Viacom’s video virus

Blockbuster saps earnings

NEW YORK — Blockbuster Entertainment’s continuing problems shrank Viacom Inc.’s net earnings 83% in the third quarter to $18.4 million, before one-time gains, on 12% higher revenue of $3.65 billion, the company said Wednesday.

The bottom line was inflated by a $416 million profit from the sale of Viacom’s radio station group, which closed during the quarter, although a year earlier Viacom had a similar one-time gain from the spin-off of its cable systems, which yielded a gain of $1.3 billion.

Aside from Blockbuster, Viacom posted higher earnings in the quarter, led by MTV Networks and Paramount. But Blockbuster is such a giant business that its troubles impact Viacom’s other businesses and cloud Wall Street’s thinking about the overall company. Viacom stock rose 62¢ to $30.06 Wednesday.

“It’s moving in the right direction,” said Cowen & Co. analyst Harold Vogel, adding that the uncertainty about Blockbuster’s near-term prospects kept him still very neutral on Viacom.

The results were “pretty much on target,” said Merrill Lynch analyst Jessica Reif Cohen.

In line with warnings from Viacom in the summer, Blockbuster’s cash flow — earnings before interest, taxes, depreciation and amortization — dropped 37% to $145.4 million on 8% higher revenue of $1.1 billion. For the first nine months, Blockbuster’s cash flow is down 79% to $126 million.

Viacom execs are working on several measures to turn around the video rental chain (see separate story) although Viacom deputy chairman Tom Dooley said the “key is our ability to increase same store sales, and we will have to wait and see how this develops.”

In the third quarter, “same store sales” (which adjusts for revenue coming from new stores) fell 1.5%, which Dooley said was an improvement from earlier quarters this year. He said that same store sales were flat so far in the fourth quarter, although “we are very cautious about extrapolating that into the full quarter.”

Dooley was much more upbeat about the rest of Viacom, noting that if Blockbuster’s contribution was excluded, Viacom would have shown 12% higher cash flow.

Once again MTV Networks showed strong growth, with 18.2% higher cash flow of $233.2 million, helped both by increased advertising revenues and affiliate fees from the cable networks and markedly higher earnings from the TV stations which are included in MTV for reporting purposes. Viacom’s premium movie channel, Showtime, increased cash flow 11%.

Viacom’s entertainment group, Paramount Pictures and Spelling Entertainment, also performed well, with 20% higher cash flow of $103 million on 21% higher revenues of $980 million. Viacom said Paramount’s cash flow included $40 million to $50 million from the syndication of “Frasier,” in addition to contributions from theatricals “Face/Off” and “In & Out.”

Publishing cash flow rose 4% to $231 million on 9% higher revenues of $860 million.

Viacom said its debt will be down to $8 billion by the end of the year, as a result of the completion of the $1.7 billion sale of its 50% stake in USA Network and the earlier sale of its radio station group. Redstone described the debt reduction as “material progress in our strategic mission to strengthen our balance sheet.”

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