Viacom (VIAB) Q2 2019 Earnings Call Transcript

Viacom (VIAB)
Q2 2019 Earnings Call
May. 10, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Viacom fiscal second-quarter 2019 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to senior vice president of investor relations and treasurer, Mr. Jim Bombassei.

Please go ahead, sir.

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

Good morning, everyone. Thank you for taking the time to join us for our March 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 trending schedules containing supplemental information available on our website.

We also have an accompanying slide presentation that you can follow, along with our remarks. I want to refer you to the Slide No. 1 in the 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 on 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.

Bob Bakish -- President and Chief Executive Officer

Thanks, Jim, and good morning, everyone, and thank you again for joining us. During the quarter, Viacom continued to focus on execution and evolution, making significant progress on both. I'm particularly pleased with the progress we made in distribution, where we secured both expanded and new distribution agreements as well as with the quick integration of Pluto TV into our business, where we are already seeing great traction. I'll update you on both areas in detail in a moment.

But first, a brief overview of the financials and some key operating highlights from the quarter. Financially, we delivered strong metrics in multiple areas, telling a story of continued momentum at Viacom. Domestic ad revenue improved sequentially to minus 2% year over year as we continue to track our return to full-year 2019 ad revenue growth. Domestic affiliate revenue, while down slightly this quarter, closed consistent with our expectations and remains on track for full-year growth.

Total revenue was a bit soft as we felt the impact of some rather significant international headwinds and timing issues. That said, we see a strong return to growth in the second half. Notably, at the adjusted OI level, Paramount delivered its ninth straight quarter of improvement and adjusted diluted EPS grew by 3%, marking the fifth consecutive quarter of growth. Moving to operating highlights.

I want to start with Paramount. Here, we see continued momentum. Paramount improved year-over-year adjusted OI by $20 million, driven by a continued benefit from the performance of Bumblebee and increased monetization of our film library. Based on this year's slate performance, we continue to expect a return to full-year 2019 profitability.

And looking ahead, we're feeling great about the remainder of the significant 2019 releases. Currently in theaters is the adaptation of Stephen King's Pet Sematary, and it's performing well. At the end of the month is the Elton John musical biopic, Rocketman, which is already generating a ton of positive buzz. And in August, we have Dora and the Lost City of Gold, a live action film from Nickelodeon's Dora the Explorer franchise.

On the TV side, Paramount also continued its success this quarter, scoring a season three renewal of Tom Clancy's Jack Ryan from Amazon and a season two pickup of The Haunting of Hill House from Netflix. Second, domestic audience performance. Here in an evolving video landscape, our brands continue to occupy critical market positions and exhibit strong performance, both in pay-TV and beyond. In the quarter, Viacom maintained the No.

1 share of U.S. basic cable viewing among key demos: kids, teens, 18 to 34s, two to 49s and African-Americans, and we had more top 30 original cable series than any other cable family. Overall, our flagship networks continue to deliver, growing share 2% year over year, with strong results at Comedy Central, MTV and Paramount Network. And while Nick remains a work in progress, it is still the No.

1 kids network by far and the first shows from Nick's new slate had begun to air with encouraging early signs from The Substitute and Ryan's Mystery Playdate. In fact, we've already ordered season two of Ryan following its strong debut. Looking beyond TV, Viacom digital consumption continues to grow dramatically. In the quarter, Viacom Digital Studios delivered 6.4 billion video views, accounting for watch time of almost 10 billion minutes, up 69% and 153% year over year, respectively.

As part of that, Nickelodeon and Comedy Central both recorded their best quarters ever, and we now rank No. 8 in global social video views according to Tubular's media and entertainment rankings, up from No. 15 a year ago. Third, domestic ad sales.

Domestic ad sales improved sequentially for the second straight quarter, driven by continued strength in Advanced Marketing Solutions, or AMS, which grew revenue 76% year over year. Looking to the full year, we continue to expect our AMS business, now including Pluto TV, to nearly double its revenue in fiscal '19, representing nearly 20% of domestic ad sales as we bring more new advanced ad inventory online across our growing portfolio. Importantly, we remain on track to deliver 2019 fiscal full-year domestic ad sales growth and expect to deliver growth in the current quarter. Worth noting, Q3 will be the first quarter of ad sales growth in five years, and the beginning of a new era of ad sales growth at our company.

Fourth, domestic distribution. Here, we achieved significant gain in distribution and are reaffirming our full-year domestic affiliate revenue outlook of low single-digit growth. Our confidence in full-year results is driven by renewals, rate escalators, vMVPD growth, content licensing, the scaling of our subscription products and inclusion on new mobile and virtual MVPDs, which brings me to two areas I want to spend a bit more time on: distribution and Pluto. They are critical to our continued success and two areas where the transformation of Viacom is clearly coming to life.

Let's start with distribution. Since 2017, we've talked about how consumers would segment by price points across the evolving distribution landscape. And as access to new content package and delivery options has grown, we introduced a strategy to ensure Viacom brands and IP would be represented on all of them. Our most recent quarter reflects this exact trend and clearly demonstrates Viacom's rapid and successful evolution in this new distribution landscape.

At the core of this success is both content, the combination of Viacom's vibrant brands, IP and creative capabilities and partnership, our passion for working with companies and utilizing our assets to create value both for clients and ourselves. So with that as a backdrop, let's talk about what we achieved in the quarter. First, the big bundle. For the past couple of quarters, there was noise in the industry about what may or may not happen in our AT&T DIRECTV renewal.

