Paramount Skydance Corp Q3 FY2025 Earnings Call

Good afternoon. My name is Nadia, and I'll be the conference operator today. I would like to welcome everyone to Paramount's Q3 2025 Earnings Conference Call. At this time, I would now like to turn the call over to Kevin Creighton, Paramount EVP of Investor Relations. You may now begin your conference call.

Good afternoon, and thank you for taking the time to join us for the Paramount Third Quarter 2025 Earnings Call. I'm Kevin Creighton, EVP of Corporate Finance and Investor Relations. Joining me today is our Chairman and Chief Executive Officer, David Ellison; our President, Jeff Shell; our Interim Chief Financial Officer, Andy Warren; and our Chief Strategy and Operating Officer, Andy Gordon. As a reminder, we will be making forward-looking statements today that involve risks and uncertainties. Our remarks will also include non-GAAP financial measures, and reconciliations of these measures can be found in our earnings letter or in our trending schedules, which contain supplemental information. These can be found on our Investor Relations website. I'll now turn it over to David for a few brief remarks before we take analyst questions.

Good afternoon. Before we get to Q&A, I'd like to take a moment since this is our first earnings call to share some thoughts on what we've accomplished so far and where we're heading. We launched the new Paramount just 96 days ago. And as we approach the 100-day mark, we're encouraged by the meaningful progress we've made in a relatively short time. We moved quickly, laid a strong foundation for what's ahead, and there's a real sense of energy and purpose across the company. Our goal in bringing these two companies together was simple: to honor Paramount's incredible legacy of storytelling while taking the necessary steps to transform it for the future. The combination unites an extraordinary and diverse collection of entertainment assets, spanning film, television, animation, interactive games, news, and sports, supported by a rich library of celebrated and award-winning content. This powerful portfolio gives us the tools to achieve scale and succeed in today's fiercely competitive media landscape, and we intend to build on this strong foundation, investing the necessary resources and talent to ensure our company is not only well positioned to compete but to lead in the industry. Our vision is to transform Paramount into the global home of world-class storytelling, powered by one of entertainment's most storied studios, the leading broadcast network, and a scaled global streaming platform that delivers must-watch programming to audiences everywhere. Achieving this vision requires reimagining how we operate, driving greater efficiency, unlocking new opportunities for creativity, and positioning the company for sustainable long-term growth. With this in mind, on day one, we identified our North Star priorities, the areas where we see the greatest opportunity to drive meaningful progress. They are: first, investing in our growth businesses, anchored by our creative engines and exceptional storytelling. Second, scaling our direct-to-consumer business globally; and third, driving efficiency enterprise-wide with a focus on long-term free cash flow generation. Over the past three months, as part of a thorough review of our assets and organization, we've taken early but significant steps towards advancing these priorities by making key leadership hires, pursuing high-impact partnerships, expanding our world-class roster of creative talent, reigniting performance across our studios, maximizing the value of our highly profitable CBS portfolio and driving efficiencies across the organization, all while staying true to our mission as a creative company. Storytelling is and always will be the heart and soul of everything we do. Every effort serves a single purpose: to bring the best stories to the broadest possible audience. Thanks to our actions to date, we are now well positioned to align resources with strategic priorities and invest boldly in areas with the greatest long-term potential. Just prior to this call, we issued a letter to shareholders outlining our third and fourth quarter results and expectations, which we encourage you to review. The letter details our 2026 guidance, including total revenue of $30 billion, driven by strong growth in direct-to-consumer revenue and global profitability, as well as adjusted OIBDA of $3.5 billion. Additionally, we have increased our run rate efficiency target from $2 billion to at least $3 billion. Building on these financial and operational priorities, we're also taking decisive steps to streamline studio operations and elevate performance, particularly at Paramount Pictures. In the near term, this includes adjustments to our film slate. Our plan is to grow theatrical output, targeting at least 15 movies per year over the next few years, beginning in 2026. While this rebuilding will take time, we are confident that our creative direction and business strategy will deliver the quality films that will enable us to engage and expand audiences worldwide. More broadly, over the next year, we plan to make incremental programming investments in excess of $1.5 billion across both theatrical and direct-to-consumer platforms. These investments are designed to expand our pipeline of premium films, television, sports, news, and gaming content for global audiences. We've clearly demonstrated this commitment through a series of major creative partnerships and long-term deals from South Park and the UFC to the Duffer Brothers, James Mangold, and our landmark collaboration with Activision to bring Call of Duty to life on the big screen and much more. Our top priority is our direct-to-consumer business, where we are focused on rapidly and efficiently scaling subscribers, engagement, revenue, and profitability. Since 2023, Paramount+ has achieved the largest U.S. subscription growth among all major streamers, excluding bundles, and we aim to aggressively build on that momentum. In Q3, we added 1.4 million new subscribers for a total of 79 million. We are committed to scaling our subscriber base and are pursuing a more balanced year-round programming strategy to drive higher engagement. As we know, this is the single greatest factor in subscriber growth and loyalty. Over the past 12 months, Paramount+ is ranked as one of the top three most sought-after sources of preferred content among major streaming services. We believe we can do even better, and we are fully committed to doing what it takes to become consumers' top choice for great storytelling. Finally, our goal is to accelerate innovation by making technology a core competency of our company. Competitors from Silicon Valley have quickly expanded into media and broader forms of entertainment. And if we want to remain competitive long term, we must strengthen our technology and do what it takes to position ourselves as the industry's most technologically capable media company. Again, I want to stress that technology at Paramount is not and never will be a replacement for human creativity. Rather, it serves as a powerful multiplier, enhancing performance, elevating the consumer experience, and equipping our creative teams with the tools that will enable them to tell even better stories more efficiently and effectively. We're excited about several innovation initiatives already underway, and we'll be sharing more details soon. While we're still in the early stages, as I mentioned, this is only day 96, we're energized by the progress we've made and the clear path ahead, and we look forward to answering your questions.

