Discovery CEO Zaslav Declares OWN Cash-Flow Positive

Earnings are down overall, but ad revenue is up

Discovery Communications missed the mark on its fourth-quarter earnings report today, off from analyst predictions by 8 cents (at an opening price of 82 cents a share), and missing predictions for revenue by $10 million. 

The main drag on the bottom line seemed to be its mammoth investment in SBS Nordic, signed at the end of last year but a continuing financial obligation, said CFO Andy Warren. The mortgage payment, essentially, is "about 40-plus million a quarter this year, and it tapers off a little next year and in subsequent years," Warren said.

But the advertising side of Discovery's business remains solid, with ad sales revenue improving 10 percent to $426 million. "The 30-percent-plus CPM differential that advertisers are paying for broadcast feels a little bit softer," said Discovery CEO David Zaslav, citing competitors FX, Turner and AMC as orgs that "did a good job" in driving prices up across the board for high-end cable networks.

"We did well in the upfront," Zaslav said in response to an analyst's question. "We saw mid-to-high single digits. We did get volume, we did get a lot of new advertisers, including 30 new advertisers on OWN." Zaslav said that the company had been able to leverage agreements with desirable partners, rather than merely pumping inventory into the market. "It's not just the volume, it's the quality of advertisers," he said.

Zaslav singled out Animal Planet for particular praise, noting that its ratings had improved, and said that the company was in a strong enough position with crime cabler ID that it could afford to turn down clients who tried to drive a hard bargain during the upfront. "We would give up—and we have in the last year—the option of getting more money if we can get a better price. We will take a higher price if it means 10 percent less volume."

The exec also declared victory for OWN: The Oprah Winfrey Network, which had a long and embarrassing period of makegoods and negative coverage after Warren's predecessor in the CFO role, Brad Singer, predicted a quick turnaround from debit to credit for the cable network, into which Discovery poured some $300 million-plus.

But the next time execs predicted a turnaround for OWN, it was for the second half of this year. Zaslav said this morning that, ahead of schedule, "I'm proud to report that when combined with the long-term affiliate fees that Discovery has negotiated, OWN is now cash-flow positive."

Unfortunately, because of its joint venture status, OWN's debts are still broken out into a separate line item on the earnings report and Warren had to field a question about whether Zaslav meant that the channel was netting money for Discovery or simply wasn't losing money any longer (he meant the latter). "There' a higher amount of amortization that impacts their net income line," Warren said. In the future, he promised, "you'll have positive equity pickup as well as paydown of that debt. There's very positive momentum and we're looking forward to second-half numbers." 

Zaslav was also unusually candid on the subject of Discovery's fees from Netflix, which, he said, come to some $75-80 million in 2014. Alongside revenue from Amazon and other over-the-top providers, the company generates a major chunk of change from repurposing its content on digital platforms.