Hollywood Earnings Season: Ad, Currency Woes to Affect Results
Analysts expect the weakest ad revenue growth since the recession and speak of "significant foreign exchange headwinds."
Weak advertising trends and currency effects will be key themes of the latest quarterly earnings season for Hollywood conglomerates, according to Wall Street observers.
Investors and analysts have raised advertising concerns since last year, and the strong dollar, in comparison to the euro, pound and other currencies, has been a drag in financial reports of various U.S. companies this earnings season. A stronger dollar makes products and services sold abroad more expensive for consumers and business partners there and reduces the revenue made abroad when translated from a weaker local currency into dollars.
"With the likelihood of the industry posting the worst ad revenue growth since the [last economic] downturn, expectations are low," Jefferies analyst John Janedis wrote in a recent report. "We think demand has slowed somewhat recently, with pricing still unchanged. In the near term the bias for earnings remains lower, but a stabilization/acceleration of the ad market would support the stocks."
Others were even less optimistic. MoffettNathanson analyst Michael Nathanson spoke of "a quarter to forget." He cited "terrible ratings trends, weak scatter volume and pricing, lower upfront CPM inflation, weak domestic box-office [trends], weak home entertainment spending and a massive spike in the U.S. dollar."
Advertising momentum became a concern for investors and analysts in 2014. "The controversy in media is clear," wrote Sanford C. Bernstein analyst Todd Juenger in a recent report. "Advertising, both in terms of ratings declines (supply) and the demand environment. We believe the market now believes TV advertising is structurally impaired until convincingly proven otherwise. This quarter's results (even if they were to beat continually lowered expectations) and management commentary likely won't be enough to restore confidence."
He lowered his financial forecasts for seven of eight companies he covers, with the biggest revisions at Viacom and Discovery Communications. He also cut his stock price target for both.
Wells Fargo analyst Marci Ryvicker said "outside of advertising trends, we noticed another big topic ... currency headwinds." She highlighted that the euro was down 8 percent year-over-year in the fourth quarter of 2014 compared to the dollar.
"We incorporated significant foreign exchange headwinds into our models, especially cable nets where we saw lower segment revenue growth for Viacom, Time Warner and Fox," she wrote. "Disney is a bit different as [it has] reduced ESPN's international footprint and CBS generates 87 percent of revenue domestically."
Ryvicker in her note said that “ratings remain weak across the board, with NBCUniversal and Viacom down the most in cable, and Fox underperforming in broadcast. As a result, we cut our advertising growth.
Her fourth-quarter broadcast ranking from best to worst: CBS, NBCU, Disney, Fox. Her cable ranking: Fox, Disney, Viacom, Time Warner, NBCU. Said Ryvicker: “We'd like to think ratings will turn around, but then we ask ourselves, 'Will they really?'”
Nomura analyst Anthony DiClemente on Tuesday also reduced his earnings expectations for the fourth quarter and for 2015 “for virtually all the stocks in our coverage, save for AMC Networks and Disney.” He explained: “This is in large part to account for the soft ad growth and/or unfavorable currency swings in the quarter.”
Here is a closer look at various companies:
Viacom will kick off quarterly earnings season for entertainment giants on Thursday.
Janedis slightly lowered his operating earnings estimates to $949 million and earnings per share of $1.27, below Wall Street estimates. “These changes take into consideration a foreign exchange headwind to revenue of nearly $30 million in the quarter as the dollar continues to strengthen,” he wrote. For the full year, “we expect a total forex impact on revenue of approximately $100 million, although the resulting effect on [operating earnings] is only about 10 million as we expect Viacom to cut costs going forward.”
He explained: “Given revenue trends, we expect a discussion around cost reductions as Viacom is the only large-cap name to not have announced layoffs.”
The analyst also cited a “tough comparison” in the latest quarter with the year-ago period at Paramount.
Nathanson predicts Viacom’s U.S. ad revenue to drop 6 percent in the latest period. Total company ad revenue growth will reach 5 percent, including the acquisition of U.K. broadcaster Channel 5, he thinks. “However, we are decreasing our non-Channel 5 international advertising [forecast] to minus 5 percent to factor in the currency headwind and slower underlying trends,” he wrote.
On Tuesday, Disney will post its latest financials.
Janedis expects operating profit and earnings per share of $2.29 billion, below Wall Street consensus, and $1.07, in line with consensus, respectively.
