Q3: Networks Rally, for Now

Programmers Bracing for Ad-Sales Downturn

Programmers should report continued strong growth in revenue and cash-flow growth in the calendar fourth quarter, but analysts are bracing for what could be a disappointing showing for advertising sales, as poor ratings have plagued many of the biggest companies in the sector.

Strong affiliate-fee momentum should keep overall revenue growth strong, with analysts’ consensus estimates calling for double-digit revenue growth at cable networks owned by both News Corp. and The Walt Disney Co.

The sector could likely see mid-single- digit revenue growth (from high-single-digit affiliate fees and low-single-digit advertising increases), high-single-digit cash-flow growth, and double-digit earnings growth, Sanford Bernstein analyst Todd Juenger wrote in a research report last week.

That should help bolster programming stocks, expected to keep climbing despite a strong 2012 in which they grew about 35%.

“Even after the 2012 run-up, we think 2013 should be another good year for these stocks,” Juenger said in a research note. “The business drivers that drove 2012 are still in place and have become appreciated by the market. And multiples are generally not stretched on either a historical basis or relative to other sectors.”

But the wildcard will be the advertising sector.

Ratings have been down at some of the top programmers — Disney and Com- cast’s NBCUniversal unit both showed declines in the fourth quarter, according to Nielsen — but so far they have not appeared to affect ad revenue, which is expected to rise in the low single-digits in the fourth quarter.

Viacom, which reported earnings last Thursday (Jan. 31), set the tone with a 16% decline in overall revenue, fueled by a 6% drop in domestic ad sales.

On a conference call with analysts, Viacom CEO Philippe Dauman said the media giant was addressing the ratings issue by launching shows on its Nickelodeon kids’ channels to attract new big-kid audiences and with plans to beef up MTV’s lineup with new reality programs and expanding its female comedy franchise.

While Disney’s over- all ratings deficit has been offset by strong rating at its kids’ networks, anlaysts wonder if other factors, like its recent spurt of carriage deals, could impact affiliate fees in the future.

“How will the large number of distribution renewals announced in [calendar 2012] flow through to affiliate-fee revenue growth in [fiscal 2013], given all the deals included TV Everywhere rights for ESPN and kids’ networks, and many of them were renewed early?” Juenger asked in a recent report.

According to Juenger, four of the top nine programmers showed overall household ratings declines in the fourth quarter — Viacom (down 8%), NBC- Universal (-7%), Scripps Networks (-3%) and Disney (-5%), while ratings at many of the remaining networks grew at a slower rate. For example, Discovery Communications started off the quarter with a strong 17% rise in household ratings in October, which tapered off to a 10% gain by the end of December. The same happened at News Corp.’s cable networks (13% to down 4% by December); AMC Networks (10% to 4%); and Time Warner Inc. (2% to -3%).

Analysts are focusing more on Time Warner’s affiliate-fee growth potential.

Morgan Stanley media analyst Ben Swinburne predicted Time Warner would increase overall cable-networks revenue by 6.1% to $3.7 billion, in line with consensus estimates.

The analyst also predicted a 6.8% increase in affiliate fees and a 4.5% rise in ad sales, adding that with 35% of its revenue derived from subscriptions and only 20% from advertising, Time Warner is less volatile than some of its peers. That said, with several affiliate contracts due in the next two years, Swinburne wrote that real acceleration in that segment isn’t expected until the first quarter of 2014.

Earlier in the month, Time Warner chief financial officer John Martin said the company would seek “aggressive” affiliate-fee increases over the next three years.