Industry Insider: A Look Into Paramount Global’s 2023 Q1 Earnings Call

Paramount

At 8:30 AM on Thursday, May 4th, Paramount Global (NASDAQ: PARA) held 2023’s First Quarter Earnings Call. One hour later, when the markets opened at 9:30 AM, its stock price dropped from the previous afternoon’s $22.87 per share to $17.50 per share, closing the day at $16.40. The 28% decrease was caused by Paramount's failure in meeting investors’ expectations both on revenues and earnings, as well as announcing a quarterly dividend cut from 24 cents to 5 cents.

At several points of his statement, CEO Bob Bakish highlighted the importance of Paramount’s vast content library to deliver long-term value to investors. He underlined the success of Paramount+ original productions such as Mayor of Kingstown and Tulsa King, as well as the benefits of bundling it with Showtime, where the shows Your Honor and Yellowjackets amounted for 30% of total streamed hours. He also praised the theatrical successes of Top Gun: Maverick (2022) with $1.5 billion at the box office, and Scream VI (2023).

The investment in streaming is the main driver of the higher operating expenses. Divided in “Content Costs” and “Distribution and Other”, the former increased by 2% compared to last year’s, while the latter by 11% (notably, investment in streaming is accounted for as “Distribution”). Moreover, the bundle of Paramount+ and Showtime called for revisions of the combined content portfolio, which resulted in $1.45 billion in charges for the impairment of content to its estimated fair value, as well as $225 million in write-off and contract termination costs. The heavy investment in its streaming services is part of Paramount’s larger internal restructuring process that ultimately aims at leveraging profitable content. In fact, Bakish stated that:

“We are leveraging our traditional media base, both financially and operationally, to invest in, build, and scale, as to have streaming networks for the 21st century.”

Taking this into account, the lower returns were somehow to be expected, as Paramount’s structural change has been apparent for the past few years - its biggest manifestation being in changing the name of the company itself as recently as February 2022 from ViacomCBS to Paramount Global. As highlighted in our article on the potential sale of its subsidiary BET, Paramount has been steadily finding ways to increase its free cash flow by divesting in those divisions and subsidiaries that do not perform organically with the rest of the company. Bakish himself states that, in order to reach the final goal of returning to profitability in 2024, their objective is to “align resources with growth areas and divest non-core assets.” Another example of this is the resumption of the sale of their publishing arm Simon & Schuster, which was halted after antitrust concerns by the government.

Although these results are justifiable given the larger restructuring plan, it is difficult to get past first impressions, and of the financial results for 1Q 2023 may look worrisome when compared to last year’s. Operating income calculated in accordance with GAAP amounted to $775 million in 2022, while a loss of $1,226 is reported for 2023. As delineated in the company’s Form 10-Q, the 1% decrease in total revenues is the result of a “weakness in the global advertising market” that negatively impacted linear networks, offset by higher revenues from streaming services. In fact, there is a 39% year-over-year increase in the DTC segment, with quarterly revenues jumping from $1,089 million in 2022 to $1,510 million in 2023. In particular, Paramount+ subscriber base increased from 39 million to 60 million, and the associated revenues increased by 65%. A further investment in the streaming division may be the final push needed for it to reach profitability.

Most streaming platforms still haven’t reached profitability, as they did not enter the market organically, but rather due to the sudden rise in demand of content caused by the pandemic. Therefore, they need significant injections of capital to be competitive, as they cannot rely only on pre-existing libraries but need to fight in the arena of original content as well. Netflix only recently reached a positive free cash flow thanks to the implementation of ad-supported subscriptions, and Disney+ is still in the red. Therefore, stressing on the content that attracts the majority of the audience seems a good strategy for Paramount to cut losses and increase revenues.

While trying to maximize cash inflows on one side, a way in which Paramount lowered its cash outflow was by cutting the quarterly dividend from 24 cents to 5 cents a share. This move may be able to result in $500 million in annualized cost savings, but it also brings attention to its high net debt leverage ratio of 6.8x EBITDA.

Bakish closed his statement with a positive message, aimed at reassuring the shareholders of Paramount’s unflinching position in the media landscape:

“This is a company that knows its strengths, knows how to build on them, and one that is positioned to succeed, including as the macro environment continues to stabilize, which makes us excited about the path ahead.”