Investors already know each company’s particular problems — and they’re more interested in what CEOs will forecast for 2013 — Wells Fargo Securities’ Marci Ryvicker says this morning as she lowered her Q4 earnings estimates for CBS, News Corp, and Viacom. “Our gut tells us that investors are already looking past the quarter, and hoping to invest in those companies most likely to show sequential improvement throughout” the year, she says. She identifies two subjects that are foremost on buyers’ minds ahead of the rash of reports due in early February: First, people will be listening for ad pacing data from Time Warner and CBS. The broadcaster’s super salesman CEO Les Moonves “will have the most positive commentary here given [its plans to air] The Grammys, AFC Championship, Super Bowl, and NCAA — but this seems to be expected,” she says. In addition, investors want to hear execs talk about how rising programming costs for sports and original programming will affect profits. They’ll be especially attentive to Disney “given the bump in costs from the NFL, college football, and the NBA” at ESPN, and News Corp in light of its “potential national sports network and other networks that we have read about in the trades.” READ MORE »
Bernstein Research’s Todd Juenger raises that possibility this morning as he and other analysts tweak their forecasts (mostly down) ahead of the barrage of Big Media reports due to be released beginning next week. The strategy — which companies virtually never acknowledge publicly — is called a “kitchen sink” because execs find creative ways to load every cost they can find in to a quarter that they figure investors are going to ignore. (In other words, they throw everything in but the kitchen sink.) That sets a low bar later on when they want to show how much things have improved. You often see companies kitchen sink earnings when a new CEO steps in. But it can also happen in a quarter like Q3: Execs have said that results could be strange. Expectations “are very low, as the Olympics stole an avalanche of ratings points and advertising dollars,” Juenger says. Investors also are unusually tolerant of Big Media companies these days. They’re seen as safe havens since they make most of their profits from cable networks — still a solid, growing business — and aren’t heavily exposed to the shaky economies in Europe and elsewhere. It’s dangerous, though, for companies to go with a kitchen sink strategy. If they don’t improve then they “will start to lose credibility in claiming that Q3 was an aberration.”
That word — “uninspiring” — is how Wells Fargo’s Marci Ryvicker characterizes the likely results from Q3 financial reports due at the end of October and beginning of November as she joined the ranks of analysts warning …
Nomura Equity Research’s Michael Nathanson underscored his concern about the upcoming earnings reports by cutting his Q3 estimates across the board this morning. He dropped CBS by 5.2% (to 60 cents in Q3 earnings per share), News Corp by 4.6% (to 40 cents), Disney by 4.5% (to 69 cents), Discovery by 3.2% (to 63 cents) Scripps Networks by 2.7% (to 77 cents), Viacom by 1.3% (to $1.16) and Time Warner by 1% (to 81 cents). Nathanson notes that “we did not get much of an update” from media execs when they were asked at recent investor conferences about the state of the ad market. The analyst projects that the companies collectively will show a 1.1% drop in ad sales in Q3, due in part to disruptions from the Olympics and later-than-expected purchases by political campaigns. While everyone expects sales to improve, Nathanson says that “recent trends don’t give much hope for 4Q upside ad surprises.” He’s also concerned about trends in broadcast TV ratings: The major networks were down in 35 out of 49 non-Olympics weeks in the season that just ended and “broadcast trends in 3Q have been disappointing.” He also lowered film studio estimates for Time Warner, Disney, and CBS — leaving News Corp and Viacom unchanged — saying that “fewer releases for some in the quarter actually help the bottom line.”
There’s a little hyperbole in Nomura Securities analyst Michael Nathanson’s observation that the Q2 Big Media earnings season that wrapped up last week was “one of the most unusual periods [for the industry] in recent memory.” But he’s basically on target. Most companies had something worrisome to report — including softer than expected Q2 revenues, and likely weakness in the Q3 ad market. Even so, media stocks are up, in some cases substantially: Over the last 30 days the Dow Jones Media Index is +7.8% while the benchmark Standard & Poor’s 500 is +4.6%. CBS is the stand out, +14.7%. “Strangely enough, the market didn’t seem to care that much about the specifics,” says Bernstein Research’s Todd Juenger. “In general, media stocks are all in favor, each with its own story.”
