What To Expect From Viacom’s Q4 Earnings

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Viacom (NYSE:VIA) is scheduled to announce its fourth quarter fiscal 2016 results on Wednesday, November 9. The company’s revenue and earnings per share beat market expectations in the third quarter. The company’s revenue came in at $3.1 billion, up 2% from a year ago, while its operating income of $769 million was down 30% year-over-year (y-o-y). Viacom also posted adjusted earnings of $1.05 per share, which declined 29% y-o-y.

In the upcoming earnings, Viacom’s results will primarily be driven by its media network performance. The company’s stock, on the other hand, will be largely driven by the speculated merger announcement with CBS (NYSE:CBS), if it happens. Unlike other media conglomerates, Viacom has a significant exposure to its media networks and relies heavily on television ratings. Viacom’s overall C3 ratings among 18-49 demographic plunged 7% in the September quarter, according to Nielsen data. [1] Going forward, we expect the company to observe pressure on its media networks in the fourth quarter, which yet again saw softer ratings. Most of the company’s media networks, including MTV and Nickelodeon, have been struggling in ratings for some time now. For Viacom, it has become immensely important to invest more into original programming, which can bring in some ratings growth and provide a stable outlook.

Softer Ratings At Media Networks Could Weigh On Q4 Earnings

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Viacom’s Media Networks contribute more than 90% of Viacom’s value, according to our estimates. This segment generates revenues from advertising sales, affiliate fees and ancillary revenues. In Q3 2016, Media Networks revenue decreased 3% y-o-y to $2.5 billion, primarily due to lower affiliate and advertising revenues. The segment’s advertising revenues declined only 1% y-o-y in the previous quarter despite a fall in ratings because Viacom’s targeted advertising products such as ‘Viacom Vantage’ and ‘Viacom Intent’ are likely to attract advertisers and help in sustaining growth. The effect of this growth was visible during the upfront sales season this year, when 35-40 deals were secured on Viacom Vantage. This would give advertisers powerful predictive insights which could provide extraordinary impact. We can expect the advertising revenues to remain stable in the upcoming quarter owing to such initiatives.

However, the company is witnessing declines in its affiliate revenue, led by the fall in its subscriber base. For instance, MTV’s penetration among U.S. pay-TV households came down from around 87% in 2011 to 82% in 2015. We expect this declining trend to continue in the near term. We also expect subscription revenue growth to slow down in Q4 2016 due to continued pressure from the rapid growth of alternative viewing platforms, which could lead to lower penetration levels for Viacom’s media networks.

We currently estimate Viacom’s media network revenues to be around $10.5 billion for CY (calendar year) 2016. An estimated EBITDA margin of 37% will translate into EBITDA of around $4 billion, representing around 99% of the company-wide EBITDA.

Expect Decline in Studio Business 

Viacom’s filmed entertainment revenues increased 30% y-o-y to $621 million due to higher license fees and theatrical revenues. However, looking at the studio business in fourth quarter, theatrical revenues could take a hit, as there were no big box office successes during the quarter. We currently estimate the studio’s theatrical revenues to be around $789 million (~20% of total revenue).

Have more questions on Viacom? Please refer to our complete analysis for Viacom

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Notes:
  1. Third-Quarter TV Ad Ratings Sink, mediapost.com, Oct 2016 []