Adam Townsend - EVP, Corporate Finance and IR Leslie Moonves - Chairman and CEO Joe Ianniello - COO.

Ben Swinburne - Morgan Stanley Jessica Reif - Bank of America Merrill Lynch Michael Morris - Guggenheim Partners Alexia Quadrani - JP Morgan Bryan Kraft - Deutsche Bank Doug Creutz - Cowen & Company David Miller - Loop Capital Laura Martin - Needham & Company James Goss - Barrington Research Marci Ryvicker - Wells Fargo.

Good day, everyone, and welcome to the CBS Corporation Fourth Quarter 2017 Earnings Release Teleconference. Today’s call is being recorded. At this time, I would like to turn the call over to the Executive Vice President of Corporate Finance and Investor Relations, Mr. Adam Townsend. Please go ahead..

Good afternoon, everyone, and welcome to our fourth quarter and full year 2017 earnings call. Joining us for today’s remarks are Leslie Moonves, our Chairman and CEO, and Joe Ianniello, our Chief Operating Officer. Following Les and Joe’s discussion of the Company’s performance, we will open the call up to your questions.

Please note that during today’s conference call, the fourth quarter and full year 2017 results for EPS and prior period comparisons will be discussed on an adjusted basis, unless otherwise specified. Reconciliations for non-GAAP financial information related to this call can be found in our earnings release or on our website.

Also note that statements on this conference call relating to matters which are not historical facts are forward-looking statements, which involve risks and uncertainties that could cause actual results to differ. Risks and uncertainties are disclosed in CBS Corporation’s SEC filings.

A webcast of this call and the earnings release related to today’s presentation can also be found in the Investors section of our website at cbscorporation.com. Finally, as you know, we’ve put out a statement about two weeks ago announcing establishment of a special committee of independent directors to evaluate a potential combination with Viacom.

On this call today, we will not be responding to any questions or comments about that process. With that, it’s my pleasure to turn the call over to Les..

Discovery in April and we’re in preproduction on the highly anticipated return of the Twilight Zone. With triple Academy award nominee Jordan Peele as executive producer. Jordan redefined the horror genre with his highly acclaimed movie Get Out and we can’t wait to see what he will do with a franchise like Twilight Zone.

At the same time, we’re expanding our content. We’re also making All Access easier to purchase than ever before including recent deals that bring the service to some of the most widely available platforms like Amazon Prime and Samsung Smart TVs.

The one-two punch of premium content and the direct-to-consumer distribution also led to a huge year at Showtime. Once again, over the top subs are proving to be additive to our overall today. And so in 2017, we surpassed 25 million subscribers for the first time in Showtime’s history.

As a result, this is Showtime’s best year ever in terms of revenue from subscription growth. None of this would have been possible obviously without our murderers’ row of hit series. Showtime had the number one scripted series in premium cable for three out of four quarters in 2017.

In the first quarter was Homeland; in the second, it was Billions; in the fourth, it was Shameless; and in the third it was some show on another network that had a bunch of dragons in it. Our strategy of premiering a new show each month is driving consistent and steady growth, and that’s continuing here in the first quarter.

Last month, we launched a new hit drama called The Chi, which had our most watched series premier since the debut of Billions two years ago and has gained terrific momentum since. We followed that up with the return of Homeland, Showtime’s number one series, which just had an even bigger season premier than last year.

And next month, we will have season three of Billions. So, Showtime is off to a terrific start in 2018. Our creative success is also driving our financial success in publishing where Simon & Schuster ended 2017 with 195 best sellers including 30 that reached number one. We had 20 of the top 100 bestselling titles.

So, we did disproportionally well where it mattered most. Coming up in 2018, we have several key books from our lineup of bestselling authors including Nelson DeMille, Stephen King and Ruth Ware. In local media with midterm elections coming this fall, 2018 is shaping up to be a great year.

In addition, having the Grammys in New York helped our biggest station WCBS set a new revenue record during the first quarter, bringing in more dollars for any award show in history. I also want to point out that we are extremely pleased to welcome Network Ten from Australia into the CBS family.

The transition with their superb management team has been seamless. This is a tremendous asset that plays right into our core strength of broadcasting.

