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A two-year crystal ball from USA Networks

Oct 29, 2001  •  Post A Comment

Barry Diller says he’s an open book.
The chairman and CEO of USA Networks has taken the unusual step of releasing his company’s two-year operating budget as a means of providing “guidance” to investors and analysts on the future performance of his business units.
In a third-quarter earnings call with analysts, Mr. Diller explained the move as his response to the frustrating exercise all public companies must go through, one that has become particularly tedious and risky in economically uncertain times.
“This is much more direct, much more transparent, much more open,” Mr. Diller said.
“In most companies, the budget and guidance are two separate processes,” he said. “And usually companies have guidance that is far less than what you really think is going to happen. This is a dopey way to do things.”
The internal budget released calls for revenue increases of 15 percent in 2001, 12 percent in 2002 and 19 percent in 2003. It also calls for cash flow increases of 16 percent in 2001, 15 percent in 2002 and 23 percent in 2003. The budget USA released shows a $3 million loss on $5.8 million in revenues from its new Trio and Crime networks and other emerging media businesses.
However, its entertainment business is generally carried by USA Network, the second-highest-rated cable network in prime time, and Sci-Fi Channel. USA Network earnings grew 31 percent to $113.7 million on a 7 percent rise in revenues to $214 million in the third quarter. Sci-Fi earnings rose 6 percent to $24 million on a 2 percent decline in revenues to $63 million.
Studios USA earnings nearly doubled to $17.6 million on a 71 percent rise in revenues to $121 million, vaulted by the “Law & Order” franchise.
The budget shows USA Networks equally dependent on advertising and affiliate fees, while Sci-Fi is more dependent on advertising by one-third for its overall revenues.
USA affiliate fees are set to increase to $120 million in 2002 from $96 million in 2000. Advertising revenues will grow slightly to $194 million in 2002 from $181 million last year. Total costs at the networks declined 10 percent in the quarter, demonstrating considerable operating leverage and the ability to control expenses in the future to maximize profits.
The internal budget calls for the company’s network and studio businesses to generate nearly $700 million in earnings on more than $1.8 billion in revenue by 2003, up from $600 million this year on $1.6 billion in revenues.
“The most significant change in each year is at cable networks, where a drop-off in high-margin advertising dollars flows almost directly to the earnings’ estimated average growth of 17 percent to 18 percent through 2003,” said Peter Mirsky, an analyst at SG Cowen.
Home Shopping Network will be the biggest contributor to growth in 2002, when its cash flow should grow 32 percent on an 18 percent rise in revenues.
However, analysts generally voiced concern about USA spending less on programming at its cable networks. “While USA has reduced all of its expenses at the cable networks in the last year, management is aware of the risks of continuing to reduce programming expenses,” said Richard Bilotti, analyst at Morgan Stanley Dean Witter.
The company has committed to increasing program expenditures in 2002.
Mr. Diller defended his decision to reduce spending and the number of original made-for-TV movies USA produces.
“We’re much better off putting more resources into fewer movies,” Mr. Diller said. He added that every dollar the company saves is spent on programming.
But not everyone walked away a believer last week. Goldman Sachs analyst Rich Greenfield downgraded USA to a “market performer” from the “recommended list,” citing concerns over the advertising recession and a slowdown in travel-related commerce. He also cut his earnings estimates for USA this year and next.
USA reported a sharp increase in its third-quarter net loss of $40.4 million, or 11 cents a share, from continuing operations reflecting $12.9 million in one-time restructuring costs.
USA reported a 14 percent increase in earnings before interest, taxes, depreciation and amortization of its operating business to $245.6 million on a 15 percent increase in revenues to $1.22 billion.
USA said prior to the terrorist attacks on Sept. 11, it was on track to exceed its original guidance of 25 percent earnings growth. Cable and studio earnings increased 31 percent to $155 million on a 19 percent rise in revenues to $398 million.#