UPDATE: Discovery Communications Profit Rises On Higher Ad Sales

Discovery Communications Inc. (DISCA, DISCB, DISCK), part-owner of the new Oprah Winfrey Network, said its fourth-quarter earnings jumped 34% on higher ad sales and pricing, especially in the U.S., but its performance was hampered by weak ratings at its flagship network.

Discovery Chief Executive David Zaslav said on a conference call with analysts that ratings at the Discovery channel were soft in October before improving a bit in November and then accelerating in December as new shows like "Gold Rush: Alaska" enjoyed early success.

"It's early, but we're much more stable now with Discovery," Zaslav said on a conference call with analysts following the release on Friday morning, adding that Discovery channel's ratings were up 11% in January.

The company's revenue and earnings for the quarter fell shy of expectations, but it issued a forecast for 2011 that was in line with analysts' estimates. Discovery Communications' Series A shares recently slid 6 cents Friday to $43.19; the stock has had a good run, rising about 11% this month and 54% over the past 12 months.

Discovery, which is part-owned by Liberty Media Corp. Chairman John Malone, has been aggressive in revamping its portfolio of cable networks to attract larger audiences in hopes of driving advertising growth and winning a stronger hand to negotiate affiliate deals with distributors, where competition is growing.

The company recently launched the Oprah Winfrey Network in a joint-venture with the TV star, which is testing Winfrey's ability to transfer her success with her syndicated talk show to a cable channel. The channel started Jan. 1 and wasn't a factor in the fourth-quarter's revenue.

Discovery Chief Financial Officer Brad Singer said the company invested $46 million in OWN in the fourth quarter and expects to spend another $50 million beyond its original $189 million commitment to the network.

Zaslav said he's "confident that we can generate sustained momentum in ratings [with OWN] and reach breakeven in 2011," adding that he expects the network could become a "very big business" over time.

Discovery also has rejiggered its lineups on its mainstay channels, like Animal Planet, which will premiere a show in March about pigeon racing that stars the former boxing champion Mike Tyson.

Cable networks have benefited from their longstanding business model, which has dual revenue streams from both advertising and subscription fees from distributors. The distribution business, however, faces rising uncertainty, as broadcasters with larger audiences negotiate for a share of the subscription market and online video alternatives threaten to steal subscribers from the traditional pay-TV business.

Cable and satellite operators, along with network owners, have rallied around a concept known as "TV Everywhere," or authentication, in an effort to head off such threats. The plan calls for putting cable programming online behind pay walls that can only be accessed by pay-TV subscribers for no extra charge, but the effort has been slowed by concerns about piracy and consumer interest, as well as financial squabbles between content owners and distributors.

Discovery has been slow to participate in various tests of the model, but Zaslav said he likes the concept. He acknowledged that consumers seem interested in watching programming online on digital devices, but he said Discovery's affiliate deals only provide distributors with the right to deliver its content to consumers on a TV screen.

"If our distributors want to do that, they'll have to talk to us, and we'll figure out a value that works," he said.

Discovery's sales in the U.S. rose 9%, driven by a 13% increase in ad revenue and a 7% boost to distribution revenue. The increases reflected increases in volume as well as higher ad prices and distribution fees. The company's international networks posted a 4% sales increase on 5% higher ad sales and 7% higher distribution revenue.

Discovery reported a fourth-quarter profit of $202 million, or 47 cents a share, up from $151 million, or 35 cents a share, a year earlier. Both periods included a penny per-share loss from discontinued operations. Revenue increased 6.8% to $1.02 billion.

Analysts polled by Thomson Reuters had expected earnings of 51 cents a share on revenue of $1.03 billion.

Discovery forecast 2011 revenue of $4 billion to $4.1 billion, which straddles the average analyst estimate of $4.05 billion and represents an increase from $3.77 billion reported in 2010.

-By Nat Worden, Dow Jones Newswires; 212-416-2472; nat.worden@dowjones.com

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