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.

Viacom Reports Inline But Stock Already Reflects Bottoming Trends

Viacom reported 1Q09 results largely in line with analyst estimates. EPS of 29 cents beat the 26 cent consensus but revenues of $2.91 billion fell a little short of the $2.97 billion estimate. Advertising trends were weak, as expected, but this still stands out as a negative particularly as Viacom's nets are far underperforming the cable network industry. For example, Viacom reported -11% ad growth, including -9% domestic, while Time Warner reported -2% total and slightly negative domestic ad growth.

Viacom's quarter got a boost from lower than expected programming expense, up just 3% vs. a full year target of up mid to upper single digits. This served to boost margins in Media Networks segment. I found the commentary on future programming expenses confusing but there appears to have been a one-time boost to margins from 4Q08 writedowns and 2Q09 could see a rise in the upper single digits.

One negative in the quarter was a 37% drop in ancillary revenues mostly related to slowing sales of Rock Band. Management said a tough comp and a shift form hardware to software sales was the cause. I remain concerned about the music genre in video games.

Paramount had a tough quarter as expected due to tough theatrical and DVD comps and a timing issue that brought most of the distribution and marketing expenses for Dreamworks Animations Monsters vs. Aliens into 1Q while revenue will mostly flow in 2Q and beyond.

Viacom shares have been leaders among the major media conglomerates during the current rally as investors feel that the asset mix is good and ratings and advertising trends (among the worst in the industry for the past year) are bottoming. I do not think 1Q results or commentary on the balance of 2009 are enough to sustain the outperformance especially following a 3% pop at the open this morning.

Viacom Earnings Preview: Is Advertising Stabilizing?

Viacom is expected to report 1Q09 EPS of 26 cents on revenue $2.97 billion. Both figures produce negative year –over-year growth as the company struggles with weak ratings at its TV networks, higher programming expenses to fix the ratings, and continued lagging performance for its film studio.

Despite bleak fundamentals, the stock has rallied sharply off the March lows, rising more than 40%. VIA shares have been among the better performing large cap media stocks. Some hope that ratings might improve and a comment from the COO that advertising is showing signs of stabilizing are helping build on investors improved confidence that an economic recovery will materialize.

In 1Q09, investors will focus on advertising trends. Domestic advertising is project to drop by 7-8%, an acceleration from 4Q08. International advertising is protected to fall mid-single digits. The outlook for 2Q will be even more important with the hope that declines will get no worse.

Helping 1Q09 should be another 10% plus rise in affiliate fees at the cable networks.

Viacom probably faces slowing growth for its Rock Band video game. This should be evident in 1Q results. How the company plans to reignite growth, especially ahead of Christmas 2009 will be of particular interest?

Paramount is off to a good start at the box office this year hoping to reverse years of lagging performance relative to its peers. The studio has a promising slate this summer including Star Trek, G.I. Joe and Transformers 2. Unlike 2008, when VIA distributed huge box office winners, in 2009 the studio owns the films. This could lead to a big profit gain if the films prove popular. Early buzz on Star Trek and Transformers is positive.

I prefer media investments focused on cable networks as is the case with Viacom. However, I find other cable network focused companies more attractively positioned. Thus, while I can see an upside scenario for VIA shares, I think better risk-reward trade-offs can be found elsewhere.

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.

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.

Viacom: Better But Needs More Growth

Viacom (VIAB) reported a solid quarter, which I would characterize as slightly above expectations. Viacom's good results follow better than expected results at Disney and News Corp, possibly a sign that fundamentals are improving for the diversified entertainment companies. At a minimum, I think that analyst estimates are now achievable as they have adjusted to the deceleration in growth over the past few years. This could be a good thing for the stocks if they can produce double digit growth. DIS shares have shown that you can still make good money on a mega cap media stock if growth and a clear strategy is evident. Viacom could get on a similar track as the rest of 2006 will see pickup in growth as comparisons ease. I come away from the Viacom quarter more optimistic that the shares could provide decent upside....

