Viacom: Turn On Track But Lacked Upside in 4Q07

Viacom reported solid results that were at the high end of expectations but I would not call it an upside surprise. Guidance for 2008 was for low double digit EPS growth which would put EPS in line with the current consensus. I think the results and guidance are good enough to support the recently improved sentiment toward Viacom shares but there was not the clean beat that Disney and News Corporation reported. Thus I see Viacom as an OK idea in what is shaping to be a better than expected 1Q08 for the major media companies but it is not the best place to be.
EPS were 84 cents adjusted against consensus of 83 cents. EPS grew 29% in the quarter with non-operating items providing a boost as operating income rose a solid 15%. Revenues rose 19% to $4.25 billion, a little ahead of the $4 billion consensus. For 2007, revenues rose 18%, operating income rose 6%, and EPS rose 14%. Viacom has aggressively bought back shares with the share count falling by 6% in 2007.
In the all important Media Networks segment, results were at least as good as expected. More specifically, cable networks looked pretty good. Total worldwide advertising growth was 8% after backing out the currency benefit. This represents an acceleration form 5% in 3Q07. Domestic ad growth was 7%, at the high end of expectations. International ad growth ex-currency was 11%. Affiliate grew 11%, reaching the low double digit level that management promised. On the Q&A during the call, management indicated that margins in cable networks fell slightly but they refused to break out margins in domestic vs. international. Within Media Networks ancillary revenues grew 72% thanks to Rock Band.
Paramount had good quarter and strong year thanks to a series of hit movies that pushed the studio to the #1 market share for the year. The box office was monetized into profits through decent DVD sales for key titles.
Guidance calls for “low double digit annual growth” from 2008 through 2010 off of the $2.36 adjusted 2007 EPS. For 2008, 12% growth would meet current consensus. Management said that so far in 2008, they are not seeing any signs of slowing ad demand due to the economy. They said that 1Q08 domestic ad growth will be comparable to 4Q07. They also noted that double digit growth in scatter advertising vs. upfront pricing was holding.