Discovery Stock Drops After CEO Talks Flagship Channel's Ratings, Ad Weakness

THR 100 List 2017 - David Zaslav -Getty-H 2017
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David Zaslav also predicts the company would get a carriage deal with YouTube TV, discussed a big Tiger Woods content deal, the exit of the stars of a HGTV hit series and challenges for online giants pushing into sports and content.

Discovery's stock on Monday dropped sharply after president and CEO David Zaslav at an industry conference discussed how the company's flagship Discovery Channel "has some ratings challenges, but is still the number 1 (non-sports) channel in America for men."

Speaking at the annual UBS media investor conference in New York, he said Discovery ratings have been "down" as of late before speaking of "some softness," which would push U.S. advertising revenue for the fourth quarter "a little" below previous expectations of 3 percent-5 percent growth. Production issues with auto-themed series Fast N' Loud that have delayed the return of the show into 2019 are contributing to this, he said, but added that the company was looking better than expected in terms of affiliate fee revenue.

Discovery's stock was down 6.9 percent as of 11:20 a.m. ET, at $28.60.

The CEO also told the 46th annual UBS Global Media and Communications Conference in New York about his disappointment about the exit of HGTV's Fixer Upper stars Chip and Joanna Gaines, saying it "sucked all of the air out of my lungs" because "I couldn’t take my eyes off the two."

Zaslav spent some time on Monday lauding a multi-year global content partnership between Discovery's Golf TV streaming service, which will launch in 2019 under a deal with the PGA Tour, and Tiger Woods. He said the deal was "a big opportunity for the golf star and the company and a great example for the company's playbook of leveraging its global reach for original content.

"I feel we’re just getting started because ... we are a different kind of media company," Zaslav said Monday, highlighting that the focus on owning intellectual property and global reach gives the company more opportunities ahead, while its focus on lifestyle and non-scripted content differentiates it from its peers.

Discovery, whose networks include the Discovery Channel, Animal Planet, TLC and OWN, in March closed its acquisition of Scripps, owner of the likes of HGTV, Travel Channel and Food Network, to create a powerhouse in the unscripted and lifestyle content field amid continuing industry consolidation. Zaslav signaled Monday that the company is confident it can exceed its target of $600 million in Scripps cost synergies, saying: "Our target now is higher and sooner."

"We were a quality IP company" like Scripps, but they had international upside and cost upside, Zaslav also said. Higher-than-expected synergies helped Discovery reduce its debt more quickly than thought, he added.

In September, Discovery struck licensing deals with Dish's Sling TV and Hulu that ensured carriage on those skinny bundles, whose appetite for the company's programming analysts had at times wondered about. "The economics on those deals are favorable for us," Zaslav has said of the deals.

On Monday, he said the deals should boost the company's pay TV subscriber reach by about 4 million and also drive stronger advertising revenue. 

Why is Discovery doing well with skinny bundles? "We have really quality brands," including female-centric network TLC, Zaslav said, highlighting that its networks also appeal to younger demographics. He said he was optimistic Discovery would be available on the YouTube TV live streaming service in the future. "We should be on YouTube," he said.

Discussing the challenges of networks that don't perform well to seal carriage deals, Zaslav on Monday said Discovery has long-term deals with AT&T and Dish and feels good about its position. Discovery's U.S. cable networks now account for 25 percent viewership in the U.S., positioning it well, he argued, suggesting that distributors may have to drop some networks down the line, but not Discovery's.

He also discussed the challenges for online giants pushing into sports and other content areas. "There was this theory that the big FAANG companies are going to own all the IP," Zaslav said. "It’s not enough to be in the cloud." Sports leagues "need a funnel," and Discovery has channels all over the world which serve as a funnel, he argued. "The PGA Tour couldn’t do a deal with Amazon or Facebook, because they need a funnel. The funnel is Eurosport and the 10 channels we have in every country," Zaslav said. 

Amazon was recently reported to be bidding for Fox’s regional sports networks that the Walt Disney Co. isn’t allowed to buy as part of its $71.3 billion Fox acquisition.

Zaslav previously signaled little interest in bidding for the Fox regional sports networks. "We like outside of U.S., but we think we are late here," he recently said about the U.S. sports assets. "Those businesses can be dicey." He concluded: "Unless it was a great deal, you wouldn’t see us in there.”

But Zaslav on Monday signaled interest in potential other acquisitions or content investments, saying the company's improving balance sheet after the Scripps deal would allow it to look at "any and all opportunities," including "investing in our own company."