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Viacom charts sequential domestic ad improvement as ratings begin to grow

With ratings starting to improve under its revitalization plan focusing on a core group of six networks, Viacom Inc. posted sequential domestic advertising improvement during its third fiscal quarter and would have moved into positive territory for the period if it had not decided to reduce inventory loads.

CFO Wade Davis told analysts on the company’s earnings call Aug. 3 that advertising sales in the U.S. declined 2% during the third quarter of its fiscal 2017, ended June 30. That marked improvement from a 4% decline during the second quarter.

Viacom made the decision to reduce the ad load at a number of its networks as a means to improve advertiser and viewer experiences with the networks. Advertising sales, Davis said, would have grown at a 1% rate in the period without the reduction, resulting in a 3-point swing in the period. Davis said the company anticipates similar results with domestic advertising in the fourth quarter.

Viacom President and CEO Bob Bakish said the company's push to devote more resources around six flagship brands — Nickelodeon/Nick At Nite (US), Nick Jr. (US), BET (US), Comedy Central (US), MTV (US) and Paramount Network, which will be converted from Spike (US) in January — is producing ratings gains and that more new programming is on tap. He noted that the time frame for turning around TV networks, relative to adding more original fare, is typically a one-year window. Over time, he said the “ad flow will follow.”

Bakish said he was pleased with Viacom’s upfront sales, which are about 95% complete and have yielded volume gains and pricing increases in the mid-to-high single digits. He noted that advertisers reacted positively to the upcoming commitment to more high-quality original fare for Paramount, which will morph from the male-skewing Spike, to more of a general-entertainment service. He also said that advertisers favored the new direction at MTV that is in part featuring more of an emphasis on music, as evidenced by the reboot of the "Total Request Live" franchise on linear and digital platforms this fall.

On the distribution watch, Bakish said flexibility and different offerings are key. "The ship has sailed on everyone having a $100 bundle," he said, pointing out that many consumers prefer lower price options – maybe even under $40. "Low-priced entertainment packets will become a reality" and that will be beneficial to Viacom.

Meanwhile, the company continues to negotiate with Charter Communications Inc., seeking a resolution to a move by the operator that has positioned Viacom services on a higher priced tier.

Bakish doesn't believe suing a big affiliate is the way to solve problems. "A better way to solve is through engagement and exploring ways we can create value together. That's what we are focused on," he said, noting that a resolution isn't likely to come until the parties reach a new renewal pact. Davis said that while the company is very focused on finding a way to bridge the gap, Viacom reserves the right to address the matter legally.

During its third fiscal quarter that ended June 30, Viacom saw total revenues improve 8.3% to $3.36 billion from nearly $3.11 billion in the prior-year period, reflective of growth across its media networks and filmed entertainment segments.

Media networks revenues grew 2% year over year to $2.56 billion in the quarter, buoyed by affiliate revenues, which improved 4% to $1.19 billion and advertising revenues, up 2% to $1.24 billion. Domestic revenues were substantially flat at $2.04 billion, while international revenues rose 8% to $522 million. Excluding foreign exchange, which had a 5-percentage point unfavorable impact, international revenues increased 13% in the quarter, primarily driven by the acquisition of Telefe.

Domestically, affiliate revenues increased 4% to $1.01 billion, principally reflecting higher revenues from subscription video on demand deals and other over-the-top agreements, as well as rate increases, partially offset by a decline in subscribers. International affiliate revenues increased 1% to $178 million.

Domestic advertising revenues declined 2% to $955 million, reflecting pricing gains that were blunted by lower impressions. As mentioned, domestic ad revenues would have improved 1% in the period, if the company had not made the decision to reduce ad load at its networks. International advertising revenues grew 14% to $280 million in the quarter.

Operating income decreased 3% to $746 million from $769 million, with results shaped by restructuring and programming charges of $59 million, tied largely to the execution of strategic initiatives at Paramount. Adjusted operating income rose 5% to $805 million from $769 million.

Viacom reported a 58.1% year-over-year gain in fiscal third-quarter net income attributable to the company to $683.0 million, or $1.70 per share, from net income of $432.0 million, or $1.09 per share. Results benefited from a $285 million gain on the sale of the company’s 49.8% stake in premium programmer EPIX (US).

The third-quarter S&P Capital IQ consensus estimate was $1.05 on a normalized basis and $1.11 on a GAAP basis.