ViacomCBS Disappoints With Its Fourth Quarter Results

Before the opening bell Thursday, ViacomCBS (VIAC) reported a disappointing top and bottom line miss with its fourth quarter results. Revenues of $6.871 billion (-3% YoY) was well short of the $7.339 billion consensus, and adjusted EPS share of $0.97 (-42% YoY) was not even close to the $1.41 FactSet consensus. We note the FactSet consensus estimates provided yesterday in our Alert here have since been updated.

By reporting segment, TV Entertainment revenues were $3.126 billion down -1% YoY. Breaking this number down further, Advertising revenue fell 5% to $1.669 billion, Affiliate revenue grew 27% to $682 million, Content Licensing revenue fell 9% to $715 million, and Other revenue was $60 million. But Adjusted Operating Income Before Depreciation and Amortization (OIBDA) was just $625 million, down 13% YoY.

At Cable Networks revenues were $3.088 billion down -2% YoY. Breaking down this number further, Advertising revenue increased 3% YoY to $1.387 billion as Affiliate fell 8% to $1.451 billion. Content Licensing revenue was $250 million. But Adjusted OIBDA fell 32% YoY to $792 million as expenses grew to $2.296 billion largely due to higher investment in content, advertising, and promotional expenses.

At Filmed Entertainment, revenues were $532 million, down -14% YoY. Revenue in each line item was down year over year as Theatrical revenue was $129 million, Home Entertainment revenue was $155 million, and Licensing revenue was $219 million. Disappointingly, Adjusted OIBDA was -$119 million, but that overshadows the full year result of +80 million Adjusted OIBDA. Management called this quarter "an outlier" compared to the prior eight straight quarters of YoY Adjusted OIBDA improvement. Though the quarter was soft, we believe there are several upcoming titles to look forward to such as A Quiet Place Part IIand Top Gun: Maverick. Both are due out in the second quarter.

On the publishing side of the business, fourth quarter revenues were $215 million (-1% YOY) as lower print book sales were partially offset by growth in digital. Adjusted OIBDA was $34 million (-29% YoY) as expenses grew $11 million YoY.

As for some other notes, management increased its annualized run-rate cost synergy target to $750 million from $500 million. That's a good thing and it's important to note this progress was not reflected in the fourth quarter results. However this number is probably still not enough to get the attention of new shareholders. Also, management commented it has made progress on the sale of the Black Rock building in Manhattan and that deal is expected to close in 2020. The proceeds from this sale are expected to go towards debt reduction and share repurchases. Speaking more on buybacks, management said they have repurchased 2.5 million shares of stock since the merger closed.

On corporate strategy, management echoed the three-pronged approach that was previously directed. They are to: Maximize the Power of Content, Unlock Value from Biggest Revenue Lines, and Accelerate Momentum in Streaming. You can find more information about this on the company's presentation slide deck here.

We think there are a lot of moving parts to the quarterly results due to the new segment reporting and some one-time events. However, management's outlook for 2020 wasn't any brighter of a picture and that's what investors are most negatively reacting to right now. Revenues to increase mid-single digit percent from 2019's $27.8 billion. With consensus currently at $29.784 billion, this means numbers must come down. As for some other items, the company expects Domestic Streaming & Digital Video Revenue to increase 35% to 40% from 2019's $1.6 billion, with domestic streaming subscribers growing to approximately 16 million from 11 million with domestic Pluto TV monthly active users increasing to approximately 30 million from 22 million. Cost synergies are expected to be approximately $250 million.

Elsewhere, OIBDA is expected to increase to $5.8 billion to $6.1 billion from 2019's $5.5 billion with Adjusted EPS in the range of $5.15 to $5.50 from 2019's $5.01. It's nice to see earnings growth, however this is a huge miss compared to the consensus estimate of $6.02. Lastly, Adjusted FCF is expected to be $1.8 billion to $2 billion, up from $1.2 billion in 2019 but below consensus expectations of $2.2 billion. This is a really big concern of ours because value investors love to see strong cash flow generation. It's good to hear management say 2021's free cash flow will be about $500 million higher thanks to several items, but the continued fact that numbers have to be taken down means that this stock is going to struggle to rally.

On the upcoming NFL rights negotiation, management reiterated its belief that the NFL values the company's broadcast reach and quality of production. Since price always matter, management said they believe they have enough financial resources to successfully renegotiate a deal. Currently we think investors are very skeptical in ViacomCBS' ability to get this deal done, and they have every right to be because the fat wallets of Amazon (AMZN) and Alphabet GOOGL loom. However, we think we must continue to side with management on this one because they simply cannot afford to miss out on this deal.

Again, we are not happy with the results today and in our Alert from this morning here, we outlined our disdain with how this management team is not moving fast enough to create shareholder value as estimates continue to go down. In a deal that we thought would be 2+2=5, ViacomCBS managed to go 2+2=3 with the market cap lost since the deal was announced about equal to what Viacom was worth pre-deal. But it is our job to find the stocks of companies who are creating value for their shareholders, and unfortunately we got this one very wrong.

That being said, we are holding on to our shares and are questioning the magnitude of this stock price reaction considering what had to have been low expectations into the print. But in light of the quarter, the outlook, and general lack of confidence in execution, we must slash our price target to $40 which reflects just 7.5x the midpoint 2020 EPS guidance. We still believe there is value within the company and it could always get bought out by a larger company who wants those assets, however are going to keep this at a TWO rating until we see a sense of urgency resonate with management.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long VIAC, AMZN, GOOGL.