On ViacomCBS Corp. (NGS: VIAC). As we expected, 2Q20 was a tough quarter for ViacomCBS, with the company’s core advertising revenue stream down 27% from the prior year. While management expects advertising to recover, and some sports, including UEFA soccer and golf, are coming back online, the recovery in advertising as a function of the macroeconomy may be slow.
However, with COVID-19, many post-merger plans may have been set aside in favor of survival mode strategies.
Revenue declined 12% year-over-year to $6.275 billion. Advertising revenue declined by $711 million or 27% and Theatrical revenue was down $149 million or 98%. Affiliate revenue rose $39 or 2%, and Content Licensing was flat.
Operating income declined 11% to $1.29 billion.
We note the passing of Viacom’s longtime controlling shareholder Sumner Redstone on August 11. Mr. Redstone made his family theater chain National Amusements into the vehicle for a series of savvy mergers, including with Viacom, Paramount Studios, and CBS, which built the company we now know as ViacomCBS. Mr. Redstone’s 80% controlling interest in ViacomCBS now passes to a seven-member trust for the benefit of Mr. Redstone’s descendants. The trust is governed by a board that includes Mr. Redstone’s daughter and ViacomCBS Chair Shari Redstone and other close Redstone family associates. We think that Ms. Redstone retains effective control of ViacomCBS through the trust. The press has speculated about possible asset sales now that ownership of the company has moved to the trust, and, while anything can happen if the right offer comes along, we think such speculation is premature given that Ms. Redstone only took full control of the company in 2018.
As we expected, the company took a significant hit from lower advertising revenue in 2Q. Management thinks that 2Q20 was the trough for advertising in 2020 and expects recovery going forward. Advertising typically comprises about 40% of company revenue, but was only 31% in 2Q. ‘A Quiet Place II,’ originally scheduled for March, is now scheduled for September 4. The latest SpongeBob movie, ‘Sponge on the Run,’ was moved from May 22 to August 7, and ‘Top Gun: Maverick’ was moved from June 26 to December 23.
On July 30, ViacomCBS announced plans to expand its CBS All Access streaming service. Management is also considering a rebranding of the service in early 2021.
At an investor meeting on March 4, CEO Bob Bakish announced that ViacomCBS would sell book publishing subsidiary Simon & Schuster.
EARNINGS & GROWTH ANALYSIS
However, the company has now moved into survival mode. With revenue declining due to the advertising and theatrical slowdown, management has promised cost cuts. The shutdown in content production and lower sports rights costs due to event cancellations provide obvious, if only temporary, cost-reduction sources. As production ramps up and sports begin again, these costs will return to the P&L. At the same time, management is moving to harvest synergies from the merger and making additional cost cuts. The company has also moved to refinance debt and increase its cash holdings. The company has seen increased momentum at its digital video streaming platforms – CBS All Access, Showtime OTT and Pluto TV – though digital is still just a small part of the revenue mix.
FINANCIAL STRENGTH & DIVIDEND
The company had expected free cash flow to rebound to about $1.9 billion in 2020, though that guidance has been withdrawn.
MANAGEMENT & RISKS
We have enumerated the risks surrounding COVID-19 in the Recent Developments section above.
However, we believe that regulatory risk has diminished under the Trump administration.