Affiliate, Ratings Gains Bode Well for Nets

Analysts See Double-Digit Growth Repeat for Programmers in Q3

The positive ad-sales momentum of the previous period is expected to continue into the third quarter, with several analysts predicting a second-straight period of double digit-growth for many top ad-supported channels.

Most top cable programmers are expected to release calendar third-quarter results in the coming weeks. Discovery Communications will be the first out of the box — scheduled to report on Oct. 31 — and most analysts are expecting the home of TLC’s Here Comes Honey Boo Boo to report another strong quarter of double-digit advertising growth.

Ratings for Discovery Channel were up about 16% in primetime during the calendar third quarter, and ISI Group Media analysts David Joyce and Vijay Jayant believe that will translate into 11% domestic ad-sales growth for the network.

The two analysts also believe Discovery will report a 14% rise in affiliate fees, helping to drive overall revenue up 13% during the period and operating income before depreciation and amortization up 10.5%. That’s compared to a 10% increase in domestic ad sales in the second quarter of this year.

That performance has helped lift Discovery Communications shares about 9% in the third quarter and 25% since the beginning of the year.

“Discovery ratings have been relatively strong which, along with its growing distribution and affiliate-fee escalation, has one of the highest growth rates of any media company,” Joyce and Jayant wrote in an earlier research note. “This higher growth rate is deservedly reflected in its premium valuation.”

Jayant and Joyce awarded AMC Networks the title of ad-sales percentage leader in the quarter, believing its flagship AMC channel will report a 24% gain in ad revenue in the quarter and a 27% rise in affiliate fees. That’s driven in part by favorable comparisons to last year, when AMC was dark to 14 million Dish Network customers for about a month during the third quarter, and higher ratings.

AMC enjoyed a strong ratings boost with the series finale of Breaking Bad (more than 10.3 million viewers). It helped drive overall ratings at AMC up by 27% in the quarter. That ratings momentum is expected to continue for the remainder of the year: The season premiere of zombie juggernaut The Walking Dead set new records on Oct. 13 with 16.1 million viewers and 10.4 million viewers ages 18 to 49, outpacing the week’s NFL games on both ESPN and NBC in the demo.

Viacom’s youth-oriented ratings are on the mend after a scare earlier in the year saw Nickelodeon lose its first monthly ratings crown to rival Disney Channel. The MTV Networks parent’s ad sales are expected to continue to ride the momentum of the fiscal third quarter ended in June. A 6% gain in ad sales beat consensus estimates as stronger ratings and new shows drove growth. Analysts expect more of the same in the fiscal fourth quarter.

Joyce and Jayant estimate that domestic ad sales could rise at a 7.5% clip in the period, driven by strong ratings at all Viacom outlets. “The key networks — Nickelodeon, MTV, and Comedy Central — generally had mid-single-digit ratings increases [in the period] and many of the smaller networks were better than that,” Joyce and Jayant wrote.

Other analysts were equally encouraged.

Morgan Stanley media analyst Ben Swinburne told clients fiscal third-quarter performance “implies underlying growth is improving along with ratings and some key areas of strength in Viacom’s core verticals.” He estimated ad sales for the company would rise 7.4% in the period.

At The Walt Disney Co, competition from Twenty-First Century Fox’s new national sports offerings — Fox Sports 1 and Fox Sports 2 — isn’t expected to have a huge impact on Disney’s own sports juggernaut, ESPN. But the lack of deferred affiliate fee revenue in the fiscal fourth quarter is expected to present some challenges.

According to Joyce and Jayant, the lack of deferred fees in the period should create about a $170 million headwind for ESPN.


Although ratings at Disney’s cable networks were mixed in the period, each channel held its ranking with ESPN a solid No. 5 overall with 2 million viewers, a 10% increase from the prior year.

Credit Suisse media analyst Michael Senno sees ESPN improvement ahead in the fiscal fourth period. “While we are not in the business of predicting ratings, we believe the early-season football trends, additional marketing behind SportsCenter, and easier comps vs. last year could setup ESPN for ratings growth heading into CY4Q,” Senno wrote. “This should bring with it strong ad trends given recent pacings indicate a healthy ad market and strong pricing for sports.”

He estimated cable networks cash flow should rise 6.5% in the fiscal fourth quarter, with revenue up 1%.

At Fox, the investment in launching the two sports networks as well as the rebranding of FXX and FX Movies should cut into overall OIBDA growth in its fiscal first quarter: Jayant and Joyce estimate OIBDA growth of 3% for the period. Ad sales on the cable side should be up about 5.5%, compared to 9% during the same period last year, they said.


Rising ratings, ad-sales figures have analysts bullish on programming stocks in the third quarter.