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Discovery Reports 10% Increase in 3Q Earnings - Broadcasting & Cable

Discovery Reports 10% Increase in 3Q Earnings

Updated: Domestic ad revenues rise 1%
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Related: Zaslav Again Sounds Alarm On Comcast-TWC

Discovery earnings rose 10% in the third quarter as overseas gains overshadowed a slow U.S. market.

Analysts have been cutting their earnings expectations for companies in the TV business for the past few months citing dropping ratings and a weak ad market.

Discovery's net income was $280 million, or 41 cents a share, in the third quarter, from $255 million, or 35 cents, a year ago.

Revenues rose 14% to $1.57 billion. But revenue was down 1% at the company's U.S. networks.

The results were just short of expectations on Wall Street, which had been looking for 42 cents a share in earnings and revenue of $1.59 billion.

The company also lowered its full year outlook for 2014, saying it expected revenue to finish between $6.3 billion and $6.35 billion, down from guidance it gave during its second-quarter report of between $6.45 billion and $6.525 billion. It lowered its forecast for net income to between $1.15 billion and $1.175 billion, from the earlier range of $1.225 billion and $1.275 billion.

Discovery’s stock was down nearly 7% in afternoon trading, dropping to $33.29 a share. In an overall mixed market, nearly all of the media stocks were lower, with CBS, 21st Century Fox Time Warner and Viacom all off about 4%.

On the company’s earnings call with analysts, Discovery CFO Andrew Warren said that without currency headwinds and a decision in Russia to curtail ad sales, the company would be at or close to the bottom end of its previous guidance ranges.

“These updated guidance ranges utilize current foreign currency exchange rates and assume stabilization of our U.S. ratings,” Warren added. “They also include approximately $20 million of anticipated 4Q content impairment charges mostly associated with our recently announced cancelations of Honey Boo Boo and Sons of Guns as well as the nominal benefit of our now consolidating The Discovery Family Channel.”

Operating income at Discovery's U.S. networks was flat at $425 million. Ad revenues were up 1% to $388 million while distribution revenue fell 3% to $318 million because of lower income from licensing agreements with streaming media outlets like Netflix.

During investor conferences, Discovery executives indicated that ad revenues were coming in short of expectations. Analyst Vasily Karasyov of Sterne Agee estimated U.S ad revenue would be up 1%.

Discovery declined to provide guidance for ad revenue growth in the fourth quarter. “People are booking closer to time we’ve been booking on some of our networks for this past weekend we were booking on Thursday and Friday for the weekend,” Warren said. “So normally we’d be able to give you a real good sense of where we would be through the end of the year here domestically, but the visibility is not what it’s been. That doesn’t mean it’s going to be bad. But I would say for the first month there was some softness in terms of the volume.”

Analyst Michael Nathanson of MoffettNathanson Research recently lowered his expectations for Discovery's earnings to 39 cents a share, noting that the company has been facing a "drip, drip, drip of bad news."

In addition to tough ratings trends at some of its networks and slower-the-expected ad sales growth, new business rules in Russia and an expiring Netflix deal appeared worrisome, Nathanson said.

On the plus said, Discovery took control of The Hub network, a joint venture with Hasbro. Nathanson estimated that the network swung to a $3.5 million profit from a $900,000 loss in the first half on $100 million in revenue.

But it’s the international area where Discovery is trying to distinguish itself from other U.S. programmers.

“Overall, our global business continues its strong organic growth with international now accounting for more than 50% of our total company revenue and growing. That’s an important inflection point for our company, a key differentiator for Discovery and the foundation of our growth strategy going forward,” CEO David Zaslav said on the call.

Zaslav said that Velocity and Turbo were being launched as global auto channel brands, with a goal of reaching 125 million subscribers by the end of 2015. He also pointed to over-the-top products overseas at its recently acquired properties that can both create new review streams and provide information about new viewing patterns.

In a research note, senior analyst Todd Juenger of Sanford C. Bernstein said the Discovery report was “without many silver linings.” He noted that Discovery did a good job in pushing an ad revenue increase out of lower ratings and that domestic profit margins improved.

The operative question for investors is, can the now dominant international business overpower the negative forces at work on the domestic business? In the short term, the answer seems to be ‘no’, as the revised FY14 guidance falls below our current (consolidated) forecast,” Juenger said.

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