What Better Ad Trends, Higher Sports Costs Mean for Hollywood Earnings Season

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Longer-term, "the bigger question is the trajectory of the pandemic, strength of the U.S. economy and how much improvement will be seen into 2021," says one analyst.

Hollywood's third-quarter earnings season will likely be a case of good news-bad news amid the ongoing coronavirus pandemic, according to Wall Street experts.

TV advertising revenue will again drop compared with the year-ago period, but the decline is projected to be less pronounced than in the second quarter, widely seen as the peak of the ad impact, thanks to the lifting of stay-at-home orders, the return of live sports and a ramp-up in political advertising spending ahead of the elections.

"While linear TV ratings continue to erode and cord-cutting stays elevated despite the return of sports, we anticipate stronger TV ad growth in the third quarter as national advertisers return to the market," MoffettNathanson analyst Michael Nathanson wrote in his earnings preview report on Monday. "Our contacts suggest that TV scatter pricing has especially increased this quarter due to stronger demand but limited supply of available ratings points. The limited supply of linear impressions coupled with strong brand advertiser demand should also benefit leading advertising VOD platforms as marketers look to manufacture the lost reach of those linear networks."

UBS analyst John Hodulik also forecasts "noticeable improvement" in advertising in the third quarter after 25-30 percent national and 30-40 percent local TV declines in the second quarter. Recent commentary from top entertainment executives "have pointed to a strong scatter market, including premium pricing, as some of the ad dollars pulled out of commitments earlier in the year were repurposed during the quarter," he explained in his Oct. 12 earnings season preview.

As a result, Hodulik increased his ad estimates for the quarter in various areas and even projects ad gains at Disney's and Fox's cable networks units. "That said, we still believe overall absolute level of spend is down and look for about 7 percent national and 10 percent local declines, including political," the analyst concluded.

In potential further positive news, Nathanson predicts a bounceback in affiliate fee revenue for the sector overall despite continued cord-cutting. "After hovering around 1 percent growth for three successive quarters, in the second quarter we saw domestic cable network affiliate fee growth turn negative for the first time on record," he explained. "Nevertheless, we expect to see a reversal of trend this quarter, with growth at some cable network operators offsetting declines elsewhere, driving 1 percent year-over-year affiliate fee growth."

However, the return of sports and other content costs is expected to be a hit to earnings. Hodulik predicts "better revenue declines but worsening profitability," explaining: "After significant pressure last quarter, we expect media revenue declines to improve in the third quarter, largely driven by better ad trends, while earnings before interest, taxes, depreciation and amortization declines worsen amid higher sports [and] content costs."

On earnings conference calls, investors will look for management updates and color on their all-important streaming strategies, as well as their longer-term outlook and strategies to recover from the pandemic. Said Hodulik: "The bigger question is the trajectory of the pandemic, strength of the U.S. economy and how much improvement will be seen into 2021."

Here is THR's closer look at the quarterly earnings season calendar and what analysts expect from key Hollywood giants' earnings reports and calls.

Telecom giant and WarnerMedia parent AT&T will once again kick off Hollywood earnings season with its third-quarter report early on Thursday, Oct. 22.

Analysts also expect the coronavirus pandemic to again weigh on WarnerMedia's results after a second-quarter revenue hit of about $1.5 billion. Some forecasts call for the entertainment unit's revenue to drop around 8 percent, with earnings before interest, taxes, depreciation and amortization down 40 percent.

Hodulik expects the entertainment arm's Turner cable networks unit to post an 8.7 percent advertising revenue decline in the latest quarter after a 40.2 percent drop in the previous period. And sports costs will increase amid the return of live sports.

On the earnings call, AT&T CEO John Stankey and his team are likely to discuss how streaming service HBO Max is doing – after saying it attracted 4.1 million overall subscribers after its first month – and get questions about the status of potential asset sales, which the telecom giant has been considering to reduce its $152 billion debt load while confirming its commitment to continued dividend payments.

AT&T recently closed its $1.1 billion sale of a majority stake in Central European Media Enterprises and has also been looking at divesting a stake of slightly more than 50 percent in satellite TV unit DirecTV, among others.

