ViacomCBS (VIAC) reported better than expected results in 2Q20.  Revenues were down -12% but good cost controls and some expense timing benefits led to adjusted EBITDA +8%.  Free cash flow was much better than expected even after the timing benefits.  Overall, the quarter showed progress for a company that has been viewed very negatively by investors.  In the last couple of months, we have noted improved tone in the research we read on VIAC.  This has translated into improved sentiment on the stock which has rallied to $26 from a March low of $10.  While Northlake continues to have concerns about VIAC’s long-term positioning in a world of cord cutting and sharply declining ratings for linear TV, we feel management has earned credibility and the shares can recover further.

VIAC gets most of its revenue and profits from broadcast and cable networks and the Paramount film and TV studio.  As Netflix led a global transition to internet-delivered TV, VIAC stumbled on many fronts both operational and financial.  New management was brought aboard and made some progress but the merger of CBS and Viacom got off to a slow start and accelerated concerns about long-term strategy.

A smart and timely acquisition of Pluto TV, successful negotiations for carriage of the company’s networks by cable, satellite, and OTT distributors, steady progress with the company’s own OTT services (CBS All Access and Showtime), and importantly, much improved free cash performance, have all helped improve sentiment toward VIAC stock.  In conjunction with its 2Q20 earnings, management announced the rollout of an international OTT service built around the company’s many brands including CBS, Showtime, Paramount, BET, MTV, Comedy Central, and Nickelodeon.  VIAC will also be bulking up its domestic CBS All Access service with many of these brands while relaunching the service in 2021. 

Subscriber growth to date for All Access and Showtime OTT has been steady and the services now reach a combined 16 million subscribers.  This pales in comparison to Netflix or Disney + but for the first time, it appears that VIAC has a strategy for digital delivery of content.  Disney has received a huge valuation for its streaming services.  VIAC has received little credit in our view.

We expect positive momentum in affiliate fees, streaming subscribers, and adjusted EBITDA and FCF growth to continue through 2020.  With the shares till trading at a depressed P-E of 6X, we think merely staying on track in 2H20 is enough of offer upside back to the low $30s.    This is enough for us to hold VIAC shares for now.

VIAC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.