Can Viacom Turn Around Its Core Business In Fiscal 2019?

by Trefis Team
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Viacom (NYSE: VIA) recently announced mixed Q1 results, as its earnings per share came in ahead of market expectations but revenues missed. The company’s total revenue increased 1% year-over-year (y-o-y) to $3.1 billion. Overall, revenues at Media Networks declined 2% y-o-y, due to an advertising decline as a result of the negative impact of foreign exchange rates on international operations. In addition, Bumblebee contributed to a strong theatrical performance in Q1 for Paramount. The results were driven by growth in worldwide affiliate revenues, Filmed Entertainment revenues, benefits from cost transformation efforts, continued year-over-year improvement in Filmed Entertainment operating income and lower interest expense due to the company’s deleveraging actions. Furthermore, Viacom’s operating income grew 4% y-o-y and its adjusted earnings per share grew 9% y-o-y in Q1. Viacom also acquired free streaming television platform Pluto TV for $340 million, a deal which is expected to close in the second quarter of fiscal 2019.

Our $35 price estimate for Viacom’s stock is slightly ahead of the current market price. We have created an interactive dashboard on How Did Viacom’s Financials Fare In Q1 which outlines our detailed analysis of the company’s earnings as well as our forecast for the company’s full-year fiscal 2019 results. You can modify our forecasts to see the impact any changes would have on the company’s earnings. Going forward, we expect Viacom to continue to post an increase in earnings and revenue growth rate in Q2, driven by growth in affiliate revenues, strength at Paramount, and savings from its cost transformation.

Future Outlook

For fiscal 2019, Viacom expects its adjusted operating income to return to full-year profitability at Filmed Entertainment and expects a low single-digit decline at Media Networks. In the same period, the company also expects to benefit from lower interest expense. Viacom’s top line growth in fiscal 2019 is expected to be accompanied by investments in AMS, digital, next-generation products and its studio initiative, which may pressure margins. These investments could be partially offset, however, by the benefits of its cost transformation initiatives, which remain on track to deliver over $300 million in run-rate annual savings in fiscal 2019 and beyond. In fact, these savings are expected to largely drop to the bottom line as well. In terms of top line, the company expects growth in the mid-single-digits on a constant currency basis, with growth at both Media Networks and Filmed Entertainment.

Media Networks Outlook

In terms of domestic affiliate revenues, Viacom expects to see low single-digit growth in fiscal 2019, helped by rate escalators, the multi-platform expansion of products based on its IP, and continued virtual MVPD growth. For domestic advertising sales, the company anticipates a negative impact of approximately 100 basis points in Q2 due to the shift of the Easter holiday into Q3. However, the company expects domestic ad sales to return to growth in the back half. Advertising sales will benefit from strong upfront pricing and significant growth in revenues from Advanced Marketing Solutions (AMS). On a constant currency basis, the segment’s total expenses are expected to grow in the low- to mid-single-digit range.

AMS is designed to help Viacom earn more revenue from emerging advertising platforms. The company has seen its advertising revenue decline year-over-year as ratings across its linear cable TV channels have suffered. In order to address this problem, the company is offering brand solutions ranging from consulting, creative and social campaign services, alongside its video inventory. This platform continues to be an engine of growth, as it increased 54% in Q1. The company expects this business to accelerate into 2019 as well, and represent about 15% t0 20% of total domestic ad sales.

Filmed Entertainment Outlook

In fiscal 2019, Viacom expects to see strong top-line growth driven by the new slate strategy, continued momentum in TV production, as well as continued improvements in the monetization of Paramount’s film library. Paramount’s 2019 upcoming slate includes animated feature Wonder Park, horror classic Pet Sematary, and the Elton John biopic Rocketman. Putting this all together, the company expects low single-digit growth in fiscal 2019.

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