Skydance Corporation (SKYD) Earnings Call Transcript

Good afternoon. My name is Sarah, and I'll be the conference operator today. I would like to welcome everyone to Skydance's Q3 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Kevin Creighton, Skydance's EVP of Corporate Finance, Investor Relations and Treasury. Please go ahead.

Good afternoon, and thank you for taking the time to join us for the Skydance Third Quarter 2026 Earnings Call. I'm Kevin Craton, EVP of Corporate Finance and Investor Relations. Joining me today is David Ellison our Chairman and Chief Executive Officer; Ynon Kreiz, our Co-CEO; Andy Gordon, our President; and Dennis Channelle, our Chief Financial Officer; [indiscernible] Skydance IR team. As a reminder, we will be making forward-looking statements today that involve risks and uncertainties. Our remarks will include non-GAAP financial measures and reconciliations of these measures can be found in our earnings letter or in our trending schedules, which contains supplemental information. These can be found on our Investor Relations website. As a note, we plan to publish our pro forma financials prior to our Q4 earnings call. I'll now turn it over to David for a few brief remarks before we address analyst questions.

Thanks, Kevin, and good afternoon, everyone. I'm pleased to be here with Ian Kris, who joined the company last month as our co-CEO. Ian and I have been working side-by-side every day, and I couldn't ask for a better partner. It's 5 weeks since we launched the combined company, so these are early days. But our teams have hit the ground running and the more we dig into business the more excited we are about the opportunity ahead. We've moved quickly to put our leadership teams in place across 3 segments: Skydance studios, direct-to-consumer and television. And we're executing on the strategy built around 3 goals: established guidance as the premier global content engine and the home of the world's leading storytellers, accelerate our integrated direct-to-consumer platform and optimize our highly profitable linear television portfolio anchored by CBS. To do all of this, we will win in storytelling by leveraging our creative capabilities, talent relationships, production prowess and expansive library of iconic IP, build the most technologically capable media company with the unified technology platform spanning streaming, live and linear that improves the user experience and drives efficiencies and lead in the crowded market by using our scale, assets and global reach to drive transformation and growth. And underpinning all of it is a program to deliver at least $6 billion in run rate synergies with more than 20 work streams already underway. We're proud of what our leadership team has delivered at Paramount. Last year, we took over an underperforming business and made significant improvements through better content, more disciplined investment and a focus on efficiency, we beat our initial guidance and raised it throughout the year. We raised our efficiency target to more than $3 billion, over 50% above our original goal, and we're on track to deliver more than $2.7 billion in run rate savings by year-end. And our 2026 Paramount film slate, is expected to generate more than $500 million more in lifetime profit than last year's. We've now taken on another company with mixed results across this business. HBO Max has performed well, consistently delivering revenue growth and has delivered hits this year, including season 2 of the Pit, Season 3 of House of the Dragon and the popular new series Hatman. And we could not be more excited about what's coming next, including the highly anticipated Harry Potter series premiering on Christmas Day. We do have some headwinds, particularly in Studios, where the Warner Bros. film slate has underperformed this year and will weigh on Q4 results. But we'll apply the same playbook we did at Paramount, greenlighting more selectively prioritizing profitable streaming growth over subscriber counts, optimizing linear and driving efficiency across the cost structure. We've proven it works, and we're confident it will work again, starting from a position of extraordinary libraries, franchises and creative talent. We're also moving quickly on integration. Our $6 billion synergy program spans corporate overhead and real estate, marketing, technology and vendor management. On streaming, we plan to launch a bundle of Paramount Plus in HBO Max in early 2027 as a first step towards a fully unified offering. We've largely completed Phase 1 of our tech convergence by moving Pluto TV onto the Paramount Plus platform, and we expect to bring Paramount Plus and HBO Max under the same tech stack much faster. We remain committed to our medium-term outlook of mid-single-digit revenue growth adjusted EBITDA margins in the mid-20% range and at least $10 billion of free cash flow in 2030. Investing in the business and reducing debt are our top priorities, and we expect to reduce net leverage below 3x by the end of 2029. We know there's a lot of interest from investors in what we're building, and we look forward to sharing more with you at an Investor Day in the first half of 2027. For now, we're confident in our plan energized by the opportunity and just getting started. And with that, I'll turn it back over to Kevin for your questions.

