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Viacom profits stoke its stock

TV unit results provide spike

This article was updated at 7:39 p.m.

NEW YORK — Viacom served up another healthy platter of quarterly earnings Thursday, and for a change, the market seemed to listen.

Conglom’s stock got a welcome 2.3% bounce Thursdayas chairman-CEO Sumner Redstone presided over a review of its better-than-expected second quarter. Double-digit profit gains were fueled by heady ad increases from Viacom’s stalwart broadcast and cable networks group.

As has become the norm for the conglom, its TV businesses — which now contribute some 70% of operating income — drove the impressive 14% net profit increase, overshadowing less-than-impressive performances from feature films, homevideo and radio.

More important, the company said its strong profit margins would continue to expand through the year. And with ad spend trending upward across all of Viacom’s TV businesses and a renewed focus on its depleted feature fortunes, investors finally may be willing to shed the skepticism that has sent company’s shares down 22% this year.

Otherwise, there wasn’t much for the Street to sneer at in the earnings report.

Net profits jumped to $754 million, compared with $660 million in the same period in 2003, on revenues up a more modest 7% to $6.8 billion.

The MTV Networks group (including Nickelodeon, Comedy Central and TV Land) in particular boasted a whopping 27% increase in ad revenues, which, along with BET’s 23% gain, drove an overall ad sales increase of 11%.

Operating margins were the real icing on the cake, however. They now stand at a creamy 42.3% for the cable networks group as a whole (including BET and Showtime). Operating income at the division soared 24% above the same period last year to $671 million.

Thanks to CBS’ strong primetime schedule, broadcast TV operating income performed similarly impressive feats, with a 34.3% operating profit gain to $576 million for the quarter. The TV station group reported an 8% increase in ad sales, contributing to some $2.1 billion in total Viacom broadcasting revenues for the three-month period ended June 30.

While the team touted its upcoming releases, including its critically praised update of “The Manchurian Candidate,” the company tiptoed around a relatively poor run in the last quarter. Weak perfs from “The Prince and Me” and “The Stepford Wives” couldn’t match a stronger showing by “Mean Girls.”

The entertainment division, which includes publishing, theme parks, the Famous Players loop and Paramount Pictures, managed to report a 3% sales gain to $920 million, largely thanks to higher revenues from publishing (Bob Woodward’s “Plan of Attack” was singled out for praise from Simon & Schuster), parks and theaters. Feature film sales (DVD, box office and other rights sales) are believed to account for around 50% of entertainment division revenues and a much lower proportion of its profits.

Company noted heavy spending at Blockbuster slowed Viacom’s bottom-line growth in the quarter.

The second-quarter conference call Thursday morning was Redstone’s first with new co-presidents/co-chief operating officers Tom Freston and Leslie Moonves, who recently succeeded prexy Mel Karmazin. The executive change also was evident in the emphasis on cable TV and film, as opposed to Viacom’s older businesses such as outdoor advertising; homevid rental giant Blockbuster; or Karmazin’s pet project, radio. Redstone said he was pleased so far with his new roster of execs and promised results of their operational prowess will be seen in the very near future.

Viacom’s recent corporate shuffle, however, required a $56 million charge for severance in the quarter, a hefty $20 million of which paid off departing Par chief Jonathan Dolgen, with some $35 million set aside for Karmazin’s going-away present.

In a now-familiar refrain, Redstone voiced frustration about the market’s refusal to properly reward Viacom stock based on his company’s underlying financial and operating strength.

“Despite our frustrations about the stock price, we will continue to manage this business for the long term,” Redstone said. “We’re confident that the market will ultimately reflect the intrinsic value.”

To help that process along, Redstone stoked shareholder enthusiasm with plans for a large stock buyback, insisting there would be no big, expensive acquisitions in the company’s future.

“Our focus is not on big deals,” Redstone said, adding that hefty acquisitions simply don’t make sense in the current environment.

Instead, Viacom will continue to focus on so-called tuck-in buys, such as its recent purchase of the remaining stake in Web service CBS SportsLine and the purchase of German music channel Viva.

While he wouldn’t specify the precise size of the share buyback, which will kick off once the Blockbuster split-off is complete in October, Redstone said investors would be pleased by its magnitude.

With Viacom pumping out free cash flow from its operations at a more efficient rate than many of its peers, analysts speculate that the company could afford to buy 5%-10% of its share base.

Feature films once again were upstaged by Viacom’s star TV businesses, whose sales and earnings strength helped stave off sluggish results from the Blockbuster, radio and film entertainment units.

But Redstone was particularly upbeat that Paramount, a small yet highly visible part of Viacom’s TV-driven empire, was set to turn the corner creatively and financially thanks to a new management regime that he expects will engender a companywide culture of cooperation.

“Paramount Pictures is well on its way back from its dry spell,” Redstone enthused to investors on the Thursday morning conference call. “You will see the beginning of a major upturn at Paramount not next year but this year. We’ve made some tremendous hires across the board.”

Asked about the company’s financial commitment to the studio, Redstone said capital earmarked for Par had increased only modestly and insisted he had no intention of making “the $200 million pictures that other studios make.”

Redstone opined Par’s upcoming “Manchurian Candidate” and stars Denzel Washington, Meryl Streep and Liev Schreiber are all Academy Award contenders. Other coming releases include Tom Cruise starrer “Collateral” (with DreamWorks) and “Sky Captain and the World of Tomorrow,” with Jude Law, Gwyneth Paltrow and Angelina Jolie.

Viacom’s new regime is intent on pumping up the cross-promotion possibilities for Par, which Freston said was not emphasized previously.

Among his new responsibilities, new studio chief Freston said he’s spending a good deal of time at Par and focusing on how to attract more talent and better ideas to improve the unit’s production and marketing capabilities on the feature film and DVD sides. He’s also cooking up cross-promotion plans (a la NBC Universal) among MTV Networks, CBS and other Viacom properties.

Freston said Par soon would announce several producer deals that will send a clear signal of the cultural shift.

Freston also indicated he was looking to reposition Showtime Networks for the modern pay TV era to make it bigger and more profitable.

“Les and I can provide the extra promotional oomph … something we did not do aggressively in the past,” Freston said.

The co-prexys talked of more integration and spirit of openness between the TV and film units, with an emphasis on exploiting promotional synergies within the whole group.

Moonves said he was reviewing the roster of radio stations, looking for opportunities to swap or sell some stations. Given radio’s rich cash flow, however, Viacom said any selloffs would not be extensive.

Looking forward, Viacom reaffirmed its prediction that full-year 2004 revenues would be up between 5% and 7%, with operating income expected post gains of around 12%-14%.