Company still suffering from slump in ad sales

The profit picture at Paramount Pictures was much improved last year, but Viacom’s full-year and fourth quarter results were dragged down by softness in advertising for its cable nets and a fall off in sales for its “Rock Band” vidgame franchise.

Viacom disclosed in its earnings release that it has increased its equity stake in the pay cabler Epix, its joint venture with Lionsgate and MGM. MGM’s cash woes have forced Viacom and Lionsgate to assume larger positions in the venture, though MGM does have some equity. Viacom had the largest stake among the partners from the start, and its share now stands at 50%.

Viacom brass accentuated the positive trends at Paramount in Thursday’s earnings call, noting that 2009 marked the studio’s most profitable year in seven years. Studio’s theatrical revenue was down from 2008 because of a slimmed-down release slate, but its profitability soared on the back of hits including summer tentpoles “Transformers: Revenge of the Fallen,” “Star Trek,” “G.I. Joe: Rise of the Cobra” and the sleeper success in the fall of “Paranormal Activity.” Strong DVD sales of “Transformers” and “Star Trek” also buoyed the filmed entertainment wing’s numbers for the fourth quarter.

“At Paramount Pictures we’re making hits and making money,” Viacom chairman Sumner Redstone enthused on the conference call with investors.

Redstone and Viacom prexy-CEO Philippe Dauman emphasized the effeciencies and savings from company-wide cost-cutting crusade that began in late 2008 as the economic meltdown hit. Viacom’s year over year fourth quarter comparisons are skewed by the massive $454 million restructuring charge the company took in fourth-quarter 2008. That restructuring produced $200 million in cost savings in 2009, the company said.

Despite a difficult operating environment, Viacom’s overall 2009 perf “far exceeded my expectations,” Redstone said. “It was a great year that ended on a great note.” Viacom’s management team demonstrated that “financial foresight, operational discipline and creative energy can produce superior bottom line results,” Redstone added.

Overall, Viacom’s revenue for the year dropped 7% from 2008 to $13.6 billion. Operating income was up 1% to $3 billion while net earnings for the year hit $1.6 billion, compared to $1.2 billion in 2008.

Filmed Entertainment delivered $298 million in operating income in the fourth quarter ended Dec. 31, thanks to strong DVD sales of “Transformers” and “Star Trek” and “Paranormal Activity” B.O. and increases in TV licensing fees. For the full year, Filmed Entertainment yielded $236 million in operating income, up 168% from 2008 on the strength of improved profit margins on Par releases and general cost-cutting at the studio.

Dauman touted Par’s promising slate of 2010 releases, including Martin Scorsese’s Leonardo DiCaprio starrer “Shutter Island,” which bows Feb. 19 (after being delayed from last year by the studio amid its spending crunch), “Iron Man 2,” DreamWorks Animation’s “How to Train Your Dragon,” and the Nickelodeon-branded “The Last Airbender,” from helmer M. Night Shyamalan.

The Media Networks unit numbers were boosted by growth in carriage fees in domestic and international markets. Media Networks operating income was down 3% for the year to $3 billion.

But advertising sales remained soft. Worldwide ad revenues dropped 7% to $4.4 billion for the year, including a 6% decline in domestic ad sales and 14% drop internationally. For the fourth quarter, advertising was down 3% to $1.3 billion, which included a 4% slide in domestic ad sales. Affiliate revenues were up 11% to $2.9 billion. Viacom does not break out numbers for “Rock Band,” but execs acknowledged the vidgame franchise’s weak perf.

Looking ahead, Dauman said the company sees “growing signs of strength” in the ad market, with pricing improving so far in the first quarter. “The tone is clearly more positive,” he said, though he added that “domestic unemployment is a serious concern for all marketers.” He noted that traditional TV advertisers are starting to spend more and that there is money to be harvested on Viacom’s youth-skewing cablers from “several increasingly competitive sectors of the technology industry.”

Improving the performance of the mothership MTV cabler remains a major focus for Viacom management. He cited the traction the channel has had of late with buzzworthy hits such as “Jersey Shore” and “Teen Mom.”

The channel has in the past few months undergone a significant exec shuffle and is working on “a new (program) slate that better reflects the interests of the millennial generation,” Dauman said.

Kidvid powerhouse Nickelodeon, meanwhile, remains a workhorse for Viacom, Dauman noted. The channel recorded the most-watched month in its 30-year history in January, fueled by tween smash “iCarly” and the new skein “Big Time Rush.”

As for Epix, Viacom chief financial officer Thomas Dooley disclosed that Viacom has recorded $19 million loss on Epix, which was formed in April 2008 and bowed in October. To date, Viacom’s investment in Epix has been $82 million, and it has received $110 million in license fees from the joint venture for providing pics to the service, which is available on-air and online as a premium movie service. Epix’s menu of films will grow to more than 3,000 titles during the next year, Dauman said.

He also pointed to the service’s recent momentum in signing carriage deals with cable operators, including Charter Communications, Cox and Mediacom and the National Cable Television Cooperative. Dauman said Epix would be available in nearly 20 million homes by May, with more deals were in the works.

Despite investor skittishness about the costs associated with the startup and the loss of pay TV coin from an outside entity, Dauman reiterated that Epix would be “cash flow positive” by next year.

“We are on the trajectory that we expected there,” he said.

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