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Media Wall Street Report from Jack Myers 8-5

August 8, 2011
Jack Myers

Published: August 8, 2011 at 10:10 AM GMT
Last Updated: August 12, 2011 at 10:10 AM GMT

As more companies released their second quarter earnings this week, analysts were mostly pleased with what they saw and gave themselves a nice pat on the back for their precise predictions. Unfortunately, it looks like a level of uncertainty is also creeping back into the scene. Weak economic data could foreshadow turbulence for the media industry into the second half of this year.

Taking it one step at a time, at least this week is mostly good news.

Time Warner (TWX) was one of the companies to have released its second quarter results this week. Analysts across the board agreed that the company's performance was in line with expectations, but they were still pleased that the results slightly exceeded their predictions.

Nomura (NHA) expects Time Warner's Studio division profits to be concentrated in the second half of this year with the last Harry Potter film still in theaters and then rolling into DVD. Most analysts are also concerned about slightly below expected ad sales and increased programming costs in the Cable Network division. However, the company's buyback has also been quite impressive to date. Spencer Wang of Credit Suisse (CS) is rather content with the aggressive return of capital; Time Warner has bought back $2.3 billion as of the end of July.

But CBS (CBS) and Comcast (CMCSK‎) were the real big hitters in this second quarter. Total revenue at CBS grew by 8% largely in part due to its deals with Netflix (NFLX) International and Amazon (AMZN).

According to Nomura, CBS has been very successful in pumping out profit from similar content stores with such deals. There is some concern, however, from Barclays Capital (BCS) that continued stock performance might be undercut in the near future. Since the company overly depends on ad revenue (62% of total revenue), the growing uncertainty in the ad industry might hurt CBS before the kinks can be fully worked out.

For its part Comcast posted a 16% increase in its second quarter earnings, and notably lost fewer pay TV customers while adding even more broadband subscribers. With a second quarter profit of $1.02 billion, many admirably pointed to Comcast's acquisition of NBCUniversal, which carried the biggest share of the growth this quarter. Since 80% of Comcast's operating cash flow comes from its cable unit, it's good news that this quarter saw continued improvement in customer metrics for cable, according to Chairman and CEO Brian Roberts.

In the advertising world, trouble might be brewing for some on a larger scale than for others. J.P. Morgan (JPM) was pleased with the solid second quarter results from ReachLocal (RLOC), the Internet marketing company that helps local SMBs with SEM and display advertising. Margins grew thanks to new products in the mix and Google rebate benefits. However, there is still concern that the macroeconomic challenges in North America will put downward pressure on revenue in the future.

Not nearly fairing as well is Lamar Advertising (LAMR), the country's largest outdoor advertiser. Revenue growth for the second quarter was only 2.4% and third quarter expectations are now 2% growth, falling quite short of Barclays Capital's estimate of 3% and 6%, respectively.

It seems that macroeconomic uncertainty is already beginning to hit advertisers. National revenues fell in the second quarter while local revenues maintained a disappointing increase of 2.8%. The third quarter doesn't appear too promising for Lamar's local or national segments either.

But remember, this week is mostly good! To prove it, let's just talk about Google (GOOG). After a conspicuous absence from last week's analyst chatter, the search engine giant is knocking 'em down with its Google+social networking service.

Even though it's still early, Spencer Wang at Credit Suisse is "encouraged" by Google's latest innovation. However, Wang points out that there is of course still room for continued improvement, particularly with customer satisfaction.

Wang also hopes to see Google tie together its newest application with its already existing array of tools, envisioning a symbiotic relationship between all Google services and Google+. In addition, Credit Suisse also released a report on the growing influence of social media. While most social network companies are private, third-party app providers will play an even bigger role going forward in the crucial area of monetization.

And even though Google might seem all powerful, it's not there quite yet. The company has had a very difficult time getting its Google TV initiative off the ground and streaming. Tech writer Dan Frommer writes on Splat that Google's partner Logitech (LOGI) reduced the retail price of the television platform from $249 to $99 during this past second quarter. But this week is still about good news.

According to Janney, TV Everywhere is picking up some steam, especially on the iPad. A contender for online streaming, TV Everywhere is an authentication system for pay TV subscribers that allows them to watch premium content on other devices. In this past second quarter, Xfinity, HBO Go, and TWCable apps were in the top 100 for 10 weeks, only a tiny bit short of Netflix and Hulu's 12 weeks.

A little good, a little bad; it's just how the world works. Unfortunately, sometimes they aren't exactly equal. Weak economic data has been mounting on Wall Street. Analysts are beginning to wonder whether the advertising market, particularly TV, and the general media business will be able to take the hit.

Janney released a report this week noting that "economic deterioration would increase pressure on ad revenue and discretionary spending on media," since advertising tends to mirror the general economy. Investors would then be much more likely to move funds away from companies with greater advertising exposure.

Here's hoping for even more good news next week.

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