Viacom's Third Quarter Profits Drop Due To Slower Advertising Growth

Viacom ( VIA ) recently reported its earnings for fiscal Q3 2014. (Fiscal years end with September). The company's revenues declined 7% to $3.42 billion, primarily due to lower filmed entertainment revenues. And in tandem, profits declined to $610 million as compared to $643 million in the prior year period. Adjusted earnings per share rose 10% to $1.42, however. Viacom's media networks saw 1% revenue growth but operating income declined by 3%. Media networks continued to see revenue growth driven by higher ratings at SPIKE and VH1. However, this led to only a 2% growth in advertising income.

The results came in on expected lines on the filmed entertainment front, due to absence of any big movie titles during the quarter. While Transformers: Age of Extinction was released in last week of June, the benefits of the same will be visible only in the next quarter.

Going forward, we expect the media networks to perform well as Viacom continues to add new programming and build on existing shows, especially at Nickelodeon and MTV. The filmed entertainment segment is poised to see a spectacular September quarter driven by the success of the recent Transformers movie.

We currently have $87 price estimate for Viacom, which we will soon update based on the recent earnings announcement.

See our complete analysis for Viacom

Media Networks Continue To Grow

We estimate that media networks contribute close to 90% to Viacom's value. The company's media networks include Nickelodeon, MTV, VH1, SPIKE and Comedy Central, among others. The segment revenues increased 1% to $2.59 billion led by a slight increase in advertising revenue, which grew 2% to $1.25 billion. If we break up advertising, domestic revenues were up 1% and international revenues increased 20%, reflecting the benefits from new channels and continued European market improvements. However, international affiliate revenue declined by 5% due to the timing of product available under certain distribution agreements. The segment adjusted operating income declined by 3% due to an increase in programming expenses during the quarter. For the full year, the company expects programming expense to grow in the mid- to high single digits.

Nickelodeon's ratings continued to grow in the second quarter and the network ranked No.1 (basic cable) in total day with kids 2-11, driven by its hit series SpongeBob SquarePants and also Paw Patrol. Both scored higher ratings in their target demographics. The network continues to bring in new programming and will launch 9 new shows by the first quarter of calendar 2015. Going forward, we expect continued growth at the media networks primarily on higher ratings, evident from the recent performance of some of its networks. Accordingly, we estimate media networks revenues will grow to a little under $10 billion for the calendar year 2014.

A Muted Quarter At The Filmed Entertainment Division

The company's filmed entertainment division witnessed a 26% decline in revenues during the June quarter due to lower theatrical revenues, which were down 43% as compared to the prior year period. In Q2 2013, the company benefited from the success of Star Trek Into Darkness. Paramount Pictures launched Transformers: Age of Extinction towards end of June and the movie has been very successful at the worldwide box-office. The movie was made with a production budget of $210 million and it has so far grossed more than $1 billion at the box-office. We believe that Viacom's filmed entertainment division will see a fantastic run in the September quarter driven by the success of its latest Transformers movie and also the recent release of Teenage Mutant Ninja Turtles and Hercules.

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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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