Earnings Scorecard: Viacom

Nov.22.10 | About: Viacom Inc. (VIAB)

Viacom Inc. (VIA.B) reported strong financial results for the fourth quarter of fiscal 2010 exceeding the Zacks Consensus Estimate. The company also decided to sell its loss making video game division Harmonix, which developed the Rock Band video game brand to further improve the company’s bottom line going forward. During the previous quarter, this division generated a negative EBITDA of $65 million. Management also decided to reduce headcount by 53 in its Paramount Pictures division. This will save around $10 million per annum.

Fourth Quarter Highlights
Net income from continuing operation was $461 million or 75 cents per share compared with a net income of $432 million or 71 cents per share in the prior-year quarter. Quarterly adjusted EPS of 75 cents was well above the Zacks Consensus Estimate of 69 cents.

Total revenue was $3,330 million, up 5% year over year. This was also better than the Zacks Consensus Estimate of $3,302 million. Top-line growth of Viacom was primarily due to revenue growth of both Media Networks and Filmed Entertainment segments.

Adjusted operating income was $837 million, up 4% year over year. Results were driven by the solid performance of the Media Networks segment reflecting higher advertising and affiliate fee revenue partially offset by higher programming costs.

Agreements of Analysts
Of the 10 analysts covering the stock in the last 30 days, only 1 analyst revised its estimate downward for the ensuing first quarter of fiscal 2011, while none revised their estimates upward. For the second quarter of fiscal 2011, out of 10 analysts covering the stock, 1 analyst revised its estimate upward, while the remaining moved in the opposite direction.

For fiscal 2011, 3 out of 18 analysts revised their estimates upward, while only 1 analyst revised its estimate downward. For fiscal 2012, 1 out of 9 analysts revised its estimate upward, while none moved in the opposite direction.

We believe the positive sentiment mainly comes from higher advertising revenue and affiliate fees. Several enterprises are raising their advertisement budgets. This, in turn, is benefiting the media industry and Viacom is no exception. With respect to its several cable TV channels, Viacom enjoys a strong brand value. The company is generating solid revenue from the affiliate fees that it charges cable TV operators for running/operating its channels.

Worldwide advertising revenue was $1.17 billion, up 7% year over year. Strong viewership rating for the company’s cable channels resulted in higher advertising revenue, which is likely to continue in the near term.

During the fourth quarter of fiscal 2010, Viacom’s pay-TV channel Epix entered into an agreement with Netflix Inc. (NFLX). As per the agreement, Netflix agreed to pay $900 million for online streaming rights of Epix’s more than 3,000 films for a period of over five years. Recently, Paramount Picture, a division of Viacom, also entered into an agreement with Walt Disney Co. (DIS) through which Walt Disney will pay atleast $115 million to Paramount for distribution rights of Iron Man 3 and Avengers. These deals are expected to make Viacom profitable in the long run.

Magnitude of Estimate Revisions

Despite the positive estimate revision trend, the Zacks Consensus Estimate inched down by 1 cent to $1.05 from $1.06 in the last 30 days, for the ensuing first quarter fiscal 2011. However, for the fiscal 2011 the Zacks Consensus Estimate increased by 3 cents to $3.18 from $3.15. Similarly for fiscal 2012, the Zacks Consensus Estimate accelerated 6 cents to $3.63 in the last 30 days from $3.57.

Our Recommendation
Viacom benefits from a well-balanced asset mix with entertainment content at its core. The company enhanced its brands worldwide through the creation and acquisition of hit programming, new channels, successful motion pictures and other forms of entertainment, including video game offerings. An improving economic outlook, together with Viacom’s disciplined management team continue to make us optimistic about the company’s future growth prospects.

We believe an improving U.S. economy and strong rating for the cable TV channels will enable Viacom to maintain profitability in the long run. Prudent cost control in the Paramount Pictures reduces its operating losses. On the other side, Paramount Pictures continues to face sales decline primarily due to a massive drop in DVD sales.

We thus maintain our long-term Neutral recommendation for Viacom. Currently, it has a short-term Zacks #3 Rank (Hold) on the stock.