CBS Earnings Preview: What Are We Expecting?

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CBS Corporation (NYSE:CBS) is scheduled to announce its third quarter results on Thursday, November 3. The company announced strong results in second quarter, with both revenue and earnings per share beating market expectations. In Q2 2016, the company’s revenue came in at $3.3 billion, up 2% from a year ago while its operating income of $733 million was up 14% year-over-year (y-o-y). Its earnings per share grew by a significant 26% y-o-y to $0.93, marking it as the highest second quarter growth for the company ever.

Going forward, CBS expects to carry forward its growth momentum in the back half of 2016 as well, driven by strong second quarter results, the Presidential elections and healthy gains in the upfront pricing markets.

Expect Stable Advertising Revenues

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The company expects a good 2016 second half for advertising. The year-to-date underlying network advertising was up 7% y-o-y in second quarter, and the company expects the growth trend to follow suit in the coming quarters. This is primarily due to upfront pricing as well as a strong marketplace for sports advertising, which began with the kickoff of the NFL season in September. In the third quarter, its TV stations and Radio are also expected to pace up to high single digits, driven by political advertising. In addition, the company’s affiliate fees, subscription fees and its over-the-top (OTT) subscription services have started showing results, which could further add to the ad revenues.

CBS averaged a 2.1 C3 rating in the 18-49 demographic in the Nielsen’s C3 data for 2016-17 TV season, which covers premiere week (Sept. 19-25), excluding its Thursday Night Football telecast (TNF). With the TNF game, it logged a decent 2.4 rating. The biggest C3 surprise for CBS was the three-tenths of a point freshman series “Macgyver” ending up with a 2.0. [1] Broadcasting networks rely heavily on advertising income, which in turn is dependent on ratings. Therefore, CBS’ stable ratings will likely result in solid advertising income. Moreover, the company is seeing solid growth in scatter ad pricing, which could further add to its ad revenue growth.

In addition, CBS is also on track to receive more than $1 billion in broadcast re-transmission and reverse compensation by the end of 2016. [2]

It should be noted that CBS is still the most watched network, so it still appeals to many advertisers. We currently estimate $4.8 billion in revenue for CBS & CW Network in 2016, and expect an estimated EBITDA margin of 20% to translate in EBITDA of close to $970 million, representing around 24% of company-wide EBITDA.

Opportunities In Content Licensing And Distribution

CBS closed its Netflix deal for in-season and out-of-season content to take effect from the third quarter. The company also plans to announce new agreements in the near term to license the Showtime brand, just as previously done in Canada, parts of Europe and Australia. Similarly, CBS television network also plans to launch six new shows in the fall, leading to even more future content licensing revenue.

Cable Network Could Likely Boost Q3 Earnings

Looking at CBS’ cable networks, it should continue to post steady subscription growth. It should be noted that CBS’ Showtime and Time Warner’s HBO are one of the popular cable networks that have been able to post subscriber growth even in the recent years with increased cord-cutting amid growth of alternative video platforms. Showtime has over 23 million pay-TV subscribers.

We estimate cable networks’ revenue to be around $2.36 billion in 2016, and expect that an estimated EBITDA margin of 45.5% will translate into EBITDA of $1 billion, representing more than 27% of company-wide EBITDA.

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Recently, there has been speculation of a CBS-Viacom (NYSE:VIA) merger since they split 10 years ago. The Redstones control both Viacom and CBS, and it would be interesting to see how the media landscape would look if the deal goes through.

See our complete analysis for CBS Corporation 

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Notes:
  1. Premiere Week C3 Ratings: The Numbers That Matter Most to the Networks, variety.com, Oct 2016 []
  2. CBS Corporation’s (CBSn) CEO Leslie Mooves on Q2 2016 Results – Earnings Call Transcript, Seeking Alpha, July 2016 []