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Discovery Announces Higher Profit Forecasts - Broadcasting & Cable

Discovery Announces Higher Profit Forecasts

Ad revenue lower in 3Q because of Olympics, Shark Week
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Discovery Communications raised its profit forecasts for both 2016 and for the next three-year period.

On its call with analysts to discuss second-quarter earnings on Tuesday, the company said that recent renewals with distributors locked in solid revenue growth, particularly in Europe where Discovery will have rights to Olympic coverage. Discovery announced a renewal of its distribution deal with Liberty Global covering 12 European markets Tuesday.

Discovery CFO Andrew Warren told analysts that the company was packing ahead of its profit expectations and was raising its guidance for 2016 earnings per share growth from high teens to at least 20%.

Warren also said that over the next three years, in constant currency, the company expected to generate earnings per share growth in the low teens or better, compared to earlier guidance of low double digits.

The upbeat outlook--as well as higher than expected second-quarter earnings--sent Discovery stock up 5% in mid-day trading Tuesday.

The increases come despite what will be a difficult third quarter in terms of ad revenue. Because of the Olympics and the decision to air Discovery Channel's popular Shark Week earlier in the summer, ad revenues are likely to be down in the low single-digit range from last year. They should rebound to positive in the fourth quarter, Warren said.

Discovery CEO David Zaslav called the move of Shark Week a mistake. The move was designed in part to avoid the Olympics, but it turned out that even during the July 4 weekend, people didn’t have time to sit around and watch sharks during the daytime the way they do later in the summer.

“I think you’ll see it next year back to late July, early August,” Zaslav said.

Ad revenues will revive in part because of what Warren called a strong upfront. Price increases were in the high-single digit range and Discovery sold a little more inventory than last year, while leaving room for sales in scatter. He said Discovery had more ad volume on its digital platforms.

Disributoin revenue were up despite the company saying that it lost about 2% of its subscribers in the quarter. The company said the subscriber losses tended to be at its smaller networks, which minimized the impact on revenue.

Discovery is also looking ahead to long-term growth from direct to consumer businesses. In the U.S., Discovery is rolling out its authenticated Discovery Go app, which is attracting younger viewers. Surprisingly more of those viewers than expected are female.

Zaslav said the company could potentially roll out apps that feature content about sciences for $2.99 or $3.99 a month, or about animals or other areas where Discovery has reservoirs of content.

The direct to consumer business could have “huge growth” for Discovery. And that revenue could be valued by Wall Street the way digital businesses are valued, he added. “It’s kind of the next generation for our IP,” he said.

Sports is also expected to be a driver of direct to consumer businesses, particularly in Europe. Discovery announced a new deal for the rights to Wimbledon in 16 more European nations, which bolsters its position as the home to tennis' Grand Slam. The deal includes digital rights, making it possible for Discovery to create a direct to consumer tennis business.

While sports rights are generally more expensive than the non-fiction content Discovery is known for, Zaslav said Discovery had been disciplined in how much it’s willing to pay for the rights it acquires.

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