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Fuzzy Picture at Viacom

Earnings beat estimates, but the media giant still has a long way to go in adapting to the digital craze.
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Updated from 7:16 a.m. EDT

Viacom's

(VIAB) - Get Viacom Inc. Class B Report

first-quarter earnings slid 36%, reflecting restructuring charges, a surge in film costs, ratings declines at its key cable networks and mounting pressures from the rise of digital-media distribution.

The New York-based media giant said Thursday that net income for the quarter slipped to $202.9 million, or 29 cents a share, from $317.2 million, or 43 cents a share, in the same period last year.

Excluding restructuring charges tied to a recent round of layoffs at its MTV Networks unit, Viacom said it earned 34 cents a share. That beat analysts' average forecast of 32 cents a share, according to Thomson First Call.

The company said its overall revenue increased 16% to $2.75 billion, exceeding Wall Street expectations of $2.55 billion. Meanwhile, Viacom's total expenses jumped 32% to $2.3 billion.

"We are pleased with the progress we're making, but we recognize that we are still very much in the midst of a transformation," said Viacom CEO Philippe Dauman on a conference call with analysts following the release.

Dauman acknowledged on the call that Viacom is facing tough ratings challenges at MTV, Nickelodeon and BET in the run-up to the industry's so-called upfront sales period, where networks negotiate ad deals for the upcoming TV season.

Citing his firm's analysis of Nielsen Media Research data, CIBC World Markets analyst Jason Helfstein estimated that ratings at Nickelodeon declined 7% from a year earlier and MTV suffered a 10% drop among the stations' key demographics.

Dauman attributed some of the declines to Viacom's efforts to drive audiences to its online destinations, where it has been overhauling its offerings in light of the recent online video craze. That said, Viacom is struggling to rejuvenate its TV ratings as well.

"We expect to see rating results starting in the summer season," said Dauman.

Earnings at the company's television division, which also includes networks like Comedy Central, CMT and VH-1, fell 3% to $601.5 million amid the restructuring charges and higher expenses. Revenue increased 10% to $1.73 billion, driven by gains at MTV and BET.

The company's film business, which includes Paramount Pictures, swung to a loss of $105.7 million, due in part to a sharp increase in U.S. print and advertising costs. Revenue climbed 27% to $1.05 billion, boosted by the acquisition of Dreamworks and a distribution agreement with

Dreamworks Animation

(DWA)

.

On the call, Dauman said Viacom's movie business would get a boost later in the year from the already released

Blades of Glory

, starring Will Farrell, and the upcoming July 4 release of

Transformers

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, a Steven Spielberg film.

Viacom's worldwide ad revenue climbed 10% to $974 million. It didn't divulge digital ad revenue, but the company committed to delivering $500 million in digital revenue in 2007.

The company is locked in a legal fight with

Google

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over alleged copyright infringement from the search giant's video-sharing Web site, YouTube. Clips of popular Viacom-owned shows were readily available on YouTube, which has fast become the world's most popular online video site.

In March, Viacom

filed a suit seeking more than $1 billion in damages. Google has denying the charges, claiming protection from liability under the so-called safe-harbor clauses of the Digital Millennium Copyright Act of 1998.

In January, Viacom signed an agreement with Joost, a free, commercially supported Internet television service created by the founders of Kazaa and

eBay's

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Skype. Viacom also has a partnership with iTunes,

Apple's

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online downloading site, and last month it named

Yahoo!

(YHOO)

, Google's chief rival, as its exclusive

provider of search ads.

Dauman said while Viacom is facing short-term challenges as digital distribution transforms the media industry, the company is in a solid strategic position for the long term as the "world's largest pure content company" and the "No. 1 online entertainment destination."

Shares of Viacom recently were down 7 cents to $41.95.