Vital Viacom touts big revs, profits

Company meets targets; sees sour notes with radio, Par

This article was updated at 9:37 p.m..

NEW YORK — There’s little doubt about who’s got media bragging rights on Wall Street these days, as Viacom on Tuesday offered up an enviable platter of revenue and profit growth figures, ample cash flow and a tidy acquisition to widen its already impressive cable programming footprint.

Viacom again proved the power of its operating leverage, turning modest single-digit (7%) revenue growth into solid double-digit (23%) earnings growth.

The company handily met its sales, profit and operating margin targets for the quarter, with the only sour note on its sluggish radio sector and a less-than-stellar first quarter box office outing at Paramount.

Meanwhile, 80%-owned Blockbuster Video turned in blockbuster results, pumping up revenues by more than 14% and posting a record first-quarter profit of $80.5 million.

Viacom’s quarterly net income clocked in at $443 million on revenues of $6.05 billion. A year ago Viacom reported a loss of $1.11 billion on revenues of $5.67 billion.

Sitting pretty

Touting “outstanding results for the quarter and a terrific start for the year,” chairman Sumner Redstone said Viacom continues to outperform the sector and generate free cash flow ($592 million in the last quarter alone), giving it an “extraordinary opportunity” to expand its business.

Trumpeting the conglom’s bullish first quarter 2003 results, Redstone also stole a bit of AOL Time Warner’s thunder when he confirmed that Viacom will pay $1.225 billion in cash to take full control of 82 million-sub Comedy Central. The deal, he said, will drop profit to the bottom line in its first year.

Clearly AOL Time Warner’s loss of the cabler — notwithstanding the opportunity to reduce AOL’s yawning debt load — is Viacom’s long-term gain.

While Viacom chief operating officer Mel Karmazin would not elaborate on specific cost savings that will come from bringing Comedy Central fully into the 14-channel MTV Networks fold, the implication is that combined affiliate and ad sales forces and leverage opportunities will be worth a bundle in revenues and savings.

Healthy sale price

Comedy Central last year generated roughly $230 million in advertising, while analysts reckon it throws off operating cash flow of about $80 million annually. That would put the sale price at a healthy premium relative to other cable nets traded in the past year.

But Comedy Central’s youthful male demo is highly compatible with its MTV brethren. The network averages a .4 primetime 18-49 rating. Overall, Viacom’s cable nets currently claim around 20% of aggregate audience share among adults. The addition of Comedy Central will give Viacom 62% reach of 18-45 year olds.

Despite a difficult economy that should logically have ravaged Viacom’s heavily ad-dependent businesses, a mix of good timing, tax treatments and stalwart ratings made management’s Q1 seem like a walk in the park.

Money to play with

Unlike several fellow media congloms, Viacom has ample free cash to play with for acquisitions, a modest and reasonably inexpensive debt load and the luxury to entertain further stock buy-backs to boost its shares.

“Viacom is the hands-down leader in our industry and on the U.S. corporate landscape,” Redstone said, noting that it is the only media company ranked among the U.S.’ top firms by market capitalization.

Karmazin said he was confident of a strong upfront ad sales season next month, thanks to strong CBS demos, tight inventory and high scatter pricing. He said scatter pricing is up 30%-40% in the 2nd quarter, with low cancellation rates.

“Some agencies posture for upfront,” Karmazin said, noting advertisers’ efforts to minimize CPM increases, “but there’s amazing demand for any inventory we might be able to pick up,” should any advertisers cancel.

Management’s characteristically upbeat call with analysts following the Tuesday morning earnings release gave investors good reason to believe Karmazin’s claim that “everything is principally back to normal,” after the Iraq war. Local and national advertising is strong and company said its cable nets lost only $2 million in revenue due to ad pullouts.

Division performances

Here’s how the different divisions performed:

  • Fittingly, Viacom’s Cable Networks unit led first quarter growth, with operating income up 21%. Cable Networks revenues topped $1.16 billion for the quarter with operating income of $432 million, while broadcast network and stations tallied sales up only 4% over last year to $1.92 billion with operating income of $242 million.

    The cable nets also improved their cash flow margins by another 2% to 41% thanks to a big jump in ad revenues at MTV Networks and BET. n?CBS and UPN ad sales combined reported revenues up 3% over last year, with 17% increases in primetime partly offset by lower sports revenues, principally due to sluggish NCAA basketball viewing.

    The war is believed to have cost CBS $20 to $30 million due to make-goods on the basketball tournament. The company said syndication revenues were off slightly last quarter compared to last year, despite big sales of “Dr. Phil,” which couldn’t compete with last year’s library sales of “Happy Days” and “The Andy Griffith Show.”

  • The Entertainment sector, which includes Paramount Pictures and Parks, Simon & Schuster and Famous Players, reported revenues up 3% for the quarter to $798 million, though operating income fell nearly 50% to $22 million. The company attributed the decline to the fact that it released only three titles in the first quarter compared to four last year, three of which were lower-cost MTV titles.

  • Revenues at vid retailer Blockbuster totaled $1.52 billion for the quarter, up 14.5% over the same period last year, with operating income up a hefty 25% to $149 million, thanks to a strong Q1 film slate and the absence of the Winter Olympics. DVD sales doubled from a year ago.

  • Radio was the only real sore point for Viacom, and Karmazin was unusually aggressive in placing the blame for the 2% falloff in radio revenues squarely on his ad sales team, rather than as a function of the industry or any war-related impact.

    “There’s no reason other than reasons related to our sales organization,” Karmazin said.

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