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Major media content, distribution companies on track for YOY revenue growth

This article is part of an ongoing series analyzing earnings expectations and post-earnings investor reactions for companies in a variety of sectors. Click here for an analysis of expectations for the banking sector.

Analysts expect quarterly revenue for most major media content and distribution companies to exceed year-ago results for the June reporting period, though sequential comparisons are more mixed.

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An analysis by S&P Global Market Intelligence covering nine companies, including network operators Scripps Networks Interactive Inc., AMC Networks Inc. and Discovery Communications Inc., found that analysts on average expect eight of the nine to record year-over-year revenue improvement, with CBS Corp. the lone company expected to see a decline. On a sequential basis, mean estimates predict growth for five of the nine companies.

An analysis by Kensho Technologies Inc. that estimates a company's stock movement after removing the impact of broad market factors showed media stocks do not always go up or down in line with earnings beats or misses, however, indicating other factors in the results may be influencing investor reactions.

Analysts who spoke to S&P Global Market Intelligence about the upcoming quarterly announcements said a couple of key determinants may have impacted financials for media content and distribution companies in the June period.

Historically, the second quarter is a weak period for cable distributors, with subscriber declines that factor into lower sequential numbers for programmers as well, noted Macquarie Research analyst Tim Nollen. He said analysts will be watching closely to see how subscriber numbers compare year over year, as both periods in those comparisons have the same seasonal impact. Macquarie has a "neutral" rating on most programmers' stocks in its coverage universe.

CFRA Equity research analyst Tuna Amobi said he expects programmers will register moderate gains from affiliate fees in the second quarter, likely in the mid-single digits.

Nollen said that virtual multichannel video programming distributors like AT&T Inc.'s DIRECTV Now and DISH Network Corp.'s Sling TV are picking up subscribers. Offerings from Alphabet Inc.'s YouTube TV and Hulu LLC are likely to do the same. However, they only launched in April and May, respectively, so it will likely take time to gain their footing. As such, network gains from these platforms at this point are not enough to offset customer defections from traditional bundles.

Fewer available subscribers also impact the advertising market. Telsey Advisory Group analyst Thomas Eagan said the domestic ad market is looking at low-single digit growth in the second quarter.

“The ad market is pretty soft,” Eagan said, pointing out that higher CPMs are being offset by lower ratings, which lead to make-goods from audience under-delivery.

Amobi said the scatter market remained strong in the second quarter, but there weren’t many opportunities to capitalize on it because of the make-goods.

While sports and news programming continue to attract audiences, entertainment fare continued to erode on live+ same day and C3 basis in the second quarter.

Between affiliate and ad sales, Eagan said the fundamentals for the sector are "lackluster and will continue that way throughout 2017." Telsey has a "hold" rating on all programmers’ stocks.

Eagan said new affiliate deals will lead to higher fees in 2018, when he believes Nielsen Holdings' Total Audience Measurement will be further along. He said networks will get credit beyond C3 and C7 measurements, and be able to monetize viewing more effectively with video on demand and longer-tail metrics like C35.

Amobi believes that overall modest top-line growth will lead to reduction in EPS from teens to high or mid-single digits. He anticipates there will be less share buybacks overall in the period, programs that usually have a beneficial effect on EPS.

Eagan said EPS can be deceptive because of share repurchase initiatives, which make it easier for companies to hit estimates. He prefers to look at operating income as a measure of performance.

Macquarie's Nollen said streaming leader Netflix Inc. has made it an "art form in terms of precision guidance. They've really only missed once or twice over the past five years.” Still, Netflix could be hampered in the U.S. if cable suffers big losses.

CFRA's Amobi said that Netflix is "still evolving," as it continues to build its subscribers internationally, and cable seasonality could have an impact on Netflix domestically.

Eagan said he is interested in hearing about audience targeting on upcoming earnings calls. He believes it is critical that networks move to this more precise approach in shaping TV ad deals that extend beyond traditional measures of age, gender and demographics.

Amobi said while the performance of Walt Disney Co.'s theme park business bears watching, "all eyes will be on ESPN (US)." The sports programmer, the media conglomerate's long-time bellwether, has come under siege from Wall Street as it continues to shed subscribers, even though it has by far the highest affiliate fee in basic cable. There also could be more guidance during the earnings call tied to the expected launch of an OTT service in conjunction with MLB Advanced Media LP's video streaming company BAMTech LLC.

S&P Global Inc., owner of S&P Global Market Intelligence, has an investment in Kensho Technologies Inc.