Viacom turned in a generally strong quarter, or as strong as it could be with domestic ad revenue basically flat, or up 1%, and ratings weakness at MTV and BET. Viacom beat Wall Street estimates on revenue ($3.86 billion) and EPS ($0.64).
Driving the results in the quarter was a big movie slate including Indiana Jones, Iron Man and Kung Fu Panda. Also strong: cable TV affiliate revenue is growing at a double-digit pace.
But underlying this is that ad sales on Viacom's TV networks is looking really bad and got worse during the quarter. Pullbacks from in retail, automotive and consumer goods are casting doubt on an otherwise strong upfront. The upfront TV ad deals are committments, not actual orders, so the question is whether advertisers follow through, or cancel them as they cut their marketing spending.
Call notes:
Chairman Sumner Redstone gives the preamble: He says the last few months have been challenging times. "I understand the frustration of shareholders." Yet, he says, there is opportunity even in difficult times. "Companies that have strong and enduring attributes--brands, global reach--will ultimately come out winners." (Redstone never tires of it: "content is king")
Hands off to CEO Philippe Dauman ... says the economy really does suck, and in the short term will be difficult to predict performance.
Worldwide ad revenues were up 2%, US ad revenues up 1%.
What happened in the ad market? Dauman says midway through the second quarter "scatter" adverting volume dropped off. Retail, automotive and consumer goods pulled back on-air spending. Low ratings at a few channels were also a problem. At the same time, audiences drifted away from broadcast TV to cable, benefiting TV Land and Nick at Night. These were older viewers and it did not help networks with younger audiences.
Overall ratings are up 5% y/y. Secured double-digit growth in volume and high single-digit increases in CPM pricing in the adult cable upfront. Nickelodeon with iCarly, is widening its lead over Disney.
On digital: Dauman says Viacom now has "340-plus" Web sites. Says still rolling out "Flux" social networking platform. Casual games is where the growth will be over the next few years.
Affiliate sales delivered double-digit revenue growth.--this is how the media networks were able to deliver 11% growth, despite nearly flat ad sales. Dauman says Viacom is able to play hardball with TV distributors. Says Viacom's affiliate fees lag behind the proportion of audience delivered to cable/satellite/telcos.
Has shipped 4.8 million units of Rockband. 18 million paid music downloads. Rockband 2 will launch this fall on Xbox 360, other game systems later in the year.
We are continuing to evaluate the processes of our cable networks. We know there is more to be done. These actions will provide immediate efficiencies.
On film: Paramount generated more than $1 billion in US box office. Paramount is No. 1 in US market share. Movies hitting in the quarter: Indiana Jones, Iron Man and Kung Fu Panda. Profits will continue to cascade through P&L for a long time as movies move through various windows.
Looking ahead: several titles on the way, DreamWorks' Tropic Thunder and Escape To Madagascar.
"We are in a period of transition, there has never been a better time to be in the content business." Consumers have a voracious appetite for content, etc.
Comment on taking political advertising for the first time?
Dauman: There has been a lot of interest in this election among the younger viewers we serve. We still review all advertising submitted to us. So far we have some advertising, on the Republican and Democratic side. Its not a huge opportunity since most political advertising is bought locally.
Q&A begins:
Can you walk us through the cable network affiliate fee step-ups over the next few years?
Dauman: On the overall package of our networks we are undervalued, but Comedy Central really stands out. Affiliate agreements were reached 10 years ago before Comedy Central reached status it has today. Across portfolio there is opportunity as we provide growth. We expect to continue to see double-digit growth in our affliate revenue in the near future.
If viewers coming from broadcast to cable are older, what kind of ad categories can you sell against them?
Dauman: A lot of advertisers reach for older demos. Pharma. Financial services. Those are the guys spending big money and coming into cable aggressively.
What was kids growth this quarter?
Dauman: We did well in the older demo networks. Softness was related to the teen demographic group. Automotive was weak across the media industry. Specific categories in consumer goods. We are working to target demos where we are not as dominant as we are in kids. Targeting older viewers through TVLand, etc.
Do you have confidence that the upfront ad commitments will actually turn into firm orders?
Dauman: We are having a good upfront. What we don't know is where the economy is going to be headed and how that will impact the scatter market.
Will buybacks be larger in the second half than the first half?
Dooley: We are a consistent buyer month after month.
Given the guidance for ad sales you for Q2 (and missed) how should be think about your projections for Q3?
Dauman: As far as ad spending going forward, it is early to make predictions for the third quarter. Softness in the scatter market continues. We do have some nice tentpole events coming up. Given he state of the econony its hard to predict.
Any restructuring charges ahead?
Dauman: We've been tightening since we've gotten here. We've been very careful in new hires. I don't want to see any cost cutting that will impact what we put on screens or affect our brands. We do not anticipate taking any restructuring charges this year.
International advertising?
Dauman: UK is our most important territory. International advertising is a third of ad revenue.
Can you update on the pay TV service announced earlier this year?
Dauman: We are in discussions with distributors. Nothing to announce. When we conclude deals we will be making announcements.
If scatter advertising is weak, how can you have had a strong upfront? Will your upfront orders stick?
Dauman: motion picture studios, wireless continue to be the core of our upfront sales. We benefited through our integrated marketing plans. Advertisers want to work with us through the season. Some advertisers that disappeared from scatter have had very publicly-disclosed problems and were not big players in the upfront market.
What percentage of domestic ads come from challenged categories like automotive?
Dauman: basically, no comment
Any game-related acquisitions given success of Rockband (Harmonix)?
Dauman: There is a lot for us to do in growing this franchise. We could look at other opportunities that have linkage to our brands but its not a focus. Not looking to make a big acquisition in this area. We're focused on casual games--may make a small acquisition there.
What networks had lower ratings in the quarter and is programming spending still going up double digits?
Dauman: Temporary softness on MTV, part on timing of debut of The Hills which happens next month. MTV has the VMAs in September which will correct itself. Weakness at BET; trying to make it less reliant on acquired programming and more internally generated. Programming spending will be steady. We are looking at the mix of programming--more original as some of the older acquired programming rolls off.
Iron Man on DVD hits in the third quarter and Indiana Jones and Kung Fu Panda in the fourth quarter.
Earnings first-take:
Release out. At first glance, it looks like Viacom (VIA) turned in a huge quarter, beating even high estimates on revenue ($3.86 billion) and EPS ($0.65). Viacom is primarily a cable company, but this quarter it's also happy to have Paramount and its two blockbusters: "Indiana Jones" and "Iron Man" pushed the movie business up 35% y/y.
So what about the cable business? Not so good. The overall unit is up 11%, but worldwide ad revenue is only up 2%, and ad sales at Viacom's US networks rose just 1%, below the company's 3% to 4% guidance. We'll get more details from the conference call at 4:30 pm ET.
Revenue: $3.86 billion vs $3.55 billion average estimate (range $3.3 to $3.76 billion)
EPS: $0.65 vs. $0.59 average estimate (range $0.56 to $0.61)
Operating Income: $792.7 million
See Also:
Obama, McCain Now Battling On MTV, Comedy Central
Google, Viacom Still Talking About YouTube Data. On Deck: Chad Hurley and Steve Chen
Viacom: Viewers Fleeing Broadcast TV Didn't Come To MTV