“Our media segment assumes 6 percent revenue growth, with 5 percent cable revenue growth to $3.96 billion and 8 percent broadcast revenue growth to $1.65 billion,” he wrote. “On the advertising front, we are assuming flat cable ad revenue, a 2 percent decline in network ad growth, a 15 percent increase in local TV advertising (boosted by political). On the affiliate fee side, we are assuming 8 percent core cable net affiliate fee growth with a doubling in retrans revenue to about $125 million.”
Operating profit at the unit will be unchanged, he argued, predicting a 7 percent cable drop offset by a 46 percent increase in the broadcast segment.
At Disney’s theme parks, Janedis expects revenue and profit growth, while the film studio should report a 34 percent drop in operating profitability to $270 million, he said. He cited “a tough comp with Frozen and Thor 2 in the year-ago period, versus Big Hero 6 in the current quarter with potential upside from Guardians of the Galaxy in home entertainment.”
Nathanson has recently slightly increased his studio forecast though, citing “better performance in home video from Guardians of the Galaxy and Maleficent.“
21st Century Fox
Rupert Murdoch’s Fox joins the earnings parade a day later.
Janedis has tweaked his operating cash flow and earnings per share forecasts to $1.68 billion and 41 cents, again below Street expectations. “These changes primarily reflect the impact of increased forex headwinds on cable network and film estimates,” he wrote.
He lowered his TV units forecasts citing forex pressures. “Meanwhile at the film segment we lowered [quarterly] film revenue … as Night at the Museum: Secret of the Tomb and Exodus came in slightly below expectations,” Janedis wrote. “While the film slate remains relatively robust through the remainder of the year, we also adjusted fiscal year 2015 revenue estimates … as the international box office comprises a significant portion of total theatrical revenue.”
Nathanson recently also cut his film operating cash flow forecast for the latest quarter citing the “disappointing” two Fox releases and the release of DreamWorks Animation’s Penguins of Madagascar.
Commentary on ratings trends at the Fox network are expected during the earnings conference call. “While American Idol premiere ratings declined 32 percent year-over-year, Fox’s new drama Empire opened…[as] Fox’s highest-rated premiere for a drama in six years,” Janedis mentioned.
Janedis also expects a possible downgrade to the company’s full fiscal-year forecast. “As a result of the move in currency, we think there is some risk that management may lower its fiscal year 2015 [operating cash flow] guidance of high-single digit growth to mid-single digit growth,” he said. “In our view, that does not change the underlying growth thesis.”
On Feb. 11, Time Warner is set to report its fourth-quarter financials.
CFO Howard Averill recently updated guidance for the quarter, highlighting greater-than-expected restructuring charges at Turner and Warner Bros., an additional programming writedown at Turner and increased tax expense.
Including those factor, Janedis projects $1.57 billion in operating profit for the quarter with earnings per share of $0.93, below Wall Street consensus levels.
He predicts TW to post a quarterly network ad drop of 1 percent and subscription growth of 8.2 percent, with “some risk due to foreign exchange” issues.
Nathanson forecasts flat U.S. ad trends and a 5 percent international ad revenue drop.
About the film unit, he wrote: “Warner Bros. had a mixed quarter from a theatrical performance with The Hobbit: The Battle of the Five Armies and Horrible Bosses 2 both underperforming their own prior films. However, this was offset by the highly profitable Annabelle with over $255 million in worldwide box office on a budget under $7 million.”
CBS will report its earnings a day later. Janedis expects operating profit of $766 million, below Street consensus, and earnings per share of 76 cents, also below its peers.
His entertainment segment forecast calls for declines amid a 3.3 percent broadcast network gain, including the benefit of five incremental NFL games versus last year, offset by a 16 percent decline in “high-margin content distribution and licensing.” He added: “Expense growth also factors in a step-up in CBS’ regular NFL sports rights fees, as well as incremental costs for Thursday night football.”
Cable network financials will grow, said Janedis, assuming $60 million of SVOD revenue from the sale of Californication.
His local media business forecast assumes 17 percent TV revenue growth and 4 percent radio growth, with “the segment benefiting from $85 million of political revenue in the quarter.”
Nathanson predicts “difficult TV licensing comparisons to last year and slower national advertising trends.”
Comcast, which will also report results for its entertainment arm NBCUniversal, will wrap up earnings season for Hollywood giants on Feb. 24.
Guggenheim Partners analyst Michael Morris predicts 2.3 percent fourth-quarter revenue growth for NBCU and 8 percent operating cash flow growth.
In a recent update to his estimates, he highlighted “a modestly higher theatrical outlook reflecting box-office performance offset by lower home entertainment sales (tough Despicable Me 2 DVD comparison).”
Discussing currency issues, he wrote: “We estimate that forex will have minimal impact in the quarter with international revenues composing only about 7 percent of total company revenues.”