USA Networks, Viacom Report

The common theme between USA Networks and Viacom is exposure to economic swings and ad spending, but both are high-growth media businesses with strong portfolios of powerhouse brands. That leaves both in positions to continue growing cash flow and providing shareholder returns. Investors looking to add some media exposure to their portfolios would be hard-pressed to find two better investments.

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By Mike Trigg (TMF Tonto)
April 25, 2001

Media juggernauts USA Networks (Nasdaq: USAI) and Viacom (NYSE: VIA) reported better-than-expected results this week amid difficult economic and ad spending conditions. USA Networks beat the Street's first-quarter estimate by a whopping $0.12 per share this morning, citing strong sales at Home Shopping Network. Viacom, meanwhile, exceeded Q1 expectations by $0.08 Tuesday despite decreased ad spending from dot-com companies.

USA Networks reported a loss of $19.5 million, or $0.05 per share, compared to a loss of $23.9 million, or $0.07 per share, in the year-ago period. The Street expected a loss of $0.17 per share. Sales increased 18% year-over-year to $1.32 billion.

You might be wondering how this company could be losing money. That's in part because of its ownership structure.

Because of regulatory restrictions, AT&T spinoff Liberty Media (NYSE: LMG.A) and Vivendi Universal (NYSE: V) own part of USA Networks through its subsidiaries, rather than owning common shares. "This structure," the company's press release explains, "causes [USA] to record net losses in situations where net income would otherwise have been recorded if their ownership were entirely in ... common stock." If those companies' stakes were converted into common stock, USA Networks would have had pro forma earnings of $0.02 per share.

Because of the negative earnings in its financials, investors will find better luck examining cash flow as measured by earnings before interest, taxes, depreciation and amortization (EBITDA). On that basis, cash flow grew 14% year-over-year to $230.1 million. More importantly, management maintained its guidance for 25% annual EBITDA growth through 2002, and expects 18% and 20% EBITDA growth in its operating business in 2001 and 2002, respectively.

Operating businesses include cable TV networks, production, the Home Shopping Network, ticketing, and hotel reservations. While those diversified revenue streams leave it equipped to withstand slowing business conditions, it also makes it difficult to understand the company. Its businesses are separated into media and e-commerce. Media includes cable TV networks like the SciFi channel and production businesses such as USA Studios and Gramercy Pictures. 

E-commerce ventures include the Home Shopping Network, Ticketmaster (Nasdaq: TMCS), and Hotel Reservations Network (Nasdaq: ROOM). These business are particularly interesting because they use the Internet as platforms but aren't exclusively dependant on the "e" in "e-commerce." Ticketmaster, for example, was a very successful business prior to the Internet, though online ticket sales do offer plenty of financial and business advantages that purchasing tickets over the phone can't. 

Turning to Viacom, it posted a loss of $7.3 million, or break-even EPS, compared to a loss of $384.3 million, or $0.54 per share, in the year-ago quarter. Revenues increased 6% year-over-year to $5.77 billion. Pro forma EBITDA increased 15% year-over-year to $1.15 billion.

Viacom attributed its results to its cable and TV networks. For those who have caught the reality-TV bug, it should come as no surprise that CBS is doing well with the popular Survivor. EBITDA at its cable business, meanwhile, grew 17% year-over-year to $365 million, helped in big part by ad gains at MTV, VH1, and BET. Television, which includes CBS and the UPN networks, increased EBITDA 14% to $315 million.

The company was hardly bullish about its guidance, however, stating that it expects cash flow to grow in the mid-single-digit range in Q2. It expects cash flow to grow 20% for the year to $6.2 billion, but warned that the figure could be as low as $5.9 billion. Given its diversified businesses and strong brands, ranging from TNN to BET, 20% cash flow growth appears to be achievable.

Potential strikes from actors and disappointing ad sales, particularly at its Infinity radio business, have Viacom concerned. Infinity owns the Howard Stern and Don Imus radio shows, but declining ad spending from dot-com companies, which spent aggressively last year, forced cash flow down 5% year-over-year. In the conference call, management said Infinity revenues were expected to pick up in the second half.

The common theme between these companies is exposure to economic swings and ad spending, but both USA Networks and Viacom are high-growth media businesses with strong portfolios of powerhouse brands. That leaves both in the position to continue growing cash flow and shareholder returns. Investors looking to add some media exposure to their portfolio would be hard-pressed to find two better investments, though the entertainment business is a difficult and asset-hungry business prone to widespread fashion swings.

Mike Trigg is often ridiculed for his love of reality television. To see his holdings, view his profile. The Motley Fool is investors writing for investors.

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