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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
At this time, I would like to welcome everyone to the Corus Entertainment Q3 2019 Analyst and Investor Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I'll now turn the call over to Mr. Doug Murphy, President and CEO of Corus Entertainment. Please go ahead, sir.
Thank you, Jack, and good morning, everyone, and welcome to Corus Entertainment's Fiscal 2019 Third Quarter Earnings Call. I'm Doug Murphy, and joining me today is John Gossling, Executive Vice President and Chief Financial Officer.Before I read the cautionary statement, I'd like to remind everyone that there are a series of slides that accompany this morning's call. You can find them on the website at www.corusent.com under the Investor Relations section.Now let's move to the standard cautionary statement found on Slide 2. Today's discussion contains forward-looking statements that may involve risks and uncertainties, additional information concerning factors that could cause actual results to materially differ from those in our forward-looking statements are contained in the company's filing with the Canadian Securities Administer -- Administrators on SEDAR.I'll now turn to our third quarter results on Slide 3. I am pleased to share that for a third consecutive quarter, we've achieved strong results. We delivered $458 million of consolidated revenue, up 4% for the quarter and driven by 10% increase in television advertising. These television advertising results exceeded our expectations. Consistent with what we've seen so far this year, with a number of contributing factors to the strong performance, including increased yield on our networks, momentum with our audit-based buying, innovative new advertising formats, direct-to-consumer advertiser spenders and double-digit growth in digital advertising. In terms of consolidated segment profit, we were consistent with the prior year at $171 million. John will take you through the details later in the call. In terms -- we're very pleased to report that our leverage target has been achieved 1 quarter ahead of our goal, which is a direct reflection of the disciplined executional excellence of our talented team. These Q3 results once again improved the company's financial flexibility. This improved financial flexibility enables us to invest in our core business and make additional investment as we build for the future, both of which were evident in our recent upfront held in early June.Moving to Slide 4. I want to share what's new and exciting for the upcoming year on our Corus networks. Global Television is a powerhouse brand in Canada with 16 hours of simulcast and just the right balance of new and returning serious this fall. Our 16 returning series include fan favorites, New Amsterdam, 911, The NCIS franchise and Survivor. And we have 12 new series on the schedule, including the debut of FBI: Most Wanted, a spinoff of the popular series of FBI, 2 of the buzziest new dramas at the L.A. Screenings this year, the Prodigal Son and Evil. And for its 11th and final season, the hit comedy Modern Family.Now turning to Slide 5. Our Specialty Channel portfolio is equally powerful. It features 5 of the top 10 Specialty Channels in Canada including the sports channels for the year-to-date with W Network, Showcase, History, HDTV and YTV being those 5 monster channels. Put simply, we have more top 10 Specialty Channels than any broadcaster in Canada and remain steadfast in our pursuit of smart opportunities to strengthen our channels and grow our audiences.Over to Slide 6. Last quarter we highlighted our partnership of Hallmark and a significant audience growth that resulted on W Network. This quarter, we re-branded the channel ACTION into Adult Swim, a brand with a strong appeal to the coveted male millennial audience. ACTION had broad distribution, but declining audiences so it's the perfect target for a re-branding. The results speak from themselves. A hugely successful launch this past April has catapulted Adult Swim into a top 10 Specialty entertainment channel for this demo.Adult Swim delivers exciting new series, such as Harley Quinn from the DC Universe and a number of new seasons of fan-favorite animated adult programming, including Robot Chicken, Family Guy and the long-awaited fourth season of Rick and Morty. This is a great example of our Specialty Channel portfolio optimization strategy in action.I'm now on Slide 7. Our steadfast commitment to maximize audiences across our networks underpins our efforts to better monetize them. One of the key elements of our Ad Tech strategy is to build and deliver audience segments to help advertisers target audiences that are most meaningful to them. Our audience segment sales accounted for 16% of our total TV ad revenue in Q3. Further, we are building momentum towards the full-scale launch of our automated audience-based buying technology cynch, a platform that will deliver and drive greater efficiencies, improved ease of transacting and provide fast accurate reporting. To date, we have onboarded more than 50 buyers, and we will soon launch a new user interface and ad inventory from global and our kids networks.Corus has been and will continue to advocate for the need to work together as an industry in Canada. A good example is audience segment selling, something that is critical to the future of TV advertising, not just in Canada, but around the world. And industry-wide made-in-Canada solution using common audience segments would create a more robust and effective ecosystem for advertisers and agencies to better target audiences for maximum campaign impact and accelerate the transformation of how we sell television. This industry initiative is gaining traction, and we are very pleased to announce that advertisers will be able to buy common audience segments from both Corus and Rogers this fall, covering nearly half of the TV landscape.Turning to our original content business beginning on Slide 8. Another key strategy of ours is to diversify our revenues for the sale of our content around the world. A Corus Advantage is a pillar of our own content strategy where we maximize the CRTC required spending on Canadian programming expenditures or CPE, to build an ever-growing slate of programming that drives ratings on our networks in Canada and is then sold internationally. Nelvana and Corus studios are at the heart of this strategy. The recent reorganization of our executive team announced in February has brought an intensified little focus to this important growth strategy at Corus.Let's hone in on the latest developments at Nelvana and Corus studios. Increasing our slate of Nelvana content will diversify our revenues as we sell these series internationally and reap the benefits of our return to merchandising revenue growth in the years ahead. We have 15 series that will be delivered or are in production this year and that's up from 9 series in 2018. Together, Nelvana and Corus kids network have collaborated on 7 new and returning animated series. 