Hollywood Earnings Season to Show Olympics, Election Effects
“Major events clearly skewed this quarter's ad revenue and ratings,” says one analyst as the earnings parade will take place amid talks about a possible CBS-Viacom deal.
The Summer Olympics in Rio, the U.S. election and cord-cutting will be among the issues in focus when Hollywood conglomerates report third-quarter earnings over the next couple of weeks.
But on earnings conference calls, sector CEOs also are expected to face questions about early-season NFL ratings trends and the outlook for mergers and acquisitions as Viacom and CBS Corp. explore a possible recombination.
"Major events clearly skewed this quarter's ad revenue and ratings," wrote Wells Fargo analyst Marci Ryvicker in a preview report. “This was a pretty unusual quarter, with two national political conventions, the Summer Olympics and the presidential debate. We believe this took a substantial number of programming hours away from the regular "primetime" shows in this typically seasonally light quarter, with political pre-empting roughly 10 hours by itself.”
Jefferies analyst John Janedis and his team recently adjusted third-quarter financial estimates lower for several companies “on a combination of weaker ratings, weak local core trends and political ad spend.”
In terms of election ads, he said: "We continue to think political advertising will remain disappointing for the local broadcasters, with national cable taking share. … We think Trump has upped spend in national cable, but swing states remain uneven."
In terms of third-quarter broadcast network advertising, Ryvicker expects a 3 percent decline on average driven by the Rio Games. “We're forecasting ABC down 2 percent (ABC had the best relative viewership levels during the Olympics), Fox down 3 percent, CBS down 4 percent (down 1 percent core), and NBC up 84 percent due to the Olympic Games (but down 10 percent core given the displacement),” she wrote.
The Olympics also had an impact on cable networks advertising, “but we estimate some really divergent performance, with Viacom down 8 percent, Disney down 4 percent, Time Warner up 2 percent, Fox up 8 percent and NBCU up 35 percent,” the analyst said. “Not surprising, the sports nets were among those that suffered the most (ESPN was down 30 percent and Fox Sports 1 down 18 percent).”
Ryvicker also forecasts that U.S. affiliate fee revenue will have grown 7 percent in the third quarter, excluding the weaker Viacom, assuming 2 percent pay TV subscriber losses on average amid cord-cutting.
Meanwhile, the box-office picture in the latest quarter differed from company to company, according to analysts. “Studios were mixed — Time Warner and Universal were great and Disney was okay, while Viacom and Fox struggled,” said Ryvicker.
In terms of key topics of debate on conference calls this earnings season, cord-cutting and new streaming services, such as AT&T’s upcoming DirecTV streaming services, are expected to be in focus. And the possible combination of Viacom and CBS, both controlled by the Redstone family, may lead to some debate on whether other content companies see any need for consolidation.
Lower NFL ratings early this football season also will likely lead to questions. “We don't think there is anything 'wrong' with the NFL or live sports,” said Ryvicker. “There has been so much noise on NFL ratings, which are down 12 percent on average. We can point to so many obvious reasons: 1) The games have just been bad. 2) Stars Peyton Manning and the hot Tom Brady are not playing. 3) There has been other "stuff" going on (a presidential debate for one). 4) Other sports have fared quite well — particularly the PGA, NBA and NCAA Football.”
She concluded: “We are not overly concerned with some of the recent ratings trends (particularly the NFL), nor do we think the not-so-skinny "skinny bundles" are going to be all that successful.”
What sentiment will entertainment industry investors leave this quarterly earnings season with? Ryvicker in a recent report offered this overall take: “It’s really not that bad.” RBC Capital Markets analyst Steven Cahall echoed: “Since the last time media and ad agencies reported, we think investor sentiment has broadly improved."
With that in mind, here is a closer look at what to expect from various big sector companies when they report their latest financials:
Cable giant Comcast will report its third-quarter results, including for its NBCUniversal entertainment business, on Wednesday.
The Summer Olympics in Rio were one of the big factors dominating TV trends in the quarter, led by U.S. Olympic rights holder NBCU.
“Although the 2016 Olympic ratings were down 25 percent versus 2012 (adults 18-49, primetime), NBC still had over four times the number of viewers than the other three broadcast networks combined during the Olympic Games,” wrote Ryvicker. “We are currently forecasting NBC ad revenue to be up 84 percent.”
NBC’s TV stations saw the Olympics preempt a lot of regular programming, “which weighed on core advertising,” said Ryvicker, who estimates it was down 10 percent in the quarter. Cable networks' advertising revenue, meanwhile, was likely up 35 percent, “with a significant boost coming from Olympic programming,” she predicted.
NBCUniversal made $250 million-plus on the Rio Summer Olympics despite lower ratings, CEO Steve Burke told a conference last month.
