Hollywood Earnings: Improved TV Ad Demand, Mixed Ratings in Focus as Giants Report

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“Commentary about the ad market should be the best in the last several quarters,” predicts one Wall Street analyst.

With TV networks businesses accounting for a majority of earnings at entertainment industry conglomerates, TV ratings, subscriber and advertising trends will once again be in focus this quarterly earnings season.

Comcast has already reported the third-quarter financials for its NBCUniversal unit, and Sony Corp. has also shared its latest results. But CBS Corp. will kick off earnings season for pure-play Hollywood giants after the market close on Tuesday.

“Commentary about the ad market should be the best in the last several quarters,” said Jefferies analyst John Janedis in a report on Monday about what to expect from quarterly earnings season. “What's hard to call this quarter is to what extent it's priced into the stocks.”

He added: “The setup for the large cap media for third-quarter earnings is meaningfully better, in our view. On the ad front, this is the first time in calendar year 2015 nets have been able to monetize ratings (if they have them) and the market has been able to push through [ad rate] increases in scatter. At the same time, ratings remain choppy to start the season and visibility into the first quarter is limited to non-existent.”

With Time Warner Cable last week reporting better-than-expected third-quarter pay TV subscriber trends and Charter Communications swinging to a sub gain, Wall Street analysts have in recent days been discussing what the news means for entertainment industry stocks, which last quarter were hit by cord-cutting fears.

"Does Strong TWC Sub Count Harken the End of Cord-Cutting Risk for Media Stocks?‎" Sanford C. Bernstein analyst Todd Juenger asked in a report late last week. "The data seems to point to an annual decline of about 1.0-2.0 million subs" across the pay TV sector, he said. "That doesn't count the additional impact of cord-shavers (i.e. 'skinny' bundles)." He added: “However, any rally in media stocks would have to come from increased multiples, not increased earnings expectations … For media stock multiples to come up, and stay up, the market would have to believe this quarter is enough to have terminal values reflect a long, slow melt of subs closer to 1 percent than 2 percent per annum, with little incremental impact of skinny bundles."

Janedis is more bullish. “While the market has questioned to what extent improved pay TV subs were driven by skinny bundles, we'd argue in this environment, the overall pay TV universe is more important than the mix,” he said.

Juenger in an earnings season preview report entitled “Guilty Until Proven Innocent” cited Universal as a box-office winner in the latest quarter and AMC Networks and Discovery Communications as TV ratings winners.

“Once again, viewership trends were blah with broadcast down 12 percent and cable down 9 percent year-over-year (adults 18-49 C+3) this past third quarter,” said Wells Fargo analyst Marci Ryvicker. “That said, the better tone around the ad environment combined with easing comps (especially Viacom and Time Warner) have likely spurred recent improvement in investor sentiment.”

Overall, conference calls this earnings season are expected to feature analyst questions about TV ratings trends, ad momentum and the outlook for pay TV subscriber trends, among others.

Nomura analyst Anthony DiClemente on Monday predicted five key themes this earnings season. The first is what he called “The great cord-cutting headfake?” Wrote the analyst: “We remain of the view that cable video subscriber losses are not accelerating … As such, we believe the third-quarter message around core video eco-system trends will be a benign one. While management teams will be asked about cord-shaving and the impact of spin-downs, they will emphasize improved content offerings within the ecosystem.”

The second theme he mentioned are TV ad trends. “Selected third-quarter ad buyer checks of ours point to healthier scatter market trends given new verticals (such as app game developers and fantasy sports) in addition to limited ad inventory,” he wrote. “This bodes well for those with improving ratings. For the group, we expect domestic cable ad growth of 1 percent in the quarter and flat year-over-year ad growth for broadcast ad revenue in the third quarter, up from minus 2.5 percent year-over-year for broadcast and cable in the second quarter.”

DiClemente’s third theme that he expects to be in focus this earnings season is content licensing. “Time Warner and Fox have broadly discussed the notion of becoming more strategic around content licensing, emphasizing content availability on MVPD-based VOD platforms, and in some cases, direct-to-consumer apps … While shrinking high-margin SVOD revenue would present a near-term headwind to earnings per share growth, better discipline would strengthen the TV bundle longer term, preserving valuation multiples as better VOD libraries presumably improve retention rates for multichannel pay TV video subscribers.”

