Rhonda Dyce is a Vancouver-based research analyst covering the media and content sector for investment firm Raymond James.

A buoyant advertising market was the catalyst behind solid first-quarter fiscal 2003 results from the Canadian media and broadcasting sector. Advertising strength was seen across all advertising mediums and helped drive EBITDA margins and earnings.

Further encouraging news came from the fact that the outlook for the ad market remains robust. The various management teams reiterated the positive outlook for the ad market and commented on the increased visibility they are experiencing.

The following is a summary of the key points from their respective earnings releases:

Astral

Specialty television reported a 28% increase in advertising revenue and a 7% increase in subscription revenue. According to management, the outlook for the specialty television advertising market remains robust into the second quarter.

On the pay-TV side, margins were in the range of 21% to 22%, despite the higher programming costs related to the increased Canadian content spending requirements. Target pay margins for 2003 are expected to be in the 22% to 23% range. The take-up rate for pay-TV by digital subscribers remains high, at roughly 60% for digital cable and 50% for DTH.

Meantime, initial integration of Telemedia radio assets, with one month’s operation included in results, saw radio margins improve from 15% in the first quarter of 2002 to 24% in the first quarter this year. Astral remains committed to its goal of 30% radio margins within six to 12 months time.

Cash flow from operations was $20 million, or $0.40 per share, and the company maintains the strongest balance sheet in the sector. By the end of fiscal 2003, Astral should be at, or close to, zero debt on its balance sheet.

CHUM

The Toronto-based media company saw total organic revenue in the first quarter grow by $20 million, or 16%, over the same period in 2002. In television, the newly added stations CKVU in Vancouver and CIVI in Victoria bolstered total year-over-year revenue growth of 23%. There will likely be additional opportunity for revenue and EBITDA growth from these stations given their relative infancy.

Total organic EBITDA growth in the first quarter of 2003 was $10 million, or 49%, over the same period in 2002, with total operating margins improving from 17% to 21%. With roughly 85% of its revenue derived from the advertising market, CHUM has significant leverage to the bottom line when there is a pickup in advertising.

Operating profit in radio went from $3 million in the first quarter last year to $8 million in the first quarter in 2003, while the operating margin went from 10% to 24%.

Cash flow from operations was $20 million, or $1.67 per share.

Corus

Advertising growth in first quarter in 2003 was 5% over the first quarter in 2002, driven by the 32% increase in advertising revenue from W. Corus expects a pickup in specialty channel advertising growth in the second quarter, closer to the industry average in the mid-teen range.

Corus’ industry-leading operating margins in television was 40% for the quarter. While these margins are expected to decline somewhat during the year, the company is expected to maintain top-tier operating margins in television.

Radio revenue increased by a solid 6% and margins were flat at 27%. The company is still targeting margins of 30% by fiscal 2004.

Overall, the sector is well positioned to benefit from a continued strength in the advertising market. The industry has significant earnings leverage in times of advertising strength. This earnings leverage will serve to drive free cash flow for the media companies. It is expected that the excess cash flow will be used to pay down debt and arm the companies for the next round of industry consolidation.

Alliance Atlantis Communications is scheduled to report its fiscal third quarter 2003 on Feb. 28. We expect the company will report solid results, particularly in its broadcasting division, which has benefited from the robust advertising market.

On Feb. 6, AAC announced that it would be taking a $24.1 million write-down in the third quarter on its investment in Headline Media Group. The write-down takes the value of the company’s investment in HMG from $27.3 million to $3.2 million. This implies a value of $0.15 per share for HMG. Headline Media holds the licence to the specialty channel The Score and to the digital specialty channel Pridevision, the world’s first dedicated gay and lesbian television network.