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May 14, 2007

Solid Results for Viacom

Viacom (VIA) reported slightly better than expected 1Q07 results. Trends did not differ greatly from analyst expectations but the risk was to the downside so I think the results will be greeted favorably by investors and VIA shares will buck the sell the news reactions seen following good results from Disney (DIS) and News Corp..

VIA reported adjusted EPS of 34 cents against a consensus estimate of 32 cents. Revenues of $.275 billion exceeded the consensus estimate of $2.55 billion driven mostly by upside in the Entertainment segment. Revenues rose 16% vs. a year ago but heavy spending at the company's cable networks and movie studio pushed operating income down 20%.

Media Networks, which includes all of VIA's cable networks such as MTV and Nickelodeon, reported 10% revenue growth and 6% operating income growth. Affiliate fees grew by 14%, advertising grew by 10%, and other revenues were up 2%. Affiliate fee growth was boosted by foreign currency and acquisitions as organic growth was just 4% abroad and 10% in the US. The closely watched domestic advertising showed growth of 8%, slightly ahead of analyst estimates. Management would not breakdown this figure between digital and TV revenues but did note that digital revenues were running storng enough that the previous goal of $500 million in 2007 was now a "commitment." I think this probably means that US TV growth was low single digits in the first quarter. Given ongoing weak ratings at VIA's big cable networks, the biggest risk to the shares is that US TV growth does not accelerate.....

Management is doing everything it can to accelerate growth. The company took over $50 million in restructuring charges at the Media Networks division in 1Q. Furthermore, the margin decline form 39.5% to 38% is the results of heavy spending on new programming and promotions. For VIA shares to work significantly from here, this investment must pay off with improved ratings and acceleration in domestic advertising growth at MTV and Nickelodeon.

2Q trends are solid so far with scatter up double digits, enough to overcome last year's weak upfront and leave total advertising pacing up mid-single digits. VIA has a particularly tough comparison in 2Q so some slowing in growth from the 1Q rate is expected.

Paramount had slightly higher than expected losses as $170 million in spending ahead of new film releases fell into 1Q and was mismatched against revenues that will fall mostly in 2Q and 3Q. Key films include Blades of Glory, Disturbia, and the studio's gig summer film set for July 4th, Transformers. Blades and Disturbia have performed well. If Transformers does decent business the studio is set for a strong second half as revenues flow through and DVD sales arrive.

VIA's stock buyback is still in place but the pace slowed in 1Q. On the call management said they still intend to buyback the full authorization and seemed unconcerned.

VIA might be making progress against my skepticism. 2H ratings and advertising growth will be the determinant of how bright the future is for VIA shares. I remain on the sidelines, partially due to my preference for DIS, NWS, and Comcast (CMCSA/CMCSK) but my negative bias might be tested.

Posted by Steve Birenberg at May 14, 2007 01:38 PM in Viacom