Viacom Inc. (VIAB) Q3 2018 Earnings Conference Call Transcript

Viacom Inc. (VIAB)
Q3 2018 Earnings Conference Call
Aug. 9, 2018, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Viacom Q3 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. If you would like ask a question during this time, simply press "*1" on your telephone keypad. Thank you. I will now turn the conference over to the presenters.

James Bombassei -- Senior Vice President of Investor Relations and Treasurer

Good morning, everyone. Thank you for taking the time to join us for our June quarter earnings call. Joining me for today's discussion are Bob Bakish, our President and CEO, and Wade Davis, our Chief Financial Officer.

Please note that, in addition to our press release, we have slides and trending schedules containing supplemental information available on our website. I want to refer you to Page No. 2 in the web presentation and 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.

Today's remarks will focus on adjusted results. Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website.

And now I'll turn the call over to Bob.

Robert Bakish -- President and Chief Executive Officer

Thanks, Jim, and good morning, everyone. Thank you so much for joining us. I'm pleased to update you on our progress to grow Viacom and position it for the future. When you look at what we achieved in Q3 and our momentum in Q4, I think you will clearly see that the Viacom turnaround is delivering demonstrable and measurable results. And you will also see how quickly we are evolving to be much more than a U.S. pay TV network company. In fact, through this combination of turnaround and evolution, we're setting Viacom up for success as a truly multiplatform, global, brand and IP-driven entertainment company.

Before we take you through a whole set of facts supporting this statement, let me first touch on some high-level financials. Q3 represents our second consecutive quarter of adjusted diluted EPS growth and, year-to-date, adjusted diluted EPS is up 4%. Underlying that, we are reporting compelling improvements in domestic affiliate sales and worldwide ancillary revenues and strong profitability improvement at Paramount. Looking to the September quarter, we now project strong adjusted OI growth and double digit growth in EPS.

Wade will take you through the numbers in detail, but before he does, let's focus on our operations, where we've continued to execute on both the turnaround and the evolution of this company. As I speak to this, I'd encourage you to refer to our earnings presentation on our website, which tracks the discussion.

I'll start with four key areas that were clearly challenged when this management team took over. Notably, U.S. distribution, the audience performance of our networks, the trajectory of U.S. ad sales, and the state of Paramount Pictures. And in each, I'll highlight just how dramatically the picture has changed for the better.

First, our domestic affiliate business, a critical area that was considered a significant uncertainty 18 months ago but now is a key turnaround story. By rebuilding and expanding our relationships with distribution partners, we closed major renewals, secured incremental carriage, and broadened the scope of our partnerships to include advanced advertising and coproduction deal. At the same time, we laid the groundwork for new areas of growth, including most recently securing carriage in the AT&T Watch entertainment-only mobile bundle. We also participated in a funding round that ensures Philo, an entertainment-only OTT skinny bundle, has the resources to drive its next leg of growth.

Importantly, we also see improvement in Viacom pay TV subscriber trends, with our sub-declines now moderating to the mid-1% range. This, driven by the full return of Viacom networks to Charter and Suddenlink systems and continued vMVPD growth. All of these efforts delivered sequential domestic affiliate revenue improvement throughout fiscal '18, including in Q3, and we now anticipate domestic affiliate revenue growth of 1% in Q4, compelling evidence of just how far our turnaround has come in this critical area.

The second area of turnaround is viewership on our domestic media networks. Here we have another strong story of continued improvement. In fact, Viacom flagship brands have now produced five straight quarters of year-over-year share growth, with particular strength at MTV, BET, and Comedy Central.

Eighteen months ago, MTV was deemed by many to be a network in decline and at risk of becoming culturally irrelevant. Well, times have changed. If you haven't been following this turnaround closely, here are a few key facts. Since last summer, the network has had four consecutive quarters of year-over-year primetime ratings growth, its best streak in seven years, while dramatically increasing its digital consumption.

In fact, in Q3, MTV is the fastest growing network in prime across cable and broadcast in its 18-34 target demo. And in 2018, it has launched five of the Top 10 unscripted cable series, with a mix of franchise IP, like Jersey Shore, international IP, like Ex on the Beach, and new IP, like Siesta Key and Floribama Shore. Add VH1 and we have nine out of the top 10 unscripted series on cable this year and it's the top nine, all while reducing cost by an average of 30% per episode. As you can see, there is depth and breadth to their success and, based on the slate that's coming for 2019, the team is truly just getting started.

BET also continues to deliver. Cable's No. 1 destination for Black entertainment and culture has now grown share and ratings by double digits year-over-year in three of the four quarters, including this last one, its highest rated Q3 since 2014.

And at Comedy Central, here, too, the story is strong. Q3 saw the network's largest year-over-year primetime ratings increases since fiscal '14. And Comedy just closed out an even bigger July, growing double digits in both total day and primetime, driven by continued gains among women 18-49, a key component of its go-forward strategy to broaden the network.

And we're building on strength outside the U.S., too, where our International Networks business continues to perform and is expected to deliver a record earnings year. In particular, we've had success programming our largest free-to-air broadcast networks overseas: Telefe in Argentina and Channel 5 in the UK. For example, in Argentina, we're the No. 1 broadcast network, which has four hit shows that have an audience share of over 45%.

That said, we do have ratings softness at Nickelodeon and Paramount Network in the U.S. that has slowed our return to growth in domestic ad revenue. But we've made a series of changes, including with Nick management, and put strategies in place to address those challenges and the early signs are encouraging.

