Radio gives CBS static


NEW YORK -- CBS Corp. reported mixed second-quarter financials Thursday as revenue slipped 1% on a bigger-than-expected radio unit decline and sluggish TV trends but profit rose, thanks to a tax benefit.

In a conference call, management acknowledged that recent TV advertising trends have been sluggish, gave further color on a longer-term strategy CBS will likely take to enter the film business and predicted it will unveil radio station sales deals soon.

But many on Wall Street were disappointed that the company didn't give an update on its plans for its big cash war chest, including about $1 billion from divestitures. Analysts and investors have been hoping for further dividend increases or stock buybacks. CBS brass said they want to keep their powder dry until the sales process for radio stations in 10 slower-growing markets is completed.

CBS president and CEO Leslie Moonves said in a conference call that the company has received various "very attractive offers" for the stations.

"We expect to conclude the process in the next several weeks," chief financial officer Fredric Reynolds said, signaling that CBS wants to hold on to its cash for now as several proposed deals would include swaps or other tax-efficient "acquisition structures." Brass didn't provide specifics, but signaled any station swaps wouldn't require the use of much cash.

Sanders Morris Harris analyst David Miller said that based on recent, comparable transactions, the radio stations "could realize a net after-tax gain of $450 million-$600 million, which CBS will likely use for the hoped-for share buybacks and/or dividend increases."

Moonves again received several questions from analysts looking for more details on an expected entry into the movie business that he has signaled will happen at some point.

The CEO on Thursday indicated that this is likely a more long-term undertaking, saying CBS' Showtime arm has output deals with three Hollywood studios that come to an end in about 18 months. He added that Showtime spends hundreds of million dollars on these deals and was looking at whether to continue some or simply buy rights for single films as other pay TV firms have done with much financial success.

Broadly in line with previous comments, Moonves said CBS could get behind four to six films a year in the $10 million-$50 million budget range with "no large studio overhead." This could allow Showtime to partly make up for some lost film product on canceled output deals, while it would also further increase its original production, he added.

However, Moonves has in the past hinted that CBS could simply take a stake in films that could be financed by others. On Thursday, he didn't make such references.

He again called this film strategy "risk free," saying the company could make up its costs thanks to various other rights, such as TV and international, before the boxoffice run of movies even starts. And after several years, CBS would have a library it can leverage, he added.

CBS reported a second-quarter profit of $781.7 million, up 3.7% year-over-year. On a continuing operations basis, excluding its recently sold theme parks unit, CBS earned $489.8 million in its second quarter as a standalone firm, up from $380.1 million in the year-ago quarter. The figures for the latest period include a $129 million tax gain.

Revenue fell 1% year-over-year to $3.48 billion, falling shy of many Wall Street estimates. Free cash flow increased 2% to $546.2 million in a well-received piece of news. "Free cash flow for the first half reached $1.2 billion, matching our full-year estimate, suggesting both upside to our estimates and increased capacity for returns to shareholders," Merrill Lynch analyst Jessica Reif Cohen said.

CBS on Thursday reiterated its full-year 2006 guidance for low-single-digit percentage growth in revenue and mid-single-digit growth in operating income and earnings per share.

Moonves said he was pleased with his firm's first-half 2006 performance. "Radio has struggled as the marketplace continues to face challenges," he said. "Nevertheless, we are encouraged by the early results of many programming changes," particularly the addition of Opie and Anthony and Spanish formats.

Radio revenue dropped 8% to $519.1 million as operating income fell 20% because of weak ad sales on the loss of Howard Stern and necessary programming changes.

The biggest growth in terms of revenue and operating income came at CBS' outdoor advertising unit.

Similarly, chairman and controlling shareholder Sumner Redstone addressed some recent criticism about the stock momentum of the postsplit CBS and Viacom Inc., arguing that CBS has seen solid business trends: "I am very pleased with CBS Corp.'s early performance as a stand-alone company," he said.

In a brief comment at the start of Thursday's call, Redstone, who is currently in Los Angeles, also said he has "enthusiasm for CBS Corp. and Les and his team."

Revenue at CBS' TV unit, which includes the CBS network and other assets, fell 1% to $2.3 billion on a decline of about $100 million in DVD sales and flattish advertising sales. Operating income in the division declined 3% because of a $24 million cost for the shutdown of UPN and higher stock-based compensation. Brass predicted better second-half DVD business momentum, with year-over-year financial improvements.