All right. Great. Thank you, David. All right. So our first question that we have is from Sean Diffley at Morgan Stanley, and it's about the first month. So the question is, you're a month into owning the new company. Can you talk about early learnings and impressions and any ealry actions you've taken that you'd like to highlight? [indiscernible] maybe we start with you, and then over to David.

Yes. Thanks, Kevin, and thanks, Sean, for the question. As much as I was excited when I joined, it's even more so the case now that have been here for over a month, and I could not be more excited to partner with David and our team at guidance. We are bringing together incredible assets, large scale and a world-class team. And this is at the pivotal time for the industry in a rapidly changing landscape. -- from what I've seen, the various parts of the company are in strong shape. The Warner Bros. Discovery team did a good job managing their business and delivered the expected results through the close with the 1 area of softness in the movie studio, and we are looking to build on their good work. We have an organization in place designed to manage the company holistically as part of 1 global strategy so that we can take advantage of our scale, our strength and our capabilities. The transformation, as David said in the prepared remarks, is off to a strong start. We're very confident in our synergy plans, getting deep into execution -- we are seeing very large areas of opportunity to reduce costs. And because of that, we have very strong confidence in achieving the $6 billion of synergy in the next 3 years. It's important to say that this is not just about cutting costs, but also how we work. And we're looking to transform and reengineer the business that we will do an even better job going forward. Another interesting point is that everyone knows about the great movies and TV content that we make, but it has been especially exciting for me to get closer to the technology that we're integrating into our operations and services which will make us a better company than a high-performing operation. And while the immediate focus is on bringing the assets together and driving sites, this is a growth story. We are shifting from legacy media to building a next-generation media and entertainment company powered by creativity and technology. And while cost synergies are an important element of what we're very focused on and spending time at the moment, we are seeing significant revenue synergy opportunities with meaningful upside given the scale of our business across our IP and franchises, content production, extensive library and distribution platforms. And I'd say kind of the last point is that as the organization is coming together, we are building a new culture and aligning the team around our holistic strategy. All in all, we are in full execution mode and momentum is building. We have a clear operational and financial targets for each part of the company and plan to hit them. We believe we have the right assets, the right capabilities and the right team and the right strategy to win.

Thank you for all that. And again, it's a pleasure to be your partner. As Ynon said, we've only grown more bullish on the combination of these assets and have confidence that we're positioned to win. If you look back on our year of owning paramount, we've delivered on our economic goals. This quarter, we grew top line revenue by 5%, Paramount Plus revenue was up 21% and has accelerated throughout the year. Engagement is up over 20% and we're on track to exceed our initial synergy target by 50%. This team is going to apply the same playbook guidance, and we're confident we're going to deliver on our plan. To that end, we're moving quickly and it's definitely been a busy month. From an organizational standpoint, we structured leadership to align with our 3 business units, studios, direct-to-consumer and television. We've aligned the leadership of linear television and direct-to-consumer. So trade-offs between streaming and linear are made with the full picture in view. Expanding on that theme, 1 business leader now spans distribution, ad sales and content sales. So decisions are made holistically versus in silos. On the studio side, we had some exciting news this morning on the DC Studio side, and we're incredibly excited to welcome Jeremy Latham. Jeremy is well regarded as 1 of the founding team members of Marvel Studios, and we are aligned in the future of D.C. with a shared vision and optimism about what we can do with this incredible treasure trove of Super [indiscernible] storytelling. We are also beyond grateful to Peter Safran and James Gun, where they're incredible contributions, both past and continuing to DC Studios. Collectively, our film studios are now unified under 1 leadership team. and the creative teams at Warner Bros., Paramount, New line and Skydance will continue to lead their labels. And our TV studios now operate together under 1 leadership team. We're streaming the first step to unifying our services in a bundle in early 2027. We will phase in changes with discipline so we can keep growing throughout the transition. As it relates to streaming convergence, Phase 1 is complete. We moved Pluto on to Paramount Plus platform and ingested BET+ into Paramount+. This took us about 18 months. Using that experience, we have an ambitious target to converge Paramount Plus and HBO Max in roughly a year. This is possible because of the latest tools in artificial intelligence. Zooming out, we're incredibly confident in our ability to execute our plan. And as Ynon said, build a next-generation media and entertainment company.

