CBS Corporation CBS delivered yet another quarter of positive earnings surprise in 2015. The company’s second-quarter earnings of 74 cents a share beat the Zacks Consensus Estimate by a couple of cents on the back of strength witnessed across affiliates and subscription fees. The bottom line of this diversified media conglomerate also benefited from share repurchase activity that helped it register 2.8% growth from 72 cents a share earned in the year-ago quarter despite the fall in net income in the reported quarter.
Including one-time items, earnings came in at 67 cents a share, down from 76 cents in the prior-year quarter.
Total revenue of this Zacks Rank #4 (Sell) company rose marginally by 1% to $3,219 million. However, the figure fell short of the Zacks Consensus Estimate of $3,238.8 million. The top line gained from higher affiliates and subscription fees (up 28.3%), offset by a fall in advertising revenue (down 2.6%) and content licensing and distribution revenue (down 9.7%).
Adjusted operating income decreased 12.2% to $641 million due to increased investment in programming and digital distribution initiatives. Adjusted operating margin contracted 300 basis points to 19.9% from the prior-year period.
Segment wise, Entertainment revenue dropped 2.7% to $1,785 million owing to the timing of television licensing revenue. Advertising revenue fell 2% due to the divestment of an Internet business in China in the preceding quarter and the timing of a few sporting events on the CBS Television Network. Affiliate and subscription fees surged 50%, reflecting an increase in rates.
The segment’s operating income plunged 23.2% to $262 million due to a fall in revenue and increased investment in programming and digital distribution initiatives.
Cable Networks’ revenue soared 19.2% to $615 million, aided by the pay-per-view boxing event on Showtime. Cable Networks’ operating income grew 3.3% to $220 million on the back of higher revenue, which was offset to an extent by a rise in programming costs related to the pay-per-view boxing event.
Publishing revenue declined 5.7% to $199 million due to the timing of robust title releases. Digital revenue now accounts for 24% of Publishing's total revenue. Despite the decline in revenue, operating income at this segment grew 8.7% to $25 million due to a fall in production and distribution costs.
Local Broadcasting revenue dropped 1.7% to $654 million in the quarter on account of lower advertising, partially offset by a rise in affiliate and subscription fees. CBS Television Stations’ revenue inched up 1%, while CBS Radio’s revenue declined 5%. The segment’s operating income fell 7.9% to $198 million due to lower revenue.
Other Financial Details
CBS Corp. ended the quarter with cash and cash equivalents of $320 million, long-term debt of $7,686 million, and shareholders’ equity of $5,963 million. In the quarter, the company generated net cash flow from operations of $446 million and incurred capital expenditures of $29 million. Free cash flow generated during the quarter was $435 million, substantially up from $4 million in the year-ago period.
During the quarter under review, CBS Corp. bought back 13.2 million shares for $799 million. Since 2015 beginning through Jun 30, 2015, the company repurchased 30.5 million shares for $1.8 billion. As of Jun 30, the company still had $3 billion remaining at its disposal under its share repurchase program.
Bottom Line
CBS Corp. is focused on lowering its dependence on conventional advertising which is commendable since it is highly susceptible to economic headwinds. Separation of CBS Outdoor Americas Inc. was a step in this direction. Also, the company is attempting to enhance its non-advertising revenue streams, like reverse compensation from affiliates, content monetization, digital distribution, syndication sales and retransmission fees, to boost its revenues.
The company anticipates crossing $2 billion in revenues from retransmission consent and reverse compensation by 2020. Moreover, with the launch of Showtime's streaming service, online news channel, CBSN, and over-the-top service, CBS All Access, the company is generating incremental revenue.
Favorably Ranked Stocks
Better-ranked stocks include AMC Networks Inc. AMCX, Salem Media Group, Inc. SALM, both sporting a Zacks Rank #1 (Strong Buy), and Entercom Communications Corp. ETM, carrying a Zacks Rank #2 (Buy).
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