News

Hits Not Enough for Viacom

8/01/2008 8:00 PM Eastern

Hit movies drove big increases in revenue and operating income at Viacom in the second quarter, but anemic domestic ad revenue growth pummeled the media giant’s stock last week.

Viacom reported strong revenue growth — 21% to $3.8 billion — and operating income rose 13% to $792 million, fueled almost entirely by its Paramount Pictures division.

But advertising revenue at its cable networks — which includes such heavy hitters as MTV: Music Television, BET, Comedy Central and VH1 — grew a paltry 1% domestically and 2% overall, suggesting that the so-called economic recession is hitting the advertising market hardest.

The poor advertising results overshadowed what was a truly strong quarter on the film side of the business.

Viacom’s Paramount Pictures was the first major movie studio to reach $1 billion in box office sales this year, fueled by blockbusters like Indiana Jones and the Kingdom of the Crystal Skull, the animated King Fu Panda and Iron Man. For the period, Filmed Entertainment generated $1.8 billion in revenue, a 35% increase over the previous year.

At its media networks division, which includes MTV Networks and BET, revenue rose 11% to $2.1 billion. But operating income at the media division was up just 4% in the period to $765 million, reflecting a weak domestic advertising market.

In a conference call with analysts, Viacom CEO Philippe Dauman said that like its peers, Viacom faced challenges from the weakening economy, but that its diverse assets helped to secure double digit growth in revenue and operating income.

Dauman said that softness in the domestic ad market in the second half of the second quarter put pressure on domestic ad sales.

Back in May, Dauman warned at an industry conference that advertising revenue would rise between 3% and 4%, roughly half of analysts’ expectations. Viacom missed Dauman’s conservative forecast, with domestic ad revenue rising just 1% in the second quarter.

During the conference call Dauman said that midway through the second quarter, scatter market volume for several of its networks “dropped off.”

Movies — That’s the Ticket
Viacom reported strong second quarter results, driven mainly by robust increases in its film division, including blockbuster hits Iron Man, the latest Indiana Jones installment and Kung Fu Panda.
2Q '08 2Q '07 % Increase
SOURCE: Viacom
Revenue $3,857 $3,186 21%
Media Networks $2,136 $1,922 11%
Filmed Entertainment $1,771 $1,311 35%
Operating Income $792 $702 13%
Media Networks $765 $735 4%
Filmed Entertainment $86 $22 291%

Dauman said that Viacom continues discussions with key advertisers and is targeting new advertiser categories that have not been as dramatically impacted by the economic downturn.

“We do see potential opportunity to counter this trend as we enter the back-to-school season and prepare for major tent pole events at our networks, such as the season premiere of The Hill and the Video Music Awards in September,” Dauman said.

Miller Tabak analyst David Joyce said that Viacom has been hurt by a shift in demographics in some of its networks that caught advertisers off-guard.

Joyce said that networks like TV Land and Nick at Nite may have gained audience from broadcasters, but that those new viewers were likely older than advertisers expected.

“It was exasperating that they’re not seeing any upturn in cable advertising yet, even though viewership is generally growing for cable networks,” Joyce said.

Dauman said the media giant expects to make up some ground on the affiliate fee front. Without giving specifics, Dauman said that the affiliate fee structure for most of Viacom’s networks is significantly undervalued. He added that long-term carriage deals for networks like Comedy Central and Nickelodeon are also beginning to roll off.

“Across our portfolio of networks there is opportunity that should drive growth as we provide value for many years to come,” Dauman said on the call, adding that Viacom expects to see “double-digit growth in affiliate revenue for the foreseeable future.”

According to data from Kagan Media, Nickelodeon receives about 45 cents per subscriber per month from operators while Comedy Central was getting about 12 cents.

Joyce said that Comedy Central could easily double or triple its affiliate fees, given the success of such shows as South Park, The Daily Show With Jon Stewart and The Colbert Report.

Joyce added that Nickelodeon could easily rise to 65 cent to 70 cents per subscriber per month.

Viacom’s share price was down 17 cents, to $29.83, in 4 p.m. trading July 29, but fell to $28.70 (down $1.30) in after-market trading. The stock was down as much as 5.3% ($1.58) to $28.25 in regular trading last Wednesday, closing at $28.67, down $1.16 per share.

Viacom is down more than 32% so far this year and the stock price has been the source of near constant consternation for chairman Sumner Redstone.

Redstone tried to put a good face on for investors during the conference call last Tuesday, blaming the drop off on the overall economic climate but vowing that Viacom’s strong content assets would ultimately win the day.

“I understand the frustration of shareholders, indeed to a greater degree than many,” Redstone said on the call. “I have also witnessed more than a few economic cycles, so I also know there is opportunity even in difficult times for companies that have strong and enduring attributes such as vibrant brands, a global reach and a visionary, seasoned management.”

Joyce said that while there is a possibility that Viacom could turn around the domestic ad situation in the third quarter, the market doesn’t believe so, at least for now.

“Investors have pretty much written off the third quarter,” Joyce said. “That’s why the stock is down 6% or so.”

Viacom also issued earnings guidance for the next three years, stating that it expects to deliver double-digit annual growth in diluted earnings per share for each of the years between 2008 and 2010.

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