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Discovery Reports Flat Earnings for First Quarter

Discovery Communications reported flat earnings as accounting for acquisitions offset the increases at its domestic and international operations.

Net income was at $230 million, or 66 cents a share, compared to $231 million, or 63 cents a year ago. The results reflected increased amortization costs from the purchase of SBS Nordic. The company also had a $92 million gain a year ago from the consolidation of Discovery Japan.

Free cash flow was $213 million, up from $108 million a year ago.

Revenues climbed 22% to $1.411 billion.

During Discovery’s earnings call with analysts, CEO David Zaslav (pictured) felt the need to explain his company strategy at a time when there is a lot of real and rumored merger and acquisition activity, and Discovery’s name is frequently in the middle.

“Our first priority remains to create long-term shareholder value by producing quality content that grows our audience and could be leveraged globally and across platforms. There is still plenty of organic growth ahead from the expansion of the global pay-TV sector,” Zaslav said.

“We are optimistic regarding acquisitions that exploit our strategic advantages, especially our local international sales force and technical infrastructure and give us more must-have content, a stronger brand portfolio and more penetration in key growth markets around the world,” he added.

Adjusted operating income for Discovery’s U.S. networks rose 2% to $383 million because of higher operating expenses, including marketing costs.

Revenues were up 3% to $708 million. Distribution revenues were up 4%, with rate increases offset by content licensing revenue realized a year ago.

Without the content licensing revenue, distribution revenues were up 6% and total revenues were up 4%.

Zaslav said that new distribution agreement include TV Everywhere rights for distributors and that those rights would be reflected in Discovery’s sub fee growth. While revenue from streaming VOD deals was down in the quarter, Discovery is not opposed to making new deals with Netflix, Amazon, Hulu and others.

“You may see them soon, you may see them later. But right now, the only issue for us is there's a gap in the value that we think all of our content is worth with all of our brands and the value that some of the distributors think. But I think that we'll find a way to true-up that gap,” he said.

Domestic ad revenues were up 5% because of higher prices.

On the conference call, CFO Andy Warren said that in the second quarter, “given the relatively stable current ad market trends with scatter pricing up high-single to low-double digits from last year's upfront negotiations, and with the ratings [strong], we anticipate ad sales growth that will once again be in the mid-single digit range. That’s despite the cancellation of the Everest Live events and the sale of the HowStuffWorks digital platform.

“Excluding these items, we would have anticipated acceleration in ad sales during the second quarter,” Warren said.

Warren said scatter volume was good. “We still see scatter pricing up high-single digits to low-double digits relative to the last broadcaster front. On the challenging side, cancellations are up a little bit, options have been taking a little bit more than prior year,” he said.

A year ago, cancellations were lower than normal, and this year, they have ticked up toward the normal level, he added.

As for the upfront market, Zaslav said: “While it's too early to predict where the upfront ultimately ends up, with scatter pricing well above last year's upfront, sustained ratings momentum across our networks, and what I think is unquestionably the best ad sales team in the business, we expect to do very well in our discussions with our ad partners.”

Discovery’s joint venture with Oprah Winfrey, the OWN Network, continues to strengthen financially. Warren said that during the quarter OWN repaid Discovery $16 million in the first quarter, versus receiving $14 million of funding a year ago, resulting in a $30 million year-over-year improvement.

Operating income was up 18% at Discovery’s International Networks. Revenue was up 51% to $671 million. Excluding SBS, revenue was up 13% despite fluctuations in foreign currency, Discovery said its long –term financial guidance remains unchanged.

The earnings were a bit below Wall Street’s expectations.

“It's hard to find a glaring miss on any line item of the Discovery report, but when added together it's enough to cause a material EPS miss versus consensus,” said Todd Juenger, senior analyst at Sanford C. Bernstein.

“Historically, the quarterly misses have usually been the result of some unexpected non-operating (and often non-cash) item. This time, it was death by a thousand tiny cuts. Small shortfalls across most line-items,” he said.

But, he added that the market seemed prepared for a result along these lines.

Discovery stock was down more than 3% in afternoon trading.