Discovery Sees Profit Bounce

Second quarter ad sales rise 1%
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Thank you, Jon and Kate. A 12% bump in second quarter ratings helped Discovery Communications record a profit of $183 million in the period, up from $43 million a year ago. The improved performance was due in part to a $46 million tax gain related to the sale of Discovery Kids to toy giant Hasbro.

The company, which programs services such as TLC, Animal Planet and Military Channel, even managed to eek out another quarterly rise on the advertising revenue front. Discovery ad sales were up 1% for the period to $290 million and 3% internationally, led by growth in Europe, Middle East and Africa. When adjusted for currency fluctuations ad revenue was down 13% to $78 million.

Distribution revenue rose 5 % to $247 million and fell overseas to $179 million in the second quarter. Discovery spent $7 million on Oprah's OWN lifestyle channel. Overall revenue was down 0.5% to $881 million.

David Zaslav, Discovery's president and chief executive officer, said in a statement, "We delivered 12% ratings growth across our domestic networks and increased international subscribers 11% while offsetting our continued investment in programming with reductions to the selling, general and administrative cost base."

Discovery recorded an $11 million content charge for the period. It is in the middle of repositioning three of its services. Discovery is partnering with Hasbro to launch a more popular Discovery Kids service with shows based on Hasbro toy franchises such as My Little Pony and Transformers. It has also partnered with Oprah Winfrey to relaunch Discovery Health as a lifestyle network named OWN. Earlier this year it hired former Hallmark chief Henry Schlieff to rebrand its Investigation Discovery Channel.

Speaking on a conference call with analysts, Zaslav hinted that
there maybe changes ahead for two of the company’s smaller channels,
Fit TV and Military. “With respect to Fit TV and Military, Military has
a strong audience and has been growing. We’re evaluating now whether
that is the best brand for us going forward. Is Fit TV the best brand?”

Analysts
were primarily focused on Discovery’s take on the current advertising
environment and any clues as to the upfront environment. The company is
seeing the benefit of having a strong female audience on TLC but is
suffering slightly from the lack of male-targeted advertisers such as
autos and financial which used to be dominant on the flagship Discovery
channel.

Zaslav added: “Discovery, even though it is doing
well, it doesn’t have, in terms of what the [ad] marketplace is
providing, the same opportunities that a female leaning channel, like
TLC or Animal Planet would have in order to monetize their ratings.”

Separately,
the company is planning to sell less than the traditional 50% of
inventory in the upfront in expectation of a stronger scatter market.
Company CFO Brad Singer, however, conceded that second quarter scatter
pricing had dropped below first quarter levels. Zaslav said Discovery
CPMs trades at a 30% discount to broadcast. The average CPM price
across the five broadcast networks was $24.26 in the first quarter,
according to TNS Media Intelligence, which looked at households in the
primetime period.

Discovery Communications is owned by Discovery Holdings and Advance/Newhouse Communications.

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