At the same time, Network Ten provides a number of compelling digital opportunities including the launch of All Access, as I mentioned, and it helps to continue to grow our international portfolio as well. So, across our Company, we are delivering outstanding results today. We are setting ourselves up for growth well into the future.

We are using our expertise to invest in the best possible content and to secure the best possible return. We are two years into the five-year strategic plan we laid out to you at our Investor Day in 2016, and we are exceeding our commitment to you.

This includes the 2018 that will be another record with the back half that will be even stronger than the first. In just a few short years, we have led CBS through a strategic and operational transformation. We have doubled the number of shows we are producing. We have dramatically increased the number of platforms we’re selling to.

We will soon have five direct-to-consumer services including All Access, Showtime, CBSN, CBS Sports HQ, and Entertainment Tonight; and now, we are gearing up to expand them into the international marketplace.

On top of all this, our base business is performing very well with compelling new opportunities in advertising, thanks to more and more data that we have to sell. And we have a growing number of reliable and steady revenue sources including retrans and reverse comp, and domestic and international multiplatform content licensing.

So, you can see why we feel extremely confident in our ability to drive earnings for years to come and why we look forward to continuing to update you on our progress. With that, I’ll turn the call over to Joe..

New Orleans. Affiliate and subscription fee revenue was up 40%, thanks to healthy gains in reverse compensation. And advertising was up 4%, which as I said earlier, included Network Ten. At the CBS Television Network, advertising was even with Q4 of 2016.

And for all of 2017, CBS network advertising came in over $4 billion, which is in line with what we said on our last call and consistent with what we achieved in each of the last five years, demonstrating once again the continued strength of network advertising. Entertainment operating income for the quarter was up 25% to $465 million.

And the operating income margin expanded by 1 point even as we continued to increase our investment in All Access, CBSN, and CBS All -- CBS Sports HQ, all of which represent new ways to drive earnings in the years ahead. Fourth quarter Cable Networks revenue was up a solid 9% to $547 million.

This increase was driven by growth at Showtime OTT which had a terrific quarter as well as the international licensing of our Showtime original series. Our Cable Networks operating income for the fourth quarter came in at $201 million compared with $290 million in Q4 of 2016.

This reflects the timing of our release schedule as well as higher level of investment in our programming. Looking at a full year basis, cable operating income grew 4% to $996 million with an operating income margin of 40%. In publishing, fourth quarter revenue was up 12% to $235 million, reflecting higher print book sales.

In addition, digital audio continues to grow strongly, driven by younger consumers. We also had a strong slate of bestselling titles in the fourth quarter including Leonardo Da Vinci by Walter Isaacson and Principles by Ray Dalio.

Publishing operating income for the quarter was up 22% to $44 million, and the publishing operating income margin grew 2 points to 19%. Turning to local media, revenue for the fourth quarter came in at $450 million compared with $526 million in Q4 of 2016 when we had that record political spending.

Non-political revenue was up 7% in the quarter, which is higher than our expectations from our last call, and we saw particular strength in the retail sector during the holiday season. Our local media operating income for the fourth quarter was $137 million compared with $216 million in Q4 of 2016 and our operating income margin was a solid 30%.

Turning to cash flow and the balance sheet. For the full year 2017, free cash flow came in at $989 million, which includes a significant investment in our owned content -- higher investment in our owned content as well as higher cash taxes compared with $1.26 billion in 2016, when we had the Super Bowl.

In addition during the fourth quarter, we issued a total of $900 million worth of senior notes and we used some of those proceeds to refinance 5.75% notes maturing in 2020 at significantly lower interest rates. Now, let me spend a minute discussing the new corporate tax law. We see two major benefits for us.

The first is that our book tax rate is going to be lowered to approximately 24%; and the second is that our cash taxes are going to be significantly reduced by hundreds of millions of dollars, as a result of the lower tax rate.

This savings will allow us to accelerate investments in our key growth initiatives such as expanding All Access and CBSN internationally, launching CBS Sports HQ and our Entertainment Tonight streaming services, and most importantly, producing more premium content.

Plus, in addition to investing in these growth initiatives I just mentioned, we also expect to buy back between 800 and $1 billion of our stock in 2018. Now, let me tell you what we see ahead. During the first quarter, local media revenue is pacing to be up low single digits. And as you heard from our peers, network advertising has been robust in Q1.

