What Factors Can Drive Growth For Viacom’s Cable Networks?

Viacom’s (NASDAQ:VIA) cable networks – which include MTV and Nickelodeon, among others – are of key importance and account for more than 90% of the company’s value, according to our estimates. The cable networks have seen steady revenue growth in the past few years, primarily driven by increased pricing and strong performance in international markets. However, viewership in the U.S. has declined in the past few quarters due to competition from digital video platforms such as Netflix and Hulu. The rapid growth of these platforms has contributed to the cord-cutting phenomenon; 260,000 households dropped their pay-TV subscriptions in 2014, and the figure is estimated to be north of 300,000 for 2015. ^[1]

The impact of this changing media landscape has been more visible on Viacom than other media companies. This can be attributed to the kind of programming that Viacom develops and broadcasts. Viacom’s content primarily targets millennial viewers, who are more prone to cord-cutting. Moreover, Viacom lacks any sports programming, which usually is able to garner high viewership and better ad pricing. Furthermore, Viacom is less diversified than many rivals, as it doesn’t own any broadcasting networks or a sizable movie business that can compete with the likes of Disney, Warner and Fox. As a result, Viacom’s earnings have been impacted in the past few quarters and the stock has dropped close to 40% in the past year. Having said that, we believe that there is now some upside for Viacom’s stock. In this note, we discuss the factors that can drive growth for Viacom’s cable networks in the coming years.

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Subscription Growth To Slow Due To Pressure From Digital Platforms

Viacom’s cable networks include Nickelodeon, MTV, VH1 and Comedy Central, among others. In our model we provide estimates for subscription and advertising revenues for MTV, Nickelodeon and VH1 in the U.S., while other smaller networks and international revenues are labeled as Spike, BET & Other. Subscription revenues for Viacom’s cable networks have been trending well, and have grown at an average annual rate of 9% in the last five years to an estimated $4.9 billion in 2015. This can be attributed to strong performance in international markets and subscription pricing growth in the U.S. The pricing for Viacom’s cable networks in the U.S. has grown between 2% and 5% over the last few years. Going forward, we expect the overall growth rate to slow down, and estimate subscription revenues to be around $6.5 billion by the end of our forecast period in 2022.

Revenues will see continued pressure from the rapid growth of alternative video platforms, which will likely result in slightly lower penetration levels for Viacom’s cable networks in the coming years. For instance, MTV’s penetration among U.S. pay-TV households has come down from around 95% in 2011 to 90% in 2015. During the same period, Netflix has seen 3x growth in its subscriber base. As more people embrace streaming options, pay-TV subscribers are likely to decline in the coming years, which will impact cable networks’ subscriber base. However, that decline will be offset by continued subscription and pricing growth in international markets. Historical dollar increases in fees per subscriber are strong predictors of future growth, and we expect the pricing to continue to grow in the 2% to 5% range for Viacom. While we estimate slower growth in subscription revenues, the segment will still grow at a faster pace than advertising in the coming years, according to our estimates.

Better Pricing, Non-Nielsen Measurement To Aid Advertising Growth

Viacom’s cable networks’ advertising revenues have been hovering around $5 billion in the last few years. While there has been more growth in international markets on a constant currency basis, that was partly offset by the strengthening of the U.S. dollar in the past few quarters. Viacom’s domestic advertising is impacted by lower ratings, which were down by double-digits in the previous television season. ^[2] Despite the ratings pressure, we expect the cable networks’ advertising to grow in the coming years.

Continued expansion and better pricing in international markets will partly drive advertising growth for Viacom’s cable networks. We don’t expect a significant decline in Viacom’s viewership from current levels, primarily due to demand for its programming. For instance, Nickelodeon is the top rated kids network (in primetime) and networks such as MTV and Comedy Central also garner high viewership. Accordingly, it is unlikely that pay-TV operators will drop these networks from their bundle offerings, so the penetration levels are likely to remain high. There will be a drop in penetration to the extent of cord-cutting, but that will not be significant in our view. Given the wide reach of these networks, Viacom’s cable networks will remain attractive for advertisers, especially for networks such as Nickelodeon, which is ranked no. 1 in its segment. Moreover, pricing growth for ad slots will offset some of the declines seen on the volume front due to lower ratings.

Furthermore, Viacom has been focused on growing its reliance on non-Nielsen based measurements for advertising growth. The company has long been stating that Nielsen’s measurement system does not adequately reflect its viewership, given the shift to digital platforms. Accordingly, it has been working on initiatives to help advertisers precisely reach their target demographics and depend less on Nielsen ratings. Viacom has been successful in offsetting some of the declines in advertising due to these initiatives and better pricing, as evident from the company’s performance in FY15, which saw only a 7% cut in domestic advertising as opposed to a double-digit drop in ratings. Given these factors, we estimate the advertising revenues to grow in low-single digits to a little under $6 billion towards the end of our forecast period, translating into overall cable networks revenues of over $12 billion. An estimated EBITDA margin of 42% will translate into EBITDA of over $5 billion, representing 90% of estimated company-wide EBITDA. The chart below highlights that advertising will still remain an important contributor to Viacom’s overall EBITDA in the coming years.

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1. The number of Americans paying for traditional TV peaked in 2012, Business Insider, Apr 17, 2015 [↩]
2. Viacom Is Having A Midlife Crisis, Bloomberg, July 1, 2015 [↩]