Cable Networks Likely Drove CBS’ Q2 Earnings

August 4th, 2015 by Trefis Team
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CBS Corporation (NYSE:CBS) will report its Q2 2015 earnings on August 5th. [1] CBS broadcasting network saw a ratings growth in key demographics for 2014-15 television season, led by some of its popular shows such as Mom, Two And A Half Men and the new series Scorpion. We believe that higher ratings likely boosted CBS’ advertising income. Looking at CBS’ cable networks, we expect a strong uptick in both the top and bottom line, primarily due to Showtime’s pay-per-view (PPV) event of Mayweather-Pacquiao fight. We’ll also be looking for any comments from the company’s management on Showtime’s new over-the-top streaming service. The service was launched recently and we expect its subscriber base to grow to around 3.5 million in the coming years. We currently estimate revenues of about $14 billion for CBS Corporation in 2015 with EPS of $3.60, which is in line with the market consensus of  $3.60 compiled by Thomson Reuters. We currently have a $58 price estimate for CBS Corporation, which we will soon update after the June quarter earnings release.

See our complete analysis for CBS

Expect Stable Advertising Revenues And Higher Retransmission Consent

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CBS has seen ratings pick up for some of its shows in the current television season, including  Mom and Two and a Half Men. Overall, the network saw a viewership growth of 5% for the season. CBS continues to be the most watched network, averaging 11.25 million viewers nightly. [2] The network likely saw a drop in volume for upfront ad commitments for the 2015-16 television season. However, the company managed to increase its rates by 3% to 4%, according to a media report. [3] We expect to learn of a slight uptick in advertising income for CBS in the June quarter. However, the company should see continued growth in retransmission consent, which its expects to be north of $2 billion by 2020. We currently estimate $8.37 billion revenue for the entertainment division in 2015 and expect that an estimated EBITDA margin of 23% will translate into EBITDA of close to $1.85 billion, representing around 45% of the company wide EBITDA.

Cable Networks Will Drive Earnings Growth

CBS’ cable networks include Showtime, which has seen massive success from its programming including, Homeland, Masters of Sex and Ray Donovan. Showtime is a premium network with no advertisements and thus charges a high subscription fees. Showtime has around 23 million subscribers. This compares with 23 million for Starz and over 31 million subscribers for HBO. Showtime recently launched its over-the-top streaming service, following the footsteps of HBO. It was a smart move by CBS given that there is a significant audience on digital platforms such as Netflix and Hulu. The streaming service primarily targets the 10 million broadband-only homes in the U.S. (see – Three Scenarios That Could Have A Meaningful Impact On CBS’ Stock Price).

Looking at the current quarter, the company will surely benefit from Showtime’s coverage of the Mayweather and Pacquiao match. The event saw a stellar success and generated 4.4 million PPV buys and $400 million in revenues for Showtime and HBO. It must be noted that Showtime will air Mayweather’s last fight in September. Showtime had an exclusive contract with Mayweather for 6 fights. The network has sold stellar 10 million pay-per-view access for previous five fights. [4] If Mayweather does decide to continue to fight and extends a deal with Showtime, it will surely be a big positive for CBS. We currently estimate cable networks’ revenues to be around $2.35 billion in 2015 and expect that an estimated EBITDA margin of 48% will translate into EBITDA of $1.15 billion, representing more than 25% of the company wide EBITDA.

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Notes:
  1. CBS Corporation’s Press Release [↩]
  2. Ratings: NBC, CBS Win Season Titles; ABC Comes On Strong, Variety, May 19, 2015 [↩]
  3. Upfront 2015: CBS Seen Closing With Lower Volume, Variety, June 29, 2015 [↩]
  4. Showtime exec insists September will be Mayweather’s last fight, GMA News, July 29, 2015 [↩]