Lower Cable Ad Revenues Continue To Hurt Viacom - Multichannel

Lower Cable Ad Revenues Continue To Hurt Viacom

Net from Continuing Operations Down 20% in Fiscal Q1
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Updated: 3:15 p.m. (ET)

Viacom's earnings from continuing operations fell by double digits, as lower ratings at its cable networks continued to result in declining ad revenue.

Company executives told analysts that if struggling kids leader Nickelodeon was removed from the mix, ad revenues at its other networks were positive and that they expected overall ad revenue to show gains in the second half of the year. That forecast encouraged Wall Street and Viacom share were up 1.52% in afternoon trading.

For Viacom's fiscal first quarter (ending in December), net income was $470 million, or 92 cents a share, for Viacom's first fiscal quarter, compared to $212 million, or 38 cents a share, a year ago, when the company reported $379 million in charges for discontinued operations and $316 million in provisions for income tax.

Net earnings from continuing operations fell 20% to $473 million from $591 million a year ago.

Revenues were $3.3 billion, down 16%.

Revenues and operating income were slightly lower than forecast by analysts. Because of cost-cutting outside of programming spending, the earnings were slightly higher than expected.

"Throughout the quarter, we kept our focus on creative excellence and strategic programming investment. Our ongoing investments in programming continue to produce results, with positive ratings trends and growing consumer engagement in new hit content, despite difficult short-term comparisons based on the mix of film releases and the lingering effect of ratings softness last year," CEO Philippe Dauman said in a statement. "Our television brands continue to be highly valued by distribution partners, highlighted by our double-digit organic affiliate revenue growth."

On the company's earnings conference call, Dauman laid out plans to beef up programming at Nickelodeon and MTV, two networks of most concern to the analysts.

Viacom's Media Networks Group, which includes such networks as MTV, Nickelodeon and Comedy Central, reported a 9% drop in operating income to $1.03 billion for the quarter.

Revenue at Viacom's Media Networks Group was down 2% to $2.4 billion. Domestic advertising revenue dropped 6%. The company attributed the decline to lower ratings. Worldwide advertising revenue also fell 6%.

"Excluding the Nickelodeon Networks, our domestic networks returned to positive ad sales growth in the quarter and Nickelodeon's ratings improvement will help us significantly improve our overall ad sales performance going forward," Dauman told the analysts.

Tom Dooley, Viacom's COO, said that the scatter market was strong and picking up strength, with prices up by double digits over the upfront, and up mid-single digits year over year. "We are seeing demand from categories like food, quick serve restaurants, wireless, electronics, automotive, and we are also looking forward given those categories are so important to us," Dooley said, adding that there are a lot of family films being released later this year that are likely to advertise on Viacom networks.

While Nickelodeon's ratings problems hurt revenues, overall kids advertising was also down, particularly in the movie category, which the company said meant it maintained its share of the market.

Dauman said that he expects Viacom's ad sales to be close to flat in the second quarter. "After that we are going to grow our ad sales. So that's the trajectory that we're on, based on what we see out there today."

Looking at the broader economy, Dauman told the analysts that he sees "increasing confidence in the marketplace, while European conditions continue to be weak. I think there is more stability there. So we think that GDP growth this year will improve over the last year and that's good for us."

Domestic affiliate revenue rose 4%. Excluding digital distribution agreements, which brought in a big chunk of revenue a year ago, the domestic revenue growth rate was in the low double-digits. Worldwide affiliate fees increased 3%. The company told the analysts it expects total domestic affiliate fee growth of 10% for the full year.

In the quarter, programming expenses grew 8%. Other expenses were flat, including lower incentive based compensation for executives. For the full year, "we continue to expect a high single digit growth rate for media networks program expense," Dooley said. "Given the timing of shows coming on air, growth will be weighted to the first half of the year. In terms of non-programming expense, we will continue to drive efficiencies throughout our organizations and/or in order to preserve or enhance our margins for the rest of the year.

Viacom's filmed entertainment unit reported a larger loss as revenues declined 37%. "Fewer home entertainment releases and a less favorable mix of theatrical releases from our film entertainment segment, affected earnings, Dauman said.

Viacom said it bought back 13.3 million shares for $700 million during the quarter. As of Jan. 30, Viacom had $3.85 billion remaining for its $10 billion stock repurchase program.

Some analysts have been recommending Viacom, thinking that the company is bound to bounce back sometime, and that its share buyback activity will support the stock. The latest news from the company largely supported those assumptions.

"The outlook could be characterized as relatively positive, if not meaningfully changed, from prior expectations," said Brian Wieser of Pivotal Research.

"We expect continued investment in programming to weigh on Media Network margins in the [second quarter], a drag that should reverse in the back half of the year," said Michael DiClemente of Barclays Capital. "Importantly for the multiple, ratings for Nickelodeon and MTV have shown steady improvement in the [second quarter], which should drive accelerating ad growth throughout the year."

DiClemente said he was lowering his second quarter earnings estimate, but maintaining his full-year forecast. "Due to our improved outlook for ad growth, as well as stable affiliate fee and return of capital trends, we are raising our price target to $68 from $55," he said.