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Should Media Firms Spend Their Tax Windfall or Save for a Rainy Day?

When Viacom reported earnings last week for its fiscal first quarter, the numbers weren’t pretty. The owner of MTV, Nickelodeon and Comedy Central saw its U.S. ad revenue fall 6%, while overall advertising increased just 1%. Affiliate revenue was off by 4%. Film revenue plummeted 28%.

But somehow its first-quarter profit soared 35% over the previous year, to $535 million. Why? The increase was “principally due to the enactment of tax reform,” the company explained.

Just when the media sector would seem to be hurting from unprecedented competition in Silicon Valley, companies reporting earnings in recent weeks are actually getting relief, thanks to the tax reform bill Congress passed late last year.

“Most of the media companies are talking about a dramatic reduction in their effective tax rate, which will have a major impact on future earnings-per-share numbers, which we expect to be revised upward as we go through the earnings season,” Tuna Amobi of CFRA Research told Variety.

While the media sector went along for the roller-coaster ride the entire U.S. stock market took last week, shares for their companies have held up relatively well over the past three months. Few of them are in negative territory, and the businesses that have been struggling the most, like Viacom and Discovery, are up the most — north of 35%. To some degree, that momentum is fueled by hopes for new M&A activity, including a potential reunion of Viacom and CBS.

While the Trump administration has been somewhat of an impediment to mega-dealmaking, given the Justice Dept.’s resistance to an AT&T-Time Warner deal, the White House has also blessed the media business in the form of rate relief.

Analysts have been eager to hear what the media conglomerates intend to do with their new fortune. Comcast has already taken action, announcing a 21% increase in its dividend and an intention to repurchase at least $5 billion in stock in 2018, CEO Brian Roberts said in January. Both Disney and Comcast have also cited tax cuts as the impetus for $1,000 bonuses they’ve given hundreds of thousands of their employees in recent months.

The media industry can use a little relief. Cord-cutting accelerated in 2017 to as many as 3.7 million, according to an Evercore Partners estimate, which will stunt affiliate-fee revenue growth. National advertising TV revenues in the U.S. are expected to decline for the first time in a non-recessionary year, according to MoffettNathanson, which also estimated that C3 primetime TV ratings (commercials watched live and after three days of DVR playback) across broadcast and cable plummeted 13% in the fourth quarter.

Other companies have also steered through choppy waters. At 21st Century Fox, advertising was off by 3% as distribution fees rose by 11%. Disney’s ad revenue at its media networks fell 8%, while affiliate fees increased 17%. Time Warner’s Turner unit grew ad revenue by 2% and affiliate revenue by 14%.

CREDIT: PETE RYAN

The new question is whether the conglomerates, aided by the effects of the tax cut, can get on solid footing. Viacom CEO Bob Bakish said he hopes to narrow the company’s affiliate-fee losses and grow its ad revenue over the course of its current fiscal year.

Tax reform could also help the media business in another way; companies outside the sector that are its biggest advertisers could be feeling more generous with their marketing budgets now that they’re flush with cash. Financial services company UBS recently surveyed 350 global marketing executives and 500 U.S. chief financial officers, and the results offered a degree of optimism. “We may see a recovery in 2018 driven by large advertisers increasing scope of work with creative agencies; and increasing spend on brand media,” the report noted.

NBCUniversal CEO Steve Burke shared an alternate theory with investors during a Jan. 21 conference call to discuss Comcast’s earnings results. “I don’t think there is necessarily a direct correlation from the tax cuts and having more cash and throwing that into advertising,” he said. “I think it might be more related to just overall business sentiment. But to the degree that business sentiment is slightly stronger now than it was six months ago, you can kind of feel that coming into the advertising market.”

Burke predicted a strong upfront market, when TV networks try to sell the bulk of their ad inventory for the coming programming season.

When the average person wins the lottery, chances of a spending spree are likely. But not so with the media companies and reduced tax rates. Disney chief Bob Iger said during a recent investor call that Disney capital is typically allocated into increasing dividends, continued share buybacks and investing in organic growth. Money could also be funneled into more M&A, but with the company’s recent decision to buy the bulk of 21st Century Fox, he said, “You can check that box off for a while. I don’t think we’re going to be in the market looking to acquire for quite a long period of time.”

Wall Street has all sorts of ideas for what various companies ought to do with a reduced tax rate, ranging from cutting debt from the balance sheet to socking cash away for an acquisition. But for the most part, the development simply alleviates some of the pressure on companies that are still facing big challenges.

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