Business and Deals

International Networks Push Discovery Profits Higher

Programmer adds another $1 billion to stock repurchase plan 8/04/2011 11:02:00 AM Eastern

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UPDATED: 11:15 a.m.

Discovery Communications posted higher second-quarter profits thanks to big gains by its international operations.

Net income rose to $254 million, or 62 cents a share, from $148 million, or 25 cents a share a year ago. Excluding one-time items in 2010, net income was up 20%, the company said. Revenues rose 11% to $1.07 billion.

The results were slightly better than Wall Street forecasts.

"Discovery continues to deliver strong financial results, particularly across our unique international platform, as the depth and breadth of our content assets have enabled the company to capitalize on the sustained ad market strength worldwide as well as take advantage of the evolution of pay-tv across the globe," David Zaslav, president and CEO, said in a statement.

Zaslav said the gains came despite making strategic investments. "Bolstering our flagship networks, building additional growth assets across the company and leveraging the unparalleled distribution platform we built over the last 25 years remain our top priorities, and we are focused on doing so while delivering sustained financial results and returning additional capital to our shareholders," he said.

The company said that for the full year, it expects total revenue to be between $4.075 billion and $4.175 billion, about $50 million above the previous guidance, and operating income to be $25 million higher than previously forecast at $1.875 billion to $1.95 billion. The company said it expects net income to be between $1 billion and $1.075 billion.

"We remain encouraged by the fact that the beneficial pricing and ad trends we have experienced over the last several quarters have continued through July, as well as by the ample upfront sales demand," CFO Brad Singer said during the company's earnings call with securities analysts.

Singer also said that the company has seen no deterioration of market conditions because of concerns about the economy.

Zaslav said that in the upfront, "we garnered upfront pricing increases in the high single to low double-digit range while achieving the highest dollar volume in our history." He added that "we were also able to generate higher volumes for many of our emerging networks as advertisers recognized the value of the brands we have invested in."

Singer said Discovery sold 20% more dollar volume during the upfront than it did a year ago. He said half of the gains came from higher prices. The other half he said, came from "refocusing on some of our non-prime inventory."

Discovery announced it was adding $1 billion to its share repurchase program. During the second quarter, the company bought about $210 million worth of stock under its $1 billion stock repurchase plan. It bought another $127 million worth of shares from July 1 through August 3.

Zaslav said that Investigation Discovery remained the company's "biggest engine driving both ratings and ad gains." Viewership was up 70% in the quarter and the network now ranks 18th among women 25-54, up from No. 26 last year. The network is in 77 million homes and has commitments to be in 80 million by the end of the year.

"I've never seen a cable channel grow this way," Zaslav said, adding that there remains tremendous upside for the channel.

The network has grown so quickly that it hasn't yet been able to raise ad prices on a cost-per-thousand viewer (CPM) basis. "All of a sudden we have these compelling ratings and it takes time, probably two or three years, for us to be able to get the CPMs that this channel deserves in light of the audience it's delivering and that quality of the audience that it's delivering," Zaslav said.

During the call, an analyst asked about turnover in management at the flagship Discovery Channel, where President Clark Bunting will be retiring next year.

While Bunting has helped build Discovery over the past year, Zaslav said, "The challenge that we had is that we had some great series that were very robust with really strong characters and storytelling, and then we had a number of other series that were just OK. And so we have been struggling to get a great creative team in there to really drive better stories, better characters and deliver on the real promise of Discovery. "

While Zaslav said he's excited about some of the new series on Discovery Channel, "I would say that right now, Discovery is good, but it could and should be better."

As for the struggling OWN joint venture, Zaslav noted that Oprah Winfrey is now in place as CEO and chief creative officer.

"We now have her creative team in place and a more robust lineup for the fall and spring," Zaslav said, including Rosie O'Donnell's talk show starting in October, Your OWN Life, based on the Oprah show library with new material from Winfrey, and Oprah's Next Chapter starting in January. "We are optimistic about the brand strength, content pipeline and ratings potential of the network," he said.

Operating income for Discovery's U.S. networks rose 4% to $395 million. Excluding the results of Discovery Health, which has become the OWN Network as part of joint venture with Oprah Winfrey, operating income was up 7%.

Revenues rose 6% to $660 million, with advertising up 10% to $361 million and distribution up 4% to $273 million. The company said ad revenue rose due to increased pricing and higher sellouts, plus $8 million from non-recurring revenue items. Adjusting for the OWN deal puts ad revenues up 13%, compared to 6% a year ago, the company said.

Profit margin at the U. S. networks was 60%, almost even with 61% last quarter.

Discovery's international networks registered a 31% increase in operating income to $173 million on a 20% increase in revenue to $368 million.

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