EPS came in at 43 cents against consensus of 39 cents. Revenues of $2.37 billion exceeded estimates of 2.25 billion. EBITDA was a little better expected. It looks to me like about half the EPS beat came from operating income and half from interest expense or other non-operating items. My only complaint would be that it looks like the revenue and operating income beat came entirely from the Entertainment division. It is possible that most of this may have been due the addition of Dreamworks. I just don’t know if this fully captured in analyst estimates. In any event, Viacom is dominated by Cable Networks, which are also the key valuation driver, so upside from Entertainment isn’t worth as much to me.

The Cable Networks came in very close to expectations. Revenues were a little light, apparently the result of weaker international results, where revenues fell 4% due to weak advertising sales. Part of this is probably due to currency although management said it didn’t yet know how much. Despite the shortfall in revenues, very good margins kept divisional EBITDA at or slightly above expectations. Management said that margins can be a little jumpy from quarter to quarter so they wouldn’t raise margin assumptions based on the 1Q results. Margin performance seems particularly good given the press release discussed elevated programming expenses.

Commentary on Cable Networks included a lot of talk about emerging networks. These are smaller domestic channels like Logo, Tempo and Noggin. These networks are achieving critical mass in distribution, crossing the 20 million and 40 million subscriber levels. As this occurs, advertising revenues should gain steam. These networks will never gain the full 90 million household distribution of MTV and Nickelodeon but could help drive corporate growth. I'd like to get a better handle on the potential long-term contribution of the emerging networks since I am cautious about the long-term growth rate of the fully distributed domestic networks.

Finally, there was a fair amount of discussion of the company's new media initiatives which include gaming and alternative distribution channels for video. Management said that these areas can generate over $500 million in revenue this year, which would be about 5% of the corporate total. Viacom owns lots of cable networks that reach younger demos so if online presence can be established, presumably there would be incremental upside relative to other entertainment companies which reach an older audience.

Viacom Earnings Preview: Forget Tom Cruise, Cable Networks Are Key

Viacom (VIAB) is expected to report weak 1Q06 results due to tough comparisons in 1Q05. Revenue growth is forecast at about 5% with EBITDA rising just 0-2%. Despite the weak start to the year, analysts expect revenue and EBITDA to grow by low double digits for all of 2006. 1Q EPS are expected at 39 cents and 2006 EPS are currently forecast at $1.96.

Management has made it pretty clear that 1Q will be tough so I don’t expect a lot of concern unless the results are a lot worse than expected. I do think there will be a lot of discussion about the full year outlook. Analysts will wonder about Paramount, just 30% of revenue, following the disappointing domestic opening of Mission: Impossible 3. I don’t see any more major releases for Paramount this summer besides the distribution deal for Over The Hedge.

More important is the outlook for cable networks. VIAB's cable networks are considered the best in the business due to their younger demographics and generally consistent ratings. These networks are presumed to be worth a premium to other company's cable network assets and to other media assets. Any reduction in growth expectations is a double whammy because it would pull lower the lion's share of VIAB's profits and lead to multiple contraction....

I have been concerned about contracting multiples for cable networks because the industry has matured in the US. New network launches are difficult, the major networks are now fully distributed in the cable and satellite universe, and ratings gains for cable as a group are beginning to slow. In fact, the first generation networks like MTV, Comedy, and VH1 have basically shown flat ratings for several years as niche networks provide audience growth. So instead of the booster shot from growing distribution, growing ratings, rising CPMs, and rising affiliate fees, revenues are now driven by rising affiliate fees and rising CPMs.

VIAB and E.W. Scripps (SSP) are the cable network plays on the street and both stocks have seen significant multiple contraction in the past year. Multiples are now around 9-10 times 2007 estimates although many sum-of-the parts valuation models still use 12-14 times for cable network values. Cable networks deserve a premium because they still offer superior growth to other media assets and they have a dual revenue stream. However, until investors gain confidence that double digit growth long-term growth remains likely, I don’t see multiples expanding.

VIAB will be the determinant of investor attitudes toward cable network assets. 1Q06 won’t mean much because revenue grew in the mid-20% range a year ago. Consequently, the key thing to listen for on the conference call is the 2006 outlook for full year growth and any commentary about 2007 and beyond.

Viacom: Better But Still Too Early

Viacom (VIA) reported slightly better than expected that 3Q05 earnings although almost all the excess was earned in the volatile and difficult to predict Entertainment division. Earnings came in at 47 cents against estimates of 45 cents. The company incurred $58 million in one-time expenses related to the split, hurricanes, and an impairment charge. Applying the tax rate in the quarter means this cost the company another 2 cents.

