With Better Ratings Viacom Looks Poised For Growth In 2013

Viacom (NASDAQ:VIAB) reported a substantial decline of 16% in revenues in Q1 fiscal 2013 compared to the same period a year ago. But the headline figure may be a little misleading. Looking closer at the details, we note that the majority of the revenue decline can be attributed to weakness in Viacom’s filmed entertainment unit, Paramount. However, this is barely an issue for the investors as we estimate that this business constitutes just about 10% to Viacom’s value due to low EBITDA margins and volatile revenues.

Roughly 85% of Viacom’s value comes from the cable networks and what matters is how Viacom’s channels such as Nickelodeon, MTV, Comedy Central, etc., perform.

Ad Revenues Suffered Due To Lingering Weakness In Ratings, But Expect Improvement

Advertising revenues for Viacom’s cable networks declined by 6% this quarter compared to the same period a year ago. ^[1] Almost all of this can be attributed to weak Nickelodeon ratings, excluding which ad revenue growth was positive. This doesn’t necessarily mean that Viacom is in trouble. The problem with Nickelodeon has lasted all year and things are starting to improve now.

The decline in ratings has resulted from the increase in time-shifted viewing, the availability of alternate video options and a lack of appealing programming. Nickelodeon’s SpongeBob SquarePants has seen a significant decline in ratings in 2012. ^[2] However, in the recently concluded quarter, Nickelodeon saw a sequential improvement in ratings in all the three months with December ratings reaching a record high for 2012. ^{[1] [3]}

The company is ramping up efforts to bring in more original programming on Nickelodeon and will be focusing on its animated series. While the new version of Teenage Mutant Ninja Turtles continues to play its part in ratings revival, Viacom plans to launch six new animation series. ^[1] MTV, which saw its key program Jersey Shore take a hit in the new season, is also doing well with the success of Catfish and MTV’s focus on youth-centric themes of today.

We feel that Viacom may have bottomed out and as far as fiscal 2013 is concerned, ad revenue growth will improve given the better ratings and international expansion will help. The international ad growth suffered this quarter from tough economic conditions in Europe and fewer promotions and events. ^[1] However, this situation should get resolved over time. Viacom is going to expand its programming in international markets. The ratings improvements from its comedy-focused channels has been impressive internationally, and the company expects to launch some networks in additional markets. ^[1]

Paramount Saw A Sharp Decline, Not A Reason To Worry

After its stellar performance that granted it top position in worldwide Box Office in 2011, Viacom’s Paramount movie studio slipped to sixth position in 2012. Viacom’s filmed entertainment revenues declined by a massive 30% in the first quarter of fiscal 2013 due to lower home entertainment and licensing fee as well as soft box office performance. ^[1]

It was a result of difficult comparison against a stellar fiscal 2011 as well as soft performance of movies released this year. Some of the movies that have been successful for Viacom include Marvel characters and there is no guarantee that Disney (NYSE:DIS) will let Paramount be the distributor for future sequels. However, given the low EBITDA margins for this business, cash flow remains small compared to that for cable networks. Filmed entertainment (or Paramount) contributes just 10% to Viacom’s value and any significant fluctuation in profits is not likely to impact the company’s value in the long term.

Our price estimate for Viacom stands at $68, implying a premium of little over than 10% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Viacom’s Q1 Fiscal 2013 Earnings Transcript [↩] [↩] [↩] [↩] [↩] [↩]
2. Viacom’s SpongeBob Crisis, The Wall Street Journal, May 2 2012 [↩]
3. TV by the Numbers [↩]