Discovery Communications' Third-Quarter Sales Rise 6%

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It's a brutal time for the pay-TV industry, but Discovery (NASDAQ: DISCK) is trying to make the best out of a bad situation. In third-quarter earnings reported this week, the network announced rising advertising sales in both its U.S. and international segments as management prepared for an expensive merger with Scripps Networks Interactive (NASDAQ: SNI) that they hope will lay the foundation for faster growth ahead.

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

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What happened this quarter?

Discovery overcame a painful drop in the pool of cable subscribers to post faster advertising revenue growth in the core U.S. market. Meanwhile, its international segment, responsible for over half of the sales base, benefited from healthy gains in both advertising and affiliate fees.

Here are highlights of the quarter:

  • U.S. network revenue growth sped up to 4% from 2% last quarter thanks to a mix of better advertising demand and strong distribution fee gains. The ad business grew 3%, with help from its digital platform, compared to a flat result last quarter as higher prices more than offset a 5% drop in the viewer base. Distribution fees rose 6%.
  • Total subscribers declined 5% in the U.S.
  • The international segment logged 7% higher revenue after adjusting for foreign currency swings, as profits held steady.
  • The 6% increase in earnings per share was powered by a sinking share count as Discovery spent $100 million on stock buybacks.
  • Free cash flow jumped due to lower cash taxes and the timing of content spending.

What management had to say

CEO David Zaslav focused his comments on the network's broad overall gains. "Advertising and global distribution revenue growth helped to drive solid third quarter results for Discovery," he said in a press release. "We continued to focus on investments to strengthen our worldwide IP portfolio as well as strategic partnerships to nourish global superfans across every screen, platform and service," Zaslav continued.

Executives said they remain optimistic about their $15 billion merger with Scripps, which appears to be on pace to close early next year. "We are excited by the prospects for a combined Discovery and Scripps as we continue to make progress on the transaction to create a global leader in real life entertainment."

Looking forward

The merger will produce a company whose scale and reach should allow it to extract more value even from a shrinking pay-TV industry. After all, combined, Scripps and Discovery will account for one-fifth of all ad-supported broadcasting in the U.S.

The business will also have a massive library of 300,000 hours of content -- plus 8,000 hours produced annually -- that it can monetize both through global broadcast networks and on digital channels.

Discovery has loaded up on $9 billion in loans over the past few months in preparation for that merger, and the new liabilities will significantly raise interest expenses. However, management hopes to pay them down quickly so that the debt burden returns to historical norms by 2019.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Discovery Communications. The Motley Fool recommends Scripps Networks Interactive. The Motley Fool has a disclosure policy.