Viacom Quarterly Earnings Drop, Film Unit Posts $136M Loss

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Bigger-than-expected U.S. ad and affiliate fee revenue drops and box-office disappointments 'Zoolander 2' and 'Whiskey Tango Foxtrot' affected the results, as CEO Philippe Dauman says, "We see the path to growth ahead."

Viacom on Thursday morning reported lower adjusted fiscal second-quarter earnings, but exceeded most Wall Street expectations. The company's film unit posted a big quarterly loss, though, as two releases underperformed at the box office, and at its TV networks, U.S. advertising and affiliate fee revenue saw bigger drops than analysts had expected.

The entertainment conglomerate, led by CEO Philippe Dauman, reported adjusted earnings of $303 million. That compared with $467 million in the year-ago period. On a non-adjusted basis, the company had in the year-ago period recorded a loss of $53 million when including a $785 million pre-tax charge for a slew of layoffs and reorganization moves in the year-ago period. Adjusted earnings per share fell to 76 cents from $1.16 in the year-ago period.

The company, which is in the process of selling a minority stake in Paramount Pictures, saw its film unit swing to a quarterly operating loss of $136 million after a year-ago profit of $1 million due to the disappointing performances of Zoolander 2, which brought in $56 million worldwide on a $50 million production budget, and Whiskey Tango Foxtrot, which reached just $23 million worldwide on a $35 million budget.

Dauman recently guided that the quarterly loss would be around $100 million higher than the company had expected before the two films' underperformance. Film revenue only declined 1 percent, or even rose 1 percent when adjusting for currency trends, though as Daddy’s Home and The Big Short, both released late in the previous quarter, boosted theatrical revenue above a weak year-ago period. That was offset by declines in home entertainment and ancillary revenue.

Meanwhile, at Viacom's media networks unit, U.S. advertising revenue again dropped amid continued ratings challenges. Overall, its operating profit fell 11 percent to $805 million amid a 3 percent revenue decline.

U.S. advertising revenue decreased 5 percent, compared to most analysts' expectation for a 3 percent-4 percent drop, "as pricing increases were more than offset by softer ratings at some of our networks," the company said. International advertising revenue declined 1 percent, driven by a 7 percent adverse currency exchange effect. Adjusting for the currency headwinds, international advertising revenue rose 6 percent, driven principally by growth in Europe.

U.S. affiliate revenue at the media networks division fell 2 percent, with the company citing "a modest decline in subscribers and a previously disclosed rate adjustment with a major distributor, partially offset by rate increases across the remaining subscriber base." International affiliate revenue increased 4 percent, or 11 percent when adjusting for negative currency effects, driven by new channel launches, increased subscribers and rate increases.

"Domestic cable revenue trends will likely lead to more investor concern as advertising decelerated despite a strong ad market while affiliates were negative in the quarter," said MoffettNathanson analyst Michael Nathanson in a report.

Viacom earlier this month struck a new distribution deal with Dish Network for 18 channels, including some that will go on Dish’s skinny-bundle offering, Sling TV. Some analysts said if Viacom had lost Dish carriage, it would have cost the conglomerate $800 million a year in profit. "The continuing strength of our brands was validated by our recent renewals with Dish and Frontier on attractive terms," Dauman said Thursday.

At Paramount, "we are looking forward to upcoming blockbusters Teenage Mutant Ninja Turtles: Out of the Shadows and Star Trek Beyond this summer," he added.

Dauman also once again touted the company's focus on addressing changing user behavior. "We are responding to industry consumption shifts with innovative, thoughtful and long-term strategic solutions and are generating meaningful results in many important areas, including content creation, data-based audience measurement and distribution innovation," he said. "There is much more work to be done, but we see the path to growth ahead and are very optimistic about our future."

Dauman is not expected to provide much insight into the process for the sale of a Paramount stake beyond saying it was processing. The company has said it was looking to close a deal by mid-year.