Discovery U.S. Ad Revenue Rises as Prices, Digital Outweigh Audience Drop

David Zaslav 2 - 2017 Ignition Future of Media - Getty - H 2018
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The cable networks company, which is led by CEO David Zaslav and last year closed its $14.6 billion acquisition of Scripps Networks Interactive, swung to a profit.

Discovery Inc. on Thursday reported a swing to first-quarter earnings that exceeded Wall Street expectations and recorded higher U.S. advertising revenue.

The company, which last year closed its $14.6 billion acquisition of Scripps Networks Interactive, posted quarterly earnings of $384 million, or 53 cents per share, or adjusted earnings per share of 87 cents. That compared with a year-ago loss of $8 million, or 1 cent per share.

First-quarter revenue of $2.7 billion was up 17 percent thanks to the addition of Scripps, which wasn't part of the year-ago period until early March. But revenue fell 5 percent when adjusting for the Scripps deal and excluding the impact of foreign currency fluctuations as a 3 percent increase at U.S. networks was more than offset by a 15 percent drop at the international networks primarily due to revenue from the Winter Olympics in the first quarter of 2018 and "a significant decrease in other due to the sale of the education business," the company said.

Discovery management, led by president and CEO David Zaslav, on a morning analyst call outlined a revenue growth strategy that increasingly steers the traditional broadcaster into digital and direct-to-consumer TV markets globally, amid increasing industry disruption.

Zaslav described creating a "funnel environment" where passionate fans of genre content can be taken from a free, ad-supported platform to becoming paid subscribers of premium streaming content.

Examples include Discovery’s strategic alliance with the PGA Tour to create a global home for golf fans, which includes the video streaming service GolfTV, and Discovery acquiring a controlling stake in Play Sports Group to create a cycling media ecosystem. "We have these affinity groups playing with us, and get to say, this is what we have behind the wall," Zaslav explained.

More recently, Discovery and BBC Studios, the commercial arm of U.K. public broadcaster BBC, signed long-term licensing agreements and a content partnership that covers BBC natural history and other factual programming to help drive a global subscription VOD service Discovery intends to launch by 2020.

"We think natural history can be massive. Every family in the world should want to have this. It will be less than $5. And it's about learning and being smarter and loving the planet," Zaslav said. J.B. Perrette, president and CEO of Discovery Networks International, told analysts his company was moving from exploiting the legacy Discovery channels worldwide to rolling out Scripps content and new streaming platforms in global markets.

That calls for going beyond taking U.S.-based product to the world to exploiting new global properties like tentpole BBC series and the U.K.-originating Global Cycling Network (GCN), as each is distributed worldwide using the Discovery infrastructure. "We're just beginning to tap into what we think will be a big and robust global scaling of those products, as we take then around the world," Perrette told analysts.

During the latest financial quarter, Discovery saw U.S. advertising revenue rise 4 percent, "primarily driven by an increase in pricing and continued monetization of digital content offerings, partially offset by the impact of audience declines on our linear networks, in part driven by universe declines." The "universe declines" were a reference to cord cutting-driven pay TV subscriber drops, with ratings being the other main factor affecting audience figures. Barrington Research analyst Jim Goss had forecast a U.S. advertising revenue improvement of only 3 percent. 

Discovery's U.S. distribution revenue was also up 4 percent in the quarter, "primarily reflecting increases in contractual affiliate rates and additional carriage on streaming platforms toward the end of 2018, partially offset by a decline in overall subscribers as well as additional revenues from content deliveries under SVOD arrangements in the first quarter of 2018." Discovery said its total pay TV subscribers for March were 4 percent lower than in March 2018, while subscribers to its fully distributed networks were 1 percent lower.

The company also unveiled a $1 billion stock buyback program in a sign that it has boosted its financial flexibility after the Scripps acquisition.

May 2 7:30 a.m. Updated with comments by top Discovery execs made during an analyst call.