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November 02, 2005

Viacom: Better But Still Too Early

Viacom (VIA) reported slightly better than expected that 3Q05 earnings although almost all the excess was earned in the volatile and difficult to predict Entertainment division. Earnings came in at 47 cents against estimates of 45 cents. The company incurred $58 million in one-time expenses related to the split, hurricanes, and an impairment charge. Applying the tax rate in the quarter means this cost the company another 2 cents.

Most VIA investors focus on segment results and on this basis results were quite close to analyst estimates except at the movie studio. Overall, revenue grew 10% and EBITDA grew 5% as margins declined due to investments in content including programming and broadband initiatives. Revenue grew more than expected while EBITDA was in line analyst estimates....

Within the segments, Entertainment was the star with revenues of $844 million against estimates of $550-600 million. Home video and the film slate were the sources of the surprise and there was flow through to EBITDA which came in at $113 million against estimates ranging from $65 to $95 million. On the call, management noted that home video is up double digits and not quite as weak as some observers have suggested. However, Paramount was late to the DVD game and is still in the middle of releasing its movie and TV library so these comments may not be applicable to other studios.

The other strong segment in the quarter was Cable networks with 15% revenue growth and 10% EBITDA growth. Both figures were slightly above expectations and will be viewed favorably by investors. Revenue growth was strong across all three sources: advertising, affiliate fees, and licensing. There is still a margin decline due to programming and digital expenses and despite the decent quarter I still think this is a segment where risk of a growth slowdown is underestimated by the Street.

Among the other divisions, TV was weak as expected coming in worse than estimates with an EBITDA decline of 17%. However, ad revenue was actually up a solid 7% as the weakness was concentrated in a tough syndication comparison. Radio grew 2%, a little better than expected and slightly ahead of the industry. I don’t think investors will reward the company for this as growth is still anemic and there is no sign of accelerating growth. Outdoor and Parks and Publishing were basically inline with estimates and will generate little interest in post-call analyst commentary.

Overall, I think these results will be viewed positively, mostly because expectations were very low and the recent stock price action set the bar at a level that is easy to jump. There was no change to guidance which implies that 4Q05 EBITDA growth will be around 8%. I think VIA shares are somewhat inexpensive but there is not huge upside unless EBITDA growth accelerates to 10% and beyond. That does not yet appear in the cards for 2006 so while some rebound for the shares off depressed levels can be expected, I don’t think 3Q05 is the catalyst for a big move up.

Posted by Steve Birenberg at November 2, 2005 11:01 AM in Viacom