At Nick, we are in the late stages of a thorough search for new permanent leadership but we have not been waiting to act. Our interim management team has been aggressively implementing change, while simultaneously working on a new go-forward plan, and their work is already starting to produce results. In fact, Nickelodeon has reduced its ratings declines so far in the fourth quarter, with ratings improving from minus 20+ to minus 12 and minus 2 over the last two weeks. And Nick recently delivered its highest total day weekly rating in over six months. This is a function of a series of scheduling changes, as well as new programming, like Double Dare, which debuted as the most viewed kids series this year.

As for Paramount Network, its growth will come as its programming slate builds. And the good news is our originals are working. The channel's most recent scripted series, Yellowstone, delivered on our very high expectations, with the latest episode delivering the highest live plus three waiting on people 18-49 to date. The show is averaging nearly 4.4 million viewers in live plus three and is now the year's most watched scripted series on cable after The Walking Dead.

Moving to ad sales, as I mentioned, some ratings softness prevented sequential improvement in the quarter. But, very importantly, in Q3, we continued to set the foundation for growing and evolving this area of our business. The stabilization in Nick's ratings that we have recently seen will benefit ad sales. But the bigger point is the strength of the upfront. We drove our strongest upfront pricing in five years, with mid- to high single digit growth across all our cable networks, reflecting the improved strength of our brands and greater share of viewership across our portfolio.

Beyond linear pricing, the upfront also reflected the power and demand for our Advanced Marketing Solutions portfolio. As a reminder, AMS includes our branded content, advanced advertising, and experiential offerings. In Q3, our AMS portfolio delivered revenue growth of 33% year-over-year. As a result of our continued progress, we remain on track to deliver AMS revenue of approximately $300 million in the full year, setting up a return to overall ad sales growth in 2019.

Lastly, on AMS, I'm pleased to announce that Fox has agreed to license the powerful data science platform behind Viacom Vantage, our ad targeting product. Fox will be the first media partner to use the Vantage engine to power its linear optimization service across its networks. This is a powerful validation of our leadership in the space. As we work to secure additional licensing partnerships with publishers, we're excited by the potential of this new business to accelerate the ecosystem and evolve into an incremental revenue stream.

Fourth in the turnaround story is Paramount Pictures, another area which, much like MTV, many had written off but where we're now seeing a very different picture. The resurgence of Paramount is evident in its continuing box office success, thriving TV production business, and now six straight quarters of OI improvement. As a reminder, our theatrical release strategy is two-fold: make targeted films for somebody or broad films for everybody, with price points to match.

That strategy is paying off, as illustrated by our three most recent hits. Our more targeted releases of A Quiet Place and Book Club together saw a domestic box office of over $250 million at a combined production and acquisition cost of $30 million. The pair clearly demonstrates the strength in the new management team, their ability to make and market great movies, and to creatively and efficiently manage distribution and costs. Of course, the latest broad hit is Mission Impossible: Fallout, which had the most successful opening of the franchise and is a global blockbuster by every measure. Coming out of the second weekend of its run, the film has generated already just short of $330 million at the global box office, with many key markets, including China, still to come.

And we're very excited about the pipeline. Up next this fall is Nobody's Fool, starring Tiffany Haddish. This is Tyler Perry's first feature for BET and Paramount Players under our cross-house deal. In all, Paramount's fiscal 2019 slate will nearly double the number of worldwide theatrical releases compared to 2018 and, consistent with the flagship strategy we unveiled last year, it includes at least five films from Paramount Players that will bring our TV brands to life on the big screen.

And speaking of TV, Paramount TV continues its great run. In just a few years, Paramount TV has grown revenues from $0.00 to more than $400 million expected in fiscal 2018. While we recently have made a management change, we have a strong senior team and a deep bench in place to continue our momentum. With season renewals ordered for hits like 13 Reasons Why and The Alienist and the upcoming Jack Ryan series even before it airs, along with an increasing number of new show pickups, like Catch-22 for Hulu and Maniac for Netflix, this business will grow substantially in 2019. Step back and I think you can see the Paramount turnaround is firing on all cylinders. And know that, as in Q3, the business is expected to be profitable in Q4 and that Paramount is on track to deliver well over $200 million in OI improvement for the full year.

But in today's media marketplace, a turnaround is not enough. Viacom must also evolve to access new opportunities and new revenue streams. This is at the core of our strategy. And here, too, we are seeing signs of success. To that end, let me take you through three really exciting opportunity areas that we are in the early stages of unlocking.

First, digital. This is really a multifaceted area, which starts with the hard work at Viacom Digital Studios. Viacom's total digital video streams have grown sequentially every quarter and are now at 7 billion across O&O and social platforms. This is three times what they were in Q3 of 2016. By the way, we also delivered a 104% increase in watch time year-over-year in the quarter.

And all of this is before we see the full impact of an additional 600 hours of new original digital content we've already commissioned and before the impact of the recent acquisition of Awesomeness, a leading digital-first destination for original programming, serving global Gen Z audiences. This acquisition enhances our footprint across leading digital and social platforms and complements our studio production efforts, a growing area of opportunity we're focused that I'll talk more about in a moment. All of this digital activity is key to feeding our audience consumption and Advanced Marketing Solutions offerings.

