Entertainment Earnings Season: Film Units Set for Close-Up
Amid signs of a strong ad market and reduced cord-cutting worries, one analyst predicts they could be "the most interesting" parts for investors this quarter.
Strong advertising trends and signs of improved pay TV subscriber momentum will be key trends when Hollywood conglomerates report their latest quarterly earnings over the next two weeks, according to Wall Street analysts.
And that could mean that film units, which will highlight box-office successes or flops depending on the company, could provide most of the intrigue this earnings season.
"The film segment might actually be the most interesting," wrote Wells Fargo analyst Marci Ryvicker in a preview report. "Despite the $75 million loss for The Finest Hours, there could be upside at Disney from Zootopia and Star Wars carryover.” Meanwhile, “Paramount’s recent flops have some questioning if a 40 percent stake [in the Viacom studio] would really be sold to someone for $2 billion. And [Warner Bros.'] Batman v. Superman might have been really profitable in the first quarter — the question is what happens in future quarters, and to the franchise in general?”
FBR analyst Barton Crockett predicts "big swings on movie performance" from one company report to the next, but also sees "a strengthening ad market" as an overarching theme this earnings season.
Added Macquarie Capital analyst Tim Nollen: “Subs and advertising both feel better into first-quarter results.”
He explained in a report on Tuesday: “The pace of cord-cutting appears to have eased. Macquarie cable/telecom analyst Amy Yong expects to see modest first-quarter video sub increases, and we believe subscribers to more of the skinny bundles coming to market are beginning to offset basic bundle declines, which themselves do not appear to be accelerating.”
In another positive trend, Nollen said that “TV advertising is robust due to factors including the weak upfront market last year, fewer bad ratings this year and a generally good U.S. ad market.” Echoed Ryvicker: “The commentary has been across management teams that network ad spend remains pretty healthy.”
In addition, network carriage disputes, changing content business models and company-specific issues could get much attention on earnings conference calls. Plus, expect some questions about regulators’ conditions on Charter Communications’ planned acquisition of Time Warner Cable and Bright House Networks. Crockett on Tuesday said the conditions were “helpful” for Netflix and content companies.
Below is The Hollywood Reporter’s closer look at what to expect in Hollywood giants’ quarterly earnings report calls.
Comcast will kick off earnings season for big Hollywood players on Wednesday morning. And despite its various TV businesses, film topics will play a key role. For starters: On the call, expect questions about the company's talks about a possible takeover of DreamWorks Animation.
At Comcast's NBCUniversal entertainment arm, the film unit had a difficult quarter amid the year-ago strength of Fifty Shades of Grey. The company’s biggest new U.S. box-office performer in the latest period was Ride Along 2, which had a strong start and then dropped off, with My Big Fat Greek Wedding 2 opening late in the quarter.
"Filmed entertainment results will be off considerably," summarized Wunderlich Securities analyst Matthew Harrigan, who predict a 38 percent operating cash flow drop in the film division.
Analysts also expect broadcast unit revenue to fall below the year-ago period when NBC aired the Super Bowl. Cable networks unit ratings also declined again in the quarter. And some analysts have slightly lowered their theme parks expectations amid tough year-ago comparisons.
Overall, Harrigan projects a 2.2 percent operating cash flow gain for NBCU, the profitability metric the company uses, to $1.53 billion, while Ryvicker forecasts $1.49 billion, in line with the year-ago figure.
Sony Corp. will report results on Thursday Japan time.
With most of the analysts following the conglomerate and providing forecasts not being based in the U.S., not much detail on expectations was available.
But for Sony's film unit, Risen and Miracles From Heaven were key releases in the latest quarter, which is the final quarter of the company's fiscal year.
Earlier in the fiscal year, Sony lowered its full fiscal-year forecast for operating income at its film division to ￥35 billion ($290 million), which would mark a drop of around 40 percent from the previous year.
Viacom will post its latest results early on Thursday, and analysts will look for the latest body language from CEO Philippe Dauman about the state of the process, in which the company is looking to sell a minority stake in Paramount Pictures.
For the latest quarter, Viacom's film unit is expected to post a loss after last year recording adjusted operating income of $1 million, excluding the impact of a $784 million charge related to a strategic realignment and related job cuts.
10 Cloverfield Lane was the company’s strongest new film release in the quarter, but it also had two major flops in Zoolander 2 and Whiskey Tango Foxtrot.
Crockett said his 74 cents adjusted earnings per share estimate for the quarter was below the First Call consensus estimate due to management guidance “that film segment profits will be squashed this quarter by a combined $100 million loss on two mid-tier movies that should not have been big risks.” In the year-ago period, the company had posted adjusted earnings of $1.16 per share.
CBS Corp. will report latest financials on May 3, and it will, as usual, provide much more insight into TV than movie trends.
“CBS should continue to benefit from a strong ad market and its hosting of the Super Bowl (with $5 million per-spot ads) should produce a pop in revenue and earnings in the first quarter,” wrote Nollen in raising his earnings estimate by 4 cents to 94 cents per share. “There could be even more upside on Super Bowl ad sales and general ad market strength, bolstered as well by early political season spending at local broadcast.”
Crockett also has raised his quarterly adjusted earnings forecast slightly to 95 cents per share, compared with 78 cents in the year-ago period “on a stronger view of ad revenue from the Super Bowl.”
Analysts will keep an eye on any latest comments from CEO Leslie Moonves on the planned sale or spinoff of the company’s radio station business, which CBS first announced in March, and upfront ad season commentary.
Time Warner, led by CEO Jeffrey Bewkes, will report its results early on May 4.
“The TV ad market looks a bit healthier than we had forecasted heading into the quarter, and Batman v. Superman was more front-end loaded into the March quarter than we had assumed,” said Crockett, and so he recently raised his quarterly adjusted earnings estimate.
