Discovery U.S. Ad Revenue Drops Less Than Expected Amid Pandemic

Discovery CEO David Zaslav
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Discovery CEO David Zaslav

"The worst is behind us," says CEO David Zaslav about the advertising market, hit hard by the coronavirus pandemic. And he said the firm would soon unveil a long-planned U.S. direct-to-consumer service.

Discovery on Wednesday reported lower, but better-than-expected financials, including U.S. advertising revenue, for the second quarter amid the novel coronavirus pandemic, which had its first full-quarter impact in the period.

U.S. ad revenue ended the three-month period down 14 percent, compared to the average Wall Street forecast for a 16 percent drop. 

The company's U.S. TV advertising had initially been looking down 20 percent in April, while May and June were looking somewhat better, management had previously said. In mid-June, president and CEO David Zaslav told an investor conference that Discovery's April advertising came in down 18 percent from the year-ago period, and "May and June look to be better, significantly better."

Zaslav told analysts on Wednesday that ad trends have "largely bottomed" out in many markets, adding "the worst is behind us." In the U.S., he noted a "nice recovery" in May and June, while such markets as Latin America are still looking for the bottom.

The CEO also acknowledged the "unusual" upfront advertising season due to the pandemic, but argued: "Noone has as much momentum as we do," including TLC, which he called the "hottest" network "bar none." Zaslav said that usually the upfront would be over by now if it wasn't for the pandemic. He reiterated previous comments that Discovery "is the new sports" and that the company has in the past been underpaid for its performance in terms of ad rates, calling that "a legacy issue that doesn't make any sense anymore" given the company's networks' reach. "We really got some swagger," he concluded. "We are the no. 2 media company in America in what we deliver. If you wanna play, you gotta pay."

Zaslav on Wednesday's earnings conference call also said 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." He said the reason the company was pushing further into the direct-to-consumer space was because it wanted to give all audiences an opportunity to see its content.

Also on the call, Zaslav said content has always been Discovery’s "North Star," but has been more important than ever amid the pandemic. "More consumers are choosing to spend time with us all around the world," he said, highlighting that the firm has rolled out more than 1,000 hours of fresh original content since lockdown that is "cost effective" and "creatively shot," while other media giants have suffered from shuttered productions. 

"We generated significant free cash flows in the second quarter, demonstrating the durability of our business, especially against the backdrop of a historic disruption to the global advertising market due to the impacts of the pandemic," said Zaslav. "We are cautiously optimistic about the global outlook for the rest of the year and firmly believe that the long-term prospects for Discovery remain as vibrant as ever."

He also highlighted "our significant liquidity cushion and the initial signs of stabilization that we're seeing in many of our key markets around the world," telling Wall Street that Discovery would resume returning capital to shareholders via stock buyback.

Total share of viewing across Discovery's international portfolio of brands in the second quarter improved 4 percent on average, with "strong" share growth in India, U.K. and Italy. The firm also said that its portfolio of U.S. networks in the quarter "gained more share in primetime than any other TV portfolio in each of our target demos."

And the firm said TLC "delivered its best quarter in network history and was the top network across all of TV on Sunday nights among women 25-54, people 25-54 and women 18-49, driven by the performance of the 90 Day Fiancé franchise. The network also continues to be the No. 1 destination for women on cable TV in 2020."

Discovery previously also said its direct-to-consumer services, such as entertainment streaming offer dplay, have seen subscriber demand amid the pandemic. And its lifestyle networks, led by TLC, have touted ratings and viewing share gains. 

Discovery had on March 24 withdrawn its 2020 financial guidance due to the pandemic, warning of "unprecedented economic uncertainty" and highlighting the "unknown impact" of the pandemic on its financial results. It mentioned the Tokyo Summer Olympics postponement to 2021 as one pandemic result affecting future results. The firm also revealed it had drawn down $500 million from a revolving credit facility to shore up its balance sheet.

Discovery had mentioned in reporting its first-quarter earnings that, in response to the pandemic, it "pursued a number of cost savings initiatives that it believes will offset a portion of potential revenue losses and deferrals due to the impact of COVID-19, through the implementation of travel, marketing, production and other operating cost reductions." It didn't share further details.

On Wednesday, it provided an update, saying selling, general and administrative expenses decreased 15 percent in the second quarter, "primarily due to lower marketing-related expenses and, as a result of COVID-19, a reduction in travel costs."

Quarterly U.S. revenues of $1.76 billion decreased 6 percent from the prior-year period on the lower advertising revenue, "primarily driven by a decline in demand stemming from the COVID-19 pandemic and, to a lesser extent, secular declines in the pay TV ecosystem and lower inventory, partially offset by higher overall ratings and pricing." 

U.S. distribution revenue increased 7 percent though, "primarily driven by increases in contractual affiliate rates and certain non-recurring items, partially offset by a decline in linear subscribers." As of June 30, subscribers to Discovery's fully distributed networks were 5 percent lower than a year earlier. 

Discovery's second-quarter total revenue fell 12 percent to $2.54 billion, with earnings down 71 percent to $271 million and adjusted operating income before depreciation and amortization, another profitability metric, down 12 percent to $1.13 billion. Free cash flow, a metric that management and Wall Street have been focusing on more in recent quarters and that covers cash left over after a company pays for its operating expenses and capital expenditures, rose 47 percent to $879 million.