At the same time, we continue to make progress establishing our presence on next-generation distribution platforms. Beyond the domestic affiliate area, we continue to expand our footprint internationally through partnerships with OTT and mobile providers. Just last month, for example, we completed a deal that will bring Nick Japan and Japan's MTV Mix onto Amazon Prime video channels, a platform that allows our international content to reach incremental audiences in Japan. We also expect to close two additional deals with mobile carriers in Europe which will be announced shortly. And we continue to talk to U.S. mobile providers about a range of opportunities.

On the direct-to-consumer front, we're taking a multidimensional approach to ensure that we're making the most out of our assets and capabilities and to quickly capture opportunities in the evolving ecosystem. The first is through a move toward launching a new D2C platform which we referenced previously. At the same time, we're pursuing a B2B2C strategy, creating targeted D2C products that are also distributed through our partners. Nickelodeon's Noggin is a great example. Since its launch on Amazon in May, we've seen rapid subscriber growth for the preschool programming product, demonstrating the continued consumer demand for our category-defining brands and content.

The last element of our D2C strategy is our cross-portfolio Viacom studio production initiative. This significantly expanded global episodic content production business is the second opportunity area I want to highlight. To be clear, this isn't about the wholesale licensing of our library product to SVOD players. This is about new first-run content for SVOD platforms and other third parties. 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 a studio production into a billion dollar business by 2020. That's why we've now established studio production units at Nickelodeon, MTV, and Viacom International Media networks. Comedy Central and BET will be launching shortly.

The mandate for these entities is to create new original content for third-party customers, levering existing and new IP, and it is already beginning to happen. In June, we announced that Nickelodeon is licensing the animated series Pinky Malinky to Netflix in a multiyear deal for 59 new episodes. At the same time, MTV Studios will capitalize on one of the TV industry's largest libraries of youth-focused and music-related IP in the world that, up until now, has been largely untapped.

But it's not just in the U.S. Launched in May, Viacom International Studios unites the extensive production capabilities of Telefe and our comedy brand Porta dos Fundos in Brazil with Viacom's Latin American brands and production capabilities. This creates a multilingual machine that accelerates our positioning as a leading global content creator and distributor of Spanish and Portuguese language content in the U.S., Latin America, and beyond. Here, we have already entered into deals with Netflix, Amazon, Telemundo, and Fox, among others, with a long list of prospects at various stages of development in the pipeline.

As we evolve our business, events and experiential are a third area of focus. We know our brands connect with consumers in the live space and we've seen that there is a business there. Millions of people around the world attended a total of 65 Viacom events in the first three quarters of 2018. In June alone, we held Viacom's first VidCon and Nickelodeon's first Slime Fest in the U.S., another huge BET experience, our second annual Comedy Central Clusterfest. And outside the U.S., we had a range of events, including our 16th Isle of MTV in Malta. In the quarter, events activity was a major driver of our double digit growth in ancillary revenues. And we're very excited about the partnership Bellator formed with streaming service DAZN in the quarter. The multiyear, nine-figure distribution deal will bring 20% more live bouts to global audiences in 2019, more than doubling Bellator revenue and making it profitable.

With that, let me hand it off to Wade for a deeper discussion on how our financial results underscore our turnaround efforts and our continued progress moving forward.

Wade Davis -- Executive Vice President and Chief Financial Officer

Thanks, Bob. As Bob mentioned, our progress in the June quarter translated to improvements in a number of key areas, including adjusted EPS, domestic affiliate revenue, Advanced Marketing Solutions revenue, Paramount profitability, and our credit outlook. In aggregate, this translated to a strong third quarter and sets us up for an even stronger quarter in September.

Now moving to the segment results, I'll start with Paramount, which is on Slide 13 of our earnings presentation. The new management team is delivering on its turnaround and has made progress, including significantly improving profitability in the quarter. For the quarter, the studio generated adjusted operating profit of $44 million, which was up $35 million year-over-year. The improvement was driven by the performance of A Quiet Place and Book Club as compared to the prior year releases, as well as the strength of the TV production business.

Filmed entertainment total revenues declined 9% compared to last year, driven by the comparison to last year's theatrical release of Transformers: The Last Knight and fewer home entertainment titles released in the quarter. The decline was partially offset by licensing revenues, which was up a strong 35%, driven by the continued success of the TV production business. Given the success of Mission Impossible: Fallout, which was released on July 27, we expect September quarter to be the third consecutive quarter of profitability for Paramount. Year-to-date, filmed entertainment adjusted operating income has improved by $160 million versus the prior year and is on track to deliver well over $200 million of improvement for the full year.

Now turning to Media Networks on Slide 14. In the quarter, we saw continued sequential improvement in domestic affiliate revenue, strong growth in AMS revenue and in our adjacent businesses, including CP, Wreck, and Live. Worldwide Media Networks revenue for the quarter were down 2% to $2.5 billion, driven by the declines in domestic advertising and worldwide SVOD licenses. This decline was partially offset by the growth in worldwide ancillary revenues and worldwide linear affiliate revenues.

Adjusted operating income declined 8%, driven by the decrease in revenue, investments in original programming, and cost-related to growth initiatives, which were partially offset by the benefits from our cost transformation.

Domestic advertising revenues declined 3%, which was flat sequentially, due to lower linear impression, partially offset by higher pricing and strong growth in our AMS business. AMS continues to be a source of strength for us and it is an increasingly important part of our business, with revenue up 33% in the quarter. We're on track to deliver AMS revenues of approximately $300 million as previously guided and we anticipate continued momentum in AMS in fiscal 2019.

