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Discovery Communications CEO: OWN Has Turned Cash-Flow-Positive

UP: David Zaslav
Discovery Communications CEO David Zaslav

UPDATED: The cable networks company, led by CEO David Zaslav, posted second-quarter earnings that rose but missed Wall Street estimates, leading it to lower its full-year target range.

Discovery Communications on Tuesday reported improved second-quarter financials amid ratings gains at key cable networks, but the results came in below Wall Street expectations.   During an earnings conference call, CEO David Zaslav also said OWN, the company's joint-venture cable network with Oprah Winfrey's Harpo, has become cash-flow-positive ahead of management's most recent prediction. Discovery later said OWN turned a cash-flow profit during the second quarter without detailing its size. Positive cash flow doesn't necessarily mean earnings in the classic sense of net income, given that this bottom-line figure can be affected negatively by other factors.
Previously, Discovery had said a cash-flow-break-even or maybe a profit would come during the back half of the year. "I am proud to report that, when combined with the long-term affiliate fees that the channel has previously secured [and advertising revenue], OWN is now cash-flow-positive and starting to pay down the investment Discovery has made in the venture," Zaslav said. "I want to congratulate Oprah and the entire team at OWN for this significant milestone -- and we remain very bullish on its long-term trajectory and our ability to drive continued asset appreciation in the future."   STORY: Discovery Channel Sets Series About Family-Owned Oil Company   Management said the balance of the company's investment in OWN, in the form of loans for which Discovery will be reimbursed, stands at $509 million. The network's cash flow will only rise from here, Zaslav predicted, with CFO Andrew Warren predicting there will be "some big second-half numbers" this year.

 Meanwhile, Zaslav touted the higher carriage fees operators have paid for OWN -- compared with its predecessor, Discovery Health -- and "significant" ad growth during this year's upfront, which saw the channel record a double-digit-percentage rise and add 30 marketers. Plus, ratings in OWN's core demographic of women ages 25-54 rose 39 percent during the second quarter.

Zaslav also gave a shout-out to Tyler Perry and lauded the multihyphenate's OWN shows The Haves and the Have Nots and Love Thy Neighbor as "bona fide hits." A third Perry show is set for a fall launch. 

OWN is now a top-20 channel among overall female viewers and a top-three channel among African-American women, including days when it takes the top rank, Zaslav said.

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Asked about the planned merger of ad-agency giants Omnicom and Publicis, Zaslav predicted it would have no effect on his company as long as it maintains popular programs and strong ratings.

And asked about possible pay TV consolidation, he said the company will "be able to continue to do well and get significant increases" in carriage fees. Plus, Discovery "can sell our content to anyone we want," including new digital players.

Meanwhile, Discovery reiterated that it has renewed a third-year option under a content licensing deal with Netflix, as pre-announced during last quarter's call, with management predicting a similar revenue effect in 2013 as in 2012.

Technical difficulties cut off management comments early during Tuesday's call, forcing a restart.

The company reported quarterly earnings of $300 million, compared with $293 million during the year-ago period. Earnings per share came in at 82 cents, up from 76 cents. Adjusted operating income before depreciation and amortization, another profitability metric, rose 23 percent to $668 million.

Revenue rose 30 percent from $1.13 billion to $1.47 billion. The results were the first set of financials to include contributions from Scandinavian broadcaster SBS Nordic, which Discovery acquired earlier this year.

Wall Street analysts had, on average, expected earnings of $328 million and earnings per share of 90 cents on revenue of $1.48 billion.

Discovery said its earnings figure came amid "strong operating performance in the current year, partially offset by higher interest and taxes, as well as increased amortization associated with purchase-price allocation for the SBS transaction."

The company has seen ratings gains at such key networks as Discovery, Animal Planet and OWN. "Discovery’s strong operating and financial momentum continued during the second quarter as we further capitalized on the organic growth opportunities across our portfolio while beginning to take advantage of the benefits that our recent strategic acquisitions provide," Zaslav said. "Our sustained commitment to producing captivating content and the further expansion of global pay TV markets combined to once again drive audience and revenue growth across our unique distribution platform."

U.S. ad revenue rose 10 percent and distribution revenue rose 17 percent during the second quarter, including money from Netflix. That left overall U.S. revenue up 13 percent at $793 million. 

International revenue soared 61 percent to $652 million, or 14 percent excluding the recent acquisitions of SBS and a stake in French TV company TF1.

The cable networks company also slightly lowered its full-year target ranges for earnings and revenue.

For the full year, Discovery said it now expects revenue of $5.55 billion-$5.625 billion, down from a previous expectation of $5.575 billion-$5.7 billion, and earnings of $1.1 billion-$1.15 billion, down from $1.2 billion-$1.3 billion. "Our updated outlook incorporates the impact of purchase-price allocation associated with the SBS transaction, current foreign exchange rates for revenue and expenses and the current share price for market-to-market equity-based compensation calculations," the company said.

Discussing the U.S. ad market, Zaslav said scatter-market pricing remains "well above last year's upfront." He said this year's upfront brought Discovery mid- to high-single-digit price increases and its highest dollar volume to date, and he predicted "sustained" ad revenue growth.

Beyond OWN and Discovery, Zaslav lauded Animal Planet for 11 percent ratings growth during the second quarter, its "best quarter in history." That distinction also went to Hasbro joint-venture channel The Hub, which grew ratings 32 percent in the kids 2-11 demo.

E-mail: Georg.Szalai@THR.com
Twitter: @georgszalai