Higher Affiliate Fees Boosts Viacom’s Earnings

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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.

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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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Notes:
  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 []