TV Challenges in Focus Again as Hollywood Giants Report Earnings

Hollywood Sign 3 - H - 2015

Box-office revenue was strong in the second quarter, but TV ratings and advertising trends remained challenged.

Some box-office successes will be amid the bright spots in Hollywood conglomerates' quarterly earnings reports this week as TV ratings and advertising weakness will once again be a key theme, according to Wall Street observers.

Comcast/NBCUniversal, which already posted its latest results, led the box-office growth charge with a 469 percent gain, with Disney recording a U.S. box-office gain of 48 percent and Time Warner an improvement of 8 percent, highlighted MoffettNathanson analyst Michael Nathanson. But others saw drops.

‎Overall, Morgan Stanley analyst Benjamin Swinburne on Monday reiterated his "cautious" stance on the entertainment sector in a report entitled "Pressure in the System."

"Excluding the Frozen/Star Wars fueled 27 percent year-to-date gain by Disney [shares], the coverage group is actually down 2 percent this year, lagging the S&P," he said. "We continue to see risk to the downside regarding estimates."

Explained Swinburne: "Stripping out Olympic and political benefits, our outlook for underlying TV advertising is for a fairly flattish 2015 with a marginal improvement in 2016 as the economy is expected to further strengthen ... If the economy disappoints, and/or if Facebook video joins YouTube as a real TV replacement buy, traditional TV spending may turn negative."

Echoed ‎Nathanson in his preview of quarterly earnings season: "You know you are in trouble when the only positive media data point in the quarter is the U.S. box office."

He added: "Yup, while that was up 9 percent to a record $3.1 billion, key television C3 ratings metrics and underlying U.S. national TV ad trends continue to slump to new lows." ‎After adding up all his quarterly estimates, Nathanson said: "We now project quarterly national ad spend will be between minus 2 percent to minus 3 percent — the weakest ... in a non-recessionary quarter."

Sanford C. Bernstein analyst Todd Juenger cited similar concerns. "We are desperate to hear acknowledgment of [the] secular TV advertising problem and solutions to cope with it," he wrote. He also highlighted rare TV ratings winners, such as 21st Century Fox's cable networks unit and Walt Disney's ABC.

Jefferies analyst John Janedis highlighted several topics that investors will look out for on earnings conference calls. "The market will look for clues on the secular debate. While there's hope that Time Warner or CBS will offer up specifics on HBO Now or Showtime, we'd expect them both to offer up only vague details," he wrote.

‎Many hope for guidance on ratings trends given a year-ago change to Nielsen ratings. "Ratings are down once again in the second quarter, but slowly moving in the right direction — and don't forget we're just lapping the Nielsen measurement issue that plagued the nets over the last year," said Wells Fargo analyst Marci Ryvicker.

Evercore Isi Media analyst Vijay Jayant said that "anemic" ad momentum is a "key investor focus." But he also noted: "Broadcast and cable TV network ratings are still down season-to-date versus 2014, but have not worsened in months. This is an important stabilization factor which, when combined with the yet-to-come measurement improvements that captures IP viewing, should support a potential return to advertising growth — perhaps even by the fourth quarter."

Foreign exchange issues due to a strong dollar have in recent quarters hurt the results of entertainment giants with big international revenue. While investors will look out for those effects, Jayant also said: "Foreign-exchange moves have vacillated in a more narrow range intra-quarter, possibly not resulting in much incremental pain."

Here is a closer look at specific companies and what analysts expect from their quarterly results.

Walt Disney
Comcast/NBCUniversal, which led the latest quarter's box-office strength, and Sony Corp. have already reported their quarterly financials, but Disney will kick off earnings season for pure-play entertainment giants on Tuesday afternoon.

Nathanson expects Disney to post quarterly earnings of $1.39 per share, compared with $1.28 in the year-ago period. Cable networks unit operating profit will end up slightly higher as "some savings from NASCAR," for which ESPN didn't renew a rights deal, could outweigh weaker advertising revenue due to tough ratings comparisons, including from last summer's soccer World Cup.

At Disney's broadcasting unit, Nathanson expects a slight operating profit drop despite a 2 percent ad gain at ABC, offset by a decline at TV stations and "an undisclosed SVOD benefit" in the year-ago period.

Studio operating profit will fall 1 percent, according to the analyst, including a writedown, estimated at around $140 million, for Tomorrowland. The majority of Inside Out's profit benefit will hit in the current quarter, he said.

"We expect another strong quarter at Consumer Products driven by new Avengers merchandise plus continued strength of Frozen licensing," Nathanson said.

In terms of the earnings conference call, expect questions about the studio's outlook and ESPN. "Much investor conversation is starting to focus on Star Wars VII," said Juenger. "The 'over/under' debate on global box office is honing in on $2 billion, especially after Jurassic World."

