TV Ratings in Focus as Entertainment Conglomerates Gear up for Quarterly Earnings Reports
The Summer Olympics will affect advertising results for the latest quarter, with Wall Street looking for signals about the ad market's outlook.
A weak ratings start to the fall TV season by most broadcast networks, sluggish audience trends for some high-profile cable channels and an unclear outlook for TV advertising are expected to be key topics on Hollywood conglomerates' earnings conference calls as they report their latest quarterly financials in the coming days.
Top executives also could indicate what financial damage Hurricane Sandy will leave behind.
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"The first signs of a stormy second half of the year for advertising had become clear once the agency holding companies reported, and then Superstorm Sandy arrived, making us certain that 2012 will prove to be a year without growth for the U.S. advertising economy," Pivotal Research Group analyst Brian Wieser said last week in reducing his ad expectations and estimating that the hurricane could shave $500 million off overall fourth-quarter ad spending.
With the Summer Olympics in London having been a big success for Comcast-controlled NBCUniversal during the third quarter, other entertainment giants are expected to report weaker TV advertising trends for the latest quarter.
"Results will be generally abysmal as the Olympics gobbled up so much third-quarter ad revenue," said Sanford C. Bernstein analyst Todd Juenger.
And Janney Montgomery Scott analyst Tony Wible said: "Uncertainty around advertising dominates expectations as we approach earnings for diversified media companies. In addition, weak box-office results likely will not offset a lackluster ad environment."
Describing the post-Olympics ad environment, Wible said: "The Olympics may have clouded some of the underlying weakness, but media companies are not seeing a rebound post-Olympics and the new broadcast season is not boosting viewership levels yet." As a result, during earnings conference calls, "investors will focus on any characterizations of the advertising market, cost controls and affiliate fee/retransmission agreement's prospects to offset ad weakness," he predicted.
Cowen & Co. analyst Doug Creutz explained that the broadcast network ratings trends early this fall season will affect their entertainment conglomerate owners' earnings for the current fourth quarter.
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"Through week 4 of the 2012 broadcast season, overall primetime ratings at the Big Four networks are down 9 percent year-over-year, meaningfully worse than the low-single-digit year-over-year declines broadcast has typically experienced over the past decade," he wrote in a report late last week. "The trend of declining ratings is fairly pervasive across most of the broadcast schedule, with many returning shows down double digits, and new shows generally delivering disappointing viewer totals. While we think there are several causes of this season's ratings declines, the most important conclusion is that most broadcast networks are likely looking at significant advertising make-goods this season, negatively impacting the earnings of their owners."
Creutz reduced his financial estimates for CBS owner CBS Corp., Fox owner News Corp. and ABC owner Disney due to lower broadcast advertising assumptions. "On the other hand, we think that a likely shortage of broadcast scatter [ad] inventory could benefit cable networks with meaningful adult 18-49 viewership and relatively stable ratings, such as those owned by Time Warner and Discovery," Creutz said.
Some Wall Street analysts have in recent weeks raised concerns about the weak start to the broadcast season, dragging down stocks. "Investor enthusiasm for media shares and consumer discretionary stocks in general has waned over the past three weeks despite modestly better jobs data," said Davenport & Co. analyst Michael Morris. "We continue to like media companies relative to the overall market given stable and growing subscription revenue, inexpensive optionality on an improving consumer given modest ad outlooks and low capital intensity business models."
Lazard Capital Markets analyst Barton Crockett also argued that the weak fall season ratings are "not a big secular problem now" for sector stocks. "Despite audience loss, pricing leverage keeps broadcast ads flattish normally, with earnings growth from rising retrans/reverse retrans fees," he argued.
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And Juenger said: "The market seems ready to forget and look forward. For the [current] fourth quarter and 2013, we believe ad demand is solid, but networks with disappointing ratings will have limited ability to capitalize."
Crockett concluded: "We remain constructive on the group, seeing 20 percent-30 percent upside over the next year in this order: Discovery (growth), Viacom (low expectations), News Corp. (growth/restructurings), Time Warner (growth acceleration) and Disney (safe harbor)."
Investors will look for how the latest quarterly earnings change analysts' tune.
Here is a look at the earnings dates and expectations for the big U.S. entertainment conglomerates:
Rupert Murdoch's News Corp. is set to report its latest quarterly results after the market close on Tuesday.