As Bob mentioned, we're seeing lower linear impressions driven by Nick and Paramount Network ratings. As a result, for the September quarter, we anticipate domestic ad sales growth similar to the June quarter. However, we're optimistic for a return to growth in 2019, given our strong upfront, continued strong scatter pricing, our momentum in AMS, and the actions that we're taking at Nick which are showing early signs of improvement.

Now moving to domestic affiliate revenue. The 3% year-over-year decrease in revenue was ahead of our guidance and a 100 basis point sequential improvement from the prior quarter. The sequential improvement in the quarter reflects the lapping of rate resets from the prior year, improving subtrends, including the reinstated carriage at Charter, continued strong vMVPD growth, as well as contractual rate increases. Excluding library licensing to SVOD, linear revenue year-over-year was flat for the first time in five quarters, which is a strong reflection of our distribution strategy delivering results.

Looking forward to the fourth quarter, we now expect to deliver better performance than previously guided, with domestic affiliate revenue returning to growth, driven by the lapping of rate resets, as well as the benefit from our reinstated carriage on Charter and Suddenlink. For fiscal 2019, we continue to expect growth in domestic affiliate revenues, helped by rate escalators, sustained vMVPD growth, including the launch of new vMVPD services from traditional distributors, and revenue from mobile.

Now turning to International Media Networks on Slide 15, revenue was negatively impacted by foreign exchange headwinds, particularly in Argentina, and the timing of SVOD licensing. International affiliate revenues decreased 2%, driven by the timing of SVOD revenue which is now expected to benefit the September quarter. For the full year, we continue to expect double digit growth in international affiliate revenue. International advertising revenues declined 4%, driven by a 5 percentage point unfavorable impact from foreign exchange. Argentina's peso devalued by 45% in the quarter, weighing on Telefe's reported results. Excluding foreign exchange, Telefe's advertising revenue grew 25%.

On an organic basis, international ad sales were up 1%, which was comparable to the March quarter. Organic results were impacted by softness in rating share in the UK. For the September quarter, given continued negative currency impacts, we expect reported international advertising growth to be similar to the June quarter. From a bottom line perspective, our costs are largely naturally hedged, so we continue to expect a record year for international profitability.

As we look to 2019, we anticipate continued growth in International Media Networks across all lines of business. We also see our rapidly growing global studio production initiative benefiting from a cost perspective given the currency devaluation in Argentina.

Finally, we continue to make progress diversifying our business into adjacent revenue streams. This is reflected in our worldwide ancillary revenues, which were up 17% in the quarter, with domestic revenues up 31% and international revenues up 2%. The growth in worldwide ancillary revenue was driven by growth in live events and consumer products revenues.

Turning to Media Networks expenses, we continue to invest in our content and growth initiatives while transforming our cost base to drive efficiencies in SG&A. In the June quarter, programming expense increased 2%, reflecting our continued investment in original programming. Distribution and other expenses grew 6%, primarily driven by costs related to our growth initiatives. SG&A decreased by 2% in the quarter and included a 3 percentage point benefit related to the savings from our cost transformation.

For the full year, we now expect programming expense to be flat versus the prior year, as we invest in original programming at our flagship networks while benefiting from the mix shift to unscripted programming and leveraging our content globally. In terms of our cost base reinvention, we are on track with fiscal year 2018 savings of over $100 million and continue to expect to achieve more than $300 million in run rate savings in 2019 and beyond and for these savings to largely drop to the bottom line.

As previously guided, we took a $15 million charge in the quarter and anticipate taking a charge of approximately $20 million in the fourth quarter, principally related to third-party professional fees.

Turning to taxes and free cash flow, the year-to-date adjusted effective tax rate was 24% as we continue to benefit from the new tax legislation. For the full year, we now expect an adjusted effective tax rate of 24%, which compares to 30% last year.

Turning to cash flow, the components of which are broken out on Slide 16 of the earnings presentation. Year-to-date, we generated $895 million of operating free cash flow, which is up from $548 million in the prior year. The increase was driven by lower cash taxes related to domestic tax reform and lower cash interest due to our de-levering actions. As Bob mentioned, Paramount's 2019 slate will nearly double the number of releases as compared to the 2018 slate. This working capital impact is largely being incurred this year. Despite this, we anticipate free cash flow in fiscal 2018 in line with last year.

Turning to the balance sheet, as we've said since we took over, one of our key initiatives has been to de-lever and strengthen our balance sheet. We took swift and deliberate actions over the past 18 months from both an operational and financial perspective to achieve that objective, including the reduction of our gross debt by approximately $3 billion. And in early July, S&P reaffirmed our investment grade status and removed us from negative credit watch, recognizing our operating progress and the steps we took to de-lever.

In terms of debt, at quarter-end, we had $10.1 billion total debt outstanding and cash of $929 million. Our debt was principally fixed rate, with a weighted average cost of just under 5%. If you take into consideration the equity credit we received from S&P and Fitch on our hybrid securities, our adjusted gross debt at quarter-end was $9.4 billion. We plan to continue to pursue opportunities to de-lever, including using our excess free cash flow to redeem debt.

