Viacom Earnings Hurt By Nickelodeon Issues

Updated: Lower ad revenues, plus a Rock Band charge, cut net
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Updated 1:10 p.m. ET

Lower ad sales and ratings at networks including Nickelodeon contributed to lower earnings for Viacom's first fiscal quarter.

Net earnings dropped to $212 million, or 38 cents a share, from $610 million, or $1 a share. Those figures, covering October, November and December, included a discontinued operations charge of $383 million for Harmonix, maker of the video game Rock Band. Net earnings from continuing operations fell 5% to $591 million.

Revenues rose 4% to $3.95 billion.

"Despite short term softness in the overall ad markets, Viacom's quarterly results benefited from strong affiliate fee revenue growth, as our industry-leading portfolio of TV brands continued to attract traditional distributors as well as emerging digital services," president and CEO Philippe Dauman said in a statement.

At Viacom's Media Networks group, which includes MTV, Nickelodeon and Comedy Central, revenue rose 3% to $2.4 billion. Operating income for the media networks division was up 7% to $1.1 billion.

On the company's conference call with analysts, Dauman said domestic ad revenues were down 3%. Viacom encountered softness in the ad market during the quarter, he said, on top of a sudden and inexplicable ratings decline for Nickelodeon during its key pre-holiday period.

Because Nick is usually full sold during the December quarter, the ratings shortfall led to make good ads to sponsors.

Without the problems at Nickelodeon, Dauman said first quarter ad revenue would have been up in the low single digits.

He said first quarter scatter volume was down by double digits because many advertisers had moved money from scatter and increased their upfront buys.

Dauman said that so far in the second quarter, "we're seeing signs of recovery in the current quarter scatter with a number of buyers returning to the market. As they do, we are confident that our brands will capture their share of dollars."

He added that "scatter pricing, for its worth, is holding up well. We see scatter to scatter pricing up and up in -- I'd say now about the mid single-digits and healthy double-digit over upfront pricing."

Viacom is seeing a slightly lower than normal level of upfront cancellations for the second quarter and Dauman predicted that ad growth would be positive this quarter.

Viacom also dismissed the notion that Viacom's streaming deals for kids programming are a factor hurting Nick's ratings.

"We don't think that the availability of the limited amount of Nickelodeon library content that we have on Netflix has had a significant impact on the ratings," said COO Tom Dooley in response to an analyst's question. "We do get data on our streams and both the number of Netflix subscribers and the number of Nickelodeon content streams were pretty much the same between the summer and the fall. So there was no real change that accounted for the fall's drop which we do not see in the summer. So, it could have been some minimal impact, but it certainly does not account for the ratings drop that we saw."

Dauman said this fiscal year Nickelodeon will premier more than 500 episodes of original programming, more than ever before, and up about 30% from last year. "We will keep layering on new shows to rebuild our rating," he said.

Meanwhile distribution revenue is expanding.

"We continue to see strong affiliate growth as both existing and emerging distributors turn to our brands to fuel their products and services," Dauman said. "We expect our affiliate revenue to grow on an annualized basis in the high single to low double-digit for the foreseeable future."

James Barge, CFO, said that domestic affiliate revenues increased 16%, while international revenues increased 18%. The growth in domestic affiliate revenues was driven by the availability of programming associated with digital distribution agreements as well as by rate increases from traditional distributors.  "Excluding the impact from the digital distribution agreement, domestic affiliate revenues grew high single digits in the quarter," Barge said.

"We're continuing to invest in more and more original programming to strengthen our brands and their deep audience connections. It was true in 2011, and it will be true again in 2012. In fact, in our 2012 fiscal year, Viacom will invest about $3 billion in our Media Networks programming."

Viacom continues to increase its profit margin while at the same time investing in content, according to Dauman.

"We will continue to invest judiciously in original programming, research and marketing to keep our media networks thriving regardless of changes in media landscape and economic environment," he said.

Dooley added that programming expenses for Viacom's media networks is expected to be in the mid-to high single digit range.

"Given the pace of programming expenses in the December quarter, we anticipate that programming expense will grow in the high single to low double digit percentage range for the remainder of the fiscal year," Dooley said.

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