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Viacom Still Neutral

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Viacom Inc. reported excellent financial results for the third quarter of fiscal 2011. Both top and bottom line were well ahead of the Zacks Consensus Estimates. Strong viewership rating for Viacom’s cable channels resulted in higher advertising revenue. In addition to the domestic market, advertising revenue from international markets also witnessed double-digit growth. Additionally, higher TV license fees also boosted Filmed Entertainment segment. However, ongoing economic turmoil in the U.S. and European region may make the company’s future financials volatile. We thus maintain our long-term Neutral recommendation on the stock.

In the previous quarter, Viacom was immensely benefitted from its agreement to disribute digital contents to online video streaming companies, such as Netflix Inc. (NFLX - Free Report) and Hulu. These business generates very high-margin, around 75%, which helped the company’s to significantly improve its bottom line. Management is hopeful that it will able to expand its digital content distribution deals both in the U.S. and internationally in the near future. As a result, Viacom has raised its iternal forecast for digital content disribution revenue, which is now expected to witness a high-single to double-digit annual percentage growth rate.

Business enterprises are more inclined toward advertisement spending in order to win consumers’ attention. Several automakers, toy companies, technology companies, and retailers are raising their advertisement budgets. This, in turn, is benefiting the media companies and Viacom is no exception. In the third quarter of fiscal 2011, the U.S. advertising revenue grew 12% year over year while international advertising revenue increased 14% year over year. The company witnessed year-over-year advertisement growth in 20 different categories. Management is hopeful that the domestic advertising revenue will grow in double-digit in the ensuing fourth quarter of fiscal 2011.  

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