What accounts for the euphoria? The most common explanation is that Big Media looks like a safe haven in a weak economy, especially in comparison to other sellers of consumer discretionary items (think Coach, Starbucks, or Best Buy). Giants including Disney, Discovery, News Corp, Time Warner, Viacom, and NBCUniversal make most of their profits from cable networks — and that business has a safety net: Channels still have enough muscle to negotiate guaranteed price hikes from pay TV distributors. For example, Disney’s cable channels are seeing “tremendous price growth,” CEO Bob Iger says. News Corp COO Chase Carey says his networks “have continued to achieve or exceed our targets.” And Discovery CEO David Zaslav says his execs will “be pushing hard to make sure that we get fair value” in carriage deals. CBS chief Les Moonves also crowed about the retransmission consent payments flowing to his broadcast stations. He’s “confident there is significant upside” because “each new deal means increased fees.”
Viacom illustrates the importance of these bullish cable network forecasts. Even though it arguably reported the industry’s most disappointing Q2 revenue and earnings results, the stock is up 8.2% since the announcement. That’s due in part to CEO Philippe Dauman’s claim that Viacom won a substantial price hike from its recent battle with DirecTV. “The battle he conducted against DirecTV was spectacular,” Chairman Sumner Redstone says. “Philippe has the same passion to win that I’ve always had.” But DirecTV CEO Michael White says programmers demanding these big increases celebrate Pyrrhic victories. “The customer at the end of the day is the one getting squeezed and bearing the brunt of these exorbitant price increase demands that are just not sustainable,” he says.
Big Media companies in the Q1 earnings season that wrapped this week reminded me of Garrison Keilor’s description of the kids in Lake Woebegon: Virtually everybody was above average, at least when measured against analysts’ expectations. Media stocks began to trade ahead of the overall market as Q1 reports spread their cheery results. But CEO presentations to analysts left me thinking that companies simply had a good quarter. With just a few exceptions — Dish Network’s Charlie Ergen comes to mind — they seemed as complacent as ever about the need for bold initiatives to reinvigorate their maturing businesses. Movie theaters still aren’t addressing the long-term declines in ticket sales. Studios still don’t know what to do about their evaporating DVD sales. Networks appear flummoxed by the general decline in their ratings. And most pay TV distributors can’t imagine anything besides marketing gimmicks that might enable them to proactively boost subscriptions. In order to beat the Street’s earnings expectations, several companies relied on unsustainable gambits. They cut costs, raised prices, and enjoyed the fruits of conveniently timed licensing deals with digital streaming services including Netflix and Amazon. It sounded like they’re hoping that they can keep coming up with new tricks, and that they’ll be bailed out by continuing growth in the overall economy, which remains vulnerable to shocks including a possible worsening of the European debt crisis.
By the end of this week we’ll know how nearly all of the Big Media companies performed in Q4. But Nomura Securities’ Michael Nathanson already has some qualms about the industry based on the ones that have reported so far –Disney, News Corp., Scripps Networks, Time Warner, and Viacom — even though most exceeded the Street’s profit expectations. Some of the good news came from filmed entertainment profits. Nathanson doesn’t like to base his forecasts on movie and TV shows, though, because there are too many quirks in Hollywood accounting. “After backing out the ever-volatile film business,” he says, “results were less inspiring.” The companies beat forecasts because they “did a remarkable (and unsustainable) job in reining in operating expenses” especially at their biggest profit drivers: pay TV networks. The problem is that some costs were held down by developments largely outside of the companies’ control. For example, the NBA work stoppage
YEARENDER: Wall Street throughout 2011 became starry eyed when they talked about tech stocks. But they still had a soft spot in their hearts for traditional media companies all year long. Five of the seven companies in the Big Media group beat the Dow Jones Industrial Average’s 5.5% increase (through December 30th) — four of them by a lot. And they weren’t outliers: The Standard & Poor’s broadcasting index was +15.2% while the S&P movies and entertainment index was +10.2%. Many of the stocks were bolstered by the industry-wide improvement in ad sales. In addition, there was a general sense of relief — perhaps a pipe dream — that digital companies don’t yet pose a clear and present danger to the way traditional movie and TV companies do business. We’ll see how long that lasts.