2 of these series namely Agent Binky: Pets of the Universe and the Remarkable Mr. King are from our Kids Can Press publishing business, Canada's largest children's publisher, providing an impressive source of intellectual property to synergistically fuel future growth in our kids content business. We remain committed to priming the pump in Nelvana as we set the stage for growth later this year and into fiscal 2020. Now to Slide 9. Corus Studios has announced 19 series for 2020 with 11 dynamic new series, including Wall of Chefs, Junior Chef Showdown, Big Home Overhaul and Big Timber. As well and importantly, we are building on our most successful franchises, announcing subsequent seasons of the hit shows, Save my Reno, Backyard Builds, Fire Masters, and Home To Win with a fresh take on Home to Win for the holidays. We are committed to growing our very successful portfolio of factual reality and livestock programming to drive audiences on our networks here in Canada and for sale around the world. Over to Slide 10. And I want to take a moment to celebrate the tremendous success of HDTV's highest-rated series in over a decade, the Island Of Bryan, a top 3 hit show across all Canadian specialty entertainment in spring. This is a true success story for our Corus Studio's content team. Stay tuned for the highly anticipated second season as Bryan and Sarah work to restore that awesome resort in the Bahamas. Now looking at Slide 11. As a pure play media and content company, we have purposefully decided not to invest in our own distribution platforms, but rather focus on what we do best, building premium channel brands with great content. Our preferred approach has always been to [ spill ] scale through deep strategic partnerships with our distributors.We all know the way people watch content is changing. Our content and our brands must be accessible and discoverable in the evolving market here in Canada. We must anticipate where our viewers are going. We are -- we're extremely excited to announce the launch of STACKTV, which is designed to target cord-cutters and cord-nevers, now available in Canada via virtual distributor, Amazon Prime Video Channels. A first offering of this kind for Corus, Amazon and Canada, STACKTV is an example of how we will deliver our diverse portfolio of premium broadcast content and brand to new audiences and a growing segment of the population that are turning to streaming platforms.With STACKTV, Canadians with a Prime Video subscription can pay an incremental fee to access 12 of our most popular live broadcast networks, including lifestyle, drama and kids networks and Global as well as all of those on demand. And in addition to STACKTV we launched the stand-alone Nickelodeon subscription video on demand channel for Canadians delivering the very best of Nick's live action, animation and Nick Jr. programming to audiences in a new and exciting way. Turning to Slide 12. In the past year, we have purposely set out to increase our delivery of both millennial and male audiences. We spoke a moment ago about how Adult Swim was a first step in that direction, here is the second step. Corus recently announced a 360-degree partnership with the global media company, Complex Networks. It is the #1 entertainment brand in United States for males 18 to 24, with more views than Netflix in its demo. And it is the #2 with women 18 to 24. Complex offers a portfolio of premium video-first brands delivering Corus' significant reach with Millennials and Gen Z. Corus will act as the exclusive ads sales partner for Complex Networks in Canada and will license content from their diverse library to be distributed on both linear channels and on demand this fall. Complex Network' Hot Ones, from the food brand, First We Feast will get a 1-hour block on Global Television following Canada's #1 late-night show for millennials and adults 25-54 Saturday night live. We will also manage Complex social channels in Canada extending our offering for advertisers across those platforms. And here is step 3, as you pursue these younger audiences. Global Television's fall schedule will be home to one of the most successful and lucrative YouTube stars Lilly Singh, and her new show, a Little Late Little Singh. This show will air Monday to Friday night after the late show with Stephen Colbert. These initiatives amplify our reach bringing advertisers both a passionate, young millennial audience and increasing our reach with males in the entertainment and lifestyle space, providing a great and attractive alternative to sports when you're an advertiser. Moving to Slide 13. We are also creating new types of great content and making it available in more places as we follow our audiences into these growing digital and social markets. I'd like to briefly mention 2 exciting initiatives as examples of its expansion into short-form content. The first is a deepening of our partnership between Twitter and our social digital agency, so.da, with the launch of Twitter Originals fueled with so.da. This next phase of our strategic partnership will see custom content for advertisers built exclusively for Twitter. Second, given the emerging opportunities and custom social video, we also announced the launch of so.da originals, newly produced premiums short-form social content series that will run across Corus' powerful channel brands and platforms further enabling us to pursue opportunities in the fast-growing digital video market. These are two examples of taking Corus' improvement plans and content expertise to new and growing platforms.Looking at Slide 14. The Global TV app at 3 million downloads and growing has been expanding on to new platforms including Chromecast, Android, iOS, Apple TV and Amazon Fire. This last one, Corus became the first Canadian broadcaster to launch on Roku, the leader in the U.S. connected TV streaming market. In addition, Globalnews.ca has seen tremendous success so far this year, reaching over 12 million unique visitors and is the #1 private online news site in Canada. News is an important priority for Corus, and I want to take a second to acknowledge our high-quality journalism and the award-winning news teams we have across the country. Now more than ever, there is a broad appreciation for quality journalism, trusted news sources and Corus is committed to bringing our news content to more people across more platforms.With that, I'll now turn things over to John who will walk us through our Q3 financial results.
