Entertainment Conglomerates Ready Quarterly Financial Reports
Quarterly earnings season for Hollywood conglomerates kicks into high gear Thursday amid continued ratings weakness for broadcast and select cable networks and questions about the economic outlook in the U.S.
The government on Wednesday reported that the U.S. economy unexpectedly contracted 0.1 percent in the fourth quarter of 2012. It was the first quarterly drop in three and a half years and came amid year-end tax disputes.
Amid the sluggish ratings -- Viacom, Walt Disney and NBCUniversal cable channels and all broadcast networks except for NBC saw weaker fourth-quarter ratings -- and weak economy, investors are likely to once again keep an eye out for data and comments from CEOs of the entertainment conglomerates about latest advertising trends.
Film results for the latest quarter will once again be mixed, according to analysts. For example, U.S. box office revenue declined 39 percent for Paramount, but rose 4 percent at Warner and in the double-digits at other big companies, according to Sanford C. Bernstein analyst Todd Juenger.
Beyond specific results though, entertainment industry investors will this earnings season also look for signs whether big Hollywood stocks have further upside. "While questions on the health of the advertising market remain paramount this quarter, the topic weighing most heavily on investors’ minds these days is, given the media sector's phenomenal 2012, is it time to get out, or can the sector outperform again in 2013?" he wrote in a recent report.
His prediction: "2013 will be another good year for the sector. Strong business drivers are still in place. Affiliate fees are safe and contracted. We are cautiously optimistic on advertising demand. And valuations still are not stretched relative to history."
Barclays Capital analyst Anthony DiClemente also called entertainment conglomerate stock prices "reasonable," arguing: "U.S. advertising remains resilient, in our view, despite macro uncertainty, as strong scatter pricing has helped offset softness in ratings."
Lazard Capital Markets analyst Barton Crockett predicts that some Hollywood conglomerates will post better-than-expected financials. "We have Disney and News Corp. delivering slight earnings per share upside for the quarter," he said. "At Viacom, we see in-line earnings and regard that as positive versus skeptical sentiment ... We’re slightly above consensus for Time Warner."
Here is a closer look at earnings expectations for U.S. stock market listed entertainment conglomerates:
Viacom, led by CEO Philippe Dauman, opens the quarterly earnings parade Thursday morning, with analysts highlighting slowly improving ratings trends for MTV thanks to such new hits as Catfish and particularly Nickelodeon, whose weakness has been a drag on the company's financials.
"Viacom's five largest networks -- Nickelodeon, MTV, Comedy Central, Spike and Nick at Nite -- all had sequential ratings improvement in the December quarter, and this has largely continued in early 2013," said Cowen analyst Doug Creutz. "We believe that with ratings trends improving, recent declines in domestic advertising are likely to abate."
Davenport & Co. analyst Mike Morris forecasts a 4 percent U.S. ad revenue drop for Viacom's cable networks in the latest quarter, and a 5 percent decline worldwide. He also estimates affiliate revenue growth of 3 percent, including a difficult comparison to a big year-ago revenue recognition for a digital licensing deal with Netflix.
Viacom's smaller film studio unit was affected by the weaker-than-hoped performance of DreamWorks Animation's Rise of the Guardians, which the company's Paramount studio distributed. DiClemente has lowered his earnings estimate "owing to a somewhat disappointing box office performance from Paramount’s release slate during the quarter." He explained: "While titles like Flight, Jack Reacher, and Paranormal Activity 4 all performed solidly … the DreamWorks Animation release Rise of the Guardians had a disappointing open with roughly $100 million in gross domestic box to-date."
DiClemente expects quarterly film losses to widen from $31 million in the year-ago period to more than $100 million. But Morris predicts: "We expect the slate and segment economics to improve as the year progresses."
Overall, DiClemente expects Viacom's to post a 10.6 percent revenue decline for the latest quarter to $3.53 billion and an adjusted operating profit drop to $845 million from $1.02 billion.
Viacom's earnings call is expected to focus on ratings and ad trends, the role of online viewership, as well as the outlook for Paramount.
Walt Disney will report its latest financials next Tuesday.
DiClemente expects 4.5 percent revenue growth to $11.62 billion, with operating profit set to decline 1.5 percent to $2.41 billion. He predicts higher media networks and theme parks results, but lower studio financials.
The studio arm in the latest quarter released such films as Steven Spielberg's Lincoln, which recently was nominated for 12 Oscars, and Frankenweenie, which helped the company grow U.S. box office by 57 percent over the year-ago period. DVD titles in the latest quarter included The Avengers, compared with Cars 2, The Lion King platinum release and Pirates of the Caribbean: On Stranger Tides in the year-ago period.
