Viacom – Discovering its Mojo

We did a lengthy review of Viacom’s (NYSE: VIA-B) vertical strategy in the Fall. Meanwhile, revenues were up 24% in 3Q07 to $3.27 billion. Adjusted net earnings grew 20% to $437 million and diluted EPS were $0.65, a 27% increase over 3Q06. The solid performance was due to the DreamWorks-Paramount blockbuster Transformers.

Earlier this month, BET announced a vertical ad network targeted to African American and urban online audiences. This audience reacts positively to online advertising and is the second largest online minority with 22.7 million users.

Viacom recently signed a 5-year, $500 million deal with Microsoft “to work together on advertising and promotion for TV shows and video games”.

Microsoft also entered into a non-exclusive licensing for content from Viacom’s cable network and motion pictures division for distribution on MSN sites and Xbox 360. Both these partnerships will accelerate Internet advertising revenues and improve Viacom’s margins.

Digital properties are Viacom’s fastest growing assets. Viacom’s music video sites, MTV.com, VH1.com, and CMT.com experienced over 1.2 billion video streams in 2007 a rise of 30% over 2006. They also attracted 30 million uniques per month. MTV Mobile video streams soared 90% over 2006; VH1 grew by 100% and CMT recorded a 252% gain. Viacom will take advantage of convergence of ad sales as its top 25 advertisers spend both on-air and on-line, totaling over $500 million.

MTV has decided to make its videos available on five online video services (Dailymotion, GoFish, iMeem, MeeVee and Veoh Networks) and Comcast Corp’s broadband site. Initial results indicate that the online distribution has helped boost television ratings, which rebounded in 4Q07. MTV Networks has created Digital Fusion to develop advertising content for videos, online games and other digital media.

Viacom sees online games as a major pillar of growth. The Company could form a partnership with Microsoft for co-developing video games. MTV plans to invest over $500 million in the next two years to develop and distribute online games. It has also entered into an agreement with film producer Jerry Bruckheimer to launch a video game development studio, that will unite Hollywood and technology.

Viacom digital attracted 42.8 million unique visitors in November and was ranked 12th in the list of 50 media properties. The addition of Flux has enhanced the time spent on company sites. Rhapsody America, a joint venture with RealNetworks is an example of such a move.

Viacom is expected to record revenues of $13.3 billion in 2007, a 17% year over year increase. OIBDA is estimated at $3.4 billion, a 7% increase with margins slightly lower. Full year EPS could hit $2.31 with $2.30 in free cash flow per share.

Viacom is well positioned as one of the fastest growing media stocks and could benefit from its various partnerships, rating improvements (5.9% in November 2007) and investments in content, gaming and other online initiatives. The stock trades at a modest valuation relative to its growth prospects.