Viacom Stock Drops on U.S. Carriage Revenue Concerns

Bob Bakish - 2017 BET Upfront - Getty - H 2017
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CEO Bob Bakish predicts a return to U.S. carriage fee growth in fiscal year 2019 and outlines key growth areas, saying the Paramount studio is "an integral part of the company" that doesn't need any M&A.

Viacom, led by CEO Bob Bakish, on Thursday reported higher fiscal fourth-quarter earnings and said it is focusing on growing its business after stabilizing it, but its stock opened down more than 8 percent after management said U.S. carriage fee revenue will only return to growth in fiscal year 2019.

The industry's recent mergers and acquisitions (M&A) chatter also came into play on the company's Thursday earnings conference call. Asked about the planned AT&T-Time Warner deal and what Walt Disney's recent talks about buying parts of 21st Century Fox means and whether Viacom may look at doing a deal focused on its Paramount studio, Bakish said: "We view it as an integral part of the company."

Viacom is "thrilled" with the new Paramount management team led by Jim Gianopulos, and "we are highly confident in our ability to drive organic growth" at the studio, he added. Bakish concluded by saying that the Paramount business "is great as it is," and the company doesn't feel the need to combine it with other companies.

The earnings call comment that Wall Street seemed to focus most on was Bakish's outlook for U.S. carriage fee revenue. He said it would return to growth in fiscal year 2019 after more weakness particularly in fiscal 2018, which will see U.S. carriage revenue drop in the mid-single digit percentage range overall after a bigger drop in the first half.

For investors, it seemed that comment carried more weight than the CEO's promise to turn his and his team's attention to growth opportunities. "This quarter’s, and this year's, performance is dramatically stronger," Bakish said on the earnings call. The just-started fiscal year 2018 is "all about acceleration" after a focus on stabilization of the business. He said the firm now had a "strong, stable foundation from which to attack a changing media landscape."

Taking advantage of next-generation business opportunities in the media networks sector, such as launching on new platforms, striking licensing deals with over-the-top providers, pushing further into direct-to-consumer offers and getting the company's previously announced digital studio off the ground, is the first of three key focus areas to drive upside, Bakish said. He shared that the company sees more than 25 percent growth in these areas to about $450 million in fiscal year 2018 with a plan to "deliver more than $1 billion organically by 2020."

The other areas of upside are diversifying the company's business beyond media, such as via live events and consumer products, and growing its share and margins. The diversification businesses will bring in $350 million in revenue this fiscal year, with a goal of $500 million-$600 million by 2020, Bakish said.

Discussing the third areas, Bakish said "we see considerable opportunity" for $100 million in savings in fiscal year 2018 and hundreds of millions in savings "mostly realized" by fiscal year 2019. He cited such areas as real estate, automation and procurement as being among the opportunities here for Viacom.   

The entertainment conglomerate, controlled by the Redstone family, earlier in the day reported adjusted earnings from continuing operations of $310 million, or 77 cents per share, for the latest quarter, compared with $273 million, or 69 cents per share, in the year-ago period. The adjusted figures exclude a year-ago $206 million restructuring and programming charge.

Wall Street had on average forecast 86 cents per share in quarterly earnings, but that excluded the impact from the collapse of a planned slate financing deal, which the company recently said would affect its earnings in the quarter. One Wall Street observer said that made it difficult to compare the reported figures with the earnings consensus estimate. But Viacom management on its earnings call provided more clarity, saying that its earnings would have hit 88 cents per share excluding the slate financing impact, beating the Wall Street consensus.

Viacom on Thursday, which marked a year and day from when Bakish was made acting president and CEO, also reported a 3 percent revenue gain to $3.3 billion for the latest quarter. 

For the final quarter of its fiscal year, Viacom posted, as forecast, higher advertising revenue at its media networks unit and a drop in U.S. affiliate revenue amid continued pay TV subscriber declines. Worldwide ad revenue rose in the latest quarter, with U.S. ad revenue unchanged amid recent positive ratings trends after U.S. ad declines in recent quarters.

Overall, media networks unit quarterly revenue rose 3 percent to $2.6 billion, driven by a 6 percent advertising revenue gain, led by a 36 percent jump in the international business, thanks to the acquisition of Telefe in Argentina and growth in Europe. Affiliate revenue fell 1 percent as a decline in subscribers in the U.S. and lower SVOD revenue was partially offset by rate increases and growth in the international business.

