TV Ratings, Ads in Focus as Entertainment Giants Gear up for Earnings Season

John Carter Taylor Kitsch Solo - P 2012
Frank Connor/Disney

John Carter Taylor Kitsch Solo - P 2012

"The first quarter has seen an unusual confluence of healthy demand juxtaposed against weak and often surprising ratings,” says Sanford C. Bernstein analyst Todd Juenger.

Entertainment conglomerates start reporting their latest quarterly earnings this week amid some renewed concerns about the global economic outlook and recent TV networks ratings challenges.

In fact, Wall Street analysts say TV viewership trends and how they will affect advertising revenue will be a key focus for observers this earnings season.

"The biggest question mark is TV advertising," said Sanford C. Bernstein analyst Todd Juenger in a report Monday. "The first quarter has seen an unusual confluence of healthy demand juxtaposed against weak and often surprising ratings. Most significant to us is the implication for the rest of 2012."

The upcoming upfront advertising sales season will also feature prominently. “Outlooks into the mid-May broadcast upfront season will be key, and management’s tone is certain to be upbeat given the need to position into negotiations,” said Davenport & Co. analyst Michael Morris.

Most predict solid overall financials from the conglomerates despite two prominent writedowns – one for Walt Disney’s John Carter, the other for Time Warner’s HBO for cancelled series Luck. "We expect another strong operating income before depreciation and amortization quarter across nearly all segments," said UBS analyst John Janedis. "However, the earnings per share upside from the group will be expense driven rather than from upside to ad growth in most cases."

Studio unit results are likely to be a mixed bag this earnings season. “The overall U.S. box office was up 10.3 percent in the quarter, driven by several large films (including The Hunger Games) as well as easy comparisons,” said Janney Montgomery Scott analyst Tony Wible last week. “Viacom saw lower performance on recent films, but the carry-over revenue from 2011 films leads us to increase estimates. Disney revenues are actually moving higher largely on the stronger performance of The Secret World of Arrietty, but our profit numbers are moving lower on the John Carter impairment.”

Here is a look at key entertainment giants and what analysts expect from their latest quarterly financials:

CBS Corp.:
Conglomerate earnings season is expected to start on a bullish note with CBS Corp.'s first-quarter financials Tuesday afternoon.

Juenger expects adjusted earnings of $289 million, while revenue will come in at $3.69 billion. His estimates are slightly below Wall Street consensus expectations.

Stifel, Nicolaus analyst Drew Crum is more bullish. He expects earnings growth on a 9 percent revenue improvement over the year-ago period to $3.82 billion. "We expect profit contributions from all segments led by entertainment (network advertising and subscription VOD like Netflix), cable networks and outdoor," he said.

All eyes and ears will be on CBS Corp. president and CEO Leslie Moonves as Wall Street will be eager to hear if he is as bullish as ever on the outlook for the ad market.

"Most importantly will be the company's forward-looking commentary on advertising (60 percent-plus of revenue), including an early read on the 2012-2013 upfronts, the syndication pipeline and prospects for additional subscription VOD deals," said Crum.

Time Warner:
Earnings season continues Wednesday morning with Time Warner.

Juenger forecasts a revenue gain to $6.92 billion, with adjusted profit of $632 million.

Operating profit at the company's networks unit will be flat, but there will be "some sequential improvement on advertising (+5 percent versus +2 percent in the fourth quarter)," according to Crum who also expects "healthy profit gains for Warner Bros. along with positive commentary concerning the upcoming slate.

Spillover from Sherlock Holmes 2 and new releases Journey 2: The Mysterious Island and Wrath of the Titans should be key contributors in the film unit.

Just like at Viacom, the TV side of the TW business will be in focus. The recent ratings momentum of TBS and Cartoon Network "is timely and bodes well for Turner ahead of the upfronts," said Crum. Juenger said though, that “[ad] demand is relatively strong, but ratings are down (with mixed strengths and weaknesses).”

A writedown for cancelled HBO series Luckis expected to lead to a writedown in the $30 million-$35 million range.

CBS Corp. corporate sibling Viacom will release its quarterly figures on Thursday morning.

The company's TV networks unit will once again be in the spotlight amid continuing ratings weakness at Nickelodeon.

Crum estimates a 5 percent TV revenue gain, as "flattish advertising" due to ratings challenges at Nickelodeon, MTV, Nick-at-Nite, Comedy Central and BET will be offset by affiliate fee growth, which includes subscription VOD revenue.

Film unit profitability will rise despite lower revenue thanks to "greater contributions from fourth-quarter film properties [such as Mission: Impossible - Ghost Protocol] along with the first-quarter performance of the low-budget title Devil Inside, and cost savings via restructuring," the analyst said. Echoed Nomura analyst Michael Nathanson: “Lower costs should likely offset difficult theatrical comparisons” with last year’s releases Rango and Justin Bieber: Never Say Never.

Overall, Crum projects flat revenue of $3.28 billion, citing "tempered expectations given further ratings weakness," which led him to reduce near-term estimates.

Juenger eyes adjusted earnings of $455 million on revenue of $3.13 billion.

Walt Disney:
On Tuesday, May 8, Disney will present its latest set of financials.

A previously announced John Carter writedown of $200 million that will lead to quarterly studio losses of $80 million-$120 million should be the biggest negative about the report. “Outside of studios (and to a lesser extent, related consumer products), we expect strong performance across the board, especially at theme parks and media networks,” said Juenger.

In Disney’s TV business, beyond the always-solid ESPN, he highlighted the “strong ratings at kids' cable coupled with strong [ad rate] growth.”

Juenger expects the conglomerate to post overall adjusted profit of $1.10 billion on revenue of $9.72 billion.

News Corp.:
Rupert Murdoch’s News Corp. will wrap up the entertainment conglomerate parade on Wednesday, May 9.

Juenger is looking for an adjusted profit of $975 million on revenue of $8.63 billion.

Expect the media portion of the conference call to feature some latest questions about the phone hacking scandal. But Wall Street is mostly looking for news about the company’s use of cash. “Barring any major surprises, the [quarterly] operating results are much less important to investors than more details on the cash deployment plan,” Juenger said. “The market would like to see another $5 billion [stock] buyback put in place…We would love to see an increased dividend.”

For News Corp., the key growth segment will once again be its cable networks, where affiliate fees remain on the rise.

“We expect filmed entertainment to deliver strong year-over-year results,” Juenger said. “TV entertainment (network and stations) is comparing against the SuperBowl last year, plus the juggernaut American Idol is finally showing its age, reportedly down 20 percent year-over-year.”