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Discovery Ad Revenue Up, Continues to Digest Giant SBS Nordic Acquisition

International biz the focus of Q3 earnings

Discovery Communications CEO David Zaslav had a lot of questions to field about international business this morning, not least because of the company's massive purchase (which it's still digesting) of SBS Nordic, part of a broader deal for international assets at the beginning of the year that came with a price tag of nearly $2 billion.

The conglomerate missed earnings predictions by only a penny, coming in at $.71 per share; the company also reduced guidance for 2013, citing expenses from the SBS acquisition. One odd note: among the one-time charges enumerated by CFO Andy Warren, which included a charge related to the company's recent break with the BBC (the U.K. network group has produced a series of HD nature footage miniseries with Discovery), was "the recent management change at TLC."

While Warren didn't elaborate further on the latter point, the TLC write-off clearly referred to the network's recent changing of the guard. In September, Nancy Daniels replaced Amy Winter as general manager of TLC.

Zaslav cited "mid to high single-digit gains" made during the 2013-14 upfront, adding that Discovery's Q3 ad sales revenue grew 12 percent to $383 million versus the year-ago period. Given the relative strength of the current scatter market, Zaslav said his team "anticipate[s] high single-digit advertising growth in the fourth quarter."

Third quarter cancelation options were minimal, Zaslav said.

With respect to Discovery's international businesses, SBS is certainly a major part of Discovery's growth strategy for the future. The group has established in-house ad sales functions in Russia, Colombia and Argentina and increased programming spend internationally by 80 percent, according to Zaslav. "Underlying operating expense growth will meaningfully abate in the fourth quarter," Warren promised. For the quarter, operating income at international networks for Discovery came to some $167 million, and Zaslav professed enthusiasm for growing markets like Brazil and the company's free-to-air business abroad. "We make more money than anyone else in Western Europe," Zaslav claimed.

Domestically, Warren made a point of emphasizing OWN's newfound profitability, noting the $20 million net contribution to the company portfolio logged by the channel (the debit still extends into the hundreds of millions, but carriage agreements are up for renegotiation soon).

With respect to thin programming in the past few months on TLC and Discovery, Zaslav said that "we felt we should hold some of our powder and let the broadcasters go first; we're feathering in with Gold Rush and Moonshiners. You'll see a real stabilization over the next few months on TLC and Discovery," he told analysts. "For the other networks, we didn't think the broadcast piece was going to have much of an effect on ID or OWN or Animal Planet, and it didn't."

The exec is also limbering up for what promises to be an interesting few rounds with Discovery's cable affiliates: all of Discovery's agreements come up at once, and Zaslav is telling everyone he wants a lot more. "Fair value for us is going to be more, because our channels are working, we've invested a lot of money, and we've put a lot into it," he said.

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