Turning to our consolidated results on Slide 17, while total revenues and adjusted operating income declined in the quarter, the composition of the underlying drivers provides a window into why we're optimistic about our future growth. In Media Networks, AMS continues to deliver strong double digit growth and is becoming a more meaningful contributor to overall domestic ad sales. Our domestic affiliate revenue trajectory has improved in the past two quarters and will now return to growth in the September quarter, marking the first time since the June quarter of 2017. And on the cost side, we're managing SG&A lower as we drive operational efficiency throughout the organization, while focusing our investments on original content and other growth initiatives that will drive future top and bottom line results.

On the studio side, while the decline in international theatrical revenues and worldwide home video revenues reduced overall revenue performance in the quarter, this was due to the mix and number of titles in release. While revenues were lower year-over-year, our current quarter releases were more profitable than the prior year's releases, which is indicative of the types of films that the new management team is developing: films aimed at either a broad or targeted audience but with a financial profile to match. And in a short period of time, Paramount TV has become a meaningful contributor to top and bottom line. We expect to continue to realize the benefits of this momentum in 2019, as we make progress toward our goal of returning the studio to historical levels of full-year profitability.

So we're extremely optimistic as we look ahead. The financial impact of the turnaround will be more significant in the September quarter, as we anticipate year-over-year growth in total company revenue, adjusted operating income, and mid- to high teens growth in adjusted diluted EPS.

With that, I'd like to turn it back over to Bob to wrap up.

Robert Bakish -- President and Chief Executive Officer

Thanks, Wade. So, to recap, seven quarters in, we've stabilized and turned around four critical parts of the business that were under serious pressure 18 months ago: our domestic affiliate business, audience viewership, our path to domestic ad sales growth, and, of course, Paramount Pictures. As we executed on all this, we strengthened our financial position, where operating and financial momentum has improved our credit profile.

But it's just the beginning. Viacom is a story of a company broadening its participation in the media landscape. We see that in the growth of our digital footprint, in the early success of our expanded studio production business, and in our growing live events and adjacent businesses. Taken together, we delivered EPS growth in the quarter and are on track to deliver accelerated EPS growth in Q4.

So it is an exciting time at Viacom and we remain focused on accelerating this momentum as we close out the year and grow the company for the future. Thank you for joining us today and now we look forward to taking your questions.

Questions and Answers:

Operator

At this time, if you would like to ask a question, please press "*1" on your telephone keypad. Again, to ask a question, that's "*1".

And our first question comes from the line of Alexia Quadrani with JP Morgan.

Alexia Quadrani -- JP Morgan -- Analyst

Hi, thank you. Just a couple questions. When you think about the success that you had in the upfront, in terms of the domestic advertising outlook, I guess when should we see sort of notable improvement? I think you suggested better growth in 2019. I'm just wondering how much, if at all, you have made goods from Nick or Paramount that may offset some of that strong pricing gains that you've gotten.

And my second question is to sort of follow-up on Wade's comments about the positive affiliate growth in fiscal Q4. Any SVOD sales in there or is that sort of 1% growth kind of a good run rate when we look further out?

Robert Bakish -- President and Chief Executive Officer

Yeah, Alexia, so let's start with your question on the upfront. Let me start by reiterating that we're very happy with this upfront. Look, as I said in our last call, our strategy was to use scarcity to drive aggressive pricing and packaging, including AMS, and that's exactly what we did. We drove the strongest price increases in five years, with, as we said, CPM growth in the mid- to high single digits. And, look, this is critically important to setting us up for growth in a supply constrained world. And this pricing is more than offsetting the current rate of universe declines. And if I compare that to our upfront last year, that was not the case.

On volume, we were down low single digits, but this was by design. We aggressively tiered our lower paying business because we wanted to ensure we have inventory to monetize and scatter. The scarcity we're seeing will create a seller's market and scatter premiums will elevate the already strong upfront pricing. Importantly, we also saw excellent demand for our AMS portfolio. That allowed for effective packaging with other kinds of inventory. And it's part of our growing position as solution providers. So all this is a really excellent foundation for ad sales growth as we transition to fiscal '19.

And the last thing I would say, because you talked about Nick specifically in the upfront, importantly, we talk about mid- to high single digit CPM growth across all the networks. But if you look at Nickelodeon in particular in the hard nine, which is where the bulk of the money is, there we had strong double digit CPM increases. So very well-positioned to monetize Nickelodeon, particularly as we start to see these early signs of a ratings rebound.

And then, finally, related to that, your questions of ADUs. We'll be well-positioned to burn any accumulation off. So feel good about this upfront as a critical step in our transition.

Wade, you want to take the affiliate one?

Wade Davis -- Executive Vice President and Chief Financial Officer

Actually, just on the ADU point, Alexia, just a little bit more specifics there. So, in the aggregate, our ADUs are actually down significantly. Nick was the only place that we incurred any sort of growth in ADUs and even that was only up less than $10 million.

With respect to affiliate, can you repeat your question, Alexia?

Alexia Quadrani -- JP Morgan -- Analyst

The question was just on your guide for the 1% domestic affiliate growth in the fiscal fourth quarter, is that a good run rate going forward longer term or is there some SVOD sales or some other sales that are bumping up that number for Q4?