And people pointed to this as a big overhang on the stock. Well, as all of you now know, at the end of March, we concluded a new long-term deal with AT&T, which included broad and deep carriage of Viacom brands on both DIRECTV and U-verse, which together represent the largest share of MVPD big bundle subscribers in the industry. In fact including this deal, my management team has now renewed or extended the vast majority of Viacom's traditional subbase. Second, virtual MVPDs and skinny packages.

This is an important sector of pay-TV industry, and during the quarter, Viacom secured several important wins. Let's start with AT&T. As part of the deal, Viacom ensured ongoing carriage in all legacy DIRECTV NOW packs, and importantly, inclusion in the new DIRECTV NOW Plus and Max offerings. Note that we are the only nonbroadcast family to be there other than AT&T's own Turner Networks.

Viacom's global portfolio also gained carriage on fuboTV's live TV streaming service as we've decided to add our leading entertainment portfolio to its previously sports-focused offering. Here, we added over a quarter million new subs as of April. In addition, Viacom Networks were a core part of the launch of Charter Spectrum TV Essentials, a low-cost entertainment-only bundle targeting broadband-only customers. So we've had a lot of activity in this space, activity which clearly illustrates the value of Viacom networks in skinny bundles.

Third is our expansion in mobile. Over the past two years, we've talked about mobile as a potentially significant growth catalyst for pay-TV content suppliers as mobile telcos look for ways to drive data packages and differentiation. The good news is we're in the very early stage of seeing that opportunity come to life and Viacom brands are clearly in the mix. As proof points to this, as part of our AT&T DIRECTV renewal, AT&T recently expanded AT&T Watch product to include MTV, Nickelodeon and TV Land.

These networks join the six we launched on the platform last summer. In addition, during the quarter, we announced the content distribution agreement with T-Mobile in which Viacom brands will play a key role in T-Mobile's forthcoming mobile video service. And remember, T-Mobile now has a subscriber base of over 80 million customers, so this is a partnership with a lot of potential for us. Viacom's activity in mobile also continues to grow outside the U.S.

In fact, Viacom International media networks now has 22 mobile-only content deals with 18 operators across 30-plus countries, a clear sign that our flagship brands are gaining significant traction on mobile networks. And fourth in distribution is SVOD and direct-to-consumer. Here, we continue to advance our strategy on multiple levels. Our rapidly growing studio production business is speeding a growing pipeline of original content to third-party SVOD players.

For example, in addition to the Paramount TV renewals I mentioned earlier, often the studio premiered PEN15 to rave reviews and announced season two renewals of both PEN15 and Light as a Feather on Hulu. We now are significant original programming suppliers to Netflix, Amazon, Apple, Hulu, among others. At the same time, in the owned and operated SVOD space, our distribution continues to grow. To that end, Apple recently announced the new Apple TV app will include four of our SVOD services as part of Apple TV channels: Nickelodeon's Noggin, Nick Hits, Comedy Central NOW and MTV Hits.

In addition, outside the U.S., we announced our first Latin American distribution partners for Paramount+, which is our cross-brand streaming video services. With NET and Claro in Brazil. Know that NET is both Brazil's largest MVPD and No. 2 broadband provider, while Claro is among the largest mobile and broadband providers across all of Latin America.

It's also worth noting that Noggin has now passed two and a half million subs globally and that a new enhanced branch is launching this summer, which brings me to the focus of my second detailed topic, Pluto TV. Here, our integration is moving swiftly and going exceptionally well and Pluto's growth is showing strong early momentum. In fact, since we announced the acquisition, Pluto TV's leadership in free streaming TV has only grown. When we announced the acquisition of Pluto TV in late January, it had 12 million monthly active users.

By the end of April, Pluto TV had approximately 16 million monthly actives, a 31% increase in three months, and we have tens of millions of additional Pluto TV-enabled devices coming online over the next few months, so there is strong growth ahead. And it's not just usage, we're already making demonstrable progress on advertising monetization. Pluto TV has instantly added billions of ad impressions per month to the Viacom portfolio, and these are high-value impressions. The audience skew is young and is diverse and the impressions are overwhelmingly delivered on a TV glass in long-form premium content, which means it is a high-quality advertising environment.

And while early, we're already seeing positive traction with advertisers, which drove strong scattered volume in March and April. In addition, Pluto TV is also now an integral and compelling part of our upfront offering, helping to differentiate Viacom. In fact, when you look at Pluto TV in combination with our networks, Viacom has expanded its reach, particularly against hard-to-reach younger demos. For example, with Pluto, we now reached 80% of all 18 to 34s in the U.S.

across our linear, digital and social products. This is the broadest reach we have ever had and with this growth comes greater value for our advertising partners and for Viacom. And speaking of partners, we're also seeing strong early traction with Pluto TV when it comes to distributors. For Viacom, Pluto TV was always more than a D2C play.

We saw this as an opportunity to broaden our partnerships with existing distributors and our early experience has proven just that. Comcast recently announced inclusion of Pluto TV in its Xfinity Flex service, which is available to Internet-only subs, and Pluto TV will be coming to Xfinity X1 soon. We have a second deal already signed with another large distributor, which we'll announce at a later date and a few more in the pipeline. Things are moving quickly as distributors have come to understand the value of extending the Viacom partnership to Pluto TV.