Thanks very much, Doug, and good morning, everyone. I'll start on Slide 15. As Doug mentioned earlier, for a third consecutive quarter, we once again delivered overall revenue results that exceeded our expectations, driven by an impressive double-digit TV advertising growth. Our consolidated revenues increased to $458 million for the quarter, and that was up 4% in the prior year. Consolidated segment profit of $171 million was consistent with the prior year quarter with the sale of TLN in the quarter negatively impacting segment profit by approximately $2 million year-over-year. The significant improvements in the top line were offset by cost increases related to a $2 million swing in stock-based compensation expense, which was driven by the appreciation in our share price, a $6 million increase in direct cost of sales, which included $3 million increase in programming costs, and a $9 million increase in general and administrative costs related to variable success-based compensation plan, pension costs and increased marketing investments in the quarter.As a reminder, we had close to $2 million recovery in stock-based compensation expense in Q4 of last year, which will impact our comparable for next quarter. Consolidated net income attributable to shareholders for the quarter was $66 million or $0.31 per share, which includes an accounting estimate change in the current year related to the useful lives or a television brand intangible assets. In the third quarter of 2019, this resulted in an additional $17 million in amortization expense, which reduced net income attributable to shareholders by $12 million or $0.06 per share basic. Further details can be found in this quarter's MD&A. Free cash flow of $90 million improved from that $88 million in the prior year quarter. This result was driven by a significantly better working capital management partially offset by higher payments for programming, more film investment spend and higher capital expenditures. Looking at Slide 16, as we announced earlier this month, we successfully amended and extended our existing credit facilities. Furthermore, we remain committed to deleveraging and have made total bank debt repayment of $190 million so far this year.Importantly, our strong Q3 results coupled with our revised capital allocation policy have enabled us to reach our leverage goal 1 quarter earlier than anticipated. This is a significant accomplishment, once again illustrating disciplined execution by our entire team. Our net debt to segment profit is now 2.92x as of the end of Q3 compared to 3.28x at the end of the prior fiscal year. We'll continue to focus on improving our financial flexibility while investing to build the future.Now let's turn to our TV results for the third quarter as detailed on Slide 17. Overall, TV segment revenues were ahead of our expectation up 5% in Q3 attributable to our significant TV advertising revenue growth up 10% in the quarter. We continue to benefit from several factors, as Doug mentioned, including increased yield on our networks, momentum with our audience-based buying, innovative new advertising format such as L-Frame, direct-to-consumer advertiser spend, and double-digit growth in digital advertising. Of note, this quarter, we saw strength in the entertainment, telecommunications and food advertising categories, which was partially offset by continued softness in the automotive category. We reported our Q3 results 10 days earlier than our previous quarter and as a result, we are not in a position to definitively state that we will report TV advertising growth in Q4, although, we are cautiously optimistic that we will see growth. For Q4, which is a seasonally smaller quarter, we do not expect the level of TV advertising growth that we reported in Q2 and Q3. Subscriber revenue is down 4% versus the prior year due primarily to the disposition of TLN and the lack of large distribution renewal this quarter. The $1 million increase in merchandising -- sorry decrease in merchandising, distribution and other revenues over the prior year reflects the lower back-end payments from our own content and soft publishing revenues compared to the previous year. That was partially offset by higher animation software revenues from Toon Boom.Looking forward, we note that in Q4 of the prior year, we benefited from a sizable multi-year subscription video-on-demand licensing deal of $4.5 million that will not recur in the current year. TV expenses in the third quarter increased by 5% over the prior year, direct cost of sales were up 4% with programming, amortization expense increasing $3 million on higher Canadian programming costs. G&A expenses were up 7%, and that was mainly from variable [ success rate ], compensation costs, driven by the strong TV advertising revenue growth and as well higher pension because.TV segment profit increased 4% in Q3 reflecting the strong top line growth. TV segment profit margins was 40%, a solid result and consistent with the prior year comparable period.Next, let's turn to our Radio results as outlined on Slide 18. Radio segment revenues decreased 4% in Q3. From an advertising category perspective, automotive continues to be the largest contributor to that decline. Regionally, Alberta is still being impacted by ongoing economic weakness, and Toronto continues to be a work in progress from a ratings perspective, although we did see some ratings improvement for that cluster in the most recent ratings book. The benefit of our revenue diversification strategy continued in markets where we have radio and television as we focus on those clients using both local TV and radio advertising solutions. Radio segment profit decreased $1.7 million in the quarter given the challenging revenue results. Our segment profit margin of 26% was below the 30% in the prior year. And before I turn things back over to Doug, I would also like to highlight that we've declared a quarterly dividend of $0.06 per class B share payable in September as detailed in our press release this morning. With that, back to you, Doug.
Thank you, John. Over to Slide 19. Our results over the last few quarters validate that our plan at Corus is working. Another quarter of TV advertising growth, another quarter of demonstrable deleveraging and another quarter of making smart investments for the future. Before I conclude, I'd like to specifically, comment on the state of our broadcasting industry in Canada today. As you all know the government of Canada is in the process of reviewing the broadcasting, telecommunications and copyright acts. Our broadcasting policy was written for a system with closed borders. One, where television and radio broadcasters had a relatively monopoly over audiences and governments acted as gatekeepers. As we all know, that world does not exist anymore. The media marketplace is an entirely open one, this is a global media industry now. Our competitors are massive, they are unrestricted and unregulated. Audiences can find content online, on demand wherever and whenever they want. And piracy remains a significant issue in Canada with inaction from Ottawa. Many foreign Internet companies do not collect or pay taxes in Canada, and foreign media companies are not required to contribute to the Canadian media system. This is untenable, and Corus is advocating for rapid change. We envision and inspire to a stronger and bigger Canadian media and content sector when they can better compete at home and on the world stage. And while we advocate for a more level playing field and a [ weight ] change, we are not standing still. We will continue to do everything within our control to win.Finally, on to Slide 20. We do have a lot to be excited about. Our great channel brands and premium content are getting stronger and are making their way into more places, building audiences. We are loading the bases with new digital and social content initiatives, diversifying our revenues into fast-growing markets. Our slate of owned content is growing which sets the table for future increases in international revenue from both broadcasters and the streaming platforms and merchandising. Our advertising -- our advanced advertising and data initiatives are really taking hold, and we have achieved demonstrable success as we advocate for an energy solution based on common audience segments. And finally, and importantly, our focus on driving free cash flow and decreasing our leverage in line with our revised capital allocation policy will enable us to build future financial flexibility. In closing, we would like to thank our talented team who continue to work so very hard to deliver these strong results. And to thank all of you, for your support of Corus as we work to deliver on our long-term plan and build for the future. John and I will now be happy to take any questions you may have. Back to you, Jack.
[Operator Instructions] Adam Shine with National Bank Financial.
So maybe just talk -- I will start with cost, I mean one thing indicative in the quarter was relatively similar net trends, Q3 versus the Q2. But obviously that was achieved within the context of tougher cost comps with respect to TV and arguably corporate cost as well. John touched on the corporate cost items. But on the TV side, certainly the strength of TV ad sales growth is hitting you with, I guess, your ad sales commissions and maybe there some other timing issues around programming spend. Maybe Doug or specifically, John, can you speak to that dynamic? And maybe also talk to efforts underway to address some of those cost items with further savings initiatives.
