Discovery's Earnings Up in Third Quarter - Broadcasting & Cable

Discovery's Earnings Up in Third Quarter

UPDATED: Advertising, distribution revenues gain
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UPDATED: 6:50 p.m. ET

Discovery Communications reported higher profits in the third quarter thanks to higher advertising revenue and $77 million from its recent deal with Netflix.

The results were better than expected, and Discovery also raised its full-year outlook. The company says it now expects total revenue for 2011 to finish between $4.175 billion and $4.25 billion. Last quarter, the company said it expected revenue for the year to be between $4.075 billion and $4.175 billion. The new outlook for net income is $1.025 billion to $1.075 billion, up from $1 billion to $1.075 billion.

It was unclear for how long the good times would continue.

"I know many of you are concerned about the ad market going forward," Discovery president and CEO David Zaslav said, during the company's earnings conference call with analysts. "While it is still too early to comment on 2012, we have not seen any meaningful cancellations on options for next year and current scatter demand and pricing for the fourth quarter remains strong."

CFO Brad Singer added that the ad market looks positive in the fourth quarter.  "The attractive current market conditions continue to exist in 2011, and we anticipate our fourth quarter domestic ad sales performance to accelerate from third quarter levels to a mid-teens increase."

For the third quarter, net income was $237 million, or 59 cents a share, up from $186 million or 43 cents a share a year ago.

Revenues rose 18% to $1.1 billion.

Discovery's U.S. networks had adjusted earnings of  $378 million during the quarter, up 9% from a year ago. Domestic advertising revenues were up 6% to $322 million. Excluding year-ago revenue associated with Discovery Health (now part of OWN) ad revenues would have been up 11%.

Domestic distribution revenue rose 33% to $350 million. Distribution revenue was boosted by extended and expanded licensing agreements for library titles, led by $77 million in revenue from a deal with Netflix announced in September. Without the Netflix deal, distribution revenue would have been up 5%.

"We were able to generate significant value from library content mostly 18 months plus old, while retaining flexibility with regards to our other distributors," Zaslav said of the Netflix deal. "A significant portion of the revenues were recognized in the current quarter but revenues from this transaction will continue to enhance our affiliate growth rates over the two year deal as we deliver additional content, and for an additional year if we exercise our option to extend."

Zaslav said this was a great time to be a content company that owns it own content. In addition to Netflix, there are other companies that want to stream professional content.

And Discovery and other content companies have another opportunity to generate revenue from the content it creates with TV Everywhere.

Zaslav said TV Everywhere represents newer content. "We haven't done any broad deals with operators on that yet," he said. "And under our existing deals, no distributors have the right to take our 13 channels onto TV Everywhere, but that's another window that we think could be advantageous because it's measured , and its authenticated and it presents another opportunity."

Discovery doesn't have any major distribution deals expiring until the end of 2012.  While a TV Everywhere deal could be negotiated before that date, in order for that to happen Discovery feels it needs to get real value in return.

"We have always felt that our content is valuable," he said. ."We think [TV Everywhere] could be a real value to consumers. The distributors are very fosucs on providing it because they think it provides real value as well. We're very supportive of it. We just feel  like we need to get value and how we define value will come through the negotiations."

Zaslav sounded hopeful on OWN, the joint venture channel with Oprah Winfrey that has gotten off to a slow start. "We are building some meaningful audience growth and flow throughout the schedule," he said, noting that Oprah is on OWN five days a week. On Fridays, Oprah has been doing a live two-hour show that appears on OWN, Facebook and Oprah.com, he added. In January, Oprah's Next Chapter, an entertainment show, is set to appear in primetime.

But from a financial point of view OWN continues to have negative cash flow and was responsible for a loss on Discovery's books this quarter. Discovery invested another $12 million into OWN this quarter, Singer said.

Discovery's international networks had adjusted earnings of $156 million, up 20%, as revenues rose 19% to $363 million.

The company said it repurchased 9.8 million of its shares during the quarter for $355 million, or an average of $36.30 per share.

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