Supporting all of this is our expanding Pluto TV premium content offering. On May 1, we launched Viacom library content on Pluto TV in a big way, adding 14 new channels with more to come. Viacom's extensive library of iconic IP is now featured through unique categories of branded channels, expanding the Pluto TV content offering. Know that our freshest products remain in the pay-TV domain on our branded networks.

In addition, in the last two months, we have significantly grown our roster of content partners, which now number over 150. Most recently, this includes the addition of CNN, BBC and Major League Soccer, and we see more opportunities ahead, including the July launch of Pluto Latino, a U.S. Hispanic offering which include a set of specialized Spanish language channels, unlocking an entirely new segment for the business, which brings me to Pluto TV's international potential. We see a significant opportunity in leveraging Viacom's global operating footprint to drive Pluto TV's growth.

To that end, we're currently launching the Pluto TV offering in Switzerland and expanding Pluto TV in the U.K., Germany and Austria where it is already launched. In addition, we'll have a Latin American launch in calendar 2019 and additional territories in 2020. And by the way, it's worth noting that the first AVOD product we've got involved with, Viacom18's VOOT service in India just crossed 50 million monthly active users and is now targeting 100 million in the next year. So as you can see, there's a lot going on with Pluto.

But big picture, the thing that really excites us is that we see Pluto TV as an opportunity to create a platform, a platform for content owners to exhibit their IP on, a platform upon which to create a very substantial advertising business, a platform from which to upsell a consumer's targeted SVOD and other products and a platform to work with distributors to create incremental value in broadband, mobile and video sub-bases, both through advertising and by upselling additional video products. It's a powerful idea, and it's a global one. The best news is we're already on our way, and that's why we're going to lean into it harder and invest some incremental money in 2019 to take advantage of the momentum we're already seeing to capitalize on and extend our early leadership position. With that, let me turn it over to Wade to take you through our financials.

Wade Davis -- Chief Financial Officer

Thanks, Bob. As Bob just discussed, we made a lot of progress in the evolution of our company this quarter. What's really exciting for us is our strategies for the transformation of our business, the associated investments that we're making to support these strategies are beginning to pay off at a scale that's now being reflected in our consolidated financial performance. This momentum will continue to build in the second half of our fiscal year, and we expect it will fully offset any headwinds associated with our linear business and drive overall top-line revenue growth on a constant-currency basis.

On a consolidated basis, which you can see on Slide 9, we delivered our fifth consecutive quarter of adjusted EPS growth. This growth benefited from the continued improvement in Paramount adjusted OI, lower interest expense from our aggressive deleveraging and the bottom-line impact of our ongoing cost transformation efforts. Beyond the P&L, we've driven very significant cash flow improvements where year-to-date free cash flow of $642 million is up over $400 million versus the prior year. Moving to the segment results on Slide 10, I'll start with filmed entertainment.

The team at Paramount continues to deliver on the turnaround where adjusted OI of $29 million improved $20 million over the prior year, marking the ninth consecutive quarter of OI improvement. This quarter's profitability growth was driven by increased monetization of our library as well as the performance of carryover titles including Bumblebee. Total filmed entertainment revenue declined 1% as stronger theatrical and ancillary revenue was offset by lower licensing revenue. Theatrical revenue more than tripled, primarily benefiting from the impressive carryover performance of Bumblebee.

Ancillary revenue grew 75% or $38 million due principally to a new music rights agreement. The decline in licensing revenue was a result of the timing of delivery of Paramount TV product as well as comparisons to last year's direct-to-SVOD release of certain films. Now turning to media networks, which is on Slide 11. My comments on media networks will be in constant currency terms.

Please refer to our earnings release for detail on our reported results. Worldwide media networks revenue declined 5% and adjusted operating income declined 4%, where we partially offset revenue declines with lower expenses. The improvement in expenses was due to the timing and mix of original programming and savings from our cost transformation efforts. Moving to domestic ad sales.

The growth rate improved sequentially to a decline of 2% year over year. The sequential improvement was driven by accelerating growth in Advanced Marketing Solutions, partially offset by approximately 100 basis points of unfavorable impact from Easter falling later this year. AMS revenues increased 76% in the quarter, compared to 54% in the December quarter. The impact that AMS is having on our domestic ad sales performance is an example of our focus and consistent execution against our stated strategies.

Fiscal 2018 was AMS' first full year of operation and it delivered over $300 million of revenue, and we're on track to nearly double AMS this year where it will represent around 20% of our domestic ad sales business. Given the scale and growth rate of the AMS business, we expect it to fully offset any linear headwinds for the balance of the year, driving full-year domestic ad sales growth. Domestic affiliate revenue declined 2% in the quarter. The year-over-year decline is largely due to the absence of library licensing to third-party SVOD distributors, which we halted as we finalized our content strategy from Pluto.

Beyond this, contractual rate increases were largely offset by subscriber declines. Taking a step back and as Bob mentioned in his remarks, this was an excellent quarter for us in the execution of our distribution strategy. Deals we secured this quarter significantly derisked the linear component of our business and set us up for consistent and predictable annual contractual rate increases for years to come. We also executed a number of agreements, providing meaningful incremental penetration on new platforms, which will be an additional source of growth as our networks are lit up from these services.