The first question goes to Robert Fishman of MoffettNathanson.

Can you talk more about your confidence for Paramount+ to gain global scale? And what role does growing your overall content spend play into better competing with the other large SVOD platforms in the future? And then just on a related note, when you think about this global scale, how do you balance growing the overall subscriber base while reducing investments in select international markets that you called out?

Yes, absolutely. By the way, Robert, thank you so much for the question. First, I'd just highlight that we had a really good quarter as it relates to our DTC business, 75 million total subscribers. Paramount+ revenue growth was up 24%, and we're up 17% for the segment. So I think we've made really good progress in that arena. To achieve scale, I think we really need to accomplish two main priorities. One is we need to increase our investments, obviously, in content. As you guys know, high-quality storytelling, sports, and entertainment all increase engagement, which drives subscribers. We've been doing that across our business. We've made investments in the UFC and Zuffa Boxing, along with incremental storytelling investments as well, in addition to bringing over talents like the Duffer Brothers, all of which will be telling stories across our ecosystem and on Paramount+. We're also making investments on the technology side of our business to really improve the product. We've brought over Dana Glasgow, formerly of Meta. And we're really in the process of converging the three streaming services that we have now onto one platform. For clarity, the company currently operates three separate streaming services across multiple clouds and multiple stacks. By unifying those all into one platform, we'll be able to significantly improve the user experience and significantly improve our recommendation discovery. This will also improve our capabilities across the ad tech we'll be able to deploy. We think that improving the content and the technology available on the platform will lead to incremental subscriber growth and engagement. Jeff, anything you want to add to that?

Yes. Let me quickly address the international aspect of your question. Interestingly, the two main areas that David mentioned—content investment and platform investment—are both global initiatives. For example, one of our largest content investments involves increasing our studio output, and there is nothing that promotes platforms in most international markets quite like quality filmed entertainment and great movies, whether animated or live action. This is a clear illustration of how our content investment is aimed at a global audience, rather than just domestic. The platform investment we are undertaking is also a global endeavor, not confined to individual markets. A key component of this is Pluto, which, despite being less frequently discussed, plays a crucial role in certain international markets with low average revenue per user and can significantly benefit our direct-to-consumer business, and can stand alone as a strong business. Currently, Pluto operates on a different technology infrastructure, which means we cannot transition users from Pluto to Paramount+. However, I am optimistic that once we launch the platform investment, we will be able to leverage this product to expand in markets that do not generate high average revenue per user.