Viacom's cable networks business has seen audience improvements, with total ratings up 3 percent in the most recent quarter, including 27 percent growth at BET, where the miniseries New Edition was a success, and 11 percent at MTV.

Adjusted operating income for the media networks unit declined 8 percent to $693 million, "primarily reflecting increases in programming expenses," the company said.

Film unit revenue rose 2 percent to $789 million in the latest quarter, "driven by growth in licensing revenues partially offset by lower theatrical revenues." Theatrical revenue was down 43 percent due to the strong performance last year of Star Trek Beyond, while home entertainment revenue fell 5 percent. But licensing revenue grew 30 percent thanks to higher film licensing revenue and Paramount Television productions. 

The film unit's financial performance in the quarter was affected by a lack of new films. "This was a weak quarter at the box office, with only one new release (mother!) that earned a rare 'F' grade on CinemaScore with an abysmal $7.5 million opening weekend," wrote Sanford C. Bernstein analyst Todd Juenger. "Total gross reached $16 million through the end of the quarter, but remains far short of the estimated $33 million budget, and a write-down seems inevitable."

Overall, the film unit posted a quarterly adjusted operating loss of $43 million, an improvement of 69 percent over the prior-year quarter's loss.

One key factor in Thursday's results was Viacom's recently announced termination of its film slate financing deal with Chinese firm Huahua, which it said would have a negative impact of $59 million in the latest quarter related to funds not received this year. Paramount said it would fill the gap left by Huahua with partners including David Ellison's Skydance Media, Hasbro and SEGA, which the studio says will cover financing for its 2018 and 2019 event films.

"In the fourth quarter and full year, we made strong progress against our plan to fundamentally stabilize and revitalize Viacom, with top-line gains in both media networks and filmed entertainment segments driven by continued execution on our strategic priorities," Bakish said. "We saw significant ratings increases across the portfolio, which drove sequential improvement in domestic advertising; our international business continues to expand, delivering double-digit revenue increases; and Paramount is demonstrating growth across multiple revenue streams as it rebuilds the theatrical slate and continues to grow its TV production business."

The CEO continued: "Viacom is stronger and our momentum continues to build. To accelerate our transition to long-term, sustainable growth, we are ramping up the evolution of Viacom's media business to better serve next-generation platforms and solutions while continuing to diversify our business and strengthen our global portfolio of flagship brands. In the coming year, we will continue to focus on unleashing the full creativity and energy of Viacom to create greater value for our shareholders and audiences."

Ratings trends along with the planned turnaround at Paramount and the film financing arrangements were also key topics on the earnings call along with comments on a recent carriage deal with Charter Communications. 

Paramount is looking to show key progress in fiscal year 2019 when a slate of branded films will be released and the TV production business, which tripled its financial contribution this latest fiscal year, will grow further, Bakish said. He predicted "significant" earnings upside for the studio in fiscal 2019. Cost efficiencies in production and marketing will be among the opportunities before then, CFO Wade Davis said, adding there will be room to improve the film unit's operating income to the tune of hundreds of millions of dollars overall. 

Viacom posted a film unit adjusted operating loss of $280 million for fiscal year 2017, an improvement of 37 perfect reflecting increases in revenue, partially offset by higher operating expenses, including the impact of the
termination of the slate financing agreement.

Bakish on the call also lauded the launch this week of online entertainment channels bundle Philo. Viacom management has long predicted such a low-priced, no-sports entertainment bundle featuring its networks. Philo, which launched Tuesday, is offering a bundle of 37 entertainment-only channels for $16 a month, including MTV, VH1, AMC, BBC America, Comedy Central, HGTV and History. For $20 per month, subscribers can get nine additional channels, including Logo and Nicktoons.

Bakish said he was "excited to see that the gap in the market for a sports-free, low-cost entertainment bundle — the entertainment skinny pack that Viacom has been calling for — is now starting to be filled."

The Viacom CEO also once again highlighted how key talent and creativity are. “There is a fresh energy and talent vitality across Viacom. And that is critically important for a creative company like ours," Bakish said. He cited the examples of a cross-house deal with Tyler Perry to write a film for BET and the Paramount deal with James Cameron for the next three Terminator films. "I'm committed to further igniting the culture of creativity that makes Viacom great — and which is essential to our success in the future."