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CBS Corp (CBS) Beats on Q3 Earnings, Sales Lag Estimates

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CBS Corporation posted third-quarter 2017 adjusted earnings of $1.11 per share that beat the Zacks Consensus Estimate of $1.07. The figure also increased 6% from the year-ago quarter. On a reported basis, the company delivered earnings from continuing operation of $1.03 a share down from $1.04 posted in the prior-year period.

Moreover, total revenues of this diversified media conglomerate came in at $3,171 million, lagging the Zacks Consensus Estimate of $3,273 million. However, it rose 3% year over year.

Further, affiliate and subscription fee revenues of $1,145 million grew 52% on the back of 27% jump in retransmission revenues and fees from CBS Television Network affiliated stations, as well as digital subscription services. Content licensing and distribution revenues declined 22% to $860 million owing to timing of domestic television licensing sales. Total advertising revenues decreased 5% to $1,106 primarily due to decline in political advertising sales.

Despite earnings beat, the company’s stock declined 1.1% during after-hour trading session yesterday as investors were hurt by lower-than-expected revenues. In fact, the company’s shares have declined 14.4% in the past three months, wider than the industry’s fall of 5%.  

Adjusted operating income declined 2% to $707 million, however, operating margin contracted 100 basis points to 22%.

Segment Results

Entertainment revenues decreased 7% to $1,815 million primarily due to decline in content licensing revenues and advertising revenues. However, this was negated by higher affiliate and subscription fees that surged 35% on account of rise in station affiliation fees, subscriber growth at CBS All Access and gain from digital efforts. Content licensing and distribution revenues dropped 26% primarily due to timing of domestic television licensing sales, which overshadowed growth in international licensing sales. Advertising revenues declined 3% owing to one less Thursday Night Football that the company broadcasted. The segment’s operating income decreased 1% to $345 million.

Cable Networks’ revenues jumped 40% to $840 million primarily owing to growth of the Showtime digital streaming subscription offering as well as distribution of the Floyd Mayweather/Conor McGregor pay-per-view boxing event. The segment’s operating income increased 3% to $294 million mainly owing to revenue growth.

Publishing revenues of $228 million inched up 1% year over year primarily due to increase in print book and digital audio sales. Bestselling titles for the quarter included What Happened by Hillary Rodham Clinton as well as Sleeping Beauties by Stephen King and Owen King. Operating income came in at $46 million, up from $44 million in the year-ago period due to higher revenues.

Local Media revenues were down 3% to $397 million as the company benefited from robust political adverting sales in the previous year quarter. However, the decline was to some extent mitigated by increase in retransmission revenue. Operating income declined 14% to $105 million.

Other Financial Details

CBS, which shares space with Twenty-First Century Fox, Inc. (FOXA - Free Report) , ended the quarter with cash and cash equivalents of $144 million, long-term debt of $9,080 million and shareholders’ equity of $2,994 million. In the quarter, net cash flow provided by operating activities was $49 million and capital expenditures incurred were $44 million. The company reported negative free cash flow of $18 million.

During the quarter under review, CBS. bought back 3.9 million shares for $250 million. As of Sep 30, the company had $3 billion remaining at its disposal under its share buyback program.

Bottom Line

In 2016, the company crossed $1 billion mark in revenues from retransmission consent and reverse compensation. The company aims to achieve $2.5 billion of revenues from retransmission and reverse compensation by 2020. Meanwhile, the company has garnered $4 billion in network advertising revenues (excluding Super Bowl) in the past five years and anticipates continuing the stupendous performance this year too.

Affiliate and subscription fees are benefiting from CBS All Access and Showtime OTT, whose subscriber base is likely to surpass 4 million combined before the end of this year. The company has the target of reaching 8 million subscribers base together by 2020. Management now intends to expand CBS All Access in the international market, and it will be initiate from Canada in the first half of 2018.

Meanwhile, Showtime gained from the successful return of Ray Donovan, which enhanced OTT subscriptions. The Showtime also gained from Floyd Mayweather-Conor McGregor fight. The company is also gradually expanding its Showtime brand overseas with new deals to license its entire portfolio in India, Hong Kong, France, Taiwan and others.

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