Viacom leadership painted a picture of recovery during the company’s fiscal first-quarter earnings call, parrying analyst questions about looming carriage talks with DirecTV, turnaround efforts at Nickelodeon and a big bet on ad-supported streaming.
The media company prior to the call reported a mixed quarter, with earnings beating Wall Street estimates but total revenue falling short of forecasts due to a decline in advertising. Investors are betting on the upside, sending shares in Viacom up 4% to $30.60 in early trading.
M&A on a broader level, including never-ending speculation about potential for renewed talks with CBS, never surfaced as a topic during the hour-plus call. But a large chunk of the company’s 35-minute prepared remarks was devoted to Viacom’s $340 million acquisition last month of Pluto TV, a leading player in free, ad-supported streaming.
CEO Bob Bakish described Pluto as a “scaled, direct-to-consumer play” that will “fit into and accelerate Viacom’s evolution.” He acknowledged that the Pluto move sends Viacom down a path that is markedly different from the subscription streaming direction of Disney and WarnerMedia. “The video marketplace will continue to segment across price points, and we want to play in all of them,” he said.
Viacom does have more targeted subscription streaming offerings, including Noggin, which Bakish said will soon launch on Roku Channels.
Pluto claims an audience of 12 million, based on how many viewers have downloaded the app, which is the No. 2 free app on Roku. “A majority of the Pluto TV audience is not watching pay-TV today,” Bakish said. That makes the AVOD outlet attractive to both programmers and distributors alike. “Distributors need a free-TV offering,” he said. “A pain point for them is how to add choice to their customer base without adding costs.”
About 7.5 million of Pluto’s overall base of 12 million have the app on smart TVs, Bakish said, which offer robust data about viewership due to the way the TV sets are built.
CFO Wade Davis said the Pluto deal would boost revenue but slightly hamper earnings in fiscal 2019, with the impact depending on the timing of the close of the deal. Viacom expects in to close in March, meaning it will not come into play in the current second fiscal quarter.
Viacom’s upcoming carriage renewal talks with DirecTV are seen as a signal moment for the company. The companies waged a bitter carriage fight in 2012, resulting in a 10-day blackout. That was before DirecTV was owned by AT&T, which is eager to contain costs as it absorbs WarnerMedia and pays down a staggering debt load.
“I know there’s a lot of noise on this but I like our hand,” Bakish said, though he stopped short of specifically handicapping the talks with DirecTV. When he succeeded Philippe Dauman as CEO in December 2016, Bakish worked quickly to repair damaged carriage relationships from the Dauman era. The efforts resulted in renewals with Charter and other major pay-TV operators, with incentives for advanced advertising and co-production offsetting was was understood to be some ground given on carriage fees.
Nickelodeon, meanwhile, has created “headwinds” due to its faltering ratings of late, Bakish conceded. But Davis said, “We’re fairly confident in the return to growth in the second half of the year.” He predicted “modest improvement across the portfolio, with specific improvement at Nick.”
Bakish noted that Brian Robbins, who formerly led AwesomenessTV and Paramount Players, is about four months into his role at the top of Nickelodeon, where he replaced longtime former chief Cyma Zarghami.
“He has extensively overhauled the team, and that team has developed a new slate,” Bakish said, noting that the slate will be unveiled next week at Toy Fair in New York. “In the pay-TV ecosystem, Nick matters more than ever,” Bakish argued.
Analysts weighed in with divergent takes on Viacom’s quarterly results. Todd Juenger, a noted bear with Sanford Bernstein, took note of the company’s accounting move including production revenue under the line item for affiliate fee revenue. Affiliate fee revenue gained 5% in the quarter.
“However one defines or classifies affiliate fee revenue, the major topic is the DirecTV renewal,” Juenger wrote in a research note. “We can’t imagine how Viacom will be able to re-classify their way out of the outcome of that event.”
Steven Cahall of RBC Capital Markets offered a far more upbeat take, saluting numbers at Paramount Pictures that “continue to impress.” Quarterly results, he wrote in a research note to clients, “were certainly ahead of expectations and demonstrate management’s commitment to bottom-line outcomes.”
Doug Creutz of Cowen & Co. found a middle ground, saluting the earnings beat and lower-than-expected costs, but expressing some hesitation and reaffirmed his “market perform” rating on the stock.
Management’s prediction for fiscal 2019 growth in affiliate and domestic ad revenue of low-single-digits “assumes domestic advertising returns to growth in the back half of the year,” Creutz wrote in a research note to clients. “We are not so sanguine, given that we expect the overall national TV ad market to remain under steady pressure from digital share take.””
Creutz offered a shoutout to Paramount CEO Jim Gianopulos for doing “a commendable job thus far in righting the ship, and view the move into TV production as a positive given the voracious demand for TV content by networks and streaming platforms.” Nevertheless, he added, “We continue to view the film studio’s position as challenged given the concentration of the market into fewer successful films, particularly given Paramount’s relative lack of A-tier IP (which is in part due to poor franchise management by prior leadership).””