CBS Earnings Preview: Cable Network Growth Likely, Broadcast Ratings May Weigh On Domestic Ad Revenues

CBS Corporation (NYSE:CBS) will report its Q3 2015 earnings on November 3rd. ^[1] Overall broadcasting C3 ratings plunged in the low double digits in the coveted 18-49 demographics during the third quarter, which will impact the company’s advertising income. Looking at CBS’ cable networks, the picture doesn’t look great either, especially with Showtime’s Mayweather-Berto pay-per-view event bringing in the lowest sales for any Mayweather fight since 2006. ^[2] Furthermore, continued growth of digital video platforms such as Netflix and Hulu has resulted in subscriber losses for many cable networks.

While Showtime has managed to grow its subscriber base recently, this shift in viewership patterns could be a cause for concern going forward. Having said that, the network this year launched its over-the-top streaming service, which could be appealing to broadband-only subscribers. As Showtime is a premium network that does not rely on advertising revenues, subscription growth – either on traditional television or its streaming service – is of key importance. We continue to believe that the cable networks will be able to continue their growth trajectory in the coming years despite digital platform concerns, primarily due to the popularity of Showtime’s programming, including Homeland and The Affair.

See our complete analysis for CBS

Expect Lower Advertising Revenues, Higher Retransmission Fees 

CBS’ C3 ratings plunged 17% in the 18-49 demographics during the third quarter. ^[3] Broadcasting networks rely heavily on advertising income, which is dependent on ratings, and this decline in CBS’ ratings will likely result in lower advertising income. On the bright side, the company is seeing solid growth in scatter ad pricing, which will likely limit the ad revenue declines. Also, the company should see continued growth in retransmission consent, which its expects to be north of $1 billion in 2016 and over $2 billion by 2020. ^[4] Furthermore, the network should see a solid Q4 with its NFL coverage, and it will also stand to benefit from increased political spending amid the 2016 Presidential Election. It should be noted that despite the ratings fall, CBS is still the most watched network, so it still has appeal to many advertisers. We currently estimate $8.2 billion in revenues for the entertainment division in 2015, and expect that an estimated EBITDA margin of 19% will translate into EBITDA of close to $1.6 billion, representing around 40% of company-wide EBITDA.

Cable Networks Likely Boosted Q3 Earnings

Looking at the current quarter, the company will benefit from Showtime’s coverage of the Mayweather-Berto fight despite its relatively low PPV volumes. Looking at other revenue streams, CBS and Showtime extended their licensing deal with Amazon Prime earlier this month. ^[5] This will boost the licensing revenues for both CBS and Showtime (also see – Content Licensing Will Be A Key Driver For CBS’s Future Growth Amid Changing Media Landscape). The network also launched its over-the-top streaming service in Q2. While the company so far hasn’t disclosed subscriber numbers, management mentioned that it was encouraging. Showtime has over 23 million pay-TV subscribers; we will be watching for an update on subscriber trends for the new streaming service, and we currently estimate the figure to be around 4 million by the end of our forecast period in 2022 (also see – How Will Showtime’s Streaming Service Impact CBS’ Performance?). We estimate cable networks’ revenues to be around $2.4 billion in 2015, and expect that an estimated EBITDA margin of 48% will translate into EBITDA of $1.1 billion, representing more than 25% of company-wide EBITDA.

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1. CBS Corporation’s Press Release [↩]
2. Mayweather-Berto PPV comes in well under 1 million in sales, Yahoo Sports, Sep 17, 2015 [↩]
3. TV’s Third-Quarter C3 Ratings Plunge 8%, Advertising Age, Oct 12, 2015 [↩]
4. CBS (CBS) Leslie Moonves on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, Aug 5, 2015 [↩]
5. Amazon Prime Video Will Exclusively Stream Three Summer CBS Series, Including ‘BrainDead’ In New Multi-Year Deal, Tech Times, Oct 1, 2015 [↩]