Advertising and Marketing

Discovery Reports Higher First-Quarter Earnings

Stock slips as profits fall short of expectations 5/07/2013 08:25:45 AM Eastern

Updated 1:26 p.m. ET

Discovery Communications reported higher first-quarter
earnings as international growth offset a decline in digital distribution
revenue.

First-quarter net income rose 4% to $231 million, or 63
cents a share, from $221 million, or 57 cents a share.

The profits were lower than forecast on Wall Street and
Discovery stock dropped by more than $2 a share in morning trading. The stock
recovered and was down about $1.50, or less than 2%, during afternoon tradin .

Revenues rose 7% to $1.2 billion, in line with expectations.

"The significant operating momentum Discovery generated
throughout 2012 continued unabated in the first quarter with more and more
audiences around the globe viewing our unique programming," Discovery CEO
David Zaslav said in a statement.

"As we continue to invest in the organic growth
opportunities our diverse distribution platform provides, we have also
completed several strategic acquisitions which we expect will further broaden
our asset mix around the world and bolster our long-term growth
prospects," Zaslav said. "2013 is off to a great start and with
continued focus on strong operating execution, we anticipate building on the
financial success we have achieved over the last several years while delivering
significant shareholder value."

Operating income at Discovery's U.S. networks fell 5% to
$377 million because of a $45 million drop in digital licensing revenue from
last year's deal with Amazon and higher operating expenses. Excluding the
impact of licensing agreements, adjusted operating income was up 6%.

Revenue at the U.S. networks was up 1%. Advertising revenue
increased 8% to $356 million because of higher viewership and ad rates.

Speaking on the company's earnings conference call with
analysts, Discovery CFO Andy Warren said the current ad market trends were
encouraging, with double-digit scatter price increases above upfront levels.
"We anticipate continued high single-digit ad growth in the second quarter of
2013."

Zaslav, on the conference call, said Discovery was hoping
for a "robust" upfront.

"We recently completed our upfront presentations to
advertisers and while it is too early to predict where we ultimately will end
up, with strong scatter volumes, scatter pricing well above last year's
upfront, sustained ratings momentum across our networks and what I think is
unquestionably the best ad sales team in the business, we expect to see
significant increases in this year's upfront," Zaslav said.

Distribution revenue was down 9% to $308 million because of
the decline in SVOD payments. Excluding SVOD, distribution revenue was up 6%
and total revenues were up 8%.

Warren said Discovery anticipates a "meaningful increase in
either the second or third quarters due to the third year of the Netflix
agreement."

Discovery also reported that equity losses from operations
including OWN, the joint venture with Oprah Winfrey, were reduced to $2 million
from $46 million last year.  "We are very
confident we will reach our previously stated goal of cash flow breakeven
during the second half of this year, Zaslav sad.

Operating income at Discovery's international networks was
up 8% to $184 million. Distribution revenue rose 15% to $275 million and
advertising revenue rose 23% to 152 million.

Discovery undated its guidance for the full year to reflect
its acquisition of SBS closing later than expected, foreign currency rates and
the effects of its stock price on equity-based compensation and said that it
expects total revenue to finish between $5.575 billion and %5.7 billion. It
expects net income to be between $1.2 billion and $1.3 billion.

"Given the delayed timing of the SBS close, it is now less
likely that we will be towards the top end of these ranges, but given the
momentum across our businesses, these ranges remain possible outcomes," Warren
said.

Analyst Brian Wieser of Pivotal Research said they
characterized the results as "positive, if slightly below our expectations." He
said the number provide reasons "for optimism around overall progress in
developing the cash-generating capacity and overall profitability of the
business."

Todd Juenger of Sanford C. Bernstein said that Discovery's earnings
report often feature unexpected noise.  "To
a smaller degree, it happened again this quarter, with revenues beating
expectations by 1%, but EPS missing by $0.02 (or potentially missing by as much
as $0.08, excluding gains and hedging losses, depending on how items are
treated and taxed)."

While
below-the-line items were a mess, Juenger said that "what really matters is
core operating growth drivers, which are firmly intact."  He said international pay-TV subs continue to
be added at mid-teen rates, led by Latin America and that Discovery's domestic
networks continue to gain share, with lots of catch-up CPM growth to come.  Juenger rates the stock as "outperform."

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