Discovery Fourth-Quarter Earnings Beat Estimates, CEO Talks Nat Geo, History Competition

David Zaslav headshot - Publicity- P 2016
Courtesy of Discovery

CEO David Zaslav also discusses the flagship channel's scripted strategy, the company's direct-to-consumer plans, sports rights spending by Eurosport and a planned second free-to-air channel in the U.K.

Discovery Communications, the company behind such cable networks as the Discovery Channel, TLC and OWN, on Tuesday reported better-than-expected fourth-quarter earnings, but revenue came in below Wall Street estimates.

The company, led by CEO David Zaslav, reported earnings of $304 million, compared with $219 million in the year-ago period. Earnings per share reached 52 cents, or 56 cents on an adjusted basis, compared with 34 cents per share in the year-ago period, and 38 cents on an adjusted basis. Wall Street had on average forecast earnings of 50 cents per share.

The company said the better earnings were driven by "higher operating results, a $31 million (or 5 cents per share) after-tax gain from the [recent] Group Nine transaction and currency-related transactional gains."  

Total company revenues "were slightly lower and adjusted earnings before interest, taxes, depreciation and amortization missed [expectations] due to much higher international costs, including content impairment charges at SBS [in Scandinavia] and higher sports costs at Eurosport," said MoffettNathanson analyst Michael Nathanson in a first reaction.

On the company's earnings conference call, Zaslav said that SBS would in the future focus less on acquired big U.S. studio content, which has seen competition in Scandinavia from the launches of Netflix and the HBO Nordic streaming service in the region, and more on cost-efficient local content, as other international networks inside the company have done. 

Discovery's quarterly revenue rose 2 percent to $1.67 billion, slightly below Wall Street estimates, thanks to a 3 percent gain at its U.S. networks and slight growth at its international networks.  

The company saw its U.S. ratings affected by bigger news channel audiences amid the presidential election. But U.S. advertising revenue increased 1 percent. "primarily due to higher pricing and inventory management, partially offset by lower delivery."  

Credit Suisse analyst Omar Sheikh recently reduced his rating and price target on Discovery's stock. "Discovery's domestic ratings dipped materially during 2016, and the latest data from Nielsen suggests there was no respite in the fourth quarter," he wrote. "The outcome of the U.S. presidential election is likely to continue to drive audiences to news networks, and we see Discovery's factual networks as particularly vulnerable to losing share. This will put pressure on the group's U.S. advertising revenues in 2017, in our view."

The company has been affected by foreign-currency fluctuations over the past year. Amid a strong dollar, foreign results have translated into fewer dollars, affecting the financials of companies with strong operations abroad.

“Discovery’s diversified set of nonfiction, sports and kids’ entertainment brands and strong strategic positioning continued to drive attractive distribution agreements, helping to deliver solid operating and financial results in 2016,” said Zaslav. "As we begin 2017, we will continue to invest in our premier global IP and brands to nourish fans across all screens, all platforms and all services to drive shareholder value and propel our business for years to come amid the rapidly changing media landscape.” 

He reiterated plans to offer more content directly to consumers, as the company has done especially with sports and kids content. 

He also lauded the U.S. ratings trends at TLC and ID, saying female audience growth for them and OWN has diversified the company beyond its male-centric networks.

Discussing the Discovery Channel, he said the company won't expand its original scripted programming beyond select shows, such as miniseries Harley and the Davidsons.

Asked about competition from 21st Century Fox's National Geographic and A&E Networks' History for Discovery Channel, Zaslav said they are both strong and successful channels, but Discovery was in a strong position, even though "we have to bring our A game" to stay there. He said six or seven years ago History beat Discovery, which "woke us up" and "forced us to get more focused" on the Discovery flagship channel again and strengthening the brand after "cheating a little bit" on it.

Discussing pay TV trends and a possible move toward skinny bundles, Zaslav said, "We have been way ahead of the curve on that," with Discovery having remade its smaller networks into super-fan channels to ensure "not large" but "very compelling" audiences. If there is a move to skinnier bundles over the coming years, which he expects to take some time, the company is well positioned, the CEO added.

He also said Discovery is talking to Hulu, Google and all the players building new digital video services.  

Discovery recently extended a carriage deal with Sky in the U.K. and Germany after a war of words. The deal "affirmed" the value of the company's portfolio and its appeal with viewers, Zaslav said.

Discovery will launch a second free-to-air channel in the U.K. in 2017 that will make money this year, Zaslav also mentioned on the call, without providing full networks. It currently has U.K. free-to-air channel Quest, which shows factual, lifestyle and entertainment programs.

Zaslav also said that 2016 was a "pivotal" year for Discovery with record revenue and earnings, adding that digital initiatives help position the company for the "rapidly evolving" media and technology market. 

Zaslav also discussed sports investments, saying the strategy for the company's pan-European sports channel is that "Eurosport will always be profitable." The idea is to drive affiliate fee growth with sports investments and thereby profits, with the CEO saying the firm has made "strong progress" in that regard.

He said sports rights deals have been struck at low- to mid-digit fee increases, while Discovery has mostly stayed away from soccer due to big rights fee increases. But he added that this trend likely has also made “all of our other sports rights more affordable for us."