According to PwC’s ‘Global Entertainment & Media Outlook 2019–2023’, “total entertainment and media revenue is expected to rise at a 4.3% CAGR to 2023, with six segments exhibiting growth above this average and seven below it. VR maintains its position as the highest-growth segment, but after a year in which consumers’ take-up failed to meet expectations, its lead over OTT (over-the-top) video is greatly diminished.”
In this article Macrovue’s investment committee looks at six global companies poised to benefit from the growth of this important sector.
Comcast (NASDAQ: CMCSA)
Comcast reported 1Q 2019 earnings on April 25, 2019. Total revenue increased 18% to $26.9B, roughly in line with Street estimates. Adjusted EBITDA increased 21% to $8.6B, 4% above the consensus. Adj. EPS of $0.77 was above the $0.68 estimate.
In 1Q19 Comcast moved wireless from Corporate and Other to the Cable segment so including wireless, Cable revenue increased 4% to $14.3B, in-line with the Street. EBITDA grew 10% to $5.7B, roughly 1% above the Street.
Broadband net adds of 375k were nicely above the consensus forecast of 353k. Clearly Comcast’s core cable business is undergoing a transition to higher margins (estimated +110bps in 2019E), lower capital intensity, and continued broadband sub/revenue growth. Video sub losses of 121k were worse than the Street at 108k losses. Wireless adds of 170k were in line with forecast. Voice losses of 53k were also in line with the Street.
NBC Universal (NBCU) EBITDA decreased 12% to $8.3B, in line with forecasts. While video net adds were a bit light, the trends are not as bad as many of the Pay TV firms that have already reported. Also, Comcast reported better data net adds, total EBITDA, and FCF in the quarter. Sky Revenue of $4.8B was $5.0B and EBITDA of $663m was 1% better than consensus.
Walt Disney (NYSE: DIS)
Walt Disney reported 1Q 2019 earnings on May 8, 2019. Revenue increased 2.6% to $14.9B, 3.6% above Wall Street estimates. Adj. EPS of $1.61 was above the consensus of $1.58. As the acquisition of 21st Century Fox’s assets closed March 20th, these results reflect just 11 days of contribution from the Fox assets.
Strong Parks performance (1.8% above Street) and Broadcast (3.8% above the Street) revenues offset top-line misses at Disney’s Studio business (5.4% below Street), Cable Nets (3.4% below Street) and DTC & International (13.2% below Street). 21st Century Fox’s assets contributed revenues of $373 million in the quarter. Cable Nets were roughly in-line with Street expectations. 21st Century Fox’s assets contributed $25 million of EBIT in the quarter. A good report with revenue, EBIT, and EPS beating consensus estimates.
Management was also upbeat on the outlook for the Studio (Movie) business, suggesting a very robust pipeline at all of its properties with Frozen II and Star Wars IX on the way and contributions from the newly acquired Fox studios, and more information coming out on Marvel’s slate later this quarter. Disney’s theme parks are set to open the biggest expansion in their history with Star Wars Land on May 31 and August 29 in Disneyland and Disney World, respectively.
Discovery Inc (NASDAQ: DISCA)
Discovery reported 1Q 2019 earnings on May 2, 2109. Revenue reached $2,707M, in-line with the consensus at $2,713M. Adj. Operating income before depreciation and amortisation (OIBDA) hit $1,159M, 7% above the Street estimate of $1,084M. Discovery reported Adj. EPS of $0.85, versus the $0.76 forecast. US revenue was $1,752, basically in-line. On a pro forma basis, distribution revenues were up 4% as rate step ups and carriage on YouTube TV were offset by a decline in linear subscribers. Advertising revenues increased 4%. The advertising growth was driven by an increase in pricing and monetisation of digital content offerings. Distribution growth was supported by increases in affiliate rates and carriage on streaming platforms. Guidance was positive.
Management expects US advertising growth up in the range of 3-5% with similar drivers as those in Q1. US affiliate growth is expected to accelerate from the 4% in Q1, primarily driven by carriage on YouTube TV. The company continues to expect full year US affiliate growth in the mid-single digit range. International affiliate growth is expected to be up low-single digits. Discovery also authorised a share buyback of up to $1 billion.
Spotify (NYSE: SPOT)
Spotify went public on April 3, 2018 at US$132.00, subsequently rallied into the US$190.00 area by mid-August but then was a casualty of the 4Q 2018 market correction trading back below the IPO price. That is not unusual for a highly hyped tech IPO which usually needs a few quarters of seasoning before the stock finds its level, so the recent underperformance is more market related than company specific in our view.