Here’s how each of the Big Media companies fared in 2011, in order of how well the stock performed. Next to the company name is the percentage increase or decrease in the stock price this year as well as the price-earnings ratio (the stock price divided by the expected earnings per share) which is a rough measure to compare how cheap or expensive the stock is compared to its industry peers.
CBS (Stock: +41.3%, PE: 15.4) Once it became clear that U.S. advertising would continue to recover, investors started to pay attention to CEO Les Moonves’ sales pitch to bet on old-fashioned network TV shows. He held the line on costs while CBS cranked out dependably popular, easy to syndicate procedural dramas including CSI, NCIS, The Good Wife, and Hawaii Five-0. Meanwhile Moonves beefed up CBS’ revenues by striking deals to license series to digital streaming companies including Netflix and Amazon. He also continued to play hardball to collect retransmission consent fees from pay TV providers, and reverse compensation from CBS affiliates. Moonves became cocky during the upfront ad sales season, asking for an unheard of 18% price hike before settling for a highly respectable 14%. That sets CBS up nicely for 2012 when it will benefit from the influx of political ads, and the growing popularity of original shows on Showtime. It also enabled the company to raise its share repurchase effort by $1.5B. But the economy remains a concern. And Moonves will have to show investors that he can tap other revenue sources to keep CBS growing in 2013. Consensus estimated 2011 Earnings Per Share (EPS): $1.90, +82.7%.
News Corp (Stock:+19.9%, PE: 15.9) Investors strangely either dismissed the UK phone hacking scandal as a minor event at the global infotainment colossus, or a positive. They didn’t mind Rupert Murdoch’s decision to abandon his $12.6B effort to buy the 61% stake in BSkyB that News Corp doesn’t already own. Those who initially liked the transaction said it would use up cash and stop Murdoch from overpaying for less promising acquisitions the way he did with Dow Jones, MySpace, and his daughter Elisabeth’s Shine Group TV production company. Now they could count on the scandal to keep Murdoch sidelined while he closed News Of The World, sold MySpace, and agreed to $5B in share repurchases. Once freed of their concerns about Murdoch, investors focused on the company’s strong fundamentals. The cable networks, its biggest profit driver, led the way. Ad sales were up, and they benefited from the company’s big – executives said overdue — increases in pay TV fees for channels led by FX, Fox News, and regional sports services. Like with CBS, the Fox broadcast network saw additional revenues from retransmission consent and digital syndication deals. Although the movie studio didn’t have a megahit like Avatar, which helped the 2010 results, it more than held its own with solid results from Rise Of The Planet Of The Apes, X-Men: First Class, and Alvin And The Chipmunks: Chipwrecked. Estimated EPS (Fiscal year ending in June 2012): $1.38, +16.9%
Viacom (Stock: +13.8%, PE: 12.7) Viacom’s shares probably would have closed the year much higher if it weren’t for the startling, and still perplexing, recent decline in Nickelodeon’s ratings. The drop in its live plus same-day audience accelerated from -5.4% in 3Q to -15.7% in October and -18.1% in November. CEO Philippe Dauman called the Nick situation a “blip,” touted the channel’s new programming plans, and questioned Nielsen’s measurements. He also announced in November an eye-popping increase in Viacom’s share repurchase authorization to $10B from $4B. Investors still want proof that Nick and other Viacom networks aren’t running out of gas. That said, they liked a lot of other things that they heard from the company in 2011 including its strong upfront ad sales and new digital syndication deals. Movie service Epix became profitable. Paramount also had a great year at the box office with releases including Transformers: Dark Side Of The Moon, Thor, and Captain America: The First Avenger. Viacom probably will have to settle for less in 2012 as the Marvel titles shift to Disney. EPS (FY ended in September) $3.78, +25.2%.
Big Media 3Q Corporate Earnings Roundup: Are CEOs Really Worried About Recession? Or Just Looking For Convenient Excuse?
