This was certainly a good quarter for Viacom
(VIA)
as the company surpassed Wall Street expectations despite a slowing economy that undoubtedly impacted consumer discretionary spending.
The company's Media Networks segment remains its core strength and cash generator. The wildcard will be how well the summer's theatrical releases perform. I have no doubt that Indiana Jones and the Kingdom of the Crystal Skull will be a megahit as it will appeal to the original Indiana Jones generation as well as that of our children. I have no feeling for Iron Man, but we will get a full report from Steve Birenberg when he gives us his weekend box office report. I saw some trailers for The Love Guru, and that one can go either way.
While Viacom is an excellent company, I cannot get myself to tune in to the stock. I have several reasons. First, the company needs to pare down its debt. It should be throwing all free cash flow at paying down debt rather than buying back stock. Second, a cash cow like Viacom should be paying a hefty dividend to its shareholders. It is not. Third is Sumner Redstone. He is a great media mind but continues to alienate his subordinates, thus, there never seems to be a qualified replacement for Redstone once he departs. As you well know, he is no spring chicken and has done a poor job at succession planning. Lastly, the stock gets no love from Wall Street. Since splitting apart from CBS
(CBS)
, Viacom has gone nowhere. CBS, however, has tanked.
Viacom reported first-quarter 2008 EPS of 42 cents, and, excluding a 2-cent non-cash impairment charge, the adjusted EPS was 44 cents. The company refers to the adjusted result during the conference call. Revenue for the quarter rose 15% year over year, to $3.12 billion.
I stand corrected regarding my comment in the preview about MTV and VH1 being in decline. According to management, VH1 posted its twenty-third consecutive quarter of growth. The company did not dispute my assertion on MTV. Spike, Nickelodeon, Comedy Central and TV Land are the leading brands for Viacom.
Media Networks revenue rose 16%, to $2 billion. Advertising sales rose 8% worldwide and 7% domestically. The scatter market was strong, and the upfront market increased double digits. Into the second quarter, the scatter market is holding up, and domestic sales are expected to be comparable to that of first quarter. Ancillary revenue rose 72% on the strength of Rock Band, which will be released in Europe soon. (My kids just got this game, and they actually all play together nicely; it's a miracle, I tell you.) Affiliate fees were up 13% in the quarter.
Filmed Entertainment revenue rose 12%, to $1.15 billion. The unit reported a $63 million operating loss, which was a $45 million improvement from the prior year. Theatrical revenue declined 7%, to $247 million. Home entertainment revenue increased $89 million, or 22%, which included $29 million for the conclusion of the HD-DVD agreement. (I just bought a Sony
(SNE)
Blu-ray player.) Spiderwick Chronicles and Cloverfield had record openings in January. Iron Man is debuting today. Indiana Jones and the Kingdom of the Crystal Skull will be released in the summer. Kung Fu Panda, in conjunction with DreamWorks Animation
(DWA)
, will come out in June. Other summertime releases are The Love Guru, with Mike Myers, and Tropic Thunder, also from DreamWorks.
Free cash flow declined slightly in the quarter due to higher cash tax payments. For the full year, management expects free cash flow to be comparable to that of 2007. Viacom ended the quarter with $8.6 billion of debt and capital leases. During the quarter, the company repurchased 10.4 million shares for $414 million.
For Rothbort's preview heading into the Viacom conference call, please click here.At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.
