Viacom’s Ratings Drop, but Ad Sales Go Up

Analysts: Ad Revenue on Track to Outpace Estimates
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Viacom surprised Wall Street last week with a positive gain in domestic advertising sales in its fiscal second quarter, despite a 14% drop in ratings at its cable channels.

The cable-content giant reported a 2% gain in both domestic and international advertising, soundly beating consensus estimates of a 1% decline. Although the ad-sales increase was not enough to off set declines at its movie studios — overall revenue dipped 6% in the period — it was a bright spot in what has otherwise been a disappointing past few quarters.

Ad sales have declined over the past three quarters as ratings at top Viacom channels like Nickelodeon and MTV have reeled from competition (from the Disney Channel) and the departure of top shows (such as Jersey Shore), respectively.

Viacom’s flagship kids’ network Nickelodeon appeared to turn the ratings corner in the fiscal second quarter — its total-day ratings were up 9% Q1, compared to a decline of 3% a year ago. In a research report, Morgan Stanley media analyst Ben Swinburne wrote that as favorable ratings comparisons continue through the second half, Viacom could beat his ad-revenue growth expectations of 3% or greater in the fiscal third quarter.

Viacom itself predicted further sequential ad revenue improvement in Q3 based on ratings trends and healthy scatter pricing, which was up by the low double digits during the second quarter.

On a conference call with analysts last Wednesday (May 1), CEO Philippe Dauman said that Viacom’s investments in original programming have helped drive ratings increases. The gains at Nickelodeon are the best for the network in two years, he added.

“We firmly believe that if we fuel the creative engines that drive our brands, we will continue to create hits that resonate with diverse audiences, keep audiences deeply engaged with our networks and increase viewership on new and emerging platforms,” Dauman said on the call.

But not everyone was convinced of continued smooth sailing for the media giant. In a research note, Sanford Bernstein media analyst Todd Juenger wrote while Nickelodeon ratings rose, they seem to have come at the expense of its smaller kids’ network, Nick Jr., where ratings plunged 71% yearover- year. Juenger added that because Nick Jr. has limited advertising, the decline had little impact on ad revenue.

“Clearly not all ratings points are equal, and the network that mattered most, Nickelodeon, carried the day from a revenue perspective,” Juenger wrote. “We continue to see the situation as precarious, however.”

Investors didn’t seem to care, driving Viacom shares May 1 to an all-time high of $69.08 (up 8%, or $5.09 per share). The stock settled down in later trading, closing at $65.09, up 3% or $1.91.

On the flip side, Time Warner Inc., which also reported quarterly results on May 1, saw its stock dip as much as 2.6% ($1.55 each) in early trading after reporting a 1 % decline in advertising revenue, despite just a 2% decline in overall ratings.

The stock closed at $58.23 on May 1, down 30 cents, or 0.5% each.

In a separate research note, Juenger wrote that comparisons to Viacom were inevitable.

“Clearly mix matters a lot (to both companies),” Juenger wrote.

Still, Time Warner managed to beat estimates for adjusted operating income growth (up 7%) and earnings per share (up 25%), primarily because of ongoing efforts to cut costs. Much of its ad sales decline was due to timing, Time Warner Inc. said — particularly the timing of the NCAA Men’s Basketball Tournament. The effect of games that aired on TNT, TBS and truTV in the first quarter last year will show up in this year’s secondquarter results.

The NCAA tournament, which was up 11% in viewership from the prior year, was the most-watched edition of March Madness in nearly two decades, the company said, which should help drive high-single-digit ad-revenue increases in the second quarter.

TAKEAWAY

Viacom’s 2% gain in U.S. and international ad sales was a bright spot in a first quarter that saw overall revenue fall 6%.

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