No show at box office hits Viacom’s earnings

MUMBAI: Viacom Inc. reported financial results for the third quarter ended 30 September, 2006. Going by the company’s non-performance at the box office, its Q3 profits were down by almost 16 per cent.


 


Viacom’s net income fell to $356.8 million from $423.3 million a year ago.


 



The operating income declined 12 per cent versus 2005 pro forma operating income, as a 14 per cent gain in Cable Networks segment operating income was more than offset by a decline in the entertainment segment.


 


Net earnings from continuing operations in the third quarter were $356.3 million versus 2005 pro forma net earnings of $415.2 million. Operating income and net earnings from continuing operations in the third quarter reflect net one-time compensation charges of $62.0 million ($37.5 million, net of tax). Net earnings from continuing operations in the third quarter also include the recognition of $29.1 million of discrete tax benefits..


 


Viacom executive chairman Sumner M Redstone said, “Considering the short time that Philippe Dauman has been in place as CEO, I am truly impressed with our solid third quarter results, particularly the performance of our well-known cable brands. I am confident that you will see further operational success in the not too distant future. Viacom will continue to expand on its creative heritage and move rapidly to the forefront of emerging digital markets, keeping us on the path to outstanding long term financial performance and free cash flow generation.”


 


Viacom president and CEO Philippe P. Dauman said, “We achieved significant financial and operational progress in the third quarter and we remain on track to deliver on our goals for the full year. I see even greater opportunities to build for future growth as we harness Viacom’s powerful brands, popular content and unique connections with the audiences that are driving the digital revolution. Viacom is rich in the short-form content that is highly attractive to online consumers, underscored by our position as a leading entertainment content property on the Internet today with an aggregate 37 million monthly unique visitors in September.”


 


“We intend to continue to invest in our future and enhance profitability for the long term, as well as for the short term. We are making rapid progress and are intensifying our focus on continuing to grow our industry-leading flagship brands both here and in promising markets abroad, on accelerating the growth of our less-developed cable channels and underutilized content libraries, and on driving existing and newly created programming to audiences across every platform. In addition to internal development, we will continue to apply a rigorous and selective approach to acquisitions that emphasizes coordination and execution and will add businesses in core areas that offer compelling experiences for our consumers,” he added.


 


Revenues


Revenues increased $182.3 million, or seven per cent, to $2.66 billion.


 


Cable Networks segment revenues increased 10 per cent to $1.84 billion. Worldwide advertising revenues at the Cable Networks segment increased seven per cent to $1,090.1 million and affiliate fees climbed 12 per cent to $510.4 million. Cable Networks segment acquisitions contributed $23.7 million of revenue growth, principally internationally, or 1.4 points of the segment’s total growth. Entertainment segment revenues were up 1 per cent, or $11.9 million.


 


DreamWorks L.L.C. and the distribution activities for DreamWorks Animation and DreamWorks live-action library films (collectively “DreamWorks”) acquired on 31 January, 2006 contributed $279.2 million which was almost entirely offset by the box office success of War of the Worlds in the third quarter of last year. Feature films released in the current quarter included World Trade Center, Barnyard, Jackass: number two and The Last Kiss.


 


Operating Income


 


Operating income decreased 12 per cent, or $89.0 million, to $655.5 million as compared with 2005 pro forma operating income of $744.5 million. Cable Networks segment operating income increased $95.7 million, or 14 per cent, to $777.7 million; this increase was more than offset by a decrease in the Entertainment segment of $114.9 million versus 2005 pro forma operating income. The decline was principally attributable to the timing, number and performance of theatrical releases in the third quarter of 2006, compared with the same prior-year period, particularly the performance of War of the Worlds released in late June 2005, but partially offset by growth in home entertainment and television. Corporate expenses increased $71.4 million to $113.8 million compared to pro forma 2005. The increase in corporate expense stemmed largely from a net one-time compensation charge of $62.0 million relating to the resignation of the former president and CEO (Tom Freston), partially offset by a compensation expense benefit from an amendment to the employment agreement with the executive chairman of Viacom.


 



Net earnings from continuing operations


Net earnings from continuing operations decreased 14 per cent, or $58.9 million, to $356.3 million from a 2005 pro forma amount of $415.2 million. The decline was attributable primarily to lower operating income and increased interest expense, partially offset by a reduction in provision for income taxes. Interest expense increased $59.7 million to $118.8 million from pro forma 2005 because of higher average debt outstanding and higher interest rates.


 


For the quarter ended September 30, 2006, the Company recorded income tax expense of $169.7 million on pre-tax earnings of $530.5 million, for an effective tax rate of 32.0 per cent, compared with a 2005 pro forma effective tax rate of 38.7 per cent. The reduction in the provision for income taxes resulted principally from the release in the period of $29.1 million of discrete tax benefits and a lower estimated full year effective tax rate. On a fully diluted basis, net earnings from continuing operations for the third quarter were $0.50 per share and include discrete tax benefits of $29.1 million as well as a reduction in the weighted average number of common shares outstanding resulting from the company’s stock repurchase program.


 


Business Outlook


 


Viacom reaffirms its full year 2006 guidance to deliver double digit revenue and operating income growth compared to 2005 revenues of $9.61 billion and 2005 pro forma operating income excluding unusual charges of $2.60 billion. The company also expects to achieve diluted earnings per share from continuing operations in the range of $1.95 to $2.00. Guidance excludes discrete tax benefits, net one-time amounts related to senior management changes, and previously announced fourth quarter 2006 international Cable Networks segment restructuring charges, which will be approximately $15 million.

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