Meanwhile, NBCU’s film unit “had a really solid quarter,” said Ryvicker. "Secret Life of Pets was a hit ($849 million globally on a $75 million production budget) and looks to be a new tentpole franchise. Further, there were no flops this quarter, with both Jason Bourne ($405 million globally on a $120 million budget) and The Purge: Election Year ($117 million globally on a $10 million budget) meeting expectations."
And NBCU’s theme parks unit benefited from some price increases at Universal Orlando and “the more significant pricing increases implemented at Universal Hollywood back in March,” while concerns regarding the Zika virus also could have had some negative impact, according to Ryvicker.
Time Warner, led by CEO Jeff Bewkes, will report its third-quarter earnings on the morning of Nov. 2. But analysts will likely focus more on added commentary on the company's mega-sale to AT&T and the deal's likelihood of getting approved by regulators.
Wall Street on average forecasts earnings of $1.36 per share, compared with $1.25 in the year-ago period.
Guggenheim Securities analyst Michael Morris recently raised his forecast to a profit of $1.37 per share citing “stronger than previously forecast theatrical and home video results.” He explained: “The theatrical slate at Warner outperformed our expectations in the third quarter led by Suicide Squad and The Legend of Tarzan (where we had a modest outlook). … We also forecast strong home video results in the third quarter led by Batman v. Superman: Dawn of Justice and The Conjuring 2.”
But Morris added a word of caution, saying, “We believe strong results at theatrical and home video were partially offset by tough year-over-year comparisons at television licensing and video games.”
At the Turner networks unit, he forecasts a 2 percent advertising revenue improvement. “Turner released fewer original program episodes in the third quarter in response to tough Olympic competition,” Morris explained. In addition, he expects 11 percent affiliate revenue growth.
Cahall is looking for Turner affiliate revenue growth of 11.5 percent and ad growth of 2.0 percent, as well as HBO growth to be driven by affiliate revenue gains. He also modeled 10.5 percent programming expense growth, adding that “the potential for greater than expected costs given the deal Turner signed with Disney/Fox” for the Star Wars on-demand rights.
All in all, Cahall expects Warner Bros. and Turner to grow segment profitability by around 10 percent each, while he projects a 3 percent to 4 percent drop at HBO despite higher revenue. After all, Time Warner CFO Howard Averill had said on the company’s most recent earnings call: “We anticipate elevated programming cost growth at HBO from the rollout of new original programming like The Night Of and Vice Principals and the timing of theatric availabilities.”
21st Century Fox
21s Century Fox will follow Time Warner in the Hollywood earnings parade on the afternoon of Nov. 2.
Guggenheim Securities' Morris recently updated his estimates for what was the company’s fiscal first quarter “primarily reflecting what we believe have been softer advertising results at the television segment.”
Instead of roughly unchanged ad revenue compared to the year-ago period, he now forecasts a 6 percent decline. “Through Sept. 25, Nielsen data shows Fox ratings down 20 percent in primetime (18-49 demo) and down 23 percent in total day (18-49) in live-plus-same-day audience,” Morris wrote. “While we anticipated lower results due to competition from Olympic telecasts, total quarterly audience was below our initial outlook.”
Morris also removed $10 million in originally estimated political advertising for Fox stations “as spending to date in the presidential election has not met expectations.”
Otherwise, he expects the film results “to be stronger” in the quarter, which included the release of Ice Age: Collision Course.
Ryvicker, meanwhile, lowered her earnings estimate to 45 cents per share, saying “Ice Age: Collision Course significantly underperformed its most recent predecessors Ice Age: Continental Drift and Ice Age: Dawn of the Dinosaurs. … The Fox network continued to see challenged ratings (down 18 percent for the quarter in ages 18-49 in primetime) despite fairly easy comps, so we lowered our ad revenue to minus 3 percent from flat.” Plus, she said she cut her political estimate to $25 million from $48 million “on the lack of spending by Trump.”
And Cahall wrote: “While the film slate posted strong growth on an easy comp, the slate did underperform our lowered expectations, principally due to Morgan. Partly offsetting this is strong TV results partly due to the sale of Homeland into SVOD.” He expects quarterly film revenue growth of 9 percent and “strong margin expansion due primarily to the shifting of P&A costs from Ice Age 5, Mike and Dave Need Wedding Dates and Independence Day: Resurgence [into the previous quarter].”
The Wall Street consensus earnings estimate for Fox is for 44 cents per share, compared with 34 cents in the year-ago period.
Leslie Moonves-led CBS will details its latest financials on Nov. 3, and everyone will look for any body language on a possible Viacom recombination.
Ryvicker has projected quarterly earnings of 98 cents per share, in line with the Street consensus. That compares with 88 cents in the year-ago period.
Her core network advertising revenue forecast is for a drop of 1 percent, or a 4 percent decline “due to 10 fewer hours of advertising as the usual shows were pre-empted for the political conventions and the presidential debate.” Core TV station ad revenue fell 2 percent, or rose 7 percent when including political ads, she estimated.
