Viacom Shares Collapse 21 Percent on Weak Ad Sales, CEO Defends Leadership
The entertainment conglomerate's stock hits a 52-week low as it acknowledges a "challenging" year, but chairman and CEO Philippe Dauman pledges to "protect and build value"
Viacom chief executive Philippe Dauman dispatched a defensive plea to Wall Street that he will turn around the embattled media giant after it reported disappointing first-quarter earnings that sent shares tanking a massive 21 percent on Tuesday.
The parent of entertainment brands like MTV, Nickelodeon, BET and Paramount Pictures said Tuesday that its quarterly results were dragged down by a weak performance in its film and cable-television businesses. The company also missed analyst projections for revenue, and cut its guidance for growth in subscription fees.
Dauman, who last week was named Sumner Redstone’s successor as Viacom’s executive chairman, pledged to prop up a stock price that has dropped more than 44 percent over the past year. But that did little to soothe investors: Viacom shares fell $8.99 to $32.86, and is down 50 percent since the most recent market peak on May 21.
Viacom's financials have been hit by ratings declines and related ad drops, with analysts saying the company's younger target audience is harder to reach in the digital age. Wall Street has also been discussing Viacom's future amid the weaker health of 92-year-old Redstone, who recently became chairman emeritus after serving as executive chairman.
Dauman has been criticized by activist investor SpringOwl, while Redstone’s daughter Shari opposed his adding the chairman title, citing his role in her father’s estate and a trust that will one day govern Redstone's holdings.
He also discussed the issues facing the company before the earnings conference call. "2015 was a challenging year operationally as we redesigned ourselves and adapted to significant industry disruption," he said. "Our first fiscal quarter of 2016 reflected these challenges. However, our revitalized organization and our investments in content, technology and strategic innovation are now beginning to bear fruit. Although our industry continues to face headwinds, we expect our positive momentum to continue and build throughout the year."
Viacom posted quarterly net earnings of $449 million, down 10 percent from $500 million in the year-ago period. Adjusted earnings per share of $1.18 was in line with the $1.18 consensus estimate by analysts and down from $1.29 in the year-ago quarter. Revenue fell 6 percent to $3.15 billion, coming in below expectations, as media networks unit revenue fell 3 percent to $2.57 billion and film revenue fell 15 percent to $612 million.
The U.S. ad revenue drop marked an improvement over the 7 percent decrease in the previous quarter and the 9 percent drop in the fiscal third quarter of 2015. "We are raising slightly our domestic advertising (from -6 percent to -5 percent), offset by lower International advertising to reflect foreign exchange headwinds," Stifel, Nicolaus analyst Benjamin Mogil said in a recent earnings preview report. It said U.S. advertising revenue dropped 4 percent, slightly better than the roughly 5 percent decline projected by many analysts.
Domestic affiliate revenue was "substantially flat due to the impact from the timing of product available under certain distribution agreements," Viacom said. International affiliate revenue dropped 6 percent, driven by a 9 percent unfavorable impact of foreign exchange. Excluding that impact, international affiliate revenue rose 3 percent.
Filmed entertainment revenue fell as an increase in license fees was more than offset by declines in theatrical and home entertainment revenue. Foreign exchange movements had a 3 percent unfavorable impact. Theatrical revenue decreased $75 million in the quarter "as carryover revenues decreased $46 million, principally due to an unfavorable comparison with the strong performance of Teenage Mutant Ninja Turtles in the first fiscal quarter of 2015," Viacom said. Home entertainment revenue fell $77 million, "reflecting a comparison with carryover revenues from Transformers: Age of Extinction" in the year-ago period. License fees increased 25 percent, "primarily driven by the licensing of certain titles for subscription video-on-demand services and television," Viacom said.
The film unit posted a quarterly operating loss of $146 million, compared to a year-ago loss of $60 million. Viacom's media networks unit posted an operating profit of $1.06 billion, down 4 percent.
"Viacom is entering an important period in its life," MoffettNathanson analyst Michael Nathanson said in a first reaction. While ad trends and ratings are likely to improve, all eyes remain focused on the looming Dish affiliate fee renewal and headlines about Redstone family dynamics. The quarter provided some positive signs of momentum (domestic ad revenues) and some lingering issues (Paramount and SVOD compares)."
Guggenheim Securities analyst Michael Morris in the headline of his report said: "New Snapchat Partnership to Take Some Focus off Soft Core Revenue Trends."
And Sanford C. Bernstein analyst Todd Juenger said in the headline of his investor note: "How Is This Not a Declining Business?" He wrote: "The glass-half-full view is domestic advertising of -4 percent was slightly better than consensus and Bernstein expectation of -5 percent. The glass-half-empty view is domestic affiliate fees were flat versus consensus +2 percent and Bernstein +7 percent (we were expecting more SVOD deals in the quarter)."