Bleak news gets even bleaker

Earnings continue on a downward trend; turnaround unlikely before late 2002

Why This Matters

The unwonderful world of Disney

The unwonderful world of Disney

Walt Disney Co. operating income for the quarter ending Dec. 31 could drop by 50%, according to the company, the two hardest-hit divisions being the media networks (broadcasting and cable) division and the parks and resorts unit. But company executives also say they've been taking corrective steps, such as carving $1 billion from annual costs over the past two years.

In a conference call with analysts last week, both Disney CEO Michael Eisner and President Bob Iger touched on specific steps they're taking to get ABC back on track. The bleak guidance for the current quarter came as the company issued its earnings for its fiscal year 2001, ended Sept. 30.

For the year, Disney reported, the broadcast segment (ABC, TV stations and syndication programming) showed a 30% drop in pro forma operating income, to $728 million, on a 9% dip in revenue, to $5.7 billion. For the last quarter, the broadcast unit was down 55% in operating income, to $84 million, on an 11% drop in revenue, to $1.2 billion.

The cable networks unit, led by ESPN, showed a 5% gain in operating income for the year, to almost $1.1 billion, on a 10% gain in revenue, to more than $3.8 billion. For the quarter, the cable unit was up 25% in operating income, to $264 million, on an 8% gain in revenue, to $1 billion. Iger said ABC is redirecting much of its new development to the family sitcom, a genre that ABC did well by in years past, with shows like Roseanne and the TGIF lineup on Friday nights, but has largely abandoned in recent seasons.

Eisner said the company is taking steps to improve the economics of the network business overall. They include changing the model to a dual revenue stream, eliminating station compensation, making lower-cost and dual-purpose programming—much of which will be seen on ABC and the just-acquired Fox Family Network (now ABC Family)—and working to get a greater share of advertiser budgets.

It's no secret that third-quarter TV earnings were way down. But guess what? The fourth quarter is going to be almost as bad—and worse for some companies.

Disney, for one, is projecting a 50% decline in operating income for the quarter ending Dec. 31 (see box, opposite).

One Wall Street firm predicts that TV-station advertising may be down another 15% in the fourth quarter.

The good news: Things will get better, but not until the second half of next year.

The earnings results that a handful of broadcasters reported last week for the quarter ended Sept. 30 were largely in line with expectations: double-digit revenue and profit declines compared with the same quarter a year ago.

The ad downturn is affecting networks and stations alike. The Broadcast Cable Financial Management Association issued combined third-quarter revenue results for ABC, CBS and NBC with the headline "Big Three Networks Suffer Worst Quarter Ever." The combined drop was a record $880 million, or 29%, to $2.2 billion. And the fourth quarter won't be much better, according to BCFM President Buz Buzogany. Continuing ad softness, he said, makes it "extremely difficult to be optimistic about quarterly comparisons improving" this year.

Just two months after issuing its forecast for 2001 and 2002, the Television Bureau of Advertising revised its projections last week. The upshot: 2001 will be a lot worse, and '02 will be somewhat less rosy than the organization thought when it issued its original projection on Sept. 6.

"Obviously, we were facing a new reality just five days later," said TVB President Chris Rohrs. TVB now says local spot will be down 8%-10% for this year, about double the decline predicted earlier. And national spot will be down a whopping 22%-24%, not the 16%-18% predicted earlier.

In a report just issued by Merrill Lynch, media analysts Jessica Reif Cohen and Keith Fawcett estimate that total TV-station revenue dropped roughly 20% in the third quarter. The outlook for Q4? In a word, "awful," the report states, predicting a further 10%-15% drop and citing the slowdown in airline and tourism advertising and the absence of the political advertising that boosted station sales a year ago.

The rocky ad market helped slice cash flow at News Corp.'s Fox Entertainment unit 24% during the quarter ended Sept. 30. TV-station revenue increased 7%, to $396 million, but cash flow dropped 17%, to $129 million. At Fox Broadcast Network, sales dipped 6%, to $320 million, and losses deepened 14%, to $38 million. Sales at Fox's cable networks increased 19%, to $436 million, but higher sports costs cut cash flow 14%, to $43 million.

During a call with analysts last week, News Corp. chief Rupert Murdoch said the company was actually starting to see signs of a turnaround in the languid TV-station ad market in early September. Network scatter was also holding up pretty well, he said. But all signs of recovery evaporated on Sept. 11. After the attack and through the end of the quarter, he said, "advertising largely disappeared."

Since October, Murdoch said, network scatter sales have "returned to normal levels," with pricing at about upfront rates. Station sales continue to be down "but are improving week by week."

Station groups also recently posted bleak third-quarter results. Young Broadcasting reported a 45% drop in pro forma broadcast cash flow, to $27 million, on a 23% revenue decline, to $79 million. Sinclair Broadcast Group logged a 27% drop in broadcast cash flow on a 12% dip in broadcast revenue; for the year, the company projects similar declines in both categories.

Still, despite the current gloom, some broadcasters foresee a turnaround—and a rosier financial outlook—for 2002. Merrill Lynch says a massive government "stimulus package" would certainly help, if it materializes, as many believe it will. Such a package would combine tax cuts and increased spending.

News Corp. Chief Financial Officer David DeVoe predicted last week that Fox will produce cash-flow growth in the low to mid teens for fiscal '02.

Others have been less specific but still reasonably optimistic about next year. Hearst-Argyle Television, which will show double-digit declines in revenue and cash-flow for 2001, expects both numbers to be positive next year, CEO David Barrett recently told analysts.

Next year, of course, Hearst-Argyle and other broadcasters will get help from the Salt Lake City Olympics and from political spending that Merrill Lynch predicts will reach somewhere between $500 million and $600 million.

Double-digit downers
Company Revenue % Chg. Profits % Chg.
Sources: Company earnings statements for the quarter ended Sept. 30. Fox numbers include TV stations, FBC and cable networks. Disney numbers are for its media networks division. Profits are pretax cash-flow figures.