Discovery Q1 profit up amid ad rebound

CEO Zaslav bullish on upfront and OWN

NEW YORK -- Discovery Communications on Friday reported better first-quarter financials amid a rebound in the advertising market.

Management also touted the firm's outlook going into the annual upfront advertising sales season and signalled that OWN: The Oprah Winfrey Network, which will replace the Discovery Health channel next year, could soon get higher carriage fee payments.

"Discovery's first quarter performance was the result of strong operational execution and an improving economic environment," said president and CEO David Zaslav. He added that "with an improved global advertising environment, we were able to further monetize our increased viewership."

On a conference call, Zaslav said the ad recovery should help accelerate Discovery's growth this year as it gets more than 40% of its revenue from ads. "We are off to a strong start," he said about the year-to-date trends and highlighted that key ad categories, particularly auto, are back in the ad game. But he also cautioned that visibility about ad trends in the back-half of 2010 was limited.

"We are optimistic that we will see real, significant increases in this year's upfront" after a small reduction last year, Zaslav said. "We'll have a very nice upfront." He particularly cited scatter market ad prices that have been well above upfront 2009 levels and Discovery's continued ratings momentum, such as an 11% U.S. ratings improvement in the first quarter despite the Winter Olympics on NBC.

Asked about the 2011 launch of OWN, the network that Discovery is operating and programming in partnership with Oprah Winfrey, Zaslav said "the response from advertisers has been very, very positive." After a recent big ad deal with Procter & Gamble, management predicted further ad deals soon.

Discovery top executives also signaled that OWN may soon get higher carriage fees. "The idea of Oprah coming to cable is a great value to the cable industry," Zaslav said.
COO Peter Liguori, who has been spending time talking about this to cable TV firms and other distributors, called talks "fruitful and productive" and said "Oprah is fairly engaged." He added that OWN currently has a slate of about 15 shows right now. "All of them seem quite compelling and certainly filling a niche in the marketplace."

Discovery's quarterly profit of $169 million was up 42% compared to $119 million in the year-ago quarter thanks to better business momentum and a lower provision for income taxes.

Revenue rose 8% to $879 million led by 16% growth at Discovery's international networks and 5% growth at its U.S. networks. U.S. ad revenue was up 9%.

Barclays Capital analyst Anthony DiClemente raised his price target on Discovery shares to $35, but cautioned that "we harbor concern" about the stock's "highest-in-class" valuation.
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