Cable networks, plagued by sagging ratings and lower affiliate fees as consumers shifted to over-the-top and online viewing options, could be in for a rebound in the calendar fourth quarter. But analysts warn that the volatile political climate — which helped drive news networks to new heights in the just-passed presidential election — could also depress results for general entertainment channels.
Several top cable programmers are expected to release earnings results next week, with most analysts encouraged by the prospects for top names like 21st Century Fox and The Walt Disney Co.
Fox is expected to be first out of the gate, releasing fiscal second quarter results today (Feb. 6). The home to perennial ratings winner Fox News Channel, general entertainment powerhouse FX, several regional sports channels and FS1 should have a strong fiscal second quarter, driven by strong ratings for Fox News and the sports channels.
Morgan Stanley media analyst Ben Swinburne estimated Fox’s cable networks should report revenue of $3.96 billion in the fiscal second quarter, up 7% from $3.70 billion in the prior year. Broadcast-TV revenue — driven by an expected 5% hike in advertising sales — should rise 8.8% to $1.85 billion from $1.7 billion in the prior year, Swinburne wrote in a research note.
Cash flow for the cable channels also should be up nicely in the period, according to Swinburne. He predicted that cable network EBITDA would rise 8.3% to $1.3 billion from $1.2 billion in the prior year, while cash flow at the broadcast division should grow by 27% to $353.6 million from $279 million.
COMCAST RENEWAL BENEFITS
Swinburne was encouraged by recent renewal deals with Comcast, which included the return of its YES Network RSN to the operator after a one-year hiatus. Some of Fox’s smaller networks, like Fox Sports 2 and FXM, could also add to growth as their subscriber penetration increases.
Credit Suisse media analyst Omar Sheikh ratedFox his top pick for the year, saying in a recent note that the company’s plan to acquire the remaining interest in U.K. satellite giant Sky it doesn’t already own has removed the M&A discount from the stock and allowed the programmer to focus on organic growth.
Fox News Channel, currently President Trump’s favorite news network, has been riding a wave of ratings growth well past the November election. But what’s good for Fox may not be so for the rest of the cable henhouse. General entertainment networks could feel the pain as viewers are glued to news channels to watch the latest controversy involving the new presidential administration.
That could serve as a blow to programmers that compete directly with news programs, like Discovery Communications, according to Sheikh.
“We expect the political news cycle to remain strong through at least the first half of 2017, driving viewership at major news networks (e.g. CNN, Fox News, MSNBC),” Sheikh wrote. “These networks directly compete with seven of Discovery’s networks for the audience of adults 25-54, therefore strength in news will further pressure Discovery’s domestic ratings, in our view.”
He noted that analysts’ consensus estimates for Discovery’s domestic ad-revenue growth are flat to 1%, and could be even lower.
“We believe there could be some downside risks to this,” he wrote.
UPSIDE SEEN FOR ESPN
Surprisingly, the analysts were bullish on Disney, which has taken it on the chin as subscribers have fled from its flagship sports network ESPN. In his report, Swinburne estimated that ESPN’s could be in for a reprieve from its 2% annual subscriber erosion over the past three years.
“We believe risk now skews to the upside,” Swinburne wrote, adding that skinny bundles and online video distributors — the two businesses many blame for ESPN’s subscriber decline — could be catalysts for growth.
“We believe the combination of moderating skinny-bundle headwinds and the emergence of new, low-priced streaming options create opportunities for incremental ESPN distribution,” he wrote.
Swinburne was also optimistic the Worldwide Leader in Sports will continue to grow affiliate fees in the next renewal cycle, beginning in 2018, largely because of new distribution players.
“We also believe new entrants (such as Hulu Live or YouTube Unplugged) will pay premium affiliate fees, suggesting a positive mix shift tailwind to rate,” Swinburne wrote.
Disney has said it plans to launch a standalone over-the-top ESPN offering using sports rights it currently owns but can’t monetize on its existing networks. While few details have been released about the service, which is expected to debut later this year, Swinburne believes it can coexist with ESPN’s existing linear networks.
“It remains a time of transition at Disney, as it evolves its ESPN/ABC distribution model to attempt to reach consumers that have been opting out of the pay TV bundle,” Swinburne wrote. “We expect the a la carte and bundled offerings will coexist for a long time, creating more earnings stability than the market presumes.”
VIACOM ON THE BOUNCE?
Swinburne upgraded the entire programming sector last week to “attractive,” slapping “overweight” ratings on Disney, Fox and even Viacom, which has experienced the greatest impact from the shift to mobile and online viewing. Swinburne believes that after a period of management upheaval and disappointing results, Viacom, which reports its fiscal first quarter results on Feb. 9, has nowhere to go but up.
“We believe new management has about a year before any significant renewals to try and improve the programming and ratings trajectory, notably for MTV,” Swinburne wrote, adding that Viacom’s biggest EBITDA contributor, kids’ network Nickelodeon, has shown healthy growth over the past year.
But not everyone was quite as optimistic. Sanford Bernstein media analyst Todd Juenger, who rightly predicted the linear network ratings declines years ago, foresees a difficult period for pay TV.
“We see no evidence of fundamental trends to support a view that things are getting less worse,” Juenger wrote last week, adding that pay TV subscribers and conventional TV audiences continue to fall while subscription VOD services like Netflix gain viewers.
“All the media Bulls are clinging to is: hope,” Juenger wrote. “Hope on macro/political (tax rates, GDP). Hope that OTT launches will slow the rate of sub decline. Hope for M&A.”
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