Rating Woes Likely To Weigh Over Viacom’s FY Q2 Earnings

Viacom (NASDAQ:VIA) will report its fiscal Q2 2015 earnings on April 30th. (Fiscal years end with September.)  We expect to learn that the company continued to see pressure on its media networks, which have seen double digit drops in ratings during the March quarter. Lower ratings likely weighed on the advertising revenues for Viacom. Earlier, lower ratings at media networks led to a 6% drop in the advertising income for the company in the December quarter. ^[1] Viacom’s movie arm Paramount will likely see a little growth in top line as the only big release was The SpongeBob Movie: Sponge Out of Water. Overall, we expect the company to post lower advertising income and higher affiliate fees, the latter led by higher rates as well as higher contribution from international markets.

We estimate revenues of about $14.2 billion for Viacom in 2015, with EPS of $6.03, which is in line with the market consensus of $5.55-$6.70, compiled by Thomson Reuters. We currently have a $80 price estimate for Viacom, which is around 10% ahead of the current market price of $71 per share.

See our complete analysis for Viacom

Lower Ratings Will Weigh Over Viacom’s Advertising Income

Media Networks are of immense importance to Viacom as they contribute more than 90% to its stock value, according to our estimates. Viacom’s media networks include MTV, VH1, Nickelodeon and BET among others. Most of Viacom’s media networks are struggling with television ratings and have been for quite some time now. Nickelodeon is down 33% in ratings while MTV is down 27% and Comedy Central down 10% in their respective key demographics for the March quarter. ^[2] The company also took a $785 million charge in fiscal second quarter, a significant portion of which is for its programming. While the decline in ratings was widespread, due to a change in viewing habits with the rise of alternative video platforms, the pace was higher for Viacom’s networks due to lack of appeal of its programming slate. Also, networks such as MTV or VH1 primarily target the younger generation, which is more rapidly shifting to digital platforms. So far, Nielsen doesn’t account for ratings on digital platforms and this weighed on the media networks revenues in the recent past. Accordingly, we expect there was continued pressure on advertising income in the March quarter. However, Viacom in the recent past has managed to grow its affiliate fees, led by higher rates and growth in international markets. We expect this trend to continue in the near term and aid the overall earnings growth.

We currently estimate Viacom’s media networks revenues to be around $10 billion in calendar year 2015. An estimated EBITDA margin of 41% will translate into EBITDA of over $4 billion, representing around 90% of the company-wide EBITDA.

Paramount Pictures Will See Slight Growth Led By The SpongeBob Movie

Viacom’s studio arm, Paramount Pictures, raked $275 million at the U.S. box office during the March quarter primarily led by the success of The SpongeBob Movie: Sponge Out of Water, which has grossed more than $300 million at the global box-office while it’s production budget was less than $75 million. ^[3] The studio’s performance has been slightly better in Q1 2015 as compared to the prior year quarter and this should aid the studio’s top line growth. We currently estimate the studio’s theatrical revenues to be around $1.25 billion and an estimated EBITDA margin of 6% will translate into EBITDA of over $75 million, representing a mere 2% of the company wide EBITDA for 2015. However, the contribution will be slightly higher at around 5% if we account for the movie licensing and electronic sales of the studio.

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1. Viacom’s SEC Filings [↩]
2. The Cost of Viacom’s Programming Woes, The Wall Street Journal, Apr 6, 2015 [↩]
3. The SpongeBob Movie: Sponge Out of Water, Box Office Mojo, As of Apr 26, 2015 [↩]