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Mixed Earnings, Cautious Guidance So Far for Media and Communications Companies

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As expected, it has been a tricky earnings season for media and communications with mixed subscriber metric, financial results, and guidance.

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Macro concerns have dominated quarterly earnings season but a key message for investors is that individual company fundamentals and performance matters. This morning News Corporation (NASDAQ:NWSA), Lamar Advertising (NASDAQ:LAMR) and Time Warner (NYSE:TWC) are trading higher in a very weak market after reporting good results and affirming guidance. The same thing happened last week for Scripps Networks Interactive (NYSE:SNI) and Comcast (NASDAQ:CMSCA). On the other hand, Charter Communications (NASDAQ:CHTR), Cablevision (NYSE:CVC), Discovery Communications (NASDAQ:DISCA), and DirecTV (NASDAQ:DTV) all traded down yesterday after reporting disappointing results or lowering guidance.

For some time now, I have pointed out that the cyclical recovery off the 2008/2009 low in media and communication business fundamentals had run its course. I think this was particularly true for national advertising. Communications was on a different cycle as concerns about competition and cord-cutting were equally important to the economic crisis.

The combination of the slowdown in the economy this spring and summer and worries about the fiscal cliff created a difficult setup for earnings this quarter. The Olympics also had a one-time impact in the September quarter. Results so far indicate that the economy's stall did hurt company performance but not in an unusually large way. Adjusting for the Olympics, national ad trends matched expectations at most companies. Political advertising kicked in as expected and along with continued strength in auto advertising supported positive trends in local advertising at TV stations. Radio appears to have lost share of political advertising.

A separate issue for TV networks is the early season ratings. Broadcast networks are really struggling, while cable nets are doing OK as a group. Conference calls seem to indicate that the issue is an acceleration in on-demand viewing in addition to an unexpected accelerated loss of market share for broadcast.

Scatter market trends and fourth quarter ad growth guidance seem closely tied to ratings performance. I would classify the scatter market as OK but uncertain. Despite seasonal strength, companies are not guiding for a pickup in ad growth from the third quarter. This is disappointing. Macro concerns, especially related to the fiscal cliff, seem to be at fault. Advertising indicators are mixed at best and an increasing number of Wall Street analysts are expressing caution.

Subscriber numbers in communications have been mixed. Wireless subs and churn look pretty good, especially considering the big new smartphone introductions. Cable and satellite video ads were better than a year ago but the momentum of improvement in a seasonally strong quarter appears to have waned. Video subs are still declining even with an apparent recovery in housing. This is re-igniting cord-cutting concerns. Broadband subs are still growing nicely. Importantly, across cable and telco, ARPU trends look good as even in a competitive environment promotions appear modest.

Again, I think the big picture is important, but for investors, individual company trends have increased in importance. As investors, we do not have to have to own every stock in media and communications. Furthermore, a look at company fundamentals can color our views on the big picture.
With that in mind here are some brief comments on the major companies that have reported results sin the last few weeks.

AT&T (NYSE:T) reported inline results and reaffirmed guidance. Wireless trends were strong with good margin performance indicating that attempts to control upgrades are holding despite the Apple (NASDAQ:AAPL) iPhone 5 and Samsung (PINK:SSNLF) Galaxy 3. Wireline trends are lagging as they are more sensitive to macroeconomic trends.
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No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

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