CBS Corporation Reports Third Quarter 2016 Results Revenues Up 4% to $3.4 Billion
Operating Income Up 6% to $798 Million
Diluted EPS Up 31% to $1.15; Adjusted Diluted EPS Up 19% to $1.05
CBS Corporation (NYSE: CBS.A and CBS) today reported results for the third quarter of 2016, including the highest quarterly diluted earnings per share (“EPS”) in the Company’s history and a third quarter record for revenues and operating income.
“CBS is clearly knocking the cover off the ball, including revenue and profit growth across every one of our operating segments,” said Leslie Moonves, Chairman and Chief Executive Officer, CBS Corporation. “Our premium content continues to be the driving force behind our success, starting with the CBS Television Network, which kicked off another terrific season as the #1 network, with the #1 new drama, Bull, and the #1 new comedy, Kevin Can Wait. With ownership in all of our new fall shows, we have once again positioned our Company to monetize additional content across all platforms for years to come. This includes content licensing and distribution, which benefited from a 40% increase in streaming revenue during the third quarter. It also includes affiliate and subscription fees, where retransmission consent and reverse compensation grew 32% during the quarter, and where we continue to see rapid growth in our subscription streaming services, CBS All Access and Showtime OTT. Meanwhile, advertising remains strong and is accelerating here in the fourth quarter as our new upfront pricing kicks in and political spending is ramping up nicely. Looking ahead to the separation of our radio business, we see additional opportunities to return value to shareholders and invest in our core content business. So we feel extremely good about our future, and we are confident we have set ourselves up to succeed under any scenario.”
Third Quarter 2016 Results
Revenues for the third quarter of 2016 increased 4% to $3.40 billion from $3.26 billion for the same prior-year period. The growth was led by a 32% increase in retransmission revenues and fees from CBS Television Network affiliated stations as well as growth from digital distribution platforms. Content licensing and distribution revenues increased 6%, driven by growth in domestic television licensing sales. Advertising revenues during the third quarter were affected by 10 hours of primetime preemptions for Democratic and Republican conventions and the first Presidential debate as well as competition from the 2016 Summer Olympics, while advertising benefited from higher political spending.
Operating income for the third quarter of 2016 increased 6% to $798 million from $753 million for the same prior-year period, reflecting the higher revenues, which were partially offset by increased investment in programming.
Net earnings from continuing operations of $514 million for the third quarter of 2016 rose 21% from $426 million for the same quarter in 2015, and adjusted net earnings from continuing operations increased 10% to $467 million, driven by the higher operating income.
EPS from continuing operations for the third quarter of 2016 grew 31% to $1.15 from $.88 for the same quarter in 2015, and adjusted EPS increased 19% to $1.05. Weighted average shares outstanding were 446 million in the third quarter of 2016, down from 484 million in the prior-year period, mainly as a result of the Company’s ongoing share repurchase program.
Adjusted results for the third quarter of 2016 excluded a one-time tax benefit of $47 million associated with a multiyear adjustment to a tax deduction, which was approved by the Internal Revenue Service (“IRS”) during the third quarter of 2016. No adjustments were made to reported results for the third quarter of 2015.
Free Cash Flow, Balance Sheet and Liquidity
For the third quarter of 2016, operating cash flow from continuing operations was an inflow of $55 million compared with an outflow of $231 million in the same prior-year period, and for the first nine months of the year, operating cash flow from continuing operations was $1.31 billion compared with $650 million in 2015. For the third quarter of 2016, free cash flow was an inflow of $9 million compared with an outflow of $289 million for the same prior-year period, and for the first nine months of 2016, free cash flow of $1.18 billion increased from $546 million in 2015. The increases for the nine-month period were driven by growth in affiliate and subscription fees and higher advertising revenues, including from the broadcast of Super Bowl 50 on CBS, partially offset by increased investment in content.
During the third quarter of 2016, the Company issued $700 million of 2.90% senior notes due 2027 and used the net proceeds from this issuance for general corporate purposes, including the repurchase of CBS Corp. Class B Common Stock and the repayment of short-term borrowings, including commercial paper.
Repurchase of Company Stock
During the third quarter of 2016, the Company repurchased 9.5 million shares of its Class B Common Stock for $500 million. For the first nine months of 2016, the Company repurchased 29.0 million shares of its Class B Common Stock for $1.50 billion, at an average cost of $51.76 per share.
