Discovery Q3 Net Income Falls; Revenue Up

Domestic ad sales improve 5% in Q3

Discovery Communications reported a decline in third quarter net income to $95 million down from $134 million. The company explained the decline was partly due to a $91 million expense, the result of a change in the mark-to-market share-based compensation which had been a benefit in the prior year. Overall revenue was up slightly to $854 million, thanks to a 5% increase in U.S. Networks, though that was offset by a 2% decline at the international unit, affected by currency fluctations.

But there was a little more cheer on the advertising front, where Discovery’s channels are largely in growth mode and benefiting from both improved ratings and better scatter rates than the upfront. Domestic advertising revenue grew 5% in the quarter to $261 million. International ad revenue was $80 million, down 4%. Excluding the impact of foreign currency changes that figure would have represented a 9% increase, driven largely by the Europe, Middle East and Africa region.

Commenting on the third quarter ad sales performance, Discovery chief financial officer, Brad Singer, said the third quarter was the first time this year that total dollars had run ahead of expectations. Speaking on an analysts’ call CEO David Zaslav added: “The marketplace is feeling stronger in terms of pricing, the last two months do feel more robust,” but he cautioned there was no visibility on whether that strength would continue, “We can’t predict where it will be.”

Even while Discovery is doing better on the ratings front, the weaker ad market is making for tough comparisons. Even while this year’s scatter pricing is running as much as 15% higher than upfront, last year’s third quarter scatter market was much more buoyant with pricing between 20% and 30% higher than upfront. Fourth quarter domestic ad revenue would be likely be, “flat to slightly positive on last year,” said Singer.

Separately, Zaslav touched on the potential opportunity to launch a global women’s channel in 2010 on the strength of TLC’s performance in the U.S. Zaslav said while Discovery has made additional programming investments in its big three channels; Discovery, Animal Planet and TLC, it is still considering the future of some smaller emerging services which he did not name. Those smaller services include: Military Channel and FitTV. “We’re being a little bit prudent. Some channels we haven’t decided is this the right brand,” said Zaslav, adding that the company sees international expansion possibilities for Investigation Discovery, run by president Henry Schleiff.

Zaslav said: “Viewership up 10% in 25-54 year old demographic while the non-Discovery marketplace up 1%.”  He added hat ratings improvement was led by TLC which has seen a 33% increase in its key demographic of women aged 25-54. No mention was made of the future of Jon & Kate Plus 8 which has been largely responsible for that increase. The channel is to air the final episode on November 23.  Zaslav noted the channel had gone from the fifteenth most popular channel for women in the demographic to the eighth in the United States.

The company reiterated full year guidance of revenue of between $3.45 billion and $3.5 billion for 2009. Discovery had little new to say on the progress of OWN: the Oprah Winfrey Network, except to say it would provide an update on the launch schedule soon. OWN had initially been slated for a first quarter launch, the executives said on the call.