On Slide 12 of the deck, we have an overview of international media networks where total revenue declined 13% in the quarter. While revenue performance was soft, we have a clear line of sight to meaningful growth in the back half of the year. International ad sales declined 6% in the quarter while channel size momentum continued, achieving its third consecutive quarter of growth in viewership share. The U.K.

ad marketplace continued to be soft given the macroeconomic uncertainty. Excluding the U.K., international advertising revenues grew 2% in the quarter. Looking ahead, for the June quarter, we expect to return to growth in international ad revenue driven by a handful of specific factors including: modest improvement in the U.K. TV ad market, which we're already seeing; contractual U.K.

ad sales commitments that are not marketplace dependent; and ongoing strong growth at Telefe driven by the political advertising cycle in Argentina. International affiliate revenue was down 13% in the quarter. The decline was due to the timing of SVOD and OTT deliveries. We have significant deliveries of SVOD and OTT content planned in the back half of the year, which would yield a return to growth in international affiliate revenue.

Now turning back to the consolidated results and looking at the items below the line. Net interest expense was lower by $25 million due to continued deleveraging actions. Our adjusted effective tax rate in the quarter was 24.5%, which was comparable to the prior year. On Slide 13, there's a summary of our cash flow and debt.

Our free cash flow generation year to date has increased significantly to $642 million, compared to $235 million a year ago. The growth in free cash flow was largely a function of improved working capital management and timing of certain production spend. Moving to the balance sheet. At quarter end, we had $9 billion of gross debt outstanding, a reduction of 11%, compared to the prior-year quarter.

Our adjusted gross debt reflecting the equity credit we received from S&P and Fitch on our hybrid securities was $8.3 billion. Turning to the remainder of the fiscal year. Now that we've closed on the Pluto transaction and are significantly into the integration phase, we're incorporating the impact of Pluto into our guidance. For the full year, we see total company revenue growth in the low to mid-single digits on a constant-currency basis, with growth at media networks and filmed entertainment.

This updated guidance reflects slightly lower growth in filmed entertainment revenue than previously anticipated due to shifting in the release dates of certain titles out of FY '19 and into FY '20. In terms of domestic affiliate revenue, we reaffirmed our expectations for growth in the low single digits for full-year 2019. Domestic affiliate revenue will benefit from rate escalators, virtual MVPD growth, content licensing and the scaling of our subscription products. We also continue to expect growth in domestic ad sales for the full year, driven by meaningful growth in the June and September quarters.

While we have seen lower linear impression delivery, principally driven by Nickelodeon and Nick at Nite, this softness will be more than offset by accelerating growth in our AMS business, including the benefit from Pluto TV. As I mentioned earlier, the scale and growth rate of our AMS business is now significant enough to mitigate ecosystem headwinds currently impacting the linear business. But beyond the growth of AMS, our linear business will benefit in the back half of the year from Easter holiday timing and advertising mix shifts, including increased volume from the studio category, which will result in higher weighted average price increases. Additionally, we expect to benefit from improved viewership share at Nickelodeon and Nick at Nite as the new management team's programming strategy comes on air.

While it's only been two months since we acquired Pluto TV, we have made significant progress on the integration which is already manifesting in the marketplace. The strategic fit, audience momentum and associated financial results are already outperforming our initial expectations. We continue to see Pluto as $1 billion opportunity as we expand the content offering, grow audience, launch new international services and enhance monetization. Based on the results we're already seeing, we're more bullish than ever.

Inclusive of Pluto, the meaningful top-line growth we will be delivering across the board in the second half of the year will require modest incremental investment. Because of this investment, combined with the macroeconomic headwind that impacted our first half international results and the increased purchase price amortization associated with Pluto, we now expect full-year total company adjusted operating income to decline in the low to mid-single digits. We continue to expect a return to profitability at filmed entertainment. In wrapping up, I want to note the extent to which the strategies we've implemented to layer growth initiatives on top of a stabilized core business are paying off.

We have been and will continue to be disciplined and relentless in the execution of our stated strategies. We're halfway through our fiscal third quarter and I couldn't feel better about the return to growth that we're seeing across our businesses. And now we'll take your questions.

Questions & Answers:

Operator

[Operator instructions] Our first question today is coming from the line of Rich Greenfield with BTIG. Please proceed with your question.

Rich Greenfield -- BTIG -- Analyst

Hi. Thanks for taking the question. So I just want to make sure I understand the commentary on the drop from 5% growth in domestic affiliate last quarter year over year to the down 2% this quarter. Is that entire change due to SVOD licensing? Are there other nonrecurrings? I don't remember you being a big licenser to things like Netflix or Hulu.

So just maybe, I guess, the larger question is, what exactly is in your affiliate revenue line? And how should we think about growth beyond 2019 now that you've renewed almost all of your deals, given that it seems like it's more than just the traditional distribution deals that are in there? So if you could just help us with those pieces, that would be great.

Bob Bakish -- President and Chief Executive Officer

Yeah. Sure, Rich. Thanks for your questions. So look, first, I want to reiterate what a successful quarter this was for us on the affiliate side as we secured both expanded and new distribution agreements.