And our scatter pricing in daytime, primetime and late night is up nearly 40% from the upfront demonstrating broad based health in the marketplace. And for the full year of 2018, as we discussed on our last call, we see four different areas that will drive topline, incremental growth, well in excess of a $100 million each.

The first driver is from advertising, which we will benefit from what we expect to be a solid midterm election cycle in the back half of the year. The second is from our direct-to-consumer offerings led by sub growth at CBS All Access and Showtime OTT. The third is from retrans and reverse comp which continues to grow strongly.

And the last driver is from international content licensing, fueled by our increased ownership of content. With these key growth drivers and the separation of our advertising based radio business behind us, we now have more confidence and visibility into our future earnings than we’ve ever had before.

And as a result, we can now comfortably say that in 2018, we expect revenue growth in the high single digits and EPS growth in the high teens. And we expect to achieve all of this even as we continue to ramp up our investment in our organic growth initiatives.

So, 2018 will be another record year for CBS, and we’re set up for continued strong growth beyond that as well. And with that, Anne, we can open the line for questions..

Thank you. [Operator Instructions] We’ll take our first question from Ben Swinburne with Morgan Stanley..

Thank you. I have one for Les and then a follow-up for Joe. Les, obviously, you’ve been a big fan, so to speak, of the NFL, over the years. But, Thursday Night Football went another direction this year.

How do you think about that process? What do you do with the savings you’re going to generate from not retaining that Thursday Night right? And there is certainly some concern in the market that that could impact your retransmission fees. I think your prepared remarks tell us your view on that.

And maybe you could just spend a minute on why you’re so confident that it’s not a factor..

Yes. Well, first of all, we love football, we like it better on Sundays than on Thursday. Economically, it’s considerably better for us to do that. Very frankly, Ben, Sunday affects the retrans and the reverse, Thursday doesn’t, since we only had single year availability. So, literally, it didn’t have anything to do with that negotiation.

As I said, we love it, we know the economics, we carried Thursday night for four year, we have exclusively for two. The reason it didn’t affect the retrans, it was not exclusive on Thursday night. So, it didn’t help any stations our own or otherwise because you can get it on the NFL network or on Amazon.

So, we know the economics really well of doing that. In addition, may I add, our Thursday night wins with our regular programming, we have Big Bang, Young Sheldon, which sort of kill it. So, we’re looking forward to taking that money and reinvesting it in regular programming and moving on from there. .

Great. And then, Joe, I think if you look at the full year, licensing and distribution was up almost 8%, I think it’s the highest growth rate since maybe 2013. I think, another concern in the market is the syndication business is sort of dead. Maybe you could just talk about the drivers of licensing and distribution for the year.

How did international do, domestic, digital, what’s making that business start to grow faster than expected?.

New Orleans. We have not sold Scorpion yet. So, we have some real beach front properties still yet to come. And our international team sells obviously some CW product as well as All Access product. So, those 65 shows have a lot of value in rest of world. And they need those -- that content for their business model.

So, obviously, we made that a growth pillar of international content licensing. We’re executing ahead of plan on that. So, we said we were going to have a good year in content licensing and we delivered..

We’ll go next to Jessica Reif with Bank of America Merrill Lynch..

Thanks. Two questions, one on OTT. Obviously, 5 million subs is incredibly impressive.

What do you think is driver? Is it Amazon-driven? And can you talk about churn? And what are the pros and cons of Amazon distributing for you? Do you lose the direct-to-consumer, do you lose that information? And then on the content -- sorry?.

Go ahead, Jessica..

Okay. And then, the increase in content has been the biggest driver of value for the Company over the many years since Les has come to CBS. You said you doubled production.

Are there any limitations from here on how much more you can scale up without losing quality and focus?.

Let me -- I’ll answer the second one. First of all, CBS is almost 24 years. So, it’s been going on a while. And the answer to your question is....

I remember when you came..

Right. I know, I was a young man then. The amount of content, the sky is the limit. As more and more people come in to the marketplace, the Netflix, the Amazons, the Hulus, the Apples, we’re supplying to all of them. We have the capability, we have the producers, we have the executive team.

The fact that we’ve doubled in just a few short years, we’re ready to go and we get -- that’s what excites us, doing more and more premium content..

