Viacom Mid-Year Review: Growth In Affiliate Revenues, Relatively Strong Film Slate

Viacom (NYSE:VIA)  has had a better-than-expected first half of fiscal 2017 (fiscal year ends September 2017) so far, with the company beating earnings per share estimates and revenue estimates in both quarters. In the first six months of 2017, the media company’s total revenue increased 7% year-over-year (y-0-y) to $6.6 billion, due to growth in both the Media Networks and Filmed Entertainment segments. The company’s top line growth was driven by an increase in affiliate revenue and strength in the company’s international operations in Media Networks, along with a stronger film slate at Paramount studio, partially offset by weakness in advertising revenue.

Viacom’s selling, general and administrative (SG&A) expenses increased 6% y-o-y for the six months due to higher segment expenses. From a bottom line perspective, the company’s net income declined 31% y-o-y to $517 million in the same period, translating into earnings of $1.30 per share. The company’s stock is almost flat year-to-date (YTD).

Media Networks Grows On Higher Affiliate Revenues

Viacom’s Media Networks revenues increased 1% y-o-y to $4.9 billion in the first two quarters of the year, primarily due to a 2% y-o-y increase in affiliate revenues. This was partially offset by a 2% decline in the segment’s advertising revenues, primarily due to higher pricing and lower impressions in the domestic market. In addition, Media Networks adjusted operating income declined 7% y-o-y due to investment in programming and employee costs.

On the domestic front, Media Networks witnessed 2% y-o-y growth in affiliate revenues, driven by rate increases, partially offset by a decline in pay TV subscribers and the impact of SVOD and OTT agreements. On the international front, the segment’s international affiliate revenues increased 7% y-o-y on the back of the impact of rate increases, subscriber growth, new channel launches, as well as higher revenues from SVOD and OTT arrangements.

Relatively Strong Studio Performance in Six Months

Viacom’s Filmed Entertainment revenues in the first six months were up 30% y-o-y, principally due to a strong 38% y-o-y increase in its theatrical revenues. The company’s theatrical revenues grew to $430 million due to box office releases including Jack Reacher: Never Go Back and Arrival. However, the segment also generated an adjusted operating loss of $246 million in the period, due to higher print and advertising costs related to the theatrical releases.

Although this segment is responsible for only 20% of the company’s revenue, the recent multi-year agreements and initiatives from China could help the company stabilize its Paramount revenues going forward.

In the third quarter, Viacom expects to improve its overall advertising sales, driven by double-digit growth in the international market, offset by declines in domestic advertising in the low single digits. Further, the company also expects to continue to grow its affiliate revenues. For the full year, Viacom expects growth rate for Media Networks programming spend to be in mid-single digits, including the impact of the acquisition of Telefe.

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