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Ouch! Soft Local Ad Market Stings Viacom

The weak local ad economy caught up with Viacom. Last week, the company warned investors that its previous earnings guidance for 2003 was too rosy. Some securities analysts had already revised downwards their forecasts for the company. But last Wednesday's admission spurred other to redo their numbers, and the stock took a 4% hit. Over the past three weeks, the share price has fallen about 16%. Last Thursday, it closed at $39.09, up 26¢ on a volume of 13.9 million shares.

Truth be told, it's not that the bottom suddenly fell out of Viacom's local markets, say Viacom watchers. It's just that the company's top two executives, Sumner Redstone and Mel Karmazin, love to spin a positive picture when they present to analysts. For now, the growth isn't living up to the talk.

"If those two just put a muzzle on, the company wouldn't find themselves in this position," said a competing executive.

During his second-quarter conference call with analysts, President and COO Karmazin went on at length about how the local TV stations were improving and how radio, whose performance he savaged a quarter earlier, was showing month-to-month improvement.

But last week, the company said that, although the national ad-sales market was robust, "the pace of the recovery in local advertising markets going into the fourth quarter is not as rapid as had been anticipated." Earlier, Viacom had predicted 2003 revenue growth, on a percentage basis, in the high single digits. Last week, that was amended to mid to high single digits.

Viacom also forecasted double-digit growth in operating income. Last week, that prediction was reduced to high-single-digit growth at best.

Reacting to the warning, Bear Stearns issued a report estimating that Viacom will generate $500 million less revenue than previously forecast for 2003, about $26.1 billion in total. Operating cash flow will be about $200 million less, $6.3 billion in total.

Merrill Lynch shaved $100 million more off its revenue estimate for the company, to $26.2 billion, having lopped $140 million off the previous week. Cash flow expected for the year was cut to $6 billion from the previous $6.15 billion.

Merrill predicted that Viacom's stock will suffer further decreases in the short term but rebound over the next 12 months. The company's operations are fundamentally sound, it said. Part of the problem: making up $100 million in political advertising that fell into the coffers last year, $90 million of which was booked in the second half of 2002.

Earlier this month, the TVB stood by its prediction that total local TV-station ad sales will be up between 1% and 3% this year, although President Chris Rohrs said it will probably be at the "low end of that range."

And different regions of the country are experiencing different results. "Things are flat-lined in the Northeast," said a source at one station group. But they appear to looking up in the Southwest. Dallas-based Belo reported that TV revenues were pacing 5% higher in September and will be up overall for the third quarter.

Local radio, where Viacom's Infinity Broadcasting has a big presence, remains anemic. First-quarter revenue was up 2%, according to RAB. Since then, the market has remained flat. For the fourth quarter, Bear Stearns predicts that Infinity will show a revenue gain of 1%-2%.