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Viacom Reports Lower Third-Quarter Revenues, Increased Costs; Strong Cash Flow Paces Pro Forma Results

24 Oct, 2001 By: Hive News

Viacom Inc. on Wednesdayannounced financial results for the third quarter ended Sept. 30, 2001, recording pro forma revenues of $5.71 billion and pro forma EBITDA of $1.33 billion, excluding the previously announced, primarily non-cash Blockbuster charge of $353 million. Pro forma free cash flow for the 2001 third quarter was $883 million, or $.50 per share.

Viacom's pro forma results for the third quarter of 2001 were led by EBITDA growth of 19% in the cable networks and video segments.

For the nine months ended Sept. 30, 2001, Viacom recorded pro forma revenues of $17.17 billion, pro forma EBITDA of $3.85 billion and pro forma free cash flow of $2.47 billion, or $1.40 per share. Pro forma resultsprincipally reflect the CBS merger, the acquisitions of the remaining interests of Infinity and UPN and the acquisition of BET as if they had occurred on Jan. 1, 2000. Pro forma results are also adjusted to exclude the third-quarter 2001 Blockbuster charge and the second quarter 2000 merger-related charge.

As previously announced on Sept. 19, Viacom's third quarter and nine-month results were impacted by lower revenues and increased costs from the events of Sept. 11. The company experienced significant loss of revenue and additional news costs during the 93 hours of continuous newscoverage on CBS, as well as lost revenue from the cancellation and rescheduling of programming and the delay of the fall broadcast season.

Sumner M. Redstone, chairman and c.e.o. of Viacom, said,"Considering the fact that we have operated in the worst economic environment seen in decades, Viacom's achievements are nothingless than extraordinary. Despite the significant economic impact of Sept. 11 and subsequent events, our businesses and our balance sheet remain exceptionally strong.

"Viacom's third-quarter results demonstrate the strength of our assets, the breadth of our leading brands and the talent and commitmentof our management team. In 2001 and the years ahead, Viacom will continue tocreate wealth for stockholders through internal growth, accretive acquisitionsin core segments and share purchase programs," Redstone said.

Mel Karmazin, president and c.o.o. of Viacom, said,"Viacom will have a record year in 2001 and approach $3 billion in free cashflow, significant achievements in light of the extraordinary businesschallenges that emerged in the latter half of the year. We continue to aggressively run the company for optimum free cash flow, taking advantage of our low capital expenditure requirements, combined with our continuing focus on cost control and revenue enhancement in every business unit.

"We also continue to press our brand and sales leadership advantage in every area to maximize revenues and capture share. As a result, we continue to demonstrateour ability to overcome short-term economic challenges. For the third quarter of 2001, excluding the Blockbuster charge, our free cash flow totaled 66% of EBITDA and, over the first nine months of the year, reached a total of$2.40 billion. Looking forward, we are confident that this continued focus onfree cash flow and our leadership positions across major media platforms willenable us to quickly reap the rewards of resurgence in the economy," Karmazin said.

For the third quarter of 2001, Viacom reported revenues of $5.71 billion,EBITDA of $977 million and free cash flow of $591 million, or $.33 per share,versus revenues of $5.81 billion, EBITDA of $1.44 billion and free cash flowof $922 million, or $.61 per share, for the prior year period. For the nine months ended Sept. 30, 2001, Viacom reported revenues of $17.18 billion, EBITDA of $3.49 billion and free cash flow of $2.11 billion, or $1.23 per share, versus revenues of $13.69 billion, EBITDA of $2.18 billion and free cash flow of $1.29 billion, or $1.14 per share, for the nine months ended Sept. 30, 2000.

Viacom reported a net loss of $190 million, or a loss of $.11 per share, for the third quarter and a net loss of $181 million, or a loss of $.11 per share, for the nine months ended Sept. 30, 2001.

Viacom's reported results for 2001 include the Blockbuster charge principally related to the elimination of less-productive VHS tapes as part of the transition from VHS tothe higher margin DVD rental market and a change in amortization. Excluding the impact of the Blockbuster charge, the company reported a net loss of $9 million, or a loss of $.01 per share, for the third quarter, and netearnings of $0.2 million for the nine months ended Sept. 30, 2001. For 2000, Viacom reported third quarter net earnings of $33 million, or $.02 per share, and a net loss before cumulative effect of the change in accountingprinciple of $394 million, or a loss of $.35 per share, for the nine-month period.

The company believes that, if current economic trends continue, 2001 pro forma EBITDA will be slightly higher than full year 2000 EBITDA of $5.0 billion and that it has the ability to achieve double-digit EBITDA growth in 2002.

The entertainment division (Paramount Pictures, Famous Players, Famous Music Publishing and Paramount Parks) reported revenues of $797 million and EBITDA of $93 million versus revenues of $786 million and EBITDA of $175 million in the prior year's third quarter, principally reflecting higher features and theaters revenues, the company said.

Paramount's top domestic theatrical releases in the third quarter included The Score, Rat Race, Hardball and Zoolander. Features' revenues were led by higher domestic home video revenues, which included contributions from Along Came A Spider, Enemy at the Gates and Down to Earth. Higher theaters' revenues were driven by higher per-capita spending and slightly higherattendance. Entertainment's lower EBITDA for the quarter principally reflects higher advertising costs attributable to the increased number of pictures intheatrical release.

In video retail, Blockbuster's revenues of $1.26 billion increased from $1.19 billion and pro forma EBITDA of $142 million, excluding the primarily non-cash charge, increased from $119 million, principally due to higher worldwide same-store sales and an increase in the number of company-operated stores. Worldwide same-store sales, including rental and retail product, increased 4.9%. On apro forma basis, Blockbuster's gross profit margins were 59.9% for 2001 third quarter, versus 60.5% in the third quarter of 2000. Blockbuster's pro forma free cash flow grew to $86 million from $37 million from the comparable prior year's quarter, as a result of lower capital expenditures, continued growth in the business and enhanced profitability.

Blockbuster ended the third quarter of 2001 with 7,851 company-owned and franchise stores, a net increase of 332 stores over the third quarter of 2000, of which 34 company-owned stores were added in the third quarter 2001. Viacom owns approximately 82% of Blockbuster.

In the third quarter, as previously announced, Blockbuster eliminatedapproximately 25% of its VHS library and selected video games as part of a total re-merchandising of its stores to accommodate in-store DVD expansion.

Additionally, Blockbuster reduced the residual value of VHS rental inventory and games to approximately $2 and $5 per unit, respectively, to reflect the rapid shift in consumer demand from VHS to DVD and the evolution in gameplatforms. Blockbuster also changed the amortization period of its VHS library from 36 months to nine months. As a result of these actions, Blockbuster recorded a pre-tax primarily non-cash charge of $356 million, ofwhich $353 million impacted EBITDA. Approximately $320 million of the charge is related to both the reduction of inventory and the change in accounting estimates and approximately $9 million is related to incremental expenses associated with the execution of the re-merchandising and management structure changes. The charge also includes approximately $27 million related toproposed legal settlements.

As previously reported, an additional primarily non-cash charge of approximately $50 million will be recorded in the fourth quarter, principally related to changes in accounting estimates.

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