Discovery Narrows U.S. Ad Revenue Drop to 8 Percent, Will Unveil Streaming Strategy in December

Discovery CEO David Zaslav
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Discovery CEO David Zaslav

CEO David Zaslav also touts TLC ratings and says the firm is in talks with T-Mobile about its skinny bundle offer, suggesting it runs afoul of the companies' carriage agreement.

Discovery on Thursday reported its third-quarter financials, including an 8 percent U.S. advertising revenue drop compared to the year-ago period due to the coronavirus pandemic.

That marked an improvement over the 14 percent U.S. ad revenue decline recorded for the second quarter.

"The worst is behind us," Discovery president and CEO David Zaslav had told the second-quarter earnings conference call this summer about the ad market.

CFO Gunnar Wiedenfels said on the earnings conference call that October U.S. ad revenue trends were unchanged from the year-ago period, helped by "tailwinds" from the elections, and down slightly in international markets. Given rising COVID rates, the company doesn't expect the whole fourth quarter to follow this trend, but still to bring another sequential improvement over the third quarter.

The company on Thursday also said it would unveil its streaming plans early next month, signaling an event to share details with Wall Street.

And Zaslav said on the earnings call that Discovery was "in active discussions with T-Mobile" to "quickly resolve" an issue with the telecom giant's recently unveiled suite of skinny TV bundles aimed at cord cutters, saying "we have a clear agreement" where and how Discovery networks are required to be carried, and the company's current plans run afoul of that.

Discovery's U.S. distribution revenue rose 2 percent in the third quarter, "driven by increases in contractual affiliate rates, partially offset by a decline in linear subscribers." As of the end of September, the firm's subscribers to its fully distributed networks were 4 percent lower than at the same point in 2019, while total portfolio subscribers were 6 percent lower.

The company's overall quarterly revenue, earnings and adjusted earnings per share beat Wall Street expectations.

Management has on recent earnings calls touted audience share gains, including at TLC, which has been powered by 90 Day Fiance and its spin-offs.

"Discovery delivered improving financial results in the third quarter, a testament to the powerful appeal of our content and brands, led in the U.S. by TLC, which beat top-rated sports and news networks in coveted primetime demos, even in a record year for cable news," Zaslav said on Thursday. "In the midst of macroeconomic uncertainty with the ongoing COVID pandemic, as well as the continuing evolution of our industry, we remain focused on positioning Discovery for long-term growth and shareholder value creation through the execution of our strategic priorities, including our next-generation initiatives."

Discovery said on Thursday that its total share of viewing across its international portfolio in the third quarter improved 5 percent on average, with "strong growth" in the U.K., Germany, Italy, and Norway.

In the U.S., Discovery said its portfolio accounted for four of the top five cable networks for the total day among key women demos in the third quarters. It "gained more share in primetime than any other TV portfolio," it added. "For 2020 to-date, TLC continues to be the #1 ad-supported cable network in primetime among women and #2 among persons aged 25-54 and 18-49."

Zaslav on Thursday's earnings conference call said that the company's content was particularly  appealing to those seeking "comfort and familiarity" during a challenging time.

Discovery reported third-quarter revenue of $2.56 billion, down 4 percent from the year-ago period. Net income for the period rose 15 percent to $300 million, but adjusted earnings before interest, taxes, depreciation and amortization, another profitability metric, fell 15 percent to $954 million.

Discovery on Thursday also said it would unveil details of its much-anticipated streaming strategy for the U.S. and beyond, signaling a global direct-to-consumer plan, in "early December." He added his team was "super excited" to do that. "We have had the benefit of being at this" for a while around the globe and see what works best, he added. "We certainly see the value of having multiple distributors supporting [us]." He also signaled that the streaming approach includes local elements for audiences in various countries given the firm's global reach. "A global platform that we can promote on our ... channels" with a mix of "unique content" can differentiate the offer from other streaming services.

Zaslav later also said that he wants users of the planned streaming service say "that's the stuff I love," lauding Disney chairman Bob Iger as "quite clever" for bundling the Disney, Marvel, Star Wars and other brands in Disney+. "You can see the stuff you love."

This summer, Zaslav had said that the company was putting the "finishing touches on bringing an aggregated direct-to-consumer product to the market" in the U.S. and enhancing SVOD services in international markets, with details to be revealed "in the very near future." Management has previously described the planned U.S. service as a way to reach the growing number of people who want access to its content but not traditional pay TV and highlighted its appeal particularly to female audiences. The CEO reiterated past comments that the service would be "differentiated" from such broad-based scripted entertainment-centric streamers as Netflix and Disney+, comparing it to a "new SUV" and vowing it would be a "terrific companion" and "useful every day" and feature "all the characters that you love."

Guggenheim analyst Michael Morris in his Discovery earnings preview wrote: "We remain positive toward Discovery heading into the company's third-quarter earnings report and anticipate results which are at least in line with Street expectations." But he added: "Clarity towards Discovery's direct-to-consumer plans is what investors are most eager to learn about and is likely the key catalyst to get the shares moving higher."

Also on Thursday's call, Zaslav lauded the company's "super-efficient" programming and content production approach and how it has been "holding our own" in terms of distribution despite cord-cutting and conflict in negotiations between networks and pay TV companies.

Addressing this year's advertising upfront market, Zaslav described it as another step towards getting paid "fair value" for Discovery's networks, later adding "we did better than anyone."

Wiedenfells said on the call that content production was almost back to normal. And Zaslav addressed the U.S. elections in passing, suggesting that news audiences could "return to normal" depending on the election outcome and signalling that could benefit non-news networks.