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Mixed Message in Earnings

May 3, 2009  •  Post A Comment

The major media companies’ earnings reports last week provided some glimmers of hope that the worst of the recession may be passing.
Those companies were mostly in the cable business, which has been one of the strongest segments of the media industry.
This week, however, the companies that own broadcast networks and local stations—CBS Corp., Walt Disney Co. and News Corp.—will be reporting, and the results are not expected to be as encouraging.
“I think it’s hard to see broadcasting turning any time soon,” said veteran analyst Harold Vogel, president of Vogel Capital Management.
Dependent on advertising without receiving lucrative subscriber fees, broadcasters are feeling the pain from the struggles of the auto industry.
“This swine flu thing doesn’t help advertising, either,” Mr. Vogel notes. “What are you going to do, say, ‘Our airline doesn’t carry swine flu’?”
Nevertheless, the first-quarter earnings announcements offer some signs that the bottom might be near.
Viacom CEO Philippe Dauman, whose company announced a 34% decline in first-quarter profits, said last week that he thought the deterioration of the advertising markets may have stopped.
“While it’s too soon to make a call, over the past several weeks we have seen the advertising markets stabilize,” Mr. Dauman told analysts on the company’s earnings conference call.
At Time Warner, which is expecting earnings to be relatively flat for the year, Chief Financial Officer John Martin said the company is expecting “that the second quarter will be our most challenging from the growth perspective.”
He said the outlook for ad growth in the second quarter is “relatively similar” to Q1, when domestic advertising was basically flat; a small increase at Time Warner’s news networks, including CNN, was offset by a mild decline at the Turner Broadcasting entertainment networks for the quarter.
Recovery Starting?
The key question is whether this moderation of bad news is the beginning of a recovery.
“I suspect they’re all bottoming out for the intermediate term,” Mr. Vogel said. “The rate of decline is probably ending where you’re starting to see a bottom. Call it a bottoming process.”
But Mr. Vogel doesn’t think this bottom will last.
“I’m basically optimistic about the very near term. I don’t think we’re headed down yet, but later in the year, or 2010, I believe we’ll go to new lows [for stock prices] in the market. So we’re not done yet with this, which is a three- to five-year healing process,” he said.
“What we’re seeing is a bounce right now. It’s welcome. It’s good relief. But don’t bet the ranch on it,” he said.
Viacom said its first-quarter earnings were $177 million, or 28 cents per share. Revenues fell 7% to $2.9 billion compared with the year-ago quarter.
At Viacom’s media networks group, which includes cable networks MTV, Nickelodeon and Comedy Central, operating income was down 9% to $629 million.
Revenues were down 8% to $1.87 billion as domestic ad sales fell 9% and worldwide ad sales dropped 11%.
Analyst Spencer Wang of Credit Suisse said the numbers at the cable networks were below his estimates.
“Viacom’s cable advertising was weak,” Mr. Wang wrote in a research note. “Overall, Viacom’s advertising performance in the U.S. continues to underperform its peers given sustained and broad ratings issues.”
Despite Mr. Dauman’s encouraging words, Mr. Wang said he is forecasting Viacom’s domestic ad sales will be down 10% in the second quarter because of the economy, weak ratings and increased cancellations of upfront orders. He’s also lowering his 2009 earnings-per-share estimate for Viacom to $2 a share from $2.07.
Time Warner reported lower earnings because of declines at AOL, but said profits were up at its cable networks.
Time Warner reported its earnings separately from Time Warner Cable, which has been spun off into a separate company.
Profits fell at Time Warner Cable because of expenses due to the separation and programming costs that rose 8%.
At Time Warner’s networks unit, which includes Turner Broadcasting and HBO, operating income before depreciation and amortization rose 11% to $1.1 billion because of increased revenue and lower newsgathering costs, the company said.
Analysts Like AOL News
The results were better than expected, but the big news for analysts was that Time Warner was closer to shedding its troubled AOL unit.
“We are pleased that Time Warner has decided to rid itself of AOL,” said Michael Nathanson, analyst at Sanford C. Bernstein & Co. “Over the past few years, despite fine results at Turner Networks, the main thrust of investors’ focus has been the future of AOL. With this situation hopefully coming to the end, we expect future attention will be paid to the Turner Cable Networks, HBO and the film studio.”
Comcast said its net income rose 6% for the first quarter, reflecting additional high-speed Internet and telephone customers. That growth offset a 2% drop in video customers. Net earnings were $772 million, or 27 cents a share, compared with $732 million or 24 cents per share in the year-ago quarter.
Despite the challenging economy Comcast said its solid results are allowing it to put money into new products and services.
“We’re equally determined to reinforce the competitive advantages, so we’re investing in products, marketing and customer service and in high-growth businesses like Comcast Business Services, while we execute on strategic initiatives like DOCSIS 3.0 wideband and going all digital that are so important to our long-term success,” the company said.

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