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Investors didn’t seem too concerned by Viacom’s (NYSE: VIAB) report of declining fourth-quarter sales and operating income. Shares rose just under 1% on Thursday following the Viacom earnings release.
But should they be?
The entertainment conglomerate that operates hundreds of television channels from MTV to Comedy Central and distributes motion pictures and other entertainment content, reported that revenues declined 5% to $3.79 billion and operating income declined 9% to $1.06 billion.
The drop in revenue was larger than expected. Even though it resulted in part from an unfavorable currency exchange rate, it also reflected declines in several key segments, including domestic advertising, where revenues fell 7%. In addition, filmed entertainment revenues fell 24% percent, theatrical revenues were down 20% and home entertainment revenues plunged 54%.
If you’re wondering how all of these steep declines in business segments could lead to a modest overall sales decline, it’s worth noting that Viacom’s domestic and worldwide affiliate revenues increased on the strength of programming distribution and rate increases, and its international advertising revenues jumped 45%. Viacom is a large and diverse company and seems to be able to offset weaknesses in some segments.
Viacom said that while its filmed entertainment and theatrical revenues suffered from the lack of a big release during the quarter, big releases are on the way. This is a company with a business that relies on big hits, making it possible for steep declines one quarter to turn into big gains the next.
But there is a bigger picture here, too. Viacom’s business is tied closely to the cable industry at a time when many consumers are cutting the cord and abandoning cable in favor of lower-priced streaming alternatives. While Viacom’s business hasn’t suffered a major slowdown, it is seeing a slow erosion. Annual revenues have shown modest declines for four straight years.
Viacom also has in Sumner Redstone a 91-year-old CEO whose eventual departure could trigger a rocky management shift.
In addition, while the stock held up well to the disappointing earnings results, it hasn’t fared well so far this year. Viacom shares are down more than 30% year-to-date, even as the company has repurchased millions of shares.
In the short term, this company’s quarterly results will rise and fall on the entertainment market conditions and the strength of its various movies and programs. Viacom has an established history of producing popular entertainment content and that probably isn’t going to change soon.
Longer term however, it’s important to understand that this is a company operating in an industry in transition. The way content is being consumed is rapidly changing and that will eventually change the way content is created.
Viacom’s fourth-quarter results offer a snapshot of its recent performance but not a crystal ball. Still, the steady revenue decline is reason for considerable concern. Investors should proceed with caution.
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