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Lower Advertising And Higher Programming Costs Weighs Over CBS' Q1 2015 Earnings

CBS Corporation ( CBS ) in the first quarter posted a 2% decline in revenues while the earnings stood at $0.78 per share as compared to $0.77 per share in the prior year period. The company continues to see significant growth in retransmission fees and expects it to surpass $2 billion mark by 2020. CBS had one less Playoff game in Q1 of 2015 and this led to a 5% decline in advertising revenues. The company's management stated that the scatter market is strong and up double digits currently. This is positive for the media industry at large and should aid the advertising for the upcoming 2016-17 television season. However, CBS continues to increase its reliance on more stable sources of income, such as subscription and retransmission fees. The company has so far been successful in doing that and the contribution of non-advertising income to total revenues has increased from 43% in 2009 to a little under 50% in Q1 2015. We believe this trend will continue in the near term as well as in the long run and drive growth for the company.

We estimate revenues of about $14 billion for CBS Corporation in 2015 with EPS of $3.60, which is in line with the market consensus of $3.60 compiled by Thomson Reuters. We currently have a $58 price estimate for CBS Corporation , which we will soon update to incorporate the recent quarterly earnings.

See our complete analysis for CBS

Entertainment Division Sees Lower Revenue Amid A Decline In Advertising

The entertainment division, which includes the CBS Television Network, saw a 2% decline in revenues while segment operating income declined 18% to $346 million, due to higher investment in programming. Lower revenues reflect a 4% drop in advertising income due to one less NFL Playoff game in Q1 2015 as compared to the prior year quarter. We believe CBS will see solid growth in the near term as well as in the long run driven by its programming appeal. Looking at the 2014-15 television season, some of CBS' shows such as Mom are seeing higher ratings. Overall, the network saw a viewership growth of 5% for the season by the end of first quarter and it continues to be the most watched network, averaging 11.3 million viewers nightly. We currently estimate $8.47 billion revenue for the entertainment division in 2015 and an estimated EBITDA margin of 22% will translate into EBITDA of close to $1.87 billion, representing around 45% of the company wide EBITDA.

Stable Top Line At Cable Networks

We estimate that Cable Networks contribute more than 30% to CBS' stock value. The Cable Networks division includes Showtime Networks, CBS Sports and Smithsonian Networks. The segment revenues and operating income were stable at $539 million and $251 million respectively. It must be noted that the prior year quarter included the streaming sale of its popular show Dexter. Showtime networks have been adding more subscribers every year and the subscriber base currently stands at 77 million. Accordingly, cable networks revenues also grew from $1.16 billion in 2007 to $2.18 billion in 2014. The network's compelling original programming including, Dexter and Homeland primarily drove this growth. Moreover, the contracts between media companies and pay-TV operators include pre-defined yearly subscription rate increases and boost the subscription revenue growth. We believe the above factors will continue to drive growth for CBS' cable networks in the near term as well as in the long run. We currently estimate cable networks' revenues to be around $2.30 billion in 2015 and an estimated EBITDA margin of 48% will translate into EBITDA of $1.10 billion, representing more than 25% of the company wide EBITDA.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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