Viacom: Flat and happy

As they report earnings, Mel and Sumner try to dispel rumors of a rift
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Wall Street wants to believe. It wants to believe the working relationship between Viacom's top two honchos—Sumner Redstone and Mel Karmazin—is nothing short of wonderful. It wants to believe the ad recovery is just around the corner. And Viacom's stock reflects that belief: Over the past three or four weeks, it has climbed more than 20%, although the company's earnings report last week revealed flat revenues for its fiscal year.

Chairman and CEO Redstone and COO Karmazin have been denying month-long reports their relationship is on the outs. During a conference call on year-end financial results last week, Redstone again insisted there was nothing to those reports. He said the two are "totally in sync" in running the company. Also last week, they appeared positively chummy at an analysts' dinner.

Karmazin sees positive signs in network ad-sales activity for the second quarter. He said the company believes the second-quarter network scatter market—at least for CBS—will be up between 5% and 15%. But Karmazin acknowledged that that assessment could change over the next few weeks depending on how sales go. He also acknowledged that the demand was artificial to some extent. With ABC and Fox in heavy make-good mode, inventory is tighter than it would otherwise be. (News Corp. President Peter Chernin told analysts that poorly performing Fox has $30 million or so in audience deficiencies to make up.) But all the networks say ad-cancellation rates are well below last year's levels.

CBS's strategy of withholding more than usual upfront ad inventory because advertisers wouldn't pay desired increases is "looking good," Karmazin said. But he stressed that it's too early to proclaim it a success. If it turns out that the strategy fails, he said, he would be to blame: "It was my decision."

Whether the strategy succeeds or no, won't be known until broadcast year-end. Karmazin said first-quarter scatter pricing was at or "slightly ahead" of upfront pricing for both the broadcast and cable nets.

Viacom reported that pro forma revenues were flat in 2001, about $23 billion, with a 2% gain in cash flow, to $5 billion. TV revenues were up 2%, to $7.2 billion, with a 1% cash-flow gain, to $1.2 billion. Cable revenues were up 4%, to $4.2 billion, with cash flow up 19%, to $1.7 billion. Cash-flow figures include write-offs of $67 million for cable and $53 million for TV, due largely to severance costs at MTV (which cut 800 jobs cut) and UPN (which was put under CBS).

After Viacom posted its results, SG Cowen issued a note proclaiming the company "the best-positioned media company for an advertising recovery because of its combination of scale, leading brands, diverse revenue streams and clean balance sheet."

The company also took a $392 million charge to Blockbuster earnings, chiefly due to write-offs of VHS tapes and the transition to DVD.

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