The next question goes to Steven Cahall of Wells Fargo.

So David, if I have maybe an initial conclusion from the shareholder letter, it's that you want more: more originals, more licensing, more sports, news, wide releases, tech, and I guess, a lot more efficiency. Is there any way you can help us think about how much investment you plan to put into Paramount Skydance over the next several years? I'm guessing it's well in excess of that $3 billion, and there's a lot of revenue as well. But just in terms of the size of the company, any way to put this into sort of a big number? And then just on the studio side, with the turnaround you're looking to do and the additional wide releases, what did you learn from your experience at Skydance, especially creatively, that you all think you can now apply since the studio, at least financially, has kind of underperformed historically?

I appreciate the question. Everything we're focused on aligns with the North Star principles mentioned in our letter. We will continue to invest in our growth areas, particularly our creative initiatives and excellent storytelling, with a strong emphasis on scaling our direct-to-consumer business. The company we acquired has a solid foundation, but there's more work to be done. As noted in the letter, we plan to invest an additional $1.5 billion in content. Our objective is to be a globally scaled streaming service, and we will invest accordingly. Our approach as owners and operators is centered around driving long-term value creation for our shareholders. One key lesson we've learned at Skydance is that quality storytelling is crucial for success, and our commitment to excellence drives us forward. This philosophy helped us achieve successes like Top Gun: Maverick. Our partnership with Paramount has been valuable, and together, we aim to apply everything we've learned to scale our growth initiatives. On the film side, when we acquired the studio, it was producing about eight movies a year. Starting next year, we will increase that to at least 15 movies annually, which will contribute to greater scale and profitability across all segments of the business.

So David, maybe I'll just add, Steven. I think it's important to also understand that every investment we make, we're looking at how it drives value for the entire company and has a proper return on investment. Two, we definitely want to get to investment-grade metrics, so we do want to get delever. And three, the goal is to have high cash flow conversion as we get through the initial investment cycle. So all those things should be factored into how we think about investments.

The next question goes to David Karnovsky of JPMorgan.

With the TV Media segment, just be great to get your updated view on your portfolio of networks. How are you thinking about advertising and cord-cutting trends from here and within your 2026 forecast and then within that context, investing into or optimizing these brands?

Absolutely. Jeff, why don't you take that?

Great. David. So one of the original things that we, as a group, were kind of united on is that people talk about linear as one homogeneous business. It's really very different. When you start to look at it that way and you look at the disconnect between broadcast and cable, it's pretty stark and growing more stark. That's why CBS was one of the cornerstone assets that we were excited about when we acquired Paramount. Those trends are continuing since we've owned the company, and we expect them to continue in the future. On the broadcast side, obviously, it's declining. It's a linear asset like any other linear asset, but the declines are very modest compared to the cable side. Those don't even take into account the fact that the content on the broadcast side is increasingly a huge driver on DTC both in terms of subscribers and engagement, not just the sports, which is becoming barbell. If you look at where leagues are going, they want reach and dollars. The dollars increasingly come from streaming and the reach still comes from broadcast. We have a perfect company for that barbell with CBS, which is the most-watched broadcast network for the last 17 years and will be so again this year. It's off to a great start, by the way, in this season. And then the streaming product, which is our North Star to grow and scale globally. So increasingly, we will put investments into the CBS side of the coin, and we see those trends continuing. On the flip side, cable is continuing to decline, and each quarter is accelerating decline, not just for us but for everybody around the media business. It's increasingly clear that streaming, first and foremost, is a replacement for the multichannel cable environment. We're fortunate; yes, we have cable channels, but they're not as large proportionately for us as for others. We're really focused on taking those brands and seeing what we can do as far as driving long-term value, both overall and in terms of for our streaming product as it scales. We're not going to spin off cable assets. This company has a history of spinning assets, and it hasn't gone very well for us, and we think for others. One of the big rationales for spin is that when companies are stand-alone, they can focus on driving the value of the brands that they have in a more specific way. We're going to do that, but we're going to do that within our company, so our shareholders get the value of that. We think we have some pretty good brands on the cable side. Obviously, Nickelodeon is a core kids and family pillar for us, and that's going to be a very important segment for our company, not just in terms of streaming, but in terms of licensing and consumer products. We've just brought in a new leader for that business. But if you look at music, which is an important category, MTV is the traditional leader there; comedy, where Comedy Central is a great brand; and then BET, which has a great position with that audience. Our goal is to look at those brands, see if we can transform those businesses in a digital way to drive value long term and make them increasingly pieces of our overall scaled global streaming strategy, which is our core business. So that's our plan.

