Viacom Revisited

Viacom (NYSE:VIA) is a media conglomerate composed of several famous brands. Ever hear of MTV? Of course you have, unless you're a hermit.

Not only does Viacom own MTV, but it runs a bunch of cable channels consolidated under the segment name MTV Networks -- Comedy Central, TV Land, VH1 (who isn't addicted to some of that channel's Sunday-night reality programming?), Spike TV, and the home of SpongeBob SquarePants, Nickelodeon. Viacom also owns movie studio Paramount Pictures, and it acquired the live-action pipeline of DreamWorks last year. The company was part of a bigger entity known by the same name -- that business was split in 2005 into CBS (NYSE:CBS) and the new Viacom (CBS wants to create opportunities for dividend growth).

It's time to check in on the company to see how its first year as an independent unit has fared.

Let's go shopping
Viacom is specifically engaging a protocol of small, prudent acquisitions as a paradigm for capital appreciation. The company believes that the Internet is a vital venue for its content. Making a splash on the Web should help Viacom's movie and cable properties as well, since interaction with the brands in an online setting might encourage users to sample content in other mediums.

The annual report mentions some interesting purchases, such as Xfire, Harmonix Music Systems, and Atom Entertainment. These assets are geared toward the younger demos that are Viacom's bread and butter. In the case of Harmonix Music Systems, Viacom scored a jewel product -- the Guitar Hero video game. Activision (NASDAQ:ATVI) owns Red Octane, the publisher of the title, while Viacom owns the developer -- talk about a powerhouse combo. So far, Viacom's buying strategy has made sense -- the company hasn't been highly expensive, and it follows the current trend of digital entertainment and social networking.  

Cash flow is cooler
No review of an annual report is ever even remotely complete until you check through the statement of cash flows.

Operational cash flow is doing OK, but free cash flow is in a decided downturn (although it remains positive). You'll notice that I'm including acquisitions in the free-cash calculation -- I can't just deduct capital expenditures because Viacom's explicit post-split purpose is to make acquisitions to increase earnings and cash flow. Keep in mind, however, that the cash allocated for buying stuff will probably increase over time; investors will need to monitor how that strategy is affecting the bottom line (i.e., whether or not it's having a beneficial effect).

Viacom's operating results are dreamy
The filmed entertainment segment experienced a 46% increase in revenues and a near doubling of its operating income. As Rick Munarriz pointed out when he covered the earnings release earlier in the month, the growth here wasn't completely organic. That's OK, though, since the live-action film slate of DreamWorks, acquired at the beginning of 2006, invigorated the division.

The media networks segment increased its top and bottom lines by 7% and 11%, respectively. MTV Networks continues to be the go-to platform for content consumption for an audience that spends a lot of discretionary cash on the weekend. Advertisers know this, and they respond by buying time on MTV, Comedy Central, etc. I've always been a fan of the MTV Networks brand, and I see no reason why it won't continue to be of value to shareholders.

Viacom's outlook
My sense is that Viacom's next few quarters will be good ones. Again, we're not talking about a lot of organic growth, but Viacom has stated all along that it intends to buy its way to prosperity. It wouldn't be surprising to see Viacom continue adding to its asset base over the next 12 months, but I hope the company does have an eye on keeping organic growth not only alive but vibrant. Acquisitions are great, but expansion of assets already owned is a big key to shareholder value.

The big risk going forward is that management suddenly loses its ability to keep on top of cultural trends -- its brands must never lose their edgy appeal. Of course, that's simply part of the media game; Disney (NYSE:DIS), News Corp. (NYSE:NWS), and Time Warner (NYSE:TWX) are all constantly investing marketing dollars in their intellectual properties in the interest of keeping them fresh and exciting. Viacom's been at this game for a long time, except now, it's on its own. We'll see if Viacom and CBS prove the split theory correct.

Check out some more Foolish content on Viacom:

• Fool on the Street: Viacom Commands Content
• Before You Buy a Viacom
• In the Nick of Time  

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Fool contributor Steven Mallas owns shares of Activision and Disney. As of this writing, he was ranked 12,037 out of 24,698 investors in the CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.