Spotify reported 1Q 2019 earnings on April 30 and it was a positive report. Although Spotify’s Q1 GAAP EPS of -$0.79 missed by $0.35, revenue of $1.51B (+32.5% Y/Y) beat by $40M. The company also provided and in-line Q2 and FY19 revenue guidance of $1.51-$1.71B and $6.35-$6.8B, respectively. User metrics were positive and ahead of market estimates with Spotify Premium subscribers totalling 100M, beating the 99.2M consensus and at the high end of SPOT's prior guidance. Premium revenue came in at $1.39B (consensus: $1.33B) with ARPU at $4.71 (consensus: $4.53).
Ad-supported MAUs were 123M compared to the 122.5M consensus. Spotify is the largest pure play music streaming service, and is benefitting from the ongoing secular shift from a ‘transaction-based’ model to an ‘access-based’ streaming model. The company is growing its total MAUs double digits, is improving gross margins, and is generating positive FCF. Spotify is growing its user base and has a differentiated “freemium” model, and is ramping up paid subscriptions. Its emphasis on providing podcasts also has the potential to drive margins higher for the business long-term.
Eros Int. (NYSE: EROS)
Eros reported 4Q 2019 earnings on May 23. 2019. Q4 FY2019 profit after tax (PAT) was up by 14.6%, PAT margins improved by 290bps. The PAT margin expanded to 26.5% in Q4 FY2019 from 23.6% in Q4 FY2018. EPS of 28.02 was up 17% Y/Y. Total income of 11397M was up 12.8% Y/Y.
Revenue growth was driven by a healthy mix of its release slate: Eros released 72 films (7 medium budget, 65 small budget) and 11 Digital Series in FY2019 compared to 24 films (1 high budget, 4 medium budget and 19 small budget films) in FY2018. Eros has also entered into three significant partnership deals which should be supportive of revenues going forward.
The company says its “Eros Now” streaming service will now be included on Apple's Apple TV Plus service. It's the only international content provider currently included in Apple's service. Eros Now has also reached a deal with Tata Sky to make its content available on the Tata “Sky Binge” platform. Tata Sky Binge is available to Tata Sky subscribers at 249 rupees/month (about $3.59) and is accessible through the Amazon Fire TV Stick - Tata Sky Edition. That will get Tata subs access to more than 12,000 titles in movies, original series, music, music videos and short-form videos.
Eros Now, the streaming platform for Eros International, has partnered with Paytm First to offer subscription-based loyalty rewards to its members. That will allow members of Paytm First (from Paytm, India's largest mobile-first financial services platform) access to Eros Now Plus services, including a library of more than 12,000 movies, TV shows, music, music videos and short-form content.
Viacom (NASDAQ: VIAB)
Viacom reported Q1 2019 EPS on May 10, 2019. Viacom Q2 Non-GAAP EPS of $0.95 beat by $0.14 although revenue of $2.96B (-6.0% Y/Y) missed by $100M. While Viacom missed consensus on fiscal Q2 revenues as ad sales dropped, it topped profit expectations partly through cost cutting measures. Revenue fell 6% as reported to $2.96B (down 4% in constant currency). Total expenses declined to $2.39B from $2.69B a year ago. Adjusted operating income fell just 1%, to $637M. Adjusted net earnings rose 3% (4% in constant currency), to $383M.
Revenue by segment: Filmed Entertainment, $730M (down 1%); Media Networks, $2.27B (down 7%). Also, Paramount Pictures hit its ninth straight quarter of Y/Y improvement in operating income as it monetised its library properties. Meanwhile, the company flagged Advanced Marketing Solutions growth in its Media Networks division and growing distribution and viewership share despite a revenue decline. Net cash from operations rose by $420M, to $719M, for the six months ended March 31. Free cash flow increased $407M over that period, to $642M. Gross debt outstanding was $8.96B. While strategic concerns will remain on the broader cable network group, the VIAB multiple at 7x FY2019 EPS is undeservedly low. Ongoing strategic announcements, improvements at Nickelodeon, and ongoing success at Paramount are likely catalysts for the stock to rerate.
You can invest in these companies directly through Macrovue's Entertainment share portfolio.
This portfolio has returned 24.34% over the last 12 months (to 1 May 2019).
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual and does not constitute financial advice. Consider the appropriateness of the information in regards to your circumstances.
Past performance is not a reliable indicator of future performance.