Discovery Q3 revenue stays flat while Lionsgate deal eats into net income

Discovery Communications CEO David Zaslav speaks at Investor Day 2015
Discovery CEO David Zaslav. Image: Discovery

Discovery Communications today announced third-quarter revenues of $1.56 billion that stayed flat year-over-year as U.S. Networks and Education and Other growth was offset by currency effects denting the International Networks division.

The company’s available net income for the quarter fell 22 percent to $219 million (down from $279 million in the year-ago quarter), a precipitous drop that Discovery said was primarily due to a $50 million (or 8 cents per share) after-tax impairment charge related to the Lionsgate investment and higher equity-based compensation.

“While we faced challenging but expected headwinds this quarter, Discovery is well positioned for long-term growth driven by our well-defined global brands, differentiated content and favorable distribution agreements,” said Discovery Communications President and CEO David Zaslav in a statement. “We have continued to strengthen and maximize our traditional pay-TV offering with robust new programming while aggressively exploiting new opportunities to leverage our content across numerous digital platforms around the world. Amid an ever shifting global media ecosystem, Discovery is evolving to reach more consumers on more screens and platforms than ever before."

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Discovery’s OIBDA dropped 2 percent to $562 million, again dinged by currency effects that prompted a 16 percent decline at International Networks. Meanwhile, free cash flow jumped a whopping 75 percent to $410 million while capital expenditures increased 8 percent to $26 million.

Discovery’s U.S. Networks division delivered a mixed bag, as distribution growth of 7 percent helped drive total revenue for the segment to $793 million, but advertising revenue for the segment fell 3 percent to $396 million.

“Advertising revenues decreased 3 percent primarily due to expected ratings declines, partially offset by higher pricing and inventory management,” Discovery said in a statement.

Jefferies analyst John Janedis said U.S. Networks ad revenue was mostly in-line with Street expectations and reiterated that Jefferies is anticipating 1 percent growth for Discovery’s fourth quarter. Despite generally in-line revenue and better cost controls in the U.S., which won’t likely affect guidance, Janedis warned that Discovery’s stock could soften.

"While the stock will take direction from the outlook on the call, all things equal, we expect modest weakness in the stock,” said Janedis in a research note.

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