Ryvicker also projected Showtime revenue and operating income growth of 10 percent and 14 percent, respectively.
While the earnings call may not bring much insight into a possible recombination of CBS and Viacom, Ryvicker wrote: “We don’t think [Moonves] can be successful unless he is “unencumbered” — meaning Les needs to be free and clear to make whatever decisions he deems necessary to making a merger work, whether that entails a sale of Paramount, a purchase of other assets, hiring people, firing people, etc.”
Said Cahall: “Ad growth, retrans and syndication trends will all matter for CBS in the quarter, especially the forward outlook in ad pacings All that said, behind the scenes will be the read on a potential CBS-Viacom merger.”
He added: “We’ve remained favorable on the transaction and note that it works better for CBS shareholders the bigger the gap in share price/valuation versus Viacom. CBS has moved up quite a bit in the last four weeks, and we expect this quarter to be squeaky clean. Viacom numbers are getting cut so this could put pressure on this stock, improving accretion to CBS shareholders. Will this move the stocks to prices that are viewed by National Amusements and the companies/shareholders as acceptable for a deal?”
The industry will keep a close eye on Viacom’s latest earnings report on Nov. 9, just days before interim CEO Tom Dooley is set to leave his post. But the focus will be much less on the results, but whether a CBS deal is looking likely.
Most analysts have sharply reduced their quarterly earnings expectations for Viacom after a profit warning from the company, which included a $115 million impairment for the unreleased movie Monster Trucks.
Ryvicker also cut her U.S. ad expectations to a revenue decline of 8 percent from her previous estimate of a 6 percent drop “on continued ratings softness” and her international revenue estimate due to a “weaker than expected European market combined with currency pressure from the British pound.”
All in all, she calls for earnings of 65 cents per share, compared with $1.54 per share in the year-ago period and compared with company guidance of 65 cents-70 cents.
Cahall expects 66 cents per share. He has lowered his domestic ad revenue forecast to a decline of 8.3 percent and his worldwide affiliate revenue estimate to an 18 percent drop. The analyst also expects a quarterly film operating loss of $145 million.
Ryvicker recently turned more upbeat on Viacom, upgrading her stock rating from “underperform” to “market perform.” She explained: “While we are still troubled by Viacom, we don't see another 20 percent of downside here.”
Disney will wrap up quarterly earnings season for Hollywood conglomerates on Nov. 10.
Morris recently updated his forecasts to account for the $350 million negative operating profit impact from having an additional week in the company’s previous fiscal year, in line with management guidance. He now expects fiscal fourth-quarter earnings of $1.15 per share, in line with the Street consensus, compared with $1.20 in the year-ago period.
At Disney’s cable networks unit, Morris forecasts the operating profit to drop 15 percent primarily due to the added week last year. He also recently lowered his advertising forecast to a 6 percent drop from a 2.5 percent decline “primarily on lower estimated core adverting revenue at ESPN. He explained: “Since our last model update, ratings at ESPN and Monday Night Football in particular have come in lower than we originally anticipated.”
At Disney’s film unit, Morris expects quarterly revenue to rise 11 percent, with growth driven by TV distribution. “Theatrical faced tough year-over-year comparisons with Finding Dory and Pete's Dragon versus Inside Out and Ant-Man,” the analyst wrote in a report. “Home entertainment comparisons were a little easier with Captain America: Civil War and The Jungle Book versus Avengers: Age of Ultron and Cinderella.”
Meanwhile, broadcasting unit results will be affected by “lower-than-expected ratings at the ABC network,” said Morris, who now forecasts network advertising to be down 3.5 percent, instead of his original estimate for a 2.0 percent drop.
Cahall cautioned though: “We’re going to be honest that we don’t have a good read on Disney into the quarter. However the fiscal fourth-quarter ends up, we believe the focus will lie instead on the fiscal year 2017 outlook and any early read-throughs to fiscal year 2018.”
The analyst recently reduced his quarterly Disney film unit operating income estimate by $53 million to $450 million “to reflect the weaker-than-expected theatrical performance of The BFG.” That would leave film operating profit down 15 percent from the year-ago period due to “a notably tough theatrical comp with Pete’s Dragon, The BFG and two smaller films in the quarter versus Ant-Man last year, a net year-over-year positive in home video results, which included Jungle Book, Captain America: Civil War and Zootopia carryover compared to Cinderella and Avengers: Age of Ultron last year, and favorable TV distribution revenue from the deal with Turner for exclusive domestic linear basic cable and companion on-demand rights to Star Wars films.”
What do analysts expect from the earnings call? Many will focus on ESPN and cord-cutting commentary, as well as the outlook for the new fiscal year. Said Ryvicker: “We’re still worried about the fiscal year 2017 guide.”