Highlights From VIA's Q3 Conference Call: Movie Hits, MTV Music Awards & Rock Band Showed Strength, But Revenues Declined 3%

November 3, 2009 12:44 PM EST

Viacom (NYSE: VIA.B) (NYSE: VIA) reports Q3 adjusted EPS of $0.69, above the consensus of $0.57. Revenues fell 3% to $3.317 billion, versus the consensus of $3.3 billion. Shares are flat on the session

Highlights From VIA's Q3 Conference Call:

• (CEO) On the big screen, Transformers Revenge of the Fallen and GI Joe The Rise of Cobra were huge successes. MTV's Video Music Awards show broke records on air and online.
  
• The global launch of The Beatles Rock Band eclipsed the competition in its first month on the market; and in September, programming on Comedy Central, Nickelodeon, MTV, and Spike took home six prime-time Emmy awards.
  
• We delivered notable improvement in the ratings trend for MTV, the economics of our Rock Band franchise are improving, though not as quickly as we'd like, and we have a much improved profit picture for Paramount.
  
• Our consolidated revenues declined 3% to $3.3 billion in the third quarter. In the media network segment, revenues were flat. We continue to see sequential improvement in the advertising market as we move through the third quarter. Our domestic ad revenues were down 4%, a 2 percentage point improvement over the second quarter.
  
• Worldwide affiliate fees grew 10% in the quarter reflecting both rate and subscriber increases.
  
• Ancillary revenues declined 3% for the quarter as lower sales of home entertainment and consumer products which reflect ongoing softness in the retail economy offset the strong revenues generated by the launch of The Beatles Rock Band.
  
• Revenues for the film entertainment segment were down 6% in the quarter, primarily due to continuing declines in the home entertainment market.
  
• Viacom's adjusted net earnings from continuing operations were $421 million for the quarter, a 24% rise over Q3 of 2008.
  
• Transformers Revenge of the Fallen has been a worldwide success, earning well over $800 million in global box office.
  
• In fact, in less than two weeks on the market, we have already sold 8.3 million units of the Transformers Revenge of the Fallen DVD, and it is the best selling Blu-Ray disk release of 2009 with more than 1.4 million units sold thus far.
  
• GI Joe The Rise of Cobra launched another franchise for the studio and currently ranks as the No. 12 movie of the year domestically with more than $300 million in global receipts.
  
• A recent example is the incredible success we are enjoying with a very low budget film Paranormal Activity, which is scaring people into theaters in huge numbers with over $85 million in domestic box office so far.
  
• Our 2010 slate is in great shape with several tent poles including Martin Scorsese's Shutter Island at the beginning of the year and Iron Man 2 and Shrek Forever in May.
  
• Our media networks segment delivered solid results in the quarter despite ongoing softness in the advertising market.
  
• The scatter market was quite active throughout Q3, and so far in Q4 with increasing scatter premiums.
  
• For example, the Ultimate Sponge Bob Sponge Bash Weekend averaged nearly 3 million total viewers throughout the weekend, more than 30% higher than the day part average for the quarter.
  
• Our recent acquisition of the Teenage Mutant Ninja Turtles is a great investment for the future at a relatively low price point. It will create value across Nick's platform globally, on television, in consumer product, online, and on the big screen for Paramount. We believe we have the creative and marketing assets in place to revitalize this once vibrant franchise. We really like the risk reward profile of this $60 million acquisition.
  
• We didn't make real progress in the third quarter as the rate of MTV's rating decline decelerated to 3% year-over-year.
  
• The network did once again demonstrate its ability to create a watershed event with the 2009 Video Music Awards show. The show was watched by 27 million viewers on MTV, MTV 2, and VH1, up 17% from the prior year. It was the No. 1 show on cable this year in the 12 to 34 demo. Overall, MTV.com logged 2.7 million unique visitors on the day of the show, which was a 20% increase over the traffic generated on the day of last year's show.
  
• BET: Its ratings are great. This past quarter its ratings were up 19%, and to date in the fourth quarter, ratings are up 25%.
  
• Soft sales of consumer products and home entertainment offset the strong sales of our Rock Band franchise. Of course the big news for the quarter was the global launch of The Beatles Rock Band.
  
• (SEVP) From a total company perspective, revenues declined $91 million or 3% to 3.3 billion as compared to the third quarter of 2008. Foreign exchange accounted for 2% of the decline. Media networks revenues were essentially unchanged while filmed entertainment revenues declined 85 million or 6%, principally due to lower home entertainment revenues.
  
• Total company expenses declined $186 million for the quarter.
  
