CBS (CBS) 1Q07 results were in line with estimates. EPS of 33 cents matched the consensus while revenues very slightly exceeded consensus. EBITDA fell a little short as margins at the TV segment were lower than expected despite better than expected revenue.
I think the quarter will have little near-term impact on CBS shares. The results provide something for the bulls and the bears. CBS remains in a position where operations are growing very slowly as the company supports the stock price with changes to the capital structure. The idea is to use capital structure to transition the company to a higher growth phase where digital initiatives are large enough and profitable enough to drive moderate growth.
Bulls think there is a lot of value that can be surfaced via capital structure changes because the sum of the parts is greater than the valuation presently accorded the company. Bears think that growth in financially dominant TV assets is at risk near-term due to ratings and long-term due to technology challenges. If growth is at risk, aggressively leveraging the balance sheet and creating fixed cash flow requirements via interest expense and higher quarterly dividends is not a good long-term strategy. I stand with the bears with my concerns being more short-term in nature as I fear a significant decline in profits at the CBS TV Network may be coming due to ratings issues especially on the Thursday night.
At the segment level, excluding the benefit of the Super Bowl and the timing of the NCAA basketball tournament, it appears that revenues would be down mid-single digits. EBITDA came in under expectations which supports this analysis. If accurate, it suggest that despite lots of talk from management about the Network, the ratings performance is beginning to take a toll. 2Q will be a good test. Comments surrounding the upfront and current scatter market conditions were very bullish suggesting management has confidence. On the other hand, Les Moonves indicated that CBS might be making some big changes to its primetime schedule. This suggests that the ratings might be of more concern to management than they admit….

Radio revenue fell 4% adjusted for station divestitures. This was a little short of estimates but EBITDA matched expectations implying good expense control. The radio results won’t have much impact on the stock.
Outdoor results matched expectations with revenues up 2% and EBITDA flat. The loss of transit contracts in NY and Chicago and the pickup fo transit in London distorted the results and covered up stronger underlying trends. In North America, EBITDA was up 16% while international EBITDA fell 63%. If the Londodn contract proves profitable, unlike the lost NY and Chicago contracts, Outdoor is poised for upper single digit growth at least.
Pubslishing results were much better than expected and made up for the shortfall in TV EBITDA allowing corporate EBITDA to match expectations.
Free cash flow was better than expected but the driver was working capital as operating profits were in line with estimates. The sustainability of these gains is open to debate.