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CBS's Q2 Earnings Top Ests, Revs Miss on Weaker Ad Trends

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CBS Corporation’s (CBS - Free Report) second quarter 2014 adjusted earnings of 78 cents per share grew 4% year over year and was ahead of the Zacks Consensus Estimate of 72 cents. Aggressive share buyback activity cushioned the bottom line.


Including, one time items, the company reported earnings of 76 cents per share, unchanged from the prior-year quarter.

However, absence of the NCAA Division I Men's Basketball Championship matches this quarter had a telling effect on the CBS Corp’s revenues which fell 5.4% to $3,188 million. Revenues also came short of the Zacks Consensus Estimate of $3,305 million.

NCAA Division matches were broadcasted by Turner Broadcasting Systems, Inc. a subsidiary of Time Warner Inc. (TWX - Free Report) . In 2010 CBS and Turner signed $10.8 billion dollar agreement to receive joint broadcast rights of NCAA tournament which was part of an effort to reduce costs and generate profits.

Revenues were also marred by lower advertising and content licensing revenues, which declined 7% and 9.4% to $1,636 million and $903 million, respectively, more than offsetting the 6.7% rise in affiliate and subscription fees.  

Also, operating income before depreciation and amortization (OIBDA) decreased 5.5% to $801 million and operating income fell 5.8% to $730 million.

Segment Details

Entertainment revenues fell 8.6% to $1,835 million owing to lower television licensing and advertising revenues. The segment’s OIBDA fell 12.4% to $376 million due to lower revenue and increased investment in new television content.

Cable Networks’ revenues dipped 0.4% to $516 million as lower licensing revenues offset growth in affiliate fees. However, segment OIBDA increased 5.8% to $219 million due to lower programming costs and higher affiliate fees.

Publishing revenues increased 11.6% to $211 million and the segment’s OIBDA increased 14.3% to $24 million. Sale of both print and digital books increased in the quarter, the best sellers being Hard Choices by Hillary Rodham Clinton and City of Heavenly Fire by Cassandra Clare.

Unfavoarble advertising trends marred Local Broadcasting revenues. The segment’s revenue decreased 4.7% to $665 million. CBS Television Stations’ and CBS Radio’s revenues fell 6% and 3%, respectively. The segment’s OIBDA decreased 6.7% to $238 million due to lower revenues partly run down by lower programming costs.

Other Financial Details

CBS Corp. ended the quarter with cash and cash equivalents of $261 million, long-term debt of $5,846 million, and shareholder equity of $9,274 million. For the first half, the company generated net cash flow from operations of $624 million and incurred capital expenditures of $69 million. Free cash flow of $524 million was generated during the first half.

In the quarter, CBS Corp. repurchased 7 million shares for $411 million bringing year-to date count to 38.5 million shares at a total cost of $2.4 billion.  Also the company increased its share repurchase authorization by $3 billion to $6 billion.

In addition, the company announced a 25% hike in its quarterly dividend to 15 cents per share. The dividend is payable on Oct 1, 2014 to shareholders of record on Sep 10, 2014.

Our Take

Declining advertising trends in the quarter suppressed CBS Corp’s performance. The company expects advertising to pick up in the second half given the Thursday Night NFL games and mid-term elections.

CBS Corp., which competes with The Walt Disney Company (DIS - Free Report) , is focused on lowering its dependency on conventional advertising, which is commendable since it is highly susceptible to economic headwinds. Separation of CBS Outdoor Americas Inc. was a step in that direction following which contribution from advertising to the total revenues came down to nearly 50%.

Since the 50:50 split in advertising and non advertising revenues, the company is focusing on enhancing its non-advertising revenue streams like reverse compensation from affiliates, content monetization, digital distribution, syndication sales and retransmission fees to boost its revenues.

CBS Corp. continues to expect retransmission fees to hit the $2 billion mark in 2020. Currently, it expects retransmission fees to reach $1 billion by 2017.  

Additionally, this Zacks Rank # 3 (Hold) stock expects  CBS Television Network to be a major growth driver as the network owns most shows in the top 10 and top 20 countdowns. Notably, its shows such as NCIS and The Big Bang Theory are worth mentioning in this respect.

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