Discovery Communications Second-Quarter Profit, Revenue Rise

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UPDATED: The cable networks group grew advertising and affiliate fee revenue as CEO David Zaslav reiterated confidence in the ratings potential of OWN: The Oprah Winfrey Network and said the firm is talking to Netflix and others about streaming content deals.

NEW YORK - Discovery Communications on Thursday reported better-than-expected second-quarter earnings and revenue as it once again posted higher advertising and affiliate fee revenue.

It also unveiled a $1 billion increase to its stock buyback program as media and entertainment companies continue to use cash to reward shareholders.

During an earnings conference call, management said advertising trends remain strong early in the third quarter and highlighted that the company has not seen a deterioration amid renewed economic concerns that has left Wall Street wondering if the ad market could take a hit.

Discovery president and CEO David Zaslav once again expressed confidence in the outlook for OWN, the joint venture network with Oprah Winfrey who recently took over as CEO and chief creative officer of the channel, which struggled in the ratings out of the gate after its January launch. And he said that Discovery is looking at possible content deals with digital distributors, such as Netflix and Amazon.com.

"Her team is already working on creating compelling content for the network," Zaslav said about Winfrey and highlighted a "more robust" fall and spring programming lineup, including shows with Rosie O'Donnell and Winfrey. "All in, we are optimistic about the brand strength, content pipeline and ratings potential of the network."

He was later asked what Winfrey's move into the CEO role means for Discovery Communications COO Peter Liguori who has served as interim CEO of OWN. Zaslav said Liguori has been freed up to re-focus on his broader Discovery responsibilities.

Discussing The Hub, the kids joint venture network with toy giant Hasbro, he highlighted that June was its highest-rated month since December.

Asked about potential deals with digital distributors, Zaslav said "we are talking to all of them," but the company is "working on getting the right value." Time Warner CEO Jeff Bewkes a day earlier had described his team's approach in similar ways.

Discovery Communications, the parent company of the Discovery Channel, TLC and other networks, recorded a quarterly profit of $254 million, up 20 percent when excluding one-time items in the year-ago period. When including those year-ago items, earnings rose more than 70 percent. Discovery made an early debt payment that affected year-ago results.

Revenue for the company rose 11 percent to 1.07 billion driven by a 20 percent gain at the firm's international networks and 6 percent growth at its U.S. channels. The financials exceeded Wall Street expectations.

On the back of a U.S. ratings gain of 6 percent, U.S. advertising revenue grew 10 percent, or 13 percent when excluding non-recurring revenue items and the former Discovery Health, which was turned into the OWN venture. Discovery cited "increased pricing and higher sellouts." Zaslav lauded Discovery, buoyed by Deadliest Catch and news-related documentaries, such as one on the death of Osama bin Laden, and TLC as key ad contributors. International ad revenue jumped 25 percent. 

Discovery slightly raised its full-year revenue guidance range from $4.025 billion-$4.125 billion to $4.075 billion-$4.175 billion. It still targets 2011 earnings of $1 billion-$1.075 billion.

“Discovery continues to deliver strong financial results, particularly across our unique international platform, as the depth and breadth of our content assets have enabled the company to capitalize on the sustained ad market strength worldwide as well as take advantage of the evolution of pay-tv across the globe," said Zaslav. "Our growth this past quarter was achieved despite continued strategic investments to further our competitive advantage both domestically and internationally."

On Thursday's earnings call, Discovery management once again lauded its strong international growth and outlook, including the planned launch of several channel in India.

3Net, the 3D network joint venture with Sony Corp. and Imax, is off to a start that has been "slower than we expected," Zaslav said. "The market demand has not developed yet." Once sales of 3D TV sets strengthen and particularly once technology that doesn't require 3D glasses arrives the network will be there to benefit though, he added.

Among its various networks and the cable industry overall, Discovery's ID continues to be the fastest riser, Zaslav also told analysts. Primetime ratings were up so much in the second quarter that the network is now the 18th-ranked network for women 25-54, compared to its 26th rank previously. He predicted ad rate, affiliate fee and viewer upside for the network in the coming years.

Zaslav also once again said there is upside for Discovery Channel under Eileen O'Neill, group president for the network and TLC. "Right now, Discovery is good," he said, adding that it could and should be better though. With a focus on storytelling and characters, he predicted the network could start exceeding market growth again.

Email: Georg.Szalai@thr.com

Twitter: @georgszalai

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