CBS Corporation turned in a pretty good Q1 given the myriad challenges, including the writers strike, falling TV ratings, a weakening local ad market, and continuing softness in radio. Flat revenue of $3.77 billion beat Street estimates as did EPS of $0.36, up 29% from a year ago.
In the short term, the strike actually boosted CBS’s results. Net income was up 14% to $244 million from $213.5 million a year ago. TV revenue was up 1% y/y, but operating income from the TV unit was up 15%, reflecting lower production costs. Moonves said the network cut “tens of millions” out of the production budget this year by producing “presentations” rather than full show pilots.
The local TV stations, while getting an influx in political dollars, are also seeing slow ad sales, a condition that may worsen as the year wears on. CBS says it is seeing “slower” growth, but not negative sales growth at the stations.
Moonves, predictably, was bullish on CBS’s pay-TV network Showtime, even though it loses much of its movie library when Viacom starts its own channel next year. He said the $300 million CBS would have paid for Paramount, MGM and Lions Gate films over three years, would be invested in more original shows like “The Tudors,” “Weeds” and “Californication.”
Coverage of the live call with chairman Sumner Redstone and CEO Leslie Moonves:
Sumner Redstone’s intro: “The CBS Corporation is doing a fantastic job–operating our core businesses, adjusting asset portfolio and capitlizing on all the opportunities in new media. I am as enthusiastic as I have ever been about what the future holds for this great company. I believe we have the wherewithal and the will to deliver for our shareholders.”
Throws his support to Moonves: “The leader of all this exccitihg activity is my friend Les Moonves. Les is as dedicated to winning as he has ever been. And there is no one I would rather have at the CBS helm than Les Moonves.”
Moonves: Revenue results were all the more satisfying considering the writers strike in the quarter. We were able to turn these soild results into increases on the bottom line. Raised dividend–this increase is a strong reminder that we are committed to returning value to shareholders.
On acquisitions: We have plenty of cash to invest in our businesses and make smart opportunistic acquisitions. We are looking to acquiring high margin businesses: first priority is content, second is interactive, third is outdoor. Last week we announced $110m acquisition of IOA, the largest outdoor company in South America.
On TV advertising: Network pricing in the scatter market is up double-digits. We anticipate a very healthy upfront selling season. We will be showing brand new shows at our upfront. The shows were filmed as presentations rather than full pilots, delivering further savings.
TV stations: Record political advertising in Q1, and much more political revenue on the way. CBS owns stations in Philadelphia and Pittsburgh, and benefitted from contested Democratic primary in Q2.
On radio: Turnaround progressing. Early progress in NYC market, with pacings up 15% for Q2. Says CBS has the largest online radio audience and projects $50 million digital revenue for the radio division.
On Showtime: Moonves says Viacom’s decision to pull its films and launch a competing channel with MGM and Lions Gate will have no effect on Showtime. Here’s why: it frees up $300 million ($100 million a year) to develop new content, like Showtime’s “The Tudors,” “Weeds,” “Californication,” etc. and CBS can still acquire films at a lower cost. In addition, Moonves says CBS will be producing its own films by the time the current deal ends, which will be distributed via Showtime.
Moonves on Showtime: “The full slate of movies will satisfy programming needs through 20010 and we are continually in the process of licensing new flms at favourable terms. Our programming will not miss a beat. Some of these films will come from our film division, which is ramping up.”
Question on ad pacings at the TV stations for Q2. Looking weaker?
CFO Fred Reynolds: We had a record Q1, but the underlying business is softer than we would like. Political is going to help us a lot but the underlying economy is not as strong as we had hoped.
Question about restructuring charges in radio and TV. When will we see savings?
Reynolds: They will all be in the results this year. Will pay back the $45 million charge this year.
Question from Jessica Reif Cohen at Merrill. Anything done to change the cost structure of the business at local stations?
Moonves: Stations were required to look at cost structure given economic weakness. Each station was assigned a task and they accomplished in a variety of ways. Some was done in personnel costs (firings) and some was addressed by new technology.
What is your view on the potential of an actors strike?
Moonves: The tone of these negotiations seems more cordial than the writers. we are optimistic we will ahve a deal before this contract runs out (in June) and we will avoid a strike.
Question to Sumner: what is going on in the pay TV market that allows both companies to have pay-TV channels
Sumner on CBS-Viacom competition: Each of these companies have obligation to follow their own strategic objectives and compete. I believe competiton is healthy. A large part of the press has missed the point. Les talks to me every day about his strategy. Phillippe (Viacom CEO Daumann) talks to me every day about his strategy–and I support both. People think there needs to a winner and a looser. Showtime’s strategy will work for CBS and Viacom’s strategy will work for Viacom. That is what I believe.
Moonves: Some of our film deals go through the end of 2010. We have spoken to other TV and movie companies and there is a large amount of product out there. It gives CBS the ability to add films to the library.
What’s the cost savings on “presentations” vs full show pilots?
Moonves: In a number of the cases, the presentations costs 50% of what a pilot would cost. Rather than a 10-day shoot, took key scenes for the presentation. You don’t necessarily need to see a full pilot before you put it on the air. We’ve saved “tens of millions of dollars” in the development process.
Do you need to acquire a cable network, like Weather Channel, to get retransmission leverage for CBS?
Moonves: We look at everything but don’t need to acquire anything. Says CBS is able to get retransmission payments from cable operators without a cable network in the portfolio.
Seeing any ad recession? Last quarter you said no recession, but how about now?
Reynolds: I’m not sure we are seeing a recession because we are still seeing growth. Advertisers are still going to the big networks and the broad media plays. It is slower, but “recession” indicates decline. We expect Q2 to build over last year. Says CBS is seeing slow growth but not negative growth.
How does CBS’s show development for the fall compare to your position last year?
Moonves: There are some who think the forced compressed nature of it may have produced better work. Or more urgent work. We will have more original product done before our announcement than anybody else. We will have a more organised idea of what’s going to be on this fall than some of our competitors.
Q1 results summary:
CBS turned in a respectable Q1, given the challenges. Revenues were flat with 2007 (when CBS had the Super Bowl) but beat expectations. Results were apparently not hurt terribly by plummeting TV ratings and the writers strike. TV revenue was up 1% y/y, but operating income from the TV unit was up 15%, reflecting lower costs from the strike — CBS wasn’t paying anyone to make new TV shows for much of the quarter. Outdoor was also up 7% y/y in the quarter, while radio was down 9% and publishing down 12%.
We’ll cover the 8:30 a.m. conference call live, and listen for colour on the advertising climate, the impact of the writers strike on the TV network, and Showtime losing its movie output deals and getting new competition from a Viacom-led pay-TV channel.
Revenue: $3.7 billion, about flat with 2007, but beating Wall Street’s $3.55 billion estimate.
EPS: $0.36, up 29% y/y vs $0.33 Street estimate
Operating Income: $720 million, up 10% from Q1 2007
Outlook: CBS expects operating income growth of 3%-5% from last year’s $2.73 billion in 2008.
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