Sure. Adam, it's a very good point and obviously, one that we expected that's why. I gave a little bit more commentary in my prepared remarks. So we looked at this I'd say in many, many ways given the results for the quarter. And you touched on the sequential Q2 to Q3, that's important to look at. Q3 is a much bigger quarter revenue-wise so that -- and also programming-wise, so that does tend to result in some increases when you look at it sequentially. Although I think in a lot of the main categories, we're pretty much flat. When I look at it year-over-year, I think the important thing to remember and as much as we don't want to relive 2018, last year was a very difficult revenue year for us. And Q3 was a case -- remember we all felt the dividend change in Q3 last year. So there were a lot of things happening where, frankly, everything was turned off. We weren't spending money on marketing, and a lot of the comp items were actually going down rather than up. So we're comping against pretty tough numbers in Q3 last year on the expense lines. I'd say that accounts for about half of the increase this year if we're kind of looking at more normal levels. And then, you're right, I mean, there are things that are happening. If you look at the mix of our revenue, and Doug spent a lot of time talking with some of the new revenue streams. Those types of revenues whether they're digital or other new forms of advertising, they are going to come with a different cost structure. Whether that's because they're cloud-based systems or because they're digital and they have revenue shares attached to them. Those things, new initiatives are probably about $4 million in the quarter of increased cost. So there are a lot of things that are pressuring us. I think going forward, look we're going to remain very focused on these costs. Some of them in effect self-adjust with results, but in some of them will come with the new platforms. But that doesn't mean that we'll just accept that and we'll figure out ways that we can try to buffer those and make sure that we're not seeing these kind of expense growth that we've had. It is really coming down to the very difficult comp for us. We knew we were going to see this, but it wasn't even better quarter as well than we expected. So that's kind of story tapped in many different ways.
Let me just add some more color to that. Let's go back to first principles. We always talk about maximize audiences, monetize audiences and rationalize the operating model. And that those principles are driven deep into our team. We're maximizing audiences by going into new places, and we're going into unregulated diversified revenue sources of market growth in the digital, social video areas. We all know you want us to -- and we all want to achieve consistent revenue growth. We have demonstrated that now 3 quarters in a row. These investments in these new markets are going to require us to fund additional headcount and prepare the table to get to more meaningful growth from these new sources. So there will be modest OpEx drags going forward as we look to expand the way from the regulated linear system, but that is a necessary investment in terms of getting to a future state where we diversify revenue based. And we'll always look, Adam, to take cost out of the legacy business where we think we can invest those same resources in new and growing areas to achieve better returns.
And may just one question, obviously, in regards to momentum going into Q4. I understand some of the timing in regards to reporting a little bit earlier. But given some of the momentum that, that Doug you've alluded to, certainly over the past 3 quarters, the strength of some of these newer initiatives that one has to assume continue to carry into the Q4. And the fact that Q4 is also relatively easy comp. Maybe you can speak a little bit more to some of the coloring around Q4. And just as a side note, we didn't look like the raptors affected you at the end of Q3. Presumably, they didn't necessarily affect you early in the Q4. You have historically, talked about hockey and Canadian teams and the NHL playoffs being more of an issue in terms of pressure than necessarily what may have transpired in recent weeks.
So a couple of things, I mean, some of the numbers I have seen would suggest that the raptors run and those, in the finals, were equal to 2x the average Canadian Olympics audience is. So there was a pretty massive drain on impressions. That's just a -- that's a back of the envelope piece of calculation. And I'm not a market research expert. But Q4 is a smaller quarter, it's a soft quarter because most Canadians are up at the lake not watching television so we typically have capacity issues. We're pretty cautiously optimistic that we'll get to growth in Q4. But right now, because we have an early close on this quarter and the timing of our analyst call was typically, as John said, 10 days earlier than it has been so far this year. We're not in a position to definitively state that we're going to be there, but I am optimistic we'll have modest growth, won't be of the order of magnitude we've seen in Q2 and Q3. But we hope to continue this momentum. The fundamentals of our strategy to transform how we sell television, the core operating know-how of our programming team in terms of scheduling the best shows. And we came out of L.A. screens with a great schedule, very, very happy with that. And I took the time to talk about our smart decisions in investments in re-branding ACTION to Adult Swim, and, last quarter, we talked about Hallmark. So we continue to make sure that we are playing offense and defense, and that combination of investments to build audiences, investments to monetize audiences, we think will continue to have a positive impact on the momentum going into Q1. All that said, and as I have said consistently in every call for the last -- and this is the fourth quarter, we really can't see around the corner, and so we need to be measured in our outlook. And we'll just continue to keep our head down and hopefully, all of you will recognize that we're disciplined operators both financially and strategically and continue to be as smart things as we work to transform our company.
Jeff Fan with Scotiabank.
Maybe start with the subscription revenue. I know there was a Telelatino impact in that number, but even excluding that, it looks like it was still down year-on-year. Maybe you can confirm that. And what the softness was related to? And also just some of up -- some of the upcoming carriage renewals, if you can remind us what's coming up and the outlook for that particular revenue line? And then perhaps a bigger picture question for Doug. I guess in the last little while you've done a lot in terms of shifting the company with respect to the distribution deals like the ones you just signed with Amazon, some content deals, Complex, Twitter, et cetera, and audience-based buying initiatives. I'm wondering if you feel like as you sit back you've got enough momentum on these fronts. Or do you think you need more to sustain kind of a top line picture as we look beyond this current fiscal year?
Jeff, I'll take the first one on Q3. So we have normalized subscriber revenue of minus 2, if you strip out TLN. The part of what's something there is we're in negotiation now for renewals with 2 of our largest distributors, those didn't close in Q3. And why it's important when they close is couple of things happened. One is there is a typically a retro pickup on those. We book revenue based on the previous deal until we have a new deal. So there is typically a retro pickup once we get the deal finalized. And as well, we are seeing rate increases so that will also help the revenue as going forward and in the quarter specifically. So if we look at Q4, not sure we're going to get both of those closed, but we expect to have better subscriber numbers even with the TLN effect that will also happen in Q4. So that's really the story on the minus 2. We're just waiting until we get these 2 deals renewed, and that can take some time just given how large they are.
