Viacom’s Stock Plunges 20% As Subscription Growth Slows

Viacom’s (NASDAQ:VIA) fiscal Q1 earnings were below street estimates amid lower domestic affiliate revenues and the subdued performance of its studio business. On the bright side, advertising was down only 4%, which is remarkable given the double-digit drop Viacom has seen in 2015 television ratings. Viacom’s stock plunged over 20% after the earnings release. The near term concern for Viacom remains its ongoing negotiations with Dish Network for carriage of its programming. Also, the revised outlook of mid-single-digit growth in affiliate (subscription) fees wasn’t well received with the investors. Viacom’s media networks are struggling with declining ratings, which has impacted its advertising business. While continued growth in affiliate fees has so far been able to offset some of the decline on the advertising front, the company now expects slower growth in affiliate income, which could be concerning. However, management stated that affiliate growth should return to normal growth levels next year. ^[1] The company’s studio business also posted a double-digit revenue drop, as there was no big movie released during the quarter while the prior year quarter benefited from the success of Interstellar.

Viacom’s cable networks include Nickelodeon, MTV, VH1 and Comedy Central, among others. Subscription revenues for Viacom’s cable networks have so far 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. However, the subscription growth is likely to slow down in the coming years. Subscription revenues will see continued pressure from the rapid growth of alternative video platforms, which will likely result in 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. A decline in subscribers will partly offset any subscription pricing growth. Another concern on subscription fees is Viacom’s ongoing negotiations with Dish Network. If Dish decides to drop Viacom, it will have an immediate impact on Viacom as Dish has close to 14 million pay-TV subscribers. In such a scenario, Viacom will lose around $1 billion in revenues and $400 million in annual EBITDA, according to our estimates (read more – What Happens If Dish Decides To Drop Viacom?).

Having said that, 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 due to cord-cutting, but that should 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. Continued expansion and better pricing in international markets will likely drive advertising growth for Viacom’s cable networks. For now, all eyes will be on the Viacom and Dish carriage renewal deal.

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1. Viacom’s (VIAB) CEO Philippe Dauman on Q1 2016 Results – Earnings Call Transcript, Seeking Alpha, Feb 9, 2016 [↩]