Discovery CEO Raises Financial Guidance, Vows to Grow in U.S. But Stock Slumps

Discovery Communications CEO David Zaslav promised Tuesday that the cable group will deliver low double-digit free cash flow and earnings growth during the next three years, including gains at its U.S. channels.

But the improved earnings forecast didn’t stop the slide in Discovery shares, which closed down 5% to $26.40.  Discovery shares took a big dive in early August along with the rest of Big Media and have yet to fully recover.

Zaslav gave the three-year forecast at Discovery’s inaugural investor day presentation in Manhattan. Zaslav emphasized that despite some turbulence in the domestic MVPD and advertising markets, Discovery is well positioned for changing times after investing heavily in content across its 14 domestic channels.

“We will show growth here in the U.S.,” Zaslav said. “Our ad sales this quarter will be up in the mid-single digits.”

Zaslav specifically forecast that Discovery would deliver low double-digit free cash flow growth from 2015 through 2018 and low double-digital adjusted earnings per share, excluding currency fluctuations, during the same period. He described those numbers as “conservative for the environment,” given the disruption under way in the U.S. in particular.

In outlining the company’s prospects to investors, Zaslav focused on its strong international platform, which is by far the largest of the U.S. majors in reaching 2.1 billion households, and the fact that the company owns virtually all of its content. That makes it possible for Discovery to control costs and make the most of its programming investments around the world.

During the nine years that Zaslav has led the company, Discovery has dramatically diversified its revenue base. When he joined in 2006, the company was valued at about $5 billion and 70% of the company’s revenue came from the mothership Discovery Channel.

“We were like a boat with one sail,” Zaslav said. “Today Discovery Communications is a cash flow machine.” He said the company would generate some $1o billion in “available capital” in the next five years.

Sports programming and kids programming has been a priority for the company in the past few years as it looked to expand genres that were a natural fit for the company driven largely by factual programming. Growing its pan-European Eurosport broadcast channels has been a big focus since Discovery first acquired an interest in the company in 2012. And Eurosport is a testing ground for OTT offerings as it has launched a successful direct-to-consumer business with its Eurosport Player and DPlay entertainment service.

Eurosport acquired Olympic rights from 2018 through 2024 for an estimated $1.45 billion. But other mega-bucks sports rights deals are not in the cards for the channel. “We’ve walked away from very expensive sports content but we’re picking up everything else,” Zaslav said.

The presentation also included a demonstration of Discovery’s experiments in virtual reality programming. “Virtual reality is going to be a huge opportunity for us,” Zaslav said. “This is not a primitive technology. It’s quite compelling and our content works great” in the format, he said.

Following Zaslav’s opening, various Discovery division heads gave overviews of the programming strategies and growth potential. Rich Ross, who oversees Discovery Channel, Animal Planet and Science Channel, gave a big plug to the environmental documentary “Racing Extinction,” set for a global rollout in December.

Ross also told investors that a limited number of scripted programs will become a larger component of Discovery’s mix, with an emphasis on “strategic” deployment of assets. Zaslav later said he felt the scripted marketplace has become “quite crowded” and “pretty expensive.”

Henry Schleiff, group president of Investigation Discovery, American Heroes and Destination America, talked up the growth of Investigation Discovery with female viewers in the U.S. and around the world.

Discovery Networks International president JB Perrette gave a broad overview of the company’s growth potential  in various regions. Despite Discovery’s early entry into key international markets the company still has plenty of “head room” to grow subscriber bases and in advertising sales as its share of viewing skyrockets, he said.

Discovery CFO Andrew Warren emphasized the company’s diversification and “flexible” cost structure when it comes to programming. Since 2010, international revenue has increased from 34% to 49% of total revenue. U.S. advertising sales had accounted for 33% of revenue in 2010 but now are closer to 25%.

Warren said the company’s total U.S. costs are about $1.4 billion, 55% of which is spent on content while $200 million is devoted to marketing. Those numbers can go up and down as needed, although Zaslav stressed that the company would look to make cuts elsewhere if needed before trimming content spending.

Discovery should be well positioned as the U.S. MVPD business moves to “skinny bundles” because it has so many channels and niches to choose from. The company is expanding its TV Everywhere-style offerings at home and aboard. In Latin America Discovery is rolling out an authenticated Discovery Kids app to take advantage of the channel’s strength in the region.

At home, Zaslav made it clear that Discovery does not intend to license its content to third-party SVOD platforms as the other majors have in varying degrees for the past few years.

“What’s happened in the U.S. is not rational,” he said of the rise of SVOD upstarts who have built businesses and viewing share by buying “super a la carte” content that has little to no branding tied to the original supplier. “I think a lot of players are starting to recognize this,” he said.

During the closing Q&A session, Zaslav observed that cable networks nowadays need more than ever to be focused on connecting with viewers as a destination for a genre rather than on the strength of one or two hit shows. He cited Investigation Discovery’s growth spurt with a slew of murder and mystery-driven programs.

“If you’re going to try to make a cable channel work on hit shows — good luck,” he said. With ID, “people can’t tell you the name of the show but they know they love that network.”

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