Hollywood Conglomerate Earnings Season: Ad Outlook, Digital Deals to Be in Focus

NEW YORK — CEO commentary on the state and outlook of the advertising market will take center stage when entertainment conglomerates report their latest quarterly financials over the next couple of weeks.

Stocks of sector biggies had a rough third quarter amid concerns about a potential relapse of the U.S. economy into recession, but last week’s third-quarter GDP report came in better than expected and showed the strongest economic growth in a year.

“The recent market improvement and not-apocalyptic third-quarter GDP results should bolster the incremental buyer, and will likely support a positive management tone on earnings calls over the next two weeks,” said Davenport & Co. analyst Michael Morris.

Echoed RBC Capital Markets analyst David Bank: “Third-quarter results and fourth-quarter outlook for most of the media and advertising players will likely bear little resemblance to the macro upheaval suggested in this summer’s market activity.”

“While we understand that most investors will focus on the forward-looking commentary coming out of the calendar third-quarter earnings, we believe that reported numbers will likely be in line with consensus expectations,” confirmed Nomura Securities analyst Michael Nathanson. But he added: “We currently expect for all of our companies to experience a deceleration in advertising in the third quarter versus the strong growth in the first half of 2011.”

Most Wall Street observers expect cable TV networks units of Hollywood conglomerates to have had another strong quarter driven by ad growth despite mixed ratings, and many a film unit is also projected to report quarterly gains amid solid box office growth.

“On the ratings front, Comcast/NBCUniversal and News Corp. were the only large cap media companies to post revenue weighted ratings growth in the calendar third quarter,” said Credit Suisse analyst Spencer Wang.

On the film side, “the box office increased 54 percent for the four studios, including 129 percent at Viacom,” said Evercore Partners analyst Alan Gould. And Bank said that among blockbuster movies in the third quarter, only Universal’s/DreamWorks’ Cowboys & Aliens “looks likely to be a write-down.”

On earnings conference calls, expect CEOs to once again tout their latest digital distribution deals, such as ones that CW owners Time Warner and CBS Corp. have recently struck with Netflix and Hulu. But they may also face questions whether the recent pace of deals is sustainable amid Netflix’s recent missteps.

“Management comments on affiliate fee negotiations and possible proliferation of tiered distributor pricing structures, rising content costs (particularly for sports rights) and additional content sales to digital distributors will also shape investor outlooks into 2012,” Morris said. “We note that a weak third-quarter subscriber result from Netflix on Oct. 24 has increased concern that digital content deals may be limited in the future.”

Some industry executives are also expected to discuss the recent launch of digital content locker UltraViolet and promise continued dividend payments and stock buybacks to reward shareholders.

Overall, Lazard Capital Markets analyst Barton Crockett said this week that he has maintained his positive stance towards big entertainment stocks “We see cable net advertising as a secular outperformer, recession resistant growth in program fees and healthy share repurchase as reasons to favor the group,” he said.

But Wang is less bullish than others on the outlook for Hollywood conglomerate stocks. “We maintain our “underweight” rating on the U.S. entertainment sector as we believe that the uncertain economy and secular forces continue to pose potential risks to both advertising estimates and the pay TV eco-system,” he said in a recent report.

Here is a look at what analysts expect from the big publicly traded U.S. entertainment companies this earnings season:

Time Warner:

Time Warner kicks off the week’s big entertainment conglomerate earnings on Wednesday morning, and Gould said: “We would not be surprised to see management raise its full year outlook.”

He expects 7 percent revenue growth to $6.84 billion and adjusted operating profit growth of 16 percent to $1.57 billion.

Film gains in revenue and profit will likely stand next to a TV unit revenue gain, but slight bottom line decline in TV due to higher NCAA costs and marketing expenses, according to Gould. “Harry Potter 8 led the film side, and the syndication of The Big Bang Theory drove the TV division,” he explained.

A possible loss of the NBA season, the studio’s outlook after the end of the Harry Potter franchise and cable networks ratings and ad trends could be key conference call questions. Potential digital deals for the Warner library beyond Netflix’s recent CW deal could also be in focus. After all, “TW has the largest TV library with over 50,000 episodes,” Gould said.

News Corp.:

News Corp. will disclose its latest financials Wednesday afternoon.

A revenue gain of 2 percent to $7.56 billion and operating profit growth of 13 percent to $1.30 billion is what Gould is looking for. But the $63 million breakup fee of the failed deal to buy full control of U.K. pay TV firm BSkyB will affect net earnings, he said.

Stronger cable network ratings and advertising and affiliate fee trends, and growth in the broadcast TV segment will help the bottom line, but Gould expects a two percent film decline despite a 10 percent U.S. box office increase driven by Planet of the Apes.

Of course, the press portion of the News Corp. conference call could once again focus on the latest fallout from the phone hacking scandal and questions on CEO succession issues. “We believe if there were any contagion to the U.S. properties it likely would have already been alleged,” Gould said. “Despite the scandal, operations have been quite strong.”

CBS Corp.:

CBS Corp. reports its third-quarter earnings on Thursday. Gould predicts 3.9 percent operating profit growth to $635 million on a 1.9 percent revenue gain to $3.36 billion driven by growth in the entertainment segment.

“Digital content monetization could yet again potentially provide an upside surprise,” predicted Bank. “We’re expecting another solid quarter from CBS as more digital-streaming revenue is recognized, which, along with incremental retrans, should continue to boost entertainment segment margins, and trends across CBS’s advertising platforms have remained relatively consistent with prior expectations.”

Analyst conference call questions “will focus on current advertising trends, the impact of Netflix’s slowdown on digital licensing revenue” and two recent CW deals with Netflix and Hulu,” said Gould.

Viacom:

Viacom reports its quarterly results next week Thursday.

The analyst expects a 31 percent operating profit improvement to $1.10 billion on a revenue gain of 15.2 percent to $3.84 billion.

Some ratings challenges in the company’s cable networks unit could likely be overcome by continued ad gains, according to analysts.

The film results could be a key highlight in that context, with Gould predicting more than a tripling of its bottom line. “Paramount’s films grossed over $500 million at the domestic box office, up 129 percent, led by Transformers 3 and the Marvel/Disney title Captain America,” said Gould. “Most of the marketing dollars for Transformers 3 were expensed in the June quarter making the film very profitable in the September period. Paramount should also show very strong pay TV results this quarter.”

Analysts will look for latest ad growth guidance after management previously reduced its forecasts a bit.

Walt Disney:

Disney wraps up quarterly earnings season for Hollywood conglomerates next Thursday afternoon with its first earnings report and conference call since CEO Robert Iger’s contract with the company was extended through 2016. 

Gould expects Disney to post a 13.1 percent operating profit gain to $1.79 billion on a 6.6 percent revenue increase to $10.38 billion.

He sees a double-digit increase in the cable networks unit’s bottom line and a 4.6 percent film unit improvement, but a big decline in broadcast unit profits due to lower syndication profit and political ad money.

“We estimate cable advertising will be up 5.5 percent during the quarter despite Disney’s prime-time ad supported network ratings being down,” he said. “We are projecting a very small gain at the studio. Disney’s films were up an estimated 23 percent at the box office and last year Disney took a $100 million write-down on the studio that produced Mars Needs Moms. But this year there will be tough home entertainment comparison with Thor versus Iron Man 2 and most of the box office upside was from DreamWorks films, particularly The Help, which is simply a distribution deal.” He did highlight though that the re-release of The Lion King in 3D grossed $72 million in the quarter and “should have been quite profitable.”

Conference call questions could include ones about the effect of the potential of a lost NBA season.