CBS Q3 Earnings in Line

The year seems to be lucky for CBS Corporation (CBS) as it continues to post record quarterly profits. The company posted third-quarter 2013 adjusted earnings per share (EPS) of 76 cents, which came in line with the Zacks Consensus Estimate and rose 19% year over year. Higher operating income and share buybacks aided the bottom line.

Including earnings from discontinued operations, EPS was 80 cents, rising 33.3% from the year-ago quarter.

However, CBS Corp’s third-quarter 2013 performance failed to cheer the market as the stock price dropped 0.5% within a day of the earnings announcement. However, year to date, it has amassed a return of 52.8%.

In the said quarter, total revenue was $3,634.0 million that surpassed the Zacks Consensus Estimate of $3,531 million and increased 11.3% from the prior-year quarter. This growth in revenues was owing to 4.3% rise in advertising revenues to $1,856 million, 17.5% rise in content licensing and distribution revenues to $1,094 million and 23.2% increase in affiliate and subscription fees to $611 million.

Another driving factor was renewal of the Time Warner Inc. (TWX) cable deal at beginning of the quarter, which restored CBS Corporation’s ties with the cable company. The agreement put to an end the prolonged dispute between the two companies.

Operating income before depreciation and amortization (:OIBDA) increased 4.1% to $941 million primarily driven by double digit revenue growth, partly offset by increased investment in television content and stock-based compensation. However, OIBDA margin contracted approximately 200 basis points to 26.0%.

Segment Details

Content Group revenues, comprising Entertainment, Cable Networks and Publishing, increased 16.3% to $2,704 million due to strong performances across the segment.

Entertainment revenues rose 12.1% to $1,884 million from the year-ago quarter, driven by increase an in domestic licensing as well as higher advertising and network affiliation revenues. The segment’s OIBDA grew 12.2% to $431 million as strong revenue growth was partly offset by the company’s increased investment in content.

Continuous growth in licensing revenues and affiliate revenues supplemented Cable Networks’ revenues to mark an increase of 36.7% to $596 million. Moreover, growth in cable networks revenues helped the segment’s OIBDA to increase 15% to $261 million, partly offset by a rise in sports programming costs.

Publishing revenues rose 6.7% to $224 million due to 39% increase in the sales of digital books. The segment’s OIBDA increased 10.3% to $43 million on the back of higher revenues, partly offset by expanding royalty and advertising expenditure.

Local Group revenues, including Local Broadcasting and Outdoor Americas, came in at $982 million, down 1.3% from the prior-year quarter revenues.

Local Broadcasting revenues decreased 3% to $641 million as absence of political advertising offset the higher retransmission fees. CBS Television Stations revenues fell 6% whereas CBS Radio revenues inched up 1% due to the new CBS Sports Radio network. The segments’ OIBDA increased 15% to $181 million due to lower revenues.

Outdoor Americas revenues rose nearly 2.1% to $341 million on the back of top line growth in the U.S. Outdoor Americas’ OIBDA increased 4.8% to $110 million in the quarter. The company is likely to spin off the Outdoor Americas division as a standalone REIT IPO in early Q1 2014.

Other Financial Details

CBS Corporation ended the quarter with cash and cash equivalents of $226 million, long-term debt of $5,944 million, and shareholders’ equity of $9,671 million. The company generated cash flow from operations of $269 million and incurred capital expenditures of $57 million. Free cash flow of $402 million was generated during the quarter.

In the quarter, CBS Corporation repurchased 5.3 million shares for $279 million, bringing the year to date total to 39.7 million shares at a cost of $1.84 billion.

The company extended its current share repurchase authorization to a total of $6 billion as it enhanced the share repurchase program by an additional $5.1 billion. Since the inception of the share repurchase plan in Jan 2011, the company bought back $4.03 billion worth of shares.

Other Developments

On Sep 30, 2013, CBS Corporation concluded the divestment of its Outdoor advertising business (Europe and Asia) for $225 million. The transaction resulted in a gain of $147 million, partly offset by an after-tax charge of $110 million.

Our Take

CBS Corporation is poised to benefit from its strategic expansion initiatives. We remain optimistic about this Zacks Rank #3 (Hold) stock and expect its growth momentum to continue in 2013 and spill over to 2014 based on reverse compensation from affiliates, strong demand of its content, digital distribution, syndication sales and retransmission consent. The company also expects CBS Television Network to be a major growth driver. Moreover, the company is developing a new advertising model, which will allow it to reap profits following the first telecast of a show.

Notably, non-advertising revenues now account for 43% of the company’s total revenue. CBS Corporation is focused on lowering its dependency on advertising and is concentrating on increasing subscription based revenue channels. The move is a commendable one as advertising revenues are highly susceptible to economic headwinds.

Alongside, CBS continues to benefit from its streamlining deals. Significantly, the company strengthened its ties with Netflix, Inc. (NFLX) by extending its multi-year streaming video deal for select library content. Moreover, it entered into a deal with Amazon.com Inc. (AMZN). These measures facilitate CBS to monetize its content.

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