Viacom’s Increased Investment In Media Networks Bodes Well While Studio Business Remains Subdued

Viacom’s (NASDAQ:VIA) fiscal Q4 earnings were below the street estimates amid lower domestic advertising sales and the subdued performance of its studio business. On the brighter side, international advertising saw a sizable uptick despite currency issues while affiliate revenues, both domestic and international, were up in double-digits. Viacom’s stock reacted positively to the  earnings release, though it is still down over 30% this calendar year. This can be attributed to a shift in viewing habits as the younger generation is embracing digital video platforms, which has resulted in lower ratings and declining advertising income for Viacom’s media networks. Viacom’s programming including, Nickelodeon and MTV, primarily targets the younger generation, which is early to adapt to newer platforms. Having said that, Viacom has been moving away from selling ads based on Nielsen ratings to Viacom Vantage, which already has 11 advertisers on board and the company expects to triple the number of deals before the upfront sales begin for 2016-17 television season. ^[1] Vantage is a data driven ad product that predicts which content will perform the best for the advertisers, thereby making them reach the target audience across its media networks.

• We currently have a $72 price estimate for Viacom’s shares, translating into a $28 billion market cap. This is roughly 40% ahead of the market price of around $51 seen over the week.
• We estimate the company’s 2015 revenues to be a little under $14 billion for an earnings per share of $5.74, compared to a consensus of $5.88 according to Reuters. We will soon update our model to reflect the recent quarterly earnings.

See our complete analysis for Viacom

Viacom Is Eyeing More Original Content

Looking at Viacom’s media networks, C3 ratings were down 11% during the quarter, which in turn, led to a 7% decrease in domestic advertising revenues. ^{[2] [3]} However, advertising revenues in international markets were up 45%, primarily reflecting the benefits of Channel 5 in U.K., which Viacom acquired last year. While Viacom’s prominent networks – Nickelodeon and MTV are struggling in ratings, it’s other networks, including VH1 and BET have seen ratings growth in the September quarter. Viacom is now investing more in original programming and this will likely bode well for the company in the long run. We maintain our view that there will be a place for both traditional television and streaming to co-exist in the foreseeable future. If there is a demand for content, media companies will be able to monetize it, irrespective of the platform it is being watched on. So if the television declines and digital video platforms continue to see rapid growth, growth in licensing revenues from digital platforms will help offset advertising declines seen on television. What matters the most is demand for the content and Viacom realizes it now. Accordingly, it has paced up its investment in original programming. Also, its efforts to move away from traditional ratings measurement system will give some relief in advertising declines.

Studio Operations To Remain Muted Despite Increased Investment

Viacom’s studio operations remained subdued in Q4. While the division benefited from the success of Mission Impossible: Rogue Nation, it was nowhere close to the prior year hit Transformers: Age of Extinction. Paramount releases fewer movies as compared to other studios such as Fox, Universal and Warner Bros. However, the company stated that it will increase investment at Paramount and it will release 15 movies in 2016, as compared to 11 in 2015. Also, Paramount television is seeing some activity on original programming as Netflix has ordered an original series – 13 Reasons Why, which Paramount will develop while Selena Gomez will be the executive producer. ^[1]

Looking forward, the studio will come up with sequels to some of earlier hits, such as Star Trek, World War Z, Terminator and Teenage Mutant Ninja Turtles. However, it will face the heat from sequels to Star Wars and Avatar, along with other Marvel and DC Comics’ movies lined up for next few years. It must be noted that Avatar and Star Wars have a massive fan base and the movies in these series are likely to do well at the box-office, thereby making it difficult for Viacom’s titles to leave their mark there as well.

Accordingly, we don’t expect any significant growth in Viacom’s box-office revenues and estimate the figure to remain under $1.5 billion. An estimated EBITDA margin of 8% for Viacom’s studio business will translate into EBITDA of a mere $115 million, representing around 2% of the company’s overall EBITDA by the end of our forecast period (towards 2022). Even if we account for studio’s electronic and physical sales, along with the movie licensing business, revenues will be close to $3 billion and EBITDA will be still be less than $250 million. Given such low value contribution of the segment, even if the upcoming movies do well at the box-office and the topline grows at a higher than expected rate, it will not have any meaningful impact on Viacom’s stock price, in our view.

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1. Viacom (VIA) Earnings Report: Q4 2015 Conference Call Transcript, The Street, Nov 12, 2015 [↩] [↩]
2. TV’s Third-Quarter C3 Ratings Plunge 8%, Advertising Age, Oct 12, 2015 [↩]
3. Viacom’s SEC Filings [↩]