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Domestic Advertising and Distribution Gains Drive Discovery Q1 Earnings

Discovery Inc. delivered advertising and affiliate revenue growth in the U.S. in the first quarter even as international revenue fell against tough year-over-year comparisons.

Discovery on Thursday reported total revenue of $2.7 billion, in line with Wall Street’s expectations and up 17% from the year-ago quarter. However, adjusted for the impact of Discovery’s Scripps Networks Interactive acquisition last year, Discovery revenue was down 5% for the quarter. Net income reached $384 million, compared to a loss of $8 million in the year-ago quarter.

Adjusted operating income was up 21% on a pro forma basis to $1.2 billion.

Discovery’s solid showing on the domestic front was offset by declines in its international division, which faced tough year-over-year comparisons after Discovery’s Eurosport unit carried the winter Olympics in Q1 2018.

U.S. networks saw advertising and distribution gains of 4% on a pro forma basis, with ad revenue reaching $1 billion and distribution hitting $697 million for the quarter. In a sign of strength in the broader U.S. ad market, Discovery’s revenues grew beyond expectations even as viewership at its flagship channels was generally soft.

On the international side, revenue fell 15% to $953 million while adjusted operating income was up 46% to $219 million due to the absence of Olympics rights costs.

“In the first quarter we delivered a solid start to 2019, as we continue to power people’s passions through our loved brands and our owned global IP in genres that nourish audiences around the world,” said David Zaslav, president-CEO of Discovery Inc. “We are a differentiated media company and have the right strategy, assets, brands, and management team necessary to drive additional shareholder value.”

Discovery is starting to reap the rewards of having the Scripps channels in the family for nearly a full year. Operating expenses at its domestic channels climbed to $691 million, from $522 million in the year-ago quarter. But on a pro forma basis, operating expenses were down 12%, which Discovery attributed to “content synergies” from the Scripps deal and lower restructuring costs compared to the year-ago quarter.

Discovery’s U.S. channels are still feeling the effects of cord-cutting. Although Discovery outlets were added to Hulu’s digital MVPD channel bundle last fall, total subscribers for Discovery were down 4% in March compared to March 2018, Discovery said. Last month, Discovery cut a deal with YouTube to add eight channels to the YouTube TV platform, which has about 1.5 million subscribers at present.

Zaslav told analysts that he sees benefits for Discovery in being on the emerging skinny bundles because it is a more selective channel list on services that typically draw a younger consumer than traditional MVPD providers.

“The skinny bundles in many cases may be much better for us,” Zaslav said. “People will spend more time with our channels.” The younger audience will have benefits on the advertising side, he added.

Zaslav acknowledged that the domestic pay-TV industry that has powered Discovery for 30 years is “in long-term secular decline” but there is still growth potential for Discovery as it runs the digital MVPD table with channels placed on all of the major streaming bundle packages: Sony’s PlayStation View, Dish’s Sling, YouTube TV, Hulu and DirecTV Now.

Zaslav also emphasized the potential of its growing suite of SVOD offerings overseas with services devoted to golf, cycling, automotibles and now natural history and factual programming through the partnership Discovery struck last month with the BBC. Discovery will marry the BBC’s highly rated “Planet Earth,” “Blue Planet” and other franchises with Discovery’s vast archive of docu programs devoted to science, space and natural history. He predicted it would be an educational draw for families with young children.

Zaslav and Discovery CFO Gunnar Wiedenfels reinforced Discovery’s positive outlook by affirming second quarter guidance of domestic advertising growth up in the 3%-5% range. Affiliate growth is projected to be up compared to the 4% gain in Q1, thanks to the new digital MVPD deals. International advertising is expected to grow in the mid single-digit range. International affiliate revenue growth is expected to be in the low single-digit range, Wiedenfels said.

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