All right. Great. So our next question comes from Steven Cahall at Wells Fargo, and this 1 is on synergies. Can you provide a sense of how the $6 billion synergies fall across the segments and what the major projects are that deliver them. Relatedly, with the 30% and 70% run rate guidance in years 1 and 2 and how should we think about the actual cost reduction in those years that flows to EBITDA since it will presumably be a percent of the run rate savings. Ian, do you want to start with this? .

Sure. I'll start, and I'll let Dennis continue. Thanks, Stephen, for the question. As we've said, we absolutely expect to achieve at least $6 billion in run rate synergy savings within 3 years. There are more than 20 work streams already underway. We are combining 2 global streaming services, 2 film and TV studio groups, 2 television portfolios and many overlapping corporate functions across the large cost base of more than $50 billion per year. That gives us a lot of room to reduce duplicative costs and optimize how we run company. This is more than cutting costs, as I've said earlier. It is a tech forward transformation that will make us more efficient, more agile and create flexibility to reinvest for long-term growth and establish a healthy margin profile and free cash flow trajectory. So it's important to say, this is beyond cost savings. This is about reengineering how we work. We've identified multibillion dollar opportunities in key areas, including non-LIBOR and labor spend. The key areas include corporate overhead and real estate and facilities as well. where we expect to achieve at least $2.2 billion of savings. This is about consolidating back office and corporate functions using shared services, implementing a single ERP through Oracle Fusion and scaling AI workflows. There's also a very meaningful opportunity to rationalize our office footprint. This includes consolidating our real estate across major markets -- just to give you an example, we have 5 sites in New York and 7 different sites in L.A. with multiple locations in Atlanta in London, just as a few examples, so we are looking to optimize that footprint and beyond reducing the footprint. We also see opportunities to move people and consolidate our business into our own properties rather than pay out rent to third parties. We also see meaningful opportunities in marketing, at least $1 billion of savings. This we will achieve through streamlining and optimizing our global spend, cross-promoting key initiatives on our own platforms and unifying media planning and buying across all of our business units. In technology, we expect to achieve at least $1.4 billion of savings. This we will do through unifying our enterprise tech stack in our streaming ecosystem and broadcast architecture integrating platforms and systems and merged pole technology functions and using AI coating tools. And then in vendor and procurement management, we expect to achieve at least $1.4 billion of savings through optimizing third-party spend across vendors, spanning hundreds and hundreds of different services. We're also looking to combine purchasing levels that will give us economies of scale by consolidating purchasing decisions into 1 centralized group. In addition to that, we also see opportunity in content, which for us is both an expense, but also an investment in building valuable long-term library asset for the company. We spent more than $30 billion annually on content, which is the highest in the industry, and we see opportunities to optimize that budget to maximize value across the company with the reach of our combined platforms across streaming, broadcast and cable, each title can work harder for us. And as 1 company, we can make smarter choices about how we distribute and monetize both new content and library content. So a lot to do here. It's still early, but we have strong confidence in achieving at least $6 million in run rate savings within the next 3 years, and I'll let Dennis complete the answer.

