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Discovery Shows Small Q2 Profit Gain

Media company reduces full-year outlook 7/30/2013 11:38:00 AM Eastern

Updated 11:35 a.m. ET

Discovery Communications reported a small increase in
earnings in the second quarter despite a 30% jump in revenues.

Net income rose 2% to $300 million, or 82 cents per share,
from $293 million, or 76 cents a share, a year ago.

Revenues rose 30% to $1.47 billion. Much of that increase
came from acquisitions in Scandinavia, which made smaller contributions to
earnings. Without the acquisitions, the company said revenues rose about 10%.

The figures were below Wall Street expectations of $1.48
billion in revenue and $324 million, or 91 cents a share, in net income.

Domestically, CEO David Zaslav told analysts on the
company's earnings call that Discovery had a successful upfront, drawing record
sales volume.  It also said that its OWN
joint venture with Oprah Winfrey turned cash flow positive in the second
quarter
, earlier than expectations, and has begun to pay back Discovery's
investment in the channel. After getting off to a slow start, OWN owes
Discovery $509 million.

Discovery reduced its guidance for the full year's earnings.
Discovery said it expects total revenue of between $5.55 billion and $5.625
billion and net income of $1.1 billion to $1.15 billion. In May, the company
had said it expected revenues to be between $5.575 billion and $5.7 billion and
net income to be between $1.2 billion and $1.3 billion.

CFO Andy Warren said that much of the reduction in guidance
was caused by the acquisition of SBS happening later than expected and because
of $130 million in amortization charges stemming from the acquisition. The
company is also facing headwinds in foreign exchange and higher stock
compensation expenses.

Adjusted operating income at Discovery's U.S. Networks group
rose 11% to $472 million in the second quarter. Revenue rose 13% to $793
million. Advertising revenues rose 10% to $426 million. Warren said that with
Discovery getting double-digital price increases in the scatter market, it
expected low double-digit ad growth in the third quarter.

In the upfront, Zaslav said that Discovery was able to get
price increases in the mid to high single-digit in addition to volume
increases. Zaslav said that Discovery's sales team was able to bring new,
high-quality advertisers into emerging networks such as Science, Destination
America and Velocity.

Distribution revenues rose 17% to $348 million. Discovery
said it had $37 million in additional distribution revenue from licensing
agreements with streaming companies led by Netflix. Excluding digital licensing
agreements, distribution revenues grew 5%.

At its international networks, Discovery's operating income
rose 51% to $265 million as revenues rose 61% to $652 million.

Discovery said it repurchased 3.77 million shares of its
series C common stock at an average price of $70.17 per share for a total of
about $265 million. From July 1 through July 26, the company bought another
1.59 million shares for $119 million. It has purchase a total of $2.87 billion
worth of shares under its $4 billion stock buyback program.

Despite missing earnings forecasts, analysts didn't seem
alarmed about the company's prospects.

"We expect a muted response in the stock," said analyst John
Janedis of UBS in a research note. "The core business appears to be operating
in-line to better."

"Discovery missed expectations (again). As usual, most of
the miss doesn't matter to our core investment," said Todd Juenger of Sanford
C. Bernstein, referring to the amortization of SBS. But Juenger expressed some
concern about Discovery's 5% growth in domestic affiliate fee growth.

"The key question is whether that will accelerate in [the
second half of] 2013 (probably not), and more importantly, FY14 and beyond as
more and more distribution renewals take place," he said in a research note. We
never expected heroic domestic affiliate fee growth. Our valuation and
investment thesis (and Outperform rating) doesn't require it. But we do expect
[more than] 6%. 5% won't do."

Discovery
shares were down about 2% in the $82 range in mid-day trading.

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