Three months ago, when Big Media CEOs wrapped up their 2Q earnings, they were still relentlessly upbeat about the business. Any worries about the economy? Not then. But the messages they delivered over the past few weeks, as they discussed 3Q, were different. Although they’re still optimistic — remember, they’re paid to be salesmen — now and then you could hear expressions of concern about where things are headed. It stood out when Viacom CEO Philippe Dauman noted that “ad sales growth will face some headwinds.” Other CEOs who are known for speaking bluntly warned that other shocks may bedevil the business. For example, Dish Network Chairman Charlie Ergen said that his satellite company — and others in pay TV — have to fight harder against rising programming costs because “there’s a limit to the price increases that could be passed on to consumers.” Time Warner Cable CEO Glenn Britt warned that premium channels such as HBO, Showtime and Starz “are clearly impacted by the economy as consumers try to cut back.” Either they’re genuinely worried, or they want a scapegoat to blame for things that are going bad, or may soon do so. Whatever the case, we can expect to hear a lot more about the economy when it’s time for the post-mortem on the all-important 4Q earnings.
As for industry performance matters, parents of movie studios had their usual mixed results to brag about or explain away: Time Warner benefitted from Harry Potter And The Deathly Hallows Part 2. Viacom was up on Transformers: Dark Of The Moon. And News Corp beat its chest about Rise Of The Planet Of The Apes and X-Men: First Class. But Disney’s Cars 2 was no match for last year’s Toy Story 3. Comcast’s Universal Pictures had nothing to compare to last year’s Despicable Me. Lionsgate suffered from Conan The Barbarian and Warrior. And DreamWorks Animation’s Kung Fu Panda 2 didn’t contribute as much in the quarter as Shrek Forever After did in the same period last year.
Over at the TV networks, Comcast’s NBC underperformed the Street’s already modest expectations. Execs at almost all the companies were eager to talk about the cash they expect to collect soon from political ads — as well as their favorite new ATM machines: retransmission consent deals and digital streamers including Amazon, Hulu, and Netflix. Speaking of Netflix, CEO Reed Hastings once again tried to reassure investors that he’s focused on “building back our reputation and brand strength” after his decision in July to slap a 60% price increase on customers who wanted to continue to rent DVDs and stream videos. In 3Q Netflix lost 57.7% of its market value and 800,000 subscribers. And since that customer loss was bigger than projected, Netflix shares continued to fall — they’re now down 67.3% since July 1.
Here are some other themes from the latest earnings reports:
Ad sales: They’s good, but for how long? Most television networks report that scatter prices are comfortably above the upfront market from this past summer. CBS chief Les Moonves says prices in 4Q are up by “mid-teens” on a percentage basis, while Discovery says it sees least high single digit percentages. But Disney’s Bob Iger noted that scatter prices have “slowed slightly these last few weeks.” Kurt Hall of National CineMedia — the leading seller of ads in movie theaters — was far more direct when he spoke to analysts after ratcheting down his company’s financial forecasts. “I’m sure that the broadcast and cable guys are sitting there now counting their lucky stars they got their upfront done before August,” he told analysts. “There’s a lot of uncertainty.”
Now that Big Media’s 2Q earnings season is over, the big question on Wall Street is: Did it give us any insight into the future? CEOs’ cheery talk about strong ad sales in TV’s upfront market, the expected bump next year from political ads, and the revenues coming in from online streaming services may be irrelevant if the economy sinks into a deep, new recession. CEOs say they see no evidence of trouble yet. The industry’s leading cheerleader, CBS chief Les Moonves, channeled his inner Buzz Lightyear last week saying that he has “every reason to believe that we will deliver strong results throughout the rest of the year, into 2012 and beyond.” Investors still sliced 6.3% off of CBS’ market value. The Dow Jones U.S. Media Index is down about 16% in the last month as traders anticipate cuts in ad spending, ticket buying, subscriptions — the works. If the pessimists are right, then the race is on: Which company will be the first to change its message from “people will buy media because they have cash” to “people will buy media because it helps them to forget their problems”?
Here are other themes from the latest earnings reports:
Jobs: Media companies still aren’t hiring. No one said that so baldly, but it’s there between the lines: CEOs talked more about financial engineering – cutting costs and returning cash to shareholders – than about spending to become more competitive. Time Warner recorded $24M in layoff-related expenses, quadruple the amount from the same quarter last year, while Viacom spent $14M, up from zero last year. Yet virtually every media company is repurchasing shares or increasing its dividend. The message? CEOs can’t persuade investors that the companies know how to make a decent profit from their cash, and shareholders want it back.
