Higher Affiliate Fees Boosts Viacom’s Earnings

Viacom (NASDAQ:VIA) recently reported its earnings for fiscal Q4 2014. (Fiscal years end with September.) The company’s revenues grew 9% to $3.99 billion but the operating income declined slightly to $1.21 billion as compared to the prior year quarter. However, adjusted earnings were up 10% to $1.71 per share. ^[1] Viacom’s media networks benefited from higher affiliate fees but lower ratings continued to drag advertising revenue down. The company’s filmed entertainment segment benefited from the success of Transformers: Age of Extinction and saw over 200% theatrical revenue growth during the quarter. Going forward, the company expects to see a 10% growth in advertising and high single to low double-digit growth in affiliate fees for fiscal 2015. ^[2] Looking at the filmed entertainment, the company will benefit from its strong lineup in 2015, including a sequel to Terminator and Mission Impossible.

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 we will soon update based on the recent quarterly earnings.

See our complete analysis for Viacom

Continued Growth At Media Networks Led By Higher Affiliate Fees

Viacom’s media networks saw revenue growth of 8% to $2.66 billion led by a 21% growth in domestic affiliate fees. Softer ratings continued to weigh over advertising, which declined 5% during the quarter. However, international advertising revenues were up 33%, reflecting the benefits from Channel 5 acquisition. The segment operating income was also up 5% to $1.09 billion. ^[1]

The decline in advertising income was due to softer ratings at the media networks. Nickelodeon’s ratings dropped 20% during the quarter while MTV U.S. ratings were down 25% as compared to the prior year period. ^[3] Given the softer ratings, the company plans to bring new programming and will launch 9 new shows at Nickelodeon by the first quarter of 2015. The company’s management stated that 30% of its advertising revenue was not dependent on Nielsen ratings and it expects that portion to increase to 50% in next three years. ^[2] Viacom’s sales for mobile platform, personalized advertising and sponsorships account for this independent portion. However, it is just a matter of time when Nielsen starts to account for viewership on alternative video platforms. We currently estimate media networks revenues to be a little under $10 billion for the calendar year 2014 and an estimated EBITDA margin of 42% will translate into EBITDA of over $4 billion by end of the year.

Viacom Benefits From The Success Of Paramount Pictures At The Global Box-Office

The company’s filmed entertainment division saw a 12% revenue growth and a 27% drop in operating income during the September quarter. ^[1] The company benefited from the success of Transformers: Age of Extinction, which has grossed more than $1 billion and Teenage Mutant Ninja Turtles, which has grossed over $450 million at the global box-office. ^{[4] [5]} The studio’s theatrical revenues were up 226% to $557 million for the quarter. The studio generated adjusted operating income of $213 million in the quarter as compared to $291 million in the prior year period, as the prior years results included the contributions from Marvel distribution rights sale. ^[1] However, the segment continues to see lower margins. While the segment revenues were $3.73 billion for the fiscal 2014, the segment’s operating income was a mere $205 million, reflecting the margins of under 6%. This is much lower than what Disney or Fox sees in their respective studio businesses. We estimate Disney’s studio EBITDA margins to be around 18% while Fox’s to be around 14%. Given these trends, we estimate Viacom’s filmed entertainment revenues to be around $3.2 billion and EBITDA of around $200 million, reflecting margins of around 6% for the calendar year 2014. It must be noted that we estimate consumer and other products as a separate driver while the reported filmed entertainment segment includes these revenues, which were $552 million for fiscal year 2014.

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1. Viacom’s SEC Filings [↩] [↩] [↩] [↩]
2. Viacom’s (VIAB) CEO Philippe Dauman on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, Nov 13, 2014 [↩] [↩]
3. Viacom’s Downturns Have Gotten So Predictable They’re an Easy Buck for Investors, Adweek, Nov 10, 2014 [↩]
4. Transformers: Age of Extinction, Box Office Mojo [↩]
5. Teenage Mutant Ninja Turtles, Box Office Mojo [↩]