George Mannes

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Viacom's View Is All Roses

George Mannes

If 2003 hasn't been everything Viacom (VIAB Quote - Cramer on VIAB - Stock Picks) could have hoped for, the coming year is looking much more promising.

That's the message executives offered up on a conference call Thursday morning in the wake of Viacom's third-quarter financial report, which came in broadly in line with expectations. The company's shares held steady around midday as investors digested the latest developments.

On a conference call with analysts, Viacom President Mel Karmazin held expectations in check for the remainder of the year, making several references to "difficult comparisons" with prior year results that benefited from the mid-presidential-term political advertising.

But Karmazin spoke optimistically about prospects for 2004, when the company's advertising sales will get a boost from CBS's Super Bowl broadcast and the cyclical effect of a Summer Olympics year combined with a presidential election campaign.

"2004 will be a breakaway year for us," Karmazin told analysts. "And I hopefully feel that you will share our enthusiasm for the company."

On Thursday morning, Viacom's shares were flat at $38.73.

Hand in Hand

Earlier Thursday, Viacom followed the lead of its crosstown rival in posting a mixed third quarter and reiterating its financial outlook.

The New York media giant said strong cable, video and television results outpaced a weak local advertising business -- which influences the company's TV station and radio station revenue -- in its latest quarter. Viacom's release came just a month after the company shocked Wall Street by warning of slower-than-expected growth in local markets.

For the third quarter ended Sept. 30, earnings rose to $700 million, or 40 cents a share, from $640 million, or 36 cents a share, a year ago. Revenue rose to $6.6 billion from $6.3 billion a year earlier. In keeping with the numbers posted yesterday by New York media giant Time Warner (TWX Quote - Cramer on TWX - Stock Picks), Viacom's results were stronger than expected on the bottom line but a bit light on the top: Wall Street analysts had forecast third-quarter earnings of 38 cents a share on revenue of $6.7 billion.

Operating income rose 7% to $1.38 billion, and free cash flow surged to $708 million from $214 million a year ago, reflecting higher operating income as well as working capital improvements including lower investments in merchandise inventory at Blockbuster (BBI Quote - Cramer on BBI - Stock Picks).

Viacom said a strong contributor to third-quarter revenue was the advertising segment, where revenue rose 8% to $2.88 billion. "We delivered top line growth in nearly every business area and brought in significant operating income gains, all despite slower-than-expected growth in local advertising that did not keep pace with gains in the national ad market," CEO Sumner Redstone said in a statement.

For coming periods, Viacom reaffirmed its expectation to deliver mid- to high-single digit percentage growth in revenue and operating income for full year 2003, with low- to mid-teen growth in earnings per share. For the full year 2004, Viacom said it expects to deliver revenue growth of 5% to 7%, resulting in operating income growth of 12% to 14% and earnings-per-share growth of 13% to 15%.

Analysts expect Viacom to earn 39 cents a share on revenue of $7.3 billion next quarter, and make $1.65 a share on revenue of $28.4 billion next year.

Upbeat

In typically upbeat fashion, Karmazin spent much of the call pointing out reassuring omens for the coming year. The rate of cancellations for first quarter 2004 TV advertising is low, he said. The CBS network has already sold out over two-thirds of its advertising inventory for the 2004, "at prices we are very, very happy with." Karmazin said he wouldn't be surprised if TV station revenue growth next year were in the double digits.

One possible driver of growth for TV advertising, Karmazin suggested, is next month's scheduled implementation of wireless telephone portability, which will enable cellphone users to switch carriers while retaining their telephone numbers. From the telecom industry, "an awful lot of people are coming in" to discuss possible advertising, said Karmazin.

Again, typically, Karmazin remained unfazed by continuing weakness at the company's radio division, Infinity. "I can't think of any better business in the United States than the radio business," he said. Radio, he said, "is a free cash-flow machine."

Though in 2003 some advertising dollars that might have been slated for radio were shifted to TV instead, Karmazin said he believed that the tightened TV inventory next year, created by greater demand for political advertising, would shift dollars back from TV to radio. Karmazin said he was confident that 2004 would be the best year ever -- in terms of revenue, operating income before depreciation and amortization, and free cash flow -- "in the great history of Infinity."

One of the biggest problems at Infinity, said Karmazin, was the performance of the 102.7 FM radio station in New York City. Much of the troubles at the station can be traced to the firing of on-air personalities Opie and Anthony in 2002, in the wake of a contest that they ran which encouraged people to have sex in public places in and around New York City. The contest backfired after a participating couple was caught having sex -- or, perhaps, simulating it -- in St. Patrick's Cathedral.

Despite the financial hit that Viacom took, Karmazin said he had no regrets about the firings. "We made a decision that what Opie and Anthony did on the radio was not acceptable to Viacom at any price. ... We will not tolerate that kind of programming."