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Advertising Sales to Drive Growth

10/20/2006 8:00 PM Eastern

Improved advertising trends are expected to drive substantial quarterly growth at two of the largest cable programmers in the U.S. — The Walt Disney Co. and Viacom — according to a trio of analysts.

Each of those programming giants is expected to release their respective quarterly results early next month. In separate research reports, Merrill Lynch media analyst Jessica Reif Cohen, Bear Stearns media analyst Spencer Wang and UBS Securities analyst Aryeh Bourkoff are expecting better advertising results fueled by stronger ratings and affiliate-fee increases.

DISNEY'S FIRST

Disney will be the first programmer to report results, slated for Nov. 9. In a report, Bourkoff said that the programmer's fiscal fourth-quarter numbers should be impressive.

Bourkoff predicts that revenue at Disney will rise 13% in the period, to $8.74 billion; operating income will rise 83%, to $1.61 billion; and earnings per share will rise 77%, to 36 cents per share, compared to 20 cents per share in the same period in 2005. Net income for the period should more than double to $771 million, versus $379 million in the same period last year, while profit margins should rise from 4.9% in 2005 to 8.8% in the fiscal fourth quarter.

Fueling that growth will be solid advertising growth at Disney's ABC broadcast network, as well as cable channels like ESPN.

Bourkoff estimated that broadcasting revenue would increase by 5% to $1.52 billion in the period, while cable networks will experience a 16.3% gain to $2.21 billion. Total cash flow for the company should increase 82% in the period to $1.677 billion from $923 million, according to Bourkoff.

Bourkoff said that while the cable networks should see gains from better advertising revenue and affiliate-fee increases, its ESPN network should experience some cost increases related to its Monday Night Football contract and its decision to shut down its mobile telephone service, ESPN Mobile.

Viacom, which is expected to release its third-quarter result on Nov. 9, should also see some gains from stronger advertising revenue and affiliate fees.

Reif Cohen was so optimistic about Viacom results that she increased her estimates on virtually every important financial metric. In a research report last week, she raised her third-quarter revenue growth estimate to 6% in the period (from 4% growth previously) and predicted that cash flow would decrease about 2% in the quarter, compared to her previous estimate of a 7% decline.

The cash flow decline is mainly attributed to Viacom's Paramount Pictures unit — Reif Cohen said cash flow will dip 70% at Paramount in the period, mainly because of difficult comparisons with the prior year.

The cable networks, however, are expected to report a 10% rise in cash flow to about $812 million, according to Reif Cohen. In her report she wrote that strong scatter market pricing for MTV Networks — up in the high-single digit range over the upfront —should drive that growth.

“Even with difficult advertising comparisons, we project 10% advertising growth (vs. our 8% previous estimate) as the U.S. market has strengthened and international comparisons should ease over time,” Reif Cohen wrote.

Reif Cohen also increased her earnings per share estimate for the company to 49 cents, from prior estimates of 46 cents. Reif Cohen's earnings prediction is one penny higher than the analyst consensus estimate of 48 cents per share.

Bear Stearns's Wang was slightly less optimistic — he kept overall revenue growth at 5.9% and predicted that cash flow would decline 7.7% in the period, mainly because of higher programming investment typical of the third quarter.

At the cable networks, Wang estimated that revenue would rise 8.1% — driven by a 9% to 10% increase in advertising revenue — and cash flow would increase 5%.

In his report, Wang wrote that Viacom stock has rebounded by about 10.5% since it announced the resignation of CEO Tom Freston in September. That compares to an 8.5% average rise in its peer group and a 3.1% increase in the Standard & Poor's 500 Index.

Wang added that he believes that further upside exists — and he reiterated his $47 per share 12-month price target on the stock — based on projected increases in the scatter market and better ratings at Viacom's networks.

According to several “channel checks” with buyers and sellers of cable advertising, Wang wrote that some cable networks like Scripps Networks — which owns HGTV, Food Network, Fine Living and DIY — have seen in some cases scatter pricing increases of as much as 10%.

SELECTIVE GAINS

Wang added that while overall Viacom's networks ratings were down 1.7% in the third quarter, ratings were up for networks that represent a greater portion of overall ad revenue for the company.

Using 2005 advertising revenue estimates for each of the networks, Wang calculated that Viacom's overall ratings for the third quarter were actually up by 1.9%.

“We believe this is better than consensus expectations and will fuel above average ad-revenue growth,” Wang wrote.

Carrying Their Weight
Down can be up. Viacom's total network ratings were down 1.7% in the third quarter, according to Nielsen Media Research. But a Bear Stearns analysis that weights ratings by their contribution to revenue says that ratings at cable networks actually rose 1.9% in the period.
Network 2005 Ad Rev ($ millions) Ad Rev. Weights 1Q '06 Change 2Q '06 Change 3Q '06 Change
BET $315 9.9% 3.5% 0.6% 0.6%
Comedy Central $318.3 10% -1.1% 1.3% 1.3%
CMT $108.3 3.4% 0.0% -0.7% 0.0%
MTV $870.7 27.4% 0.7% -3% 1.4%
MTV2 $40.7 1.3% 0.3% 0.0% 0.3%
Nickelodeon $804.9 25.4% -0.3% 1.2% -0.7%
Spike $249.1 7.9% -0.06% 0.2% -1.1%
TV Land $142.9 4.5% -0.3% -0.4% -0.5%
VH1 $322.4 10.2% 0.6% 0.0% 0.6%
TOTAL $3,172.3 100% 2.7% -0.8% 1.9%
Source: Bear Stearns analysis; Kagan World Media data

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