Wade Davis -- Executive Vice President and Chief Financial Officer

Well, SVOD, as we said, was a headwind for us in this quarter, both domestically and internationally. When you think about the guide and the return to growth, we're not yet going to provide any details with respect to '19 overall other than to say that we're confident in overall affiliate growth for the full year. We are returning to a place where pricing, contractual pricing increases are more than offsetting subscriber declines. The benefit from Charter and Suddenlink reinstatement came online in this quarter and is also going to impact, to a lesser extent, next quarter. We're continuing to see strong virtual MVPD contribution, both from a volume and pricing standpoint. And then obviously in the virtual MVPD line, that's a good contributor to our AMS business, as much of the virtual MVPD subscribers carry addressable units with them for us. And so that's contributing to the addressable AMS inventory volume. So we're confident about continued growth in domestic affiliate going into 2019.

Alexia Quadrani -- JP Morgan -- Analyst

Great. Thank you very much.

Operator

Our next question comes from the line of Ben Swinburne with Morgan Stanley.

Benjamin Swinburne -- Morgan Stanley -- Analyst

Thanks. Good morning. One for Bob and one for Wade. Bob, you talked about a goal of a $1 billion TV production. I just want to confirm, is that across Paramount and the Media Networks? Is that the 2020 target? And maybe you could just help us think about sort of the strategy around that and how you think through your confidence level in reaching those type growth rates over the next couple of years.

And then, Wade, I think you're saying mid- to high teens adjusted EPS growth for '19. I just wanted to understand. What are you assuming for U.S. advertising growth at Media Nets underpinning that assumption? Just understanding sort of the strong upfront against some of the ratings trajectory issues.

Robert Bakish -- President and Chief Executive Officer

Sure, Ben. So on the studio side, the $1 billion 2020 number is Viacom, so that's Media Networks plus Paramount and that's global. And the studio initiative is really driven by a confluence of things. First, the large and growing demand from third parties for quality episodic content worldwide, Viacom's ownership of broad and deep libraries of IP -- now, that's stuff both we've developed and stuff that we have stating in the libraries waiting to be developed -- combined with our strong capabilities in content creation. It's about a deal flow that we currently have with respect to talent and ideas that's larger than our owned and operated networks can accommodate. And it's about this increasing opportunity to extend brand reach beyond pay TV, which is serving more consumers and growing awareness to drive other elements of the flagship strategy.

Again, this initiative is about creating new first-run content. It's not about the wholesale licensing of library product to third parties. We are taking a page from the Paramount TV playbook, which is mine the library for IP, leverage talent relationships in the ecosystem, use a cost-plus model, not deficit financing. We view it as a way to extend the brands to other platforms and generate incremental revenues. These shows, in addition to being a business on their own right, can serve as promotion for our brands. Because, by far, the fullest experience of our brands will continue to be in the pay TV space. So we're convinced this is a great opportunity here. Again, it's global. You heard me talk about international in my remarks. And we're convinced it's incremental.

Benjamin Swinburne -- Morgan Stanley -- Analyst

So you see this, just to follow up obviously, as really additive to the engagement trends across your kind of core business rather than something that you may be making trade-offs around monetizing on or off platform?

Robert Bakish -- President and Chief Executive Officer

We see it as definitely incremental.

Benjamin Swinburne -- Morgan Stanley -- Analyst

Yeah. Thank you.

Wade Davis -- Executive Vice President and Chief Financial Officer

So, Ben, with respect to your question around high teens growth in Q4 and, in particular, ad sales guide on domestic, so first of all, we're very proud of the accelerating EPS growth. It's actually driven by pretty much factors across our entire business in all geographies. Domestic ad sales though, as we said in our prepared remarks, are going to be sequentially flat with Q3. Our biggest issue there is supply constraints. As you saw in Q3, our actual revenue numbers significantly overindexed the decline in supply. That's a dynamic that's going to continue and really is reflective of ad sales firing on all cylinders despite the supply constraints. And that performance, we're going to take into 2019, and we're highly confident that 2019, on a full-year basis, is going to grow. Bob talked about the dynamics in the upfront, where our pricing gains are now offsetting the current universe estimate declines.

And then AMS. AMS is now at a position where, given that we're on track for $300 million of revenue in Q4, it is really material. And that business is going to continue to grow into 2019, continuing its growth rates in the 30% to 40% range. And given the fact that it's now at that level of materiality and contributing that level of growth, it's really changing the dynamics of our domestic ad sales business.

Benjamin Swinburne -- Morgan Stanley -- Analyst

Thank you for the clarification.

Operator

Our next question comes from the line of John Janedis with Jefferies.

John Janedis -- Jefferies -- Analyst

Can you give us a little bit more color on the international business? There had been a focus on adding channels. Will that continue to slow the growth? And Telefe, are you set up for margin expansion on top of the revenue growth? And can you also give us an update on India? And then separately, Bob, how are you feeling about the rollout and opportunity for the entertainment pack? Just looking for an update there. Thanks.

Robert Bakish -- President and Chief Executive Officer

Sure. So on international, we did see it slow down a little this quarter but that was overwhelmingly driven by currency and, on the distribution side, some SVOD timing. Before I peel it apart, very important to note we continue to expect a record year for international revenue and profitability and we anticipate international continuing to be a growth engine for 2019 and beyond.

So, with respect to Argentina, we have a free-to-air broadcaster down there. The 45% peso devaluation was a material headwind. But important to note, organically, the business performing very well. We continue to be No. 1 on audience share. Ad sales were up 25% on a constant currency basis. And we're in the very early stages of developing a retransmission consent-driven affiliate revenue stream, enabled by some regulatory change down there. And I mentioned the studio production initiative. A big hub for it is Argentina. And so now we're looking at what else we can move into there to really even get more benefit given the cost economics down there. So Argentina, again, the peso was a bit of an issue but we're very happy, in general, with what we see as we step back.

