Healthy top-line performance, effective strategic measures, and operating efficiencies facilitated CBS Corporation (CBS) to post better-than-expected third-quarter 2011 results. The quarterly earnings of 50 cents a share beat the Zacks Consensus Estimate of 46 cents and surged 43% from 35 cents earned in the year-ago quarter.
What Numbers Say?
Revenue inched up 2% year over year to $3,365 million, which is quite a healthy figure as the reported quarter lacked significant political advertising revenues. The increase in revenue was boosted by a 5% increase in content licensing and distribution revenue to $867 million and a 7% growth in affiliate and subscription fees to $438 million. Advertising revenue remained flat at $1,992 million during the quarter.
However, total revenue remained below the Zacks Consensus Estimate of $3,451 million.
Adjusted operating income before depreciation and amortization (OIBDA) increased 25% to $837 million, reflecting high growth margin revenue and better cost containment. OIBDA margin expanded 500 basis points year over year to 25% during the reported quarter.
Getting to the Segments
Content Group revenue, comprising Entertainment, Cable Networks, and Publishing, increased 3% to $2,272 million from the year-ago quarter, reflecting revenue increases in all categories.
Entertainment revenue inched up 1% to $1,632 million from the year-ago quarter, reflecting increased retransmission revenues, growth in primetime advertising and the new licensing agreement for the digital streaming. Entertainment OIBDA soared 46% to $405 million.
Higher affiliate revenue coupled with increased licensing income from international syndication and digital streaming for Showtime original series helped Cable Networks revenue to increase 14% to $420 million. Cable Networks OIBDA increased 19% to $203 million.
Publishing revenue crept up 1% to $220 million, reflecting a notable increase in the sales of profitable digital content book, partly offset by a slump in sales of printed books. Publishing OIBDA increased 19% to $38 million during the quarter.
Local Group revenue, including Local Broadcasting and Outdoor, contracted 0.3% to $1,133 million.
Local Broadcasting revenue inched down 3% to $656 million from the year-ago quarter attributable to a 6% decrease in CBS Television Stations revenue. CBS Radio revenue remained flat during the reported quarter. Local Broadcasting OIBDA declined 6% to $184 million.
Outdoor sales also increased 4% to $477 million, reflecting improvement in the outdoor advertising in Americasand positive currency fluctuations. Outdoor OIBDA grew 4% to $80 million.
Cheering Shareholders
Better-than-expected results, rebounding advertisement market and surging free cash flow, enable the company to enhance shareholders value through share repurchases and dividend increases. During the quarter, the company repurchased 13.5 million shares for $350 million under its $1.5 billion share repurchase program bringing the total repurchases to $850 million year-to-date.
Moreover, the company also announced a $1.5 billion increase in its prevailing share buyback program. CBS added that it expects to complete the authorization by the end of 2013.
CBS remains well positioned to drive revenue growth in the coming quarters through its strategic initiatives and operating efficiencies. Management remains optimistic and expects growth momentum to continue in fiscal 2012 based on reverse compensation from affiliates, strong demand of its content and streaming, retransmission consent, and political advertising.
Due to its exposure in publishing, radio and television broadcasting, and outdoor billboard businesses, CBS remains highly susceptible to the advertising market. To mitigate this, the company is striving to add diverse revenue streams to hedge against economic cycles.
The retransmission and affiliate fees generated from CBS’s cable and satellite partners for retransmitting broadcast programming have been another source of revenue. This is evident from the company’s long-term programming deal with the cable operator Comcast Corporation (CMCSA), whereby the latter will retransmit the signals of CBS television network, the Showtime Networks and CBS College Sports, across its various platforms, to meet consumers’ growing demand for TV, Video on Demand and online content.
Revenue from retransmission keeps growing at a brisk pace. Further, the company is increasingly getting reverse compensation from its affiliates marking a new source of revenue. The company also expects reverse compensation to expand in the coming quarters.
In the recent past, CBS secured deals worth hundreds of million, including a two-year deal with Netflix Inc (NFLX), and also signed a nonexclusive licensing agreement with Amazon. Com. Inc (AMZN). These measures facilitate CBS to generate revenue from shows that have already run on TV years ago and facilitated the company in capitalizing its content.
Moreover, the company’s 14-year contract with Turner Broadcasting to divide rights fees for the NCAA tournament was a part of an effort to reduce costs and help in generating profits.
Recently, CBS entered into a couple of long-term streaming deals for CW content with Netflix and Hulu. Management stated that the deal will boost the studio bottom line, while providing the company the flexibility to sell its content anywhere.
Other Financial Details
CBS Corporation ended the quarter with cash and cash equivalents of $947 million, long-term debt of $5,961 million, and shareholders’ equity of $9,898 million. The company generated $29 million of free cash flow during the quarter. Year-to-date the company generated free cash flow of $1,528 million.
Currently, we have a long-term ‘Outperform’ rating on the stock. Moreover, CBS Corp. holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.
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