And the deals we secured in the quarter, including AT&T, really de-risked the linear component of our business and set us up for a consistent and predictable annual contractual rate growth. Now to your question, probably the best way to do it, because you're all trying to do it, is look at Q1 versus Q2. In total, as you know and as you stated, Rich, Q1 at 5% growth versus Q2's minus 2%, within that, the core in Q1 was plus 2% and the core in Q2 is flat and then the balance, the noncore in Q1 was plus 3% and in Q2 is minus 2%. So let's talk about that.

In reverse order, noncore. In Q2, we halted library SVOD licensing as we finalize the Pluto strategy, which cost us 200 basis points versus the prior year. And as I indicated by the numbers in Q1, noncore was a bit of a tailwind. Again, not massively, but it shifted from tailwind to headwind.

In terms of the core, looking at Q2, as we said -- as I just said, it was flat. Within that, subs were negative, in the one and a half to 2% range, which was consistent with our prior quarter. So the driver of the core being flat is really -- the difference in the quarter is really renewal activity in the second quarter. Beyond that, I can't really say as we take our confidentiality agreements very seriously.

Now pivoting to the future, which is the second part of your question really. In terms of our 2019 outlook, as you know, we reaffirmed low single-digit full-year domestic affiliate growth, and as part of that, we'll see sequential improvement in the third quarter. Why do we see that? A number of reasons. First, we renewed with all major distributors, which means we have predictability in terms of the positive impact of built-in rate escalators.

Note that on the subscriber side, we're assuming very modestly higher sub-declines in the back half of the year and this is all incorporated into our guidance. Second, we see continued benefit from vMVPDs, both as we benefit from growth in places where we already work as well as from new deals we struck in the second quarter, which of course include Charter Spectrum TV Essentials, fuboTV and the DIRECTV NOW Plus and Max offerings. We also anticipate a benefit later in the year from the forthcoming launch from T-Mobile. Third, we'll also benefit from our portfolio of subscription products continuing to scale as we've added incremental distribution, including from Apple channels as well as growing our portfolio of offerings, which will include a new version of Noggin and the launch of MTV Hits, both in June.

But stepping back from all this, Rich, this is another example where we clearly articulated the strategy. We've been executing against it, and we're delivering results. And this strategy included broadening our partnerships with our existing distributors to unlock new opportunities and a strategy to accelerate our participation in next-generation platforms, including OTT and mobile, to broaden consumer access to our brands and IP. Both of those elements put together are driving growth in this changing landscape.

Both are reflected in our Q2 and, of course, beyond.

Rich Greenfield -- BTIG -- Analyst

And just to be clear, Bob, you're basically saying that 2020, you feel comfortable that in fiscal 2020, you're going to grow affiliates at some level above what you're going to do until you said low single-digit growth for '19, but you think you're going to do better than that in fiscal 2020?

Bob Bakish -- President and Chief Executive Officer

So we talked about 2019 and reaffirm that. We have not given 2020 guidance yet. As we always do, we will give that as part of our fourth-quarter call.

Rich Greenfield -- BTIG -- Analyst

Thank you.

Operator

The next question is from the line of Alexia Quadrani with J.P. Morgan. Please proceed with your question.

Alexia Quadrani -- J.P. Morgan -- Analyst

Hi. Thank you very much. Just a question to clarify what you said about the distribution and I have a question on Paramount. On the distribution side, you've mentioned the annual contracted rate increases several times in your prepared remarks.

I just want to clarify, understand it correctly that even if you may have an initial reset to market rate, you may or may not depending on the contract, we can assume that all of your contracts with distributors have some sort of built-in annual rate escalators. And then just on Paramount, which continues to outperform and do really, really well, better than expected. Can we -- at this point, have we cycled all the films that were green-lit by the previous management team? And sort of how do you see the balance of sort of film for box office release versus content sold to other venues for the longer term?

Bob Bakish -- President and Chief Executive Officer

Sure, Marci. So to your question, yes, all of our affiliate deals have built-in annual escalators. They're in the five and a quarter percent range. So yes, that was true before, that continues to be true.

Now with respect to Paramount, let me start by emphasizing just how far Paramount has come. This really is a remarkable turnaround where the team has improved profitability by over $500 million in three years. And under Jim's leadership, this is again an iconic studio where people bring in projects first. The slate going forward is strong, it's really coming together.

It's worth noting that Paramount was really the talk of CinemaCon last month in Vegas. We got incredible excitement showing pieces of Rocketman, Terminator -- yes, with Arnold; Gemini Man with Will Smith; Sonic with Jim Carrey; and Top Gun, once again with Tom Cruise's need for speed, just to name a few. So distributors can't wait, and of course, the TV business continues to ramp quickly. To your question, yes, Wonder Park was the last of the legacy slate.

We're feeling great about the studio and its trajectory.

Alexia Quadrani -- J.P. Morgan -- Analyst

Thank you.

Operator

The next question is from the line of Marci Ryvicker with Wolfe Research. 

Marci Ryvicker -- Wolfe Research -- Analyst

Thank you. Two questions. First, Bob and Wade, you both mentioned that you halted your content licensing strategy as you were closing the Pluto deal. So are you resuming this strategy? Have you changed it? Any update there? And then on Pluto, can you talk about the CPM differential for these ads relative to linear ad? And any number you could put behind this for us.

Thanks. 

Bob Bakish -- President and Chief Executive Officer

Sure. So first, let me apologize to Alexia because I just called her Marci and -- anyway. Then Marci, hello and thank you for your question. 

Marci Ryvicker -- Wolfe Research -- Analyst

Thank you. 

