Viacom Sounds Cautious Note for Q2

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Spurred by the performance of its cable and broadcast networks, Viacom Inc. reported a lower-than-expected loss in the first quarter, but warned that the weakened advertising market could hinder growth in the second quarter of this year.

Investors took that warning to heart, driving Viacom stock down by $1.80 per share last Tuesday to $51.30 from $53.10 the previous day.

Still, Viacom chief operating officer Mel Karmazin stuck to his guns regarding the advertising slowdown, stressing to analysts that Viacom would not be as adversely affected as other media conglomerates.

Karmazin has vehemently stated that Viacom would outperform its peers during the advertising slowdown because of the strength of its broadcast and cable networks.

"Advertising is alive and well and living at Viacom," Karmazin said in a conference call with analysts. Five of its six operating segments turned in revenue and cash-flow growth despite "advertising recession" talk, he said.

"If there is to be a recession, we just aren't going to be there," said Karmazin. "We're just not going to participate."

Viacom's Infinity Broadcasting Corp. radio and outdoor advertising division was the only segment that didn't show growth, Karmazin said. That was mainly because of an extraordinary first quarter in 2000, when cash flow rose 24 percent.

Karmazin said that in light of the decline of dot-com advertising, he was "comfortable" with cash-flow growth estimates in the high single digits for Infinity going forward.

Despite Karmazin's optimism, outgoing Viacom chief financial officer Fred Reynolds said the advertising slowdown most likely would impinge on Viacom's second-quarter growth.

Reynolds projected mid-single digit cash-flow growth in the second quarter.

Reynolds restated that Viacom was on track to meet its full-year, cash-flow growth target of 20 percent, but that depends on an ad-market rebound in the second half of the year and doesn't factor in a strike by Hollywood actors and writers.

If writers and actors strike — and the ad market does not recover as expected — growth would fall short of that target by about 5 percent, said Reynolds.

Still, Viacom reported strong results for the quarter, particularly for the cable properties.

Revenue rose 6 percent, to $5.7 billion, and cash flow rose 15 percent, to $1.15 billion, in the period ended March 31. Pro forma free cash flow grew 20 percent, to $648 million.

Losses were dramatically lower — about $7.3 million, compared to $384.5 million in the corresponding period last year. Viacom broke even on a per-share basis in the quarter, compared to a 54-cents per-share loss in the same period a year ago.

Analysts had expected Viacom to lose 8 cents per share in the quarter.

Cable-network revenue rose 3 percent, to $998.9 million, but cash flow rose 17 percent, to $365.4 million.

Viacom said that cable networks MTV: Music Television, VH1, Black Entertainment Television, Showtime and TV Land posted double-digit revenue gains, mainly because of higher cable-affiliate and direct-broadcast satellite revenue against modestly higher operating costs.

In the period, subscriber growth at the networks continued, with Nickelodeon and TNN: The National Network passing the 80-million-subscriber mark and VH1 reaching 76 million subscribers.

At Showtime, subscriptions increased by 26 percent, or 6.2 million, to 29.6 million subscribers.