Investors and analysts will also keep their ears open for any commentary on further layoffs at WarnerMedia, which cut hundreds of staffers in August. WarnerMedia is looking for a further restructuring to cut its costs by as much as 20 percent, which could hit thousands of jobs, as the coronavirus pandemic affects the entertainment business, the Wall Street Journal recently reported, citing people familiar with the situation.

A week after AT&T's results, NBCUniversal owner Comcast is on tap for its third-quarter update on Oct. 29.

Hodulik has maintained his forecast for 9 percent advertising revenue declines each at NBC and the firm's cable networks group after second-quarter drops of 34.8 percent and 27.1 percent, respectively.

Cowen's Gregory Williams projects cable networks unit ad revenue to be down 8 percent and distribution revenue to fall 10 percent, while content licensing will be up 12 percent. That will leave EBITDA at the unit down 26 percent, he projects, "as a result of lower revenue growth and a cost increase due to catch-ups on sports rights amortization from the second quarter."

At NBCU's broadcasting unit, Williams expects an ad decline of 9 percent, "offset by distribution growing 7 percent and content licensing growing 55 percent, with EBITDA up 12 percent."

The film unit could post a content licensing revenue gain of around 10 percent for the latest period, but that will be "offset by roughly zero theatrical revenue," predicts Williams. He expects film EBITDA growth of 2 percent "on a total cost decline of 40 percent" due to lower production and marketing spending.

NBCU's hard-hit theme parks, meanwhile, should see a big revenue decline to around $326 million from $1.63 billion in the third quarter of 2019, with an EBITDA loss of $236 million after a year-ago profit of $731 million, according to the analyst.

"Re-opening headwinds offset cyclical tailwinds at NBCU," Morgan Stanley analyst Benjamin Swinburne wrote in his earnings preview. "While sports have returned to NBC and the ad market in the third quarter likely improved markedly from the second quarter, the outlook for film production and distribution and theme park attendance has, if anything, worsened of late due to the pandemic."

Meanwhile, Comcast's cable systems are widely expected to provide some good news and report record quarterly broadband user growth since Comcast chairman and CEO Brian Roberts at an investor conference in September said the firm was trending to add more than 500,000 such subscribers.

On the Comcast earnings call, expect an update on the performance of the Peacock streaming platform, which recently reached more than 15 million sign-ups, potential latest comments from management on Universal's premium VOD and traditional film release strategy, as well as the outlook for theme parks.

"We expect the conversation to be dominated by the outlook given the many headwinds the business will likely continue to face from COVID-19," said Williams. "In NBCU, we expect updates on the broader business as we see incremental risk across all segments."

Fox Corp.
Fox. Corp., led by CEO and executive chairman Lachlan Murdoch and chairman Rupert Murdoch, is up next with its financial report on Nov. 3.

Hodulik now forecasts a 26.6 percent ad revenue decrease at the Fox broadcast network in the latest quarter, better than his previous projection for a 40.2 percent decline. For the company's cable networks, "given strength at Fox News," he now even forecasts a small 0.7 percent ad gain after previously modeling a 3.2 percent decline.

In other positives, strong political ad spending should help Fox's local TV stations to some degree, and retransmission consent revenue will continue to grow, according to analysts.

Cowen analyst Doug Creutz overall forecasts a 6 percent quarterly revenue decline to $2.50 billion at Fox, with operating income before depreciation and amortization (OIBDA) dropping nearly 23 percent to $663 million.

Hodulik now predicts $2.62 billion in quarterly revenue, up from his previous forecast of $2.55 billion, and earnings before interest, taxes, depreciation and amortization (EBITDA) of $826 million, up from $616 million.

Nathanson on Monday raised his quarterly EBITDA forecast "significantly from a 36 percent decline to now 10 percent growth ... given slightly better advertising and much lower programming costs, which partially gets reversed next quarter."

On the call, expect questions on the outlook for TV advertising and sports, as well as the company's digital strategy.

ViacomCBS, led by CEO Bob Bakish, continues the earnings parade for entertainment powerhouses on Nov. 6.

Analysts expect improved cable networks unit affiliate fee trends, with Hodulik predicting a 1 percent decline after a 6 percent drop in the previous period. Lower ad declines, cost cuts – some from the Viacom-CBS recombination – and delayed productions should also help the bottom line, even though analysts still expect it to come in below the year-ago period.

