Discovery Communications Second Quarter Earnings, Revenue Rise

The cable networks giant managed to squeeze more profits out of its U.S. advertising business.

Discovery Communications on Monday reported sharply increased second-quarter earnings, even as it faced foreign exchange issues from an expanding international business.

The cable networks giant saw net income jump 43 percent to $415 million, from a year-earlier $289 million, as improved operating margins offset higher restructuring and interest costs and a $23 million loss from equity investees. The profit line was up 26 percent when excluding currency effects from European exchange rate exposure. 

Discovery posted per-share earnings of 66 cents, which beat a Wall Street estimate of 54 cents. Revenue rose 3 percent to $1.7 billion, up slightly from $1.65 billion in 2015 and meeting analyst expectations.

The second-quarter results were mixed, however, when breaking out Discovery's U.S. and international operations, especially in Europe with its bet on TV sports with Eurosport.

Discovery's U.S. networks saw overall revenue rise 7 percent to $873 million as distribution revenue rose 8 percent to $386 million on higher rates offsetting lower subscriber numbers. Advertising revenue rose 5 percent to $471 million, underscoring the health of the domestic advertising business. 

International networks by contrast saw their overall revenue drop 1 percent to $790 million, underpinned by a 2 percent rise in distribution revenues to $427 million that offset a 7 percent drop in advertising revenue to $342 million. Changes in foreign currency exchange rates reduced international revenues during the latest quarter.

Discovery is facing headwinds in the global advertising market, however. European ad revenue is expected to be impacted during the third quarter by continuing economic uncertainty following the recent Brexit vote and the Rio Olympics dominating viewership in August.

And in the U.S., the male-skewing Discovery Channel has seen viewers get drawn away by wall-to-wall coverage of the U.S. presidential election on cable news channels. "We're looking for the election to be over because we have a strong hand with our channels and brands," Discovery Communications president and CEO David Zaslav told analysts during a conference call on Tuesday morning. 

Also on the international side, Discovery and Liberty Global on Tuesday renewed their long-term distribution deal that gets Discovery’s networks, including flagships Discovery Channel, TLC, ID and Eurosport, to Liberty Global customers across 12 European markets, including Austria, Belgium, Germany, Hungary, Ireland and the U.K.

Zaslav told analysts that Discovery will continue to invest in premium and diversified content that targets "superfans" on pay-TV, free-to-air, direct-to-consumer and digital platforms. He added Discovery Communications was learning about the direct-to-consumer market, especially in Europe with its Eurosport app, and was exploring plans to go direct-to-consumer in the U.S. market.

The media group has already deployed its Discovery Go app into around 30 million U.S. cable homes, and by the end of 2016 is expected to cover the entire U.S. market. Back in Europe, Discovery is looking to reduce subscriber churn by possibly offering season passes for niche sports like tennis, cycling and winter sports.

Zaslav also told analysts that, given that Discovery owns or controls its content, the group can draw from its library for Discovery, Science or Velocity to create direct-to-consumer products for niche audiences. "We're looking very hard at whether we can create a Science Club at $2.99 (a month), or $3.99, and you get that app and all that science content," he ventured.

Aug. 2, 6:45 a.m. Updated with comments by Discovery Communications CEO David Zaslav during an analyst conference call.