Discovery Communications Touts Upcoming Launch of OWN: Oprah Winfrey Network

Management expects growth from channel, but doesn't detail guidance; company reports strong third-quarter financials

NEW YORK - Discovery Communications on Tuesday reported improved third-quarter financials driven by advertising growth of 16% in the U.S. and 23% internationally, but management spent large portions of a conference call with analysts answering questions about OWN: Oprah Winfrey Network, which launches in January.

"We are spending a ot of time on the launch," said CEO David Zaslav. And Oprah is "all in." While all cable networks need time to find a voice and audience, he said "we are very optimistic" about the new network and that it will become a "a very big asset" for Discovery as long the audience is nurtured correctly, particularly online.

Management touted the shows and personalities that OWN announced as part of its launch lineup Monday, including Dr. Phil and Dr. Oz, and said that ratings could grow over time as Rosie O'Donnell and Winfrey join the program schedule full-time. The latter is "maybe the best brand in media" and will have an increased presence on OWN after her syndicated talk show run ends next year, Zaslav said. And O'Donnell is "a proven audience generator" who will add more appeal to the network when she starts there, which could be as early as the summer, he said.

Management predicted higher revenue for OWN than the current Discovery Health network, which it will replace. But it didn't give specific revenue or operating profit guidance for 2011, about which an analyst inquired.

Discovery Communications COO Peter Liguori said OWN's success will depend on good, on-brand creative, but predicted significant ratings improvement, hinting that viewership could double compared with Discovery Health. He also highlighted an "extremely robust ad business" for OWN, with room for increases in affiliate fees from distributors over time being another upside opportunity.

Discovery said Tuesday that it has provided $107 million of OWN funding to-date and that it is still working with the estimated $189 million total funding estimate, which it unveiled this summer after an original $100 million estimate. "Discovery expects to recoup the entire amount loaned to OWN provided that the joint venture is profitable and has sufficient funds to repay the company," the company said in a regulatory filing.

After the market close, Discovery reported improved third-quarter financials, but some analysts expressed disappointment that programming and other spending kept a lid on profit growth. The company's shares declined slightly early in after-hours after closing near their 52-week high before the financial update.

About two years after its first earnings report and call as a publicly traded company, the cable networks firm posted a third-quarter profit from continuing operations of $161 million, up 73% from $93 million in the year-ago period.

Revenue rose 11% to $926 million. U.S. advertising revenue jumped 16% driven by higher ratings and sellouts, as well as higher pricing.

Management said U.S. ad revenue should grow in the mid-teens percentage range in the current fourth quarter, with the exact figure depending on program performance. Continued ad pricing strength also makes Discovery optimistic about 2011, although it is too early to predict ad trends for next year, management said.

"Discovery continues to enjoy strong operational momentum across our businesses ," said Zaslav. "Our ability to execute, combined with a robust advertising environment, enabled us to deliver third quarter results that exceeded our expectations."

For the full year 2010, Discovery projected a profit of $650 million-$700 million on revenue of $3.75 billion-$3.80 billion. The latter range is slightly above the firm's previous projection.

Ratings across the company are up year-to-date, and Zaslav highlighted continued gains at ID, Animal Planet and other networks of the company. TLC now has 21 series exceeding 1 million viewers now and grew its ratings in the third quarter despite tough year-ago comparisons from Jon & Kate Plus 8, he told an earnings conference call and highlighted the upcoming debut of Sarah Palin's Alaska on TLC on Sunday Nov. 14.
Joint venture kids network The Hub, with partner Hasbro, is also off to a solid start, Zaslav said. Since its launch, it has seen viewership gains over its predecessor Discovery Kid, he highlighted. Established competitors, such as Nickelodeon, are well ahead in the ratings though as management said would naturally remain the case after the launch.  "The early signs are encouraging," even though the network starts off a low base, Zaslav highlighted though.

Barclays Capital analyst Anthony DiClemente on Tuesday morning had said that he is cautious on Discovery shares after their recent runup. He has an "equal weight" rating on the stock. "We take a cautious view of Discovery shares in the near-term as the stock has appreciated 15% (versus 6% for the S&P) since second-quarter results were reported" in August, he wrote in a note to investors. Programming costs continue to rise, growth is likely to decelerate and the stock overall seems "priced for perfection," he said.