The next question goes to Jessica Reif Ehrlich of Bank of America Securities.

One of the things that differentiates your narrative from other media and entertainment companies is the focus on entertainment and tech. I'm just wondering, David, can you give us your vision of how tech and entertainment interrelate and how you drive growth? Like can you give us concrete or specific examples or color on how you think about that? And then just one thing in the release: when you talked about your partnership with IPG and Publicis for digital ad sales, what did they bring to the company? Like what tools will they bring to help drive revenue growth?

Jessica, great question. I'll take the first part of it, and then I'll pass it off to Jeff to jump into the second part of it. So again, what I would say is, as we've stated, our goal is to become the most technologically capable media company. There are several areas where that's going to directly impact our business, and I'll talk about a couple of initiatives underway currently. When we acquired the company, as I said previously, we were operating in three streaming services currently: Paramount+, Pluto, and BET+. Those are three completely independent tech stacks. They operate across two different clouds, and there's no connectivity, obviously, between those businesses currently. Convergence is currently underway to basically unite them into one unified platform, which should be done around the middle of next year. From there, we have a roadmap to obviously significantly improve the overall product for Paramount+. When you improve products, you get benefits like increased engagement, improved recommendation engines, and obviously, your ad sale monetization will improve as you improve the ad tech. Several areas this is going to impact the direct-to-consumer business. Another bucket is we're currently in the middle of an Oracle Fusion integration. The company, when we acquired it, did not have an enterprise solution. We're currently in the process of deploying that across the business. It will lead to significant operational efficiency across the entire company. It will also give better real-time information to managers. To think of it kind of like if you're a pilot, your instrumentation is important. The better visibility you have in terms of how the company is doing on a day-to-day basis improves your decision-making. We also know AI will have a significant impact across every business, and we plan to utilize that here. We obviously feel that frontier technology, working with more traditional machine learning will really impact how things like search and discover work on the platform. There will be increased efficiencies across the business by deploying those tools, and we also believe it will have an impact on content creation. But I want to be really clear that when it comes to content creation, we really view AI as a tool for artists to iterate more quickly, to tell better stories, and create further accessibility across the entire content creation pipeline. From that standpoint, we think technology is going to impact all aspects of our business, and we want to be a leader in that space. And with that, I will turn it over to Jeff to talk about the second part of your question.

