How Is Nickelodeon Network Trending For Viacom?

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Viacom‘s (NASDAQ:VIA) Nickelodeon network saw a 20% ratings decline in the third quarter. [1] The network was no exception as ratings were lower in the second half of 2014 for most of the cable networks. While the network is currently at the top spot with kids 2-11 for the 4th consecutive month, ratings are lower as compared to the prior year period. [2] Lower ratings translate into lower advertising revenues for the content owners such as Viacom. This could prove meaningful as Nickelodeon U.S. contributes more than 13% to the company’s value, according to our estimates. The contribution is much more significant if we account for the global operations. However, we believe that Nickelodeon will see better ratings in the coming months driven by the network’s focus on original programming and addition of new shows.

Nickelodeon earns revenues primarily from two sources, subscription and advertising. The network generated over $700 million in advertising revenues and over $600 million in subscription revenues in 2013. An estimated EBITDA margin of 42% for Viacom’s cable networks translated into EBITDA of over $550 million, representing 12.50% of the company’s overall EBITDA during the same period.

We estimate revenues of around $13.92 billion for Viacom in calendar year 2014, with EPS of $5.67, which compares to the market consensus of $5.38, compiled by Thomson Reuters. We currently have a $91 price estimate for Viacom, which is around 25% ahead of the current market price.

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See our complete analysis for Viacom

Steady Growth In Subscription Revenues

Nickelodeon U.S. currently has a subscriber base of close to 100 million and it charges an estimated monthly subscribtion fees of $0.52. This translates into annual subscription revenue of $621 million. Nickelodeon’s subscription revenues have grown at an average annual rate of over 5% in the past years and we expect it to continue to grow at a similar rate. If we account for Nickelodeon internationally, the revenues will be much higher. Globally, Viacom reaches 330 million households across 110 countries, and it is poised to benefit from the surge in Nickelodeon’s viewership. We estimate monthly subscription fee to be around $0.71 and subscriber base to be around 106 million, translating into subscription revenues of $907 million by the end of our forecast period. This growth will be driven by Nickelodeon’s popularity among kids 2-11 with several hit shows such as Teenage Mutant Ninja Turtles under its banner. There is lesser competition for this channel compared to other mainstream channels. The only noticeable competitors are The Disney Channel and Cartoon Network. This should help Nickelodeon in maintaining its subscription pricing. Given the high demand of top rated channels such as Nickelodeon, service providers will need to ensure access to such programming for customers. Moreover, the pay-TV companies sign multi-year agreements with content owners with pre-defined price increments each year and this will ensure steady growth in subscription pricing in the coming years.

Advertising Revenues Are Still Lower Than The Pre-recession Levels

The ratings trend at Nickelodeon directly impacts the advertising revenues for the network. The network’s advertising revenues plunged 11% in 2012 led by lower ratings due to lack of its programming appeal to kids. However, the network came back strongly in 2013 and posted higher ratings driven by its focus on original programming. The advertising revenues have declined from $816 million to $703 million between 2010 and 2013. 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. Given the network’s efforts to revamp content, we believe Nickelodeon’s advertising revenues will pick up in the coming years. We estimate the network’s advertising revenues to grow to $900 million by the end of our forecast period.

This growth will be led by continued improvement in ad pricing and ratings at Nickelodeon’s shows. Ad pricing has picked up since the recessionary period of 2008 and 2009. The overall U.S. advertising market is growing and advertisers are willing to shell out more money on advertisements. TV still remains the biggest medium for advertisements and thus, Nickelodeon, given its continued appeal, will benefit from this broad level improvement. Television currently accounts for close to 40% of all advertising and it is expected to drop to 37% by 2017, according to a research by ZenithOptimedia. However, this downturn will primarily be due to a rise in ad spending at other platforms and cable spending will continue to rise in the near term. [3]

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Notes:
  1. Viacom’s Downturns Have Gotten So Predictable They’re an Easy Buck for Investors, Adweek, Nov 10, 2014 []
  2. NICKELODEON WINS NOVEMBER WITH KIDS FUELED BY HIT LIVE-ACTION SLATE, Nickelodeon’s Press Release, Dec 4, 2014 []
  3. Executive summary: Advertising Expenditure Forecasts December2014, ZenithOptimedia []