Discovery Q 4 revenues touch $904 mark

Discovery Communications, Inc. (“Discovery” or the “Company”) (Nasdaq: DISCA, DISCB, DISCK) has reported financial results for the full year and fourth quarter ended December 31, 2008. The discussion below assumes the transaction between Discovery Holding Company (“DHC”), Discovery Communications Holding LLC (“DCH”), and Advance/Newhouse Programming Partnership that resulted in Discovery becoming a public company, as described in the Other Items section on page 5, occurred on January 1, 2007 and as such includes 100% of Discovery Communications’ results for both 2008 and 2007. Please see the as adjusted financial statements beginning on page 14 for an explanation of why management believes this presentation is appropriate.

David Zaslav, Discovery’s president and chief executive officer, said, “This past year was one of significant accomplishment for Discovery, as we delivered strong operating performances across our businesses and successfully transitioned to a fully public company. Strategically, we strengthened the programming and development at our fully distributed channels and finished the year with double digit ratings growth in the fourth quarter among key demos at Discovery Channel and TLC. We also established new identities for several of our emerging networks and continued our international expansion, increasing our subscriber base overseas by 16%. Most importantly, our strategic initiatives were achieved while strongly growing revenues and Adjusted OIBDA, in what are increasingly challenging times. As we execute our 2009 operating plan in a difficult economic climate, our stable foundation of contracted and growing subscription revenues, diversified international expansion and stringent focus on costs give us confidence that we will outperform the marketplace and continue to grow moving forward.”

Fourth quarter revenues of $904 million increased $1 million over the as adjusted(1) fourth quarter a year ago as 8% growth at U.S. Networks was mostly offset by a 23% decline in Commerce, Education and Other as well as a 4% decline at International Networks, primarily the result of a $33 million impact from foreign currency fluctuations. Adjusted Operating Income Before Depreciation and Amortization (“OIBDA”) grew to $362 million, an increase of $222 million versus the fourth quarter a year ago, mainly driven by an increase of $188 million at U.S. Networks and an increase of $26 million, or 32%, at International Networks. The prior year results included a content impairment charge of $139 million, primarily at U.S. Networks. Excluding the impact of the content impairment charge, Adjusted OIBDA increased $64 million or 23% from the prior year. Adjusted OIBDA margin, excluding the impact of the content impairment charge, increased to 38% for the fourth quarter, up from 31% in the same period a year ago. Adjusted OIBDA is defined as revenue less (i) cost of revenues and selling, general and administrative expense excluding marked to market share-based compensation expense under our long-term incentive plans, (ii) restructuring and impairment charges, (iii) depreciation and amortization, including amortization of deferred launch incentives and (iv) gains on assets and business dispositions.

Fourth quarter net income from continuing operations of $105 million ($0.25 per share) grew $113 million versus the as adjusted(1) loss from continuing operations of $8 million ($0.03 per share) a year ago.

Free cash flow was $128 million for the fourth quarter, an increase of $24 million from the as adjusted(1) results in the same period for 2007. Free cash flow is defined as cash flows from operating activities less acquisitions of property and equipment.

Full year 2008 revenues of $3,443 million increased 10% or $302 million over the as adjusted(1) revenues for 2007, primarily driven by 10% growth at U.S. Networks and 12% growth at International Networks. Adjusted OIBDA increased 49% to $1,310 million led by 37% growth at U.S. Networks and 52% growth at International Networks. The prior year results included a content impairment charge of $139 million, primarily at U.S. Networks. Excluding the impact of the content impairment charge, Adjusted OIBDA increased $216 million or 21% from the prior year and Adjusted OIBDA margin grew to 38% in 2008, up from 28% in 2007.

Full year net income from continuing operations of $274 million ($0.85 per share) grew $123 million versus the as adjusted results(1) of $151 million ($0.54 per share) a year ago. The increased results primarily reflect the higher Adjusted OIBDA as well as a $69 million benefit in the current year related to the unrealized change in the fair value of the marked to market share-based compensation, which was an expense of $141 million in the prior year.

U.S. Networks’ revenue in the fourth quarter of 2008 increased 8% to $536 million primarily driven by distribution and advertising revenue growth. Distribution revenue grew 13% largely from higher rates across the fully distributed networks, subscriber growth at the emerging networks and lower launch-support amortization. Advertising revenue increased 6% from higher pricing as well as increased ratings at Discovery Channel and TLC, which satisfied prior period ratings shortfalls.

