Key Takeaways From Viacom’s Q4 2016 Earnings

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Viacom (NYSE:VIA) announced mixed Q4 results as its earnings per share came in ahead of expectations but revenue missed. The company’s total revenue declined by 15% year-over-year (y-o-y) to $3.2 billion, on the back of declines in both the Media Networks and Filmed Entertainment divisions. Viacom also reported adjusted operating income of $538 million, down 49% y-o-y, along with adjusted earnings of $0.69 per share, which decreased 55% y-o-y.

Although the company did not announce any details regarding its potential merger with CBS (NYSE:CBS) in the fourth quarter earnings call, we cannot rule out the possibility of it happening in the near term. Viacom’s results are primarily driven by its Media Network performance. Unlike other media conglomerates, Viacom is one of the least diversified of the U.S. media conglomerates and relies heaving on its flagship media networks. However, most of the company’s media networks (such as MTV and Nickelodeon) have been struggling with ratings for some time now, and ratings headwinds continued to pressure advertising growth in the fourth quarter as well. 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.

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Softer Ratings At Media Networks Weigh On Q4 Earnings

In the fourth quarter, Viacom’s media networks saw a revenue decline of 11% y-o-y to $2.48 billion due to an 8% y-o-y decline in advertising revenue and 16% y-o-y fall in its affiliate revenue. Moreover, Viacom’s overall C3 ratings among the 18-49 demographic plunged 7% y-o-y in the September quarter, according to Nielsen data. [1]. These softer ratings continue to weigh on the company’s domestic advertising, which declined 8% y-o-y during the quarter while its domestic affiliate revenue declined 19% y-o-y, principally reflecting lower revenues from SVOD arrangements [2]. However, the company’s total international revenues were up 2% y-o-y, driven by new channel launches, increased subscribers, rate increases and the completion of certain SVOD arrangements. In addition, the media network segment’s operating income declined 27% y-o-y to $741 million in the fourth quarter.

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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.

Studio Operations Continue To Decline

Viacom’s Filmed Entertainment revenues in the fourth quarter were down 24% y-o-y, principally due to a 55% y-o-y decrease in its theatrical revenues. The company’s theatrical revenues decreased to $203 million due to lower licensing revenues and difficult comparisons to the strong international performance of Mission Impossible: Rogue Nation in the September quarter of 2015. The segment also generated an adjusted operating loss of $137 million in the quarter, due to lower revenues as well as a $115 million programming impairment charge.

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Guidance

In Q1 fiscal 2017, Viacom expects its domestic affiliate revenue to grow in low single digits, and expects its studio business to do well with the release of films which include Arrival, Allied and the highly anticipated Silence based on the acclaimed novel. However, the company could face difficult bottom line comparisons given that it also anticipates higher advertising and promotional expenses owing to the timing and mix of its film releases in the next quarter.

For the full year 2016, Viacom expects the media networks programming expense growth rate to be in the mid to high single digits. The company also expects media network’s SG&A expense to grow in first half of 2017 due to the timing of spending on multiplatform and data products as well as advertising and promotion expense related to the marketing of new original series.

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 []
  2. Viacom’s (VIAB) CEO Tom Dooley on Q4 2016 Results – Earnings Call Transcript, Seeking Alpha, Nov 9, 2016 []