Industry earnings estimates for the latest quarter have come down over the summer “given higher year-over-year sports rights fees, lower TV licensing and a weak film slate,” said DiClemente in highlighting his fourth theme for earnings season. “As such, and given improving trends in the ad market, we think third-quarter estimates may below enough.” But what about next year? “Looking ahead to ‘16, consensus earnings per share estimates were revised just 3 percent since August,” said the analyst. “Foreign-exchange headwinds and tough compares may suggest that [the] Street may still be optimistic on 2016 earnings.”

What does that mean for sector stocks? DiClemente said that topic will be the final key theme for earnings season. “Media calendar year 2016 price/earnings multiples have expanded by 14 percent off their August lows, but still lag their pre-second quarter levels,” he said. “Within our coverage group, AMC andCBS are attractive as their calendar year 2016 multiples are off 14 percent and 9 percent,respectively."

Here is a look at what to expect from Hollywood conglomerates when they report earnings over the coming days…

CBS Corp.
Opening this week’s earnings parade will be CBS Corp. on Tuesday afternoon.

“We reduced our estimates to reflect lower-than-expected syndication/SVOD revenues in the quarter, while we note that advertising momentum in the quarter was strong,” Stifel Nicolaus analyst Ben Mogil said in his preview note. He expects third-quarter revenue of $3.3 billion and earnings of 81 cents per share, down from $3.4 billion and 84 cents, and compared to consensus forecasts of $3.3 billion and 83 cents.

Time Warner
Time Warner will report its latest financials on Wednesday morning.

Mogil expects quarterly revenue of $6.5 billion and earnings of $1.09 per share. That compares with the consensus estimates of $6.5 billion and $1.08. "Ad trends and ratings at Turner will likely be highlighted during the call," he said. "‎Nielsen ... ratings have shown mixed ratings across the board at TBS, TNT and CNN."

Commentary on HBO Now is also expected to attract attention on the earnings call again. "While we do not expect quantitative data on the progress of the new offering, we do expect some directional commentary on the performance to-date," Mogil said.

21st Century Fox
Fox also reports its latest results on Wednesday morning.

Mogil has slightly reduced his revenue expectations "on lower cable advertising and content revenue," but modestly increased his operating profit estimate "on lower cost at cable ... primarily due to lower costs at FX Networks." He also highlighted: "Earnings per share [are] largely impacted by higher losses at Hulu reflecting the channel's spending uptake."

He forecasts quarterly revenue and earnings of $6.3 billion and 36 cents per share,  compared to consensus of $6.5 billion and 39 cents.

"With expectations of net domestic subscriber growth (subscriber growth at Fox Sports 1, Fox Sports 2 and the National Geographic channels greater than subscriber declines at Fox News and FX), we are interested in trends/progress to-date," said Mogil. “Also of interest to investors will be commentary on broadcast and cable advertising trends. We do expect the company to highlight some of the trends at Hulu given the large spend the channel is undertaking."

Walt Disney
Disney will announce its quarterly financials on Thursday afternoon, and given that its reduced ESPN guidance last earnings season caused a sector-wide stock sell-off, all eyes and ears will be on the latest figures and outlook.

“Given investor focus on subscriber trends, investors will be interested in a subscriber update, which Disney generally provides with year end results,” said Mogil. “Also of investor interest will be cost commentary at ESPN outside of programming costs, as well as early Star Wars consumer product commentary following Force Friday.”
He forecasts quarterly revenue and earnings of $13.7 billion and $1.08 per share, compared to the Wall Street consensus of $13.5 billion and $1.13.

“At the parks segment, we view positive domestic and international airport passenger data at Orlando International Airport as a good proxy for segment growth,” Mogil said. We view this data point as likely easing investor concerns of a strong dollar slowing down international attendance.

Closing out earnings season for Hollywood conglomerate will be Viacom, which will report its latest results on Nov. 12.

Mogil recently modestly reduced his quarterly earnings estimates on “higher programming expenses, which we view favorably, as domestic ad weakness in the quarter was lighter than we had previously estimated.” He explained: “We view the company as ramping up programming investment and view the investment as prudent/positive as the strongest shows on its networks have generally been the newest ones.”

He added: “On the SVOD side, with Epix leaving Netflix, the company has now domestically entirely left Netflix and view that decision even with likely smaller SVOD contributions as favorable for an ad -supported company and to continue to ensure new entrants into the SVOD arena a longer-term positive regarding pricing and windowing.”
Summarized the analyst in his report’s headline: “Domestic ad improves and view higher programming/promotion expenses favorably.”

He forecasts quarterly revenue and earnings of $4.0 billion and $1.52 per share, respectively, compared to Wall Street consensus of $3.9 billion and $1.56.