Ad market, Paramount to blame for Q3 drop

Viacom blamed the lack of a “Transformers”-sized hit at Paramount Pictures and a declining ad market for a 37% drop in its third-quarter profits.

Earnings announced Monday for the quarter ended Sept. 30 shrank to $401 million from $641 million in the year-ago period. Total revenue gained 4% to $3.4 billion, though theatrical film revenue plummeted 36% to $312 million.

The results generally conformed with downward revisions announced last month as the ad softness took its biggest officially acknowledged toll yet on the major media congloms. Time Warner, News Corp. and Disney are all slated to report earnings later this week.

Worldwide ad revenue dipped 2% to $1.16 billion, with a 3% fade in the U.S. due to ratings softness at MTV and other channels. The gloomy ad picture helped send operating income down 15% and ate into net profit.

“The economic environment and ongoing uncertainty have posed new challenges for the media industry, and Viacom has not been immune to the impact of these forces,” said chief exec Philippe Dauman. “Over the past two years, however, we have been judiciously managing our finances and operations. Thanks to these efforts, we believe that we will be well positioned both in the near term and as the global economy regains its footing over time.”

In a conference call with analysts, execs tried gamely to spin the numbers, asserting that showbiz would yet prove recession-resistant and that proper management was in place to steer the conglom through tough times.

Chairman Sumner Redstone has had a rough autumn. For one thing, his personal stake in troubled vidgame maker Midway Games has reportedly shriveled from $1.8 billion to $64 million in just three years. He also has had to scramble to pay margin calls on loans related to National Amusements, technically the parent of Viacom and CBS.

Redstone’s financial struggles have prompted speculation about the fate of both CBS and Viacom — “the love of my life,” he called the latter Monday. On the Viacom call, he reprised sentiments from the CBS earnings call last Thursday, insisting he would not sell “a single share” in either company. Talks with lenders, whose margin calls triggered the profit warnings and sizable selloffs in CBS and Viacom stock, are progressing well, he said.

Viacom shares fell almost 2% to $21.08 on a refreshingly neutral day for the Dow.

Dauman acknowledged the challenges at MTV, though he noted the cable net retains the top rating for auds in the target 12-24 demo. He said remedies will include more original programming, with production increases in the “high single digits” and a range of interactive inducements for young viewers. Cross-promotional efforts on sister nets for top skeins like “The Hills” also will be boosted.

Dauman said at the outset of the call that the company planned to tread lightly on third-quarter results and instead shift the focus toward plans for the future. Nevertheless, some big-ticket items surfaced from an eventful quarter. Among them:

  • The unwinding of Paramount’s relationship with DreamWorks will save Viacom some $50 million a year in overhead, Dauman said, mainly because salaries and administrative costs will migrate to the Reliance-backed outfit.

    Par retains distrib rights to the “Transformers” franchise, plus a first look at co-financing opportunities on DreamWorks projects, Dauman added.

  • The still-unnamed pay TV venture announced in the spring as a teaming of Par, MGM and Lionsgate “appears to be on track for its planned Oct. 1, 2009, launch. Negotiations are at an incredibly advanced stage with certain distributors,” he said, with announcements of carriage deals forthcoming.

    A wall of skepticism has greeted the venture, which took shape as a response to CBS-run Showtime’s aggressive approach to a potential reupping of output deals with several top providers.

  • Tom Dooley, Viacom’s chief administrative officer and chief financial officer, said Paramount still has “several hundred million dollars left” in various slate finance pacts and would continue to tap them.

Given the impossibility of replicating such off-balance-sheet financial setups in today’s economic climate, “We’re prepared to finance films on the balance sheet if need be,” he said. “We already co-finance a lot of pictures,” such as the upcoming “The Curious Case of Benjamin Button,” a split with Warner Bros.

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