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July 28, 2009
Viacom's Sequential Improvement in Advertising is Bullish
Viacom reported mixed 2Q09 results with adjusted EPS of 49 cents matching expectations on $3.3 billion in revenues, which were $200 million light of expectations. The revenue shortfall came from the Paramount movie studio and Rock Band which are less important aspects of the Viacom story. The company's cable TV networks performed well in the quarter, showing sequential improvement from 1Q on domestic ad trends and operating margins. Headline revenue of -14%, operating income of -22%, and EPS of -23% certainly remain weak but the sequential improvements at the cable nets will likely carry the day.
Domestic advertising was -6% in 2Q, better than expectations of -7% to -9%, and a 300 basis point improvement from 1Q09's -9%. While previously declining ratings stabilized in 2Q, it is not clear if the sequential improvement in advertising was Viacom closing the gap with its peers or a general improvement in market conditions. Viacom had been underperforming peers by 300-900 basis points over the past several quarters.
Management stated that if Rock Band video game is backed out of Media Networks, the margin on the cable nets improved by 100 basis points sequentially. This is also a positive for Viacom as it has spend heavily to improve ratings at its cable networks.
Despite greater than expected weakness at Rock Band and Paramount, this quarter is a win for Viacom shares as trends in cable networks is what matters.
As far as read through to other cable networks, Viacom's results are promising but we won’t really know for sure until we get Time Warner's results on Wednesday morning. I suspect that we will learn that cable nets as a group held up better than expected in 2Q but that some of Viacom's games were closing its underperformance gap. Management comments that it completed its upfront at acceptable pricing and volume and that the scatter ad market strengthened in June and into July are hopeful signs for cable network industry.
I have no issue with those who want to play an advertising recovery via Viacom. However, I prefer the greater operating leverage at CBS and the higher growth and superior, non-fiction focused business model of Discovery Communications.
Disclosure: CBS and Discovery Communications are widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts.
Posted by Steve Birenberg at July 28, 2009 09:54 AM in Viacom
WHAT DO YOU THINK OF TODAY'S NEWS FOR CETV:
1.NEW PURCHASE
2.OFFICIAL NAMING OF CEO ?
STOCK APPEARS TO BE SELLING OFF AHEAD OF EARNINGS.
Today's purchase is mostly about eliminating a conflict of interest so that Adrian Sarbu can be elevated to CEO. It also furthers the new ambition to create a content business that can be used not only by CETV stations but also be sold to others.
The model is Time Warner or Disney where there is a big production studio and a separate segment of stations/networks. Some of the programming on the stations/networks is supplied internally while other programming produced is sold to outsiders. I think this is a good model for CETV to follow.
The stock has been strong recently and the market is selling off today. I would not read anything into today's action as far as the earnings report goes. I expect a weak report and cautious comments about the rest of 2009. Upside could come from cost cutting and more positive comments on recent advertising demand.
If you have held the stock this long nothing that will be said tomorrow is likely to impact your opinion of the long-term. If I had to bet, I'd say it trades off tomorrow but I am holding my stock and would be a buyer on significant weakness.
Posted by: Steve at July 28, 2009 10:15 AMTHE CETV CONFERENCE CALL WAS AS EXPECTED.IT WAS HOPEFUL FOR THE FUTURE,BUT CLOUDED BY THE FOG OF THIS SEVERE RECESSION
1 WHAT DO YOU THINK OF SARBU'S PERFORMNCE AS CEO AND AT THIS CONFERENCE CALL?
2. WILL THE COMPS BE BETTER 3RD QUARTER OR 4TH QUARTER 2009?
3 SARBU FELT THAT CETV WOULD BOTTOM 3RD QUARTER 2009,GROW IN 2010, AND REACH 2008 LEVELS IN 2011.IF THIS IS TRUE, THE STOCK SHOULD RISE TOWARD THE END OF THIS YEAR AND THROUGHOUT 2010.DO YOU THINK THIS IS LIKELY?
4 WHAT DO YOU THINK OF THE FOLLOWING:
A.PUT OWNERSHIP BY CETV REGARDINGTHE UKRAINE
B. VALUE OF ACQUIRED MEDIAPRO AND ITS EFFECT ON PRESENT STOCK VALUE[? DILUTION]
C.POSSIBLE PURCHASE IN BULGARIA
D. PRESENT DIRECTION OF CETV AS OUTLINED BY SARBU
I think the quarter could have been worse. Performance at Core stations as a gorup was better than I feared. I also think the commentary on the rest of 2009 and 2010 was more constructive than feared. That said, I see no catalysts for the stock besides a bill market. I am not surprised it is trading off and I am a buyer on significant FURTHER weakness.
Regarding your questions...
I think Sarbu did fine though I wonder why they bothered to talk about 2011 given limited visibility and the fact that they did not see 2009 coming. His English oculd be better but he is a very good operator of TV assets.
I think 4Q can surprise to the upside but not 3Q. I am talking about local currency. But this is not something you can buy the stock today for as it might not happen. 2010 should be an up year in local currency. EVERYTHING DEPENDS ON THE ECONOMY.
I like the put deal in Ukraine. I hope Ukraine turns and they keep the 50% as the long-term upsdie is substantial.
I also like MediaPro. This is a substantial business and the idea of selling TV shows just as CBS, Time Warner, and News Corp do is sound. MediaPro has been very successful in CEE markets already.
I was surprised that Sarbu was so open aobut possible buying News Corp's bTV in Bulgaria. the street will not like this. My view of any deal is dependent on price but overall without bTV I see little potential for decent retunr on investment in Bulgaria. Either do the deal or get out.
As noted, I think the idea of diversifying into content makes sense. I also think they have done a lot to firm up the balance sheet. They should have realized how bad things were getting earlier and they never should have bought Bulgaria but they are now responding well to the crisis.
Posted by: at July 29, 2009 10:19 AM