Jeff, to your big picture question. So I believe that we're making a lot of smart bets on growing areas, new areas and the core business so a disciplined approach to sort of the core or explore if you would. We often talk around here about we're trying to hit singles, we're not trying to swing for fences. And we have a lot of investments, they are both offensive and defensive. Defensive ones are -- basically sit in the back of the house, automation strategies and machine learning things we're working on. Offensive are many ones I talked about in the call -- in my prepared remarks. I am actually very pleased with the success of our singles. We're getting on base sort of to borrow for Moneyball, as long as we get on base -- the more we get on base the more runs we're going to score. And I think we're starting to see some pretty consistent scoring in fiscal '19. And my bias is to continue to make organic investments that our teams bring to us. We empower all of our teams at Corus to bring forward entrepreneurial innovative ideas. And we are always looking to find new ways to fund different ways of doing things. So you will continually hear from us new things that we're doing on the order what you just heard in this call and what you heard in the last call. And I think that for the moment is the prudent way to manage the company and continue to focus on making smart reasonable bets at the same time paying down our bank debt.
The next question comes from the line of our Aravinda Galappatthige from Canaccord Genuity.
I start with the question on the flexible pricing models. I know you talked about that as the tailwind to the quarter this time as well. Is it fair to say that at this point, all the Specialty Channels are on that flexible model? And connected to that, maybe for Doug, do you feel that, that introduces potential volatility going forward when you think about that growth obviously when ratings are good? You get that uptick in pricing, and it obviously accentuates the strength. But does that potentially increase the downside as well when you have lighter rating?
So I'll go top of your question. So no, not all of our Specialty Channels are on floating rate cards. Our biggest ones are on floating rate cards that was an innovation that the team brought to the floor for this fiscal, and we have been very pleased with the results. And yes, it does introduce a little more volatility, you can cut both ways. So we're kind of putting our money where our mouth is in terms of those big Specialty Networks, which is kind of why we're making concerted efforts to improve those brands. Quite honestly the old system of trading on Specialty Channels was high- and low-demand seasons. And the people that benefited the most from that was not Corus. So we want to find ways -- one of the real tales of the tape this year for Corus is managing price and getting better yields. And whatever you sneak has happened with audiences, we can give more value per audience because we're smarter, but then it's audience segmentation or floating rate cards or other digital strategies then that is obviously an additive outcome.
Great. And on another topic relating to the Amazon Prime Video Channels. Obviously, the first that have known vMVPD in Canada. It sounds like the model like from the economics to Corus are attractive, potentially even more attractive than sort of a BDU model, at least as attractive. What is sort of -- what are you hearing in terms of additional sort of players coming into Canada? Obviously, in the U.S. it's tracking towards sort of 10% of the linear subs are on these platforms. Could, if it expands to that level, obviously, be arguably quite beneficial for Corus. So I just wanted to get your take on how you see that aspect playing out.
Thank you, happy to. Well, as I said in my remarks about the government, it's a global marketplace. So we anticipate many more of these [ vBDUs ] coming to Canada. Virtually all of them are doing their homework right now on this market. Obviously, it's a very easy adjacent market for them to penetrate. And so I would suspect that in the coming 12 months, there will be at least another one that will come to the market, and then behind that one, probably, another one after that. So I think it's -- I think this is the beginning of an opportunity for our company to go to some more interesting parts of the marketplace where the traditional systems has -- hadn't been enabled to pursue. And I think it also opens up an interesting conversation about packaging in general and how audiences don't necessarily want to have a sports in their bundle and the success of our package on STACKTV. As the quarters play out I think will be very telling in that regard.
Great. And lastly, for me. Obviously, your leverage is now below 3x, likely to get better given the free cash flow you're generating. Is there a point at which you maybe sort of shift your mindset with respect to M&A, obviously, deleveraging is a huge priority for you guys? Is there a point beyond which you think you are more open to M&A options be it in digital be it in your core business? How are you thinking about that, Doug?
We -- obviously, we have a team that looks at potential acquisition opportunities. But in all candor, I think everything is too expensive out there, especially given how cheap we are. So my bias really is to continue to deleverage the balance sheet and make sure we've got the financial flexibility to make organic investments. I think there's a lot of businesses out there for sale, and they want multiples on nascent earnings and negative cash flow business models that just -- are not justifiable. So my perspective at this point in time is, absent a complete reset of valuations, we're just going to stick to our knitting.
Drew McReynolds with RBC.
Following up on I guess all the moving parts to the TV business and Doug, you alluded to all the investments you're making. We have seen other media companies now going through a transformation where rightfully so they're reinvesting in some new growth opportunities, and certainly you've had that underway for now. But with these other companies, we typically get negative margin surprises as those level of investments either ramp up unexpectedly or what have you. Is there any kind of broad parameters you can give us for modeling TV margins let's say over the medium term? And how all of that looks from your perspective at this point?
That's a tough one. I mean if you -- in terms of your examples if you're referring to some of our big U.S. content businesses and the investments they have made, i.e. in Disney and Maker, and Fox and MySpace, and that's exactly my comment earlier about saying we're not swinging for the fences in any of this stuff. We're not going to get hurt in anything we're doing. We are just trying to get on base, and we're trying to do smart things to -- on the measured way transform our business. But as far as trying to give you guidance on EBITDA margins in TV, we're hoping it's going to be manageable within the existing margin structure that's certainly our goal. As I mentioned in my comments, rationalizing the operating model is one of our first principles. And we want, obviously, to grow both top and bottom line. This quarter was particularly noisy because of the comparables of last year but also because of some of the investments we're making. Now that we've continued to deliver and acquired some momentum on top line, we want to continue to pursue these growth areas. So obviously net-net, we wouldn't give any sort of guidance on margin impact but I think -- I would like to think that you'd expect us to be as diligent as possible in expense control.
And -- that's helpful, and maybe put it a different way. Do you know when you look at singles, is there -- opportunities there that perhaps doubles, triples or home runs where you could spend, take on a little bit more risk and invest. And do you feel constrained by having to stay within a kind of TV margin range particularly now that the balance sheet friction and pressure is -- certainly looks well behind you now?
That's an inversion of the prior question, but I am happy to answer that too. No, no, no, I'm pulling your leg. I think -- I'll give you a good example of a single that's turning into a double and that's audience segment selling. I hope those in the call recognize just how foundational this is to reinventing the television sales industry in Canada. Now that we have Rogers on board, we are selling the same definition of those audience segments. Look at page, whatever it is on the presentation, that shows all the segments. The -- we have been told by our advertising agencies, guys, if you can just as the same definition of audience segments, we will more rapidly embrace that. And so I think you're going to see that turning into a double, if not more, and we're talking to the other broadcasters in Canada to get them in. We have a really unique opportunity in Canada, I talked about it before and described it as fortress Canada. We have 2 large distributors that own media companies, Rogers and Bell and we have us. And we have 2 video platforms X1 and Kin rolling out. And we should be able to work together to build a really sort of robust broadcasting and media sector in Canada setting aside the brain damage that are regulatory backdrops. So I think the audience segment selling is a real exciting development. And that really doesn't require a lot more capital, it requires a lot more in sort of relationship capital than it does financial capital.
