Discovery Second-Quarter Earnings Rise, CEO Talks Consolidation

Discovery Communications CEO David Zaslav

UPDATED: The cable networks giant saw weaker U.S. trends but strong gains in its international business, with CEO David Zaslav saying his team would stay disciplined in potential deals.

Discovery Communications on Thursday reported improved second-quarter financials driven by its international business.

On an earnings conference call, CEO David Zaslav was asked about his appetite for further acquisitions after recent deals in Europe and amid deal chatter across the industry. "The organic growth story is very appealing for us," he said, citing upside in the U.S. and various international markets, including Eastern Europe, Mexico, Brazil and India, even in the absence of acquisitions.

He added that the company is always looking for deal opportunities though, including in Europe and Asia, and reiterated his long-term stance that deals that add intellectual property or accelerate growth are attractive, but they would have to come at a good price. He vowed that the company would stay financially disciplined in any potential deals.

He also discussed such recent Discovery acquisitions as Eurosport, which has rights to all content on all platforms, and a deal to acquire U.K. production firm All3Media in a 50:50 joint venture with John Malone's Liberty Global. "These acquisitions allow us to increase our content libraries … and exploit more formats and intellectual property around the world," Zaslav said.

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Asked about pay TV consolidation in Europe, such as the planned BSkyB acquisition of Sky Italia and Sky Deutschland, the CEO said Discovery has good scale, putting it in a strong position to continue doing well in that environment.

The cable networks company posted earnings of $379 million, compared with $300 million in the year-ago period. Wall Street analysts on average had expected $328.5 million.

Revenue rose 10 percent to $1.61 billion. It was expected to hit $1.60 billion, compared with $1.47 billion in the year-ago period. U.S. networks revenue dropped 2 percent, but international revenue rose 23 percent.

The latest quarter included a $31 million gain associated with the sale of HowStuffWorks, a $29 million gain related to the consolidation of pan-European sports network Eurosport and a $15 million increase in equity earnings. 

Operating income before depreciation and amortization, another profitability metric, rose 6 percent to $694 million. While U.S. OIBDA declined 1 percent, Discovery's international networks posted a 19 percent gain.

"Domestic ratings were hurt by the cancelation of Everest, which was intended to be the launch pad for the new programming [in the second] quarter and likely due to the competition from the World Cup," Evercore Partners analyst Alan Gould said in a recent report. "Nonetheless, primetime ratings decreased only by an estimated 1 percent during the quarter, the strongest cable network company performance excluding Disney/ESPN."

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"The operating strength across Discovery's organic businesses, along with increased contributions from strategic acquisitions, led to sustained financial momentum during the second quarter," Zaslav said. "Investing in compelling programming remains a priority as we integrate our recent acquisitions and build new avenues of growth so we can deliver additional long-term value to our shareholders."

U.S. advertising sales rose 5 percent, while distribution revenue fell 8 percent from the year-ago period, which had benefited from subscription VOD licensing deals.

International ad sales jumped 23 percent, or 17 percent when excluding the acquisition of Eurosport, with distribution revenue up 19 percent. More than 50 percent of revenue came from international networks, which management has previously said will account for a majority of full-year 2014 revenue.

Asked about Discovery's international business, Zaslav said that Latin America is currently likely the firm's strongest market. He highlighted that Discovery Kids is the top cable network in Brazil and that the firm has five of the top 20 channels in Latin America. "Our international business has never been stronger," he said. "Our international business right now is just accelerating."

Among other markets, he said that "we're seeing big, big growth in India."

Asked about Eurosport's appetite for big sports rights, including those of soccer, Zaslav said it "is a profitable business that has significant growth locked in as it is today." Any rights deals will be disciplined, he said, explaining that the firm has had "a lot of conversations about joint bids," — for example, with distribution partners, which could make sense.

Discussing U.S. ad market trends, Zaslav said the company saw mid-single-digit percentage growth in the upfront ad market. With ad volume trends not as strong as in the past, Discovery decided to sell less ad inventory in the upfront, he said. Zaslav described the overall ad market trends as including "good pricing," with volume down "a little bit."

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On the earnings conference call, Zaslav stated that "it's a great time to be in the content business," emphasizing that his team feels very comfortable with Discovery's position and strategy.

He said the firm continues to focus on such strategies as spending on content, developing stronger and more valuable brands and building additional scale and market share in key growth areas.

Zaslav said it is important for them to have strong programming and to own all global and digital rights. The company has more than tripled its programming investment in recent years.  

He also remarked that his team sees "room for continued growth" in U.S. advertising, vowing that Discovery would outperform the industry in the long term.  

Management said Thursday that OWN, the network joint venture between Discovery and Oprah Winfrey, paid back $20 million in the latest quarter to Discovery.

Twitter: @georgszalai