Discovery Communications Inc. Tunes In to Higher Profits

By Markets Fool.com

Investors have been bracing for bad news from TV networks that are catering to an ever-shrinking pool of U.S. cable subscribers. Pessimism around what that trend will mean for Discovery (NASDAQ: DISCK), which relies on large audiences to attract advertising clients, contributed to the stock's 25% slump over the past 12 months.

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This week the pay-TV specialist announced earnings results that provided clues about how management can navigate that risky environment while keeping sales and profit growth intact.

Here's a look at how the Q2 numbers compared to the prior-year period:

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Revenue

$1.71 billion

$1.65 billion

3%

Net income

$408 million

$286 million

43%

Earnings per share

$0.66

$0.44

50%

Source: Discovery's financial filings.

What happened this quarter?

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Overall sales rose by 3%, marking Discovery's second straight quarter of accelerating growth. By comparison, revenue rose 2% in Q1 and fell by 2% in the final quarter of 2015.

Image source: Getty Images.

Here are the main highlights of the quarter:

  • U.S. network revenue jumped 7% thanks to a healthy mix of improved distribution fees and higher advertising sales. Fees, which Discovery charges to pay-TV operators for the right to carry networks like TLC and Animal Planet, spiked by 8% while ad revenue ticked up by a solid 5%. In both cases, however, the company made up for declining volume by raising prices.
  • Profitability ticked up in the U.S. market, rising to 62% from 61% a year ago. The gain puts the network on pace to boost its domestic margin significantly over fiscal 2015's rate of 57% of sales.
  • The international business moved in the other direction, posting sales and profit declines as segment margin dropped to 32% of sales from 33% last year. After accounting for currency swings, though, the top and bottom lines rose.
  • Stock repurchase spending was $377 million, on par with recent quarters.

What management had to say

CEO David Zaslav sought to put the results in long-term perspective for shareholders. The company "posted a solid quarter of growth and financial results by investing in premium and diversified content," he said in a press release. "Our differentiated portfolio of nonfiction, sports and children's content in more than 220 markets positions Discovery for continued growth and shareholder value creation in the months and years to come."

That portfolio of content, Zaslav continued, is widening its reach to "superfans on pay-TV, free-to-air, direct-to-consumer and digital platforms."

Looking forward

Executives have predicted that -- despite all the concerns over cord-cutting -- the U.S. market will remain a healthy growth engine for years to come. This quarter's results back up that claim as revenue, profit, and operating margin all rose even as overall subscriber numbers fell.

Meanwhile, Discovery is making aggressive moves to lay the groundwork for its next phase of growth by ramping up investments in popular content, especially sports. Zaslav and his team are also spending heavily on international expansion so that the media giant has a strong foothold in markets that are less mature than the U.S. Finally, as the chief executive pointed out above, Discovery is following viewers to the internet with direct-to-consumer offerings and digital distribution platforms.

The company's long-term earnings power will be shaped by how well management can execute on these growth initiatives relative to traditional competitors like Time Warnerand Scripps Networks and rising rivals like Netflix. For now, at least, a profitable (but slowly shrinking) U.S. market is keeping Discovery's results churning higher while the company works to position itself to compete in a TV industry that's moving away from broadcast channels and toward streaming apps.

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Demitrios Kalogeropoulos owns shares of Netflix. The Motley Fool owns shares of and recommends Discovery Communications, Netflix, and Time Warner. The Motley Fool recommends Scripps Networks Interactive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.