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Morningstar | Viacom Posts Mixed 2Q; Paramount Remains on the Upturn

Viacom reported a mixed fiscal second quarter, as revenue fell short of consensus projections and EBITDA beat Street estimates. Paramount continues to rebound as the studio has gained momentum on both film and TV production sides. On the distribution side, Viacom signed a new long-term deal with AT&T which includes carriage on the updated DirecTV Now packages. We are maintaining our narrow moat rating and our $36 fair value estimate. With shares trading in 4-star territory, the price may offer an attractive entry point to investors with the patience to ride out the bumps from the firm’s ongoing retransformation.

Quarterly revenue fell 6% year over year (negative 4% on a constant currency basis) to $3.0 billion, as filmed entertainment fell 1% and media networks segment declined 5%. U.S. affiliate fee revenue was down 2% to $1.1 billion as SVOD library licensing revenue fell due to the decision to reserve library content for Pluto. While the company benefited from affiliate price increases and the growth of OTT pay TV platforms, the overall decline in subscribers more than offset these benefits. Ad revenue in the U.S. fell 2% as higher pricing continues to be more than offset by lower ratings and ad loads per hour. One bright spot in domestic advertising for Viacom is the continued growth of the Advanced Marketing Solutions, or AMS, platform, which posted 76% revenue growth versus 54% in the fiscal first quarter. The acceleration at AMS was driven by the integration of Pluto TV. Viacom sees large amount of growth potential at the streaming TV platform which was not selling all of its ad slots as an independent service. International media revenue was down sharply by 22% as affiliate revenue fell 13% and advertising was down 6% due to macro weakness in the U.K.

The studio revenue declined 1% as the strong movie slate in the quarter was more than offset by lower licensing revenue. Bumblebee and What Men Want drove theatrical revenue growth in the quarter, the third straight quarter of growth for the rebounding studio. TV production continues to improve with 22 shows ordered or in production as the studio remains focused on placing scripted shows on any platform. Total adjusted operating margin improved by more than 110 basis points year over year to 21.5%, as ongoing expense management more than offset higher programming costs and the revenue decline.