Viacom Posts Loss In The March Quarter Amid Restrucutring

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Viacom (NASDAQ:VIA) recently reported its earnings for fiscal Q2 2015. (Fiscal years end  with  September.) The company’s revenues declined 3% to $3.08 billion while the net loss stood at $53 million compared to a profit of $502 million reported in the prior year quarter. However, adjusted earnings stood at $467 million or $1.16 per share. The company took a $784 million restructuring and programming charge in the March quarter. [1] Viacom’s media networks benefited from higher affiliate fees, but the company continued to see a drop in domestic advertising, which was down 5% due to lower ratings. While the company’s filmed entertainment segment benefited from the success of The SpongeBob Movie: Sponge Out of Water, the segment revenues and operating income declined due to decreases in home entertainment and licensing revenues, partly led by unfavorable foreign currency impact. We continue to believe that the ratings woes will weigh over Viacom’s performance in the near term and expect the media networks revenues to see low-single-digit growth over the next few years.

We currently 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 we will soon update to incorporate the recent quarterly earnings.

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See our complete analysis for Viacom

Media Networks Operating Income Lower Amid Higher Costs

Viacom’s media networks saw revenue growth of 3% to $2.45 billion led by 3% growth in affiliate fees. Softer ratings continued to weigh over domestic advertising, which declined 5% during the quarter. However, international advertising revenues were up 80%, reflecting the benefits from Channel 5 U.K., and this helped the company more than offset the declines seen in domestic market. [2] Overall, advertising was thus up 4% for the quarter. The segment operating income declined 5% to $903 million. The decline in operating income was due to a 9% increase in costs. Domestic advertising remained weak due to softer ratings at the media networks. 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. [3] While the decline in ratings is 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. We expect this trend to continue in the near term. However, media networks should continue to benefit from affiliate fees, which is growing steadily due to higher rates and growth in international markets. We currently estimate media networks revenues to around $10 billion for 2015 and an estimated EBITDA margin of 41% will translate into EBITDA of over $4 billion, representing close to 90% of the company-wide EBITDA.

Unfavorable Foreign Exchange Weighs Over Studio Operations

The company’s filmed entertainment division saw a 21% decline in revenues to $659 million while operating income was down over 90% to $1 million. The company did benefit from the success of The SpongeBob Movie: Sponge Out of Water, which has grossed more than $300 million at the global box-office. However, a 25% drop in home entertainment and a 32% drop in licensing fees led the revenues to slide lower. Also, a 20% increase in costs dragged the operating income lower. The fall in revenues was partly led by unfavorable foreign exchange. However, we believe the studio will do well in the near term primarily due to the solid lineup that includes Terminator: Genisys and Mission Impossible 5 scheduled to be released. Accordingly, we estimate Viacom’s filmed entertainment revenues to be around $3.02 billion and EBITDA of around $184 million, reflecting less than 5% of the company-wide EBITDA for calendar year 2015.

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Notes:
  1. Viacom’s SEC Filings []
  2. Viacom’s (VIA) CEO Philippe Dauman on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, Apr 30, 2015 []
  3. The Cost of Viacom’s Programming Woes, The Wall Street Journal, Apr 6, 2015 []