Viacom stock fell following its earnings report Thursday because analysts were concerned that following a series of renewals with distributors, subscriber revenue is expected to be lower in fiscal 2018.
Speaking on Viacom’s fourth-quarter earnings call Thursday, CFO Wade Davis said that as a result of renewal with Charter Communications, Altice and others, domestic affiliate revenue “will show high single-digit declines” in the first and second quarters of 2018.
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The declines will improve in the second half, but result in mid-single digit declines for fiscal 2018, Davis said.
The drop in affiliate revenue comes because on top of the industry-wide decline in traditional pay-TV subscribers estimated at about 3.5%, Viacom lost additional subscribers because Charter retiered some of Viacom network.
Affiliate revenue is also down because Viacom is making less of its programing available to SVOD services.
Davis, and Viacom CEO Bob Bakish said domestic affiliate revnue would return to growth in 2019 as Viacom regains distribution with Charter and laps renew rate resets and benefits from rate increases in the new distribution deals.
"The company's guidance of high single-digit declines in affiliate fees in the coming two quarters and full-year negative growth in 2018 points to the company's recent agreement renewals having come at terms much weaker than expected," said analyst Kannan Venkateshwar of Barclays.
Viacom also said that after improving to a flat quarter of domestic advertising revenue, ad revenue would be down low-single digits for the first quarter of 2018 because of rating softness. Ad revenue trends should improve in the second half, the Viacom executives said.
During the call, Bakish laid out plans for growing Viacom but the short-term revenue news seemed to dominate analysts attention and led to Viacom stock falling more than 5% in Thursday morning trading.
“The domestic affiliate fees sort of tainted the entire call so we are not sure that anyone really absorbed any of this,” said Ryvicker, referring to Bakish’s bullish projections.
Bakish said he plan for increasing growth at Viacom called for:
- "Accelerating the evolution of Viacom’s media business to better serve next-generation platforms and solutions."
- "Pushing the diversification of our business to grow our revenue footprint outside of media."
- "Growing share and margins, both in our core domestic networks business as well as at Paramount’s film and television production to drive earnings growth in what continues to be a very large and profitable business."
Bakish said he sees opportunities in over-the-top businesses, with direct to consumer experiences, free and authenticated apps and standalone subscription services. There are also advanced advertising and brand solutions.
“The good news is these are not businesses we have to create from scratch. In fact, in fiscal ‘17, the next generation platform and solutions businesses generated more than $350 million in revenue. The better news is we can grow this substantially and that is what we are increasingly turning our efforts to,” he said.
He pointed to Viacom’s experience in Japan, where a mobile version of MTV was created and quickly drew more viewers than the linear version of MTV on pay –TV, which also grew.
“All told, these areas are targeted to grow more than 25% to approximately $450 million in 2018, with a plan to deliver more than $1 billion organically by 2020,” Bakish said.
Bakish also talked about the focus on off-screen businesses. He said those businesses generated $280 million in revenue in 2017 and are expected to grow about 25% to $350M in 2018. “We have a plan in place to deliver between $500 and $600 million of revenue by 2020,” he added.
In the Viacom network business, Bakish said there were plans to reduce costs by $100 million in 2018. CFO Davis said those savings would be achieved via changes in procurement, real estate, automation and other efficiencies. They said there would be additional run-rate savings in the hundreds of millions realized by 2019, and that those savings would drop to the bottom line.