Okay. That's helpful. Doug, you actually answered my next question. So last one here on the regulatory front. I think anybody on this call with common sense would realize all the points you made. What -- not getting into politics here, but what's the gating factor in terms of leveling the playing field in whatever way with some of the bigger global platforms you're competing with? What is that gating factor from a regulatory standpoint?
I think that our governments lacks the will to do what is right because it's politics. And I think it's unfortunate. I think it's really unfortunate. Anybody that's got even half of the knowledge of economics knows that Canadian small businesses pay sales tax. They -- why we allow foreign Internet companies to come in here without paying any taxes into this system, why we allow foreign media companies come in here not paying taxes into the system. Canadian is the buy by [ nefarious ] as first principles. I think that is -- to me it's untenable how we have gotten this far. We're going to see today at 10:30 the Janet Yale panel what we heard review. I have low expectations in that. And I look forward to those of you in the call commenting of what we see there. But I just think its maths will be frustrating. And I think the time is now to act, and I'd like to see more action at Ottawa.
Vince Valentini from TD Securities.
Let me start by trying to unpack a couple of things I've heard already on the call, and then I have a couple of my own bigger, bigger questions. First, when you talk about the floating rate cards for your Specialty Channels. Can you just clarify all the new eyeballs you're reaching on Roku or now on Amazon with STACKTV? Do you get to include those in the total audience that you deliver to the advertiser?
Once there -- if they're on those big channels and once we've got the platforms built, we do, but at the moment, Amazon does not -- we don't have that in their tech road map right at launch.
But that's for VOD, right? They do count in the linear stream.
They're measured in linear.
Yes.
If I watch a linear show on Roku or Apple TV, I might not watch at the exact the same time it airs on Global at 8 o'clock on Thursday night, but I watch it sometime in the next 3 or 7 days, that still counts, right?
Well, so those are 2 different things, Vince. There is -- as far as I know there is not a PVR-type functionality right now so you can't record a live show and then play it back. You can watch it on video on demand choice or channel. That's what Doug was talking about. There is no ad insertion right now in those streams. But if you're watching it live then it does count in the rating's ecosystem. And that...
Okay. So this is showing in development, and I assume you have plans to try to monetize those eyeballs as they move to -- in platforms you're getting you content into?
Yes.
Yes, absolutely.
Yes. Let's go there for a second, Vince, because that's a big one. Where we hope to be in maybe in 6 -- 9, 12 months from now is being able to take over cynch platform to monetize our linear audiences, monetize our VOD audiences on existing PDU systems, monetize our linear audiences on STACKTV, monetize our linear audiences on the connective devices, monetize our on-demand audiences on a STACKTV and the connected devices all through one platform buying audience segments.And then the extent to which we raised the rates on the floating rate cards on the big specialties that would be raised through the system.
Okay. That answers my question. The STACKTV, I'm just -- I'm not 100% sure, is this your brand name and concept or is this Amazon's brand of STACKTV? Like can you just take STACKTV in those 12 channels in that concept and insert it into another virtual distributor that comes along to Canada in the future?
So that is our brand, we created that brand, we have much discussion around here about what the brand should be. And we tailored it for Amazon in particular. Whether or not we take it out to another VBD or not, we haven't discussed that. But we -- that one was built and designed for the Amazon partnership.
Okay. And [ ABB ], I mean it seems very exciting you've given some more data points on this call as the outlook getting in better with Rogers on board in the common definitions. But I mean, obviously, it stepped down a touch in Q3, it's now 16% of your total ad revenue versus 17% in Q2. I found that a bit surprising. I'm wondering is this just because Q3 was so busy? You may have even run out of inventory that using that better platform to be able to get better yield and get ads into some of your less -- lesser viewed shows perhaps wasn't even necessary or couldn't be used properly because you had some much demand across the board.
It will float around, Vince, I mean it was 17% last quarter, 16% this quarter. It will be into the 20s in Q4 just because we're seeing what the campaign's looking like. It really depends on of campaigns. Some buyers, some advertisers just want to buy the demos still, and they'll back up the truck and buy a whole bunch of adult 25, 54. And that will kind of preclude the segment selling. Other buyers most particular the direct-to-consumer advertisers, we talked about at length my [ Tevago ] guy and [ metaphor ] they will work with us on hotter segments because they are more of a targeted advertisers. So you will see that mix move around on any given quarter, but directionally speaking, the slope is going up from left to right.
And in absolute dollars, Vince, it was up. It's just that, you're right, the percentage of Q3 being such a big TV ad quarter. That's just the math of diluting the percentage a little bit.
I put it this way. We're growing -- we are growing the absolute dollars on [ ABB ], double digits every quarter.
Great. Last clarification one and then before my two 2 bigger picture ones, apologies for multiple questions. But the subscriber revenue, you mentioned specifically adjusting for Telelatino, John. Is -- was there any impact from action disappearing and Adult Swim taking over that Channel, but it was in free preview for much of the quarter. Should we expect some boost from Adult Swim in Q4 as well?
So in the quarter, no, there wouldn't have been any impact. We don't -- effectively it's 0 ratable, it's a free preview. It's just open to everybody in the ecosystem to watch it. Yes, look, we're hopeful. One of the reasons we launched it was to improve the penetration of that channel. So that will take some time potentially, packaging changes take time. Our negotiation cycle can be 2 to 3 years with BDU. So in terms of rate improvement that will potentially take some time. But I think the first shoe to drop will be just more demand for the channel coming out of free preview and hopefully, more customers will want to package that with their service. So yes we're very hopeful. It's probably going to be a slower start just given the dynamic with the BDU negotiation.
