Viacom Inc reported a 32 percent drop in earnings, but tempered yet another quarter of depressed results with the announcement that it has reached a key distribution deal for its new movie channel Epix.

Epix, a venture owned by Viacom's Paramount film studio along with Lions Gate Entertainment and MGM, inked a deal that will allow Verizon Communications Inc to carry the channel on its FiOS service.

Prior to the Verizon deal, there has been rising concerns in some circles about the lack of a distribution partner for the channel, which Viacom hopes will compete with Time Warner Inc's HBO and CBS Corp's Showtime.

This a multiplatform game changer... and you can look forward to announcements of more distribution deals in the near future, Chief Executive Philippe Dauman told investors on a conference call.

Viacom, which runs a host of media businesses, including MTV and Comedy Central, also indicated it is well ahead of much of the TV industry in signing deals with advertisers for commercial time during the 2009-10 season.

Shares of the company rose as much as 3.5 percent in morning trade, before giving back much of those gains.

We're not hunkering down, waiting for the economy to improve or for an easier set of (comparisons), Dauman said.

He said Viacom is nearly done with our advertising upfront, the period when much of the commercial deals for the upcoming TV season are signed.

Dauman declined to provide specifics on how prices held up compared to past deals, but said given current conditions, we are very pleased with the results from both a volume and pricing standpoint.

Those conditions -- namely a severe downturn in advertising spending and a hesitation on the part of consumers to shell out money for the latest DVDs or video games -- were unmistakable in second quarter results.

Profit dropped to $277 million, or 46 cents a share, from $406 million, or 64 cents a share, in the same period a year ago. Excluding severance charges, earnings were 49 cents a share, a penny ahead of the average estimate from analysts polled by to Reuters Estimates.

Revenue fell 14 percent to $3.3 billion, a steeper drop than most analysts had expected.

Revenue was hit from several sides. Not only did the prolonged slump in advertising continue to undercut Viacom's earnings, the pullback in consumer spending also hurt sales of the video game Rock Band and DVDs.

While Viacom is not as dependent on advertising as some other media companies -- such as corporate sibling CBS Corp -- it still gets about 30 percent of annual revenue from ads.

Dauman predicted several months ago that advertising was finally stabilizing, and noted on Tuesday that U.S. ad revenue had actually increased from the first to the second quarters.

However, he declined to say whether it would rise from the second to the third quarter. It's still early in the quarter, We're not in a position to make predictions, he said.

Meanwhile, Viacom's Paramount Pictures pulled out two big hits during the quarter -- Star Trek and Transformers: Revenge of the Fallen. Still, the combination of the two films could not surpass the results of Iron Man and Indiana Jones and the Kingdom of the Crystal Skull in the same period a year earlier, so Viacom's theatrical revenue dropped 27 percent.

Home entertainment revenues also declined, dropping 29 percent and underscoring the industry's broader struggles with a depressed DVD market.

Shares of Viacom, up 26 percent this year on optimism of an ad market recovery, rose 32 cents to $24.57 on the New York Stock Exchange.

(Reporting by Paul Thomasch; Editing by Derek Caney)

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