- Cable Networks constitute 58% of the Trefis price estimate for ViacomCBS's stock.
- TV Entertainment constitutes 36% of the Trefis price estimate for ViacomCBS's stock.
WHAT HAS CHANGED?
- Impact of Coronavirus
Toward the end of March 2020, ViacomCBS' stock had dropped to $11, dropping almost 68% since the WHO declared a global health emergency on January 31, 2020, in light of the coronavirus spread. With the slowdown in industrial and economic activity, the consumer spending power is expected to decline. Additionally, due to lockdown in almost all major cities over the globe, major movie releases and shooting has been halted, which is not good news for a media giant like ViacomCBS. The company’s key revenue sources – movie theaters, film openings, and live sports events from the CBS network – have come to a virtual halt due to the pandemic. Additionally, the cord-cutting has led to a drop in TV advertising demand, affecting revenue projections. However, the announcement of the stimulus package by the Fed, gradual lifting of the lockdowns, and vaccine rollout has led to expectations of faster economic growth and recovery in the company's traditional business segments. The stock has recovered around 4x since its March lows and currently stands at $45 as on 4th April 2021.
- FY2020 Results
VIAC's total revenue fell 6% to $25.29 billion in 2020 from $27.00 billion in 2019, driven by the adverse effects of COVID-19 on its business, including lower demand in the advertising market, the closure or reduction in capacity of movie theaters, the cancellation of live events for which VIAC had the broadcast rights, and production shutdowns. The y-o-y revenue comparison was also impacted by the broadcasts in 2019 of annual tentpole sporting events, the Super Bowl and the semifinals and championship games of the NCAA Tournament. These decreases were partially offset by a 49% increase in streaming revenues, reflecting growth across streaming services, including Pluto TV, CBS All Access (rebranded as Paramount+ in March 2021), Showtime Networks’ premium subscription streaming service (Showtime OTT), and BET+, as well as record political advertising sales. The company reported EPS of $3.93 in 2020, lower than $5.38 in 2019, mainly due to lower revenues and higher cost associated with the pandemic.
- FY2019 results
Full Year 2019 revenue increased 2% to $27.8 billion, driven by growth in Advertising, Affiliate and Content Licensing. Advertising revenue increased 2%, driven by 5% growth in domestic advertising sales, reflecting CBS’ broadcasts of Super Bowl LIII and the NCAA Division I Men’s Basketball Tournament’s national semifinals and championship games, as well as higher revenues from Advanced Marketing Solutions which includes Pluto TV, partially offset by lower political ad spend. Affiliate revenue grew 3%, fueled by 20% growth in reverse compensation and retransmission, as well as strong subscription streaming revenue, which more than offset declines in pay TV subscribers. Content licensing revenue rose 5%, reflecting higher revenues from licensing library and original production to third parties. Domestic streaming and digital video business – which includes subscription revenue and digital video advertising – generated approximately $1.6B in revenue. Earnings came in at $5.01 per share in 2019 compared to $5.87 per share in 2018, due to higher operating expenses and merger-related cost
- CBS-Viacom Merger
In August 2019, CBS and Viacom announced that the two companies, which separated in 2006, have decided to merge to form a $28-$30 billion company. The the deal concluded by early December 2019. The new company, ViacomCBS, listed its shares on NASDAQ after the deal is completed. Under the terms of the deal, each Viacom share will be worth 0.59625 shares of CBS, while Viacom CEO Bob Bakish will run the combined company as its CEO with CBS interim chief Joe Ianniello and other unit chiefs reporting to him. Industry trends in recent years took a toll on both companies, particularly Viacom, which shrunk to a $12 billion market size while CBS stagnated, hovering around $19 billion; both were dwarfed by media giants like AT&T, the parent of Warner Brothers (formerly known as Time Warner), which has a market value of $251 billion; and Comcast, the owner of NBC Universal, which is valued at $400 billion. Though the cost synergies out of the merger are expected to be around $500 million as disclosed by Viacom earlier, analysts say with a market cap that should hover around $30 billion, the newly combined CBS-Viacom is still too small to effectively compete with industry behemoths. Tech giants like Amazon and Apple are now entering the media space with significant streaming services and both have market values that approach $1 trillion.
- Additional Debt Raised
On March 27, 2020, ViacomCBS Inc. entered into an underwriting agreement with BofA Securities, Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, and Morgan Stanley & Co. LLC, pursuant to which the Company agreed to issue and sell $1.25 billion aggregate principal amount of its 4.750% Senior Notes due 2025 and $1.25 billion aggregate principal amount of its 4.950% Senior Notes due 2031. The Notes were issued and sold on April 1, 2020. The new debt will increase the company's interest expense, but its high operating cash flow and a comfortable cash balance helps the company avoid any major solvency issue.
