Viacom reports mixed Q1: Profit sinks, revenue leaps

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NEW YORK -- The licensing unit of Viacom Inc.'s Paramount Pictures unit has struck a deal with car distributor Daewoo Motor Sales to explore the development of a theme park in South Korea based on films and characters in the Paramount library, the companies said Thursday.

The news came as Viacom reported a 36% decline in its first-quarter profit because of higher film marketing expenses and a restructuring charge at its MTV Networks cable unit for 250 job cuts. The bottom-line figure disappointed some on Wall Street, but the company's revenue grew a better-than-expected 16%.

Viacom reported a first-quarter profit of $202.9 million, down from $317.2 million in the year-ago period. The figure for the latest quarter included a $35 million charge for the MTV restructuring. Brass said total restructuring charges will amount to about $70 million, with the rest to be taken in the current quarter.

Viacom's operating income declined 29% to $443 million in the first quarter. Its revenue rose to $2.75 billion.

In the quarterly earnings conference call, Viacom president and CEO Philippe Dauman emphasized that the Daewoo agreement is structured as a licensing deal, with the entertainment powerhouse "not putting up any money" for the park. It will, however, get licensing fees for opening its film library for Daewoo to develop the park and for helping in that endeavor.

Dauman said this is one of "many ways" that the Viacom film unit is looking to boost its margins and create new revenue streams. Among others are a "more robust" made-for-DVD business and production for cable TV, he added.

Under the agreement, Daewoo Motor Sales must raise the funding for the park, estimated at $800 million, and develop it. Its location is Incheon, about a one-hour drive from capital Seoul. The park is expected to entertain more than 5 million visitors annually.

"We are thrilled to be involved in the development of South Korea's first international movie studio theme park," Paramount Licensing executive vp Michael Bartok said. "This new development will significantly add to South Korea's already-growing tourism sector and complement all of the world-class developments in the rapidly growing Incheon region."

Viacom's film operations, which include Paramount and DreamWorks, saw their first-quarter revenue rise 27% to $1.05 billion, but they swung to a $105.7 million operating loss from a year-ago profit of $51.1 million.

Promotional costs for the boxoffice successes "Blades of Glory," which opened at quarter's end and therefore brought in the most revenue in the current second quarter, and "Disturbia," which hit theaters just after the end of the first quarter, dragged down the bottom line.

Miller Tabak + Co. analyst David Joyce said film print and advertising costs were higher than expected at $236 million but added, "We would give Viacom the benefit of the doubt for now as we believe the filmed-entertainment (profit) miss was probably just a timing issue."

Dauman on Thursday touted upcoming movies like "Transformers" and lauded his film team for having started planning several years ahead to ensure financial success. "Paramount has wind in its sails for the next several years," he said.

Asked about day-and-date film release trials by cable operator Comcast Corp., Dauman said a first round has shown "no impact on our DVD sales." News Corp. president and COO Peter Chernin on Wednesday had suggested more research is needed to guarantee no cannibalization of DVD sales (HR 5/10).

Dauman also said that Viacom still has to evaluate full results of the trials, a process that he expects to be completed in the next three months or so.

Meanwhile, the Viacom media networks unit, which houses cable channels such as MTV, Nickelodeon, BET and Comedy Central, grew revenue 10% to $1.73 billion, but operating profit fell 3% to $601.5 million. A 19% uptick in expenses as the networks try to create new hit shows, restructuring charges and other factors contributed to the decrease.

Wordwide network advertising revenue jumped 10% to $974 million, with U.S. ad growth excluding acquisitions up 7%.

Scatter market ad rates are up double-digits over last year's upfront, which should bode well for this year, the Viacom CEO said.

For the second quarter, advertising revenue is pacing up in the mid-single-digit percentage range," Dauman said. Some analysts were disappointed by this expected deceleration, while others noted that Viacom's ad comparisons are toughest in the current second quarter.

Dauman said that though Viacom faces ratings challenges -- particularly at MTV, BET and Nick at Night -- it is addressing them by replacing older programs with newer, more exciting content, lauding a "promising slate" at MTV, among other things.

He also touted his company's increasing focus on creating digital businesses and making traditional and new-media assets work together. For example, he lauded multiplatform ad sales including 13 online destinations and six networks tied to the release of the trailer for Sony Corp.'s "Spider-Man 3."

While Dauman emphasized several times that he feels the turnaround and refocusing of Viacom's key businesses is well under way, he also signaled that financials could remain patchy this year.

Some on Wall Street are more cautious, though. "With anticipation of softer ratings at MTV, BET and Nick at Night, slowing cable networks advertising growth, continued softness in the German and U.K. television markets, worries over digital revenue dilution, and the shadow caused by the YouTube lawsuit, we continue to maintain our 'sell' rating at this time," SMH Capital analyst David Miller said in a report.

However, Bear Stearns analyst Spencer Wang maintained his "outperform" rating on Viacom's stock and his $49 price target, saying, "We are encouraged by Viacom's first-quarter performance."

Dauman on Thursday also reaffirmed the company's goal of achieving $500 million or more in revenue from digital businesses this year.

Viacom executive chairman and controlling shareholder Sumner Redstone said during Thursday's call that the quarterly earnings "demonstrate that under Philippe's leadership we have begun to unleash the company's potential" while "seizing our digital future." He lauded the management team for doing "a terrific job."
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