Discovery Defies Tough Ad Market in Q1

Discovery Communications on Monday announced a substantial gain in first-quarter profit, exceeding expectations with $119 million in net income, an increase of 250 percent versus the year-ago period.
The programmer posted a 1 percent gain in revenue for the period ended March 31, taking in $817 million, beating analysts’ projections of $799 million. At Discovery’s U.S. networks division, which houses the fully distributed cable nets Discovery Channel, TLC and Animal Planet, revenue rose 5 percent on increases in ad sales and affiliate dollars.
Despite a tottering advertising market, Discovery was able to boost its domestic ad sales revenue 2.1 percent in the quarter, to $244 million. Through May 4, of the five major network groups that have reported Q1 earnings, only Discovery and NBC Universal have posted year-over-year ad-sales gains. (The Turner nets were flat in the period, while Viacom posted a 9 percent drop in domestic ad revenue and Comcast’s programming division fell 8 percent.)

Discovery’s affiliate fees, which account for half of the networks’ overall revenue, grew 10.7 percent, to $248 million.
While Discovery’s ad sales growth puts it ahead of many of its cable peers, that momentum is expected to slow down in the second quarter of 2009. The company anticipates domestic ad sales revenue will be “flat or slightly below the prior-year period,” although Discovery indicated that visibility was extremely limited.
During Monday morning’s conference call with investors, Discovery president and CEO David Zaslav provided a synopsis of the current state of the ad market, noting that third-quarter cancellations were coming in “at about the same level as Q2, which was about 13 to 14 percent, although we picked some back up in scatter.”
Zaslav added that he remained cautiously optimistic about the upfront, although he wasn’t willing to break out the crystal ball.
“It is difficult to predict where the ad market will ultimately end up at this point but our programming, brand portfolio and strong platform gives us a great story to tell,” Zaslav said. “When combined with what I truly feel is the best ad sales team in the business, we have a real opportunity to grow market share in the upfront and through scatter.”
Moreover, the constant stream of affiliate revenue should bolster Discovery in a foundering ad market, Zaslav said, adding that the money that comes in from cable, telco and satellite operators provides “a foundation of resiliency.”  
While the overall profit gain was significant, a good portion of the increase was driven by a $40 million decline in Discovery’s income tax bill and a $24 million increase in other non-operating income.
Last week, Discovery announced it would pair up with toymaker Hasbro to create a standalone kids’ network. Upon launch, the new network will be the fourth Discovery property to get a makeover since Zaslav took the reins in January 2007. Investigation Discovery was launched in January 2008, assuming the Discovery Times slot on the cable dial, while Planet Green arose from the Discovery Home network on June 4 of last year. Early 2010 will see the rise of OWN: The Oprah Winfrey Network, a mega-brand lifestyle net that is set to replace Discovery Health in 73 million households.

Wall Street observers were encouraged by Discovery’s strong earnings performance, as Barclays Capital analyst Anthony DiClemente reiterated his “overweight” rating on the stock. “It will be difficult for investors to poke holes in Discovery’s 1Q09 results,” DiClemente wrote in a note to investors. “Given the strength of its underlying cable business model, Discovery is very well-positioned…and remains our top pick in entertainment.”

In early-afternoon trading, shares of Discovery were up $1.61, or 8.65 percent, to $20.22.