- Advertising and Content Licensing To Drive Near-Term Growth
ViacomCBS expects to see strong gains in advertising, with big sports events programming from the Super Bowl and the NCAA men's basketball tournament. The company also expects continued growth in content licensing, as it is planning to expand content development and distribution to a host of third-party distributors such as Apple, Netflix, and TBS. The company also stated its financial goals to reach a high-single-digit revenue CAGR and double-digit adjusted earnings CAGR through 2021, largely driven by investments in programming, marketing, and technology.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of ViacomCBS' value that present opportunities for upside or downside to the current Trefis price estimate for ViacomCBS:
Cable Networks Subscription Growth
- Cable Networks Revenue: ViacomCBS' cable networks, which includes Showtime Networks, has been able to grow its subscriber base even in the recent years despite the growth of digital video platforms. It should be noted that many cable networks have seen subscriber declines as more people embrace newer digital technologies, which costs a fraction of monthly pay-TV bill and thereby increase the cord-cutting phenomenon. The reason for subscriber growth at Showtime has been the quality of content and its demand. Showtime is home to some of the popular TV shows, including Homeland, Ray Donovan and The Affair among others. Showtime Networks penetration among the U.S. pay-TV households currently stands around 70% and there is still room for growth. It should be noted that the figure is much higher for some other networks, such as FX with 90% penetration levels. If Showtime Networks manages to reach 85% penetration levels in the coming years, along with 5 million streaming subscribers, it will result in additional revenues of over $1 billion for cable networks by the end of our forecast period, representing an upside of 10% to ViacomCBS' price estimate. However, if the cord-cutting phenomenon intensifies, it may result in a lower subscriber base even for ViacomCBS. However, even in that case streaming subscribers should continue to grow as viewers shift to digital platforms. There is no potential downside for streaming services as there is limited cost being incurred on technology and the programming offered on the service is Showtime's in house programming. Streaming growth can help offset some of the revenue declines on pay-TV front and this may result in a revenue loss of over $700 million by the end of our forecast period, resulting in over 5% downside to our current price estimate.
- Broadcasting Advertising Revenues : Broadcasting networks heavily rely on advertising. Currently, we forecast the advertising revenues to slightly increase from around $4.4 billion in 2018 to $4.5 billion by the end of our forecast period. There could be a 5% downside to our price estimate if this figure remains subdued around $3.5 billion. This could happen if the network is unable to secure/renew future sports programming rights and its non-sports programming doesn't pick up. Also, the growth of digital platforms has led to lower viewership on television. On the other hand, there could be around 5% upside to our price estimate if the network revenues blow past expectations north of $6 billion by the end of our forecast period. This is possible due to a better ad marketplace driven by the growth in the economy and ViacomCBS' appealing content and its sports coverage.
For additional details, select a driver above or select a division from the interactive Trefis split for ViacomCBS at the top of the page.
ViacomCBS makes money primarily through advertising on Television Network, licensing of TV shows, fees charged to cable and satellite operators for carrying premium channels such as Showtime, and advertising revenues earned by its owned TV stations, radio business, and billboards.
SOURCES OF VALUE
Cable Networks are most valuable for ViacomCBS primarily due to their consistent revenue growth rate and high margins.
Cable Networks revenues stood at around $12.3 billion in 2020, with the expected growth being attractive. Given the demand for premium content, stability of subscription business, newly launched streaming service and annual fee increases, we expect these revenues to grow to over $15 billion by the end of our forecast period.
Furthermore, this business has high EBITDA margins of around 29% compared to 18% for TV Entertainment and 9% for Filmed Entertainment.
Increasing pay-TV competition
Increasing competition among pay-TV providers such as Comcast, Time Warner, DirecTV, AT&T, and Verizon is favorable for media companies. In such a scenario, ViacomCBS can gain negotiating power in discussions regarding the pricing of subscription fees for its programming content.
Increasing disputes with pay-TV service providers
Even though competition among pay-TV companies is increasing, they cannot continue bidding up subscription prices for channels. In order to protect consumers, pay-TV providers are increasingly taking a stand against media companies, leading to frequent channel blackouts.
Online licensing & broadcast advertising
With the growth of online streaming companies such as Netflix that monetize primarily older content, licensing opportunities have expanded for media companies. However, given a decline in traditional television viewership, ratings are hit hard and this has resulted in lower advertising revenues for most of the media companies. So far, licensing revenue growth has not been able to completely offset the declines seen on the advertising front. Having said that, broadcasting networks, such as FOX, CBS, NBC, and ABC have been able to contain the advertising decline due to their exposure to sports programming, which garners very high viewership and better ad pricing.
There is a massive demand for streaming services and for certain premium networks such as Showtime and HBO, it makes sense to go over-the-top and tap the 70 million homes, which haven't subscribed to these networks. Accordingly, the company launched All Access for CBS programming and Showtime Anytime for Showtime's programming that is now being offered as a standalone streaming service. In the early months, these services are seeing good traction and are likely to drive future profits for the company.