Discovery Third-Quarter Earnings, U.S. Ad Revenue Drop

Discovery Communications CEO David Zaslav (best we have) - P 2016
Courtesy of Discovery Communications

The cable networks company, led by CEO David Zaslav, sees its latest results fall shy of Wall Street expectations and takes an impairment charge on its stake in Lionsgate.

Discovery Communications, the company behind such cable networks as the Discovery Channel, TLC and OWN, on Tuesday reported weaker-than-expected third-quarter earnings.

The company, led by CEO David Zaslav, reported earnings of $219 million, compared with $279 million in the year-ago period. Earnings per share reached 36 cents, or 40 cents on an adjusted basis. That compared with 43 cents per share in the year-ago period, and 47 cents on an adjusted basis.

Wall Street had on average forecast earnings of 43 cents per share.

Discovery's Zaslav during a morning analyst call touted Eurosport, considered Europe's ESPN, as a future "Netflix for sports." But Zaslav stopped short of calling Netflix a direct competitor to Discovery, a traditional cable powerhouse, insisting the U.S. video streaming giant is more a competitor to HBO.

"Directionally, they've moved to be more like an HBO. So, in terms of where Netflix sits with us, we see them more as a premium service. We don't really see them as competitors with our brands," Zaslav argued.

At same time, Discovery is investing heavily in Eurosport, with premium and local sport offerings, to grow its digital business in Europe. That strategy includes more planned direct to consumer offerings.

The goal is accelerating Eurosport's access to over 320 million households in Europe, of which only half access the Pan-European sports network as they are mostly not pay TV households.

"That makes Europe the most important continent for sports growth and opportunity over the top," bigger than even a maturing U.S. market where the cost of high sport fees is encouraging cord-cutting, Zaslav said. “One of the things that has stopped the growth of cable is the price of all that sports,” he said. 

To exploit an expanding European market, Discovery on Tuesday unveiled a partnership deal with BAMTech, the streaming business of Major League Baseball, that includes a joint venture, BAMTech Europe, to work with content owners, networks and OTT platforms to drive their digital reach and performance across Europe.

Netflix spends over $6 billion a year on content to go directly to consumers with its streaming service, Zaslav told analysts. The BAMTech Europe joint venture, by contrast, is gravy because, overall, Discovery owns or controls its content and so can draw from its library to create direct-to-consumer products for niche audiences, including for auto and science enthusiasts.

"We're going to be offering our sports content across Europe and our cost of content is zero. This could be a very profitable business for us," the Discovery boss said.

The latest results at Discovery were dragged down by a $50 million, or 8 cents per share, after-tax impairment charge related to the company's stake in Lionsgate, due to the downturn in the company's stock price, and higher equity-based compensation.

Discovery's quarterly revenue was essentially unchanged at $1.57 billion. U.S. advertising revenue in the quarter dropped 3 percent after a 6 percent increase in the year-ago period.

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.

Guggenheim Securities in its recent third-quarter earnings preview "modestly lowered our [U.S.] advertising forecast from minus 2 percent to minus 2.5 percent as ratings came in softer than we had previously anticipated."

MKM Partners analyst Eric Handler wrote in an earnings preview: "While the third-quarter scatter market was solid, ongoing ratings weakness at the Discovery Channel (combined with Olympics headwinds and Shark Week occurring in the second quarter this year versus third quarter last year) should result in advertising falling 3.0 percent. We look for distribution revenue to increase roughly 8 percent, which is primarily due to the recent AT&T renewal. Operating expenses are projected to increase 5.8 percent, driven primarily by increased marketing spend and continued investments in digital platforms."

“While we faced challenging but expected headwinds this quarter, Discovery is well-positioned for long-term growth driven by our well-defined global brands, differentiated content and favorable distribution agreements,” said Zaslav. “We have continued to strengthen and maximize our traditional pay TV offering with robust new programming while aggressively exploiting new opportunities to leverage our content across numerous digital platforms around the world."

Discovery recently agreed to acquire a 35 percent stake in millennials-focused Group Nine Media, a new holding company that will bring together Thrillist Media, in which Axel Springer owns a minority stake, Discovery's digital network Seeker and others via a $100 million investment. The group also includes NowThis Media, The Dodo and Seeker's production studio SourceFed Studios. Discovery has the right to acquire a controlling stake.

The deal creates a video-focused new-media company with 3.5 billion global monthly video views and more than 12 billion monthly social impressions across such platforms as Facebook and Snapchat, immediately giving it the scale that could take an independent digital startup years to build. "If you're in the business of selling advertising, scale and the ability to target play a really big role," said Ben Lerer, the Thrillist co-founder who will run Group Nine as CEO.

Etan Vlessing contributed to this report.