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In case you missed it Viacom was featured in our World News last night.

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Viacom on a Roll
By Brian Lund (TMF Tardior) April 26, 2000

Entertainment conglomerate Viacom Inc. (NYSE: VIA) produced a fine set of first-quarter earnings this morning. Despite a scant 2.5% growth in revenue, the company increased its net income to $76 million, 11% higher than last year's first-quarter total before extraordinary losses. The gain was led by a 20% increase in advertising revenue from its MTV Networks. Earnings per share (EPS) rang in at $0.11, well ahead of the $0.06 that analysts expected, according to First Call.

If only looking at the bottom line were all that was required to analyze a supermegamultimedia company! Viacom, unfortunately, calls for a lot more diligence even to begin to comprehend its complexities.

It's difficult to say exactly what Viacom is at any given moment, because its structure changes so much. Since it acquired Paramount Studios and Blockbuster video stores in 1994, its primary revenue drivers have been its TV networks (including MTV, VH1, Nickelodeon, and half of Comedy Central), its entertainment division (Paramount's TV and movie productions), and video (Blockbuster).

Viacom has seen some major changes, however. The company has typically made about $300 million worth of acquisitions annually in the last five years. Last August, the company spun off 18% of Blockbuster (NYSE: BBI) . That means that, while Viacom still has Blockbuster's numbers in its financial statements, it's necessary to net out the minority shares. Last month, Viacom acquired the 50% stake in the UPN network that it didn't already own for -- get this -- $5 million.

That's not all. The Wall Street Journal reported today that a Federal Communications Commission staff report has recommended conditional approval of the proposed merger with CBS Corp. (NYSE: CBS) , provided the combined company sell off about 15% of its TV stations, leaving it with ownership of 35% of the nation's stations.

Furthermore, Viacom has said that it intends to take its online properties public -- including MTVi,, and -- over the next year or two. Viacom Online ranked 23rd among Internet properties in March, with just over 8 million unique visitors, according to Media Metrix. Individually, led the Viacom field, ranking 44th among News/Infotainment sites. ranked 50th.

So how does an investor assess such a monstrosity? There are two general approaches. One is to count up the number of big hits Viacom has in the pipeline: video sales for The Talented Mr. Ripley and still more Titanic DVD sales; rights to the never-ending Star Trek franchise; and syndication rights to the tragically omnipresent Judge Judy are just a few examples that analysts will use in their reports.

If you want to look more than one or two years into the future, you may do best to look at past efficiency. The entertainment industry is erratic, to put it mildly, so let's look at a few numbers since the big 1994 acquisitions:

1999 1998 1997 1996 1995
Sales ($M) 12,859 12,096 10,685 12,084 10,916
FCF ($M) -412 260 -190 -528 -675
ROA (%) 2.8 1.4 3.1 2.4 2.4
ROIC (%) 3.9 2.0 4.1 3.1 3.0

(Note: FCF=free cash flow; ROA=return on assets; ROIC=return on invested capital.)

The erratic revenue stream isn't nearly so great a worry as the usually negative FCF (note that that number is operating cash flow minus capital expenditures -- acquisition costs, which have been large, are not included). The one year of positive FCF, 1998, was the Titanic year. Viacom's returns on assets and invested capital, too, are nothing to write home about, averaging 2.4% and 3.2%, respectively.

Entertainment is a rough, confusing, asset-intensive business that fluctuates wildly depending on passing fashions. Viacom's 10-year chart illustrates that. Make sure that you are not faint of heart before getting on board.

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