Communications and media companies reported some stabilization in the advertising market contraction and the global economic downturn, and remain encouraged by continued growth in wireless data, digital voice, and video services.
While first-quarter earnings remained largely disappointing, several executives said the severity of the advertising market decline appears to have abated.
In response to difficult industry conditions, many communications and media firms announced measures to improve their cash positions, such as reducing operating expenses, adjusting headcounts and inventory levels, and examining capital expenditures carefully.
“It is increasingly clear the worst is over,” said News Corporation chairman and CEO Rupert Murdoch. “There are emerging signs in some of our businesses that the days of precipitous declines are done and revenues are starting to look healthier.”1 During the quarter, News Corp.’s revenue declined more than 15 percent.
Viacom president and CEO Philippe Dauman expressed similar sentiments, and said Viacom executives felt better about market conditions in late April than they had two months earlier.2 Viacom’s revenue declined 7 percent year-over-year.
Although the overall ad market remained challenging for media firms, a few pockets of strength were emerging among quick-service restaurants, discount retailers and wireless carriers. In addition, some international automakers are increasing their ad spending to gain market share from struggling U.S. competitors.
“While it’s too soon to make a call, over the past several weeks we have seen the advertising market stabilize,” Dauman said.
Bertelsmann said reduced ad spending in its media properties contributed to a 6.5 percent revenue decline in the quarter. The company said it expects the ad market to remain challenging through the calendar year.3
Display and local advertising revenue also trended lower during the quarter. According to Comcast chairman and CEO Brian L. Roberts, local cable advertising sales decreased 25 percent year-over-year during the quarter. Revenue increased 5 percent and operating cash flow increased 8 percent, as the company reduced capital expenses by 19 percent.4
In its publishing operations, Time Warner said advertising revenue fell 30 percent and subscription revenue declined 16 percent. Net income was USD 690 million, compared with USD 822 million in the prior-year quarter.5
Walt Disney Co. senior executive vice president and CFO Tom Stagg said local TV ad revenue declined 30 percent, and added companies are buying television time much closer to their commercials’ air date.6
“While we believe the pace of decline has stabilized, we believe ad buyers and consumers remain cautious,” Stagg said.
At the New York Times Company, advertising revenue decreased 27 percent year-over-year, due to lower volume from categories such as real estate and employment recruitment.7 Quebecor said its newspaper unit revenue declined 12 percent to USD 246 million, due primarily to reduced ad demand.8 Similarly, News Corp. reported lower ad revenues at its newspaper properties in the United Kingdom, Australia and the United States.
While ad revenue remained challenging, wireless carriers reported favorable growth patterns for voice and data revenue. For example, AT&T senior executive vice president and CFO Rick Lidner said wireless postpaid subscriptions increased 24 percent.9
Lidner highlighted the growing importance of data plans and integrated handsets. For example, nearly 40 percent of AT&T’s postpaid subscribers have monthly recurring data plans and nearly a third of its postpaid customers own integrated data devices. The company said integrated devices accounted for nearly 60 percent of its wireless handset sales during the quarter. These sales were led by Apple’s iPhone, with the company reporting 1.6 million iPhone activations in the quarter.
“Our data revenue stream is now approaching a USD 13 billion annual business, and still grew at nearly a 40 percent year-over-year growth rate,” said Lidner. “There are some pressures on usage-based revenues, but overall it’s a business that’s very healthy.”
AT&T reported revenue of USD 30.6 billion, down 0.6 percent year-over-year. Net income was USD 3.2 billion, down 9 percent from the year-ago quarter.
Data and emerging markets revenue were bright spots for Vodafone, which said revenue grew 1.3 percent (excluding foreign exchange) to GBP 41.0 billion for the 2008/9 fiscal year. In India, revenue increased 33 percent during the year, and Vodafone’s customer base expanded 56 percent. In Africa, revenue grew 14 percent and customers increased by 11 percent.
Data revenue, which increased 26 percent during the year to GBP 3.05 billion, helped offset falling prices and reduced voice and roaming revenue in mature European consumer and enterprise markets. Free cash flow increased 2.5 percent year-over-year.
“In Europe, we expect voice and messaging trends to continue to be negative, with ongoing pressures on pricing not fully compensated by usage growth,” said chief executive Vittorio Colao. “We still see positive growth in mobile data in Europe, but clearly, the balance of the two could be challenging.”10
Other wireless carriers reported similar growth in the adoption of mobile data and broadband services. For example, Deutsche Telekom CEO René Obermann said data revenue excluding messaging grew 44 percent year-over-year in Europe and 30 percent in the United States, due in part to the launch of additional 3G smartphones. In the U.S., Obermann said the company had 1.5 million users of 3G converged devices, and data ARPU increased. Overall revenue marked a 6.2 percent gain.11
Telefonica reported growth in net wireless subscribers in Europe and Latin America. In the Americas, revenue increased 8.7 percent (in constant currency), driven by growth in broadband and mobile services. Data revenue grew three percentage points to reach 17.2 percent of service revenue. Overall company revenue declined 1.4 percent.12
Telefonica said capital expenditures decreased 3.7 percent in the quarter as the company shifted investments away from wireline and GSM capacity in mature markets. “We continue to invest in growth platforms such as fixed and mobile broadband, and pay TV,” said CFO Santiago Fernandez Valbuena.