"Investors have been highly concerned about ESPN subscriber losses," he added. "Organic results at ESPN should show some advertising weakness as well given year-over-year audience declines (due to tough World Cup comp and weak NBA season) and more content being moved to ABC."

Time Warner
The entertainment conglomerate, led by chairman and CEO Jeffrey Bewkes, will report its second-quarter earnings on Wednesday morning.

Nathanson expects quarterly earnings of $1.02 per share, compared with 98 cents in the year-ago period. He calls for Turner networks operating profit to rise amid nearly unchanged advertising thanks to affiliate fee growth and programming expense controls. CNN and Cartoon Network saw ratings growth, while TNT and TBS saw further declines.

HBO operating profit will also drop as the year-ago period benefited from an initial payment from Amazon as part of a digital licensing deal, he expects.

Film unit operating profit will fall 7 percent, Nathanson forecasts. "Warner Bros. had a solid quarter from a theatrical performance led by Mad Max: Fury Road and San Andreas," he said. "However, the second quarter also included underperforming titles, including Entourage and Hot Pursuit." Last year's home video releases of The Lego Movie and The Hobbit: The Battle of the Five Armies also causes tough comparisons.

In terms of conference call topics, the Turner networks ratings outlook and HBO Now are widely seen as key issues. "Audiences at Turner have been very weak and don't seem positioned to improve," wrote Juenger. "Growth at CNN and Cartoon has been offsetting declines at TNT and TBS."

He also said: "Investors are craving any metrics on HBO Now subscriber uptake and characteristics (demos, current pay TV subs?) — but we doubt they will get much. It's still very early days, and we doubt TW feels compelled or obligated to disclose any details anyway."

CBS Corp.
After the market close on Wednesday, CBS Corp. will report its latest numbers.

Nathanson forecasts earnings of 72 cents per share, compared with 76 cents in the year-ago period. He expects operating profit to fall 12 percent "led by slower ad trends and tougher-than-expected content licensing comparisons." He added: "CBS will likely face difficult syndication sales comparisons in the quarter from Criminal Minds and Blue Bloods last year, only partially offset by the beginning of CSI Hulu dollars."

Nathanson recently raised his cable networks unit revenue forecast due to the Mayweather-Pacquiao boxing fight on Showtime, but said he slightly reduced his operating profit estimate "because this was essentially a breakeven event."

On the earnings call, "investors will be very interested in expectations for Showtime OTT (both domestic and internationally)," said Juenger. "CBS is often more forthcoming than Time Warner (with respect to HBO), so CBS may provide a better read-across for HBO Now than we get directly from TW."

Another issue that could come up on the call is summer TV. "So far this summer, the broadcast networks are having most success with reality programming (as opposed to bigger budget scripted programming, which has only recently been an addition to broadcast summertime lineups)," said Juenger. "Does this change the way CBS will think about summertime programming for 2016?"

21st Century Fox
In the first Fox earnings report since Rupert Murdoch left his CEO title to son James Murdoch, Nathanson expects earnings of 39 cents per share, compared with 45 cents last year.

Cable networks will once again be a key growth driver. Fox network advertising revenue could drop 10 percent amid ratings weakness, with Fox stations seeing a 2 percent decline, Nathanson projects for the latest quarter.

Film unit results are expected to be down from the year-ago period, with the analyst citing a "lack of theatrical and home video releases this past quarter." He said: "While Spy performed nicely, the biggest contributor for the studio was spill-over from DreamWorks Animation's Home. This compares to X-Men: Days of Future Past and the extremely profitable The Fault in Our Stars last year."

The earnings call is expected to draw much interest. "It will be James Murdoch's first earnings call as CEO, investors will be keenly attuned to his command and body language," said Juenger.

Analysts also expect an update on fiscal year financial guidance given that Fox's fiscal year ended in June. "Most of the recurring guidance declines have been driven by currency and secular advertising," said Juenger. "Some has been Fox-specific advertising. And some has been increased investment decisions (i.e. India). It will be imperative for Fox to convince investors the additional spend (and the past two year investment program) is more of an offensive investment in pursuit of growth, as opposed to defensive spend into a
decaying sector."

Viacom, led by CEO Philippe Dauman, will wrap up Hollywood earnings season on Thursday morning.

Nathanson forecasts earnings of $1.47 for the latest quarter versus $1.40 in the year-ago period. Stock buybacks will help earnings per share, but Nathanson projects an operating profit decline of 5 percent.

He expects U.S. advertising revenue to decline 8 percent in the quarter "as ratings challenges did not abate" and MTV2 was "the only network to post growth in the quarter."

Film unit operating profit will fall, he predicted. Said Nathanson: "Paramount did not have any theatrical releases in the quarter with only $3 million in total domestic box office from spillover from The SpongeBob Movie: Sponge Out of Water."

Twitter: @georgszalai