Discovery Reports Higher First-Quarter EarningsStock Slips As Profits Fall Short of Expectations 5/07/2013 9:44 AM Eastern
Discovery Communications reported higher first-quarter earnings as international growth offset a decline in digital distribution revenue.
First-quarter net income rose 4% to $231 million, or 63 cents a share, from $221 million, or 57 cents a share.
The profits were lower than forecast on Wall Street and Discovery stock dropped by more than $2 a share in morning trading. The stock recovered and was down about $1.50, or less than 2%, during afternoon trading.
Revenues rose 7% to $1.2 billion, in line with expectations.
"The significant operating momentum Discovery generated throughout 2012 continued unabated in the first quarter with more and more audiences around the globe viewing our unique programming," Discovery CEO David Zaslav said in a statement.
"As we continue to invest in the organic growth opportunities our diverse distribution platform provides, we have also completed several strategic acquisitions which we expect will further broaden our asset mix around the world and bolster our long-term growth prospects," Zaslav said. "2013 is off to a great start and with continued focus on strong operating execution, we anticipate building on the financial success we have achieved over the last several years while delivering significant shareholder value."
Operating income at Discovery's U.S. networks fell 5% to $377 million because of a $45 million drop in digital licensing revenue from last year's deal with Amazon and higher operating expenses. Excluding the impact of licensing agreements, adjusted operating income was up 6%.
Revenue at the U.S. networks was up 1%. Advertising revenue increased 8% to $356 million because of higher viewership and ad rates.
Speaking on the company's earnings conference call with analysts, Discovery CFO Andy Warren said the current ad market trends were encouraging, with double-digit scatter price increases above upfront levels. "We anticipate continued high single-digit ad growth in the second quarter of 2013."
Zaslav, on the conference call, said Discovery was hoping for a "robust" upfront.
"We recently completed our upfront presentations to advertisers and while it is too early to predict where we ultimately will end up, with strong scatter volumes, scatter pricing well above last year's upfront, sustained ratings momentum across our networks and what I think is unquestionably the best ad sales team in the business, we expect to see significant increases in this year's upfront," Zaslav said.
Distribution revenue was down 9% to $308 million because of the decline in SVOD payments. Excluding SVOD, distribution revenue was up 6% and total revenues were up 8%.
Warren said Discovery anticipates a "meaningful increase in either the second or third quarters due to the third year of the Netflix agreement."
Discovery also reported that equity losses from operations including OWN, the joint venture with Oprah Winfrey, were reduced to $2 million from $46 million last year. "We are very confident we will reach our previously stated goal of cash flow breakeven during the second half of this year, Zaslav said.
Operating income at Discovery's international networks was up 8% to $184 million. Distribution revenue rose 15% to $275 million and advertising revenue rose 23% to 152 million.
Discovery undated its guidance for the full year to reflect its acquisition of SBS closing later than expected, foreign currency rates and the effects of its stock price on equity-based compensation and said that it expects total revenue to finish between $5.575 billion and %5.7 billion. It expects net income to be between $1.2 billion and $1.3 billion.
"Given the delayed timing of the SBS close, it is now less likely that we will be towards the top end of these ranges, but given the momentum across our businesses, these ranges remain possible outcomes," Warren said.
Analyst Brian Wieser of Pivotal Research said they characterized the results as "positive, if slightly below our expectations." He said the number provide reasons "for optimism around overall progress in developing the cash-generating capacity and overall profitability of the business."
Todd Juenger of Sanford C. Bernstein said that Discovery's earnings report often feature unexpected noise. "To a smaller degree, it happened again this quarter, with revenues beating expectations by 1%, but EPS missing by $0.02 (or potentially missing by as much as $0.08, excluding gains and hedging losses, depending on how items are treated and taxed)."
While below-the-line items were a mess, Juenger said that "what really matters is core operating growth drivers, which are firmly intact." He said international pay-TV subs continue to be added at mid-teen rates, led by Latin America and that Discovery's domestic networks continue to gain share, with lots of catch-up CPM growth to come. Juenger rates the stock as "outperform."