Viacom To Benefit From Transformers Movie But Softer Cable Networks Ratings Will Weigh On Earnings

Viacom (NASDAQ:VIA) will report its Q4 fiscal 2014 earnings on November 13th. (Fiscal years end with September.) Viacom likely benefited from its movie arm, Paramount Pictures, given the success of Transformers: Age of Extinction at the box-office globally. However, the company’s key media networks, Nickelodeon and MTV, were down in ratings during the third quarter and this likely weighed over the quarterly earnings. In the previous quarter, the company saw lower revenue and profits given the lower advertising revenues and absence of any big movie title.

We estimate revenues of around $14.42 billion for Viacom in calendar year 2014, with EPS of $5.71, which is in line with the market consensus of $5.40-$5.70, compiled by Thomson Reuters. We currently have a $92 price estimate for Viacom, which is more than 25% ahead of the current market price.

See our complete analysis for Viacom

Viacom Will Benefit From The Success Of Transformers

Paramount Pictures’ Transformers: Age of Extinction was released towards end of June and the movie has been very successful at the worldwide box-office. It was made with a production budget of $210 million and it has so far grossed more than $1 billion at the box-office. ^[1] Moreover, the studio came up with another hit, Teenage Mutant Ninja Turtles, which has grossed more than $450 million. ^[2] We believe that Viacom’s movie business will see a fantastic run in the September quarter driven by the success of these movies. We estimate the studio revenues to be north of $3.50 billion in the calendar year 2014. Viacom may see benefits from Interstellar in the next quarter, as Paramount has distribution rights for the North America region. It must be noted that Viacom’s movie business offers low margins due to high production costs. The studio’s EBITDA margin has been under 10% over the past few years. Looking at the first nine months in fiscal 2014, the studio generated revenues of $2.37 billion but expenses were $2.38 billion, resulting in operating loss of $8 million. ^[3] It will be interesting to see how the margins trend in the September quarter, given a significant portion of Transformers grossing has come from China, where the studio’s profit cut is lower than other markets.

Softer Ratings At Media Networks Will Weigh Over The Q4 Earnings

Media Networks are of immense importance to Viacom as they contribute more than 90% to its stock value, according to our estimates. The company’s media networks include MTV, VH1, Nickelodeon, BET, Comedy Central and MTV among others. MTV U.S. has seen a decline in ratings in the recent past. The MTV Video Music Awards saw an 18% decline in viewership this year while overall MTV ratings dropped by 25% during the quarter. ^[4] Even Nickelodeon saw a 20% drop in ratings. ^[5] As a result, Viacom’s advertising revenues declined 5% to $1.1 billion during the quarter. ^[6]

However, we believe that cable networks’ continued focus on new and original programming will pay off well for the company in the coming years. The media networks are introducing new programming to attract more viewers. For instance, Nickelodeon will launch 9 new shows by the first quarter of 2015. We estimate media networks revenues to be north of $10 billion by 2015 and an estimated EBITDA margin of 42% will translate into EBITDA of over $4.3 billion in the next year.

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1. Transformers: Age of Extinction, Box Office Mojo [↩]
2. Teenage Mutant Ninja Turtles, Box Office Mojo [↩]
3. Viacom’s SEC Filings [↩]
4. VMAs Ratings Down Despite Blue Ivy Surprise, Billboard, Aug 26, 2014 [↩]
5. Viacom’s Downturns Have Gotten So Predictable They’re an Easy Buck for Investors, Adweek, Nov 10, 2014 [↩]
6. Broadcast, Cable TV Networks’ Ad Revenues Slip In Q3, MediaPost, Nov 11, 2014 [↩]