Viacom (NASDAQ:VIA) may continue to feel the impact of lower ratings at Nickelodeon and MTV when it releases its Q4 fiscal 2012 results tomorrow. Last quarter’s results were dismal primarily due to this reason, as well as soft performance by its movie business. As far as the latter is concerned, Viacom is still behind the other major movie studios this year and substantially below its own performance of 2011.  However, we believe this shouldn’t be a source of too much concern since the movie business constitutes just over 10% to the company’s value. TV networks still contribute more than 80% and their results dictate where Viacom is headed.
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Ratings Issue At Nickelodeon And MTV
Nickelodeon’s ratings have declined this year substantially and this can be attributed to the fading charm of some of its popular shows such as SpongeBob SquarePants and iCarly. Getting Nickelodeon back to the top and improving its ratings substantially should be Viacom’s top priority given the financial significance of this network. Thankfully, the company seems to be doing just that by investing heavily in original programming and cleaning up some of the older series that are not performing well. An example is the newer version of the immensely popular series Teenage Mutant Ninja Turtles. This is likely to draw some attention and help improve ratings. Therefore, we expect slightly better performance by Nickelodeon in Viacom’s Q4 fiscal 2012 excluding the impact of standoff against DirecTV (NASDAQ:DTV). The impact of DirecTV dropping Viacom’s channels could result in weak revenue growth from the company despite the efforts made to revive Nickelodeon.
As far as MTV is concerned, its weak performance could drag Viacom’s growth. The impact of DirecTV, in tandem with general weakness in the channel’s ratings due to the lack of new programming is a cause of concern for Viacom. The ratings for the new season of Jersey Shore were down substantially (~40%) compared to the last year and it appears that the company needs to revamp its programming on the network. 
Growing Digital Licensing Will Help
While Viacom’s total revenue from media networks grew by 14% between 2007 and 2011, the affiliate fee component increased by 56% during the same period.  Advertising revenue hasn’t been able to keep up with the growth in affiliate fee due to the economic turmoil of 2008-09, as well as due to the fact that affiliate fee is aided by the growth in digital licensing revenue. According to paidcontent.org, Viacom’s total digital revenue stood at around $1 billion in 2011, double of what it was in 2007.
The company has been pushing for growth in this digital licensing through various deals. Last quarter, it signed a deal to make Nickelodeon’s programming available on Hulu. We expect this growth to be additive to margins and mitigate some of the impact of weak Nickelodeon and MTV ratings.
Our price estimate for Viacom stands at $67, implying a premium of more than 30% to the market price.Notes:
- Box Office Mojo [↩]
- ‘Jersey Shore’ Final Season Premiere Takes a Nearly 40 Percent Ratings Hit, The Hollywood Reporter, Oct 5 2012 [↩]
- Viacom’s SEC Filings [↩]