Discovery, led by CEO David Zaslav, said on Wednesday that it reached 20 million paying streaming subscribers worldwide to its direct-to-consumer services, including Discovery+, as of the end of its third quarter on Sept. 30.
That was in line with Wall Street estimates. Discovery had ended its second quarter in June with 17 million and in early August reported having reached 18 million global paying streaming subscribers by then.
In its third-quarter earnings report on Wednesday, the company also recorded a U.S. advertising revenue gain of 5 percent, while its U.S. distribution revenue posted a 21 percent increase, helped by Discovery+.
In Discovery’s international business, ad revenue jumped 28 percent, or 26 percent when assuming constant currencies, in the third quarter thanks to the Summer Olympics in Tokyo, to which the firm had the rights in Europe, and a rebound from the COVID pandemic hit in the year-ago period. International distribution revenue rose 7 percent, or 6 percent excluding currency effects, driven by Discovery+.
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Overall third-quarter revenue rose 23 percent to $3.15 billion, including $425 million of what the company calls “next-generation revenues,” growth of approximately 100 percent over the the prior-year period.
U.S. advertising revenue increased “primarily due to higher pricing, the continued monetization of content offerings on our next-generation platforms and higher inventory, partially offset by lower overall ratings and secular declines in the pay-TV ecosystem,” Discovery said. Distribution revenue rose despite a decline in linear pay TV subscribers. “Subscribers to our fully distributed linear networks at Sept. 30, 2021 were 3 percent lower than at Sept. 30, 2020,” the firm noted. “Total subscribers to our linear networks were 8 percent lower, or 4 percent lower excluding the impact from the sale of our Great American Country linear network.”
Despite higher revenue, increased expenses, mostly due to the Olympics and spending on streaming growth, meant that Discovery’s third-quarter earnings fell from $300 million to $156 million, and adjusted operating income before depreciation and amortization dropped 24 percent to $726 million. However, that exceeded Wall Street earnings estimates.
U.S. operating expenses increased 26 percent to $895 million due to such factors as “growing content investment in Discovery+” and “higher marketing-related expenses to support Discovery+.” International operating expenses jumped 77 percent to $1.37 billion, due to costs related to the Olympics and the return of European sporting events to a more normalized schedule after COVID disruptions, as well as higher content and marketing spending to support Discovery+.
In its earnings report, Discovery highlighted that it “successfully broadcast the Tokyo 2020 Summer Olympic Games, which reached over 372 million people in Europe across TV and digital platforms, and delivered 1.3 billion minutes of Olympics content on our streaming services.”
Discovery previously also said that it would recognize $175 million-$200 million of adjusted operating income before depreciation and amortization (AOIBDA) losses during the third quarter as a result of the Olympics, while emphasizing that its expectation was to break even or generate slightly positive AOIBDA and free cash flow over the life time of its Olympics deal.
“We made great strides in the quarter operationally, financially and creatively,” said Zaslav. “The team drove solid momentum in our direct-to-consumer business, which we grew to 20 million paid subscribers at quarter end on the strength of our global brands and fan-favorite content, including
the Summer Olympic Games and Shark Week.”
The Discovery+ streaming service launched in the U.S. on Jan. 4 with a monthly price of $4.99 with ads and $6.99 without ads. It has also been rolling out in international markets.
Wells Fargo analyst Steven Cahall in his earnings preview left his streaming subscriber estimate unchanged at 20 million for the end of the third quarter “despite several market launches being pushed out from late third quarter to the fourth quarter.”
In mid-May, Discovery unveiled the mega-merger with AT&T’s WarnerMedia, with Zaslav set to lead the combined company. The merged firm is expected to have $52 billion in revenue in 2023, and the companies are targeting $3 billion in cost synergies. Both companies are moving through the regulatory review process of the planned merger without problems so far, seeing “broad support” for it, Zaslav had said in early August.
In Wednesday’s earnings report, Zaslav touted “very healthy cash flows during the quarter, further strengthening our balance sheet and financial profile.” And he added: “We are very excited about our pending merger with WarnerMedia and the opportunity to bring these two companies together, combining iconic and globally cherished franchises and brands, and positioning us to more efficiently drive global scale across the combined portfolio.”
