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Discovery Q2 Earnings Get International Boost

Discovery Communications reported higher second quarter earnings thanks to growth of its international business.

Net income rose 26% to $379 million, or $1.09 per share, from $300 million, or 82 cents per share, a year ago, topping Wall Street expectations.

Revenues rose 10% to $1.61 billion, with growth from international acquisition offsetting a 2% decline at Discovery’s networks in the U.S.

“The operating strength across Discovery’s organic businesses, along with increased contributions from strategic acquisitions, led to sustained financial momentum during the second quarter,” David Zaslav, CEO, said in a statement. “Our persistent focus on building a broad and deep content portfolio to leverage the opportunities across our unique distribution platform is driving viewership and revenue growth worldwide as pay-tv continues to evolve. Going forward, investing in compelling programming remains a priority as we integrate our recent acquisitions and build new avenues of growth so we can deliver additional long term value to our shareholders."

During the company’s conference call with analysts, Zaslav said the company was well-positioned in the face of the industry’s focus on consolidation.

Discovery said that for the full year, it expects total revenue to be between $6.45 billion and $6.525 billion, adjusted operating income to be between $2.6 billion and $2.65 billion and net income to be between $1.225 billion and $1.275 billion, cutting the high end of each forecast.

Adjusted operating income for the U.S. networks was down 1% to $466 million.  Distribution revenues were down 8% to $319 million as higher rates were offset by lower streaming payments from the Netflix deal that was cut a year ago. Excluding the decline in licensing deals, distribution revenues were up 4% and total revenues were up 4%. Zaslav said Discovery is in talks with all of the streaming VOD providers and expects eventually to have some relationships that are mutually beneficial.

Advertising revenues rose 5% to $446 million despite canceling the live Everest event on Discovery Channel, competition from the World Cup and the sale of

Discovery CFO Andy Warren said the company expects third quarter ad sales growth will be in the mid-single digit range.

Zaslav said that in the upfront, Discovery got price increases in the mid-single-digit range but that sales volume was lower.

“We decided to sell less into the upfront market,” he said, focusing on maintaining its CPM levels. “If the scatter market performs similar to what it's done in the last few years, we'll have some significant upside for having that extra inventory.” 

Warren also pointed out that OWN, Discovery’s joint venture with Oprah Winfrey, “continues to increase its cash flow generation and repaid Discovery $20 million in the second quarter.”

At the international networks, operating income jumped 19% to $297 million. Revenues were up 23%. Discovery completed its acquisition of Eurosport during the quarter. Excluding Eurosport and currency fluctuations, the company said revenues were up 14% and operating income was up 15%.

Analyst Todd Juenger of Sanford C. Bernstein, in a research note, said that this quarter had been hard to forecast and remains tough to evaluate because of Discovery’s acquisitions, currency adjustments and SVOD deals.

“What we got was definitely a beat. The magnitude and source of the strength, compared to expectations, is harder to discern," Juenger said.

Juenger noted that “Discovery took down the top end of fiscal 2014 guidance, ut everyone on the Street, (including us) was already near the low end anyway.”

Now he says the short term focus is on advertising, while the long-term debate remains focus on the European acquisition/growth strategy.