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Viacom earnings tumble by 32%

Advertising recovers compared with last quarter

Viacom’s revenue dipped and profit fell 32% last quarter as Paramount swung to a loss amid tough year-to-year tentpole comparisons, and the ailing economy continued to squeeze the media networks.

But the conglom also announced progress on several key fronts Tuesday, including news that it expected to regain ownership of DreamWorks’ live-action library in 2011, that its nascent Epix movie channel has its first distribution deal, and that the sale of National Amusements’ moviehouses is advancing.

Filmed entertainment revenue at Paramount fell 22% to $1.4 billion on lower theatrical and home entertainment sales. The studio swung to a $25 million loss from a profit of $86 million the year before.

Theatrical revenue fell 27% to $584 million. Viacom cited the timing of tentpole releases this year vs. last and said a strong box office showing by “Star Trek” — and the first seven days of “Transformers: Revenge of the Fallen” — fell short of year-earlier pics “Iron Man” and “Indiana Jones and the Kingdom of the Crystal Skull.”

Home entertainment revenue was down 29% to $435 million, also on tough year-on-year comparisons with the “Indiana Jones” trilogy, a big DVD seller last year. The glum retail climate has pummeled video sales as consumers tighten their belts.

But chief executive Philippe Dauman, in a conference call Tuesday announcing the conglom’s quarterly results, said he doesn’t think the weak economy tells the whole story.

Overall, he said, “consumer appetite for DVDs may be showing signs of fatigue.” The exceptions, he said, are movies that were strong box office performers, which are still holding up well.

In terms of vault value, chief financial officer Tom Dooley also said during Tuesday’s conference call that Viacom would likely regain full ownership of DreamWorks’ live-action library in 2011. The company sold the 59-film library in 2006 to a partnership led by George Soros to defray some of the cost of acquiring DreamWorks.

Soros Strategic Partners and Dune Entertainment hold a 51% stake in DW Funding, the entity that houses the library. The agreement included a so-called put option through which Soros could require Viacom to repurchase the 51% interest in DW Funding at fair market value. Viacom also has a corresponding call option allowing it to buy.

Dooley said when the put/call option is settled — in 2011 at the earliest — Viacom would pay off the balance of certain of the entity’s debt and resume full ownership of the film library.

The debt in question stood at about $440 million as of June 30. Dooley estimated that sales currently on the books will reduce this balance to some $380 million by the settlement date.

“Assuming this transaction takes place, we will determine the most cost-effective method to carry these assets. We can sell them, refinance them in an asset securitization transaction or keep them on our balance sheet,” he said.

Dauman also announced Tuesday that the Epix movie channel, a venture of Viacom, Lionsgate and MGM, had inked its first distribution deal, with Verizon Communications. The network, which is set to launch in early October, will be carried on Verizon’s FiOS TV service.

Viacom’s revenue fell 14% to $3.3 billion for the second quarter ended in June. Net earnings slumped to $277 million from $406 million. The figure includes $33 million in severance charges split between television and film, as well as $352 million in cost cuts year over year.

Industry watchers are scouring earnings for any sign of an economic rebound and a corresponding uptick in advertising. Domestic ad sales at Viacom’s Media Networks — including MTV, VH1, Nickelodeon, BET and Comedy Central — declined 6% year on year. But Dauman noted that the number was up three points from the preceding quarter, indicating some stabilization in the marketplace.

Yet when asked about trends in the current quarter, he pointedly declined any talk of recovery.

“It’s still early in the quarter. We’re not in position to make predictions. We haven’t even finished the first month of the quarter,” he said.

Dauman also said the networks group is “just about done with our advertising upfront.” Given current economic conditions, he said the company is pleased with sales volume and pricing, but didn’t provide details.

Media networks saw total revenue dip 8% to $1.97 billion. Operating profit fell 12% to $671 million.

Worldwide advertising revenue dropped 8%. Execs indicated that while there’s a glimmer of hope on the domestic front, the international picture appears bleak.

The division also took a substantial hit from slower sales of videogame “Rock Band.” Ancillary revenue, which had been buoyed by “Rock Band” for most of last year, plunged 41%.

Dauman said a retooling of the networks’ “creative machinery” is bearing fruit, with ratings trends improving across key networks. BET just finished the highest-rated quarter in the net’s 29-year history, he said. Its annual BET Music Awards, in essence a tribute to Michael Jackson three days after he died, scored its highest ratings ever.

Chairman Sumner Redstone, meanwhile, told investors that the sale of movie theaters owned by his family holding company National Amusements is on track, despite speculation that unloading those assets has been difficult.

“I can tell you that, whatever you may hear from the uninformed, there is substantial interest for a number of our theaters,” Redstone said. “We are extremely pleased with the progress we are making … and with our relationship with our banks.”

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