Okay. And the 2 bigger picture question. There has been a lot of talk about OpEx, and you mentioned last year being extremely low. Can I step back here and say, in a period where you had -- if I can call it, I mean, pretty horrendous top line trends in 2018 plus distortion of the dividend cut. You were able to keep EBITDA almost flat in '18 versus '17, and now we're seeing a bounce back to more normal levels. Is there an inherent skill set would you agree that you can manage your cost dynamically as revenue trends go up and down? So if people do want to think that there is a bigger hit coming in the next couple of years maybe a recession or whatever else that the top line won't be as strong that you probably be able to immediately go back to that sort of behavior you had last year of cutting discretionary cost to keep your EBITDA and free cash flow stable even in bad times?
Look, I think there is a whole lot of different components in the cost structure. So there are some that are quite a bit fixed. I think programming is that category and that's our biggest expense. Yes, on anything that's variable with either revenue or EBITDA or free cash or stock-based comps, obviously, with the share price, those things will adjust up or down depending on how we're performing. So of the $17 million increase, half of that was related to comp items this quarter. So I think that -- and last year, we had the opposite happening. So I look at our full year '19, we're probably going to see a swing in stock-based comp items of at least $15 million. Well, that's huge, I mean to the extent that our EBITDA is running flat if we didn't have that swing, we'd be up 3% or 4% just the net item alone. So yes, there is some dynamic nature of these costs. I wouldn't necessary call them discretionary because they do move based on targets that are set and plans that are in place. But the self-adjusting nature is helpful, and in that direction you mentioned in '18, where we're able to recover a lot of cost because of the performance.
Yes. And conceptually, this just I would say that as I mentioned now a couple of times that we want to invest in the core business, we want to invest in the future state and we also want to always look for ways to take costs out of the legacy business to stop behaviors and activities that don't have value. So we can redirect resources into ones that do, and that just kind of a fundamental cultural philosophy of our business been. So I appreciate the compliment quite frankly. And we -- but we don't want to do -- last year, we could have very easily got very, very, very defensive an outline and just kind of cover it up and going in our bunker. We had to do that at some level, but we also have to make tough decision on the capital allocation policy. There was no doubt that was the right decision that gave us some financial flexibility to make both the mark accelerate or the repayment of debt -- we pay $190 million down already in the 3 quarters this year, so we're tracking nicely. But we're also now being able to make smart investments in transferring the business. So if we got to a big recession again, we would go back to more probably more into a defense mode. But we also can't -- we can't stop making these smart investments. So that's why the question that we got from Aravinda, I just want to come back to that, we have very little appetite to make an overvalued acquisition right now, there is just no upside for us of doing that. And so our buyers would be to take that debt leverage and keep driving that down as low as we can. So that whatever happens on the economy in the recession, however, that may impact our top line and EBITDA accordingly, get that leverage low, low, low. I think we'll be in a good spot to survive some choppy waters should and if that time come.
And last one for me. Just in a merchandising and distribution other segment. So I mean it's down -- revenues there were down 5% year-to-date. And you've given all kinds of examples of the production pipeline being up in both Nelvana and Corus Studios. I appreciate you don't want to stick your neck out on advertising revenue into future quarters. But on this category, we do not have some visibility that although, shows our -- starting to find buyers and you should see a pipeline that you can give us some sense of confidence in what 2020 could look like for that segment versus what somewhat weak trend so far in 2019?
Yes. We should be -- this is taken quite frankly slower than I would like to start ramping up. A lot this has been -- some changes in how we recognize revenue, some delays in episodic delivery out of Nelvana. But that is just part of the business. I think we'll comfortably double-digit revenue growth beginning in the fourth quarter and rolling through all in fiscal '20. I'll give you that.
Excluding X1 sale in Q4.
Correct.
David McFadgen with Cormark Securities.
A couple of questions. So I think one of the reasons why the TV advertising revenue growth has been fairly strong in the first 3 quarters this year is there has been some shifts going on in the marketplace between digital back to traditional linear TV. Do you think we're done with that, and then advertisers feel that now the mix is appropriate? Or do you think that's going to continue to progress into next year?
Yes. Well, that is the right question, David, and that's sort of the crystal ball. Here is one way to get to that number, let's look at the Accenture study, which, I believe, all of you had a chance to review. We suggested that TV is under-invested in the media mix when you look at outdoor radio, digital, television, print. It's underrated by kind of 5 points, 42 to 47 is the optimal based on their [ analysis ] of all those studies, which I think you are familiar with. You take 5 points of $11 billion total advertising market in Canada roughly summing those media mix that's $550 million. We are -- we've seen a nice growth in revenue $70 million, 40% times $550 million is $220 million. So maybe we're close to the halfway mark of that money coming back in? I don't know, that's the best I can figure, that's probably the optimistic cut because it's not as simple as that. But we're doing all the right things on audience delivery. So as long as we stay strong on a delivery basis, as the media mix I think kind of corrects itself, we should be in a position to reap the rewards. But that's the best piece of analysis I can give you on that question.
Right. But have you seen any or have you heard any comments from your clients, your advertising clients that feel that now the mix is appropriate or you haven't heard anything like that?
I think -- quite frankly, I think everybody -- every CMO is reinventing their campaign strategy every quarter. And it's just -- there is just -- there is this so much dynamism in the marketplace. And so they're experimenting with different mix models on all kinds of different campaign. So I don't think anybody is saying, okay, I got the -- I've got the right -- I'm going to fix it at this type of a mix. I think it's very, very fluid. And so partially why we wanted to go hard at Millennials was we wanted to offer our advertising solutions in the new audience segment and demo that we haven't here to [ forth ] been able to do help accelerate some of that shift in the TV.
Okay. I was just wondering if given the lack of clarity I guess for the fourth quarter on the TV advertising front, maybe we were down on this shift, but I guess it's just hard to know right now.
No, the only reason why we're not being as definitive as in the previous quarters, we could look on the books and say we had the sales on the books. Because we're reporting a couple weeks earlier than we typically would, on the last prior quarter, we're just not going to be able to say that. So -- but we are -- we're pretty optimistic we'll have -- we'll be in a modest growth area. It's not going to be as big as Q2 and Q3.
