Economy takes toll on Viacom in Q2

'Trek,' 'Transformers' not enough to offset revenue drop

NEW YORK - Viacom Inc. posted weaker second-quarter financials early Tuesday as continued advertising weakness amid the recession, weaker sales of video game "Rock Band" and tough film comparisons dragged down the results.

On the earnings call, chairman Sumner Redstone said the National Amusements theaters sale is also progressing. "Whatever you may hear from the uninformed, there is a substantial amount of interest (from several parties)," he said.

Viacom's earnings dropped 32% from the year-ago period to $277 million. Operating income declined 26% to $586 million despite a $352 million net reduction in expenses. Excluding severance charges, operating income decreased 22% to $619 million. Revenue fell 14% to $3.3 billion.

Management in a statement pointed out a stabilization of advertising declines in the quarter, but also signaled the expectation that an economic recovery will take time.

"While the global economy continued to be a challenge in the second quarter, the diversity of our revenue streams, sequential improvement in our domestic advertising sales, our generation of cash and our operational discipline all helped to temper the short-term impact," said Viacom president and CEO Philippe Dauman. "As we look to a longer-term recovery, we continue to manage costs aggressively and make changes in the business that will better position Viacom for growth."

Film unit revenue fell 22%, contributing to a swing to an operating loss of $25 million, compared to a year-ago profit of $86 million.

The success of "Star Trek" and the first days of "Transformers: Revenge of the Fallen" couldn't offset the year-ago strength of "Iron Man" and "Indiana Jones and the Kingdom of the Crystal Skull." In addition to a 27% decline in theatrical revenue, the company reported a 29% home entertainment revenue drop.

In its earnings report, Viacom didn't mention the boxoffice flop "Imagine That," which also came out during the second quarter. Analysts have predicted the firm will have to take a writedown on the movie.

Discussing DVD trends, Dauman said that the recession and a maturing market are both drags on sales momentum. Industry executives have taken different stances on how much the DVD market is hurt by underlying weakness and the recession. "While the economy is certainly playing a role in this decline, the trend does support the notion that the consumer's appetite for DVDs may be showing signs of fatigue," Dauman said Tuesday. But recent blockbusters are exceptions, which should bode well for the firm's fourth quarter, he said.

He also said discussions with other studios and service providers about combining back-office functions in the DVD space are "fairly complex" and will take a while, with most financial benefits of a possible deal likely to be seen only next year. He estimated the cost savings potential at "several tens of millions of dollars a year."

Dauman also said Viacom is in talks with DVD rental kiosk firm Redbox and others as it looks for new DVD opportunities. Redbox recently struck a deal with Sony.
Meanwhile, at Viacom's media networks unit, which houses its cable networks, such as MTV, BET and Nickelodeon, operating income fell 12% to $671 million on an 8% revenue decline.

U.S. advertising sales here dropped 6% after a 9% decline in the first quarter. Worldwide ad sales fell 8%.