Deals to Be in Focus During Hollywood Earnings Season
"Weak fundamentals are likely to be overshadowed by a focus among investors around M&A," says one analyst.
Entertainment conglomerates are gearing up to report their latest quarterly results, and talk about acquisitions and mergers, real or potential, is set to play a key role on management teams' conference calls with analysts this earnings season.
After all, AT&T's $85.4 billion deal to acquire Time Warner looks like it has entered the final stages of its regulatory review; 21st Century Fox's Sky deal is likely to get an extended competition review in the U.K.; Discovery Communications and Scripps Networks Interactive reportedly have been discussing a possible combination; and John Malone has looked at a way for one of his Liberty companies to buy a stake in Univision Communications, according to one report.
Even if none of these deals end up being finalized, a spotlight on industry consolidation could take some focus off such issues as pay TV losses.
"Weak fundamentals are likely to be overshadowed by a focus among investors around M&A," Pivotal Research Group analyst Brian Wieser wrote in a report previewing entertainment earnings season.
Debates about such fundamentals as cord-cutting and advertising trends are "likely to be de-emphasized this earnings season in favor of a focus on M&A" though, Wieser said, "especially with news of Scripps discussing combinations with each of Discovery and Viacom coming to light [on July 18]. Combinations such as these should be positively received by investors given the potential to drive efficiencies into these businesses. We think that networks will require investments in programming that outpace revenue growth on an ongoing basis, limiting the opportunity for margin improvement without the synergies that might follow from this kind of M&A. Network owners who attempt to reduce growth in spending on programming will probably find that they lose audience share (and advertising budget share) as well as clout with distributors or the ability to sell directly through to consumers."
FBR analyst Barton Crockett echoed that sentiment, writing: "The upcoming calendar second-quarter earnings reports come as consolidation talk overtakes group sentiment."
And Barrington Research analyst Jim Goss said: "AT&T's quest for Time Warner indicates no media target is too big to be on some company's wish list. Potential interest in Scripps by Discovery means complementary and scale ambitions remain important in the changing media landscape and that [John] Malone (also apparently interested in Univision) continues to play a major, farflung role. More to come? Wouldn't be a surprise."
Still, pay TV subscriber trends and advertising momentum are expected to also play prominent underlying roles on earnings calls this quarter. Jefferies analyst John Janedis believes that the advertising upfront season finished better than expected. "We had expected total volumes to decline about 3 percent, but we think broadcast TV ultimately will post 3 percent growth to $9.2 billion, while cable will grow 1 percent to $9.6 billion," he said in his earnings season preview. "Total dollars written were at the highest level since the '13/'14 upfront."
Below is a quick glance at integral things to look for when key entertainment companies report their results this earnings season.
AT&T and Time Warner
The telecom giant, which is looking to acquire Time Warner, will report its second-quarter financials and subscriber figures after the stock market close on Wednesday.
Analysts will listen to chairman and CEO Randall Stephenson's team for any update on when the Time Warner acquisition could close. In addition, they will analyze latest subscriber figures for DirecTV, DirecTV Now and U-Verse.
Meanwhile, Time Warner has not set an earnings date yet, but is expected to report in early August. All eyes will be on body language about the regulatory review of the AT&T deal.
CNN is expected to be in the spotlight again, given its ongoing feud with President Donald Trump. "Cable news networks continue to get a healthy ratings boost from coverage of the Trump presidency," Crockett said. But the Turner cable networks unit's profitability is set to be hit by a move of the NCAA Final Four to CBS this year.
At the film unit, the strong performance of Wonder Woman came in the same quarter as the weak box office for King Arthur: Legend of the Sword, and video game results are expected to be strong again. RBC Capital Markets analyst Steven Cahall expects that this will boost film profit in the second quarter, with HBO being Time Warner's other key growth business in the latest earnings report.
Overall, however, Wall Street is forecasting Time Warner earnings of $1.19 per share, down from $1.29 in the year-ago period.
Cable giant Comcast and its entertainment unit will post latest figures on Thursday morning. Deal talk could also play a role here amid chatter about Comcast and Charter Communications striking a wireless partnership with telecom giant Sprint or possibly more.
Comcast itself is expected to report a pay TV subscriber decline in what is traditionally the weakest quarter of the year for pay TV companies, with Wall Street set to listen closely for clues on how trends are exactly shaping up.
At NBCUniversal, Wells Fargo analyst Marci Ryvicker predicts operating cash flow, the profitability metric used by the company, to rise 23.8 percent in the second quarter, driven by the film and theme parks units.
