Discovery Earnings Fall Shy of Estimates, CEO Blames U.S. Pay TV Sub Declines on Sports

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Discovery Communications CEO David Zaslav

David Zaslav also discusses skinny bundles and the $14.6 billion deal to acquire Scripps Networks Interactive, whose latest earnings fell.

Discovery Communications, led by CEO David Zaslav, on Thursday reported third-quarter earnings of $218 million, or 38 cents per share, compared with $219 million in the year-ago period, or 36 cents per share.

The company posted posted earnings of 43 cents per share on an adjusted basis, up 8 percent amid a lower share count. The result came in below the Wall Street consensus estimate.

The virtually unchanged quarterly earnings of $218 million were driven by "improved operating results and a tax benefit" offset by $142 million, or 25 cents per share, in after-tax Scripps deal-related costs, as well as "currency-related transactional losses versus gains in the prior year, and losses from equity investees primarily due to solar investments," Discovery said.

Third-quarter revenue increased 6 percent to $1.65 billion. The company's U.S. networks unit posted a 4 percent revenue gain, including a 3 percent advertising improvement to $407 million in the third quarter and a distribution revenue increase of 6 percent to $402 million. The distribution growth was due to higher affiliate fee rates and increases in content licensing revenue, partially offset by a decline in subscribers. Discovery that its total portfolio subscribers declined 5 percent in the third quarter, with subscribers to fully distributed networks falling 3 percent.

"As subscriber declines continue across the pay television landscape, we continue to pursue our strategic pivot” to distributing content directly to consumers, Zaslav said on the company’s earnings call.

"We are getting hit by the 3 percent [pay TV subscriber] decline," he also said. "We are on Sony and DirecTV [virtual pay TV services], and we are not on those other skinny bundles, meaning Hulu and YouTube. We are continuing to talk to them and work on that, and we are focused very hard on the fact that the U.S. is the only market that doesn't have a bundle without sports."

Zaslav and Viacom CEO Bob Bakish have been talking about the possible launch of a cheaper entertainment-focused programming bundle without sports.

"We are having some constructive discussions with distributors and some constructive discussions with other programmers, and over-the-top provides a significant opportunity to attack that," Zaslav said Thursday. "We see a meaningful market for that everywhere else in the world."

Pointing out that most pay TV markets around the world are "fairly stable, some are growing," Zaslav said the U.S. could be stable or slightly up in terms of pay TV subscribers if it wasn't "the only market with very expensive all-sports and retrans packaging." He argued that if younger or entry-level people had "a chance to get into the market," "we might be seeing flat to even up" a little, adding: "I think eventually we'll get there."

Zaslav also argued that "the big sports guys will be forced to take the big hit in the next round."

Discussing new opportunities, he said Discovery is talking to Amazon, with which it already has distribution deals in some international markets, Facebook, Google and Apple as they provide new distribution platforms looking for content. "If Apple wanted to do a deal with one person and wanted to offer a family pack everywhere in the world, or Facebook wanted to do that or Amazon or if the mobile players wanted to do that in Europe, who would they go to? There are very few companies. ... We have a massive amount of content." And the planned acquisition of Scripps Networks Interactive will only help here, the CEO said.

Discovery and Scripps last earnings season made it official, unveiling a $14.6 billion deal that will combine the two cable networks companies known mostly for nonscripted and lifestyle content.

"Advertising and global distribution revenue growth helped to drive solid third-quarter results for Discovery,”
said Zaslav. "We continued to focus on investments to strengthen our worldwide IP portfolio as well as strategic partnerships to nourish global super fans across every screen, platform and service. Additionally, we are excited by the prospects for a combined Discovery and Scripps as we continue to make progress on the transaction to create a global leader in real-life entertainment.”

Discovery will acquire Scripps in the cash-and-stock deal, which the companies said would bring together two sets of strong brands, including networks popular with women, allow for $350 million in cost savings, provide more international opportunities for Scripps' business given that Discovery has been a global player longer than Scripps and give the merged firm more upside in digital and direct-to-consumer services.

"This is the right transaction at the right time," Zaslav said, reiterating the company expects to close the deal in early 2018.

Scripps operates HGTV, Travel Channel and Food Network, among others, while Discovery's networks include the likes of Discovery Channel, Animal Planet, TLC and OWN. 

Scripps also reported its latest financials on Thursday, with third-quarter adjusted segment profit of $303.4 million marking a decrease of 4.5 percent from the year-ago period. Adjusted earnings fell 12.5 percent to $136.7 million, or $1.05 per share. The drop was "primarily driven by the expected increase in programming and marketing costs, partially offset by the growth in operating revenues," Scripps said.

Scripps' third-quarter revenue rose 2.8 percent to $825.5 million.

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