Viacom Overcomes Scatter Jitters with Solid Q2 Earnings

Media giant predicts adjusted earnings per share from continuing operations will climb by low-single-digit percentage for full year.
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Viacom reported mostly improved second-quarter earnings late Tuesday, although it acknowledged that the domestic scatter market has gotten soft for its basic cable networks.

Despite that mixed picture, the media giant predicted that its adjusted earnings per share from continuing operations would climb by a low-single-digit percentage for the full year, which would be robust given the weak economy.

Viacom net earnings from continuing operations climbed 3% in the second quarter on an adjusted basis to 65 cents per fully diluted share from continuing operations, better than the 58 cents many analysts forecast. Revenue advanced 21% to $3.86 billion for the quarter ended June 30. On a lump-sum basis, net earnings fell 6% to $407 million.

The difference between the per-share gain and 6% net-income drop was due to Viacom buying back stock, which amounted to 12.2 million shares in the quarter ended June 30 at a cost of $446 million. That shrunk shares outstanding to 623 million.

The “adjusted” basis presentation excluded a raft of one-time events -- both positive and negative -- for better comparison. For example, it compensated for deconsolidation of Viacom’s cable networks in India, which were rolled into a local partnership.

In the second quarter, Viacom’s networks segment performed well, with profits up 4% and revenue climbing 11%, helped by the Rock Band franchise. The segment includes MTV, Comedy Central and Nickelodeon.

“Viacom delivered strong top- and bottom-line results in the second quarter despite the challenges of a weakening economy and its impact on advertiser spending,” president and CEO Philippe Dauman said in a statement.

Most media companies would be happy to present Viacom’s earnings to analysts, but Dauman -- who took the operating helm in late 2006 -- and executive chairman Sumner Redstone at times were very cautious in their comments to an analysts’ conference call.

A source of worry was an abrupt fall-off in the scatter ad market midway through the second quarter. Also, Viacom brass said the strength in cable advertising for now seems to be shows delivering older demographics -- due to drug and financial-services marketing. Viacom sees some cable ad softness for youth and kids’ demos, which are core to some of its basic-cable networks.

Scatter ads are bought in-season near telecast dates. Viacom cable networks made healthy gains in the separate and just-concluded cable upfront ad market, which has a different mix of advertisers than scatter. Upfront heavies include cellular phones, movies and quick-service restaurants. Upfront ads don’t start until the new TV season late in the year, and they are cancelable under certain circumstances.

To respond to cable’s ad shift to adult demos, Viacom is developing older-skewing original programming for TV Land and some other channels. In a new trickle of revenue, its Comedy Central and MTV Networks are getting their first presidential political ads, but Dauman cautioned that this won’t be a huge category.

MTV and BET experienced some ratings softness, although Viacom executives said that was at least partly due to the timing of new program premieres. BET is undergoing a long-term shift to in-house programming, reducing its reliance on acquired fare.

One area that Viacom talked up as ripe for internal growth is ratcheting up carriage fees for its basic-cable networks, which have seen their audiences soar while locked into long-term contracts that soon expire. Dauman expects big carriage-fee jumps for Comedy Central and Nickelodeon making healthy though lesser gains.

Viacom said there were no new developments on its startup premium pay movie channel, which is a joint venture. Its mainstay will be film rights from Viacom’s Paramount unit, and company brass said talks with potential channel distributors are progressing.

Looking ahead, Viacom brass said the company is poised for a strong fourth quarter this year because film production at its Paramount Pictures was accelerated to avoid a potential actors' strike, which front-loaded some expenses. Plus hit movies -- particularly Kung Fu Panda and the latest Indiana Jones adventure film -- go into lucrative DVD release in this year’s final quarter.

With media valuations plunging, Viacom is not looking to make acquisitions. “We continue to be focused on growing organically” via internal initiatives, Viacom senior executive vice president Thomas E. Dooley told investors.

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