EUR 850.00 For Business Accounts Only

Morningstar | Viacom Posts Strong Start to Fiscal-Year 2019; Restructuring Plan Delivering Growth

Viacom started fiscal-year 2019 on a strong note, as revenue for the first quarter met consensus projections and EBITDA beat Street estimates. The results were buoyed by another strong quarter at Paramount. Management’s restructuring plan is delivering results, but we still believe that long-term affiliate revenue growth may be restrained by the challenges in gaining carriage for its smaller channels. We are maintaining our narrow moat rating and our $36 fair value estimate. With the stock trading on the cusp of 3-star territory, we believe that investors should wait for a pullback before investing in this high-uncertainty name.

Quarterly revenue improved 1% year over year (4% on a constant currency basis) to $3.1 billion, as filmed entertainment grew 14%, partially offset by a 2% decline in the media networks segment. U.S. affiliate fee revenue was up 5% to $969 million as the company benefited from price increases and the growth of OTT pay TV platforms. While the continued growth is a positive sign, domestic affiliate fee revenue for the quarter is still 2% below the same quarter in fiscal 2016. Management projects low-single-digit affiliate fee growth for the remainder of fiscal-year 2019, implying no new carriage agreements for the year. We expect the upcoming AT&T renewal negotiations to be contentious but to conclude without a blackout, as AT&T needs to stay off the radar of regulators and Viacom is a large part of AT&T’s skinny Watch TV package.

Ad revenue in the U.S. fell 3% 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 platform, which posted 54% revenue growth. AMS is the firm’s attempt to create an advertising targeting solution for traditional and OTT TV distribution. Fox signed a technology licensing deal with Viacom for AMS last year, providing some validation for the new platform.

International media revenue was flat, excluding the impact of weak currencies in Latin America, as both affiliate revenue and advertising were flat. The 49% increase in theatrical revenue was due once again to a strong movie slate in the quarter and a weak comp from last year. The performance of Bumblebee indicates continued momentum at Paramount after the recent strong box office for Mission Impossible 6. Despite the reinvigoration of two of its franchises, we still think that the firm needs to invest in Paramount, which remains the weakest of the six (soon to be five) major studios. The investment should be used to either create or buy new franchises in order to not only compete with the other majors, but also to stave off Netflix and Amazon, that are both focusing on and spending heavily on films. Netflix’s Roma, for example, is up for 10 Oscars at the 91st Academy Awards on Feb. 24 and Amazon just spent a record $47 million to acquire five films at the 2019 Sundance Film Festival. Total adjusted operating margin improved by 90 basis points year over year to 24.3%, as ongoing expense management and overall revenue growth more than offset higher programming costs.