Discovery Revenue Up, Net Down in Second Quarter

Company cashes in on improvement in advertising market
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Discovery Communications chalked up an 11% increase in revenue in the second quarter, but despite growth in operating income its net income declined from a year ago.

After $138 million in expenses for restructuring borrowings and a $75 million tax payment, net income was $106 million, or 25 cents a share, down from $177 million, or 42 cents a share, a year ago, when Discovery registered a gain from the sale of 50% of Discovery Kids. Excluding the one-time items, the company says net income was up $80 million in the quarter.

Discovery, which largely rode out the recession on subscriber fee revenue from cable operators, cashed in on the improvement in the advertising market, with second quarter revenues rising to $963 million, compared to $865 million a year ago.

The company also said it plans to buy up to $1 billion of its own stock.

"We delivered double-digit revenue and Adjusted OIBDA [Operating Income Before Depreciation and Amortization] growth, capitalizing on the greater global demand for advertising while continuing to demonstrate the operating leverage inherent in our business model," said David Zaslav, president and CEO of Discovery. "At the same time we remain focused on further strengthening our global content, with increased investments in Animal Planet and ID translating into ratings and advertising growth domestically, while TLC is expanding its footprint internationally."

OIBDA grew 18% to $455 million.

Most of the financial figures exceeded analysts' expectations.

At Discovery's U.S. networks, revenues rose 10% to $620 million, driven by a 13% increase in ad sales. Adjusted OIBDA at the U.S. networks was up 11% to $379 million despite higher operating expenses, primarily due to increased marketing spending.

Zaslav said Discovery had a strong upfront, selling about 50% of its inventory, 30% more than last year, at prices that were up in the mid to high single digit range. He added, "The market still feels quite strong. We're projecting for this year low double-digit, low teen advertising growth in 2010."

He said ad prices in the scatter market remain about "15-plus percent above upfront pricing."

During the company's earnings call, Discovery CFO Brad Silver said that the Oprah Winfrey Network has already cost about $75 million. The current agreement for the joint venture obligates Discovery to a maximum of $100 million, but Silver said that contract is being revised and "it will likely go up."

Discovery COO Peter Liguori said that OWN, due to launch Jan. 1, has gotten a strong reception from advertisers, with "very solid CPMs and good absolute volume."

Liguori noted that while Winfrey cannot do a talk show until next fall, "she'll be on the network via a few once-a-week shows such as Master Class," She will also be making a show focusing on the behind-the-scenes production of the final season of The Oprah Winfrey Show.

"And she'll be highly prevalent through all the interstitials," Liguori said. "In fact she shot some yesterday. She was very excited about it. She's deeply involved in every aspect of the network and truly does work her magic on a daily basis."

Zaslav and other Discovery executives pointed to opportunities at some of the network's smaller networks.

Discovery has increased the programming budget for Animal Planet by 60% since 2007 and the spending has been more than offset by increases in ad revenue, Zaslav said.

He said the network had been an underperformer, but that "over the next two to three years if we can continue to invest in the content and connect with viewers, we think there's meaningful upside there."

Discovery ID "was kind of a surprise for us," Zaslav said.

Ad revenues at each of those networks were up more than 25%.
Revenues at Discovery's International Networks increased 15% to $306 million, due mainly to a 38% increase in ad revenue. Adjusted OIBDA was up 45% to $132 million from a year ago.

Following the earnings report, Standard & Poor's said it maintained its strong buy opinion on Discovery's shares.  S&P noted that a rebound in both U.S. and international advertising and expanding margins helped the company exceed Wall Street expectations.

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