Merkuri2
Background
Paramount Global (NASDAQ:PARA) released a moderately negative Q3 quarterly report, as advertising business results are weighed down by the weakness of the advertising market. As part of my past articles, I singled out the undervaluation of Paramount’s shares. Although the stock has fallen by 26% since my last Paramount article, I keep believing that the long-term prospects of the company remain very attractive to the investors.
However, the slowdown in the global economy has led to weakness in the world advertising market, and especially the TV advertising market. This had an impact on the investment case of the company. Previously, I highlighted the growth of the Paramount+ streaming service and the PlutoTV AVOD-service as drivers of the company’s business growth. While Paramount+’s numbers were strong this quarter, PlutoTV’s active user and engagement growth was offset by the drop in advertising ARPU.
However, the long-term business outlook for Paramount remains very attractive, so I remain bullish on the stock. The last quarterly report confirmed my point of view. Let’s take a closer look at the financials to understand why I maintain my positive view on the company.
General indicators
Paramount Global’s revenue grew by 5% YoY to $6.9 billion (2% worse than consensus expected). Total OIBDA fell 23% to $776 million (3% better than consensus expected) due to increased investment in streaming. Free cash flow (“FCF”) loss was $342 million (-47% YoY, margin (-5%), a year earlier, it was at (-3%)). The consensus expected +$136 million of FCF. The company ended the quarter with a net debt of $12.4 billion. Net Debt/EBITDA is 3.8x.
Direct-to-consumer
Streaming results were worse than expected due to weak ad revenue. Total streaming revenue totaled $1.2 billion (+38% YoY and 3% worse than expected). The overall streaming subscriber net addition (Paramount+, Showtime OTT, etc.) was 4.7 million. The number of subscribers totaled 67 million, 0.5 million below the consensus forecast. The segment’s OIBDA loss amounted to $343 million, 6% better than consensus expected. Subscription revenue was $863 million (+59% YoY, consensus $880 million). Advertising revenue was at $363 million (+4% YoY, consensus $404 million ).
Paramount+
Paramount+ subscribers increased by 2.7 million to 46 million (expected 46.7 million) in the 3Q. The net new subscribers totaled 4.6 million. However, 1.9 million subs were removed from these statistics to account for joint venture with Comcast (SkyShowtime). Given the adjustment, the results of streaming are quite solid, especially since the 3Q release schedule was not so impressive.
However, the 4Q release schedule looks promising. There will be the releases of Top Gun: Maverick, season 5 of the company’s most popular series, Yellowstone, its second prequel, 1923, and much more. This schedule should help to attract new subscribers. Also, as an additional business growth driver, I highlight the geographical expansion of the service. Paramount+ was launched in Italy in September (in partnership with Sky Italia). By the end of the year, it is expected to launch in Germany, Austria and Switzerland (in partnership with Sky Deutschland), and in France (with Canal+).
Pluto TV
The number of Pluto TV’s monthly active users (“MAUs”) totaled 72 million (+2.4 million QoQ, +32% YoY). Nevertheless, the service’s revenue decreased by 7% YoY. It should be noted that the decrease in revenue was due to a decrease in the cost of displaying ads, and not due to a decrease in user engagement. There were no problems with this.
For the first time, in September, the service entered the Nielsen rating, by which its share in total TV hour usage in the U.S. exceeded 1% in September. According to management, the growth rate of hours watched on the service was double-digit. The drop in revenue was due to a decrease in the cost of display because of the U.S. TV advertising market weakness, that was contracted by 38% YoY. I highlight the launch of the service in Canada (scheduled for December 1) as the next driver for the PlutoTV’s MAU growth.
TV Media
Segment revenue decreased by 5% YoY and totaled $4.9 billion (2% worse than consensus expected). Subscription revenue was down 5% YoY, advertising revenue declined 3% YoY, and licensing revenue fell at 9% rate YoY. Segment adjusted OIBDA was at $1.2 billion (-11% YoY, 25% margin), in line with the expectations. In the 4Q, management expects that the advertising market weakness will keep impacting the segment results. According to management, the segment’s revenue is expected to fall by 2% YoY in the 4Q.
Filmed entertainment
Segment revenue was at $783 million (+48% YoY, 13% better than consensus expected). Film distribution revenue totaled $231 million (50% better than consensus expected). Licensing revenue was at $549 million (consensus $531 million). Segment OIBDA amounted to $41 million (consensus $34 million). Better-than-expected results were driven by the box office success of Top Gun: Maverick, which grossed $1.4 billion (the 11th highest-grossing film of all time), as well as the success of Smile ($203 million at the world box office).
Final thoughts and risks
Paramount Global’s strategy of transforming its business into a streaming service is on the right track, which should help the company achieve higher revenue numbers with an EBITDA margin of 25% in the long run. The addressable market, including streaming, is twice as large as the addressable market for traditional media companies. I also expect the long-term ARPU to be higher than it was before the launch of streaming. This is already confirmed by the fact that Paramount+’s ARPU in the UK is 20% higher than the ARPU of the cable business there.
Nevertheless, the company’s shares do not yet have a show performance. However, the company’s long-term prospects remain undeniably attractive, so I maintain my bullish view on the company’s shares. Warren Buffett’s increase of Paramount Global holdings in the 3rd quarter confirms my thesis about the investment attractiveness of the company’s shares.
Separately, it is worth noting that investing in PARA’s shares also implies a number of risks. One of them, a slowdown in the TV advertising market, has already materialized and may put pressure on the company’s results in the coming quarters. I strongly recommend you familiarize yourself with the risks that the company may face in the company’s latest annual report (10-K).
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