EUR 850.00 For Business Accounts Only

Morningstar | Viacom’s Rebound Continues with Strong End to FY2018; U.S. Affiliate Fee Growth Stabilized for Now. See Updated Analyst Note from 18 Nov 2018

Viacom ended fiscal 2019 on a strong note, as revenue for the final fiscal quarter of the year beat consensus projections and EBITDA came in line with Street estimates. Management’s restructuring plan appears to be working, but we remain concerned about the long-term affiliate revenue growth. We believe Viacom still faces challenges in gaining carriage at the OTT pay TV operators for a number of its smaller channels. We are maintaining our narrow moat rating and raising our fair value estimate to $36 from $35 to account for rolling our model. With the stock trading in 3-star territory, we believe that investors should wait for a pullback before investing in this high uncertainty name.

Quarterly revenue improved 5% year over year to $3.4 billion, as filmed entertainment grew 25% and media networks segment revenue was down 1%. The U.S. affiliate fee revenue was up 3% as the company lapped the re-tiering at Charter and benefited from increased carriage on OTT pay TV platforms. While the growth was a positive sign, we note that domestic affiliate fee revenue for the quarter is still 1% below the same quarter in fiscal 2016. Even with the growth, we believe that Viacom will continue to suffer relative to its peers from its inability to gain carriage at some of the newest OTT pay television 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 U.S. fell 4% as higher pricing continues to be more than offset by the lower sub count and decreased impressions. International media revenue was 1% on a constant currency basis as the growth in affiliate revenue advertising just barely offset the 13% decline in ad revenue.

The 25% increase in theatrical revenue was due to a strong slate in the quarter and a weak comp from last year. The performance of Mission Impossible 6 does point to some momentum for the new management team at the studio. Despite the success of MI6, we believe that the firm still needs to invest in Paramount, which remains the weakest of the six (soon to be five) major studios. The studio needs to create new franchises in order to not only compete with the other majors, but also to stave off Lionsgate, which out grossed Paramount in 2017. Total adjusted operating margin improved by 180 basis points year over year to 19.2%, as ongoing expense management and overall revenue growth more than offset the higher programming costs.