CBS Profits Rise

Network and local station ad sales post big gains

By Jon Lafayette -- Broadcasting & Cable, 11/4/2010 4:30:35 PM

CBS joined the list of media companies riding an improved advertising market to report higher third quarter profits.

Net income rose 53% to $317 million, or 46 cents per share, from $207.6 million, or 30 cents a share, a year ago, the company said Wednesday.

Revenues slipped 2% to $3.3 billion from $3.35 billion. A year ago, CBS benefited from first-cycle syndication sales of five key shows that brought in $300 million in revenue. The company said it its ad revenues rose 10% and that affiliate and subscription fees rose 15%.

 "CBS' strong momentum continues to grow across our businesses," said Leslie Moonves, president and CEO in a statement. "Just as we saw last year, each quarter in 2010 is delivering higher profits than the quarter before. The operating environment continues to improve, and we are reaping the benefits of our lower cost structure, with margins that are approaching pre-recession levels."

Moonves noted that CBS has been the top-rated network in the new season, with its new shows getting off to successful start.  Meanwhile, the broadcast advertising marketplace remains strong both nationally and locally, with robust pacing increases across the board. As we close out the year, we believe that the fourth quarter will continue the trend of improving upon the quarter before it, he added.

With free cash flow growing, CBS declared plans to buy back $1.5 billion worth of its own share.

Revenues for the company's Entertainment segment, which includes the CBS Television Network and  CBS Television Studios, fell 12% to $1.62 billion. A year ago's revenue included sales of Medium, Criminal Minds, Ghost Whisperer, Everybody Hates Chris and Numb3rs. Ad revenues at the CBS broadcast network were up 7% and prices for ads in scatter were up 35% after a strong upfront. "That bodes well for the fourth quarter and first quarter as well," Moonves said during the company's conference call with analysts. Interactive display ad revenues grew 17%.

Operating income for the Entertainment segment fell 14% to $277.9 million.

Moonves said things would be improving in the next year, as a new retransmission contract with Comcast takes effect bringing in new revenues, and a new deal sharing the rights to the NCAA Men's Basketball Tournament lowering sports rights costs take effect. Retransmission fees are up 40% and the company will reach its target of $100 million in retrans fees this year.

At the same time, the network is talking to its affiliates about reclaiming some of the money they get for retrans. "So we are making those deals. They are not very noisy, but we are getting paid by them. And it should, over the next number of years, also amount to hundreds of millions of dollars down the road," said CFO Joe Ianniello, who noted that the biggest CBS affiliate deals don't come up till 2013 and 2014.

Moonves also described the improved economics for CBS Television Studios, which has 27 shows in production. The three dramas it produces for CBS were all sold internationally for more than $2 million an episode, which means "all three were profitable before a single episode aired."

"Within weeks of announcing Hawaii Five-0 was on our schedule, we sold it in more than 100 markets, and now it's in nearly all 200 of our overseas markets . And of course, on this show, domestic syndication is still to come," Moonves said, all of which shows that "ratings success represents just the first length in our increasingly valuable monetary content chain."

Down the road looks good for CBS. "Looking further out to 2011, we expect to have another strong year," said Ianniello. ". Here is what we know. We know this year's upfront was up high single-digits, which runs through Q3 of 2011, and scatter is tracking well above upfront. Given the strength of our schedule, we expect this trend to continue. We know the cost of the current prime time schedule is less than last year's, and with our revised NCAA agreement, sports costs will be down next year as well. We know we have new retrans agreements that provide meaningful upside in 2011. We know we have more favorable Outdoor contracts. We know we will get cost savings from our 2010 restructuring activities. We know interest expense is going to be lower, and we will generate significant free cash flow."

CBS' cable networks saw revenue rise 12% to $370 million. Showtime Networks' subscriptions were up 7% to 64.9 million. Earnings for the cable networks rose 33% to $170.5 million.

CBS's local TV stations had a 25% increase in revenues, driving by growth in ad sales. CBS' local broadcasting group, including radio, had a 15% increase in revenue and a 49% increase in operating income to $195.1 million. While a record amount of political ads fed the growth in ad sales, the political ads pushed other ad commitments back into November and December, Ianniello said. Without the election ads, sales are tracking at a 20% increase from last year, he said.

Near the end of the conference call, one analyst asked what would happen if the NFL locked out its players next season.

"Well, Joe and I are going to get out on the field and start tossing the ball around," Moonves said. "It's not programming you replace. It's not like, ‘Okay, if I take off this show for prime time, I'll have another show ready.' The NFL is the NFL, and it's very valuable. But we are hoping that nothing bad happens here."