Thanks, Ian. I can give you some color on how the program will flow through the P&L in our financial statements. So as Ynon said, we're well now we executing on the transformation program. This 20-plus work streams. The teams are getting to their plans or [indiscernible] on the early projects. In terms of the P&L impact, it's worth reiterating that we expect to deliver 70% of run rate synergies by the end of '28 and 30% by the end of '27. Now these are run rate figures so that in-year benefit will be lower because our actions will land throughout the year. And we'll give you all more specific guidance on the specific contribution of synergies when we go through our overall 2027 outlook next quarter. Now, Elon gave you the breakdown by function, but I thought I'd spend a little bit of time on it is how that hits across the segment. So the majority of the savings are going to come through corporate, D2C and TV in DC this is primarily through tech and marketing optimization. And then in TV, you'll see pretty broad-based cost structure optimization, similar to how we've been delivering here at Paramount before the combination. In terms of cash cost to achieve the $4 billion of the overall synergy program, 60% to 70% of that will be incurred between 2027 and 2028 with $1.5 billion to $2 billion hitting in 2027. Separately, just to give you an update on the Paramount program, this was before we combined the Paramount efficiencies program is on track to deliver. And we had raised that target of $3 billion, which is $1 billion above our initial goals and will deliver 2.7 run rate efficiencies by the end of 2026, and we expect to realize the remainder of that in '27. This is a major focus for us. So we want to make sure we deliver operationally -- we delivered the financial impact we've outlined, and we'll continue to update you all as we go.

All right. Great. Thanks for the question, Steve. Our next question is from Peter Supino at Wolfe Research. This one is assuming strategy and bundled plans. Question is in streaming, should we expect HBO Max and Paramount to continue as separate brands with unified tech and support costs? And when will you begin increasing stand-alone subscription prices and discounting the bundle? David, do you want to maybe take this one? .

Yes, absolutely. And Peter, thank you for the question. So bundling is our first step towards unifying the 2 services. It lets us start capturing the consumer and monetization benefits ahead of a fully unified product and we believe consumers will be delighted by this as the bundle will deliver what we view as an unmatched portfolio of entertainment, news and sports. For example, a subscriber could potentially see a new episode of Harry Potter, Frisco King, the Pit, MerriKingstown, Knight of the 7 Kingdom, Rooster and Landman, all offered over a few months of time. Additionally, they will get the Pay1 movies from Paramount Warner Bros. and [indiscernible]. One of the true consumer benefits of 30 movies a year is it delivers a theatrical film with a full marketing campaign to the service roughly every other week. Not to mention marquee sports like the NFL, UFC, Champions League and all of March Madness. I also think it's important to note that HBO Max and Paramount Plus are highly complementary offerings, and over-index with different consumer segments in different parts of the country. By bringing these services together, we are well positioned to deliver for a broad range of audience cohorts. And given this, we really do expect to grow reach and engagement, improve retention and increase revenue and profitability in line with or ahead of the leading competitors over the long term. Today, the 2 services reach a combined 203 million subscribers worldwide, and Pluto adds roughly 75 million monthly active users. Regarding the question around basically tech and product improvements, we have seen really strong results since we acquired Paramount with Plus engagement up over 20%. And now we have Pluto operating on that same tech stack. This gives us strong momentum and confidence as we build a unified platform across Paramount Plus and HBO Max. We'll phase in new plans for pricing with discipline and consumer feedback so we can continue to grow the services throughout the transition.

Great. Thanks for the question, Peter. Our next question is from Matt Condon at Citizens Bank, and this one's on technology investments. David, you've spoken extensively about building a technology-first media company and have assembled a leadership team with significant experience across some of the largest tech companies. As you look ahead over the next 3 to 5 years, particularly with AI reshaping how consumers discover and engage with content, how do you envision the consumption of premium entertainment evolving? And where do you see the biggest opportunity for Skydance to differentiate itself as those consumption habits change? .

