Mixed Fortunes for Viacom in 1Q

Viacom Inc. ( VIAB - Analyst Report ) declared mixed results for the first quarter of 2012 with EPS matching the Zacks Consensus Estimate but revenue falling short of the estimate, mainly offset by advertising and ancillary revenues.

Net income from continuing operation in the quarter was $591 million or $1.06 per share compared with $620 million or $1.02 per share in the prior-year quarter and was also in line with the Zacks Consensus Estimate.

Total revenue in the reported quarter was $3,952 million, up 3% year over year but was slightly below the Zacks Consensus Estimate of $3,979 million. The year-over-year upside in revenue was mainly attributable to the strong performance of Filmed Entertainment and Media Networks segments. Quarterly operating income was $1,016 million, down 2% year over year.

During the reported quarter, Viacom bought 16.2 million common shares worth $700 million. At the end of the first quarter of fiscal 2012, Viacom had $1,147 million in cash & cash equivalent and $7,017 million in outstanding debt on its balance sheet compared with cash & cash equivalent of $1,021 million and outstanding debt of $7,342 at the end of fiscal 2011. Debt-to-capitalization ratio at the end of the reported quarter was 0.47 compared with 0.46 at the end of fiscal 2011.

Media Networks Segment

Quarterly revenue of $2,448 million increased 3% year over year. This was mainly driven by solid growth in affiliate fees, however mitigated somewhat by the reduced advertising and ancillary sales. Domestic and Worldwide affiliate revenues climbed 16% in the reported quarter mainly fueled by growth in digital sales and expansion in rates. Both domestic and worldwide advertising revenue dropped 3% year over year primarily due to reduced channel ratings and slowdown in the U.S. advertising market. Worldwide Ancillary revenue plunged 13% year over year. Quarterly operating profit was $1,129 million, up 7% year over year.

Filmed Entertainment Segment

Quarterly revenue surged 4% year over year to $1,558 million buoyed by increased theatrical revenues, partly offset by the slowdown in the Home entertainment segment and reduced Ancillary revenues.

Worldwide home entertainment revenue decreased 6% year over year. Theatrical revenue shot up 37% year over year while TV license fees increased 9%. However, ancillary revenue plummeted 46% year over year. Quarterly operating loss for the segment was $31 million compared with an operating profit of $68 million in the year-ago quarter.

Recommendation

We believe that Viacom is well positioned for long-term growth as it continues to benefit from its predominately cable networks-based business model, strong affiliate fee revenue growth, global brands, strong share repurchase plan, multi-platform content, and is one of the fastest growing traditional ad media.

However, stiff competitions fromother media companies like News Corp. ( NWSA - Analyst Report ) and Time Warner Inc. ( TWX - Analyst Report ) along with slow economic recovery may act as headwinds for the stock going forward. We, thus, maintain our long-term Neutral recommendation for Viacom.

Currently, Viacom has a Zacks#3 Rank, implying a short-term Hold rating on the stock.