Discovery Net Rises, Sees Profit at OWN by 2013
07/31/2012| 01:02pm US/Eastern
--Discovery profit gains on higher revenue, lower taxes
--Sees OWN profitable by "back half" of 2013
--Confident going into programming contract negotiations this fall
(Updates share price and adds details throughout.)
By William Launder
Discovery Communications Inc.'s (DISCA, DISCB, DISCK) second-quarter earnings rose 15%, and the cable network operator said efforts to turn around the struggling Oprah Winfrey Network were moving faster than it previously expected.
Ratings laggard OWN has seen viewership increase by 25% since the start of the year, and all of its original advertisers are still working with the joint venture between Discovery and media personality Ms. Winfrey.
"We're significantly ahead of where we thought we would be last quarter," Discovery's Chief Executive David Zaslav told analysts during a conference call, adding that OWN should be profitable by the "back half" of 2013.
Discovery's joint venture with Oprah Winfrey has started slowly since launching in 2011, prompting a pull-back by some advertisers and leading Discovery to more than double its initial investment. Wall Street analysts also have taken a dim view on the joint venture, although it accounts for only a small part of Discovery's operation of 14 U.S. networks.
Elsewhere at Discovery, revenue from the U.S. networks segment jumped 6% to $700 million. Advertising revenue was up 7% on increased pricing, higher sellouts and better ratings at networks like Investigation Discovery, which saw a 41% jump in adult women viewers--one of its primary target audiences.
Currency fluctuations partially offset top line revenue at Discovery's international business, which comprises one of the most extensive networks of international channels in the media industry. Excluding foreign-currency fluctuations, international revenue would have increased by 19%, rather than 11%.
The home of Discovery Channel, TLC and Animal Planet also confirmed its full-year guidance for a net profit of up to $1.1 billion.
However, growth in operating profit for the third quarter will drop to a percentage in the low single digits because of currency fluctuations and the fact that last year's third quarter benefited from an initial $77 million in revenue from a licensing deal with Netflix Inc. (>> Netflix, Inc.), the company said.
Operating profit growth is expected to return to the double-digit percentage range in the fourth quarter, however, Discovery said.
For the period ended June 30, the company posted a profit of $293 million, or 76 cents a share, compared with a year-earlier profit of $254 million, or 62 cents a share. Analysts, on average, were expecting earnings of 70 cents a share, according to a poll conducted by Thomson Reuters.
Revenue rose 7% to $1.14 billion, slightly below the analyst estimate of $1.16 billion.
Discovery's Class A shares slid 0.7% to $50.58. The stock is up 28% in the past 12 months.
Mr. Zaslav voiced confidence about Discovery's negotiating power as several key programming contracts come up for renewal this fall. "We feel very good about where we are in terms of the hand that we have," he told analysts. "But we'll be pushing hard to make sure that we get fair value."
Tense negotiations and occasional standoffs over the costs that network owners charge TV distributors are commonplace in the industry, as highlighted by a recent feud between Viacom Inc. (VIA, VIAB) and DirecTV (>> DIRECTV).
Mr. Zaslav further praised digital distribution deals with Amazon.com Inc. (>> Amazon.com, Inc.) and Netflix as a lucrative revenue source accompanied by few overhead costs.
"That's one of the reasons why it's such a good time to be in the content business right now if you own your content," Mr. Zaslav said.
Discovery will likely extend its current contract with Netflix to a third year and is also open to signing more digital partnerships in markets like Western Europe, Mr. Zaslav he added.
--Chelsea Stevenson contributed to this story.
Write to William Launder at email@example.com
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