Will CBS’s Headcount Reductions Impact Its Margins?

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CBS Corporation (NYSE:CBS) recently announced that it is laying off staff in its network and syndication businesses in order to trim costs. This restructuring is reportedly relatively small (around 50 staff members) and not considered on the same scale as the recent moves at ESPN. However, CBS’s moves are due to the same reason – a shift towards digital distribution of its programming. The company continues to shift towards CBS All Access as well as Showtime’s standalone digital service, in addition to the ad-supported news streaming service CBSN. The company already has more than 2 million subscribers of All Access as of now, and more than 4 million subscribers combined with Showtime’s over-the-top (OTT) product.

While most networks are going through tough times with declining ratings amid the growth of digital platforms, CBS All Access and Showtime OTT continue to be key contributors to CBS’s growth. CBS expects its OTT subscribers to grow to 8 million by 2020, bringing in as much as $800 million in additional revenue.

Impact on Margins

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CBS’s EBITDA margins have rebounded in the past two years following some declines, due to higher revenues from some  sporting events as well as cost cuts. In 2016, the company reported higher advertising sales from the broadcast of the Super Bowl – which is broadcast on CBS every three years – and higher political spending, along with higher licensing revenues from digital streaming as well as domestic and international syndications. Meanwhile, the company also saw declines in its expenses, including compensation expenses, royalty costs, and severance costs, leading to a higher margin of 26% in 2016 from 24.1% in 2015. Going forward, we expect the company’s growth momentum to continue into 2017, and we expect its EBITDA margin to exceed 27% for the full year. CBS is likely to benefit from higher affiliate and subscription fees of Showtime’s streaming offerings, as well as the timing of international TV licensing sales of Showtime’s original series this year. However, we expect the company’s EBITDA margins to level off at 27.5% by 2020, as a result of further pressure from alternative viewing platforms.

CBS network is committed to paying a set amount every year, in some cases for the next decade, to broadcast lucrative sporting events such as the NFL, March Madness and pay-per-view boxing events. For instance, CBS extended its deal to broadcast the NFL in 2011 until 2022, as its rights fee jumped from $619.8 million per season to $1.08 billion. As NFL ratings have stagnated, it makes sense for the company to look to cut costs elsewhere. While this round of layoffs is not significant, it signals that the company is trying to reduce its costs further. Accordingly, we will be keeping an eye on areas for cost cuts going forward.