CBS Earnings Drop Amid Higher Content, Streaming Spending Ahead of Viacom Merger

Joe Ianniello - Publicity-H 2019
Courtesy of John Filo

The company, led by acting CEO Joe Ianniello, is in early December expected to complete its recombination with Viacom.

CBS Corp., which in early December is expected to complete its recombination with Viacom, reported lower third-quarter earnings Tuesday that exceeded Wall Street estimates despite increased spending on content and its growing streaming services.

The company, led by acting CEO Joe Ianniello, reported adjusted earnings of 95 cents per share, compared with $1.24 a share in the year-ago period. The consensus Wall Street estimate stood at 92 cents per share. 

Operating income for the third quarter of $501 million compared with $690 million for the same prior-year period and "included costs incurred during the third quarter in connection with the pending merger with Viacom." Adjusted operating income fell 21 percent to $581 million from $736 million for the prior-year period "as a result of an increased investment in content, including a higher number of series produced for multiple platforms, as well as the company’s direct-to-consumer streaming services."

Third-quarter revenue hit $3.30 billion, up 1 percent, compared with an analyst estimate of $3.37 billion. "Affiliate and subscription fee revenues were up 12 percent, driven by increases in fees from CBS Television Network affiliated stations and retransmission revenues, as well as growth from the company’s direct-to-consumer streaming services," the firm said. "Content licensing and distribution revenues were up 1 percent, mainly as a result of higher sales of series produced for third parties."

Advertising revenue decreased, as expected, 7 percent from the third quarter of 2018, when the company had "record political advertising sales fueled by the 2018 midterm elections." But Ianniello highlighted "solid underlying network advertising growth of 2 percent during the quarter."

The results came even as ratings for the CBS broadcast network were down in the third quarter. Bernstein analyst Todd Juenger in his earnings preview wrote: "Conventional C3, adults 18-49 primetime audiences for the big 4 broadcast networks were down 13 percent" from the year-ago period in the third quarter. "CBS was down even further (18 percent), with part of the underperformance being driven by the blackout with AT&T, which lasted from July 20 to Aug. 9, as well as Nexstar CBS affiliates, which lasted from the beginning of the quarter until the end of August."

Meanwhile, CBS Corp.'s streaming services, CBS All Access and ShowTime, had been expected to post gains in the latest period thanks to such shows as CBS All Access' Why Women Kill. And continued retransmission consent fee gain were also widely expected to boost results, as they did.

Ianniello on a morning analyst call said the merger with Viacom was "on track to close in just a few weeks," in line with an early December closing predicted by CBS and Viacom executives in recent weeks. "We remain fully focused on integrating these two great companies. I'm very pleased with the way we have positioned CBS to thrive in this ever-changing media landscape," he added.

Ianniello also discussed CBS' direct-to-consumer platforms, CBS All Access and Showtime Now, pointing to accelerated growth, enlarged viewership and reduced subscriber churn. He reported direct-to-consumer revenue at CBS was up 30 percent during the latest financial quarter for his marquee streaming services.

"We are getting paid higher rates per sub(scriber)," Ianniello said. And as CBS ramps up production across all of its divisions, he pointed to expanded efforts to bolster the streaming services. "We're really trying to be strategic to drive more subscribers to the direct to consumer services," Ianniello said, as he pointed to The Good Fight, which launched on CBS All Access and moved to CBS this past summer to help promote the show and the CBS All Access streaming service.

Ianniello also cited over 1,000 hours of library CBS and Showtime content that has not yet been monetized online. These include series like Ray Donovan, The Affair, SEAL Team, MacGyver and the partially exploited NCIS franchise.

CBS additionally has a deal with Viacom to add more advertising-driven VOD channels on Pluto, starting Wednesday. As the recombination of Viacom and CBS nears, it was expected the CBS content would increasingly show up on Viacom’s free Pluto TV service.

"It's win-win, it's greater distribution and the top of the funnel," Ianniello argued. On the linear TV front, he predicted CBS will finish the current fall-winter TV season in May 2020 "as America's most watched network for the 12th consecutive year."

Ianniello was also asked about an upcoming carriage agreement with Comcast that includes Showtime and could pose a challenge during renewal negotiations next year if they follow Lionsgate and its own renewal talks with Comcast that has seen Epix channels swapped in for Starz in the main Premier package.

"Our approach will be the same: I don't believe all content is equal, where you can interchange shows for people as we seek out the content they want. I look at the track record of Showtime and the quality content they have on the air, as well as the CBS television network. We've been successful with every other distributor, getting paid fair market value, so we would fully expect the same," he told analysts.

Nov. 12, 6:30 a.m.: Updated with comments by CBS execs made during a morning analyst call.