Discovery U.S. Ad Revenue Growth Slows Amid Flagship Ratings Challenges

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Discovery president-CEO David Zaslav

The cable networks company, led by CEO David Zaslav, last year closed its $14.6 billion acquisition of Scripps Networks Interactive.

Discovery on Tuesday swung back to fourth-quarter earnings after posting a year-ago loss, but U.S. advertising revenue growth slowed amid ratings challenges at its flagship Discovery Channel.

Discovery president and CEO David Zaslav on the company's quarterly earnings call asserted, though, that these challenges "are improving."

Zaslav also used the call to aver that Discovery stands out in a content landscape that is "increasingly cluttered and crowded" and that, unlike other entertainment giants, such as Walt Disney and WarnerMedia, it owns its content. "Our strategy has been to own and control virtually all of our content rights in every window in every market around the world," he told analysts. "We have purposefully left meaningful revenue dollars on the table while playing the long game, as compared to many of our peers that have, for example, hived off digital distribution to any number of streaming services or sold off international rights. As a result, we will not have to buy back content and give up revenue."

GolfTV, the streaming service that Discovery has launched under a partnership with the PGA Tour, is "off to a great start," Zaslav also said Tuesday. While the service is still in beta and is "really just getting started," early engagement numbers are "impressive," he said. The exec added that Tiger Woods is having "a lot of fun" interacting with fans as the golf star and company have created a range of content pieces over three events.

Asked if Discovery would bid for Fox Sports in Brazil if the country's regulator decides that Walt Disney must sell it to get approval for its $71.3 billion deal for large parts of Fox, JB Perrette, president and CEO of Discovery Networks International, simply said, "We look at everything."

The company, which last year closed its $14.6 billion acquisition of Scripps Networks Interactive, posted quarterly earnings of $269 million, or 38 cents per share, or 74 cents per share on an adjusted basis, or 82 cents excluding restructuring and other charges, compared with a year-ago loss of $1.1 billion, or $1.99 a share, which had been driven by a goodwill impairment charge. 

The company said the improvement in the bottom line was "due to higher operating results, primarily due to the integration of Scripps Networks partially offset by higher restructuring and other charges, higher tax expenses and higher interest expense."

Adjusted operating income before depreciation and amortization, another profitability metric, rose 86 percent, or 5 percent when excluding the impact of transactions, to $1.2 billion. 

Fourth-quarter revenue rose 51 percent to $2.8 billion, but it fell 2 percent when excluding the impact of transactions, with a 1 percent gain in the U.S. more than offset by flat international results and "a significant decrease in education and other revenues due to the sale of the education business."

In the U.S., Discovery in its first fourth-quarter and full-year results since closing the Scripps deal reported an advertising revenue improvement of 3 percent, down from its third-quarter increase of 5 percent, citing the "continued monetization of digital content offerings and an increase in pricing, partially offset by the impact of audience declines on our linear networks," led by the Discovery Channel. 

"It was a very challenging quarter for the flagship, while TLC, Food and Travel all saw growth," said Sanford C. Bernstein analyst Todd Juenger in a preview of the earnings report.

Zaslav at an industry conference in December had said that the company's flagship Discovery Channel "has some ratings challenges, but is still the number 1 (non-sports) channel in America for men." He said that Discovery ratings have been "down" amid "some softness," which would push U.S. advertising revenue for the fourth quarter "a little" below previous expectations of 3 percent-5 percent growth, which analysts thought to mean 2 percent-3 percent.

Production issues with the auto-themed series Fast N' Loud that have delayed the return of the show into 2019 contributed to this, Zaslav said, but added that the company was looking better than expected in terms of affiliate fee revenue.

Meanwhile, U.S. distribution revenue grew 1 percent in the fourth quarter after no change in the third quarter. The slight uptick is "primarily reflecting increases in contractual affiliate rates, partially offset by a decline in overall subscribers," Discovery said. "On a pro forma combined basis, total portfolio subscribers for December 2018 were 4 percent lower than December 2017 and subscribers to our fully distributed networks were flat with the prior year, primarily due to additional carriage on streaming platforms toward the end of the year, which offset the overall trend of subscriber declines."

International networks revenue on a pro forma combined basis, excluding the impact of foreign-currency fluctuations, came in unchanged in the fourth quarter amid a 2 percent increase in distribution revenue, flat advertising and a 21 percent decrease in "other revenues due to the timing of certain content distribution and licensing revenues."

Management said it was bullish on the company's 2019 outlook.

"2018 was a transformational year for Discovery, highlighted by our operational accomplishments, our strong progress in synergy generation and our overall solid financial performance, as we continued powering people's passions around the world," Zaslav said Tuesday. "Discovery is a differentiated global content company, and we are optimistic that we will continue to build on all of our operating momentum to drive additional shareholder value into the future."

On the call, the exec also lauded the continuing benefits from the Scripps takeover, citing "meaningful" cost savings, the use of Scripps content to strengthen networks in foreign markets and the launch of new pay TV, free-to-air or digital launches of Scripps channels, especially Food Network and HGTV.