Conglom's operating income flat despite robust revs

NEW YORK — Viacom Inc. reported flat operating income Tuesday for the quarter ended March 31, even though sales of the entertainment giant rose 9.9% to $3 billion.

The company’s Blockbuster subsidiary continued to drag on overall performance by posting a 13% decline in cash flow (earnings before interest, taxes and depreciation), despite a 20% gain in video revenues.

Viacom blamed its video division’s cash-flow slide on beefed up ad expenses and on accounting technicalities caused by the change in the year-earlier quarter to the revenue-sharing model now in place.

Corporate bright spots included a strong performance from MTV Networks, with cash-flow gains of 34%, and a reduction in interest expense of $59.8 million.

The company even took a one-time charge of $23.5 million in the quarter for the early retirement of debt.

Its savings on interest alone, however, more than accounts for the 48% jump Viacom reported for pre-tax earnings from continuing operations.

As for Viacom’s operating income of $277.5 million — up only 1% from the year-earlier quarter — a segment analysis reveals:

  • $172.7 million, representing a 36% increase, came from its networks segment, which includes MTV, VH1, Nickelodeon/Nick at Nite and Showtime;

  • $113.1 million, representing a 11% decrease, came from its entertainment segment, which faced tough comparisons due to “Titanic’s” contribution to the year-earlier quarter; and

  • $50.3 million, representing a 31% decrease, came from its video segment, which nonetheless posted 17% gains in same-store sales worldwide.

Parks, online losses

These three contributions, plus $1.3 million from Viacom’s publishing segment, were offset by operating losses of $16 million in the parks segment and $1 million in its online segment, plus $42.9 million in corporate overhead.

Lehman Bros. analyst Larry Petrella said, with the exception of Blockbuster, the major segments pulled together better than expected.

“While film was down, it wasn’t down as much as I thought,” he said. “And the networks continue to be outstanding.”

Viacom chairman and CEO Sumner M. Redstone had nothing but praise for the networks, as well.

In addition to the double-digit increases at MTV Networks, capped by 28% ad-revenue gains at MTV and VH1, Redstone cited a 44% cash-flow jump at Showtime Networks. He also noted Nickelodeon/Nick at Nite’s continued dominance as cable’s No. 1 net.

Theatrical success

Despite its slide in operating income, Viacom’s entertainment segment showed surprising buoyancy, thanks to theatrical releases “Varsity Blues” and “Payback” and to higher contributions from Paramount’s home-video and pay-television operations.

Explaining segment results in a conference call, Redstone was most vigorous in his defense of Blockbuster Video, most likely because 20% of the 6,500-unit video-rental chain was supposed to have been offered to the public in the quarter just ended.

Now it appears an initial public offering will be lucky to begin in the current quarter.

Analysts have expressed concern that Blockbuster, in sprucing itself up to go public, has been buying market share at the expense of earnings.

‘Significant’ gains

Redstone didn’t take direct issue with this complaint but called Blockbuster’s share gains “significant and sustainable.”

“We’re up double” the 9% growth rate recorded for the industry, he said, and claimed that $4.5 billion in video-rental revenues remained ripe for the taking from “mom and pop businesses.”

Analysts nonetheless fear that delays in a Blockbuster offering could catch up with Viacom, as pay-per-view and video-on-demand from digital cable boxes start eating into the rental market.

While dragging its feet on Blockbuster, Viacom all but promised to exploit the market’s mania for cyber stocks in what Redstone kept calling “the very near future.”

The company’s Internet sites, which provide online music and children’s destinations featuring entertainment, information, community tools and e-commerce, reported that revenues of $4.7 million represented a 114% gain from the year-earlier quarter.

Viacom also owns Red Rocket, an online education toy retailer, and recently acquired Imagine Radio, an Internet radio company that transmits original radio stations with a wide range of formats, as well as Web site developer Nvolve.

“There will be developments,” Redstone said in reference to such properties, “that will enhance and add great value to our online strategy.”

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