First, I really appreciate the question, and it cannot be more on point. I guess starting at 30,000 feet, as a team, we believe creativity and technology working together will shape the future of entertainment full stop. First, in a world of AI swap, we think there will always be a premium for a truly handcrafted storytelling. The summer box office and our growing engagement on PPlus or a few proof points of this. We also believe in a world of artificial intelligence, the value of franchise IP has never been more important. And we have approximately $40 billion franchises, which I think highlights the strength of our overall portfolio. We also continue to believe that artificial intelligence is a tool for artists and will never be a replacement for them. Regarding your question as to how AI will receive our business, the answer is significantly. And again, we view this as an opportunity across all aspects of our business. While none of this is forecast in our model, we've been developing AI tools that, again, it's early days, but it strongly indicate that content will be easier to produce, projects across the organization will speed up and how we work will transform. Again, all of this makes the value of premium IP and live events more valuable, not less. And this thematic is also having a positive impact at Paramount+, and we see that continuing across all of our D2C services. In regards to differentiation, we think content is an area where we differentiate. We have unmatched IP franchises, world-class talent, sports, news and an incredibly deep library. Scale is another area of differentiation with HBO Max and PPlus, we have 200 million-plus subscribers, as we've said, 75 million [indiscernible] on Pluto. When you look at the overall portfolio, we have the #1 broadcast network to CBS, leading cable brands and 2 premier new services. Together, this creates a platform that is second only to YouTube for overall television watch time according to the most recent Nielsen Gage, and that creates an incredibly compelling platform for advertisers and AI-driven tools will have a positive impact there as well. Regarding where AI is working today and in fact, over the next 3 to 5 years, look, I don't have a crystal ball, so I'll give you my best perspective is where we sit today. I don't think it can be discounted how fast this technology is moving. But on an enterprise basis, we see these tools yielding greater productivity across the organization. Every discipline across the business will use these tools and productivity will improve as a result. From a product perspective, things like personalization across sign-ups, registration and retention experiences plus search, discovery and recommendations will all improve. I think when you zoom out and look at production, AI really has the potential to be the biggest creative unlock in modern history. The last time we saw anything close to this was really the advent of CGI and digital composites in the early '90s. That technology gave birth to amazing stories like Jurassic Park and Terminator 2 and it's hard to imagine that AI is not going to have a more significant impact than that. And I personally believe that's going to be an incredible unlock on creativity. If you go back in time, speaking a terminator to which everyone knows is one of my favorites, to '83, when James Cameron made that movie, it was made for $4 million. if you wanted to make that picture today, Shopper shot is $60 million to $70 million. And there's not a lot of first-time filmmakers with an original idea without -- at the time, [indiscernible] would be keen one of the biggest movie stars in the world, but he wasn't then. There's not a lot of bets that get taken like that across our industry. And we think these tools will help unlock more original storytelling by being able to make the budget more digestible to be able to take that amount of risk. As it relates to your question around tech investments, we view everything through an ROI lens. We'll build the technology that is truly differentiated and bespoke to our business and we'll partner with the leading technology providers where it makes sense and where they can help us grow our business. Ultimately, we do see technology as a core competency of our company that will allow us to both save costs and drive growth over the long term.

All right. Great. Thanks for the question, Matt. Our next question is from Rick Prentiss at Raymond James, and this 1 is on asset sales and deleveraging. So the question is, do you see opportunities for selective asset divestitures as you focus on core long-term growth businesses and deleveraging. What criteria would determine whether an asset is strategically important to retain? Dennis, do you want to take this one?

