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Discovery Earnings Rise On International Boost

Domestic network revenue, income up 10% 10/31/2013 09:03:59 AM Eastern

International growth boosted earnings at Discovery Communications in the third quarter.

Net income rose 24% to $255 million, or 71 cents a share, from $205 million, or 55 cents a share, a year ago. Excluding the impact of licensing agreements, newly acquired businesses and foreign currency fluctuation, the company said its operating income before depreciation and amortization was up 11%. Revenues rose 28% to $1.375 billion.

Discovery left its outlook for the full year unchanged. The company expects total revenue to finish between $5.550 billion and $5.625 billion and net income to come in at between $1.1 billion and $1.5 billion.

"Discovery's strong third quarter results once again demonstrate the breadth and depth of our brands and the myriad of opportunities across our global distribution platform. We are translating the consistent viewership gains we are delivering globally into strong advertising growth both domestically and internationally, while at the same time further leveraging our unique distribution footprint by capitalizing on the pay television evolution in many of our markets worldwide," Discovery President and CEO David Zaslav (pictured) said in a statement. "As we invest in the organic growth opportunities across our diverse portfolio, we are also focused on the integration of our recent acquisitions. Building additional long-term growth prospects remains a priority as we deliver sustained financial results and return additional capital to shareholders to further build shareholder value."

Discovery said operating income for its U.S. Networks was up 10% to $425 million. Revenues rose 10% to 733 million. Ad revenue was up 12% to $383 million. Distribution revenue was up 10% to $329 million.  Excluding increased revenue from licensing agreements, distribution revenue was up 5% and total revenues were up 8%.

During the company’s earnings conference call with analysts, CFO Andy Warren said that Discovery's joint venture with Oprah Winfrey, the OWN Network, which turned cash flow positive after a slow start, has accelerated the amount of money it is paying back to Discovery. "During the third quarter, the joint venture paid down approximately $20 million of its total outstanding obligation," Warren said. "For the fourth quarter of this year, we expect OWN to further accelerate its cash repayments to Discovery, while generating positive equity income for the first time in the joint venture's history."

Discovery loaned OWN about $300 million as it retooled its programming scoring low ratings after its launch.

Ad revenue at Discovery's U.S. networks was up 12% to $383 million. Distribution revenue was up 10% to $329 million. Excluding increased revenue from licensing agreements, distribution revenue was up 5% and total revenues were up 8%.

Discovery executives said the company will air fewer premiere hours of programming during the fourth quarter, but that given strong market conditions, it anticipates high-single digit advertising ad growth in Q4.

In October, "we pulled back a little bit. The broadcasters have been strong. They were coming out with a lot of strong content. Football was coming in. And we felt like we should hold some of our powder and let the broadcasters have their thing," Zaslav told analysts. For the first quarter, Zaslav said cancellation of upfront advertising buyers were "quite low."

Operating expenses at the U.S. networks were up 11% because of higher content amortization and increase marketing costs.

Operating income at Discovery's International Networks was up 34% to $232 million as revenue increase 59% to $620 million.

The recently acquired businesses that impacted Discovery's earnings include SBS Nordic, Switchover Media and a TV station in Dubai.

The company said it bought back 6 million shares of common stock for $448 million in the quarter.

Analyst Vijay Jayant of International Strategy & Investment Group said his overall take on the 3Q13 results was that "strong overall advertising growth continues, with the international operations performing a little better on both revenue and expenses than expected." Revenues were a tick under estimates, but profit margins were higher than expected. "It would appear that the international acquisitions are being integrated well, and we like the moderately better-than-expected capital returns of $448M in the quarter," he said.

November