--Discovery profit gains on higher revenue, lower taxes
--Sees OWN profitable by "back half" of 2013
--Confident going into programming contract negotiations this
fall
(Updates share price and adds details throughout.)
By William Launder
Discovery Communications Inc.'s (DISCA, DISCB, DISCK)
second-quarter earnings rose 15%, and the cable network operator
said efforts to turn around the struggling Oprah Winfrey Network
were moving faster than it previously expected.
Ratings laggard OWN has seen viewership increase by 25% since
the start of the year, and all of its original advertisers are
still working with the joint venture between Discovery and media
personality Ms. Winfrey.
"We're significantly ahead of where we thought we would be last
quarter," Discovery's Chief Executive David Zaslav told analysts
during a conference call, adding that OWN should be profitable by
the "back half" of 2013.
Discovery's joint venture with Oprah Winfrey has started slowly
since launching in 2011, prompting a pull-back by some advertisers
and leading Discovery to more than double its initial investment.
Wall Street analysts also have taken a dim view on the joint
venture, although it accounts for only a small part of Discovery's
operation of 14 U.S. networks.
Elsewhere at Discovery, revenue from the U.S. networks segment
jumped 6% to $700 million. Advertising revenue was up 7% on
increased pricing, higher sellouts and better ratings at networks
like Investigation Discovery, which saw a 41% jump in adult women
viewers--one of its primary target audiences.
Currency fluctuations partially offset top line revenue at
Discovery's international business, which comprises one of the most
extensive networks of international channels in the media industry.
Excluding foreign-currency fluctuations, international revenue
would have increased by 19%, rather than 11%.
The home of Discovery Channel, TLC and Animal Planet also
confirmed its full-year guidance for a net profit of up to $1.1
billion.
However, growth in operating profit for the third quarter will
drop to a percentage in the low single digits because of currency
fluctuations and the fact that last year's third quarter benefited
from an initial $77 million in revenue from a licensing deal with
Netflix Inc. (NFLX), the company said.
Operating profit growth is expected to return to the
double-digit percentage range in the fourth quarter, however,
Discovery said.
For the period ended June 30, the company posted a profit of
$293 million, or 76 cents a share, compared with a year-earlier
profit of $254 million, or 62 cents a share. Analysts, on average,
were expecting earnings of 70 cents a share, according to a poll
conducted by Thomson Reuters.
Revenue rose 7% to $1.14 billion, slightly below the analyst
estimate of $1.16 billion.
Discovery's Class A shares slid 0.7% to $50.58. The stock is up
28% in the past 12 months.
Mr. Zaslav voiced confidence about Discovery's negotiating power
as several key programming contracts come up for renewal this fall.
"We feel very good about where we are in terms of the hand that we
have," he told analysts. "But we'll be pushing hard to make sure
that we get fair value."
Tense negotiations and occasional standoffs over the costs that
network owners charge TV distributors are commonplace in the
industry, as highlighted by a recent feud between Viacom Inc. (VIA,
VIAB) and DirecTV (DTV).
Mr. Zaslav further praised digital distribution deals with
Amazon.com Inc. (AMZN) and Netflix as a lucrative revenue source
accompanied by few overhead costs.
"That's one of the reasons why it's such a good time to be in
the content business right now if you own your content," Mr. Zaslav
said.
Discovery will likely extend its current contract with Netflix
to a third year and is also open to signing more digital
partnerships in markets like Western Europe, Mr. Zaslav he
added.
--Chelsea Stevenson contributed to this story.
Write to William Launder at william.launder@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires