Viacom: Focusing on Non-Nielsen Advertising - Dan Salmon, BMO Capital Markets
Event
Revenue of $3.99B was ahead of our $3.96B estimate and consensus of $3.89B. Adj. EPS of $1.71 was also ahead of our $1.70 and consensus of $1.68. Media Networks adjusted OI was $1.09B (vs. our $1.11B and consensus of $1.01B).
Impact & Analysis
Although Viacom's focus on "non-Nielsen" dependent advertising creates a strong opportunity in monetizing its non-linear viewership, it will take time to get there and recently accelerated ratings declines don't help the wait. Management noted that 30% of its domestic ad sales are non-Nielsen dependent and it aims to get to 50% over the next three years. Viacom Velocity and Echo should be significant contributors in helping to achieve that target as branded content and social continue to gain importance for both marketers and network owners. Other advertising included in the category are dynamic ad insertion into VOD, digital sponsorships, mobile app and ".com" viewership and a nascent YouTube presence. While Viacom's struggle to renew with some smaller cable operators creates some uncertainty, the company has 70% of its agreements locked up for at least three and up to eight years. And agreements with virtual MVPDs like Sony can offset that impact as those consumers will have more options and can ultimately sign up through those new distributors.
Valuation & Recommendation
We maintain our Market Perform rating but lower our target to $72 from $76, implying 9.1x FY2015 EBITDA and 12.2x adjusted P/E. We are lowering our FY1Q15 EPS estimate to $1.33 from $1.43, FY2015 to $5.89 from $6.12 and FY2016 to $6.76 from $7.05.
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Daniel Salmon, Equity Research Analyst at BMO Capital Markets. Research trends at the intersection
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