You asked about India. As you know, Viacom18 is an unconsolidated joint venture that we have with Reliance where we're at 49%, they're at 51%. That business continues to perform and, in fact, continuing to expand in both the regional space -- India is kind of like Europe, multiple cultures and languages in there -- and the national space, i.e., the Hindi space. And its Voot product, which is its ad-supported AVOD platform, continues to perform and ramp and will continue to benefit, and probably increasingly benefit, from our partners ownership of Geo.

Wade Davis -- Executive Vice President and Chief Financial Officer

I'd just like to add a couple things on India. As you know, we did a transaction with our partner in which we sold them 1% and that created movement from the 50/50 to the 49/51 that Bob referenced. So just a couple things on that. First, it's important to remind everybody that that transaction, even though it was for a small percentage, occurred at a multibillion dollar value. And that's something we tend to be somewhat frustrated it doesn't really show up in the value of the overall company. And then, secondly, I'd just like to point out that, notwithstanding the value that that placed on the business, the real motivation for that transaction was to more closely align the operational incentives of our Viacom18 business with Reliance, who has really transformed the broadband telecommunication infrastructure in India. And since they have taken more direct operational control of that business, they have charted a very clear, definitive, and aggressive path to take Viacom18 to the No. 1 media business in India.

James Bombassei -- Senior Vice President of Investor Relations and Treasurer

Operator, we'll take our next question.

Operator

Yes, sir. Our next question comes from the line of Rich Greenfield with BTIG.

Richard Greenfield -- BTIG -- Analyst

A couple of questions. The first, just I think, Bob, if I heard you right, and I might need my hearing checked, but I think you said that you're going to license your advanced advertising data to Fox. I'd love to have just any idea of the size of that, in terms of revenue to Viacom, or how to think about that. But, more importantly, I think the advanced advertising business from Fox is actually being sold to Disney. So does that mean effectively within the next 6-9 months that Disney will be licensing data from Viacom for targeting advertising?

And then, two, a bigger picture question for you and Wade. You're doing well over $3.00 in earnings through the nine months. It looks like you're heading to well over $4.00 for the fiscal year. Calendar year will be higher. That's with Paramount losing money. I know it's a long-winded question, but with your stock under $29.00, is there any reason for Viacom to be a public company? I mean, why don't you and National Amusements find a third party and find a way to go private because it seems like there's a growing disconnect between the company's earnings power and the stock price? And just wonder how you think about the importance of being public.

Robert Bakish -- President and Chief Executive Officer

Sure, Rich. So let's do it in reverse order. So, on the Viacom question, look, we think there's a clear and demonstrable fact set that this company is making material progress in a whole set of areas and we summarized that in our remarks regarding Q3 and what we're seeing in Q4. At the same time, we totally agree that the company is currently undervalued by the public marketplace. But we're not going to comment on any specific M&A related to Viacom. We're focused on operating the company and, again, continuing to move the ball down the field. Any M&A, including of the form you're talking about, is really a Board question.

Wade Davis -- Executive Vice President and Chief Financial Officer

Yeah, why don't I take the Vantage question? So I'll have to take it a little bit in reverse order. So, first, on the Disney point, which is just a little bit of a detail, our deal does specifically contemplate that transition but the important thing to note is that we're not actually licensing data. This is a technology license. So we're licensing our Vantage targeting engine, which is software, and then there's a set of managed services agreements that relate to the ongoing operation of the customer segment creation and posting.

This is a really key development for our AMS business and this comes out of the significant investment that we started making in 2015 in the advanced TV business. And then ultimately the evolution and creation of the Open A.P. partnership, which we, in partnership with Fox and Turner, brought to life last year. And it's important to note that Open A.P. continues to evolve significantly. So even though we launched it only between us, Fox, and Turner in 2017, it now has grown to include NBCU and Univision, with just the current members representing well over 50% of the GRP delivery in the U.S.

Fox is going to be the first publisher to license the Vantage targeting engine, which we're really excited about. The structure of that deal, as I said, it's a software license and a managed services agreement. There's an upfront license fee associated with the initial tech and implementation. And then there's a variable part of that that allows us to participate in the upside. And then it is also important that this is a new line item in our AMS business and a significant opportunity for us to partner with other publishers on this and we're in late-stage discussions with a number of other publishers and we're really excited about the possibility and upside for this business in 2019.

Richard Greenfield -- BTIG -- Analyst

Thanks.

Operator

Our next question comes from the line of Doug Mitchelson with Credit Suisse.

Douglas Mitchelson -- Credit Suisse -- Analyst

Thanks very much. I guess, for Bob and Wade, a couple questions. The first phase of the turnaround for ratings at your networks was done pretty cost-effectively. I think you've talked about the switch from scripted to unscripted. As you look forward to maintain the momentum and progress at MTV and others and revitalize Nick and invest in the digital studio, what's the right outlook for sort of programming cost growth? And a second question. You've talked about TV production quite a bit and how it's growing substantially. If you haven't said it, where would you expect margins to shake out at that TV production business once it's fully scaled for Paramount? Thanks.

Robert Bakish -- President and Chief Executive Officer

Yeah. So on the production business, that is a double digit margin business. And we would fully anticipate getting there pretty quickly. Again, we are not doing this in a kind of deficit financing model. We're doing this in a cost-plus model, which has a bunch of appeals certainly from a capital standpoint and has pretty predictable margin characteristics.

