Image source: Discovery.
This has been a tough year for businesses that depend on selling television ad space to generate profits. People are drifting away from subscriptions to expensive cable TV bundles, leading to lower ratings -- and fewer opportunities to market commercial time.
Discovery Communications' (DISCK +0.00%) shares have been hurt by this trend: The stock has underperformed the market in 2015 as advertising growth flattened in the first two quarters of the year.
But the TV network this week posted third quarter results that showed encouraging signs of life in the commercial market: Advertising revenue jumped up 6% in its lucrative U.S. television business.
The U.S. and international results
Overall, third-quarter revenue ticked lower by 1% to $1.5 billion. But there were a lot of moving pieces within that seemingly flat result. Discovery's U.S. business, which comprises half of its operations, posted an 8% sales jump as advertising and distribution fee revenue both grew solidly in the quarter:
| Q3 2014 | Q3 2015 (change) | |
|---|---|---|
| Distribution | $318 million | $357 million (12%) |
| Advertising | $388 million | $410 million (6%) |
Discovery's U.S. business results by segment. Source: financial filing.
The international side of the operations recorded a 9% revenue drop -- although the dip was driven by foreign exchange swings. Adjusted for the currency moves, international revenue would have actually seen a 9% jump. "Discovery's unique portfolio of assets and global brands drove yet another quarter of strong worldwide viewership and financial results," said CEO David Zaslav.
The early pickup in advertising momentum that Zaslav noted in last quarter's conference call seemed to carry through this quarter. In fact, Discovery's 6% U.S. advertising growth was enough to bring the company into positive territory on that metric, up 2%, through the first nine months of the year. However, management said the gains were mostly tied to higher prices, and not increased delivery volume, which suggests that ratings are still under pressure from a shrinking cable TV market.
Similarly, Discovery's earnings performance was a tale of two regions. A 4% gain in adjusted profit from the U.S. was swamped by a 21% reported dive from the international markets. Again, the international performance looks much better after adjusting for currency movies. Profits rose by 4%, on that basis.
"Fast n' Loud" is one of several hit shows for Discovery this year. Image source: Discovery.
And despite the earnings gain in the U.S market, that segment posted lower profitability as adjusted margin slipped from 59% to 57%. Management blamed higher content and marketing costs for the dip, which looks like a short-term hit. Profitability is holding steady through the first three quarters of this year at a strong 58%.
Rising buybacks and profit outlook
The company announced a new $2 billion stock buyback authorization that could send stock repurchases spiking higher. Discovery has spent $600 million so far this year on its own stock, compared to $1.1 billion in the year-ago period. But it intends to resume significant buyback spending in the current quarter.
The move appears to reflect increasing confidence in the business by management. "Discovery is like no other media company, propelled by our unmatched global infrastructure, local leadership, efficient global content model and sturdy position in the U.S.," Zaslav said. "We are confident in our ability to drive near and long-term growth and shareholder value."
As for that near-term growth, Discovery updated its 2015 sales and earnings guidance. Management confirmed their expected adjusted revenue gains of about 10% while boosting their profitability outlook just a tad. Adjusted profit margin was previously targeted in the "low- to mid-single-digit range," but now should be in the "mid-single-digit range," they said.
