to this form of consumption as we -- as they -- as we sell them up.

[Laura Martin, analyst]

Okay. So it is an on-ramp. I get what you're doing. It's an on-ramp.

[Joseph Ianniello, executive]

On-ramp. There's the better word, Laura. It's an on-ramp. You don't mind if we use that in the future a lot? We'll give you credit. We're on-ramping them to All Access.

[Operator]

And we'll go next to John Hodulik with UBS.

[John Hodulik, analyst]

Maybe first a follow-up to Mike Morris' question on the accelerating subscriber trends. Can you give us a little bit more color on where that acceleration is coming from? Is it the multichannel environment, some sort of combination of traditional and streaming? Or is it the DTC side? And then along with that, the Sling TV is really the only major platform that you guys aren't distributed on. What's the outlook there? Is it something that we can expect at the next renewal cycle? And then one other question, if I may. We've got near-term targets for All Access and Showtime. How should we think of the longer-term, how big that -- the market opportunity is? I mean, is it a question of just continuing to add more content and growing the market that way? And is there any consideration to -- we're expecting obviously, a big DTC launch in '19. So in getting out there and getting share before these other DTC products come to market?

[Joseph Ianniello, executive]

Okay, John, it's Joe. And your subscriber growth number. Obviously, just the law of numbers. The virtual MVPDs are smaller than our OTT stuff. So have this as a percentage. But both areas, the growth is significant. And so I think again, we're seeing that again as folks just are choosing a broadband platform is great and some of them are just saying, "Hey, I just want what I want and I want just CBS." So we're catching them all. So I would say both of those are contributing very nicely. As far as our targets, still obviously, we gave you our target for 2020. We think we're going to beat or meet those. That was before we launched All Access internationally. So obviously, we wouldn't have launched All Access internationally if we didn't see a lot of good data points along the way domestically. And I think we're being prudent on how we roll it out internationally. So look -- we certainly look at [indiscernible] subscribers every quarter that they report, and we see what the opportunity is. And based on the strength and depth of our content, we feel we're in the very early innings of this growth story.

[Leslie Moonves, executive]

And regarding Sling TV. Regarding Sling, I imagine that the next negotiation, we will probably be on that platform. You never know. It's always part of a negotiation. We're not on now, but we probably expect to be.

[Operator]

We'll go to Marci Ryvicker with Wells Fargo.

[Marci Ryvicker, analyst]

Speaking of Netflix, I know that you are producing original content. But how much of your library content is still on Netflix now? Has that gone down over time? And then the second question is, Joe, you mentioned local media looking to be up low- to mid-single digits. So it feels like it's acceleration from Q1 to Q2. Is that from retrans? political? Or are you actually seeing a stronger underlying ad environment at the local stations?

[Joseph Ianniello, executive]

Okay, Marci, I'll take the second one first. The low- to mid-single digits. Yes, look, it's certainly political. It's helping that and retrans, I would call the local ad market as steady. Clearly, in the first quarter, we comped against the Olympics. So we're seeing that steady in the back half of the year is going to, obviously, be driven by political and again as well as retrans. So that's really going to be the story for local. And as far as Netflix look, Netflix is still, as Les mentioned in his prepared remarks, Criminal Minds and NCIS is still the top 10 show viewed on Netflix. So they're still very interested in our library. And so we continue to have an ongoing relationship with them selling them shows as they come available.

[Adam Townsend, executive]

Great. Thank you, Marci. And thank you, everyone, for joining us this evening. Have a good night.

[Operator]

And that concludes our conference for today. Thank you for your participation. You may now disconnect.