Viacom spins record Q3

Co. sees gains from cable, network TV

NEW YORK — A sharp drop in profits at its studio division, along with sluggish radio and outdoor results, didn’t stop Viacom from reporting a “record third quarter” Thursday.

Healthy gains from its cable and network TV businesses and a $40 million insurance payment to cover 9/11 losses contributed to a record third-quarter operating profit, the company said.

Viacom reported total revenues up a modest 5% to $6.6 billion for the three months ended Sept. 30, compared with the same period last year, on an 8% bump in total ad sales. Operating income rose 7% to $1.38 billion with net earnings of $700 million, a 9% gain over last year’s third quarter.

Profits at the filmed entertainment group (Paramount Pictures and Parks, Simon & Schuster and Famous Players) plunged 24% for the quarter compared with last year. Part of the decline could be attributed to Par’s less-than-stellar summer at the box office (think “Lara Croft Tomb Raider: The Cradle of Life,” “Dickie Roberts: Former Child Star” and “Marci X”). A drop in homevid titles released also was a factor.

Chief financial officer Richard Bressler said higher advertising costs for feature films were largely to blame for the precipitous drop in third-quarter operating income to $112 million at the division on revenue of $1.1 billion, up 3%. For the first nine months of the year, entertainment profits are off by 32%.

Viacom prexy and chief operating officer Mel Karmazin nevertheless was optimistic about the fourth quarter, touting upcoming releases of two big re-makes, “The Manchurian Candidate” and “Stepford Wives,” along with Nick’s first SpongeBob SquarePants movie. Upcoming video/DVD release of “The Italian Job” as well as just-released Indiana Jones trilogy also are expected to bolster Q4 sales within the entertainment group.

The overall mixed results broadly met Wall Street’s expectations, already tempered by Viacom’s recent downgrade of sales targets. But a big thrust of management’s Thursday morning call with analysts and investors was its high hopes for 2004, a year when the Super Bowl (with ad time already 66% sold) and a presidential election should restore Viacom to its usual health.

Karmazin promised, “2004 will be a break-away year for us,” reiterating boss Sumner Redstone’s pledge to investors.

Not that there’s anything wrong with its current position.

“That 5% revenue growth is a huge amount of money,” coupled with double-digit earnings-per-share growth and “amazing” conversion to free cash flow, Karmazin gushed in management’s conference call with analysts.

Echoing Time Warner’s observation about the ad climate a day earlier, Karmazin conceded that the broadcast network ad scatter market is running a bit soft, although he was characteristically bullish about prospects for a turnaround.

He noted some inventory sold at double-digit increases over upfront prices in September before pricing went a bit flat in recent weeks. Karmazin, who said pricing now is running at “a slight premium,” insists advertisers have money to spend but are waiting longer than usual to spend it.

“There’s a belief on the part of advertisers that if they hold onto money, they think there’s a price advantage. But the good news is that the scatter business is coming. So we’re on track to hit the number we thought.”

He described current scatter pricing at a “slight premium” to the upfront, pointing to the good news that only $3 million of some $70 million worth of advertising that has come up for cancellation has been exercised. “That bodes well for 2004,” he said. Advertisers have until the middle of next month to cancel any upfront commitments for the March 2004 quarter.

Such a relatively low cancellation rate bolsters Karmazin’s contention that scatter pricing will pick up later, said Prudential analyst Katherine Styponias, who noted, “If advertisers were truly convinced that the scatter pricing was going to continue to weaken, they would be canceling a larger percentage of their upfront buys.”

Viacom, which is more exposed to the vagaries of the ad economy than many of its peers with 45% of its revenues derived from advertising, was quick to tout the continued strength of its “crown jewel” cable networks group. The division, led by MTV Networks and Comedy Central, delivered operating income up 20% from last year, along with a fat 42% margin.

Cable network ad revenue expanded by 25%, thanks in part to the recently acquired Comedy Central, which contributed some $67 million to the cause. Company has high hopes for Comedy’s continued growth, including a possible international channel launch next year.

Cable nets are clearly the group’s growth engine, especially big guns like MTV, BET and Comedy Central. In addition to healthy ratings gains at MTV domestically and in Europe, fueled by new shows such as “Rich Girls,” Karmazin credited Nickelodeon and Spike for particularly strong showings. He noted Comedy Central delivered its biggest ever September audience, aided by Jon Stewart’s Emmy-winning “The Daily Show.”

“There’s no sign of maxing out in our biggest nets,” Karmazin said.

The TV division, which includes broadcast webs CBS and UPN along with its TV stations and production/syndication businesses, reported revenues for the quarter up 5% to $1.88 billion, with operating income up 19% to $362 million. The two nets ad sales combined generated 7% advertising growth, less than some had hoped, though company said primetime delivered double-digit gains. Things were a bit leaner for the more locally ad-dependent stations group, where station group revenues were up 4% for the first nine months of the year; that still outpaced the market’s 1% gain.

Quarterly results also were bolstered by majority-owned Blockbuster’s results, which earlier this week reported profits up 25% to $63.7 million on virtually flat revenues of $1.38 billion.

Company reaffirmed its expectation to deliver mid- to high-single-digit sales and operating income growth for full-year 2003, with a “conservative” forecast of 5%-7% top line growth in 2004 driving 12%-14% earnings growth.

Company is upbeat about primetime and morning prospects at the Eye Network, which so far leads all nets in total viewers through the first three weeks of the fall season. Though total viewing is off 2% year-over-year, likely due to baseball playoffs, Karmazin noted the strong early outings for new series “Cold Case,” “Two and a Half Men” and “Joan of Arcadia” bode well for the balance of the season, and its ad prospects as well.

One weak area was outdoor advertising, where sales nudged up just 1% in the quarter and operating income dove 29%.

As for its current sore point, radio, 3Q revenues rose a scant 2%, but in its top 10 markets, its 4.6% gain easily outpaced the industry average of 3.4% for the industry. While Karmazin is still a big believer in radio and remains optimistic that big advertisers are coming back to the medium, Viacom stopped short of predicting what the fourth quarter might look like. Karmazin blamed Infinity Radio’s sluggish recovery largely on tough comparisons over last year, when radio picked up big gains from a soldout TV market for political ads. Viacom predicted 6%-7% growth for radio in 2004.

“I can’t think of many better business than the radio business in the U.S.,” Karmazin said, noting radio continues to make significant contributions to Viacom’s free cash flow, with the highest operating margins (48%) of the company’s various high-margin businesses.

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