Discovery CEO Forecasts U.S. Growth Over Next Three Years, Touts Ad "Turn"
David Zaslav and his executive team are speaking at the company's inaugural investor day in New York amid recent concerns about cord-cutting.
Discovery Communications has a strong financial outlook and will grow its U.S. business over the next three years, despite concerns over cord-cutting, president and CEO David Zaslav told the company's first-ever investor day in New York on Tuesday. He also touted a turn in advertising momentum in the U.S. for the company.
"We have fully stabilized our U.S. business for growth," he said early on in the event. "For the next three years, based on even our worst-case scenario, we will show growth here in the U.S. And I feel good about where we are."
Added Zaslav: "Our ad sales this quarter will be up mid-single digits, and that’s a first — It’s the beginning of a turn. Part of that is our performance, and part of it is the fact that the market is stronger. We now have a domestic business that will grow, and you partner that with our international business … and I think we've got one hell of a company." Even if the ad market softens, he said the company will benefit from carriage fee increases locked in as part of recent deals, he said.
The company on Tuesday also made a three-year financial forecast, with Zaslav saying it may turn out conservative, but "we will absolutely make those numbers." The guidance included low double-digit free cash flow compound annual growth for the 2015-2018 period and low double-digit adjusted earnings per share gains, excluding currency effects.
The CEO said that Discovery would have at least $10 billion in available capital over the next five years, which it plans to invest in organic growth, acquisitions and stock buybacks. He also called the company a "free cash flow machine."
He spoke at the start of the event, which was webcast. Other speakers include CFO Andrew Warren, JB Perrette, president of Discovery Networks International, Bruce Campbell, chief development & digital officer and general counsel, as well as Rich Ross, group president Discovery Channel, Animal Planet and Science Channel.
Zaslav early in the investor day also told attendees that Oprah Winfrey would appear later in the day at the event.
Despite the bullish outlook, following a recent meltdown in entertainment industry stocks amid cord-cutting and other worries, Discovery's stock was down in early market activity on Tuesday. As of 9:50 a.m. ET, it was down 7 percent at $25.84.
FBR Co. analyst Barton Crockett said on Monday that "consensus expectations for a positive event look reasonable."
He said there was "particular potential for near-term positivity on domestic advertising, helped by a combination of solid ratings and TV ad demand that appeared to improve modestly for the TV network sector as the third-quarter progressed."
With other sector players having said that the TV advertising environment had seen improved demand, the analyst suggested Discovery had it easier to convert that into revenue gains given many competitors have seen ratings softness. "Discovery, however, has solid ratings, so we believe it could separate from peers and potentially see better improvement in ad growth," Crockett said. "Specifically, Discovery could now see domestic ad growth in the third quarter that is better than the low-single-digit outlook given at the time of the second-quarter earnings call."
He added: "Longer term, we expect Discovery to focus on potential from its pan-European Olympics deal, new over-the-top version of Eurosport and step-up to high-single-digit domestic affiliate fee growth in 2016 from a successful Comcast renewal. From the Comcast deal, we expect Discovery to focus on expanded on-demand capabilities as a notable answer to the popularity of on-demand libraries from growing SVOD services like Netflix."
Zaslav had in February signaled that the company would launch over-the-top video services in the U.S., based on experiences gained in Europe.
Also on Tuesday, Perrette, president of Discovery Networks International, said there was still enormous upside in Discovery's international. He said the ad story abroad looks like the U.S. in the 1990s and highlighted that the company has diversified its portfolio over the past five years beyond male non-fiction content offers.
He also predicted continued growth in international pay TV subscribers and average revenue per user, adding that "the opportunity for disruption is significantly less” abroad than it is in the U.S. as the pay TV bundle is more appreciated, he said.
More to come ...