For sure. Thanks, Rick. So I think it's important to first talk about our deleveraging path more broadly, and then we can get into some specifics around the levers. We remain very confident that we'll hit our medium-term target. Just to remind everybody, that's growing top line mid-single digits, achieving mid-20% adjusted EDA margins and getting free cash flow to $10 billion in 2030. We will hit our leverage goals, that's 3x by 2029. We'll do this through cash flow generation and of course, growing the EBITDA of the company. . I just want to note that like until we hit our leverage target excess cash beyond reinvestment in the business and our current dividend goes to repaying the debt. So I think it's important to remember that the 2 businesses we combined are strong cash flow generating businesses. This combination gives us the ability to grow more quickly and more profitably but we do have an underlying base that we're working from. So as a combined company, for example, we are on track to deliver of underlying free cash flow if you exclude the onetime transformation costs. So as we go forward and hit our deleveraging goals, we have a number of levers to improve free cash flow from today's levels. The first being reduction in onetime transformation costs. This has impacted both businesses in the last few years. Our current free cash flow and WBD free cash flow both had cash off from the Skydance transaction. Peak's free cash flow also included $500 million in transformation costs in '25 with another $500 million in '26 through the third quarter, this includes $174 million in Q3 alone, which on an underlying basis puts us at a much higher conversion rate than what we had guided earlier in the year, we'd expect now 30% free cash flow conversion ex transformation and transaction costs. So that's the first lever, which is a reduction in onetime transformation cost. The second, as we pay down our debt, our cash interest cost will come down. And the third is working capital improvement. And this will be a major initiative for us as both businesses have room to improve in this area. And it's one of the areas we're actually deploying AI work close first. We just launched an AI agent that's helping in our procure-to-pay area. On the capital structure, I think it's -- I think I want to make sure we put a fine point on this. Achieving our leverage targets does not require us to raise additional capital or divest assets. We will hit our leverage goals through our operating plan. At the same time, we will review the portfolio as we integrate, and we'll be opportunistic where we can around monetizing noncore assets. And when we have more to share there, we will do so.

All right. Great. Thanks, and thanks, Rick, for the question. Our next question comes from Jason Basin at Citi. And this 1 is on the outlook. Could you provide some additional color to help us think through the Q4 and 2027 outlook? Also, any additional information you can share on moving to annual guidance versus quarterly that you have been providing previously.

Absolutely. I can take this one. Okay. So to hit briefly on Q3 for stand-alone Paramount, we feel really good about the quarter we delivered strong growth in overall company revenue, 5% up year-on-year. We talked about the momentum in Paramount+, up 21% year-on-year, $1 billion of adjusted EBITDA, which exceeded the top end of our guidance. And this is really, I think, a good representation of the management team and the team we have here now the combined company delivering on the goals we set out to achieve. . As we think about guidance moving forward, I do want to update you all on our philosophy. So we're making decisions to drive the company on a long-term basis. We're not managing towards short-term quarterly targets and so we want investors to focus on full year and medium-term outcomes. So with that, we are moving to an annual guidance methodology. So we'll provide our next guidance for 2027 and our next earnings call. Then we'll provide quarterly color on trends, major moving pieces across the business when we believe appropriate. So with that new guidance philosophy, I did want to provide some color as we think about the rest of the year and as we're going into 2027. So for the full year, Warner Bros. is on track with our underwriting plans with the exception of the near-term film slate. And then Paramount on a stand-alone basis remains on track for our prior 2026 guidance, which is including the high end of the profitability range at $3.9 billion of adjusted EBITDA. And remember, we took that up during our last earnings call. To go a little bit more into Q4, on D2C, we expect strong growth on revenue, continued strong growth. And for context, on a pro forma basis, DTC revenue grew 15% in Q3 when you combine both Warner Bros. and Paramount, businesses. On the linear business, we expect trends to be consistent with prior quarters, adjusting for seasonality around politics and sports. And then in the Studios business, while the Paramount film site continues to perform well, that will be more than offset by the continued underperformance of the Warner Brothers film slate. Based on this, we expect to have a $200 million headwind to adjusted EBITDA in Q4. This includes films that are already released quarter-to-date as well as films that we will release going forward. With this, we expect slower revenue growth and slower adjusted EBITDA for the combined studio segment than previously anticipated for the quarter. Moving to '27, just to provide you all with some preliminary color on '27, we expect continued strong growth in D2C revenue. We expect to grow the studios revenue and increase total company adjusted EBITDA year-on-year, and this will be based on both the underlying growth and the ramp of our $6 billion synergies program. We'll provide our full 2027 outlook next quarter, but on cash flow, we do expect to be breakeven or better next year, including our cost to achieve synergies.