CBS Corporation (NYSE:CBS) on November 6th reported its Q3 results, which turned out to be best in the company’s history. The company generated an 11% increase in revenues and 19% growth in the earnings, driven by higher content licensing, distribution, and affiliate and subscription fee revenues.  However, operating income grew only by 4%, reflecting significant investment in programming for Under the Dome and Ray Donovan. CBS benefited from the deal with Time Warner Cable (NYSE:TWC) as revenues from retransmission fees surged 50% year to date.  The company also announced the spin-off of the Outdoor Americas division into a standalone REIT, to be effected through an IPO in early 2014. We expect the company to continue to do well in the near term with strong primetime lineup, higher ratings and fast growth in non-advertising revenues.
We currently have $53 price estimate for CBS Corporation, which is just below where it now trades. We will soon update our model based on the third quarter earnings announcement.
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CBS’ Summer Programming Was The Key Growth Driver
CBS’ solid performance was largely driven by the successful summer programming schedule on the CBS Television Network, which included an expanded the schedule for Big Brother, new episodes of Unforgettable, and the debut of Under the Dome. The ratings for Under the Dome have been exceptionally high. The series was the basic cable and broadcast TV’s top show for the summer. Nielsen estimates that more than 53 million viewers watched all or part of Under The Dome‘s first season (To read more, see CBS’ Under The Dome Will Drive Higher Ad Revenues.)
This solid summer programming produced steady growth in advertising revenue, which was up 4% year to year. This increase reflected higher revenue at the CBS Television Network, partially offset by a decline at CBS Television Stations that resulted from lower political advertising spending. If we look at the network advertising, it was up 13%, reflecting the benefit from original programming. However, the company is focused on increasing its non-advertising revenues, which accounted for 50% revenues in the third quarter. The growth here was driven by healthy increases in international syndication, digital streaming, cable affiliate fees, and retransmission fees.
The first cycle availabilities of NCIS: Los Angeles and The Good Wife brought in higher content licensing and distribution revenues, which grew by 18% to $1.09 billion. Broadcast of the primetime Emmy Awards witnessed the show’s largest audience in 8 years. CBS has 3 of the top 5 shows on television. The Big Bang Theory and NCIS lead the ratings for the CBS Television Network. The NFL football ratings are also 5% higher this year, the benefit of which will be seen in the fourth quarter as well. 
Strong ratings should continue to boost the company’s overall growth. Next summer, the company will offer the second season of Under the Dome, and another new original programming series called, Extant. Success is anticipated because the show, like this year’s hit series, is from Steven Spielberg’s Amblin Entertainment. We continue to believe that CBS will do well in the near term given the solid demand for its content and the company’s continued focus on original programming.
Cable Networks Repeat Solid 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 third quarter, CBS’ cable networks revenues increased by 37% to $596 million, primarily driven by the Floyd Mayweather pay-per-view boxing event, higher content licensing from Dexter and Ray Donovan, and underlying traditional affiliate revenue growth. In addition, this unit experienced continued increases in both rates and subscribers.
The hit series Homeland remains the number one program for the Showtime network, with a 25% gain in ratings over the previous season. The network’s new series, Masters of Sex, is seeing 31% higher ratings than Homeland’s latest season.  Notably, CBS has only now begun licensing Showtime programs such as Dexter, which Netflix (NASDAQ:NFLX) has added to its collection. Going forward, as digital streaming continues to rise, such licensing deals will bring in more syndication value for the company. CBS’s 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 these trends to continue as the demand for content continues to grow.
- CBS Corporation’s SEC Filings [↩]
- CBS Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, Nov 6, 2013 [↩] [↩] [↩]