In connection with the Company’s previously announced plans to separate its radio business, CBS Radio Inc. (“CBS Radio”) filed a preliminary registration statement with the Securities and Exchange Commission during the third quarter of 2016 for the proposed initial public offering of its common stock. In October 2016, CBS Radio borrowed $1.46 billion through a $1.06 billion senior secured term loan due 2023 and the issuance of $400 million of 7.25% senior unsecured notes due 2024 through a private placement (“CBS Radio Borrowings”). The term loan bears interest at a rate equal to 3.50% plus the greater of LIBOR and 1.00%. The weighted average interest rate on these borrowings is 5.25% as of November 3, 2016. Also in October 2016, CBS Radio entered into a $250 million senior secured revolving credit facility. As of November 3, 2016, there were no outstanding borrowings under the revolving credit facility. The CBS Radio Borrowings are guaranteed by certain subsidiaries of CBS Radio. The Company does not guarantee, or otherwise provide credit support for, the CBS Radio Borrowings or the revolving credit facility. The net debt proceeds will be primarily used by CBS Corporation to repurchase shares of its Class B Common Stock, with the remainder to be used for general corporate purposes and ongoing cash needs.
In preparation for the planned separation of CBS Radio, the Company changed the manner in which it manages its television and radio operations during the third quarter of 2016. Accordingly, the Company’s previously reported operating segment, Local Broadcasting, has been separated into two operating segments, Local Media and Radio. In connection with this new segment presentation, the presentation of intercompany revenues has been revised, including station affiliation fees paid by Local Media to the CBS Television Network. Prior period results have been reclassified to conform to this presentation.
Reconciliations of non-GAAP measures to reported results are included at the end of this earnings release.
Consolidated and Segment Results (dollars in millions)
The tables below present the Company’s revenues by segment and type, operating income (loss) excluding restructuring charges, impairment charges, and other operating items, net by segment (“Segment Operating Income”), and depreciation and amortization by segment for the three and nine months ended September 30, 2016, and 2015.
Entertainment (CBS Television Network, CBS Television Studios, CBS Studios International, CBS Television Distribution, CBS Interactive, and CBS Films)
Entertainment revenues for the third quarter of 2016 were $1.95 billion, up 1% from $1.93 billion for the same prior-year period. This increase was led by 39% growth in affiliate and subscription fees, driven by higher station affiliation fees and subscription growth for CBS All Access. Due to 10 hours of primetime preemptions for Democratic and Republican conventions and the first Presidential debate as well as competition from the 2016 Summer Olympics, network advertising revenues were down 2% for the third quarter. Content licensing and distributions revenues were 3% lower than last year’s third quarter, which included the initial domestic availability of Elementary. Growth in domestic streaming sales partly offset this impact.
Entertainment operating income for the third quarter of 2016 grew 3% to $348 million from $339 million for the same prior-year period, driven by the increase in revenues.
Cable Networks (Showtime Networks, CBS Sports Network, and Smithsonian Networks)
Cable Networks revenues grew 14% to $598 million for the third quarter of 2016 from $526 million for the same prior-year period. The increase was driven by higher revenues from the domestic licensing of Showtime original series, including Penny Dreadful, and growth from Showtime Networks’ over-the-top streaming service.
Cable Networks operating income for the third quarter of 2016 increased 16% to $285 million from $246 million for the same prior-year period, reflecting the revenue growth, which was partly offset by increased investment in original series.
Publishing (Simon & Schuster)
Publishing revenues increased 11% to $226 million for the third quarter of 2016 from $203 million for the same prior-year period. The increase was led by growth in both print and digital book sales, including the bestselling titles Born to Run by Bruce Springsteen and The Girl with the Lower Back Tattoo by Amy Schumer. Digital revenues represented 23% of Publishing’s total revenues for the third quarter of 2016.
Publishing operating income increased to $44 million for the third quarter of 2016 from $43 million for the same prior-year period, as the increase in revenues was largely offset by higher production and selling costs.
Local Media (CBS Television Stations)
Local Media revenues rose 9% to $409 million for the third quarter of 2016 from $376 million for the same prior-year period, reflecting growth in retransmission revenues and higher political advertising sales from upcoming federal and state elections.
Local Media operating income increased 21% to $122 million for the third quarter of 2016 from $101 million for the same prior-year period, primarily reflecting the higher revenues.
Radio (CBS Radio)
Radio revenues were $319 million for the third quarter of 2016 compared with $318 million for the same prior-year period, reflecting higher national advertising sales, which were offset by lower local advertising sales.
Radio operating income grew 5% to $77 million for the third quarter of 2016 from $73 million for the same prior-year period. The increase mainly reflects lower expenses resulting from restructuring activities put in place during 2015.
Corporate expenses for the third quarter of 2016 increased $29 million to $78 million from $49 million for the same prior-year period, mainly due to higher pension and other employee-related costs.