Blockbuster drags down Viacom qtr.

NEW YORK — A hefty $323 million writeoff at Blockbuster pushed its parent company, Viacom Inc., into a $210 million loss for the second quarter, it said Tuesday, compared with a $26 million profit a year earlier.

Viacom had warned of the write-off last month, which covered the costs of closing certain international stores and losses on excess retail stock. At the same time Viacom had revealed that the video chain’s second-quarter earnings would collapse.

And the conglomerate kept its word, reporting that excluding the impact of the writeoff, Blockbuster’s operating profit plunged 68% to $45.9 million as a result of lower profit margins on video sell-through business, costs of its new distribution system and rental tape writeoff costs.

Aside from the besieged video chain, Viacom’s results were mixed. MTV Networks (including MTV, Nickelodeon, Showtime and Viacom’s TV stations) once again led the way with earnings growth, posting 19% higher cash flow (earnings before interest, taxes, amortization and depreciation) of $200.1 million on 11% higher revenue of $625.5 million. The growth was largely due to very strong advertising sales at MTV, although the Showtime Network helped out with a 63% increase in cash flow.

But the entertainment division, primarily Paramount Pictures, suffered a 17% decline in cash flow of $94.9 million on 14% higher revenue of $862 million. Viacom blamed the decline on “a change in Paramount’s television product mix” as well as the difficulty of competing with the performance of Paramount’s “Mission: Impossible” last year.

Simon & Schuster managed to squeeze 6% higher cash flow of $55.9 million in what has been a tough publishing environment.

Viacom’s total cash flow fell 73% to $127 million on 8% higher revenue of $3.03 billion. Excluding the impact of the writeoff, cash flow fell 21% to $374 million.

The earnings result was largely in line with Wall Street expectations, analysts said, and Viacom stock closed up 19¢ to $30.50. “The numbers were on target,” said Merrill Lynch analyst Jessica Reif.

Biggest issue

How quickly Viacom can turn around Blockbuster remains the biggest issue for the entertainment conglomerate and was the subject of much of a conference call held by Viacom chairman Sumner Redstone with Wall Street analysts Tuesday, according to those on the call.

Redstone revealed on the call that a Blockbuster stock offering, which was planned for early next year, is on hold at least until the video chain starts showing earnings growth.

In a statement, Redstone said the new management team at Blockbuster led by new CEO John Antioco “is putting operational and marketing initiatives in place that are designed to refocus on the video rental business and grow market share. Accordingly, we are optimistic that Blockbuster will enter a period of renewed growth next year.”

But analysts said Redstone and other Viacom execs were notably more cautious in their predictions on the call. Redstone said that while Blockbuster’s revenue decline has flattened out in recent weeks, he was sticking with projections that the full year will show a 4% drop in revenue adjusted for store openings. This assumption underlay Viacom’s prediction last month that full-year cash flow would be $400 million to $500 million.

Redstone revealed on the call that Blockbuster’s store-building program is slowing down. After opening 500 stores in the first half of the year, another 100 to 150 stores will open by the end of September and no stores will be opened in the fourth quarter.

The program of new store openings is under review, Redstone said, and decisions about how many stores will be opened next year have not been made.

“They have really identified some of the problems and the rest of the business is reasonably solid and secure. But (Blockbuster) is draining their time and attention and I think it’s a major distraction,” said Cowen & Co. analyst Harold Vogel.

Vogel added that whatever Viacom does to fix Blockbuster’s short-term problems, “it doesn’t address the long-term issue, which is a change in technology and shift in consumer preferences (away from video).”

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