CBS CBS Corp

CBS Corporation’s (CBS) effective strategic measures, operating efficiencies and better expense control helped the company to post stellar second-quarter 2011 results. The quarterly earnings of 58 cents a share beats the Zacks Consensus Estimate of 45 cents and surged more than double from 22 cents earned in the year-ago quarter.

Getting to the Numbers

Revenue increased 7.8% to $3,586 million from the prior-year quarter, reflecting 21.3% jump in content licensing and distribution revenue to $733 million, 11.8% growth in affiliate and subscription fees to $426 million with an increase of 2.6% in advertising revenue.

Total revenue also came ahead of the Zacks Consensus Estimate of $3,553 million.

Adjusted operating income before depreciation and amortization (OIBDA) increased 50.8% to $873 million, reflecting margin expansion in each segment. OIBDA margin expanded 700 basis points year-over- year to 24.0% during the reported quarter.

Segment Dissection

Content Group revenue, which comprises Entertainment, Cable Networks, and Publishing, increased 9.1% to $2,432 million from the year-ago quarter, reflecting strong growth in entertainment and cable networks revenue.

Entertainment revenue jumped 9.8% to $1,836 million from the year-ago quarter, reflecting increased retransmission revenues, growth in Network primetime advertising and the new licensing agreement for the digital streaming of some library titles. Entertainment OIBDA soared 97% to $440 million.

Increase of rates and growth in subscriptions at Showtime Networks and CBS College Sports Network coupled with increased international syndication and home entertainment revenues for Showtime original series helped Cable Networks revenue to increase 11.9% to $413 million. Cable Networks OIBDA rose 36.4% to $176 million.

Publishing revenue inched down 3.2% to $183 million due to sluggish performance of print book sales, partly offset by a rise in digital content sales. Publishing OIBDA increased 12% to $19 million during the quarter.

Local Group revenue, which comprises Local Broadcasting and Outdoor, upped 4.1% to $1,181 million.

Local Broadcasting revenue crept up 1.9% to $691 million from the year-ago quarter due to increased advertising sales. CBS Television Stations revenue increased marginally, whereas CBS Radio revenue grew 4.0%.

Local Broadcasting OIBDA rose 7.5% to $230 million. Management forecasted that for third-quarter 2011, Radio revenue and Televisions Stations revenue is trending to be up in low-single digits compared with the prior-year quarter.

Outdoor sales also increased 7.2% to $490 million, reflecting continued improvement in the outdoor advertising sector and positive currency fluctuations. Outdoor OIBDA jumped 8.9% to $86 million. For the third quarter of 2011, Outdoor Group revenue is pacing up mid-single digits.

A look through Investors Eye

Sequentially, CBS has made a positive comeback in each quarter, outshining its performances in the previous quarters. The company remains well positioned to drive revenue growth in the coming quarters through its strategic initiatives while derisking its business. Management expects growth momentum to continue in fiscal 2011 and 2012.

Better-than-expected results, rebounding advertisement market and surging free cash flow, enable the company to enhance shareholders value through share repurchases and dividend increases. The company repurchased 9.9 million shares for $250 million under its $1.5 billion share repurchase program during the reported quarter.

Due to its exposure in publishing, radio and television broadcasting, and outdoor billboard businesses, CBS remains highly susceptible to the advertising market. To mitigate this, the company is striving to add diverse revenue streams to hedge against economic cycles.

The company entered into a two-year deal with Netflix Inc (NFLX) and also signed a nonexclusive licensing agreement with Amazon. Com. Inc (AMZN)These measures facilitate CBS to generate revenue from shows that have already run on TV years ago and help the company in capitalizing its content.

Moreover, company’s 14-year contract with Turner Broadcasting to divide rights fees for the NCAA tournament was the part of an effort to reduce costs and help in generating profits.

The retransmission and affiliate fees generated from CBS’s cable and satellite partners for retransmitting broadcast programming have been another source of revenue. This is evident from the company’s 10-year programming deal with Comcast Corporation (CMCSA), the cable operator, whereby the latter will retransmit the signals of CBS television network, the Showtime Networks and CBS College Sports, across its various platforms, to meet consumers’ growing demand for TV, Video on Demand and online content.

Revenue from retransmission keeps growing at a brisk pace. Further, the company is increasingly getting reverse compensation from its affiliates marking a new source of revenue. The company also expects reverse compensation to expand in the coming years.

Other Financial Details

CBS Corporation ended the quarter with cash and cash equivalents of $1,346 million, long-term debt of $5,964 million, and shareholders’ equity of $9,948 million. The company generated free cash flow of $646 million during the quarter.

Currently, we have a long-term ‘Outperform’ rating on the stock. Moreover, CBS Corp. holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.

 
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