Viacom (NASDAQ:VIAB) recently posted its earnings for the second quarter. While the company reported gain in its cable networks business due to a rebound in advertising revenues, the filmed entertainment segment showed weakness. Nickelodeon’s ratings improvement led to a 2% increase in revenues for Viacom’s cable networks division. However, the movie business underperformed, principally reflecting lower carryover revenues compared to contributions from Mission Impossible: Ghost Protocol in the previous year.
We expect the network ratings to improve further this year as Viacom continues to add new programming and build on existing shows. While the licensing relationship with Netflix (NASDAQ:NFLX) is due to expire month, Viacom is looking for other alternatives to distribute its content.
Cable Networks Drive Revenues
Nickelodeon’s ratings declined in 2012 due to the negative impact of alternative video platforms and lack of appeal to kids. Later in the year, the network started to focus on original programming and developing better content, which helped in the ratings rebound. In Q2 2013, Nickelodeon registered a growth of 7% in its key demo ratings.  Animation remains the prime focus as the network plans to bring to the screen programs such as Monsters vs. Aliens: Sanjay and Craig, Rabbids and Breadwinners, and new episodes of Teenage Mutant Ninja Turtles (TMNT), the Legend of Korra and SpongeBob.  It will be interesting to see how the ratings pan out for the new season of TMNT, which was last year’s number 1 new animated program among boys aged 2-11 years, across all networks. Earlier in March, Viacom launched the ‘Nick App’ for iPad. The app provides an interactive platform for on-demand access to Nickelodeon’s content as well as other interactive activities. Given the increased use of smartphones and tablets, Viacom needs to deliver its content on multiple platforms. The company’s management confirmed one such app for MTV to be launched later this year.
MTV has also seen improvement in its ratings in recent months. For instance, the viewership of ‘MTV Movie Awards’increased by 22% this year.  Later this year, MTV plans to air the next season of its popular program Catfish. We expect the network’s revenues to increase due to reduced time window between seasons for its popular programs and its continued focus on original programming.
Movie Business Underperforms
Viacom’s film and entertainment revenues declined 20% this quarter.  The company attributed this to lower carryover revenues as a result of last year’s release of Mission Impossible – Ghost Protocol. The company has been releasing fewer movies as compared to the other studios and released just two films this quarter – G.I. Joe: Retaliation and Hansel and Gretel: Witch Hunters. Viacom is betting on Star Trek Into Darkness and World War Z this summer to boost its filmed entertainment revenues.
Given the increased demand for streaming services such as Netflix, Amazon (NASDAQ:AMZN) and Hulu, Viacom must ensure that it captures the digital space to distribute its content. The company’s current licensing agreement with Netflix will expire this month. Netflix’s management has stated that it will let the agreement expire as it plans to target specific content for subscribers.  Viacom needs to ensure that this pocket of revenues doesn’t dry up and will look for other avenues to distribute its content.
We are currently in the process of updating our model for Viacom in the light of recent earnings.
Our price estimate for Viacom stands at $67, roughly in line with the current market price.Notes: