Paramount CEO: Ad market tough, but bright spots ahead

The advertising environment doesn't seem to be improving for legacy media companies as ad buyers flee linear television in favor of streaming.

"Yes, the ad market was challenging in 2023 and still isn't exactly where we want it to be," Paramount (PARA) CEO Bob Bakish said on the company's fourth quarter earnings call on Wednesday. "But we're encouraged by some signs of stabilization, including healthy scatter premiums."

In advertising, the scatter market refers to the ad inventory not purchased at the Upfronts.

Paramount, like other media companies, has struggled amid a tough ad environment. Big Tech companies have seen their businesses rebound while smaller players have not.

Linear ad revenue slumped 15% year over year in Q4, steeper than the 12% drop expected by analysts and also worse than the 14% year-over-year slump seen in the third quarter.

The company said the drop reflects continued softness in the global advertising market and a 5-percentage-point impact from lower political advertising. Advertising revenue in the quarter was also impacted by the Hollywood strikes and unfavorable foreign exchange headwinds.

But Paramount does see some bright spots ahead, largely driven by sports.

"Based on what we've seen to date, we expect to report low to mid-teens advertising growth in Q1, including the benefit of the Super Bowl," Paramount CFO Naveen Chopra said on the call.

Beyond sports, Bakish added the company has seen healthy domestic growth in other ad categories, including consumer products, quick service restaurants, and retail. International, though, remains challenged.

"The international side was tough last year. We are seeing stabilization there as well, but currency does really remain a headwind," he explained.

While linear advertising has struggled, direct-to-consumer advertising delivered growth of 14% in the quarter, benefiting from a 27% increase in total viewing hours across Paramount+ and Pluto TV.

On Wednesday, the company revealed full-year streaming losses peaked in 2022 with Paramount+ now expected to reach domestic profitability in 2025. But that might not be enough to stop the bleeding.

Paramount was recently put on "credit watch negative" by ratings agency S&P Global, which cited weak operating free cash flow trends amid the ongoing deterioration of linear TV and subsequent shift to streaming.

S&P argued margins and cash flows generated by streaming businesses, which are replacing the linear TV segment, will be lower in comparison due to "greater required content spending, higher technology investments, and higher marketing and subscriber acquisition costs."

"Paramount's cash flow metrics are weaker than similarly rated peers," S&P Global ratings director Jawad Hussain said in his ratings call published Friday.

"Paramount is not the only media company that has experienced weakened free cash flows as it launches and grows its streaming service," Hussain continued. "However, its cash flow declines have been worse than its industry peers because of its smaller scale, less business diversification, and slower DTC ramp up."

Paramount shares are down about 25% since the start of the year, massively underperforming the S&P 500's (^GSPC) 6% rise over that same time period.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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