EUR 850.00 For Business Accounts Only

Morningstar | Viacom Continues to Rebound With Strong 3Q; U.S. Affiliate Fee Growth Remains Weak Point

Viacom posted another strong quarter, as revenue for the fiscal third quarter was in line with Street estimates and EBITDA and earnings per share beat consensus projections. The firm’s restructuring plan appears to be hitting its stride, but we remain concerned about the weak affiliate revenue growth. We believe Viacom still faces challenges in gaining carriage at over-the-top pay-television operators, which continue to gain subscribers. We are maintaining our narrow moat rating and fair value estimate of $35 per share. With the stock trading in 3-star territory, we would wait for a pullback before investing in this high-uncertainty name.

Quarterly revenue declined 4% year over year to $3.2 billion, as filmed entertainment fell 9% and media networks segment revenue was down 2%. The 3% decline in U.S. affiliate fee revenue was due in part to retiering at Charter and lower subscriber revenue. While management projects affiliate revenue growth of 1% in the fourth quarter, we believe Viacom will continue to suffer relative to its peers from its inability to gain carriage at some of the newest OTT pay-TV distributors. This disparity will be exacerbated if platforms without Viacom’s channels, such as YouTube TV and Hulu with Live TV, gain subscribers at a faster pace than platforms with more standard bundles, like DirecTV Now and PlayStation Vue. Ad revenue in the United States fell 3%, in line with the decline last quarter, as higher pricing was more than offset by the lower sub count and decreased impressions. International media revenue was flat on a constant-currency basis as the slight growth in advertising offset weakness in affiliate revenue.

The 21% decline in theatrical revenue was due to a weak and light slate last quarter and a tough international comp with last year. While the studio has struggled, the performance of A Quiet Place and Book Club in the U.S. in the quarter does point to some momentum for the new management team at the studio. Despite the recent success of Mission Impossible, we believe the firm still needs to invest in Paramount, which remains the weakest of the six major studios. Total adjusted operating margin fell 20 basis points year over year to 23.7%, as ongoing expense management was more than offset by the overall revenue decline and higher programming costs.