And Jessica, on your -- the OTT question, obviously, we’re ahead of plan with the 5 million. So, we’re very pleased with that. It’s broken out almost evenly between the two services. And CBS All Access really just launched on Amazon in January. So, it’s not a big part of their base yet, it’s much more significant at Showtime.

They are fantastic marketers and show they are able to drive sub growth which is terrific. We see lower churn with those sort of services because the consumers are used to that proposition. So, that’s really good. And we do get the data on all of our shows and stuff. So, we feel -- and the economics are obviously favorable.

So, it’s really just a win-win for this new distribution model. But, it’s really being driven by the consumer..

We’ll go next to Michael Morris with Guggenheim Partners..

Good afternoon, guys. Two questions. First, can you help us size the Network Ten contribution and how to think of it for the coming year? Is it -- is straightforward just kind of doubling the 4% advertising lift in the quarter at entertainment.

And assuming that carries forward, are there other revenue streams to think about and is it profitable? And then, second, the investors have been focused on digital platforms ramping up their show production, but lately there has been a lot of press around executives and show running talent moving or making commitments to some of these platforms.

And, Les, could you comment on how important these individuals are to your process, whether this is a shift in the competitive dynamic and how that impacts your business? Thanks..

Mike, I’ll take the first part. Network Ten, look, we grew 11% in the quarter; without Network Ten, we would have still grown double digits. So, I think it’s -- all the advertising right now is coming from advertising for Network Ten.

So, as we look forward into ‘18, what I would say, it’s dilutive to our margin because again obviously, we are investing in there and there is a ramp that’s coming in the profitability. So, stay tuned for that.

So, again, it’s not a significant deal, obviously, on a $13.7 billion revenue base, we’re talking hundreds of millions of dollar in that magnitude. So that will give you some -- that will size it for you. .

Regarding the creators, as I said I’ve been this doing this a long time. And previously, there was very little competition. And then it would expand to cable and people would start going to HBO. Look, Ryan Murphy is an extraordinary talent, one of the greatest creators out there. They offered him hundreds of millions of dollars. He had to take it.

But then you look a Chuck Lorre. Chuck Lorre has three shows on CBS and he also has a couple of shows over on Netflix. So, we have a lot of talent. There is a lot of room. The landscape does change. But, we find new talent and we also continue to be in business with the best talent. So, Netflix is another competitor and as well as the supplier.

So, it doesn’t concern me..

We will go next to Alexia Quadrani with JP Morgan..

Thank you. Just a couple of questions. You mentioned earlier licensing of The Good Fight, I think through Amazon to some global markets.

I guess, how do you balance licensing your content like this outside of United States versus maybe your plan to actually moves CBS All Access into those markets directly? And then, my second question is just sort of on the same train of thought, kind of any thoughts of possibly sort of preselling The Twilight Zone internationally and help continue to fund the show..

Let me start and Joe jump in later. Obviously, let’s go back to Star Trek, which was as expensive of a production as we have ever done. We were just launching All Access. We got a huge amount of money from Netflix for the international rights, and it made it very viable for All Access and continue to do that.

As we look out into the marketplace and as we expand CBS All Access internationally, there is the possibility you would sell it to Netflix or Amazon with carveouts or where CBS has their own over-the-top servers. When you look at Twilight Zone, once again, another huge, huge property with incredible creative auspices there.

We haven’t yet decided on what to do, needless to say, Netflix is calling, Amazon is calling and we’re getting closer. We will look at it. My guess is we will make a huge international sale, because by the time Twilight Zone goes on the air, we won’t be in that many territories but we will leave room open to do it later on.

So, on each case, we look at what the marketplace is, what’s available, and how we’re planning. But more and more of it will come to us and less and less we will go to them. But right now, economically, it’s very good to be selling to Netflix and Amazon..

We will go next to Bryan Kraft with Deutsche Bank..

I wanted to ask you a question on measurement and ratings. I know, you’ve made some real progress this year using TCR and measuring out the 35 days.

Can you talk about where you think Nielsen’s ability to measure on all screens is at this point? And do you think TCR is the answer to closing that gap? And lastly, how much upside do you think there is next season to the GRPs you’ll have available to sell as a result of the expanded measurement currency with TCR and also out of home? Thanks. .

