WHY THIS MATTERS: With less financial pressure, broadcast and cable companies can gear up their direct-to-consumer offerings.
Wall Street is cautiously upbeat about the media industry as companies in the TV business get ready to release their earnings for the third quarter.
What had been dark clouds over the industry now seem less threatening. Analysts are predicting that advertising revenue growth will be better than in the last few quarters.
The pace of subscriber losses in the pay TV business has also moderated, which makes the trend in distribution revenues less dire.
Some of the individual stories are also more positive, with Discovery getting traction with streaming distributors and the battle between The Walt Disney Co. and Comcast over 21st Century Fox’s assets and Sky having been settled.
“Based on our industry contacts and bottoms-up tracking, positive trends for media should include stable-to-improving total pay TV subscriber trends (traditional + virtual) for the fourth quarter in a row, U.S. TV advertising stable year-over-year again as the strong scatter market and digital efforts offset ratings declines, and cost-cutting efforts continue to deliver,” Credit Suisse analyst Doug Mitchelson said in a recent report.
“We expect international revenues will be hit by currency, though with little impact flowing through to bottom lines,” Mitchelson wrote. “M&A and the pursuit of streaming will remain topical.”
As traditional TV’s temperature improved to lukewarm, though, streaming giant Netflix was red hot after a third-quarter report showed better than suspected subscriber growth.
Reed Hastings, CEO of traditional TV’s chief nemesis, insisted during Netflix’s earnings call that it can continue to add subscribers and increase profit margins.
“There is so much growth ahead that’s possible in streaming video entertainment,” Hastings said. “So, we’re just going to focus on that for a very long time.
“Unfortunately, lots of other companies are also focusing on that, but that’s going to make it exciting for us for the next few years, great for consumers, incredible for producers,” he added.
The Walt Disney Co., which is acquiring entertainment assets from 21st Century Fox in order to supply its own subscription services, and AT&T’s WarnerMedia, which talked about using HBO to entice people to subscribe to a streaming service it will introduce later this year, didn’t make Hastings particularly nervous.
“We don’t focus that much on anyone because no one seems to affect us that much,” he said. “Someday there will have to be competition for wallet share, we’re not naive about that, but it seems very far off from everything we’ve seen.”
As companies report, analysts will have their ears out listening for clues as to management strategies for dealing with particular issues.
When Disney reports, attention will be paid to the company’s progress in rolling out direct-to-consumer products, which is expected to be an expensive undertaking.
“From here on, at least for the next year and a half, we think Disney will need to focus on building a halo around the OTT story while guiding down earnings expectations due to OTT investment needs, which is obviously a tricky balance,” Barclays analyst Kannan Venkateshwar said.
Credit Suisse’s Mitchelson said Disney should course-correct Wall Street’s consensus about its 2019 earnings. He expects Disney chairman and CEO Bob Iger will have commentary about “swing factors” on its earnings call, including direct-to-consumer launch costs, the dilutive impact of the Fox deal and the price tag for launching Star Wars Lands at its theme parks, while core trends remain similar to last year, he said.
Mitchelson also expects to hear from Comcast about its next steps after winning the bidding for Sky.
Other media companies will also have important stories to tell, according to Mitchelson.
Life After Les at CBS
For CBS, the focus will be on strategy following the departure of chairman and CEO Les Moonves, who had elevated the company with his programming acumen and industry cheerleading. Interim CEO Joe Ianniello will lead the earnings report.
Mitchelson expects Discovery’s third-quarter ad revenue to exceed forecasts and wants to hear what the company is expecting for U.S. advertising in 2019, and about the timing of stock buybacks following its acquisition of Scripps Networks Interactive earlier this year.
For Viacom, Mitchelson sees upside potential for fiscal fourth-quarter margins and earnings per share but says ad trends will be a key going into 2019.
Venkateshwar of Barclays also noted that cable operator stocks are more in favor with investors.
“This has been driven by more stable subscriber trends than what was feared late last year despite price increases, easier comps vs. competitive AT&T promotions, hurricanes, expectations around reduced capital intensity in 2019, continued programming and operating cost moderation, greater operating visibility at Charter due to the lapping of billing system issues, and commencement of buybacks at Altice,” he said. “As we head into earnings, we believe these tailwinds are likely to benefit Altice and Charter more than Comcast, which is seen as a less of a U.S. cable pure play.”
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