Similarly, Verizon, which said revenue was up 11.6 percent (helped by the company’s Alltel acquisition), reported 1.3 million net additional customers during the quarter. President and COO Dennis F. Strigl said wireless revenue was up 9.5 percent, and average revenue per user (ARPU) from data services increased 14 percent year-over-year as sales of integrated devices doubled. Verizon said financial discipline helped increase cash flow from operations by 19.1 percent.13
“We continue to see very good growth on the data side,” Strigl said. “We have no evidence of customers trading down on plans or features.”
Internet revenue grew 16 percent year-over-year at Sprint, which said net operating revenue declined 12 percent to USD 7.04 billion. The company said wireless postpaid churn increased slightly on a sequential basis, due to higher business deactivations, but decreased year-over-year. Free cash flow was USD 796 million, compared with USD 536 million in the fourth quarter of 2008. Sprint’s net loss was USD 594 million, compared with USD 505 million in the first quarter of 2008.14
Carriers and handset makers expect the growth in data services to expand beyond messaging and mobile Internet access. For example, Nokia president and CEO Olli-Pekka Kallasvuo cited favorable sales of a music-capable touch-screen device in Europe and Asia. Kallasvuo said 20 percent of Nokia’s music sales during the quarter came from over-the-air downloads, which potentially can increase data revenue for mobile operators. Nokia also announced plans to improve its cash position by reducing its device portfolio and channel inventories, and adjusting production capacity.15
Despite growth in data-related revenue, mobile operators and telecom providers were not immune to the economic downturn. Several companies reported lower corporate revenue as large enterprise customers deferred purchases, or ordered fewer devices in the wake of headcount reductions.
BT Group posted a net loss of GBP 1.28 billion, due primarily to restructuring and related charges in its services unit. The company said customers are delaying purchase decisions and prices are falling due to economic conditions. As a result, BT plans to reduce operating costs and capital expenditures to generate more than GBP 1 billion in free cash flow during the coming fiscal year. Revenue grew 1 percent, with consumer sales declining 7 percent. Enterprise revenue grew 19 percent, largely from growth in conferencing services.16
Delayed purchases of replacement handsets also affected NTT DoCoMo, which said revenue fell 10 percent to JPY 1.07 trillion. Net income was JPY 34.2 billion, down 70 percent year-over-year.17
The integration of video, high-speed data and voice services remained an increasingly important source of revenue for communications and media companies. Comcast, for example, said cable revenue increased 5.5 percent, due in part to increases in high-speed Internet and voice. The company said 24 percent of its customers have subscribed to triple-play offers, compared with 18 percent in the year-ago quarter.
At Verizon, broadband and video revenue of nearly USD 1.3 billion represented a year-over-year increase of 36.3 percent.
AT&T said wireline data revenue, including IP voice, video and business services, increased 5.3 percent to USD 6.5 billion. Consumer IP revenue increased 23 percent and business IP sales rose 10.5 percent.
Despite the economic downturn and a growing emphasis on generating cash, most communications and media companies plan to continue capital and technological investments to expand the scope and delivery of digital services and content.
Verizon, for instance, is continuing to invest in its fourth-generation long-term evolution (LTE) network, which it expects to introduce in test markets by the end of 2009, and Sprint plans to expand WiMAX service to 10 cities by year-end.
Comcast said it plans to continue capital investments to upgrade its digital infrastructure and customer service initiatives. By the end of the year, it hopes to bring DOCSIS 3.0 high-speed Internet services to two-thirds of its subscriber footprint.
News Corp.’s Murdoch said the company is studying a number of plans to monetize the delivery of its news content online, and plans to shift most of its leading news sites to subscription models by the end of the year. Deutsche Telekom plans to expand the company’s U.S. 3G network and device portfolio, and to continue to build 2G cell sites to reduce roaming expenses.
Communications and media companies reported a blend of positive and negative results from their entertainment units. Viacom, for instance, said affiliate revenue increased 13 percent, due to higher fees and the addition of new outlets. Home entertainment revenue was down 9 percent year-over-year, with consumers showing less willingness to purchase back-catalog DVDs and fewer titles being released.
Disney said room and admissions discounts helped the company maintain attendance at its U.S. theme parks, but per-capita spending declined 6 percent due to discounts and reduced retail spending.
News Corp. said filmed entertainment and cable network programming operating income increased 8 and 30 percent respectively, while television revenue decreased from USD 415 million in the year-ago quarter to USD 4 million.
For Time Warner, networks revenue rose 6 percent to USD 2.8 billion, while filmed entertainment revenue declined 7 percent to USD 2.7 billion.
— Sean Collins. Global Chair, Communications and Media
1 News Corp. conference call, May 6, 2009
2 Viacom Inc. conference call, April 30, 2009
3 “Bertelsmann Impacted by Ad-Market Developments in First Quarter,” news release, May 12, 2009
4 Comcast Corp. conference call, April 30, 2009
5 Time Warner Inc. conference call, April 29, 2009
6 Walt Disney Company conference call, May 5, 2009
7 New York Times Co. conference call, April 21, 2009
8 Quebecor Inc. conference call, May 15, 2009
9 AT&T Inc. conference call, April 20, 2009
10 Vodafone Group plc conference call, May 19, 2009
11 Deutsche Telekom AG conference call, May 7, 2009
12 Telefonica S.A. conference call, May 13, 2009
13 Verizon Communications Inc. conference call, April 27, 2009
14 Sprint Nextel Corp. conference call, May 4, 2009
15 Nokia conference call, April 16, 2009
16 “Preliminary Results for the Fourth Quarter and Year to 31 March 2009,” news release, May 14, 2009
17 “Consolidated Financial Results for the Fiscal Year Ended March 31, 2009” NTT DoCoMo earnings news release, April 28, 2009
