CBS’ Advertising Poised To See Solid Growth In The Near Term Amid Sports Coverage

CBS’s (NYSE:CBS) recent quarterly earnings were above expectations, but lower advertising sales and licensing weighed on the company’s revenue growth. While the cable networks saw growth in affiliate and subscription fees from its new streaming services, licensing revenues were much lower as compared to the prior year quarter. However, the key takeaway from the earnings release was the solid scatter ad pricing in the current quarter, which will likely boost Q4 earnings.

On the streaming front, the company did not disclose any subscriber trends, but it will bring in exclusive original programming for the over-the-top services, including a TV series based on Star Trek. This could be significant, as major streaming players such as Netflix have been eyeing original programming to increase their subscriber bases. On that note, we discuss below how CBS will benefit from advertising in the near term and why it makes sense to offer exclusive programming on its streaming services.

We currently have a $64 price estimate for CBS, which we will soon update to reflect the September quarter earnings release.

See our complete analysis for CBS

CBS Network Will Likely See Solid Growth In The Near Term

While most of the broadcasting networks are going through tough times with declining ratings amid the growth of digital platforms, CBS has managed to stay at the top in total viewership with an uptick in ratings in the current quarter, courtesy of its NFL coverage. CBS’ Thursday Night Football is up 5% in ratings and there is one more game left in December that the network expects to have a good draw. In Q3 also, the underlying network saw 8% growth in advertising while it expects Q4 to be even better. It must be noted that Q4 is usually a big quarter for advertising due to sports programming. What appears to have worked in CBS’ favor is the low upfront sales for the current television season. The network has more units to sell in the scatter market, which is seeing solid growth in pricing amid high viewership. ^[1]

Also, it’s not just Q4, as CBS should see advertising growth in a few upcoming quarters. Firstly, in Q1 2016, there is an additional NFL playoff game. Then CBS will air the Super Bowl, which will likely see low-double-digit growth in pricing for 2016. 2015 Super Bowl ads were sold at $4.5 million for a 30-second spot by NBC, and the 2016 price could be around $5 million. Lastly CBS, being the most watched network, will absorb a significant chunk of political ad spending amid the Presidential election next year. Also, the network is riding high on retransmission consent and reverse comp, which is likely to surpass $1 billion next year. ^[1] Overall, CBS will see solid growth in the near term and based on the above factors, we are revisiting the network’s advertising income in our model.

Original Content For Streaming Service Will Boost Subscription Growth

CBS’s standalone services, All Access and Showtime Anytime, are trending well, according to the company, but it hasn’t disclosed the subscriber numbers. Premium network Showtime has several solid hits, including Homeland and The Affair. The network has around 23.5 million subscribers on television and it is targeting broadband-only homes with its over-the-top service.

The company recently stated that it will bring original programming to the streaming services. In fact, it is also considering offering the NFL on CBS All Access. The network rightly sees an immense growth opportunity by bringing original programming to these platforms. Original programming, including House of Cards and Orange Is The New Black, is something that helped Netflix drive rapid subscriber growth in the past few years. Now CBS’ services are not directly comparable with Netflix, which CBS calls a valuable partner as well as a competitor. Having said that, CBS does have some good assets that could be helpful in creating a reasonable subscriber base for its streaming service, and Star Trek could be the first step in that direction.

Streaming is much more profitable for CBS than it is for Netflix. In fact, CBS’ profit margins for streaming will be as high as 60%, in our view, as it will primarily offer in-house programming unlike Netflix or Hulu, which need to acquire programming rights for most of the content on their services, which naturally compresses margins. If the company manages to gain an overall streaming subscriber base of 7.5 million at a $11 price tag (for Showtime Anytime), it would translate into revenues of around $1.30 billion and EBITDA of over $750 million annually. For now we estimate the subscriber base to be around 3.5 million towards the end of the decade. We’ll have more clarity on subscriber trends once the company starts disclosing that figure.

Key Earnings Takeaways:

• Total revenues declined 3% year-over-year to $3.3 billion
• Diluted EPS stood at $0.88, compared to $0.13 in Q3 2014
• Total advertising fell 4% to $1.48 billion while content licensing fell 8% to $1.05 billion
• Television segment revenue grew 1% while cable networks revenues declined 16%
• Overall operating income grew 1% to $753 million

see CBS Corporation’s Q3 Earnings Release

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1. CBS (CBS) Leslie Moonves on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, Nov 3, 2015 [↩] [↩]