CBS Q2 Earnings Reaffirm Our Bullish Stance

July 29th, 2016 by Trefis Team
CBS: CBS logo
CBS
CBS

Key Takeaways From Q2,2016

  • 2% Increase in revenue, 14% in operating income and 26% in EPS
  • International licensing deals with Netflix and Bell Media Canada.
  • OTT customers are growing and could reach 8 million by 2020, bringing $800 million in additional revenue.
  • CBS may surpass $1 billion in retransmission and reverse compensation by 2016.
  • Strong upfront sales season with just 20% inventory held back to gain benefit of strong scatter pricing trends.

1) Reverse Compensation and retransmission Fee Could Reach ~$2.5 billion by 2020

  • Year-on-year growth of 44% in reverse compensation and retransmission fee in Q2 2016
  • 14% of reverse compensation and 24% of retransmission deals to be renewed by 2017. This gives an opportunity to increase pricing.
  • Retransmission fee and reverse compensation could account for 80% of incremental revenue by 2020.
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2) Strong Focus On Content Licensing And OTT Services

  • Content TV Licensing currently accounts for 20% of CBS’ valuation.
  • Licensing deals with Bell Media Canada, Netflix, Sky in Europe and Stan Pact in Australia will give boost to licensing revenues.
  • Showtime and CBS All Access could have potential 8 million customers by 2020, adding $800 million in annual revenue (5% CBS 2015 revenue)

Potential Risk

CBS’ cash conversion cycle reached 131 days in 2015, its highest level in last 5 years. This was due to significant reduction in payables period and increase in its inventory days. Reduction in payables period could mean that the company is not efficiently using its credit or the company’s financial strength is improving. However, the latter seems unlikely as the company’s financial strength was sound in previous years as well.  This may be a temporary issue.

Screen Shot 2016-07-29 at 4.53.12 pm

*Source- Morningstar.com

However, we have taken the effect of the same in our model. Overall we continue to maintain our bullish stance on CBS.

Sources:

  1. Bristol-Myers Squibb (BMY) Giovanni Caforio on Q2 2016 Results – Earnings Call Transcript, Seeking Alpha, July 28,2016