Credit Suisse analyst Michael Senno expects film unit revenue to be essentially unchanged at $1.78 billion, with the unit's operating profit up 3.4 percent at $359 million. "Box office performance was strong, led by Ice Age and carryover revenue from releases late last quarter," and much of the marketing spending came in the previous quarter, he said. "However, weaker home video compared to last year, which benefited from Rio, offset the upside."
Television revenue and operating profit at News Corp. could rise 5.1 percent and 23 percent, respectively, Senno said, citing stable Fox broadcast ratings. But he reduced his estimates amid "recent commentary of a slower than expected post-Olympics ad market."
Cable networks will once again be a key growth driver at News Corp., with expectations for double-digit revenue and operating profit growth.
Overall, Senno forecasts a slight 1.4 percent revenue gain for News Corp. to $$8.07 billion on operating profit of $1.40 billion, up 1 percent.
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Said Creutz: "We continue to rate News Corp. shares "outperform," however the extent of the ratings weakness at Fox season-to-date does make us incrementally more cautious."
Time Warner, led by CEO Jeff Bewkes, is set to report its third-quarter financials early on Wednesday.
Senno projects weaker film division results, with revenue down 10 percent year-over-year and operating profit down 40 percent to $317 million. "The declines from last year reflect the difficult comp to the final Harry Potter movie release, carryover revenue from the previous Harry Potter DVD and the off-network syndication of Big Bang Theory," he said. "Besides Dark Knight Rises, the rest of this year’s slate was relatively weak, while last year also included Horrible Bosses and Crazy, Stupid, Love."
TV networks results should come in higher though. The analyst projects 3.5 percent revenue and 9.3 percent operating profit growth. Senno expects that affiliate revenue will offset a 1.5 percent ad drop.
In total, Time Warner revenue will end up down around 3.2 percent at $6.84 billion, with operating profit down 5.0 percent at $1.53 billion, according to Senno.
CBS Corp. CEO Leslie Moonves and his team are gearing up for their latest earnings report after the market close on Wednesday.
Amid broadcast networks' weaker start to the fall TV season and concerns about the TV ad market, the company's stock has trended lower in recent weeks. On Monday though, two analysts expressed their support for the stock with upgrades that argued there was upside potential ahead. They cited the stock's value compared to the shares of other sector giants and the company's reduced dependence on ad revenue.
Even before that, RGC Capital Markets analyst David Bank said: "We don’t subscribe to the consensus view that the relationship between prime-time ratings and CBS network ad revenues are simply linear."
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Nomura analyst Michael Nathanson expects total CBS Corp. revenue in the third quarter to rise 2.1 percent to $3.44 billion. Operating profit will rise 2.8 percent to $860 million, he predicts.
Fresh off its announcement of the $4.05 billion acquisition of Lucasfilm, Walt Disney and CEO Bob Iger are due to post the entertainment giant's latest results after the market close on Thursday.
Disney's studio division should see unchanged revenue "due to the light theatrical release schedule and difficult comparisons to last year, which benefited from The Lion King re-release and distribution of DreamWorks’ The Help," Senno predicts. He expects the late quarter release of The Avengers on DVD to offset a box office decline. Film operating profit will drop 19 percent amid a $50 million pre-announced writedown for a canceled Henry Selick-directed stop-motion animation movie project.
The analyst, meanwhile, projects higher cable networks financials amid ad and affiliate fee growth.
Senno also expects broadcasting revenue end operating profit to rise slightly. "We expect that the soft national broadcast ad market in the third quarter and weak ratings at ABC broadcast should be offset by a boost from political revenue at the stations," he argued.
Overall, Disney's revenue will rise 5.6 percent to $11.01 billion, with operating profit up 7.2 percent to $2.26 billion, according to Senno.
Viacom, led by CEO Philippe Dauman, will wrap up the latest quarterly earnings season with its financial report on Thursday, Nov. 15.
Senno expects the company's core cable TV networks unit to post flat revenue amid a 7 percent U.S. ad decline "due to soft ratings and impact from the Olympics and 10 percent lower international ad revenue, impacted by weak foreign exchange." A 10 percent programming cost increase, partially offset by lower operating cost growth, should lead to an operating profit drop of around 5 percent for the TV arm.
Viacom's film revenue will decline 43 percent "due to the relatively light box office and home video release slates comping against the theatrical releases of Transformers 3 and Captain America last year and three strong home video releases," Senno said. However, lower print and marketing spending could leave film operating profit up 3 percent, he estimates.
Overall, Senno is looking for a 19 percent revenue decline to $3.29 billion, but Viacom's operating profit may only drop 1.7 percent to $1.04 billion.