Discovery Tumbles on Outlook for Pay-TV Fees

NEW YORK ( TheStreet) -- Discovery Communications ( DISCA) was tumbling Monday as the owner of 14 U.S. television networks reported second-quarter revenue from domestic affiliates, cable-TV and satellite providers that was less than analysts were expecting, reflecting a possible slowdown in the company's core business.

Shares of the Silver Spring, Maryland were falling 3.8% to $81.12, paring the cable-TV provider's 2013 gain to 27%.

The owner of the Oprah Winfrey Network, Discovery said revenue from affiliate fees rose 5% in the quarter while total sales increased 28% to $1.46 billion, just shy of the $1.48 billion average forecast of 22 analysts surveyed by Bloomberg. Content providers such as Discovery receive so-called affiliate fees from pay-TV providers to carry their programming.

"We never expected heroic domestic affiliate fee growth," said David Beckel, a media analyst at BersteinResearch. "Our valuation and investment thesis (and Outperform rating) doesn't require it. But we do expect greater than 6%; 5% won't do."

Discovery Chief Executive David Zaslav, in an investor conference call, said that affiliate fee increases are expected to be "roughly 5% for this year."

Net income also came in less-than-expected at $300 million compared to a forecast of $329 million.

On the bright side, OWN, the Oprah Winfrey network turned cash-flow positive in the second quarter, Discovery's finance chief Andrew Warren said in an investor phone call. Discovery is beginning to pay down the investment that discovery made in the venture which provided the popular talk-show host and producer a network to spotlight her program and similar entertainment.

Discovery also showed that it's future may exist outside the U.S. as revenue from international distribution, adjusted for currency valuation, rose 14%, led by Latin America.

Written by Leon Lazaroff in New York

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