Paramount Q3 Earnings Mixed, but Advertising Revenue Decline an Ominous Omen for 2023

Paramount (PARA) reported mixed third-quarter results, but underlying ad revenue weakness does not bode well for the near future. Total ad revenue fell 2% as expected declines at the traditional linear business overwhelmed surprisingly anemic growth at the direct-to-consumer, or DTC, segment. Even with the growth in affiliate and subscription fees, advertising still represented roughly 37% of revenue over the last 12 months. For 2023, we expect that a continued advertising slowdown along with cord-cutting, currency headwinds, and the loss of political ad revenue will drag down ad revenue at both the linear and DTC segments. We still project low-single-digit top-line growth over the near term, driven mostly by the expansion of the firm’s DTC segment which will continue to burn cash through 2025. We are lowering our fair value estimate to $45 from $58 to account for lower ad and subscription growth along with a slower path to DTC breakeven margins.

Revenue grew 5% during the quarter as DTC and the studio business more than offset the TV media weakness. DTC revenue expanded 38% to $1.2 billion, with subscription revenue up 38% to $836 million, but ad revenue improving by only 4% to $363 million. Paramount+ and Pluto both generated decent customer growth, adding 2.7 million net subscriber additions (even with the loss of 1.9 million Nordic customers shifted to SkyShowtime) and 2.4 million monthly active users, respectively. While the firm does not break out subscribers by region, we suspect that most of the growth this quarter was driven by the international rollout of Paramount+ over the course of the year.

The adjusted EBITDA loss at the DTC segment widened to $343 million versus $198 million a year ago. On a trailing 12-month basis, the segment has generated adjusted EBITDA losses of $1.7 billion. Even with the DTC losses, Paramount has still produced $3.2 billion in adjusted EBITDA over the last 12 months, showing the resilience of the business overall.