Ad SpendingPuts BounceIn Earnings

Hardest-hit media companies expecting biggest rebounds
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What goes down must come up. Next week, many of the major companies in the television business will report quarterly earnings, and analysts expect the ones hurt most by the collapse of the advertising market due to the recession to show the biggest rebounds.

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“The companies that are going to show the strongest growth are going to be those with the most exposure to the local and national TV ad markets,” says David Joyce, managing director of media equity research at Miller Tabak + Co.

“The general theme is that the EBITDA is going to be growing much faster in the next couple of quarters than revenue because of the cost-cutting that’s been put in place. But we still see revenue growing in the mid- to upper single digits for traditional broadcast and cable network owners.”

David Bank, managing director of global media and Internet research at RBC Capital Markets, says News Corp.’s earnings report and the conference calls with analysts and reporters following the release are likely to have the strongest implications for the industry’s outlook. It’s not that he expects News Corp.’s quarterly figures to be overly revealing. The trick is that News Corp.’s fiscal year ended in June, and the company usually offers full-year guidance for the next fiscal year when its earnings come out.

“So, they’re going to be really the first company to have to try to see around the corner, if you will, and give us a relatively longer-term view,” Bank says.

Bank is projecting that most media companies will show mid- to high single-digit growth in operating income for their television groups next year. “In terms of the color, I think they’re all going to say basically the same thing: ‘We’re cautiously optimistic,’ or ‘We think trends are solid and very encouraging, but the tenuous nature of the global economy makes things really difficult to predict.’”

While reporting earnings last week, Comcast CEO Brian Roberts indeed said, “We remain cautious but optimistic.” Comcast reported that second-quarter revenue rose 6.1% to $9.5 billion, but because of costs associated with the acquisition of NBC Universal, Comcast’s net income fell 8.6% to $884 million.

NBC Universal reported last month that its second-quarter profit rose 13% to $607 million on strong ratings and advertising sales at its cable-television networks.

Right now, Comcast is not very dependent on ad revenues. Comcast COO Steve Burke said on the earnings call that ad revenues for its cable systems and its cable networks were about $2.5 billion, which is “a large number but not all that significant compared to $35 billion in total revenues.”

He added that “with a combined NBC Universal and Comcast, advertising revenue will approach a very meaningful $10 billion. Having the advertising market rebound is a very good thing for the combined company.”

Optimism in the face of pessimism
Most forecasts for ad spending have been more and more optimistic about growth, even though consumer confi dence and purchase intent seem to be declining. Bank says that despite this disconnect, all the data he sees points to higher ad revenues across the industry. If there are going to be surprises as the media conglomerates report earnings, they are more likely to come on the expense side, particularly when it comes to trends in programming expenses.

“I think the top line for 2Q and even 3Q going forward is relatively visibly solid, but I think the market was a little bit surprised last quarter with something like ESPN’s ramp-up in operating expenses, or what’s going on with programming expenses generally with all these networks,” Bank explains.

For the broadcasters, retransmission consent payments are starting to lessen their dependence on ad revenue. But most of the media conglomerates—the exception is CBS—also own major cable networks. This means they’re also receiving subscriber revenues, which remain stable in times of economic volatility.

So, even though the ad market comeback means that companies most dependent on ad revenue will see the strongest growth in the short terms, Joyce says that “we continue to like the companies that have recurring revenue streams the most, those that were heavier into the cable networks because of the advertising and affiliate fee component, which is obviously what the broadcast assets are going to start looking like more and more over time.”

E-mail comments to jlafayette@nbmedia.com and follow him on Twitter: @jlafayette

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