As far as the Media Networks programming side, we've been very focused on -- as part of the flagship strategy, that was clearly about prioritization and making sure that we were spending our money in the places where we had the best short- and long-term position. It was also about mix. We talked about -- you mentioned it, too -- unscripted as an example of that. And both of those things are clearly working. And we anticipate continuing to move in that direction. Our programming growth was probably in the 2% range this quarter of Q3. On a long-term basis, it's going to be higher than that. We're probably more mid-single digits. But that's how we see it playing out.

Douglas Mitchelson -- Credit Suisse -- Analyst

If I could just ask Wade a question. On the balance sheet, when is the balance sheet refresh sort of complete and you can be more aggressive deploying free cash flow in other ways?

Wade Davis -- Executive Vice President and Chief Financial Officer

So, in the short term, we have said that we're going to continue to use free cash flow to continue to strengthen the balance sheet. And, importantly, embedded in your question is are we going to start buying back shares. We don't foresee any share buybacks in the foreseeable future. You're right. This is a business that has tremendous free cash flow that creates value for shareholders and also creates significant opportunities for us. As the balance sheet continues to strengthen, we're going to shift incremental free cash flow toward higher levels of investment in the business, first in the organic opportunities that we see and that we've been delivering on and then, second, on targeted M&A that you've seen us engage in where we think we can both accelerate the clearly articulated strategic plan that we have as well as drive immediately attractive risk-adjusted returns from a financial point of view.

Douglas Mitchelson -- Credit Suisse -- Analyst

Thank you both.

James Bombassei -- Senior Vice President of Investor Relations and Treasurer

Operator, we'll take our last question.

Operator

Our final question comes from the line of Michael Nathanson with MoffettNathanson.

Michael Nathanson -- MoffettNathanson -- Analyst

Hey, guys, you hear me? So I have two questions. Thanks. One for Wade and one for Bob. Wade, if you turn to your cash flow in Slide 16, I'm just trying to get a better handle of what's the right way to think about your cash tax payments normalized. And then working capital. I know this year is a build at Paramount but in a kind of normal, steady state cycle, what's the right way to think about working capital on cash flow?

And then for Bob, I know international, I feel like, has been bouncing around due to SVOD, currency, Telefe, but can you give us a sense of, at the linear side, what's the right way to think about the normalized affiliate fee growth for the international business, maybe ex-currency and ex- the SVOD business?

Wade Davis -- Executive Vice President and Chief Financial Officer

Sure. So quickly on cash flow. So the dynamics currently are really a fairly significant upside around cash taxes. And that's both a function of domestic tax reform and rate, as well as some significant tax planning that's been done by our tax department that's given us some real benefits with respect to domestic and international. Working capital is obviously up, as we importantly absorbed the nearly doubling of the Paramount film slate 2018 to 2019. Media Networks working capital is relatively stable. And what you're going to see going into the next year is you're going to see positive working capital trends and you'll see cash taxes normalize. So that's really the dynamics that you should think about from a free cash flow standpoint.

Robert Bakish -- President and Chief Executive Officer

Yeah. And on the affiliate side, internationally it's a function, as you said, of SVOD. But strip that out, talk constant currency, and, again, it varies depending on launch activity as well, but I think you should think about that as mid-singles revenue growth envelope. And the reason you get that is there's a lot of noise but our services are still in significant demand. I recently was with the CEO of Alteef, which I know is a U.S. operator, but in that conversation, he told me that the readdition of Viacom services to Suddenlink has been a significant positive to their business. And the performance of the video bundle, in particular, where weekly viewership minutes are up over 10% since we were added and bundle video selling rates are also up over 10%. So that continues to speak to the importance of Viacom's services to viewers in the U.S. and beyond. It speaks to the great work that we're doing at MTV, where those ratings are up dramatically. I mean, having the Top 9 unscripted shows on television is no mean feat. So that stuff is resonating.

And that's why, as we look to the future, we had to manage through the implementation of a new affiliate strategy, where we broadened what we were doing to include advanced advertising and co-production as we simultaneously got a whole bunch of our brands healthier. And as we did all that, you're seeing sequential improvement in affiliate sales in fiscal '18, including in Q3. You're going to see a return to growth in Q4. And there are a lot of positives going on here. And I think it's worth noting that the decline of the Viacom stock price, as I look at charts over the last two years, was fundamentally correlated to negative news in affiliate, in general and with respect to us. And what you are seeing here is us coming out the other side of that, through strategy, through relationships, through product. And so, yeah, we do project international affiliate growth in the mid-singles. We project U.S. affiliate growth in the fourth quarter and in 2019. And we're feeling pretty good about that.

James Bombassei -- Senior Vice President of Investor Relations and Treasurer

We want to thank everyone for joining us for our earnings call.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 60 minutes

Call participants:

James Bombassei -- Senior Vice President of Investor Relations and Treasurer

Robert Bakish -- President and Chief Executive Officer

Wade Davis -- Executive Vice President and Chief Financial Officer

Alexia Quadrani -- JP Morgan -- Analyst

Benjamin Swinburne -- Morgan Stanley -- Analyst

John Janedis -- Jefferies -- Analyst

Richard Greenfield -- BTIG -- Analyst

Douglas Mitchelson -- Credit Suisse -- Analyst

Michael Nathanson -- MoffettNathanson -- Analyst

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