Viacom Inc. reports Q3 profit gains

Cites improved theatrical film and TV advertising trends

New York -- Viacom Inc. reported better-than-expected third-quarter profit gains thanks to improved theatrical film and TV advertising trends, as well as cost controls.

On a conference call Tuesday morning, management struck cautiously positive tones about the ad market, saying it strengthened throughout the third quarter and seems on the right track.

"The road to recovery will be a bumpy one," but the U.S. economy is moving into the right direction, said president and CEO Philippe Dauman.

Asked about the current fourth quarter, he said it is still too early to call ad trends despite double-digit price gains in scatter market ads.

He also cautioned that the recovery in some European countries where Viacom has a big presence is still weak.

Dauman and executive chairman Sumner Redstone also lauded a resurgence at the Paramount film unit, which swung to a $69 million profit. "They are on a roll," the latter said.

And Dauman said: "The rationalized slate strategy is clearly paying off."

The CEO touted a further push into animation built around Nickelodeon's animation operations in Burbank and support facilities elsewhere. Viacom is looking to build them "into a production hub for television" and is considering leveraging them for film productions, too, he said.

He didn't pick up on an analyst question whether the animation push could also help Paramount prepare for a possible loss of its distribution relationship with DreamWorks Animation next year.

The entertainment company Tuesday morning posted a quarterly adjusted profit from continuing operations of $421 million, up 24% from the year-ago period. Operating profit rose 14%.

Revenue fell 3% to $3.3 billion with lower home entertainment and advertising sales more than offsetting increases in affiliate sales and theatrical film revenue. Viacom's TV networks unit recorded unchanged revenue, while its film division posted a 6% decline from the year-ago period.

"As we enter a period of economic recovery, Viacom is already beginning to reap the benefits of a highly focused and well executed strategy," said Redstone.

Dauman lauded "a stronger programming slate (that) drove ratings gains at several core networks."
In the film unit, "Transformers: Revenge of the Fallen," which had been released late in the second quarter, and "G.I. Joe: The Rise of Cobra" were key financial drivers in the third quarter, with management predicting strong fourth quarter DVD sales thanks to them. Theatrical revenue overall rose 16%, but home entertainment revenue fell 21%.

In the TV networks unit, U.S. advertising revenue fell 4%, a two percentage point improvement over the second quarter. Worldwide ad revenue declined 5%.

Here some other highlights from the earnings report and call:

* Dauman said premium TV joint venture Epix, in which Lionsgate and MGM are Viacom's partners, is "close to additional distribution announcements."

* Redstone, whose National Amusements recently struck a deal to get rid of its debt burden, said:
"I'm very pleased to get the events of the past year behind me."

* Dauman said "Transformers 2" has become the highest-grossing film in China ever. The film has sold 8.3 million DVDs since its recent U.S. home entertainment launch.

Asked later about how well Viacom can do in China, the CEO said: "We think we can do well in China once China opens up its market as it should."

* Discussing the $60 million acquisition by Nickelodeon of Teenage Mutant Ninja Turtles, Dauman said: "We really like the risk-reward profile." He said additional deals in that vein - low capital outlays with high upside - are possible.

* Viacom reported "strong sales" for the "The Beatles: Rock Band" video game, but said U.S. retail sales remain challenged. Asked if the Rock Band franchise will turn a profit this year, management said it will depend on holiday season sales.