Discovery Communications Plans Q3 Hibernation

Strong upfront precedes some pullback during Olympics

Don't expect a lot of new content on the Discovery Channel until after Shark Week, Discovery Communications CEO David Zaslav told investors and journalists on the company's second quarter earnings call Tuesday morning. "We're holding back a number of our premieres because we feel that the Olympics right now has a significant amount of cultural momentum," said Zaslav. "We've tried to be conservative here in our approach."

Zaslav admitted to some "choppiness at TLC and Discovery" (both saw viewership declines) and praised the company's international presence and its new favorite child, Investigation Discovery (ID), which helped to bring up the conglomerate's volume average in the upfront. Overall, domestic ad dollars were up 7 percent for the quarter for a total of $387 million.

"While we have made considerable progress in increasing pricing and volume on this network, we still have a significant way to go before we achieve parity with the success ID is having today," said Zazlav.

CFO Andrew Warren gave a rundown of the company's fortunes during the upfront: domestic ad revenues up 9 precent, volume at 55 percent, favorable pricing at ID, ad growth down at "certain networks" due to ratings softness, presumably Discovery and TLC. Zaslav credited ad sales head Joe Abruzzese for Discovery's ability to move some of its ad dollars into growing networks like ID, Military, Destination America and Velocity, where they'll be able to turn that money directly into programming investment.

And speaking of expensive programming investments, the outlook on the Oprah Winfrey Network was sunnier than usual. For the first time in a while, Zaslav didn't have to push his break-even date for the network back any farther. "OWN remains on track to reach profitability in the back half of next year," he said, echoing his prediction from last quarter's earnings call. The network's leadership team seems to have stabilized with Erik Logan and Sheri Salata running the show, and Oprah actually appearing on the network that bears her name. 

Warren cautioned listeners not to open the champagne quite yet. "As you look forward, though to third and fourth quarter, we do expect slightly higher losses in that line, because we'll be investing in more content," he said. "We're going to put a little more money into it, especially on the marketing side." Still, the "Other (expense) income" line on the Q2 report where OWN's sins are accounted for was a mere $6 million off—a major improvement over the $54 million debit last quarter.

Zaslav also touted the success of kids' network The Hub, which continues to grow reliably, although it's been several quarters since anyone has mentioned the company's third joint venture, 3Net, which seems to be lying fallow for now.

Discovery Comm's relationship with Netflix was also a point of discussion during the Q&A session with analysts. "TV Everywhere is something that we think is valuable; the distributors would like it but we haven't come to any agreements yet," said Zaslav. Distributors prefer TV Everywhere because it requires a cable account to access Netflix-like on-demand content; consumers prefer Netflix. "We've done some tests with Comcast and we like that model."

Earnings were up 15 percent to 76 cents per share, beating Wall Street analyst predictions of 60 cents per share. Revenues were up 7 percent.