Look, we took a stab at quantifying this for you guys in 2016 in Investor Day with that consumption that’s occurring outside our monetization window. So, it started in a live rating and went to a C3 rating and now C7. And as Les just gave you an example from the Young Sheldon case, there is still significant consumption coming outside of that.

And so, we’re reliant on a third-party measurement system. We hear Nielsen is making certainly investments in their technology to capture all of this. But, obviously, we’re anxious in making sure we’re able to do that. Because it’s a lost opportunity.

So, the good news is the consumption is there and there is real upside I mean, you can do it by percentages, but it’s double digit percentages are now kind of watching it on their own time. And that’s an opportunity.

And we have to make sure we’ve delivered that for advertisers and we have to measure that and get paid for that, but we are delivering that today. So, that’s why we made it a pillar and that’s why we reorganized the sales, our sales team and so we are laser focused on that..

If I could just ask one follow-up, and I don’t know if you know this off the top of your head.

But, what would the ratings look like if all of the consumption were actually being measured right now? I mean, how different would those primetime ratings look?.

Yes. Bryan, we actually said that also in our day. We took the top 15 shows now and looked back 15 years, and the ratings are actually up. So, a lot is said with CPMs, you guys look at CPMs and you look at the ratings, we are delivering more than the overnight rating states. Advertisers know that, we know that, everybody knows that.

And so, our internal data, we try to -- we published that and we said we didn’t want to look at one show. We said, let’s look at the top 15 shows and aggregate that audience and compare that.

And it made sense, because there are so many different ways to watch it on different time schedules before it was in that one hour window, you either watched it or didn’t watch it. Now, it’s always available to you. So, it shouldn’t be that foreign of a concept to say consumption is actually up.

You have to have the right content obviously and being to CBS network number one in 14 of last 15 years that certainly gives us a premium advantage..

We’ll go next to Doug Creutz with Cowen & Company..

Hey, thanks. You talked about how happy you are with how CBS, the news direct-to-consumer product is doing.

I wondered if you could talk a little bit about the economics there, how meaningful a contributor can that be in your plans for the new DTC products you are offering? And then, secondarily, just a quick one, on the high teens EPS growth, you mentioned, is that off to fully adjusted for 4.40 number, is that off to continuing up to 4.19 number? Thanks..

Yes. Doug, it’s Joe. Yes, it’s off 4.40 number, so just to be clear on that. And on CBSN, look, it’s contributing, I would put it in the tens of millions right now in terms of profitability, Doug. But we’re focused on really growing that and we want to take that internationally. We want to make the content offering more robust.

We’re really building that getting the loyalty to the audience and then what we are seeing is it’s now available inside of All Access. We want the people to convert up to our paying service in All Access. That’s why we’re doing it with sports and entertainment news as well, based on the success we’ve seen with CBSN..

We’ll go next to David Miller with Loop Capital..

Yes. Hey, guys. Les, couple for you. Thanks for the breakout or actually thanks for the aggregate sub number on the OTT product’s 5 million subs. Could you just size that up between Showtime and All Access? My guess is that maybe 55% to 60% of that 5 million is All Access. But, if you’re willing to provide any granularity that would be great.

And then, also, I think -- correct me if I’m wrong, I think, 33 out of 100 Senate seats are up for election this year. There has been some news reports out suggesting that political spending this year could actually outpace 2016. Do you agree with that? And any other commentary surrounding that would be helpful..

Number one, the OTT services, they are sort of neck and neck. And it’s really -- it’s pretty 50-50 right now, which we’re really pleased about. And they’ve gone their own ways and they offer different things and the fact that they are that both doing exceptionally well is a big boom for us. Look, we’re anticipating a very big political year.

Obviously there is lot of seats that are up, there is a lot of issues on the table, there is lot of ranker in the market place, and we expect that there will be a lot of money spent. So, whether it beats 2016, we’re optimistic that it will..

We will go next to Laura Martin with Needham & Company..

Hi, there, maybe a couple.

Strategically, Les, do you see your position in OTT as a complement to your linear channel over OTT, which is sort of how Disney is positioning their new sports service or do you see them as sort of substitute from a consumer point of view, which is how I think of All Access? And then, [indiscernible] and scatter, I’m fascinated by the 40% higher rate.