Pay TV: This was “the weakest (quarter) in the industry’s history,” says Bernstein Research’s Craig Moffett. Analysts were startled to see the largest cable, satellite, and telco companies collectively lose about 195,000 video customers. The cord cutters don’t fit the stereotype of well-to-do technophiles. Moffett says that “all the evidence” shows that a growing number of people – especially young adults — simply can’t afford pay TV. Dish Network seemed to confirm that thesis by saying that it will shift its marketing focus to upscale consumers instead of bargain hunters. With the U.S. market stalled, it’s easy to see why cable programmers want investors to look at their expansion efforts in growing markets overseas such as India, Russia, China, and Brazil. “It is the current momentum and potential of our international assets that present a meaningful, unique opportunity for us,” Discovery Communications CEO David Zaslav told analysts.
UPDATE: The Walt Disney Co was the last major studio and network to report quarterly earnings, and its fiscal 3rd quarter profit rose 40% on the strong box office grosses from Pixar’s Toy Story 3, Marvel’s Iron Man 2, and Tim Burton’s Alice In Wonderland 3D. As promised, here is an earnings roundup showing that Big Media is alive and well and even flourishing not just this quarter but in many cases for next quarter or even the entire year. Yet the trickle down effect has been slow or nonexistent for Hollywood. After rounds of layoffs during the economic crisis, the moguls are still slow to put people back to work. And the movie and TV community still is underemployed. But what everyone can count on is that Big Media’s good news for the benefit of Wall Street will turn into bad news to the detriment of talent, behind-the-camera, post-production, and below-the-line unions when it’s time to negotiate:
August 5th: Viacom Inc Reports Sharply Higher Earnings For Q2
Credit the rebounding economy and recovering advertising market. Net earnings rose to $420 million, or 69 cents a share, up 52% from $277 million, or 46 cents a share, a year ago. Executive Chairman Sumner Redstone gushed, ”With six months under our belt in this calendar year, day after day our confidence continues to grow as the emerging economy recovery builds. Now of course we’re not all the way back, but the light is brighter than it’s been for some time… Consumers are returning to the marketplace, marketers are beginning to spend again to grow revenues and capture share and Viacom is now and will continue to benefit.” Revenue at Viacom’s media networks group rose 6% to $2.1 billion.
Viacom CEO Philippe Dauman said ad revenue growth has been improving quarter by quarter. “Once we get into October and into the December quarter, we will benefit from this upfront where we have greater volume than last year at higher pricing. Dauman singled out Jersey Shore as a show where ”we have advertisers scrambling to get on it. We have advertisers who want to be wall to wall in particular episode. We’re turning them away.” Viacom’s movie business was down 10% to 41.25 billion, led by a 43% drop in home entertainment revenue. Also, Paramount Pictures has primarily been distributing others’ films like Iron Man 2 and Shrek Forever After in 2010 and self-financing its own pics. It is deliberately pursuing a strategy of a smaller slate of films in 2010-2011. Still, the film unit booked income of $69 million, reversing an $8 million loss in the same quarter a year ago. Viacom continued to post equity losses from its EPIX joint venture but said it should approach break-even by the end of the year.
August 4th: News Corp Posts Improved 4th Quarterly Results
News Corp posted a profit of $875 million, or 33 cents a share, for its fiscal 4Q ended June 30th easily beating analysts expectations. That compared with a loss of $203 million, or 8 cents a share, a year ago, when News Corp took an impairment charge. Revenue grew 6% to $8.11 billion, as companies spent more to advertise on the company’s television stations, TV channels and newspapers. That beat the average forecast of analysts of $8.05 billion. COO Chase Carey explained that brisk sales of advertising at Fox Broadcasting and the company’s cable television networks made the difference, while ad rates at the Fox network are up by a double-digit percentage from this spring. Ad rates are even better at the cable channels, which already represent more than 50% of the company’s profits. Local television station advertising revenues improved 29% in the quarter and 8% for the year compared to the same periods a year ago, reflecting strength in the automobile and telecom sectors.