Disney management is expected to address progress at its theme parks and interactive media businesses. "Disney had previously said it expects interactive to be profitable during fiscal year 2013," DiClemente said. "It appears the Street remains skeptical of this goal." He added: "Another year of investment at the parks could limit operating leverage."
Plus, analysts will look for any additional color on Disney's recent acquisition of Lucasfilm.
Time Warner, led by CEO Jeff Bewkes, will provide its fourth-quarter earnings update early next Wednesday.
Time Warner's film unit in the latest earnings report faces a tough comparison with strong year-ago home video sales of the final Harry Potter movie, but had such key theatrical releases as The Hobbit: An Unexpected Journey, as well as Argo and Cloud Atlas, which allowed it to grow its U.S. box office revenue.
Overall, DiClemente expects film revenue to decline from the year-ago quarter, but operating profit to rise from $433 million to $524 million in the latest quarter. That would leave full-year film profit at $1.21 billion, down slightly from he $1.28 billion recorded in 2011.
TV networks unit revenue and operating profit will increase though amid some improving ratings trends, analysts predict. They expect HBO to report subscriber growth for 2012 after years of declines or little movement.
For Time Warner as a whole, DiClemente expects revenue to edge up 0.5 percent to $8.24 billion and adjusted operating profit to rise 13.3 percent to $1.93 billion.
Analysts will look for latest comments on ad trends. Time Warner management previously said that international weakness will be offset by improving U.S. ratings trends in the fourth quarter. "Due to ongoing ratings challenges for the Turner networks, as well as a soft market for ad demand in Europe, we are modestly lowering our consolidated advertising growth estimate to 5 percent from 6 percent," DiClemente said Wednesday.
Some observers also expect questions about the future of the company's magazine business to resurface on the call. "While there are compelling growth opportunities at the networks and film and TV entertainment segments, we think publishing will likely continue to be a drag on the company’s consolidated growth rate," DiClemente said. "Following News Corp.’s recent spin of its publishing assets, we are curious to see if management discusses any strategic options for the publishing segment that might unlock more value for shareholders."
Rupert Murdoch's News Corp. is set to report its financials next Wednesday afternoon.
The company recorded a U.S. box office revenue gain driven by Taken 2 and Life of Pi, compared with a year-ago slate led by Alvin and the Chipmunks: Chipwrecked and The Descendants.
But the company's Fox broadcast network posted ratings declines, which analysts expect to be one of the key areas of weakness in the earnings report next to the conglomerate's newspaper business. The company's cable networks saw ratings that were more mixed, rising in total households and in the 18-49 year-old demo, but declining for people above the age of 2, according to Juenger. But the cable channel unit is once again expected to be a key growth driver for News Corp.
Investors will look for the latest financials to provide an update on the legal cost of the phone hacking scandal. And they will listen for any earnings conference call updates on the planned separation of the conglomerate's entertainment businesses, which will be known as Fox Group, and a new News Corp. focused around the company's book and newspaper assets.
Wall Street observers also hope for an update on News Corp.'s acquisition appetite. "Over the last few months, News Corp. has appeared to be busier on the acquisition front than it has in quite some time," DiClemente said.
CBS Corp. will wrap up fourth-quarter earnings season for entertainment companies on Feb. 14, a day after cable giant Comcast will report financials for NBCUniversal, in which it owns a 51 percent stake.
DiClemente estimates that fourth-quarter revenue will rise 1.4 percent to $3.84 billion driven by continued growth at the cable networks segment, which includes Showtime. Operating income before depreciation and amortization will jump nearly 20 percent to $1.04 billion, he projects."We are modeling a slightly more difficult digital distribution revenue comparison against the Netflix revenue booked in the year-ago period," he said.
On the earnings call, led by CEO Leslie Moonves, investors expect to hear more color on the company's announcement earlier this month that it plans to convert its U.S. outdoor business to a real estate investment trust and sell its international outdoor unit.
DiClemente also said that he hopes for an update on new ratings measurement systems. "Across the industry, live ratings have come under pressure in recent years, and while [live-plus 3 days] ratings have been more resilient, we believe recent softness reflects in part a shift to alternative platforms that are not necessarily reflected in the [live-plus 3 days] ratings," the analyst said. "If the industry can create a new commoditized cross-platform rating, CBS will be able to better monetize viewership of its content on connected-devices and mitigate the risk of evolving content consumption habits."