Hollywood Conglomerates Prepare for Quarterly Earnings Season

A stock specialist on the floor of the New York Stock Exchange August 5, 2011 - H
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Wall Street expects weaker cable network ratings and a mixed box office performance to be key themes.

NEW YORK - With quarterly earnings season in full swing, Hollywood conglomerates will over the next couple of weeks report their financials for the final quarter of calendar year 2011.  

The latest results will be driven by weaker cable networks ratings at many companies and a mixed box office performance. "Cable network ratings in the fourth calendar quarter were lackluster," said Credit Suisse analyst Spencer Wang, adding that scatter advertising was "fairly sluggish."

Nomura Securities analyst Michael Nathanson said fourth-quarter results for conglomerates "were impacted, [to] varying degrees, by unusually weak cable ratings," which led to negative earnings revisions on Wall Street. "News Corp.’s cable network programming was one of the few bright spots with 9 percent growth. In contrast, the quarter’s ratings saw 7 percent live ratings declines at Time Warner, Viacom, Comcast/NBCU, and double digit declines at Disney (13 percent)."

Expect ratings to be among the key themes of earnings conference calls - among with the advertising market, which after a weaker fourth quarter seems to have done okay early in the new year. Of course, 2012 guidance and shareholder returns will also once again get much attention on entertainment conglomerate's earnings conference calls.

Management hints about plans to fix cable networks ratings challenges will be key given that a majority of conglomerate's profits comes from cable channels. "For the five major media stocks we cover, cable programming contributes any where from around 60 percent of companywide earnings before interest and taxes to over 90 percent," said Wang, whose coverage includes News Corp., Time Warner, Viacom, Walt Disney and Discovery Communications. "Factors affecting the cable programming business are the main drivers of stock performance for our sector."

On the ad side, RBC Capital Markets analyst David Bank expects "a broad deceleration In network TV advertising growth" in 2012, while Morgan Stanley analyst Benjamin Swinburne has predicted that "advertising growth should be "good enough" barring a major economic shock in Europe."

But analysts agree that entertainment conglomerates will accelerate their stock buybacks. Swinburne predicts that "share repurchases alone drive 8.5 percent of earnings growth in the group in 2012, where we expect earnings before interest and taxes growth in the 8 percent-10 percent range." 

Plus, some on Wall Street will be looking for mangement teams' latest thoughts on film industry trends. "Box office results in 2011 were disappointing, both [in terms of] attendance and 3D/premium mix," said Swinburne. "We expect more of the same in 2012, and the increase in sequels versus 2011 has us concerned that downside risk remains. Digital film ownership remains elusive."

Wells Fargo analyst Marci Ryvicker this week initiated coverage on the entertainment conglomerates with a fairly bullish report though. "We are bullish on media and rate the diversified entertainment sector "outperform"," she wrote. "We have seen enough evidence over the past six months to support the fact that diversified media is healthy, that must-have content will be monetized, and that there is still significant growth in this business."

She slapped "outperform" ratings on the stocks of News Corp., Time Warner and CBS Corp. and "market perform" ratings on Viacom and Disney.

Here is a look at what to expect during the quarterly earnings parade for entertainment conglomerates.

Viacom kicks off conglomerates' quarterly earnings season on Thursday with what will be its fiscal first-quarter results.

"Overall, we expect a more subdued quarter with weaker advertising revenues plus operating losses for filmed entertainment due to timing on print and advertising spend," summarized Stifel, Nicolaus analyst Drew Crum the Wall Street expectations.

Bank projects quarterly revenue of $3.85 billion, up minimally from $3.83 billion in the year-ago quarter on an operating profit decline of 4 percent to $998 million. But Crum predicts reduced costs from a year-ago restructuring and improving margins at the international TV networks to help the bottom line.

"Year-over-year key demo ratings for MTVN Networks declined 14 percent during [the quarter], with declines accelerating each month during the quarter," highlighted Swinburne. "Ratings performance was primarily dictated by 19 percent declines at Nickelodeon, the most significant network contributor to ad revenues in the December quarter." As a result, he cut his U.S. ad growth estimate to about 1 percent.

Bank similarly recently lowered his ad revenue growth forecast for the period from 5 percent to 1.5 percent "largely given the material ratings drop at Nickelodeon and somewhat more cautious stance from advertisers in the calendar fourth quarter."

Also, the film unit had difficult year-ago comparisons in the latest quarter as Jackass 3D, True Grit and The Fighter in the year-ago period exceeded expectations and the release of The Adventures of Tintin and Mission: Impossible - Ghost Protocol late in 2011 meant high spending, while most of the profit will be reaped this year. Analysts predict all this will make the film unit's bottom line swing to a loss in the latest period. Swinburne predicts losses of $40 million-$50 million.

Miller Tabak analyst David Joyce is one of the more bullish analysts on the film unit. He upgraded his rating on Viacom from "neutral" to "buy" on Tuesday, predicting a stronger film performance with a minimal operating loss of $1 million that will help offset weaker cable TV trends.

Walt Disney:
Japanese consumer electronics and entertainment giant Sony Corp., which not too many U.S. analysts follow, also reports its latest results on Thursday.
Then, next week Tuesday, it will be Walt Disney's turn.

"We expect a more subdued quarter for media networks but further gains at [theme] parks to headline the results," predicted Crum.