Wall Street on average expects earnings of $1.29 per share, compared with adjusted earnings of $1.19 in the year-ago period.
Amid ratings challenges at TBS and TNT, but positive momentum at CNN, the ratings outlook and what it means for advertising sales will be a topic on the earnings call. “Given what was largely a challenging year for TBS and TNT on the ratings front, we are interested in the company's upfront strategy,” said Stifel Nicolaus analyst Benjamin Mogil.
And Nollen wrote in a report: “While we calculate that live+same-day ratings at TNT and TBS were down mid- to high-single digits in the first quarter, CNN continued to perform very strongly, up over 50 percent.”
Again, film performance will play a central role, with box office from Batman v. Superman: Dawn of Justice, which opened in mid-March, being a key factor in the latest results. Management in that context also is expected to once again touch on the DC Entertainment film slate. “Batman v. Superman starts the DC Comics superhero movie cycle,” said Nollen. “Despite poor critical reviews, Batman v. Superman opened up strongly … All told, the movie has grossed nearly $835 million globally since release.”
He continued: “Over the next five years, Warner Bros. is planning to release nine more DC Comics movies, with Suicide Squad being the next (Aug. 5). In addition, Warner Bros. is currently producing 8 DC Comics related TV shows. Both of these should also continue to drive consumer products and video game sales growth.”
Meanwhile, analysts don’t expect a specific HBO Now subscriber count update on the call. Said Mogil: “We do expect directional commentary around strong subscriber growth in the current quarter, but would view this commentary somewhat cautiously given the strong quarterly slate.”
21st Century Fox will continue the earnings parade after the market close on May 4.
The conglomerate’s U.S. box-office revenue rose 119 percent over the year-ago period to $755 million, boosted by an unlikely superstar, according to Nollen: “Deadpool provided a surprising lift to the film segment in the March quarter,” in addition to contributions from such films as The Revenant. But, he cautioned, “the release calendar for home video and TV shows sold into syndication was weaker, so that the film segment comps slightly down in the quarter.”
In Fox's broadcast TV segment, Nollen calculated that live-plus-same-day ratings fell about 13 percent in the latest quarter, “facing tougher comps versus last year’s entire season 1 release of Empire during the time period.”
But Fox should “continue to benefit from especially strong performance from Fox News due to the ongoing political intrigue,” the analyst explained, even though he acknowledged that the company’s overall cable ratings “are so-so.” Added Nollen: “FX is performing about in line with cable peers, down 7 percent season-to-date, but Fox Sports 1 is weak, prompting the network to seek a refresh of content.”
What does all this taken together mean? Mogil recently raised his quarterly earnings forecast by 8 cents to 47 cents per share amid the better-than-expected box office in the quarter. That would be in line with the company’s year-ago earnings from continuing operations and just above the 46 cents per share First Call consensus.
The earnings call could bring talk about the political season’s impact on Fox News, changing business models and carriage disputes. “Given the company's regional sports networks exposure and the recent YES/Comcast dispute, though relatively limited given the subscriber count, we view the overall [carriage] tensions as a focal point on the call,” said Mogil.
Disney will wrap up quarterly earnings season on May 10.
Some analysts have recently trimmed their company forecasts for the quarter on some increased cost expectations.
The box office was mostly good news in the first quarter, offset by a disappointment. “Disney had a good box-office quarter, up 100 percent with Star Wars grossing over $2 billion from its December 18 release and running into mid-February, and Zootopia proving a surprise hit with nearly $900 million in the global box office through last weekend,” said Nollen.
“Disney had surprising success in the March quarter with Zootopia, which largely offset a surprising $75 million loss on Finest Hours,” echoed Crockett.
On the TV side, analysts said solid ad trends will be weighed against subscriber commentary. “Disney, we believe, is benefiting from healthier TV ad trends apparent for the group,” said Crockett. “However, the shift of the college football championship to the December from the March quarter will weigh on March quarter ad trends.”
But Nollen emphasized, “The big question for Disney earnings … is again the status of ESPN.” Citing management commentary that subs for Dish’s Sling TV have been a positive, he said, “The Disney relief rally could continue. If there is any indication of weakness or further uncertainty at ESPN, or the cable networks in general, then Disney shares could struggle again.”
Crockett predicted “healthy” U.S. theme parks unit trends, adding: “International is slow, but should accelerate markedly mid-June with the launch of Shanghai Disneyland.” Overall, he recently lowered his quarterly earnings estimate by 7 cents to $1.39 per share, up from $1.23 in the year-ago period and in line with the broader Wall Street estimate.
On the earnings conference call, “investors will continue to focus on subscriber trends across the Disney cable network portfolio as well as an advertising update across broadcast and cable,” predicted Mogil. “Also of interest will be commentary on its recent deal with Warner Bros. for full-in season stacking rights for new 2016-2017 and 2017-2018 broadcast series and cost implications from this deal.”
Mogil said he also will look for the latest commentary on Hulu cost trends. “Disney has already noted higher spends at Hulu. and we expect this to be reiterated on the earnings call” amid an increase in original programming, he said. But he also believes another factor to contribute to this trend, namely increased in-house production, which means “costs will continue to rise as the license fees need to be on par with third-party services, such as Netflix.” Explained Mogil: “We can envision an environment where initial production costs increase to include participations/residual buyouts to grant the producer more windowing flexibility. This rights buyout has been one of the main reasons why Netflix's production costs are higher than traditional production costs, which do not include these buyouts but then in turn have higher costs subsequently as participations are triggered.”
Analysts don’t expect the call to yield more insight into the recent decision by COO Tom Staggs to leave the company and possible successors for CEO Bob Iger.