Viacom Q3 FY 15 Earnings Preview: Watchout For Advertising Income Amid A Double Digit Drop In Ratings

Viacom (NASDAQ:VIA) will report its fiscal Q3 2015 earnings on August 6th. (Fiscal years end with September.) ^[1] We expect to learn that the company continued to see pressure on its media networks, which yet again saw a double-digit drop in ratings. Lower ratings surely weighed on the advertising revenues for Viacom. In the previous quarter, advertising income declined 5% amid rating woes and this time around the fall could be steeper. While a ratings decline can be seen across the industry amid the rise of alternative video platforms, the fall for Viacom’s cable networks has been much steeper. This can be attributed to the target demographics of Viacom’s cable networks. For instance, MTV and Nickelodeon have a younger target demo, which is rapidly moving to digital platform. However, Viacom has been addressing this issue and is lowering its reliance on Nielsen estimated ratings. Nevertheless, the company will continue to face the headwinds from lower ratings at least in the near term.

Unlike other media conglomerates, Viacom has a significant exposure to its media networks and relies heavily on television ratings. Its studio, Paramount, is also smaller than those of other media companies. We estimate that media networks contribute more than 90% to Viacom’s stock value. Most of the media networks, including MTV and Nickelodeon, have been struggling in ratings for quite some time now. Looking at Q2, Viacom’s overall C3 ratings plunged 20% with Nickelodeon down 30% among kids 2 to 11, Comedy Central down 23% among adults 18-49 and MTV falling 22% in the 12-34 demographics. ^[2] However, so far the impact on advertising has not been dramatic and the revenues declined only 5% in the previous quarter despite a double-digit fall in ratings. ^[3] Viacom says that it is moving away from Nielsen ratings based ad sales and plans to derive 50% of its ad revenues from non-Nielsen dependent sources, versus the current 30%. ^[4] While this may take some time, Viacom is surely headed for lower advertising income in the June quarter. On the brighter side, the company 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 offset some of the revenue decline seen on advertising front. 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. Looking at overall Viacom, we currently estimate revenues of about $14.2 billion in 2015, with EPS of $5.83, which is a bit below the market consensus of $5.92, compiled by Thomson Reuters. We currently have a $80 price estimate for Viacom, which we will update after the June quarter earnings release.

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1. Viacom’s Press Release [↩]
2. Drawn and Quartered: Ongoing Ratings Slide Will Take a Bite Out of Cable Earnings, Advertising Age, July 13, 2015 [↩]
3. Viacom’s SEC Filings [↩]
4. Behind Viacom’s Case that TV Ratings Aren’t Everything, The Wall Street Journal, July 17, 2015 [↩]