Transformers 4 Bolsters Viacom’s Movie Business

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Viacom’s (NASDAQ:VIA) Paramount Pictures has come up with another hit movie – Transformers: Age of Extinction, which continues to show strength at the box office globally. Every movie studio has its own share of hits and misses, given the cyclical nature of the business. This year, apart from Transformers, the studio has benefited from the success of Noah and The Wolf Of Wall Street, and has amassed more than $1.2 billion at worldwide box office. [1] The benefits from the success of Transformers will be seen in the September quarter. The studio will continue to ride high over Transformers’ box office grossing as well as the licensing deals. We believe Paramount will see spectacular year with its solid slate that includes Hercules and Teenage Mutant Ninja Turtles, both of which will be released in the coming months.

However, the success of these movies will likely be less important to shareholders. We estimate that the movie business contributes around 3% to Viacom’s stock value. This is primarily due to the  extremely low margins. In 2013, the studio generated revenues of $1 billion, representing 8% of Viacom’s overall revenues. However, it’s estimated EBITDA margin stood at around 8%, resulting in EBITDA of just $88 million.

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See our complete analysis for Viacom

Success of Transformers In International Markets

Transformers: Age of Extinction was developed with a production budget of $210 million and it has already grossed close to $600 million at the box office globally. [2] The film is doing well in overseas markets, especially China. It has so far grossed $185 million in the U.S. and $412 million in the international markets. [2] The success in China is notable as the movie broke all previous records and is now the highest grossing film in the country with collection of $220 million as of Sunday, July 6. [3] The overseas audiences make up for 70% of theatrical box office revenues, and hence, tend to be the primary focus of studios’ marketing efforts. Viacom’ upcoming film Hercules is also expected to be more popular with the overseas audience.

How Is Viacom’s Movie Business Trending?

Viacom’s Filmed Entertainment business includes production, acquisition, marketing and distribution of movies and stage plays worldwide by Paramount Pictures. This includes revenue from different media such as box office, home entertainment (i.e., DVDs), licensing, television and other. The movie business has been volatile for majority of the large studios depending on the success or failure of the individual movies released.

Viacom’s studio revenues increased from $1.47 billion in 2007 to $2.33 billion in 2011. However, the figure declined in 2012 to $1 billion and stayed around similar levels in 2013. The rise in 2011 revenues was primarily driven by the success of previous Transformers movie, Marvel’s Thor and Captain America. The lower revenue in the subsequent years was a result of fewer releases and absence of big hit title such as Transformers that could give a significant boost to the revenues.

We expect the studio business to do better in the coming years and estimate revenues northward of $2 billion towards the end of our forecast period. There are various factors such as growth in international audience and ticket prices that will contribute to this growth. The rising disposable income is encouraging consumers in emerging markets to turn to movie theaters for leisure and entertainment. This has led to rise in international audience for the Hollywood movies. Moreover, the ticket prices have risen over the past few years, especially due to the popularity of 3D films. This trend is likely to continue and drive up prices, which will positively impact the box office market sales. Also, Paramount is developing sequels to some of the popular titles such as Terminator and Mission Impossible, which may attract higher audience for the studio in the coming years.

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Notes:
  1. 2014 Worldwide Grosses, Box Office Mojo, As of July 10,2014 []
  2. Transformers: Age of Extinction, Box Office Mojo, As of July 10, 2014 [] []
  3. Transformers 4′ Becomes the Highest-Grossing Movie Ever in China, Variety, July 7, 2014 []