Viacom (NASDAQ:VIAB) recently posted its earnings for the third quarter. The company reported 14% revenue gain led by robust growth in its cable networks business. The company’s multi-year licensing deal with Amazon (NASDAQ:AMZN) helped in generating higher affiliate fees revenue. While the revenues at filmed entertainment division jumped 15% to $1.16 billion led by higher box-office collection, higher distribution costs weighed on the income. Ratings trends and strong marketplace demand drove an increase in the volume of advertisement units, especially for Nickelodeon. We expect the network ratings to improve further this year as Viacom continues to add new programming and build on existing shows. The company stated that it was doubling its share buyback plan to $20 billion from $10 billion, which further reflects the management’s confidence in its business. 
Cable Networks Growth Driven By Higher Affiliate Fees
According to our estimates, cable networks contribute close to 85% to Viacom’s value. The revenues for cable networks division jumped 13% to $2.6 billion led by higher affiliate fees and advertising revenue.  The advertising revenues grew 5% to $1.22 billion in the quarter driven by better ratings at Nickelodeon and MTV networks. By the end of June 2013, Nickelodeon scored 22nd week of y-o-y gains fueled by the new additions to its live-action and animation rosters.  The second season of MTV’s Catfish witnessed steady ratings while the third season of Teen Wolf saw a 15% jump in its ratings as compared to 2012.  The affiliate fee revenues surged 26%, to $1.23 billion in the quarter driven by the benefit from the availability of certain programming related to digital distribution arrangements and rate increases. Going forward we expect the ratings for the cable networks to improve further, especially for Nickelodeon as the network continues to focus on developing new and original content.
The Distribution Costs Weighs Over The Earnings
The revenues from filmed entertainment division increased by 15% to $1.16 billion driven by higher theatrical revenues from Star Trek Into Darkness and World War Z. Paramount Pictures box-office market share in 2013 is around 11% so far with total grossing of $711 million . However, the operating income for the filmed entertainment segment decreased by 63% to $17 million, reflecting the distribution costs associated with the release of World War Z late in the quarter, partially offset by the benefit from the Marvel distribution rights sale.  Going forward, the studio business looks positive for the company, as it has recently announced revival of the Paramount Television studio after seven years, signaling the increasing importance of producing content for broadcast and cable channels and newer digital platforms. .
Our price estimate for Viacom stands at $69, roughly in line with the current market price.Notes:
- Viacom Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, Aug 2, 2013 [↩]
- Viacom’s SEC Filings [↩] [↩]
- NICKELODEON RATINGS UP NEARLY 20% FOR THE WEEK, POSTS 22STRAIGHT WEEKS OF GAINS, Nickelodeon Press, Jun 25, 2013 [↩]
- TV Ratings: MTV’s ‘Teen Wolf’ Hits Highs With Season 3 Premiere, Hollywood Reporter, Jun 4, 2013 [↩]
- Box Office by Studio, Box Office Mojo [↩]
- Viacom revives Paramount Television studio, eyeing multiple platforms, LA Times, Jul 23, 2013 [↩]