And so just moving on, just on the radio side I mean the business continues to be weak. Is there any signs that, that business is going to be stable in the short term?
I think radio, in general, across the country is soft this year. So I think all of us are feeling that. In our particular case, we have isolated 2 major markets that we're doing triage on, Toronto and Edmonton, primarily. We've seen nice results on [ queue ] here in Toronto. So we're -- we've got a great programming team in the radio side just looking at driving it. What was getting -- what's really true, which I don't know if you picked up on in John's comments, is the automotive category is soft in both TV and Radio but especially in Radio. So whereas auto dealerships would advertise aggressively to move cars up a lot. Especially in Alberta, things are pretty dire out there at the moment. So there are macro levels, there is category issues, there is a Corus-specific issues that are all kind of a play here. I think it's not dissimilar to some of the disruption we saw in Television last year, where we saw some real interesting swings in the industry and in the audience delivery. I think we're seeing similar things in Radio. I do think it will stabilize, but we've got ride through the choppy waters at the moment.
Okay. And then maybe a couple of questions for John. So just looking out into the fiscal 2020, I mean can you give us any idea in terms of the programs spend and CapEx? How it would compare with say fiscal '19, your expectations at this point?
Yes, David, we're just in the middle of that planning cycle so it's a bit early to comment on either of those. I mean CapEx is generally relatively small around here, I mean that's -- I don't want to pile on too much of the commentary on the growth spending. But keep in mind, if we run CapEx of $25 million, $30 million, $35 million that pretty low intensity. We don't have the luxury of investing for growth through the CapEx alignment, we're doing a lot of that through OpEx. So that's, I think, a good thing from our cash flow perspective, but I don't expect. There is lots of demand for CapEx, but it's not ever going to be that material. So -- and then, as I say, we're just kind of rolling up all of the 2020 plans right now, we won't have a good view of that probably until the next quarter.
Maher Yaghi with Desjardins.
I just wanted to go back to your comments about the investment you want to make in getting some growth in the business. Can you -- I mean, have you quantified how much of that is going to be? I'm trying to figure out what's the path for continued deleveraging of the business as you are ramping up these investments? And also in addition to that, why do you feel 3x leverage is the right metric or the right value at which you want to start making these investments? Why isn't it 2.5x or 2x? Just trying to understand how you arrive at that 3x as the right metric. And my second question is on the subscriber revenues and subscriber fees in TV, excluding TLN, how much subscriber fees were down year-on-year?
I'll take the first one and let John take the second one. Yes. No, listen, Maher, the 3x was a target that we set when we bought Shaw Media. And we were delayed because of a variety of things, not the least of which was a soft revenue last year and the government's denial of $200 million sale of 2 French channels to Bell. The same date the Department of Justice approved $85 billion sale of Time Warner to AT&T, I'll have you note. Back to my earlier comments on Ottawa. Now we -- 3x is not the limit here, I want to be perfectly clear. It's -- we will come out and talk more about leverage targets, but I want to make these investments and continue to delever. To me, those things need to be part and parcel of our going-forward strategy.
Yes. Now the target is under 3x, which we've now achieved. But I don't think there is any suggestion that we stop at 3x. So it was that target going back now over 3 years. And it was the right target for us to put up internally and externally to make sure that we continue to delever so we're there. And we're just going to keep going. And it's a bit undefined, obviously, we say under 3x, but we've got some more work to do now to feel what the optimal capital structure is. But we understand all the moving pieces given volatility and uncertainty and trying to balance that with cost of funding and what the right place to be is. So we know -- as Doug has said many times in the call, we're going to keep going. In terms of the subscriber ex TLN, that was the number I gave earlier, that was about 2% was the normalized -- negative 2% was normalized number for Q3 without TLN. And then just back to your first question about investment levels. I think the good news for me it ties a bit to the last question on CapEx, but the nice thing about a lot of initiatives are that they will require funding as success comes. So because some of them are revenue based or activity based, we don't have to commit to mass investments as we head into these initiatives to the extent that we end up with revenue growth, and they're successful then that will come with OpEx. But it's not like we have to commit a whole lot of money upfront.
It's very much a test -- it's the test and learn in an agile philosophy that we're doing on all of these different things. So that's my notion about none of these bets are going to be mortal if they don't work.
And how fast would you be able to figure out the return on these investments? How -- what's the return metric on them in terms of payback you figure?
I mean simply put, none of these investments are made without a very diligent green light process. So the team goes through significant brain damage to get approval on these things because we want to make sure that we have the right analysis to support. What we're looking for is incrementality on revenue and on contribution margin on a cash basis over a 3-year period.
And frankly, a lot of the investment to the extent there is any, you want to call it, upfront investment, tends to be a handful of people that we need to get on board to run these platforms.
Yes. So it's OpEx drag, and it was a little bit when we started off.
Okay. Great. And just to follow up on subscriber fees, excluding TLN, sorry I missed that earlier. Who -- we are getting subscriber numbers ad hoc from the cable companies? We're hearing some information from other sources. Can you talk a little bit about the current trend in subscriber -- in the cable business in general in Canada? Have you seen a slight uptick in disconnections or the trend is pretty much the same as we have seen in the last couple of quarters?
It would seem like the trend, Maher, in basic subs is similar. We're planning cord cutting of somewhere around 2%. And then you get some packaging changes and some cord shaving on top of that. So I don't think we've seen an uptick in the loss of basic subs. In fact some of the distributors are reporting pretty good positive numbers. So -- but yes, it's a mix but you see all the -- and probably when you follow them every quarter in terms of the basic video numbers that everybody reports.
Yes. We add them as much as we can as some companies don't have the same accounting methods as others.
There are no further questions at this time. I would now like to turn the call back over to Doug Murphy for closing comments.
Thanks, Jack. Thanks, everybody, for your interest in Corus. As ever, we're available for follow-up questions. A lot of information we provided on this call. We remain excited about the future. I want to take a moment and thank the Corus team and many of you who are on the phone at the moment. And we always appreciate the good hard work that we bring every single day. And have a great day and enjoy your summer. Bye.
This concludes the Corus Entertainment Q3 2019 Analyst and Investor Conference Call. We thank you for your participation. You may now disconnect.