Discovery Communications (NASDAQ:DISCK) this morning posted fourth-quarter earnings results. As expected, the owner of popular cable channels such as TLC and Animal Planet said sales and profits were hurt by soft advertising spending in the U.S. and by falling currencies abroad.
The what and why
Top- and bottom-line numbers failed to meet even Wall Street's lowered expectations. Profit fell 13% and Discovery booked $0.38 per share of earnings in the fourth quarter. That was below analysts' recent target of $0.45 per share, and significantly worse than the $0.54 per share the pros had originally predicted in October. Meanwhile, fourth-quarter revenue improved by 9% to $1.68 billion, or just below expectation of $1.7 billion in sales.
The surprise weakness in the quarter was advertising, which makes up about half of Discovery's business. Revenue from ad sales in the U.S. shrunk by 3%, following a 1% gain in the third quarter and a 5% improvement in each of the first two quarters of 2014. Discovery is not alone in dealing with this challenge: Just about every media company, including Scripps Networks and Disney, posted lower advertising sales in the fourth quarter.
But Discovery suffered a bigger drop in profitability than most rivals. And both its U.S. and international businesses suffered from that lower earning power. The U.S. division's profit margin fell to 54% from 59% a year ago. Discovery's international business posted slowing growth: Advertising sales rose by just 7% compared to the more than 20% gains it posted in the prior three quarters. Profit margin in that segment dipped by 2 percentage points to 37% of sales.
The bigger picture
Stepping back, solid full-year results help put the fourth quarter's struggles in perspective. Discovery's revenue improved by 13% over 2013 and adjusted profit rose 4% to reach $2.4 billion. Adjusted earnings per share jumped 13% thanks to an aggressive $1.4 billion of spending on stock repurchases.
CEO David Zaslav highlighted that big-picture progress for 2014. In a press release accompanying the results, he said, "Despite a more challenging U.S market and significant foreign currency headwinds, our content portfolio once again drove audience gains and boosted our market share around the world." Management was set to issue its 2015 outlook in a conference call with investors slated for Thursday morning.
With the stock down 60% over the last seven months, Discovery has quickly become one of the cheapest media companies in the market. Today's earnings results might not do much to flip that trend, given the company's profitability struggle.