And one of the things we’re seeing in Priceline and Expedia which do $5 billion each year in search engine marketing is they are pulling money out of that Google Search Engine and they are putting it on TV.

And I’m wondering if you guys already seeing that in your marketplace that’s helping the scatter number?.

Laura, let me deal with the first. I do view it as complementary. Obviously, the things that are diving our OTT product right now are catch-up on our network shows, on the main network shows. And then, obviously, as we add more and more original content, that becomes a bigger driver. Obviously Star Trek had a great effect as will The Good Fight.

When Twilight Zone comes on, it’s that. But, I think the good news, it also has a lot of the library. So, I do view them as working together as we go forward. More and more people are going to be watching the shows in different ways.

And as we’ve always said, you can get your CBS on a traditional MVPD, you can get it on a skinny bundle or you can get it now on All Access and each one of them pays us more. So, we look at it all working together..

And Laura on your scatter pricing, we’re seeing broad-based strength. So, we’re seeing dollars come back from -- if they are circulating in digital. I think there will always be some digital components but we’re also seeing it tech and telecom, in other areas where we’re seeing big budgets coming to television advertising. So, that’s positive.

Maybe tax reform has something to do with that as well. But, we’re positioned nicely..

So, we will go next to James Goss with Barrington Research..

I would like to dig in a little bit more on the introduction of direct-to-consumer internationally. I was wondering if you could discuss the process and pacing of that and maybe frame out any of the economic expectations and subscriber expectations.

And I’m also wondering somewhat to what Les was talking earlier, if there is any conflict with your international series syndication sales that makes that a little trickier to pull off?.

Jim, it’s Joe. Look, we’re going through the process and just how we did that in the United States. So, that’s why we’re going kind of Canada first, close to us, English language, we know what rights they have and stuff like that. So, we’ve built the tech stack to really scale that infrastructure.

So, we’re going to be cautious to make sure we learn lessons along the way. We look at where Netflix is and see their sub growth and so we have some envy there. And so that’s going to be -- we are going to set our sights there, and those who will be our expectations. Obviously, we’re spending money to do that. So we’re pre-revenue right now.

But, we think it’s the best ROI because we’ve seen the success CBS All Access has, Showtime OTT as well as CBSN domestically. So, we know we’re on to something. So, we’re going to be deliberate in the approach. And as far as the conflict, each country, the rights are sold differently. So, obviously, we never violate any of those contracts.

But, we’re going to be strategic in the roll out and how we do this. So, each country’s offering maybe a little differently. But, long-term, the goal is to have a global direct-to-consumer offering with original product in there, live content, library. It’s going to be a compelling offering for the consumer..

Okay. Thanks.

And one other thing, to the extent that you have these other opportunities bubbling up internationally as well as domestically, do you think that take some of the pressure off of always needing the expensive sports programming and award show emphasis and things of that nature that have tended to pressure costs in the past?.

We love our sports, we love our Grammy awards, we love being a full service network. You probably should talk to Fox. They’re going a different way..

That question will come from Marci Ryvicker with Wells Fargo..

Thanks. Two questions. Joe, local is pacing up low single digits, I assume that includes political.

So, can you talk about maybe the pace excluding political? And then, related to that, are you feeling any impact from the Olympics, so perhaps the pace would be even higher in a more normalized environment? And then, secondly, on the cost cutting side, you talked about $50 million run rate benefit.

What segment will that be in and is there anything else to cut or may that $50 million moves higher over time?.

Marci, we always look for efficiencies throughout the organization. So, I think we’ve demonstrated that we’re pretty cost disciplined. The $50 million is really split amongst the four segments we have, the largest being the entertainment segment. So, I would spread that and again disproportionally on the entertainment segment.

As far as local, political in Q1 is very small. As you know, this is all back half, Q3, mostly actually Q4. Over 50% of the dollars are spent in the month of October. So, it’s not really driving that low single digit growth that we talked about.

And obviously, the Olympics take some money out of the marketplace for two weeks in February, but we had a very strong January. And again, we expect to hit our guidance..

Great. Thank you, Marci, and thanks, everyone, for joining us. This concludes today’s call. Thanks a lot..

And again, this does conclude today’s conference. We thank you for your participation. You may now disconnect..