The stronger dollar was not good news for Discovery on Tuesday (Nov. 6), as the company released its third-quarter earnings report and admitted that currency exchange problems had contributed to a revised forecast for 2012, down from between $4.55 billion and $4.65 billion to between $4.48 billion and $4.53 billion.
Domestically, Discovery has been investing heavily in programming and expects to see some return on that investment in 2013; CEO David Zaslav was particularly proud of Investigation Discovery (ID) and TLC, which airs the network's extremely popular Here Comes Honey Boo Boo.
"Margins have been small," Zaslav said of his star networks. "There's been margin compression over at ID because we've been investing in it. You'll really start to see it grow over the next two, three, four years."
Zaslav also praised Animal Planet, which has held strong ratings in the third quarter, and said the company was "very happy" with The Hub, dismissing an analyst's question about whether or not it would be a good idea to sell its stake in the joint venture back to Hasbro.
Zaslav also issued an unequivocal mea culpa with reference to the Oprah Winfrey Network, a high-profile joint venture with Harpo that is finally on its way to finding its feet after a shaky first year and several management changes. "We were much too teachy and preachy and earnest when we started," Zaslav said. The network's newer material, however, is making strides with audiences, especially with African-American women, and the new deal between OWN and Tyler Perry promises to bring in yet more revenue. Zaslav also promised a renewed focus on comedy. "We're having a lot of fun with Tyler and [Welcome to] Sweetie Pie's (the network's biggest non-Oprah show)," Zaslav said.
Given the earnings miss, CFO Andrew Warren made a point of assuring analysts and investors that the company was in solid financial shape. Discovery's international holdings are bearing the brunt of the currency fluctuations, but other parts of its portfolio are ready to bear fruit, notably the deal with Netflix, which allows Discovery to monetize library content. "The deal is lumpy, and there's a very big lump next year," Warren said. "From a cash-flow perspective, it's extraordinary. If you look at the third quarter, free cash flow was up 12 percent. It was very much driven by that. Netflix and Amazon both have an amazing cash profile."
And speaking of improving cash profiles, Warren also broke down Discovery's investment in OWN—the company invested $89 million in the network during the first half of the year, but Warren projects that the number will drop significantly, with $29 million in Q3 and less projected for Q4, bringing the network in for an annual outlay of less than $150 million. The network continues to be on track to break even, and ratings continue upward.
All told, Discovery Communications’ domestic networks unit took in $343 million in ad sales revenue, up 7 percent from $322 million in Q3 2011. This was a particularly strong outcome, given the competition the networks faced from NBC’s coverage of the 2012 London Summer Olympics, which, Zaslav said, had been challenging. The execs also admitted to a dip during October of about two weeks, during which volume dropped sharply.