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Major programmers, content distributors on track for YOY revenue, EPS growth

Analysts project that quarterly revenue and earnings per share for most major media content and distribution companies will exceed year-ago results for the September reporting period. Expectations for sequential comparisons, though, are more mixed.

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An analysis by S&P Global Market Intelligence covering nine companies, including network operators AMC Networks Inc. and pending merger partners Discovery Communications Inc. and Scripps Networks Interactive Inc., found that analysts on average expect eight of the nine to record year-over-year revenue improvement. Only CBS Corp. is expected to see a decline. Sequentially, the mean estimates predict growth for four of the nine companies. EPS expectations tracked similarly.

An analysis by Kensho Technologies Inc. that estimates a company's stock movement after removing the impact of broad market factors showed media stocks do not always go up or down in line with earnings beats or misses, however, indicating other factors in the results may be influencing investor reactions. For instance, Viacom Inc. and Walt Disney Co. both saw their stock prices drop after reporting earnings beats during the first two quarters of 2017.

Viacom executives after the June quarter earnings announcement noted that Chinese studio Huahua Media had fallen behind on a payment, as well as indications that its domestic affiliate revenues would decline in the September quarter, among other factors impacting the business.

The performance of ESPN (US), which has been hampered by a significantly diminished subscriber base and higher rights fees, remained an issue for Disney during both periods. In the June quarter, management noted that higher programming costs, lower advertising revenue and contractual expenses at ESPN were largely responsible for a 22% drop in operating income for the media networks segment, including cable.

As major media companies prepare to announce their September quarter financials, analysts expect more fallout from the declining traditional pay-TV universe and a less than robust advertising market.

With the nation’s top two distributors shedding subscribers — Comcast Corp. is expecting a downturn of between 100,000 and 150,000 video customers, while AT&T Inc. indicated that it will lose 90,000 overall in its third quarter — many of the media companies will see their viewership continue to shrink.

Jawad Hussain, an analyst at S&P Global Ratings, in an interview said he "expects companies to report accelerating subscribers losses, with the declines offsetting increases in affiliate fees." Hussain believes that virtual MVPDs are providing an uptick for cable networks, but the gains have been slow.

Telsey Advisory Group analyst Tom Eagan in an interview said that the cable side of FOX Networks Group, led by the ratings strength FOX News Channel (US), has been performing well. With some less mature networks still expanding their bases, 21st Century Fox Inc.'s overall cable portfolio has registered growth. Eagan anticipates it bucking industry trends again.

As to Viacom, Eagan believes that President and CEO Bob Bakish's strategy to focus on six core networks is fundamentally correct as those networks produce the bulk of affiliate fees. He expects an ongoing carriage dispute with Charter Communications Inc. will be resolved, with most if not all of the carriage fees directed toward that core group.

Subscriber growth should continue to build for streaming leader Netflix Inc., which S&P Global's Hussain projects will add between 4.5 million and 5 million U.S. customers in 2017, some 2.5 million of whom came on board during the first half.

Hussain said Netflix's programming commitments are not going to slow down, however, leading to higher expenses. As certain suppliers, including Disney, elect to not renew previous pacts, he said some of Netflix outlays will serve to replace lost content.

Telsey's Eagan said the third quarter was another soft one for the advertising market: "Ratings were down and volume was light." Meanwhile, he said higher upfront fees "don't truly kick in until the fourth quarter."

Hussain said the ad market is cyclical and media companies have been pointing toward improvement in the third quarter, but the retail and consumer packaged goods sectors remain challenging, dampening the ad market's outlook.

S&P Global Ratings credit analyst Naveen Sarma noted that while networks maintain that the scatter market remains strong, recent quarterly advances are being blunted by 10% to 12% audience declines. Companies are not generally acknowledging make-goods, that practice of reimbursing advertisers for audience under-delivery, but Sarma believes they are curtailing ad sales revenues.

Macquarie Research analyst Tim Nollen held a more upbeat view. "While make-goods may have to be made depending on ratings, digital ad sales, plus dynamic ad insertion brings better ad growth than a C3/C7 rating may imply."

S&P Global Inc., owner of S&P Global Market Intelligence and S&P Global Ratings, has an investment in Kensho Technologies Inc.