Bob Bakish -- President and Chief Executive Officer

In terms of library licensing, as we said, we halted that as we finalized our Pluto strategy. And again, it wasn't really material, but it was a piece of business in the comp quarter. On a going-forward basis, what we're going to do is we're going to really continue to work to optimize the return on our library assets. We're going to look at the performance of those assets on Pluto, which, by the way, in the first very short period has been very strong, and we're going to look at other opportunities should they present themselves.

Worth noting that Pluto product tends to be nonexclusive, so we have a lot of flexibility there.

Wade Davis -- Chief Financial Officer

Yes. And in terms of CPM and a small color around the ad opportunity on Pluto. So in general, digital CPMs are higher than linear CPMs. That's reflective of the ability to target those ads on a more direct basis.

That's the case here with Pluto. We currently see CPMs in kind of the mid-teens to low 20s. The real opportunity with Pluto though is taking advantage of increasing the monetization of that inventory from just selling more of it, right? So this business, as we said in the past, I mean, the rate at which it's scaling and then audiences engage with the product, I mean, it has billions of monthly impressions and the significant majority of those impressions are growing until today. Obviously for years now, we've had big focus on advanced advertising and Pluto is part of the advanced advertising business.

So the Pluto inventory rolled into the advanced media component of AMS and the investments that we've made in AMS and building out an advanced ad business, building out the sales force that knows to sell these products, integrating it into our upfront cycles, all of these are things that allow us to be highly confident in our ability to take the unsold inventory that Pluto has right now and significantly ramp monetization on that.

Marci Ryvicker -- Wolfe Research -- Analyst

Great. Thank you.

Operator

The next question is from the line of Jessica Reif with Bank of America. Please proceed with your question.

Jessica Reif -- Bank of America Merrill Lynch -- Analyst

Thank you. I have two questions. Just kind of maybe following on this whole advertising commentary with all the different platforms. Do you have AMS, OpenAP, part of AT&T's results, Comcast? Can you talk about how you use the different platforms? As you renew your distribution deals, there's always an advertising component.

When there's some of your inventories being used for some of the deals, can you talk about who sells the inventory? How does it roll? How do you use that effectively in various distribution deals? And then on Paramount, are you considering or would you consider joining any of the direct-to-consumer services? Some of the ones that have been announced clearly needs scale or is it all being reserved for Pluto? And then as part of Paramount, could you talk a little bit about China? Do you think there'll be any backlash with the current situation -- the current trade situation?

Wade Davis -- Chief Financial Officer

Do you want me to take that and then you take...

Bob Bakish -- President and Chief Executive Officer

Yes.

Wade Davis -- Chief Financial Officer

So with respect to -- I mean, I think the question really is about how our advanced ad sales deals work with our distributors. So as Bob talked about in the earlier -- in his earlier remarks, the strategy with our distributors has been to focus on how we can broaden the nature of our relationships with them and bring value beyond and in a way that it's complementary to the core content licensing. And so as we have -- obviously, all of the affiliate that any other content companies do have an advertising component. The difference here is that we brought to bear our capabilities with respect to advanced advertising and the products and the technologies that we have, Resident and Vantage, and obviously that integrates with things that we've done like OpenAP.

So -- and the way those deals are structured are really to build out the enablement and the processes that allowed both us and our distributors to be able to capture incremental value from pivoting from linear broadcast ads to advance targetable, addressable media on their footprint. And so in terms of who actually sells that, we're setting up those processes and procedures to allow both parties to sell them, depending on who can bring the most valued equation at any given time. Paramount?

Bob Bakish -- President and Chief Executive Officer

Yeah. And just again very simply, Jessica, there has been inventory that was sold by networks, i.e. national, say, Viacom and local since the beginning of time in pay-TV. It was a local veil and national veil.

That continues to be the case today. The operator is still local, we sell national. What's different today, again as we said, is we have now have a direct connection into a subset of the operators' plant which allows it to deliver dynamically different ads into set-top boxes versus all ads being the same, and that gets you all kind of targeting yield and efficiency gain, so that's that. On the Paramount side, look, Paramount is -- both has a massive library on the film side, and as we said, has real momentum on the current and future slate side.

And what -- part of their business is monetizing that content out of, call it, first window. So if you look at it, led by, in this case, Dan Cohen who runs sales there, we're constantly looking for opportunities to monetize that asset and that includes licensing product to all kind of folks including on the D2C side. And yes, we're using Paramount product on Pluto as well, and you should expect that hybrid ecosystem to continue as we look to maximize both P&L value and asset value. With respect to China, clearly, a lot of noise about China in the broad market, big negotiation going on, creating some uncertainty.

Look, I believe that will play through. There's huge demand underlying for film product in China. You've seen it become very material as Chinese consumers love American film product. We don't anticipate any kind of long-term problem here.

But of course, we will have to see how this trade negotiation plays out exactly.

Jessica Reif -- Bank of America Merrill Lynch -- Analyst

Thank you. 

Operator

Our next question is from the line of David Miller with Imperial Capital. Please proceed with your question.

David Miller -- Imperial Capital -- Analyst

Yeah. Hey, guys. Congratulations on the back half guidance there. I appreciate the clarity.

Jim, could you just talk briefly about the -- how many Paramount series you expect to deliver in the second half of this year and how many Paramount series you expect to deliver next year? And I have a follow-up. Thanks. 

