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Lower Cable Ad Revenues Continue to Hurt Viacom

UPDATED: 3:15 p.m. ET

Viacom's earnings from continuing operations fell by double
digits, as lower ratings at its cable networks continued to result in declining
ad revenue.

Company executives told analysts that if struggling kids
leader Nickelodeon was removed from the mix, ad revenues at its other networks were
positive and that they expected overall ad revenue to show gains in the second
half of the year. That forecast encouraged Wall Street and Viacom share were up
1.52% in afternoon trading.

For Viacom's fiscal first quarter (ending in December), net
income was $470 million, or 92 cents a share, for Viacom's first fiscal
quarter, compared to $212 million, or 38 cents a share, a year ago, when the
company reported $379 million in charges for discontinued operations and $316
million in provisions for income tax.

Net earnings from continuing operations fell 20% to $473 million from $591
million a year ago.

Revenues were $3.3 billion, down 16%.

Revenues and operating income were slightly lower than
forecast by analysts. Because of cost-cutting outside of programming spending,
the earnings were slightly higher than expected.

"Throughout the quarter, we kept our focus on creative
excellence and strategic programming investment. Our ongoing investments in
programming continue to produce results, with positive ratings trends and
growing consumer engagement in new hit content, despite difficult short-term
comparisons based on the mix of film releases and the lingering effect of
ratings softness last year," CEO Philippe Dauman said in a statement.
"Our television brands continue to be highly valued by distribution
partners, highlighted by our double-digit organic affiliate revenue

On the company's earnings conference call, Dauman laidout plans to beef up programming at Nickelodeon and MTV, two networks of
most concern to the analysts.

Viacom's Media Networks Group, which includes such networks as MTV, Nickelodeon
and Comedy Central, reported a 9% drop in operating income to $1.03 billion for
the quarter.

Revenue at Viacom's Media Networks Group was down 2% to $2.4 billion. Domestic
advertising revenue dropped 6%. The company attributed the decline to lower
ratings. Worldwide advertising revenue also fell 6%.

"Excluding the Nickelodeon Networks, our domestic networks
returned to positive ad sales growth in the quarter and Nickelodeon's ratings
improvement will help us significantly improve our overall ad sales performance
going forward," Dauman told the analysts.

Tom Dooley, Viacom's COO,
said that the scatter market was strong and picking up strength, with prices up
by double digits over the upfront, and up mid-single digits year over year. "We
are seeing demand from categories like food, quick serve restaurants, wireless,
electronics, automotive, and we are also looking forward given those categories
are so important to us," Dooley said, adding that there are a lot of family
films being released later this year that are likely to advertise on Viacom

While Nickelodeon's ratings problems hurt revenues, overall
kids advertising was also down, particularly in the movie category, which
the company said meant it maintained its share of the market.

Dauman said that he expects Viacom's ad sales to be close to
flat in the second quarter. "After that we are going to grow our ad sales. So
that's the trajectory that we're on, based on what we see out there today."

Looking at the broader economy, Dauman told the analysts
that he sees "increasing confidence in the marketplace, while European
conditions continue to be weak. I think there is more stability there. So we
think that GDP growth this year will improve
over the last year and that's good for us."

Domestic affiliate revenue rose 4%. Excluding digital
distribution agreements, which brought in a big chunk of revenue a year ago,
the domestic revenue growth rate was in the low double-digits. Worldwide
affiliate fees increased 3%. The company told the analysts it expects total
domestic affiliate fee growth of 10% for the full year.

In the quarter, programming expenses grew 8%. Other expenses
were flat, including lower incentive based compensation for executives. For the
full year, "we continue to expect a high single digit growth rate for media
networks program expense," Dooley said. "Given the timing of shows coming on
air, growth will be weighted to the first half of the year. In terms of
non-programming expense, we will continue to drive efficiencies throughout our
organizations and/or in order to preserve or enhance our margins for the rest
of the year.

Viacom's filmed entertainment unit reported a larger loss as
revenues declined 37%. "Fewer home entertainment releases and a less favorable
mix of theatrical releases from our film entertainment segment, affected
earnings, Dauman said.

Viacom said it bought back 13.3 million shares for $700
million during the quarter. As of Jan. 30, Viacom had $3.85 billion remaining for
its $10 billion stock repurchase program.

Some analysts have been recommending Viacom, thinking that
the company is bound to bounce back sometime, and that its share buyback
activity will support the stock. The latest news from the company largely supported
those assumptions.

"The outlook could be characterized as relatively positive,
if not meaningfully changed, from prior expectations," said Brian Wieser of
Pivotal Research.

"We expect continued investment in programming to weigh on
Media Network margins in the [second quarter], a drag that should reverse in
the back half of the year," said Michael DiClemente of Barclays Capital.
"Importantly for the multiple, ratings for Nickelodeon and MTV have shown
steady improvement in the [second quarter], which should drive accelerating ad
growth throughout the year."

DiClemente said he was lowering his second quarter earnings
estimate, but maintaining his full-year forecast. "Due to our improved outlook
for ad growth, as well as stable affiliate fee and return of capital trends, we
are raising our price target to $68 from $55," he said.

Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.