Thanks, David. Jessica, when we signed our deal before we owned the company, one of the things we found in due diligence is that the company hadn't done the traditional media reviews in a long time of their buying relationships with the agencies. So we worked with prior management to do a review. The initial objective of the review was more traditional: we found that the cost by which we were buying marketing was much in excess of what we've seen in our previous employers and the market. The initial objective was to use this review to lower the cost of buying marketing for our various marketing entities, most notably our streaming and film divisions, which are the two largest buyers of advertising. Once we got into the process, we realized that the opportunity was significantly bigger than that. We met with all the top holding companies multiple times, and we ended up doing two deals with the two largest agencies, Publicis and IPG. The relationships and deals we did were much broader than just buying. On the buying side, we're going to get significant savings in the cost of marketing across the company in addition to a lot of benefits going with the two largest buyers. The real opportunity is more two other areas: first, these agencies are not just buyers of advertisers but represent all of our sales clients. As part of the deal, we secured significant revenue commitments over three years with both Publicis and IPG. Most of this advertising should be in the digital area where we need it the most; you should see that in our numbers over the next couple of years. More broadly, we're now partnered on a broad basis with the two biggest agencies as the world transitions from linear to digital. We see lots of opportunities as we do the things that David talked about in building our platform and building our ad tech capabilities to work with these partners. And as part of that, we brought in a new head of our advertising business, Jay Askinasi, who, most notably, came from Roku but before that was the Head of Digital for Publicis, one of our two new big partners. This is obviously a big micro thing we did, but on a macro basis, we see a lot of opportunities in the coming years to grow our business in this way.

The next question goes to Ben Swinburne of Morgan Stanley.

David, I'm guessing you probably can't talk about all the WBD speculation out there in the press. But I was wondering if you could talk a little bit about Paramount's guidance's broader M&A philosophy and just how you think about industry consolidation as something that could benefit the company or benefit overall returns in the industry. Obviously, we've seen kind of rolling M&A through this sector for a number of years, and I noticed you guys divested some assets, so it would be interesting to hear how you think about just the portfolio broadly going forward. And then just one kind of clarification question from the letter. You guys talked about getting to investment-grade metrics by 2027. I was just curious if you could talk about what that actually entails in terms of leverage level that you're aiming for and how it helps us think about your balance sheet goals.

Yes, Ben, thank you for the question. First and foremost, we're focused on what we're building at Paramount and transforming the company. And today, 96 days in, we are more confident than ever in our ability to achieve all of our North Star principles that we've discussed in the letter and previously on this call. I appreciate that we can't comment on specific numbers and speculation. What I would also say, as it relates to M&A in terms of our mindset, is that there's no must-haves for us. We really look at this as buy versus build, and we absolutely have the ability to build to get where we want to go. We believe we can achieve our goals with our creative content engines, our streaming goals, and that we can drive enterprise efficiency and create value and long-term free cash flow generation, all through the building standpoint. As it relates to M&A, everything for us ties back to whether it accelerates those three core principles. We're fortunate that we have the balance sheet to be opportunistic when we think that M&A will advance our goals. We are also long-term disciplined owner-operators. From that standpoint, we'll always approach things through the lens of maximizing value for shareholders. From an M&A standpoint, it's always going to be about how we accelerate and improve our North Star principles.

Yes. I think we mentioned in the letter that we are divesting two of our over-the-air businesses in Spanish-speaking Latin America. The company has a lot of different assets. We've clearly laid out in the letter, as David just said, our North Star priorities. If there are assets in the company that aren't critical and essential to our North Star priorities, we'll look at them case by case and decide to divest when we don't need to invest in things that are noncore to what's going to get us to global streaming scale. So I think you will periodically see us divest smaller assets.

Yes. I would just add on the leverage point that we're not sort of investment-grade across all the agencies today. We want to get all three remaining agencies to rate us as investment grade. There is a numerator and denominator to that equation relative to leverage ratios, and we will focus on achieving those goals.

The next question goes to Rich Greenfield of LightShed Partners.

I guess from a really high level, David, it would be great to get your view on the UFC strategy. It was obviously by far the biggest statement you've made since acquiring Paramount. How do you think about earning a return? You obviously put up a much bigger price than what was paid before. Between the subscriber base of Paramount+ getting this included, price increases—one is coming, but you didn't specify how much—how do we think about how you drive a return, and how you'll use the UFC assets across Paramount+, CBS, and even maybe some of your cable networks?

