Newly merged ViacomCBS is having a really bad day. The stock tanked, and is still down more than 17%, after disappointing quarterly earnings and a barrage of questions from Wall Street entertainment analysts – answers to which they clearly did not find reassuring.
The inquiries themselves were unusually anxious: “Looking at your guidance for 2020, I’m curious about how much conviction you have in these numbers,” was the first.
“Absolute conviction,” CEO Bob Bakish said.
“Are you confident you can accelerate advertising growth over time?” was the second. Wall Streeters also asked why cable affiliate fees were down 8% and why content costs were up steeply. One wondered if a beta test of the new streaming product temporarily dubbed House of Brands set for later this year is fast enough given the rapid surge of competition. Another asked if ViacomCBS really could afford to ink an expensive new deal with the NFL.
They weren’t sure why the company licensed crown-jewel properties like SpongeBob SquarePants and South Park to third parties even as rivals including Disney+, Peacock and HBO Max are clawing back some of their best programming for their own streaming services.
“They still think they are big enough to have a streaming business and be a supplier of content,” noted one analyst who was on the call.
“I just couldn’t get my hands around it. The numbers don’t make sense,” he said.
ViacomCBS swung to a loss last quarter due in part to a $468 million fee for “restructuring and other corporate matters” including severance costs. Bakish noted a consolidation of the sales force of the two companies but otherwise didn’t discuss the extent of layoffs, which are common in mergers.
CFO Christina Spade said a chunk of $750 million in anticipated cost savings from the deal will occur “from incremental opportunities across areas where Viacom and CBS have the most overlap – namely duplicative organization areas, vendor sourcing and, to a lesser extent, real estate consolidation.”
Black Rock, the modernist skyscraper designed by Eero Saarinen that has been CBS headquarters for more than half a century, is on the selling block.
Spade said the merged company will see about $250 million of the savings this year, $350 million in 2021 and the remaining $150 million in 2022.
This “cross-synergy” target is higher than the $500 million ViacomCBS originally projected. But that didn’t appease investors.
Wall Street particularly was concerned about free cash flow, a key metric of a company’s financial flexibility, which swung to a negative $561 million for the quarter from a positive $371 million the year before. For full-year 2019, it was $877 million, down from $3.1 billion. Viacom forecast a free cash flow range of $1.8 billion-$2 billion this year, below analysts’ estimates of about $2.2 billion, one said.
Bakish said fourth-quarter numbers still reflected two separate companies executing on separate strategies with all the costs and none of the benefits of the merger. He cited “legacy content investment decisions” at some business units and said spending on content will ramp down across the board.
Showtime was a particular focus. “Over the years, the premium cable outlet has made strong progress elevating its brand, deepening its programming lineup, expanding its reach through OTT. That said, it was a working-capital headwind for the company in 2019 and the time is right to … evolve the programming mix,” Bakish said – hence the concurrent announcement of RuPaul’s Drag Race All Stars airing a special edition on the premium cable network.
“To be clear, Showtime will continue to be a home for scripted shows … and the investments we made in 2019 will clearly pay dividends in 2020. [But Showtime has] traction in other formats … and we see an opportunity to lean more in this direction,” he said.
A programming council led by Showtime CEO David Nevins is exploring what content goes where across the breadth of the merged company.
Bakish said ViacomCBS will not be licensing as much content to third parties in the U.S. as it has in the past but will look at every decision “as one window in time.”
For instance, said the decision for Nickelodeon to make a SpongeBob SquarePants spinoff for Netflix as part of a multi-year production deal benefits the franchise. A giant platform like Netflix drives awareness and creates new fans for the content, and for the upcoming SpongeBob film.
“I’d rather he sold (MTV’s) Teen Mom and kept SpongeBob,” said one analyst. “SpongeBob is the biggest character within Nickelodeon, and South Park is one of the biggest show from the legacy Viacom network.” HBO Max inked a deal last fall for exclusive streaming rights to the iconic Comedy Central series.
Bakish said the new streaming service will have three components – free, premium pay and a middle tier he called “broad pay,” which the company is still working on. He noted the service will be launching from “a position of strength,” given the $1.6 billion in domestic revenue reported in 2019 – up 60% – the 22 million monthly average users and 11 million-plus domestic pay subscribers. “That’s a foundation, so we are taking that and building on it. It’s not new,” he said.
ViacomCBS’ merger and reorganization creates challenges and opportunities. Viacom is one of the leading content creators globally, noted Barrington Research analyst James Goss. Wall Street may come around, the stock may bounce back. Just not today.