Viacom, CBS warn ad market sinking results

By Paul Thomasch

NEW YORK (Reuters) - Viacom Inc and CBS Corp warned that quickly deteriorating advertising sales would slash their profits, signaling that the financial crisis is hitting the media industry harder than previously thought.

The Friday warnings battered media stocks and raised concerns about the industry's ability to weather the turmoil. Shares of Viacom and CBS about 20 percent in their worse single-day fall since they split into separate companies in late 2005. Both are still controlled by Sumner Redstone.

"Given the rapid softening of the economy and the uncertainty this creates in forecasting advertising growth, we are taking the prudent step of moderating our near-term targets," Viacom Chief Executive Officer Philippe Dauman said.

Viacom, owner of MTV Networks and the Paramount film studio, forecast that its third-quarter earnings would fall at least 10 percent short of analyst forecasts, as worldwide advertising revenue dipped about 2 percent.

CBS, whose television network is home to shows like "Survivor" and "CSI," said it expects to take a $14 billion charge in the third quarter because current economic and market conditions have undercut the value of investments.

That charge is almost equivalent to a full year's revenue, according to analyst estimates. The average Wall Street forecast is for CBS to post 2008 revenue of $14.4 billion and profit of $1.2 billion, according to Reuters Estimates.

CBS also said it expected 2008 adjusted operating income to drop in the mid-teens on a percentage basis from the prior year -- a dramatic revision from this summer, when it forecast "comparable" operating income for the two years.

Likewise, it said adjusted operating income before depreciation and amortization would decline in the mid-teens, whereas it has previously expected low-single digit growth.

"The continued economic slowdown in the United States has adversely affected advertising revenues across the company's businesses, primarily at the local level, and the effects of the current financial crisis are likely to cause further declines in advertising spending," CBS said in a statement.

Just a month ago, CBS CEO Les Moonves said the company was seeing "the beginning of a comeback" in some local advertising categories.

But the rapid deterioration of the economic picture in recent weeks has media companies and analysts scrambling to revise their outlook for advertising this year and next.

Citigroup became the latest to mark down its advertising outlook in a research note issued on Friday, saying that the picture has "deteriorated markedly" for both 2008 and 2009. Wachovia made a similar move earlier this week.

And UBS analyst Michael Morris, in lowering his own earnings outlook for Viacom, cautioned investors about the "softer environment" and wrote that "mounting macro pressure on demand and abundant supply is likely to pressure ad pricing in 2009."

Viacom forecast adjusted diluted earnings per share of 53 cents to 55 cents for the third quarter. That compares with the average analyst estimate of 61 cents a share, according to Reuters Estimates.

It saw a 3 percent drop in U.S. advertising revenue in the quarter, while international ad revenue rose about 8 percent.