Discovery's Q1 Earnings Show Big Boost in Ad Revenue

Discovery Communications again appeared to set the bar for
top tier cablers, reporting a 9% increase in domestic ad revenue for the first
quarter. Even against strong competition from NBC Universal's Winter
Olympic Games, the company -- which includes the cable properties Discovery, TLC
and Investigation Discovery, among others -- reported ad revenue at $266
million for the period. Subscription revenue rose domestically by 4%.

Losses at the company's tiny education unit and corporate
expenses were the sole negatives in a strong set of earnings. Total network
revenue from US operations was $546 million, a 5% increase.

Underlying an ad comeback in foreign markets, particularly
in Europe, Discovery's international
operations saw a bigger bounce in ad revenue, recording a 35% rise, or 44% with
the benefit of foreign exchange rates.

Ad revenue was $82 million in the quarter to March 31, while
distribution revenue, typically of bigger import to Discovery on the
international front, rose to $186 million, up 7%.

Overall first quarter revenue at Discovery Communications
was $879 million, up 8%, while adjusted operating income was $367 million, up
10%. The company also noted $13 million in content write-offs for the latest

Discovery raised its full year outlook, raising its year end total revenue number to $3.7 billion. The company has $700 million to $800 million in free cash flow, according to Chief Financial Officer Brad Singer, but was unlikely to use it for any major acquisitions, rather investing in improving its global channel operations.

Questions about the joint venture Oprah Winfrey fronted network, OWN, dominated the call with analysts looking for data on how ratings might perform to how much the company could command in affiliate fees. In a quick note to investors, Morgan Stanley's media analyst Benjamin Swinburne, explained the interest was due to the effect OWN could have on earnings per share in 2011. Morgan Stanley had predicted a domestic ad growth of just 6.5% in the first quarter.

Discovery CEO David Zaslav and COO Peter Liguori told the Wall Street community that the idea of Oprah Winfrey coming to cable is a great value to the cable industry, and that they are sitting down with distributors about how best to represent that value.

CFO Brad Singer detailed some of the start-up funds that Discovery had committed to the venture saying the company was obligated to provide a maximum of $65 million to the joint venture this year. Discovery has already spent $35 million on the channel in 2009 and had put in $15 million this quarter and was spending between $2 million to $3 million a month. "We're working with partners on incremental funding," he added.

When asked to predict how ratings for the new channel would compare to Discovery Health, which is being replaced by OWN, Liguori said: "It's very difficult to predict. Health is in the 0.2 and 0.3 range and some health programs will wind up on OWN. We expect the network to have a very solid slate but it's a brand new network and people will need to find it."

Zaslav said the initial focus would not be on ratings but about finding a voice for the channel so that it would be among the 8-10 channels people want to watch. Procter & Gamble has already committed $100 million to the channel, for both advertising and integration opportunities.

Zaslav further underscored the returning strength of the ad market for the financial community. "In the second quarter everybody is back. The autos are back significantly, overall sell out is stronger, scatter pricing is very good. The feeling is it is continuing to grow. We'll have a very nice upfront."

While Discovery's advertising performance is remarkable, CFO Singer was asked what ad categories were strong and weak. Autos, retail, technology and credit cards were out spending with Discovery Communications. Though movies are not that strong. That news underscores comments made by Viacom CEO Philippe Dauman, on the Viacom earnings call on April 29, the company would like to see a return in the movie category.