Discovery Earnings Down on OWN Losses

Share price down year-over-year from 74 cents to 57 cents

First-quarter revenues at Discovery reached $152 million, up 16 percent year-over-year against the first quarter of 2011. Profits, however, fell 28 percent against the previous year, due in part to OWN, its still-struggling joint venture with Oprah Winfrey.

Discovery said in its earnings press release on Tuesday that "accumulated operating losses at OWN exceeded the equity contributed to OWN," and thus the OWN losses are now recorded as "other expense, net" in the company's financial breakout—$50 million, all told. The share price of 57 cents was below the Wall Street prediction of 60 cents.

Despite the depleted equity, CEO David Zaslav continued to express confidence in the struggling cable network. "I want to talk about what the real story is at OWN," Zaslav said. The exec touted the network's growth, saying that originally "it had virtually no sub fees," and that most of the MSOs distributing the channel would be paying for the privilege as of Jan. 1, 2013. Zaslav was also quick to associate the decisions at the cabler with his own judgment, as well: "We have blue-chip advertisers in place supportive of what Oprah and I and Erik and Sheri are doing," he said. "Despite what you read, we're making real progress."

However, he said: "We've got a long way to go. I feel better about where we are than I ever have. Oprah's having a lot of fun. She's working very hard. We're convinced that by the end of 2013, this business will be cash-flow positive." He also said that he expected the network's losses to decrease in 2012.

The company's other major joint venture, The Hub (3D network 3Net is in something of a holding pattern these days), saw a 33 percent uptick in viewership this quarter, and the rest of the Discovery portfolio is generally doing well. 

Analysts pressed executives on the question of whether Netflix viewership would cannibalize linear television ratings; Zaslav said that Discovery has seen no evidence of that trend and in any case, the agreements with Netflix and Amazon are short enough that the company won't be locked in for too long, should it see a ratings decline associated with streaming content online. "We did keep them fairly short so we have some flexibility," Zaslav said. "Netflix deal was two years with a one-year option in case we want to go for a third."

Though ad revenue was up some 16 percent this quarter, Discovery predicted a softer Q2 (in keeping with general market trends) and, like most of its cable media peers, heavily pushed its ability to drive a hard bargain when carriage agreement negotiations begin near the end of the year (barring OWN, which is mostly settled, according to Zaslav). Other factors in the earnings decline included marketing costs for the network's well-received Frozen Planet miniseries.

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