Revenue slide is seen for cbs

CBS declared itself “Mentally Strong” in a news release the other day, trumpeting the big ratings for the network’s latest hit drama, “The Mentalist.”

Fiscally fit, however, is the question.

The broadcasting giant today reports quarterly results, and Wall Street is bracing for grim numbers -- and looking for CBS Corp. to outline a strategy for how it will navigate the choppy waters ahead.

A rapidly deteriorating economy is making it difficult for CBS to capitalize on its resurgence in prime time, where viewership is up 6% over last season, a notable achievement at a time when network TV is experiencing an audience exodus. In addition to “The Mentalist,” the network has notched gains for sitcoms “Two and a Half Men” and “How I Met Your Mother,” the Navy forensic drama “NCIS” and the news magazine “60 Minutes.”


Even “CBS Evening News With Katie Couric,” pummeled by critics after an embarrassing start with Couric in the anchor chair, has increased its audience about 1% this season.

But all that isn’t of much help right now for CBS, which is uniquely vulnerable to the recession because nearly 70% of its revenue comes from advertising. TV and radio stations have been battered as mainstay advertisers such as automakers, financial firms and retailers have slashed spending. Unlike media rivals Time Warner Inc., Walt Disney Co. and News Corp., CBS doesn’t have a broad stable of cable channels pouring in subscriber revenue to offset advertising declines.

The nose dive in TV and radio ads is hitting the company on the balance sheet. Last fall CBS took a $14-billion write-down to reflect the diminished value of its broadcasting assets and billboards. Since then, the economy has eroded further. CBS’ Internet play -- spending $1.8 billion to buy technology news operation CNet Networks Inc. -- is widely considered an ill-timed investment in the wake of a massive retrenchment in online advertising.

“They overpaid for it,” said longtime media investor Harold Vogel. “I wouldn’t be surprised if they had to take another write-down.”


Then there is the issue of CBS’ generous dividend. Vogel and other analysts are watching to see whether CBS reduces the payment. The company currently issues more than $725 million a year in dividends to shareholders, which it has done to attract investors. That is money that CBS desperately needs for other purposes.

“In this environment, cash is the most important asset that you can have,” Vogel said.

Last week Standard & Poor’s downgraded CBS’ credit outlook to negative from stable, citing the “extremely weak recent results and lowered guidance” issued by other media companies.

“The outlook revision reflects our growing concern about the deepening recession, which we expect will continue for all, or the majority, of 2009,” S&P; credit analyst Michael Altberg said.


In addition, S&P; noted, CBS’ cash position is at its “lowest point” since the company split from Viacom Inc. in December 2005. On Sept. 30, the end of the most recent reporting period, CBS had $553 million in cash.

Some analysts have further suggested that CBS could face a cash crunch and a problem meeting a $1.6-billion debt repayment due in 2010.

“Local ad trends continue to shock us with unimaginable rates of decline,” Sanford C. Bernstein & Co. analyst Michael Nathanson wrote in a recent report.

CBS’ decision about its dividend payment is playing out against the backdrop of the credit troubles facing Sumner Redstone, the 85-year-old controlling shareholder of CBS and Viacom. Redstone divided his company in half to try to “unlock” value. Viacom, with the cable channels MTV, Comedy Central and Nickelodeon, was supposed to be the fast-growing company while CBS, which generates billions in cash, was the slower-growth company that paid a sizable dividend.


The CBS dividend provides a steady stream of income to the Redstone family’s privately held firm, National Amusements Inc. In October, National Amusements disclosed that it was in violation of its debt covenants and had to restructure $1.6 billion in debt. To satisfy bankers, the company shed its investment in the underperforming video game firm Midway Games and said it would sell some movie theaters to raise money to pay down debt.

Last week, during Viacom’s quarterly earnings call, Redstone said National Amusements was close to an agreement with bankers. It is unclear whether the CBS dividend factors into the negotiations with bankers to restructure debt.

Martin Pyykkonen, media analyst with Wunderlich Securities, said CBS could save more than $300 million this year by cutting its dividend 50%. “Even if they cut the dividend in half, that would still be a 10% yield, which by any measure is still high,” he said. “As the controlling shareholder, Redstone carries a pretty big stick. But you would have to question the prudence of management if they keep paying out such a large dividend.”

Bernstein analyst Nathanson predicted that TV revenue for CBS could decline 10% in the fourth quarter “as the weak local advertising market will more than offset the benefit of broadcast station political advertising.” He also estimated that revenue to the stations could fall as much as 17%.


Radio trends are also on the slide. Nathanson predicted that CBS radio revenue would decline 22%.