Discovery, led by CEO David Zaslav, reported that it has reached 15 million paying subscribers worldwide to its direct-to-consumer services, including Discovery+.
In late February, the firm said it had reached more than 11 million paying streaming subscribers. In its second earnings report since the Discovery+ launch early in the year, the company disclosed that it had ended the first quarter in March with more than 13 million.
Discovery also reported on Wednesday that its U.S. advertising revenue in the first quarter of 2021 fell 4 percent compared with the year-ago period; management had forecast a drop. But U.S. distribution revenue rose in the double-digit percentage range thanks to Discovery+ and higher carriage fees.
The ad decline was “primarily due to lower overall ratings, and to a lesser extent secular declines in the pay TV ecosystem and lower inventory, partially offset by higher pricing and the continued monetization of content offerings on our next-generation platforms, primarily Discovery+ and TV Everywhere,” the company explained. The lower ad inventory was partially due to the company promoting Discovery+. Distribution revenue gains were “driven by the launch of Discovery+ and increases in contractual affiliate rates, partially offset by a decline in linear subscribers.”
Quarterly revenue, which grew 4 percent to $2.79 billion, exceeded Wall Street estimates, while bottom-line figures came in below expectations amid stepped up streaming investments. Quarterly net income fell 63 percent to $140 million, with adjusted operating income before depreciation and amortization down 24 percent to $837 million. Total U.S. operating expenses increased 33 percent to $983 million, with the firm citing “growing content investment in Discovery+.”
In pre-market trading, Discovery’s stock was down more than 7 percent at around 7:30 a.m. ET.
“What matters most is next-gen/Discovery+ subs, and they’re meeting or exceeding expectations,” said Wells Fargo analyst Steven Cahall, whose forecast has been for 16 million streaming subscribers as of the end of June, in a first reaction. “While the stock has been volatile year-to-date … we think lots of investors have fresh eyes for Discovery. With direct-to-consumer proceeding well and sub losses pretty modest for now, we expect more bullish sentiment to return to Discovery shares.”
Zaslav said: The global rollout of Discovery+ is off to a fantastic start by any measure. Key metrics, including subscriber additions, customer engagement and retention, are exceeding our expectations and demonstrating sustained momentum into the second quarter.” And he added: “Our strong direct-to-consumer performance underscores the outstanding value and appeal of our content, brands and personalities to both consumers and distribution partners alike.”
Discovery+ recently also launched on cable giant Comcast’s Xfinity Flex broadband-only service before its rollout on Comcast’s X1 pay TV platform, giving subscribers “access to more great Discovery programming over the internet alongside all the live and on-demand content they get as part of their TV subscription.” That made the deal the first for the Discovery streamer with a pay TV partner and was seen as a positive given some on Wall Street had wondered if distributors would prefer to focus on carriage arrangements for Discovery‘s linear networks.
On Wednesday’s earnings conference call, Zaslav said the direct-to-consumer strategy’s execution has been “nearly flawless” and touted its upside potential. For example, the CEO said the streaming business still had much of the Discovery+ expansion into international markets ahead, strengthening management’s conviction it was a key growth business adding to the core linear networks operations.
He cited Italy as an example where the introduction of Discovery+ was opening up new growth opportunities, mentioning the likes of Germany and Brazil as other key foreign markets with upside.
Overall, he forecast “a healthy inflection in our revenue trajectory” thanks to the growth of Discovery streaming.
Zaslav also said that the company is spending more on content to help drive success across its platforms, highlighting that “we are investing more than ever before.”
CFO Gunnar Wiedenfels on Wednesday also noted that Discovery’s core networks pay TV subscriber declines in the latest quarter came in better than in other recent periods.
Zaslav also described the company’s streaming audience as younger, with about half being pay TV subscribers and half not. And management signaled that it feels its early streaming trends in such areas as subscriber momentum and usage is looking better than those of various rivals.