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CBS Beats on Bottom Line

Zacks Equity Research

CBS Corporation’s (CBS) second-quarter 2012 earnings of 65 cents a share beat the Zacks Consensus Estimate of 58 cents and jumped 12% from the year-ago quarter on the back of increase in affiliate and subscription fee revenues as well as effective cost management that helped in mitigating the fall in advertising revenue.

Management hinted that total revenue of $3,476 million dropped 3% over the prior-year quarter due to difficult year-over-year comparisons. The prior-year quarter, benefited from a multi-year digital streaming contract and the NCAA men’s basketball championships, which was aired in the first quarter of the current year. Total revenue also fell short of the Zacks Consensus Estimate of $3,543 million.

Advertising revenue declined 3% to $2,142 million, whereas content licensing and distribution revenue slipped 8% to $816 million. On the other hand, affiliate and subscription fees rose 8% to $465 million.

Adjusted operating income before depreciation and amortization (:OIBDA) increased 3% to $901 million, whereas OIBDA margin expanded approximately 200 basis points to 26%.

Segment Details

Content Group revenue, comprising Entertainment, Cable Networks and Publishing, decreased 4% to $2,342 million.

Entertainment revenue fell 7% to $1,707 million from the year-ago quarter that gained from the initial licensing of the programming for digital streaming, domestic syndication sale of Frasier, and the NCAA men’s basketball championships, which fell in the first quarter of the current year versus the second quarter of the previous year.

However, these were to some extent mitigated by increase in high-margin retransmission revenue and rise in international syndication revenue in the quarter under review. OIBDA in the segment dipped 3% to $426 million.

Growth in subscriptions rates at Showtime Networks, CBS Sports Network and Smithsonian Networks along with a rise in licensing revenue due to digital streaming of Showtime original series supplemented Cable Networks revenue to jump 8% to $446 million. Cable Networks OIBDA increased 8% to $190 million.

Publishing revenue rose 3% to $189 million, reflecting increased sales of digital books, partly offset by fall in sales of print books. Publishing OIBDA plunged 53% to $9 million during the quarter due to legal charges.

Local Group revenue, including Local Broadcasting and Outdoor, came in at $1,185 million, up from $1,181 million in the prior-year quarter.

Local Broadcasting revenue climbed 2% to $704 million from the year-ago quarter. Television Stations revenue jumped 6% on the back of higher automotive and political advertising, as well as increase in retransmission revenue, partly offset by fall in retail and financial services advertising.

CBS Radio revenue fell 2%, reflecting improved automotive advertising, offset by fall in advertising related to retail and financial services. The segments’ adjusted OIBDA jumped 8% to $248 million.

Management now expects Local Broadcasting revenue to rise in the high-single digits for the third quarter, buoyed by the growth of TV stations in the teens. This augmentation comes on the back of the auto, political and the entertainment categories.

Outdoor revenue edged down 2% to $481 million. Revenue for the Americas rose 2% in constant currency portraying growth in the U.S. billboards and display businesses. Revenue for Europe inched up 1% in constant currency, mirroring increase in advertising revenue related to the 2012 Summer Olympics in London. Outdoor OIBDA grew 8% to $93 million.

CBS Corporation now projects Outdoor revenue to be rising in the high-single digits for the third quarter in constant currency, aided by advertising sales associated with the London Olympics and growth in the U.S.

Growth Story

CBS remains well positioned to drive revenue growth in the coming quarters through its strategic initiatives and operating efficiencies. Management remains optimistic and expects growth momentum to continue in fiscal 2012, based on reverse compensation from affiliates, strong demand of its content and streaming, retransmission consent and political advertising.

Revenues from retransmission continue to grow at a brisk pace. Further, the company is increasingly getting reverse compensation from its affiliates, marking a new source of revenue.

The presidential elections will be accretive to the company’s result in the upcoming quarter. In 2013, AFC Championship Game, the Super Bowl and the Grammys will benefit CBS. Management expects reverse compensation to surpass $100 million in 2013.

Other Financial Details

CBS Corporation ended the quarter with cash and cash equivalents of $1,888 million, total long-term debt of $6,801 million, and shareholders’ equity of $10,118 million. The company generated cash flow from operations of $612 million and incurred capital expenditures of $54 million, resulting in free cash flow of $558 million.

During the quarter, the company bought back 9.4 million shares at a price of $32 per share, aggregating $301 million. Since the commencement of the program, through June 30, 2012, CBS Corporation has bought back 60.6 million shares at a price of about $26 per share, totaling $1.59 billion.

The company recently announced that its Board of Directors has agreed to enhance its share repurchase program and hike the quarterly cash dividend. The share repurchase authorization will rise by 57% to $4.7 billion from the initial program announced in January 2011.

Under the new program, the company has already repurchased shares of worth $1.7 billion, with $3 billion remaining for future repurchases. The company aims to complete the new share repurchase program by the end of 2014.

Additionally, the Board of Directors also approved a 20% hike in its quarterly cash dividend to 12 cents from 10 cents a share. The increased dividend will be paid on October 1, 2012 to shareholders of record as of September 10, 2012.

In a strategic move to reduce interest outflow, CBS Corporation refinanced its debt during the quarter. The company announced the offering and redemption of debt, simultaneously. The company issued 1.95% senior notes of $400 million due 2017 and 4.85% senior notes of $500 million due 2042.

The proceeds were utilized to redeem 8.625% debentures of $152 million due August 1, 2012. The company also repaid 5.625% senior notes of $338 million due August 2012 and 8.20% senior notes of $400 million due 2014.

Currently, we have a long-term Outperform recommendation on the stock. However, CBS Corporation, which competes with News Corporation (NWSA) and Walt Disney Company (DIS), holds a Zacks #2 Rank that translates into a short-term Buy rating.

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