Bob Bakish -- President and Chief Executive Officer

Yeah. So this is Bob, I'll take the question. 

David Miller -- Imperial Capital -- Analyst

Sorry about that.

Bob Bakish -- President and Chief Executive Officer

No, no problem. So look, I just said we're tremendously excited about Paramount. That extends to what Nicole Clemens is doing on the television side. As you've seen, we continue to ramp volume there and I'll get to the numbers in a second.

But importantly, they really are not just producing volume there producing hits. One title that I didn't mention in my prepared remarks, which I encourage you to check out, is a Catch-22, which we made for Hulu. The reviews of that series are off the charts and it's yet another example of the fantastic work the Paramount TV team is doing in the space. With respect to call it the numbers, again, very high-growth business.

We now have 22 shows order to or in production, which will be delivered over the coming period. This is a mix of shows for SVOD players like Netflix and Hulu and the like. We're making shows for our own networks including like Boomerang for BDT. We are making shows for traditional players, cable networks both basic and premium, and there is just a lot of activity there.

It is a fast-growth business, creating incredible product that has a very bright road ahead.

David Miller -- Imperial Capital -- Analyst

OK. And then Bob, on the slate for Paramount for both the back half of this year and into next year for the expensive films like Terminator and Top Gun and so on and so forth, should we assume that most of those are all of those are co-produce with Skydance? Or I mean are you taking our partners to kind of defray the risk there? Or are those purely your films?

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

Why don't I take the slate question? So as I think everybody knows, we made a pivot -- we made a decision to pivot away from a slate financing structure a couple of years ago. As we've evolved our slate strategy to really have a balance of being franchise films, co-branded films with our big flagship brands and smaller budgeted, more targeted films, we have decided to really look at it picture-by-picture basis at cofinancing opportunities. And the places that, as you pointed out, you really want to share risk around the bigger budgeted films. And there's no shortage of demand for any of the big franchise films that bring in cofinancing partners.

A number of these films are co-financed with Skydance, but they're not the only cofinancing partner that we have. But really for everyone and of the big franchise films that we have upcoming in the fiscal '20 slate, which is a significant number of big exciting films, each one of those more or less has some risk sharing through cofinancing partners.

David Miller -- Imperial Capital -- Analyst

OK. Wonderful. Thank you very much.

Operator

Thank you. The next question is from the line of Tim Nollen with Macquarie. Please proceed with your question.

Tim Nollen -- Macquarie Research -- Analyst

Thanks. I wonder if you could talk a little bit about Nickelodeon and the turnaround that you have referred to previously there, TV progress they're making at MTV, I think with a bit more of a digital-first strategy there. What are you doing similarly or differently with Nickelodeon? I do see the shared gains you mentioned. But if you could talk a little bit more about the digital versus the linear strategy shift, please?

Bob Bakish -- President and Chief Executive Officer

Yeah, sure. So big picture, it's important that we note that we did grow our flagship share in the quarter overall and MTV and comedy have really done well. Paramount Network is improving. And BET, we'll see some significant benefit as Tyler Perry comes online in the fall.

And by the way, to your point on MTV, it is both a traditional ratings story and a digital story. It's worth noting that MTV's primetime ratings are up on the order of 50% over the last couple of years. So MTV is clearly resonating on television as well as generating pretty extraordinary consumption off television. Now to your question on Nickelodeon, I'm happy to say Brian continues to do great work here.

As you know, he's rebuilt the team and also the pipeline of shows. The first effort to come to air, which is Ryan's Mystery Playdate, has quickly emerged as the No. 1 preschool show on television. And it also actually has broader traction with two to 11s, which is great.

Fully 25% of the audience of the show is new to Nickelodeon, also great. And if you look at the Live+7 lift, which I know is a little esoteric, but it's comparable to PAW Patrol. So that says this show has real potential. And they have a lot more coming.

They'll have almost 40% more original hours this summer versus last summer and the stuff looks great. Now beyond TV because as you said and consistent with our flagship strategy, it is about multiple platforms, not just linear TV. And beyond TV, Nick continues to expand as well. Direct-to-consumer side, Noggin had just short of 500,000 U.S.

subs in March. That was up 23% versus the prior quarter and over 300% versus a year ago. Also, as I mentioned, we have a new version, which is now in beta, and it will launch in June. That's a significant upgrade from the prior version.

It's got a whole new user front end that will improve content discovery. It's got a big added gaming component, which is something obviously consumers love that Noggin hadn't traditionally supplied. And then we also did a bunch of back-end work there to improve scalability. That, of course, won't be viewable by the consumer.

It's not just D2C. Nickelodeon and its studio initiative also closed another animation deal with Netflix for two feature-length versions of RIP, in this case Rocko and Invader Zim. And we're also expanding the portfolio of live events. Most recently, we expanded our the JoJo Siwa D.R.E.A.M.

tour by adding dates and markets. So I'm really excited about what's going on at Nick and looking forward to the quarters ahead.

Tim Nollen -- Macquarie Research -- Analyst

Great. And is there more original programming coming to the virtual bundle deals that you've been doing recently like exclusive original stuff from the likes of MTV, Nickelodeon?

Bob Bakish -- President and Chief Executive Officer

Well, our flagship brands have a deep component of original content that are carried wherever those are carried in the pay-TV environment. So yes, that, of course, will continue. I'm not sure what you're referring to in terms of any specific in this virtual bundle point.

