MTV ratings give Viacom a 'Shot'

New series, strong 'Hills,' 'Real World' bring revenue injection

Wall Street doesn't always pay attention to TV ratings trends, but in the case of Viacom's cable networks, viewership is a key factor of financial performance, and resurgent U.S. ratings trends have been in particular focus this year.

As 2007 comes to a close, more analysts have stopped wondering whether MTV Networks has still got it and are increasingly confident that the company has started turning ratings around at key channels thanks to such new shows as "Pageant Place" and "Shot at Love With Tila Tequila" and stalwarts "The Hills" and "The Real World."

"Ratings are definitely a key driver of revenue performance for companies like Viacom Inc. and CBS Corp.," Stanford Group analyst Frederick Moran said. "Other broader-based media conglomerates have other businesses overshadowing ratings."

For Viacom, ratings trends — and in turn, advertising revenue — have been looking up of late, even though programming investments have somewhat held back the bottom line of the networks unit.

"Ratings stabilization and easy comps should be a tailwind for 2008," Goldman Sachs analyst Anthony Noto said in his third-quarter earnings review. "Investments in better content, which should continue, are starting to show some results."

For example, Viacom reported third-quarter organic advertising revenue growth in the U.S. of 4% year-over-year, a slight improvement compared with the 3% gain in the second quarter.

Said Moran, "The difficult period for Viacom has passed, and comparisons and growth outlook should improve in the fourth quarter and in 2008, which could be a year, if the ad market allows for it, they benefit from their (program) investments."

In the final quarter of 2007, things also have been going well.

Bear Stearns analyst Spencer Wang recently lauded "accelerating ratings momentum," citing a 5.9% ratings improvement in November, following a 1.7% gain in October and a 3.4% jump in September.

Banc of America analyst Jonathan Jacoby said last week that the turnaround has gained further traction in early December, with month-to-date ratings up 9% on a revenue-weighted basis. He also cited a 17.9% improvement at the MTV network, a 21% gain at VH1 and 7.3% growth at Spike.

The sequential ratings gains of key shows might be particularly good news for 2008, he said. "Pageant" has seen average sequential gains of 4.2% since Oct. 8, with "Shot" up 1% on average, Jacoby said.

Viacom president and CEO Philippe Dauman at a UBS investor conference this month called "Shot" a "breakout top 10 cable show. The nice thing about that show is that every week with a new episode, the ratings have grown, and we love to see that," he said. "It's a tremendous hit for us."

However, some warn that it might be a bit early to say that Viacom's ratings have completely turned the corner. "The first quarter of 2008 will be key," Jacoby said.

Although investors have largely accepted that the network unit's profitability has been affected throughout 2007 by Viacom's program investments, some point out that original management forecasts called for most spending to be done after the first half of the year.

Some said they are waiting for the profitability situation to improve in the new year. "That spending has kept down the unit's bottom line, and I hope things will look up from here soon as well," one media investor said.

For the first three quarters of 2007, for example, the media networks division has seen a 10% revenue increase, which translated into only a gain of 1% in operating income before depreciation and amortization.

Of course, management hopes the ratings effect will well outlast the content spending. "The investments we have made in programming for networks such as MTV have really paid off so far," Dauman said at the UBS conference. "We're very encouraged with the ratings' progression."

The networks unit's success will now depend on how the ratings momentum continues as well as how the U.S. advertising market plays out.

Said Moran, "The biggest hurdle remains the overall state of advertising, which has been hurt by a sluggish economy."

However, while 2007 started for Viacom with many doubters on Wall Street, many are entering 2008 with optimism. Viacom shares have been outperforming most peers amid the positive ratings signs and some strong film performances this year. On Monday, the company's Class B stock closed at $42.30, up 2.4% year-to-date.

Chad Newman contributed to this report.
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