Discovery Quarterly Earnings Drop Amid Scripps Networks Integration Charges

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CEO David Zaslav on the earnings conference call discusses if the company could launch a U.S. direct-to-consumer service, saying "we are having a lot of discussions."

Discovery Inc., led by CEO David Zaslav, on Tuesday reported lower second-quarter financials as the company continues to integrate Scripps Networks Interactive.

The Scripps acquisition, which was completed in March, created a powerhouse in the unscripted and lifestyle content field that combines assets including the Discovery Channel, TLC, Animal Planet and OWN with Scripps' HGTV, Travel Channel and Food Network channels.

"We feel like we are doing really well," Zaslav said on Tuesday's earnings conference call about the Scripps deal. 
"We are increasingly confident in our road map and strategy." He said there have been first successes of cross-promoting content, among other things.

Asked about a possible launch of a U.S. direct-to-consumer service a la CBS All-Access, Zaslav said other companies have great movies and scripted series, but "to a consumer they are starting to look alike," meaning Discovery can "nourish and support" people interested in unscripted content. "We think we have something that is very different than everyone else."

So what to do? "We are carefully looking at it," Zaslav said. "Should we align with some of the existing players, should we go ourselves, should we align with a direct-to-consumer platform, should we align with a global player? We are having a lot of discussions."

Discovery posted a profit of $216 million, or 30 cents per share, or 77 cents when excluding various items, for its second quarter, the first full quarter including Scripps, compared with earnings of $374 million in the year-ago period, or 64 cents a share. Wall Street had on average forecast earnings of 84 cents per share.

The company said "improved operating results were more than offset by higher restructuring and other charges associated with the integration of Scripps Networks [Interactive], higher interest expense and a gain related to the sale of the education business versus a small loss last year related to the sale of the Raw and Betty production studios." The restructuring and other charges amounted to $187 million in the latest quarter, or 20 cents per share, compared with just $8 million in the year-ago period.

Discovery's second-quarter revenue rose 1 percent when excluding currency fluctuations but including recently acquired businesses – namely Scripps and Oprah Winfrey joint venture OWN – in both periods, to $2.85 billion. When including currency fluctuations, revenue remained unchanged. 

Including Scripps in both periods, U.S. Networks' revenue for the second quarter increased 1 percent from the year-ago quarter "as distribution revenues and advertising revenues each increased 1 percent, while other revenues decreased 10 percent," Discovery said. "The growth in pro forma combined distribution revenues was primarily due to an increase in contractual affiliate rates, partially offset by a decline in affiliate subscribers and to a lesser extent, lower contributions from content deliveries under licensing agreements."

The company said its pay TV subscribers declined 5 percent, "while subscribers to our fully distributed networks declined 3 percent." The growth in advertising revenue was "primarily driven by continued monetization of our digital content offerings, and to a lesser extent higher pricing, partially offset by lower audience delivery on our linear networks."

Zaslav said on the earnings call that the company would see pay TV "meaningful" subscriber growth next year after declines this year.

"We delivered solid financial results in our first full quarter as a combined company and continued to make great progress with our integration of Scripps Networks Interactive and our pivot to digital, mobile and direct-to-consumer products and services," said Zaslav. "As the global leader in real-life entertainment, we are uniquely positioned in the media marketplace to deliver long-term value for our passionate superfans, shareholders and business partners around the world."