CBS CBS Corp

Growth in high margin revenues and effective cost control measures facilitated CBS Corporation (CBS) to post better-than-expected fourth-quarter 2011 bottom-line result. The quarterly earnings of 57 cents a share surpassed the Zacks Consensus Estimate of 53 cents and jumped 23.9% from 46 cents earned in the year-ago quarter.

Key Numbers

Revenue inched down 3.1% year over year to $3.78 billion, which is quite a healthy number as the reported quarter lacked significant political advertising revenues compared with the prior-year quarter. Moreover, the prior-year quarter’s revenue included the second-cycle syndication sale of CSI: Crime Scene Investigation.

Revenue for the quarter was boosted by an 8% increase in affiliate and subscription fees to $460 million. However, the increase was more than offset by a 4.8% decrease in content licensing and distribution revenue to $758 million coupled with a 4.4% decline in advertising revenue to $2.5 billion.

Total revenue also missed the Zacks Consensus Estimate of $3.92 billion.

Adjusted operating income before depreciation and amortization (OIBDA) increased 9% to $837 million, reflecting high growth margin revenue coming from streaming deals, increased international syndication revenue and higher retransmission fees. Increased revenue and better cost containment led OIBDA margin to expand 200 basis points year over year to 22% during the reported quarter.

Adjusted operating income marked an increase of 11% year over year to $701 million, whereas adjusted operating margin expanded 230 basis points year over year to 18.5%.

Getting to the Segments

Content Group revenue, comprising Entertainment, Cable Networks, and Publishing, remained almost flat at $2.62 billion from the year-ago quarter, as the revenue increase in cable networks division was offset by revenue decline in entertainment and publishing division.

Entertainment revenue inched down 1% to $2 billion from the year-ago quarter, reflecting flat advertising revenue and tough prior-year comparison, partly offset by increased retransmission revenue and multiyear licensing agreement for the digital streaming. Adjusted OIBDA at the segment soared 28% to $318 million.

Growth in subscriptions and rate increases in CBS Sports Network, Showtime Networks, and Smithsonian Networks along with rise in digital streaming for Showtime original series supplemented Cable Networks revenue to increase 7% to $395 million. Cable Networks OIBDA increased 4% to $175 million.

Publishing revenue inched down 1% to $229 million, reflecting slump in sales of printed books, offset by the sales of profitable digital content. Publishing OIBDA jumped 40% to $28 million during the quarter.

The quarter’s best-sellers were ‘Steve Jobs’ by Walter Isaacson and ‘11/22/63’ by Stephen King.

Local Group revenue, including Local Broadcasting and Outdoor, decreased 7.3% to $1.24 billion.

Local Broadcasting revenue declined 12% to $721 million from the year-ago quarter attributable to an 18% decrease in CBS Television Stations revenue coupled with a 5% decrease in CBS Radio revenue. Local Broadcasting OIBDA declined 17.4% to $266 million.

Outdoor sales crept up 1% to $514 million, reflecting improvement in the outdoor advertising in Americasand higher revenues from United Kingdom. Outdoor OIBDA grew 30% to $131 million.

Fundamentals Remain Strong

CBS remains well positioned to drive revenue growth in the coming quarters through its strategic initiatives and operating efficiencies. Management remains optimistic and expects growth momentum to continue in fiscal 2012 based on reverse compensation from affiliates, strong demand of its content and streaming, retransmission consent, and political advertising.

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 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 long-term programming deal with the cable operator Comcast Corporation (CMCSA), 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 quarters.

CBS secured deals worth hundreds of million, including a two-year deal with Netflix Inc (NFLX), and also signed a nonexclusive licensing agreement with Amazon. Com. Inc (AMZN). These measures backed CBS to generate revenue from shows that have already been broadcasted on TV years ago and facilitated the company in capitalizing its content.

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

CBS entered into a couple of long-term streaming deals for CW content with Netflix and Hulu, which will boost the studio bottom line results, while providing the company the flexibility to sell its content anywhere.

During the quarter, the company extended its broadcast rights deal with the National Football League (NFL) for nine more years. The newly announced deal will extend CBS Corporation’s existing deal to 2022. The current deal was scheduled to end in 2013.

(Read our full coverage on the story: CBS Corporation Extends NFL Deal)

Glimpse of Future

Management stated that scatter pricing at the network division is up in mid-teens due to increased demand, while local broadcasting is faring better than the reported quarter. Coming to the advertising front, non-political revenues are up in low single digits so far in the first quarter of 2012. Outdoor segment is pacing to be up mid single digits in the first quarter of 2012.

Further, CBS Corporation’s long-term agreements with the NFL, the NCAA, the SEC and the Grammy’s will generate stream of positive cash flows for the company in the long run. 

Other Financial Details

CBS Corporation ended the quarter with cash and cash equivalents of $660 million, long-term debt of $5,958 million, and shareholders’ equity of $9,908 million. The company generated a negative free cash flow of $44 million of during the quarter. Year-to-date the company generated free cash flow of $1,484 million.

Moreover, healthy results and rebounding advertisement market helped the company to enhance shareholders value through share repurchases and dividend increases. During the quarter, the company repurchased 7 million shares for $170 million under its $3 billion share repurchase program bringing the total repurchases to $1.2 billion in fiscal 2011.

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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