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International Headwinds Hit Discovery Communications Q4 Earnings

Discovery Communications Q4 earnings were dented by headwinds on the international front, from higher costs at its Eurosport networks to programming write-downs to adverse currency exchange rates against a strong dollar.

Discovery posted a 3% year-over-year increase in revenue for the quarter to $1.67 billion and a 1% gain in adjusted operating income to $581 million.

Operating income at Discovery’s 13 U.S. channels was up 9% to $447 million but down 12% on the international side to $231 million. Distribution revenue in the U.S. was up 6% to $375 million but offset by a 3% decline in subscriber rates. Distribution revenue overseas was up 3% to $418 million, but would have been up 10% if not for currency issues.

Advertising was essentially flat at home and abroad. The U.S. networks logged a 1% gain for the quarter to $421 million. International was down 2% to $379 million.

Discovery took an undisclosed write-down on entertainment content on the books at its SBS channel serving parts of northern Europe.

Discovery CEO David Zaslav said during a conference call that some of the company’s lower-profile channels in the U.S. have lost subscribers as more MVPDs begin offering smaller channel packages, but its strongest networks — including the flagship Discovery, TLC, Animal Planet, Velocity and Investigation Discovery — have gained ground. He confirmed that the company is in talks with Hulu and Google’s YouTube to be part of their upcoming digital MVPD packages.

Zaslav emphasized that 85% of Discovery’s affiliate revenue comes from five core channels. “We’ve focused on making them stronger. We’ve been way ahead of the curve on that,” he told analysts, referring to Viacom’s move last week to focus its programming and marketing resources on the six biggest channels in its U.S. portfolio of 25 outlets.

Zaslav during the call talked up the improved ratings at TLC and OWN as highlights for the full-year 2016. Discovery’s scripted miniseries “Harley and the Davidsons” was a success at home and abroad, but the channel only plans to carry one big scripted event per year, Zaslav said when asked about content cost growth at its domestic channels.

The Discovery chief was also pressed during the call by analysts about cost projections for its international networks, particularly the sports rights for Eurosport’s linear and digital offerings. Zaslav defended the expenditure on Olympics rights, saying his experience at NBC taught him the brand-building value of carrying the event.

“We have those rings for the next decade,” he said.

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