Viacom Reports Higher Net Despite Drop in Revenue

UPDATED: With Nick and MTV in slumps, ad revenue down 6%

By Jon Lafayette -- Broadcasting & Cable, 11/15/2012 10:02:43 AM

UPDATED: 3:00 p.m. ET

Lower ratings at networks including Nickelodeon and MTV put a big dent in Viacom's fourth-quarter revenues, but lower selling and administrative expenses and reduced tax, depreciation and amortization costs led to a higher net profit in the quarter.

Earlier this week, Viacom's MTV named former CW programming chief Susanne Daniels as president of entertainment. Over the summer the company shook up programming leadership at Nickelodeon, where rating have been down by double digits since last year's first quarter.

On a conference call with analysts, president & CEO Philippe Dauman said that the company was investing in programming and adding executive talent in order to boost ratings and reverse the decline in ad revenues.

In response to a question from an analyst about whether or not MTV was broken, he replied, "it is not broke. It is highly successful," pointing to the high ratings for the premiere of the new series Catfish. "I have no concern about MTV's vitality going forward."

Dauman said Viacom has had its eye on Daniels for a long time.  "We are very pleased that she has committed to coming with us," he said, adding that she will bring with her -- and you'll see announcements in the near future -- some additional talent who will bring to bear more development in both the reality and scripted areas. So we've got a good pipeline now and this will only turbo-charge it."

Though some analysts see the ad market turning soft, Dauman insisted that as far as advertising was concerned, Viacom's networks did not have a demand problem, but that it needed to increase the supply of ratings points available to sell to advertisers.

Dauman said that in the current quarter, "we are seeing pricing up in the mid-teens over the upfront and scatter versus scatter pricing up in the mid-single-digits year-over-year. Advertiser demand for our content is there and we are in a position to quickly monetize ratings improvement as it takes hold."

But Dauman said he expected that in the current quarter, ad revenues will be down less than in the fourth quarter, but still down year over year.

"We're still climbing back up. I don't expect that this quarter we'll see us getting to positive territory, but we'll see improvement. We are going to strive very hard to get back into positive territory as the year progresses and continue to improve from there," he said.

As ad revenues have dropped some of Viacom's cable networks increased their ad load. But Viacom COO Tom Dooley said that those ad loads have been reduced. 

Dauman also assured analysts that Viacom will buy back the $2.5 billion in stock it is scheduled to repurchase in 2013. He added that "I continue to not see any large scale acquisition that makes sense for Viacom. We have a lot to do in growing organically."

Net earnings rose 13% to $650 million, or $1.27 cents a share in the fourth quarter, from $576 million or $1.01 a share a year ago. Adjusted operating income was down 1% to $1.05 billion.

Revenue fell 17% to $3.36 billion in the quarter.

At MTV's Media Networks division, operating income fell 3% to $933 million. Revenues were down slightly to $2.29 billion. Domestic ad revenue was down 6% and worldwide ad revenues decreased 7%.

Domestic affiliate revenues increase 12% driven by rate increases and higher digital revenues. Worldwide affiliate revenues were up 11%.

Viacom's fourth quarter results "were absolutely bad, but relatively good (versus very low expectations)," said Bernstein Research senior analyst Todd Juenger in a research note.

Looking ahead toward 2013, Juenger said that Wall Street consensus expectations seem to include advertising growth. "That does not seem like a realistic base case to us," he said.

"Any business turnaround requires management changes, and some have been made," Juenger said. "But at Nickelodeon, changes have not been made at the very top, and any hopes that Rich Ross may come to the rescue were dashed when he signed on with News Corp. Mostly there was executive shuffling a layer or two down, and only one identifiable executive brought in from the outside."

Referring to Daniels, Juenger added that "at MTV, the new head of programming has a terrific resume for young audiences, albeit with scripted programming, whereas most of MTV's success has been in unscripted."

"All things considered, while domestic ad declines of 6% will be the weakest among peers, given ratings trends, we thought they could have been worse," said John Janedis of UBS. "While there have been signs of improvement, we think Viacom is carrying a fair amount of make goods, and the combination of still weak ratings means the domestic ad growth will trend below peers for the next couple of quarters, in our view."