The film division had a hit with The Fate of the Furious, while The Mummy performed weaker than expected in North America. Wall Street and Hollywood alike will be interested to hear if NBCUniversal CEO Steve Burke mentions how that will affect the film studio's plans for its Dark Universe.
Viacom will report its latest earnings on Aug. 3, and much focus will be on how the turnaround of its cable networks business is going. But again, deal chatter is likely to be a focal point as well after a report that Viacom has also held talks with Scripps about a combination.
Scripps, Viacom and Discovery are all "in particularly difficult positions, especially relative to owners of broadcast networks, including Disney, Fox and CBS," said Wieser in a report. "Discovery, Scripps and Viacom each lack sports programming or much in the way of other high-end original content on their core U.S. networks. Each of them will generally have a harder time persuading distributors to increase the fees paid by much or to ensure carriage of every network."
Any comment from Viacom CEO Bob Bakish or CFO Wade Davis on their appetite for a deal would be of interest to Wall Street observers.
In terms of Viacom's quarterly earnings, meanwhile, Cahall recently increased his estimate for the networks unit "to reflect continued cost management," but he lowered his film unit expectations "on the underperformance of Baywatch and Transformers: The Last Knight."
Overall, Wall Street forecasts earnings of $1.05 per share, the same amount in adjusted earnings the company had reported for the year-ago period.
Also reporting results that same day will be AMC Networks, which analysts have also at times mentioned as a possible player in any consolidation of cable networks companies.
CBS Corp. will provide its second-quarter earnings update on Aug. 7.
CEO Leslie Moonves has not been mentioned as a deal-seeker, much as his team has long argued that the company doesn't need to buy anything and continues to do well building out new services and revenue streams, such as over-the-top service CBS All Access.
Most analysts expect him to also spend time on discussing the recent upfront advertising market and broader ad trends. In terms of second-quarter earnings, the Wall Street consensus stands at 96 cents per share, compared with 93 cents last year.
Discovery Communications and Scripps Networks Interactive
Investors will listen extra closely to whether Discovery CEO David Zaslav has anything to say before the market open on Aug. 8 about the reports of renewed deal talks with Scripps, whose CEO Kenneth Lowe will discuss the latest financials one day later.
Credit Suisse analyst Omar Sheikh is among the bears on a possible deal. "We remain cautious on the industrial logic of a combination with Scripps beyond cost savings, and continue to believe it will be hard to structure a transaction which satisfies both buyer and seller," he wrote in a recent report.
Others are more bullish. "We view the deal as among the most logical in media," said Cahall. "Both are somewhat relatively sub-scale when dealing with distributors, and while their combination may not put them on equal footing with a broadcast network or major sports rights owner, scale matters and should improve network carriage and affiliate negotiations."
Given the Wall Street debate on the deal, expect everyone to watch out for any signs that it may indeed come together.
Disney will discuss its latest financials after the market close on Aug. 8. It is a rare entertainment giant that hasn't been surrounded by deal speculation.
Analysts expect its call to focus on fundamentals, such as pay TV subscriber trends, which are key for its ESPN unit. The earnings consensus estimate is for $1.57 per share, down from $1.62 a year earlier.
Cahall recently reduced his estimate "to primarily reflect lower results at cable networks (fewer NBA playoff games) and consumer products and interactive media."
About the film unit, Guggenheim Partners analyst Michael Morris said: "The company again had a robust theatrical release slate in the quarter, which included Guardians of the Galaxy 2, Pirates of the Caribbean: Dead Men Tell No Tales and Cars 3. However, the studio faced tough year-over-year comparisons versus The Jungle Book, Captain America: Civil War and Finding Dory."
Home entertainment also faced tough comparisons, primarily due to The Force Awakens. Morris, for one, forecasts a quarterly film unit profit of $594 million, down from $766 million last year.
21st Century Fox
Rupert Murdoch's Fox looks to be closing out quarterly earnings season for Hollywood giants after the market close on Aug. 9.
Analysts and investors on the earnings call for the end of the conglomerate's fiscal year will surely look for any latest timing guidance on the Sky deal review in Britain. Not that management is likely to know much more than its previous update that it hopes to close the deal by mid-2018. The U.K. government last week said it expected to decide within weeks whether to request a more in-depth competition review of the deal.
In terms of quarterly earnings, the Wall Street consensus for Fox is 35 cents per share, down from 38 cents in the same period last year.
Wall Street will surely listen out for color on the performance of Fox News, which has seen strong ratings but has also been dealing with lawsuits.
For the studio unit, Cahall recently slightly reduced his estimates due to a lower film forecast, citing "a weaker-than-anticipated slate as Alien: Covenant and Diary of a Wimpy Kid underperformed both domestically and internationally."