In the industry giant's broadcast and cable TV business, "advertising appears to have remained relatively steady across all of Disney‘s TV assets in the fiscal first quarter, though ESPN had a somewhat tough time on the ratings front," Bank said. "We are lowering our overall fiscal first-quarter cable networks advertising growth estimate to 5 percent from prior 8.5 percent given somewhat weaker-than-expected ratings performance at ESPN."

He also predicts a 27 percent operating profit decline at the film unit. "Studio entertainment comparisons remained tough largely due to the Toy Story 3 home video release in the prior year quarter versus Cars 2," Bank wrote. "In terms of new theatrical releases, there was only one Disney-owned release in the fiscal first quarter (The Muppets) versus two in the prior-year quarter (Tron: Legacy, Tangled), making box office comps somewhat difficult as well."

Overall, Bank expects revenue growth across Disney's units, except for unchanged revenue at its interactive media unit and a film decline. In terms of operating profit though, he sees the interactive media and broadcasting divisions also posting a slight decline. Disney's overall revenue should rise 4.5 percent t0 $11.20 billion. The segments' operating profit will be up 4.7 percent to $2.31 billion.

Time Warner:
Time Warner is set to post its fourth-quarter results next week early on Wednesday.

Management has said that the company will likely not reach its cable network ad growth guidance of mid-single percentage growth for the fourth quarter, leading analysts to lower their ad growth estimates. "Continued lackluster ratings performance at Time Warner‘s major cable nets certainly does not help, although TBS ratings in primetime appear to have stabilized," said Bank in cutting his forecast from 6 percent networks ad growth to 2 percent. But: "Margins in fourth quarter 2011 likely benefited from materially lower programming expense - the new NBA season began very late in the quarter, providing some bottom-line cushion."

In the film division, he is looking for "overall flattish results" for the fourth quarter. "Theatrical comps were somewhat difficult…given Harry Potter in the prior-year quarter while Sherlock Homes: A Game of Shadows performed decently but was not stellar. However, on the home video side, the quarter likely benefitted from the release of the last Harry Potter installment versus Inception, which was the major new release a year ago." The TV studio should see a fourth-quarter benefit from a CW deal with Netflix, but last year also saw a boost - from Two and a Half Men going into syndication. Analysts expect record full-year film profits though as signaled by management.

Despite some challenges, Wang recently "modestly" raised his adjusted operating income estimate "to reflect better cost control." He expects TW's quarterly revenue to rise 2.9 percent to $8.04 billion and adjusted operating profit to jump 13.5 percent to $1.62 billion.

Bank, somewhat more bullish, is looking for TW's revenue to climb 3.6 percent t $8.1 billion and operating profit to rise 16.2 percent to $1.66 billion.

News Corp.:
Rupert Murdoch's News Corp. is set to report its latest quarterly financials on Feb. 8, with Bank predicting "another standout quarter from cable network programming" and slightly higher operating profit for the TV broadcast segment amid flat local TV ad trends, retransmission consent money partially offset by higher programming costs and mixed Fox network trends. "Overall ratings were decent despite X-Factor‘s underperformance versus guarantees," Bank said.

At the cable networks, ratings gains at FX helped push News Corp. to a 2.2 percent revenue-weighted ratings increase, according to Wang. "Strong primetime programming led by Sons of Anarchy and It’s Always Sunny in Philadelphia drove a 16.7% increase in absolute ratings at FX," he wrote. "On the negative side, Fox News declined 13.3 percent."

In News Corp.'s film business, analysts see weaker box officer figures in the latest period as Alvin and the Chipmunks: Chipwrecked and other releases couldn't compete with Black Swan and the latest Chronicles of Narnia in the year-ago period.

But other factors are seen as driving film profitability higher. "On the home video front, Rise of the Planet of the Apes was a standout performer…versus a relatively uneventful new home video release slate last year," Bank said. "Filmed entertainment segment results likely also benefitted from the initial delivery of content to Amazon that amounts to an estimated tens of millions of [operating profit] in the quarter." Wang estimates that digital revenue from Amazon at "$75 million-plus of high margin revenue."

Bank eyes a film unit operating profit gain of 54 percent, while Wang estimates a 68 percent improvement to $317.8 million.

Overall, News Corp. revenue is expected to be largely unchanged at $8.79 billion, while operating profit will jump 13.3 percent to $1.46 billion, Bank estimates. Wang eyes a 13.8 percent gain.

But the earnings conference call will once again be one of the main draws as News Corp. management traditionally also takes media questions, which have in recent quarters often focused on the latest in the phone hacking scandal.

CBS Corp.:
A week after News Corp., CBS Corp. is scheduled to finish quarterly earnings season for entertainment giants - on the same day as cable giant Comcast Corp. will report its figures, including those for entertainment company NBCUniversal, in which it owns a 51 percent stake.

Bank expects a solid finish to 2011 for the company led by president and CEO Leslie Moonves. "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," he wrote. He added that trends across the company's advertising platforms "have remained relatively consistent with prior expectations."

He predicts "modest growth" in CBS network advertising and a slight gain in local TV station ads.

Total CBS Corp. revenue rose a minimal 0.1 percent in the fourth quarter to $3.90 billion, while operating profit before depreciation and amortization rose from $755.5 million to $831.4 million, according to Bank's estimates.

Davenport & Co. analyst Michael Morris recently raised his fourth-quarter and 2012 estimates for CBS. "The television ad health debate will be the key theme on CBS earnings," he predicted. "Our checks indicate both national and local TV ads are trending “just okay.” Network buys are improving from a slow fourth quarter, but scatter pricing is down year-over-year."

Email: Georg.Szalai@thr.com

Twitter: @georgszalai