Most VIA investors focus on segment results and on this basis results were quite close to analyst estimates except at the movie studio. Overall, revenue grew 10% and EBITDA grew 5% as margins declined due to investments in content including programming and broadband initiatives. Revenue grew more than expected while EBITDA was in line analyst estimates....

Within the segments, Entertainment was the star with revenues of $844 million against estimates of $550-600 million. Home video and the film slate were the sources of the surprise and there was flow through to EBITDA which came in at $113 million against estimates ranging from $65 to $95 million. On the call, management noted that home video is up double digits and not quite as weak as some observers have suggested. However, Paramount was late to the DVD game and is still in the middle of releasing its movie and TV library so these comments may not be applicable to other studios.

The other strong segment in the quarter was Cable networks with 15% revenue growth and 10% EBITDA growth. Both figures were slightly above expectations and will be viewed favorably by investors. Revenue growth was strong across all three sources: advertising, affiliate fees, and licensing. There is still a margin decline due to programming and digital expenses and despite the decent quarter I still think this is a segment where risk of a growth slowdown is underestimated by the Street.

Among the other divisions, TV was weak as expected coming in worse than estimates with an EBITDA decline of 17%. However, ad revenue was actually up a solid 7% as the weakness was concentrated in a tough syndication comparison. Radio grew 2%, a little better than expected and slightly ahead of the industry. I don’t think investors will reward the company for this as growth is still anemic and there is no sign of accelerating growth. Outdoor and Parks and Publishing were basically inline with estimates and will generate little interest in post-call analyst commentary.

Overall, I think these results will be viewed positively, mostly because expectations were very low and the recent stock price action set the bar at a level that is easy to jump. There was no change to guidance which implies that 4Q05 EBITDA growth will be around 8%. I think VIA shares are somewhat inexpensive but there is not huge upside unless EBITDA growth accelerates to 10% and beyond. That does not yet appear in the cards for 2006 so while some rebound for the shares off depressed levels can be expected, I don’t think 3Q05 is the catalyst for a big move up.

Viacom Third Quarter Earnngs Preview

Viacom (VIA/VIAb) reports before the open on Tuesday. Most investors are looking ahead to the split of the company that will occur at year end but this report could provide some insights on how the two new parts may perform right out of the chute as this is probably the last report as a combined company.

Estimates for VIA have fallen steadily all year in the face of sluggish advertising growth. Among major media companies, VIA has the greatest exposure to advertising at just under 50% of revenue. I surveyed analyst estimates focusing on segment level numbers and found little variation in expectations with the expectation of the volatile Entertainment segment that contains the Paramount movie studio. Overall, revenue is expected to grow 6-7% and EBITDA is expected to rise 4-5%....

Like many media companies, VIA now produces EPS. For 3Q consensus EPS estimates are 45 cents against 42 cents a year ago. For 2005, the consensus EPS estimate is $1.73, putting the shares at about 18 times current year estimated earnings. Although it will never be reported, for 2006 the consensus EPS estimate is $1.98.

In the third quarter the strongest segment will be Entertainment due to the box office success of War of the Worlds. The film was released on June 29th putting most of its revenue in 3Q but leaving P&A expenses mostly in 2Q. In other words, a lot of very profitable revenue is hitting in 3Q. EBITDA estimates for the segment vary widely, ranging from $65 million to $95 million.

Cable Networks will also show above corporate average growth with EBITDA likely rising almost 10%. I've written several times recently about my fears that cable network growth is slowing more than the Street is thus far willing to admit. Guidance commentary on cable networks will be an important factor in the future performance of the stock.

Radio is expected to continue its struggles with revenue and EBITDA each rising plus or minus 1%. Television will be a drag due to tough comparisons against political advertising and syndication revenue in the year ago quarter. Analysts are looking for EBITDA to decline between 11% and 15%.

VIA shares are trading at historically low multiples of EBITDA near 8 times current year estimates. Personally, I find this attractive given the high free cash flow, low capital intensity nature of the company's assets. The issue, however, is growth not value and until it becomes apparent that advertising growth in traditional media is ticking up, I think VIA shares will be frustrating to own.