Viacom posts higher profit but cable ad sales weak

By Kenneth Li

NEW YORK (Reuters) - Viacom Inc reported lower-than-expected advertising sales at its cable television networks due to weakness in sectors such as retail and automotives, and said the short-term economic outlook was "difficult to predict."

While Viacom posted a higher-than-expected second quarter profit on Tuesday, boosted by box office hits such as "Iron Man," it said U.S. ad sales at its cable networks rose just 1 percent, below its forecast of 3 percent to 4 percent growth.

"Advertisers in a few categories, such as retail, automotive, and certain consumer goods, pulled back their on-air spending as they adjusted their own operating plans and product launches," Viacom Chief Executive Philippe Dauman said on a conference call with investors.

"Low ratings at a few of our networks also contributed," he said, citing BET. Viacom also owns MTV Networks and Nickelodeon.

The company did not issue a third quarter U.S. ad sales projection.

Viacom's results underscored the media industry's efforts to diversify businesses that are heavily dependent on ad sales in a deteriorating U.S. economy.

"We have entered a period of slow advertising growth," Gabelli & Co associate portfolio manager Christopher Marangi said. In the second half of the year, "it's probably more of the same or maybe a little better at 3 to 4 percent growth," he said.

RBC Capital Markets analyst David Bank said he expected the stock to trade moderately lower on Wednesday, but not by much as investors have already discounted the media sector.

Shares of Viacom, which currently trade below levels reached before its split with CBS Corp, have fallen over 30 percent this year, compared with a more modest 11.5 percent decline for Time Warner Inc.

Viacom, the New York-based owner of Paramount movie studios, said second-quarter net profit fell to $407 million from $434 million a year earlier. Earnings per share were 65 cents per share, up from 63 cents a year earlier, when its share count was higher.

Revenue rose 21 percent to $3.86 billion.

Excluding items, Viacom's profit was 64 cents per share. On that basis, Wall Street estimated 58 cents per share, according to Reuters Estimates.

Second quarter results for filmed entertainment were boosted by 35 percent to $1.77 billion. Box office revenue rose 84 percent. Operating income from the movies division rose to $86 million from $64 million a year earlier.

But strong film results masked weaker growth in its cable networks unit, where revenue rose 11 percent to $2.14 billion, primarily boosted by sales of the "Rock Band" video game. Cable network operating revenue rose 4 percent to $765 million.

"I have witnessed more than a few economic cycles," Viacom Executive Chairman Sumner Redstone, 85, said on the conference call. "There is opportunity even in difficult economic times."

RBC's Bank said "What you're seeing is the realities of the macroeconomic environment and the (advertising) dollars have skewed to an older demographic."

Although a writers' strike earlier this year hurt television network viewing, driving consumers to cable networks, Viacom said it did not help its biggest networks as they generally target younger viewers.

Dauman, addressing concerns that sales of Rock Band, which require the manufacturing of plastic guitar and drum-set accessories, are hurting profit margins, said he expects the game to begin to generate increasingly meaningful bottom-line results.

He also said Viacom was not seeking to make any major acquisitions in the video games industry but planned to develop more Apple iPhone games based on other of its movie franchises including "Saturday Night Fever," "Days of Thunder" and "School of Rock."

Viacom reaffirmed its annual profit outlook from 2008 to 2010 and expects to generate low double-digit percentage annual growth in diluted earnings per share from continuing operations.

(Additional reporting by Yinka Adegoke; editing by Jeffrey Benkoe, Andre Grenon)