Tim Nollen -- Macquarie Research -- Analyst

No, I'm just wondering if there's new digital production going through those virtual bundles from those studios.

Bob Bakish -- President and Chief Executive Officer

Well, when you talk about virtual bundle like Charter Spectrum TV...

Tim Nollen -- Macquarie Research -- Analyst

About the mobile. I was thinking more about the mobile deals that you've got like AT&T Watch and some of those.

Bob Bakish -- President and Chief Executive Officer

So the AT&T Watch is a -- the traditional vMVPD. It's a entertainment-only skinny pack delivered via mobile. So you can think about that as the same configuration you would get on DIRECTV as an example, just obviously fewer selections, thankfully. We now have nine services on that.

So no, there isn't a lot of -- there isn't difference there.

Tim Nollen -- Macquarie Research -- Analyst

OK. All right. Thank you.

Operator

Thank you. The next question is from the line of John Hodulik with UBS. Please proceed with your questions.

John Hodulik -- UBS -- Analyst

OK. Great. Maybe first up, Bob, in the way you guys both mentioned some increased investment going into the back half of the year. First, could you size that and maybe give us some more granularity on, is it on the Pluto side or some of the content initiatives that you guys -- that, Bob, you just talked about? And then maybe over on Pluto, yes, the way you talked about 50% of the inventory going on sold and the $1 billion opportunity, is the $1 billion opportunity just fully selling out that inventory at that $20 CPM and maybe executing on the international opportunity? And how quickly can you close that gap and sell that inventory up to 100%? Thanks. 

Wade Davis -- Chief Financial Officer

Sure. Why don't I start with the Pluto piece since it's a little bit with embedded in the modification of our guidance. So yes, we -- I'm going to keep correlating this is a $1 billion opportunity. And when I highlighted it as a $1 billion opportunity, I really want to underscore that that's in the U.S.

alone. And when we highlight the $1 billion opportunity, we're just doing simple math on today's users and comparable monetization rates. And so we don't want to get ahead of ourselves in doing more aggressive math, but we highlighted those dynamics when we closed on the transaction, and it was 12 million monthly average uniques. Three months later -- that was the announcement.

Three months later, it's 16 million monthly average uniques. So in three months, it grew 30%. So the momentum continues to grow there. And when we do talk about the $1 billion opportunity on that relatively simple math, that is the domestic market alone.

So as we scale up the infrastructure to accelerate growth internationally, the first material thing you're going to see us do there and it's going to happen in this calendar year is to launch Pluto in Latin America. We're also scaling up the infrastructure to accelerate the fairly nascent services that Pluto had in the U.K. and Germany, Austria, Switzerland countries. So we're excited about this being a global opportunity as well and it's one that really leverages the infrastructure that we have.

In terms of incremental investments and how that impacts our guidance, so there are two pieces that impacted the adjustment to our OI guidance for the year. By far, the biggest of those is accelerating the investments that we're making in our growth initiatives, principally Pluto. So given the momentum that we talked about, we are -- we're going to be making some significant relative to Pluto's spend, not significant in the scheme of things, but we'll be making incremental investments in Pluto. Those investments are principally going to be in expanding the team.

Most in -- with respect to the expansion of the team, it's really product and engineering. We're investing money in accelerating the integration process, particularly in the ad tech and data infrastructure areas that allows us to integrate and sell their inventory more fluidly across our entire pools of advertisers, particularly as we enter the upfront. And then we're going to have a range of incremental product releases over the course of the summer as we continue to improve the product to grow consumption and engagement. So yes, I guess with that, I'd like to turn it over to Bob just to wrap up the call.

Bob Bakish -- President and Chief Executive Officer

Yes. Thanks, Wade, and thanks, everyone, for your questions. Look, as I hope you heard today, the second quarter marked another period of strong execution and evolution at Viacom. We unquestionably have momentum in the core, including having secured meaningful distribution wins, both extending existing relationships and creating new ones in the U.S.

and beyond, which together broaden the footprint of our services. And importantly, we are on track to deliver on key previously stated objectives for the year, including audience share growth for our flagships, a return to full-year advertising and affiliate growth at domestic media networks as well as full-year profitability for Paramount. In addition, we see a strong second half for our international business, including a return to growth. At the same time, in this rapidly changing TV ecosystem, we're leaning more and more into the evolution of our company.

In that regard, we're extremely excited about the consumption of our brands that we we're seeing off TV, including across social media and in real life, as well as what we're beginning to see in the mobile distribution space. And there is unquestionable momentum at our key new businesses: AMS, studio production, and of course, D2C, including Pluto TV. These businesses are transforming the composition of our company. So thanks again for your support.

We look forward to continuing to update you as we go through this exciting second half of fiscal 2019.

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

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

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

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

Bob Bakish -- President and Chief Executive Officer

Wade Davis -- Chief Financial Officer

Rich Greenfield -- BTIG -- Analyst

Alexia Quadrani -- J.P. Morgan -- Analyst

Marci Ryvicker -- Wolfe Research -- Analyst

Jessica Reif -- Bank of America Merrill Lynch -- Analyst

David Miller -- Imperial Capital -- Analyst

Tim Nollen -- Macquarie Research -- Analyst

John Hodulik -- UBS -- Analyst

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