CBS (NYSE:CBS) recently reported its Q2 2013 results. The company witnessed a 11% increase in net income and revenues. While its cable networks business continued to grow at a healthy rate of 16%, the advertising business saw a steady growth of 5% primarily due to 11% improvement at CBS’ broadcast flagship, which benefited from the success of certain big events such as NCAA. We expect CBS to continue to do well in the near term with strong primetime lineup and growth in ad pricing for the new season. In addition to this, margins continued to improve and this has been the major factor behind the stock’s rise in the recent past.
Growth In Advertising Revenues
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CBS’ advertising revenues for the three months ended June 30, 2013, increased by 5% to $2.09 billion primarily driven by the timing of the semifinals of the NCAA Tournament, which aired during the second quarter of 2013 versus the first quarter of 2012, as well as underlying growth at the CBS Television Network.  However, local broadcasting advertising decreased 2% mainly reflecting lower advertising revenues. Moreover, in the second half of 2013, the company expects local advertising revenues to continue to be negatively impacted by lower political advertising spending as 2012 benefitted from the U.S. presidential election.
The company recently concluded its upfront advertising sales season for the 2013/2014 television broadcast season, during which a significant portion of advertising spots for CBS Television Network’s non-sports programming is sold. The upfront sales resulted in price increases that are expected to positively impact revenues during the season. The company’s management stated that once again the company took share from its competitors, and it is the leader in both volume and pricing.  Going forward, as the new season begins, the network is committed to original programming and fewer repeats, which will help the network improve its ratings further and target higher rates for the balance of the inventory. (See – CBS’s Upfront Ad Sales Set A Good Tone For Next Season)
Cable Networks Business Is The Key For Long Term Growth
CBS operates premium cable networks such as Showtime, which are ad-free and thus rely on quality content that allow the company to charge a high fee per subscriber. In the second quarter, CBS’ cable networks revenues increased by 16% to $518 million, primarily driven by revenues from a pay-per-view boxing event, higher affiliate revenues reflecting rate increases and growth in subscriptions at Showtime Networks, CBS Sports Network and Smithsonian Networks, as well as higher licensing revenues from digital streaming of Showtime original series.  CBS Content licensing and distribution revenues increased by 22%, driven by higher revenues from the licensing of programming for digital streaming and international syndication. Cable Networks affiliate fees increased 5% reflecting growth in subscriptions and rate increases at the cable networks. 
We note that CBS’ cable networks business has been growing in the past few years fueled by growth in subscribers, rising subscription fees and growth in licensing revenues. We expect this trend to continue as the demand for content continues to grow. Moreover, digital streaming is picking up which will benefit the content owners such as CBS. The company is already in negotiations with Time Warner Cable (NYSE:TWC), over retransmission of content and seeks 600% higher premium compared to what other CBS broadcast stations charge it on average. 
We are currently in the process of updating our model for CBS in view of the recent earnings.Notes: