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CBS Corp. Delivers Strong Second Quarter Earnings as Viacom Merger Talks Proceed

CBS Corp. delivered strong second quarter earnings on Thursday, posting top and bottom line growth as the company prepares for the transformation of a merger with its corporate sibling Viacom.

CBS reported what it described as record second quarter revenue of $3.81 billion, up 10% from the comparable quarter last year. Operating income was up 5% to $695 million. Net earnings climbed 10% to $440 million while adjusted earnings per share hit $1.16, up 4%. CBS’ numbers met or beat Wall Street analysts expectations for the quarter.

Digital content licensing and subscriber gains for CBS’ streaming platforms, CBS All Access and Showtime, were the biggest drivers for the quarter. CBS cited a library content licensing agreement for an outside digital platform as a big contributor to the 13% gain in content licensing and distribution for the quarter.

Ianniello disclosed during CBS’ conference call with analysts that CBS All Access will launch a kids programming section later this year with 1,000 hours of programming. The offering will include new seasons of animated series “Cloudy With a Chance of Meatballs” and “Danger Mouse.” Ianniello said the goal was to make CBS All Access more valuable to subscribers with children and to reduce the churn factor. Or as Ianniello put it: “More things for more people.”

CBS’ board of directors has been in negotiations with Viacom to pull off a long-gestating merger agreement. There’s been much speculation that the deal would be done to coincide with today’s earnings announcements from both CBS and Viacom. Sources say any completion of a deal is likely to be at least a few days awa. It’s understood that work on the merger slowed down considerably this week as both companies focused on earnings reports and CBS finalized a carriage deal to end its three-week contract standoff with AT&T’s DirecTV and U-verse platforms.

Ianniello and CBS chief financial officer Christina Spade were not asked about the status of Viacom talks. Investor relations chief Anthony DiClemente warned participants at the start of the call that executives would not respond to any queries about M&A matters.

Ianniello emphasized the importance of CBS’ investment in high-end content to driving future growth. He noted that the CBS Television Studios production arm is fielding some 89 shows this year, up from 70 at the same time last year. CBS is balancing a focus on owning most the content that runs on CBS, CBS All Access, Showtime and other platforms while at the same time producing shows for non-CBS outlets such as Netflix (“Dead to Me”), Fox (“BH90210”) and ABC (“Kids Say the Darndest Things”). Original production for Showtime is up 40% this year over last year.

“We are operating at a sweet spot in the industry and setting ourselves up for continued long-term growth,” Ianniello said.

Ianniello said CBS All Access and the stand-alone Showtime are on track to deliver a total of 25 million subscribers by 2022. Total subscribers grew a whopping 75% year-over-year, marking an acceleration of subscriber growth posted in Q1, Ianniello said.

CBS’ Entertainment unit encompassing the CBS network and CBS Television Studios delivered $2.7 billion in revenue for the quarter, up 14% with help from a 9% gain in advertising revenue. CBS network ad revenue inched up 3% from the prior year quarter. Content licensing and distribution revenues grew 18% thanks in part to shows produced for outside networks. Operating income for the entertainment unit was up 16% to $426 million.

Cable networks hit $562 million in revenue while operating income fell 24% to $185 million. CBS chalked up the dent to higher programming costs at Showtime tied to the launch of dramas “City on a Hill” and “The Loudest Voice” in the quarter.

CBS’ local media division contributed revenue of $423 million, up 1%, and operating income of $130 million, up 2%. The Simon & Schuster publishing arm delivered $218 million in revenue (up 5%) and $33 million in operating income (up 6%).

Ianniello also emphasized CBS’ bullish forecast for CBS All Access growth. The length of time that users spend on the service grew by 60% year over year, thanks to the appeal of original series. CBS has high hopes for upcoming originals “Why Women Kill” and “Picard,” the latest “Star Trek” series.

Jo Ann Ross, CBS’ longtime advertising sales chief, was also on the call, talking up CBS’ sales prowess in the upfront. The combination of CBS’ growing digital inventory with the heightened advertiser demand for traditional TV spots made for a potent sales pitch to Madison Avenue.

“We have a greater share of (advertisers’) premium video budgets than ever before,” Ross said. 

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