CBS buoyed by strong Q2 earnings

Ad growth, streaming rights pacts drive Eye to top Wall St. expectations

The knock on CBS Corp. has long been how vulnerable it is to the vicissitudes of the advertising marketplace, but its second-quarter earnings Tuesday could go a long way toward changing that perception.

With revenues up 8% year over year, prexy-CEO Leslie Moonves gave credit to a mix of income sources for reducing CBS exposure to Madison Avenue. Licensing deals with digital platforms like Netflix are allowing the Eye to generate new profits from vintage library fare such as “Cheers,” “Star Trek” and “The Twilight Zone.” Strong growth in international content licensing revenue, carriage and subscription fees and retransmission consent coin also drove CBS to easily beat Wall Street’s expectations with its second-quarter results.

“CBS is a fundamentally different company today than we were a few years ago,” Moonves said in a conference call with analysts.

Beyond its success in tapping new sources of revenue, CBS also had a good story to tell on the advertising side based on upfront-price percentage hikes in the mid-teens and some positive trends to counter shaky macroeconomic forecasts.

CBS cited a 21% gain in content licensing and distribution revenues, buoyed by recent digital streaming licensing pacts for older shows in the CBS vault.

Overall, CBS’ revenue for the quarter hit $3.6 billion, with net earnings of $395 million, or 58 cents a share. That surpassed analysts’ estimates of EPS ranging from 39 cents-50 cents.

A big driver for the quarter was a deal announced back in February with Netflix that analysts have estimated to be worth $200 million. With similar deals unveiled last month with Amazon and a second overseas Netflix pact, CBS could see digital platforms continue to boost earnings in the coming quarters.

But Moonves urged analysts to see this as a long-term trend given the expected influx of new buyers chasing Netflix including Google, Apple and Dish Network, which has made it clear that it will use its Blockbuster acquisition to enter the subscription video-on-demand space.

In addition to a deep bench of buyers, Moonves pointed to an even deeper catalog from which to feed those buyers that CBS has barely begun to tap. Conglom can draw from four different libraries — Paramount, Aaron Spelling, King World and CBS itself — and its most attractive property hasn’t even hit this market yet: three “CSI” franchises still on air.

While one analyst questioned the fixed fees these deals deliver in lieu of per-sub rates, Moonves defended them as the right way given that the digital VOD biz is still in its early days.

“We’d rather take the money at this point, we think it’s a much better businesss model,” he said, adding the pacts have built-in flexibility to renew on more favorable terms.

While CBS estimated these digital deals have margins in the 50%-60% range, they pale to the 100% drop to the bottom line that come from retrans fees. Moonves said CBS is on target to hit $250 million next year and $600 million-$700 million in three to five years.

He also sought to persuade analysts there’s been little turbulence in negotiations with stations on either the retrans or reverse-comp fronts, in contrast to what News Corp. has weathered in its own pursuit of local revenues.

Also driving the 12% growth to $413 million in affiliate and subscription fee revenues was higher carriage rate and subscription growth for cable properties Showtime, CBS Sports and Smithsonian. Moonves credited Showtime’s original programming for driving international and homevideo sales, too.

Total advertising revenues for the company gained 3% in spite of tough year-to-year comps for its TV and radio stations, many of which benefitted from the political advertising spending spree in last year’s midterm elections. Moonves anticipated political spending would return at the close of this year as the presidential election nears.

While he acknowledged recent instability in Washington, D.C., over deficit financing isn’t sitting well with advertisers, he outlined several factors that are making them more comfortable, from the end of the NFL lockout to the gradual return of Japanese automakers to the automotive category.

“The recent NFL deal is a big shot in the arm to us and to our advertisers,” Moonves said.

As he’s done for the past 10 years, Moonves was able to tout the solid Eye schedule and a slew of recent renewals to secure such event fare as the Grammy Awards for the long term. But he conceded CBS would give its eyeteeth for Fox’s “American Idol” or “The X Factor,” which he projected would be a hit. “I think it will do very well but it won’t hurt us,” he said.

Moonves estimated he sold 80% of ad inventory in the upfront, holding back enough for scatter to see the 40% increases that marketplace delivered going into May.

Revenue for the entertainment division, encompassing the Eye net and CBS TV Studios arm, was up 10% to $1.84 billion, with operating income spiking 97% to $440 million.

Publishing generated more modest growth in operating income, with a 12% gain to $19 million, which CBS attributed to higher digital sales and cost-saving initiatives.

The Local Broadcasting unit encompassing TV and radio stations felt the impact of tough year-to-year comps even amid a strong advertising market, as operating income gained 7% to $230 million.

Operating income for the Outdoor wing was up 9% to $86 million.

The rosy earnings news, announced after market close, helped CBS’ stock price perk up in after-hours trading following a down day for the markets overall. CBS shares were down $1 at close of trading Tuesday to $26.28.

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