Hodulik now forecasts a 11.6 percent ad revenue decline at the CBS network, better than his previous projection for a 16.2 percent fall and the second-quarter drop of 26.1 percent. For the company's cable networks, his prediction has improved to a 10.4 percent decrease from a 14.0 percent drop, after a second-quarter dip of 20.6 percent.

Overall, that leads the analyst to forecast $1.14 billion in EBITDA for the latest quarter on revenue of $6.12 billion. He said that meant a slight lowering of revenue expectations as lower film and licensing revenue "more than offsets upside to advertising and affiliate." But his EBITDA is up from $956 million previously, "driven by upside to cable network margins."

Creutz predicts ViacomCBS' quarterly revenue will fall 15 percent to $5.73 billion, with adjusted OIBDA down 24 percent to $964 million. He expects the TV Entertainment unit, which includes the CBS network, and film division to record higher profits than in the year-ago period, with the cable networks business to post a lower profit.

Nathanson on Monday "meaningfully" raised his third-quarter estimates for the company "to better reflect the benefit of lower programming, better advertising and affiliate fees, only partially offset by lower content licensing." He projects "improved U.S. declines" in advertising revenue of 8 percent. His quarterly EBITDA now stands at $1.1 billion, down 11 percent from the year-ago period, compared with his previous forecast for a 22 percent drop.

Expect ViacomCBS to again tout its streaming momentum, including at subscription streamer CBS All Access, which it is beefing up and broadening ahead of next year's Paramount Plus rebrand, and advertising-supported Pluto TV. Analysts on the earnings call could also ask for an update on the planned sales of such assets as publishing arm Simon & Schuster and Black Rock, the CBS headquarters in midtown Manhattan.

Walt Disney
Disney and CEO Bob Chapek wrap up the latest quarterly earnings season for Hollywood giants on Nov. 12.

Hodulik forecasts the ABC broadcast network's ad revenue to drop 17.1 percent in the latest quarter, a bigger decline than the 7.9 percent recorded for the previous period. For the company's cable networks, including ESPN, he forecasts a 28.9 percent ad gain though, reversing the previous quarter's 60.8 percent decrease. Cable advertising will "return to growth with [the] NBA playoffs at ESPN," he explained.

The other positive in the quarter will be continued subscriber growth at the Disney+ streaming service. Hodulik expects the company to have reached 66 million Disney+ subscribers at the end of the latest quarter, arguing that gains are "likely less than last quarter given more limited international launches."

On the negative side, theme parks started to open, but the analyst forecasts "limited attendance to drive continued negative profitability." Hodulik also predicts "studio results to be under pressure with theaters closed."

Overall, he lowered his quarterly revenue and earnings estimates for Disney slightly, forecasting revenue of $12.65 billion, an EBITDA loss of $1.06 billion and a loss per share of 94 cents.

Creutz forecasts a revenue drop of nearly 27 percent to $13.97 billion and an operating loss of $714 million, a swing from a year-ago operating profit of $3.45 billion. He predicts that the theme parks and consumer products unit will record the biggest swing from a $1.38 billion profit to a $1.40 billion loss. He also sees the media networks unit profit falling from $1.78 billion to $1.29 billion, and film profit declining from $1.08 billion to $489 million.

On the call, analysts are expected to ask questions about the pandemic's longer-term impact and the reshaping of Disney for the streaming age, including a recent reorganization and a letter from activist investor Dan Loeb.

But Wall Street doesn't expect Disney brass to answer all streaming questions right away given an investor event late in the year. Morgan Stanley analyst Benjamin Swinburne said in a recent report about the streaming reorganization that how it "structurally manifests itself in specific business outcomes and consumer choice will likely be laid out at Disney's upcoming virtual investor day Dec. 10."

One streaming issue many hope to get some color and data on is how Disney’s decision to move Mulan, from a planned theatrical release to Disney+ in the U.S. and other markets amid the coronavirus pandemic has played out.

Stocks outlook

What does all this mean for entertainment sector stocks? Nathanson raised his stock price target on Fox, his only "buy"-rated entertainment giant, by $1 to $37, representing 38 percent upside to the current price. Among his "neutral"-rated stocks, he upped his target for ViacomCBS by $2 to $27.