Yes, Rich, thank you so much for the question. We couldn't be more excited about our partnership with TKO, Dana White, and UFC. I would also loop into that Zuffa Boxing. Those two deals obviously make Paramount+ really the home for combat sports in—obviously—in the United States, and we also have rights in Latin America and Australia. When you look at the UFC, it is the largest sport that is not split off across multiple platforms. It really is a unicorn sports property, and we think it's going to drive tremendous value in terms of both subscriber growth and engagement across Paramount+, as well as CBS, where there will be some aspect of the UFC that also lives on CBS. Additionally, I think when you think about the UFC and the opportunity there, there are 100 million fans in the U.S. alone. It's grown 25% since 2019 to date, doing all of that behind the double paywall in its previous home. When you eliminate the double paywall, it's going to become much more accessible, and we think that growth rate will increase. We believe we are offering our subscribers at Paramount+ really significant value in the fact that for approximately the pay-per-view cost, you can access all of the UFC across Paramount+. We think it's a great value for consumers, and really going back to our North Stars of scaling our direct-to-consumer business requires investing in more content. Rich, you know this; you talk about this all the time. Having an asset like the UFC is going to increase engagement on the platform, drive subscribers, and we feel incredibly confident in the investment we just made. With that, I'll—

Yes. Bridging into the second part of the question, one of the things I would just note before I dive into more details here versus where we were in the investor announced round numbers 18 months ago, is that we are investing significantly more into content than was contemplated at that time. We are also driving greater efficiencies, which we believe will drive greater long-term value from a company perspective unmatched prior expectations. On the efficiencies, we will start '26 with $1.4 billion of those accomplished and in run-rate. By the end of '26, we'll have accomplished most of the $3 billion plus that we've outlined in our letter. We feel very good about our ability to hit our projection next year. Regarding content write-downs, you may know that in transactions like this, a review of all the content and libraries takes place, and we made appropriate economic and accounting adjustments to ensure they're consistent with our strategy and the company going forward.

Can I add one thing on UFC?

Yes.

To go back, Rich, if you don't mind using the example of UFC, if you were going to design a sport for us, UFC is perfect in so many ways. If I want to punctuate what David said, when we were looking at this asset for Paramount, we had a real desert of sports that ended at the end of the Masters and started again in the NFL. We saw lots of churn over the summer as people turned off the service and then turned back on for the NFL. UFC is a year-round sport, which is very unusual for major sports. Also, the sports industry is increasingly bifurcated: regular and event sports. You can look at recent NBA deals; there's a lot of regular season, and then there's a lot of postseason. Everybody who bought those rights would say that postseason NBA is different from regular season NBA. With the UFC, there is no regular season and postseason. Each of these numbered events that David talked about coming out from behind the paywall is an event, and having events throughout the year aligns perfectly where we’re trying to go.

The final question goes to John Hodulik of UBS.

Two, if I could. First, David, how should we think of the long-term profitability of the D2C business? What are the major levers to get there? It sounds like from the letter, you think ARPU is one of them where you guys could make some substantial headway in the near term. And then getting back to the comments on the investment, is this a situation where you are investing so heavily on the front end that free cash flow may turn negative in the near term before the platform scales up? Or how should we think of free cash flow trends over the next couple of years?

Yes, John, I’m going to turn it over to Andy to take that question, and then I'll fill in after that.

Sure. Yes. So the free cash flow is one of the biggest opportunities we have moving forward. For '26, we expect about $800 million of transactional and transformation costs, so on a reported basis, it will be negative. But on an adjusted basis, taking those one-time items out, it will still be positive. When we look forward, it really comes down to our ability for two things: working capital has been a big negative for this company for many years. It's a real opportunity for us to both get better payable and sales terms. One thing David spoke of was our ability to get better systems in place, better visibility into accruing receivables by customer and area, which will be a big driver of that. The other area I mentioned will accelerate cash flow growth is cash tax rates. Ours is marginal today and will improve over time. One real benefit of having a global portfolio of IP is that where you domicile that IP influences cash tax rates, and that's something we're also focused on. David, do you want to circle back to D2C profitability?

Yes. Absolutely. If you go and it's outlined, the D2C segment, it is profitable next year. It will be increasingly profitable in 2026. When we look at the growth rates across the business, we believe that we can grow and scale in service, and we're doing that in a fashion that is profitable.

The call has concluded. Thank you all for joining us today.