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Media Sector: Viacom, NYT

Posted on Thursday, Feb 19th 2009

Time to take a look at the Media sector, and how things are going there.

Viacom (VIA) has made some smart moves in the past that are now enabling the company to perform better than media industry peers. In its recently announced results, Viacom reported flat Q4 revenues of $4.24 billion. For the year, revenue grew 9% to $14.63 billion.

Adjusted diluted earnings for the quarter came in at $0.76 per share, marginally better than analyst estimates of $0.75. For the year, earnings stood at $2.38 per share, growing by $0.02 over 2007 results.

During the quarter Viacom repurchased 8.5 million shares for an aggregate value of $148 million. For the fiscal 2008 they repurchased 39 million shares for an aggregate purchase price of $1.2 billion. Given the current market, where there is intense focus on cash flow and liquidity, the company has stopped purchases under their buyback program (in effect since the end of last year) and will re-evaluate this decision based on the overall economy and their performance during the year.

By segment, there was a 3% decline in advertising revenue to $1.35 billion. Media networks rose 1% to $2.48 billion as fees from cable and satellite operators grew 12 % to $667 million. Ancillary revenue came in flat at $0.46 billion.

Viacom announced a restructuring initiative to control costs and expects a benefit of $200 million per year from this step. To manage costs, it is also looking at eliminating pay increments for senior executives and has reduced the Paramount studio’s cost structure, leveraging its infrastructure to produce and distribute Paramount films and reducing staffing across the studio.

Viacom is continuing to focus on content and has a lineup of new releases scheduled for the coming quarters. The strength of its content can be gauged from brands such as Nickelodeon, which in 2008 was the number one cable network in total day for kids 2-11 and for total viewers for the fourteenth consecutive year. 

Viacom’s brands and presence in multiple platforms and geographies have earned it audience loyalty, and it is continuing to build on that. In terms of platforms, it recently announced the launch of 14 new applications on the iPhone, including SpongeBob Tickler, MTV News and Comedy Central Jokes.com.

Its digital strategy continued to impress. Viacom significantly increased its VOD offering with several distribution partners and expanded distribution of its emerging networks. The company ended the year with 46 million unique users.

Viacom is continuing to build its distribution model and is looking to grow its business with traditional cable and satellite partners and leverage new technologies to deliver content to global audiences. Recently it tied up with AT&T to provide mobile feeds for its vehicle entertainment service.

The company’s global expansion continued with the launch of its first-ever international HD music and kids’ service across Europe and Latin America. It entered the Indian market through a joint venture to launch Colors, a Hindi-language general entertainment channel that has leapt to the number two spot in this market.

Vicaom was affected by the soft retail environment, which hurt sales of its high-priced game title ‘Rock Band’. Yet it was the number one game title of 2008 by revenue across all game genres and recorded more than 10 million units shipped worldwide.

At the end of the quarter, Viacom had a leverage ratio of 2.8 times with a cash position of $800 million. Given its strong balance sheet and the attractive valuations that most small companies are available for these days, it should look at picking up some of them (prospects outlined in the web 3.0 analysis)..

The stock rose 4% after the results announcements to end the trading day at $16.29; it is currently trading at $16.53 with a market cap marginally short of $1 billion.

Another major media player, the New York Times (NYT) is in an absolute mess. Q4 revenues came in at $772 million, significantly higher than the Street’s expectations of $758 million but a drop of 11% over the year. For the year, the company closed revenue at $2.9 billion compared with $3.2 billion a year ago.

EPS of $0.26 was in line with the Street’s expectations and fell 41% over the year. For the fiscal, EPS of $0.81 dropped 16% over the year.

By segment, ad revenue was down 17.6% and other revenue was down 3.7%. Owing to its strong brand presence, the company was able to command higher circulation prices, driving circulation revenues up 3.7%. At the News Media Group, ad revenues fell 8.4%, with declines in classifieds, retail and national advertising.

NYT is facing significant pressures in its digital transformation efforts. Though Internet businesses contributed 12% of revenue in the quarter, compared with 11% a year ago, advertising revenue is becoming harder to earn. Online ad sales fell 3.5% for the quarter to $81.9 million. This is despite NYTimes.com’s being able to command higher display ad revenue on account of its brand name and the significant improvements made in the earlier quarters. About.com also saw softer advertising revenues, and the company is now looking at improving the design of the site to optimize About’s cost-per-click revenues.

The company’s cost-control measures are showing good results. In the quarter, NYT was able to reduce operating expenses 8.5% despite a 33% increase in newsprint prices. It expects an additional benefit of $20 million in annual savings through other measures such as the completion of the consolidation of two of the Boston Globe’s printing facilities and improved contracts with pressmen and drivers in New England.

The company’s biggest concern as of now is its financial structure. It recently announced a private financing transaction for $250 million in senior unsecured notes and warrants to be used to refinance existing debt, including amounts currently borrowed under its revolving credit facility that matures in May this year. It is looking at other financing initiatives such as cost controls, capital spending restrictions, dividend payout decreases and the rebalancing of its asset portfolio to reduce total debt. As a step towards that, the company is exploring the possible sale of its 18% stake in New England Sports Ventures, whose holdings include the baseball team the Boston Red Sox, Boston’s Fenway Park and approximately 80% of the New England Sports Network, a regional cable sports network.

In times when companies can look at relatively cheaper acquisition targets, NYT will have to get its financial position in order before being able to fill identified portfolio gaps.

The stock is trading at record-low levels of $3.71 with a market capitalization of $534 million.

The newspaper and magazine industries’ woes continue as content on the internet get consumed for free, and abundantly available from many different sources. This fragmentation of media due to the meteoric rise of blogs has thrown the entire industry in disarray. How would the industry ever break this habit of consumers expecting quality content without having to pay for it?

In the next 18 months, as companies like WSJ, NYT, Forbes, and others navigate the turbulent waters, they would also need to come up with ways to establish (a) differentiation (b) monetization.
Without, they will wither.

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