Discovery U.S. Ad Revenue Rises Despite Ratings, Subscriber Drops

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Discovery president and CEO David Zaslav

The Discovery boss told analysts the disruptive streaming wars had produced a resurgence in TV advertising.

Discovery CEO David Zaslav on Tuesday said eyeballs and advertisers that in recent years were drawn to streaming services and smartphones are returning to traditional TV.

"For the moment, TV is back, and I think we're the lead horse," Zaslav told analysts during a morning earnings call after his company posted better-than-expected second-quarter earnings and higher U.S. advertising revenue despite drops in ratings and pay TV subscribers amid cord-cutting.

The Discovery boss hit back against streaming competitors by insisting they were mostly playing in an increasingly crowded and competitive scripted drama space, while Discovery dominates the rest of the global TV business with a bet on lifestyle, sports and other unscripted fare producing bigger international audiences.

"There's only one company playing at our level in the other half of the content pie," he said of Discovery. So as many market watchers point to the demise of traditional TV, Zaslav offered a contrarian view.

"The television industry is far from dead, here or abroad. Contrary to what many believe, we're getting real meaningful growth from the core TV business around the world, and it feels sustainable," he told analysts. On the lifestyle front, Zaslav announced the Chip and Joanna Gaines joint programming venture with Discovery will be called Magnolia, and a launch date has been set for 2020.

Despite Disney, WarnerMedia and Apple driving toward the streaming space now dominated by Netflix and Amazon, Zaslav argued linear TV remains strong, as evidenced by his company's advertising revenue growing during the latest quarter. "The ability to sell product, advertisers are finding television is the most effective platform to do that. So there's a move back. There's a feeling of safety — what are you next to? In digital there's a fear of that. The overall narrative for these companies has changed," he said.

Zaslav was also asked about possible mergers and acquisitions for Discovery down the road, and he answered dealmaking isn't a strategy in and of itself as he was looking more to smaller, tuck-in deals to accelerate growth. "We're always looking opportunistically, but we don't see anything significant at this point," he told analysts.

Discovery on Tuesday posted an earnings report that came more than a year after it closed its $14.6 billion acquisition of Scripps Networks Interactive, meaning the financials provided the first like-for-like comparisons with the year-ago quarter since the deal.

Discovery posted quarterly earnings of $947 million, or $1.33 per share, or adjusted earnings per share of 98 cents. The latter figure excludes a one-time, non-cash tax benefit from a restructuring across several international markets that amounted to $455 million. The result compared with a year-ago loss of $216 million, or 30 cents per share.

Second-quarter revenue rose 1 percent to $2.89 billion and was driven by a 5 percent increase in the U.S., including a gain of 6 percent in U.S. advertising revenue. Discovery said the ad gain was "primarily driven by increases in pricing and, to a lesser extent, inventory, as well as the continued monetization of digital content offerings, partially offset by lower overall ratings and the impact of audience declines in the aggregate on our linear networks." Distribution revenue in the U.S. rose 5 percent.

“Domestically we believe there is upside to our 4.0 percent advertising growth outlook, which is an acceleration from the 3.1 percent result in the first quarter,” MKM Partners analyst Eric Handler had written in his earnings preview. “Advertising gains should be able to offset likely weakness in distribution resulting from increased cord-cutting, although our 5 percent view remains intact (and hopefully gets supports from virtual [distribution] deals).”

International revenue fell 3 percent to $1.02 billion due to the impact of foreign currency fluctuations. Excluding that, revenue increased 3 percent as advertising rose 5 percent and distribution revenue climbed 3 percent, partially offset by an $8 million decrease in other revenue. "The increase in advertising revenues was primarily driven by higher pricing in certain markets in Europe and to a lesser extent, the consolidation of the UKTV Lifestyle Business [in a deal with the BBC] and expanded digital content offerings," the company said.

Discovery on Monday said that its U.S. network portfolio now makes it the No. 1 media company for female viewers. "Across all TV viewing in the U.S., including broadcast, the Discovery networks are the most watched for women 25-54 in live-plus-7, total day, growing the group’s share to 16 percent," it said. "Discovery has four of the top five networks for women in total day with number one Investigation Discovery (ID), number two HGTV and tied for number four Food Network and TLC."

Examples include Discovery’s strategic alliance with the PGA Tour to create a global home for golf fans, which includes video streaming service GolfTV, and Discovery acquiring a controlling stake in Play Sports Group to create a cycling media powerhouse. 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.

Aug. 6, 7 a.m.: Updated with comments by Discovery Communications execs made during an earnings call.