• Films entertainment expenses declined $173 million, and media network expenses declined $16 million. Decline in films entertainment was principally due to lower distribution and production costs as a result of fewer theatrical releases in the quarter.
  
• Consolidated operating income increased 14% to $784 million in the quarter.
  
• Media networks revenues were flat at 2.1 billion in the third quarter. Domestic revenues increased 1%, and international revenues declined 4%.
  
• Domestic advertising revenues declined 4% in the third quarter, which was an improvement from Q2's decline of 6%.
  
• International advertising declined 18% in the quarter with foreign exchange negatively impacting the growth rate by 6 percentage points.
  
• Moving to ancillary revenues, domestic revenues declined 6% while international revenues increased 2%.
  
• Media networks operating income of 773 million in the quarter was 2% higher than last year. The operating margin improved approximately 60 basis points to 36% in the quarter.
  
• Now turning to films and entertainment, Q3 revenues declined 6% to $1.2 billion.
  
• World wild theatrical revenues increased 16% in the quarter to 361 million versus last year.
  
• Worldwide home entertainment revenues declined 21% or 124 million from the third quarter of 2008.
  
• TV license fees declined 8% to 316 million in the quarter, reflecting the title mix of available film product.
  
• We took advantage of the attractive rates in the public debt markets issuing a total of 1.4 billion in new fixed rate debt spread out amongst 5, 6, and 10-year maturities at rates between 4.25% and 5.625%.
  
• We also successfully tendered for a 1.3 billion of our 5.75% senior notes that were due in 2011, leaving $193 million outstanding.
  
• (Q&A) Two questions about the sustainability of a couple of the line items. So in terms of the programming costs you talked about programming costs grew 4% on an adjusted basis. As we get out of the recession, how should we think about the programming cost growth next year? Do we see the cost to increase at a faster pace? And, secondly, you talked about affiliate fee increase, and 80% in the domestic affiliate fee growth came from the pricing increase. How sustainable is that pricing improvement? When do we see things lapping those price increases? (A)As far as programming costs, we have been able to keep the programming cost growth in the low single digits. We would aim to
  maintain programming cost growth at the low to mid single digit level. We are looking at those costs across the entirety of our portfolio. We adjust our spending depending on where the needs are. There are transitions that take place in various networks at licensed programming comes off, for example, and we replace it with original programming. So we try to manage it across our portfolio and making sure that we grow the programming costs in accordance with the revenue opportunities for our networks and where the needs are. As far as affiliate fees, as I mentioned in my remarks, we provide great value to our distributors, and we are happy to provide great value to them. But we believe we continue to have room to grow from low affiliate fee base to reflect the investment that we are making in programming and in other ways in our brands. Our programming tends to over-index in other products that our distributors roll out to their customers, such as video on demand, as well as online and other offerings that they put out. So we believe that and we are targeting continued growth in our affiliate fee rates and continue to work with our customers to maintain that.
  
• I think in your opening remarks, you said the business was improving but not as quickly as you would like it. Can you tell us what disappointed you about the pace of improvement and what we should look forward to in the next couple quarters and what you're going to do about it? (A)Well, we had a great launch. We obviously at this time of year, a great launch of The Beatles product. At this time of year, we await the holiday season to begin as the month of November unfolds, we will start putting more marketing dollars together with our retailing partners behind that product. We also generate royalty fees through the Harmonix relationship with Activision, so to some extent, the performance of that business will depend on the performance of our competitor. So we just have to be cautious given that we are entering over the next couple -- next several weeks a retail season that will depend on how consumers spend their money generally. So we have to be cautious about how it is unfolding. Meanwhile, we're continuing to manage that business with a close eye on inventory levels and with a greater focus on software.
  
• If you look at your slide No. 8, it seems rather obvious that the capital structure is in pretty good shape, and knowing the cash generation of this business, it seems obvious that in 2010 you'll start having some free cash flow to deploy. So when you think about that, how do you consider the buybacks or dividend question in 2010, and what are the triggers for those decisions? (A) You're quite right. Tom has done a great job in managing our balance sheet. We are in a very strong position, as I mentioned. We also are a company that is back-end loaded to the second half of the calendar year on its cash flow. So as we get into the new year and we evaluate the strength of the economic recovery, as we look at our own capital needs and situation, we do have just a couple of off balance sheet financings which get consolidated under new accounting rules in 2010, but we take that into account the receivables facility which you're aware of, we do have in 2011 a repurchase of the Dreamworks library. I think the estimated value at that time is about a $300 million level. So we take all these things into account, and clearly after we look at our capital needs and the situation in the economy, we will evaluate the return of some of that capital to our shareholders. And so sometime next year, we'll evaluate our situation.

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