Adjusted OIBDA increased $188 million to $300 million reflecting the 8% revenue growth and lower operating expenses, primarily due to the impairment charge of $129 million taken in the fourth quarter a year ago, which also resulted in a $19 million decline in content amortization expense in the current quarter as compared to prior year. Excluding the impact of the impairment charge taken a year ago, programming expense increased $16 million and Adjusted OIBDA grew $40 million or 17%.

U.S. Networks’ revenue for the full year 2008 increased 10% to $2,062 million mainly driven by distribution and advertising revenue growth. Distribution revenue grew 10% largely from higher rates across the fully distributed networks, subscriber growth at the emerging networks and lower launch-support amortization. 2008 distribution revenues also include $8 million of one-time revenue related to accruals in prior periods for certain distributors. Advertising revenue increased 9% as compared with 2007 as a result of pricing and higher sellouts, partially offset by lower ratings at TLC and Discovery Channel. Additionally, other revenue grew 20% reflecting Discovery’s sales representation of Travel Channel and an increase in digital revenue, primarily from the inclusion of HowStuffWorks, which was acquired in December 2007.

Adjusted OIBDA increased 37% to $1,111 million reflecting the 10% revenue growth and 12% lower operating expenses, primarily due to the content impairment charge of $129 million taken in the fourth quarter of 2007, which also resulted in a $76 million decline in content amortization expense in the current year as compared to the prior year. Excluding the impact of the impairment charge taken a year ago, programming expense increased $49 million and Adjusted OIBDA grew $96 million or 10%. Full year results also include a content impairment charge of $17 million related to the management team reorganization at TLC during the third quarter of 2008.

International Networks’ revenue for the fourth quarter decreased 4% to $294 million as the $33 million impact of foreign currency fluctuations resulted in a 2% decline in distribution revenue and a 12% decline in advertising revenue. Excluding the impact of foreign currency fluctuations, revenues increased 6% led by 8% affiliate revenue growth, primarily from subscriber increases in EMEA (Europe (excluding U.K.), Middle East and Africa) and Latin America. Advertising revenue in local currency terms was flat as strong growth in EMEA and Latin America was offset by lower advertising revenue in the U.K. due to lower rates as well as the interpretation of a contract provision resulting in a limitation in our ability to monetize our audience. Excluding the U.K., advertising revenue in local currency terms increased 14% over the fourth quarter a year ago at International Networks.

Adjusted OIBDA increased 32% to $107 million as the 4% revenue decline was more than offset by an 18% decline in operating expenses. Excluding the impact of foreign currency, Adjusted OIBDA increased 36% reflecting 6% revenue growth and a 4% decline in operating expenses as increased programming expenses were more than offset by lower marketing and research costs.

International Networks’ revenue for the full year 2008 increased 12% to $1,158 million led by 16% distribution revenue growth primarily from subscriber increases in EMEA (Europe (excluding U.K.), Middle East and Africa) and Latin America. Advertising revenue increased 2% as strong growth in EMEA and Latin America was offset by lower advertising revenue in the U.K. due to lower rates as well as an interpretation of a contract provision. Excluding the U.K., advertising revenue in local currency terms increased 22% over 2008 at International Networks. The full year also included 28% growth in other revenue driven by the sale of Discovery Networks programs in the U.K. and Canada.

Adjusted OIBDA increased 52% to $387 million reflecting the 12% revenue growth and a 1% decline in operating expenses as lower marketing and research costs were mostly offset by increased programming and personnel costs. Excluding foreign currency fluctuations, revenues increased 12% and Adjusted OIBDA increased 45% versus 2007. The full year impact of foreign currency increased revenues by $7 million and Adjusted OIBDA by $17 million.

Commerce, Education and Other fourth quarter revenue decreased 23% to $70 million primarily reflecting lower commerce revenues as compared to the same period a year ago, which included stronger DVD sales of Planet Earth. Adjusted OIBDA increased to $11 million as compared with the break even results in the fourth quarter a year ago as the revenue decline at commerce was mostly offset by lower operating costs as compared to prior year. Additionally, prior year results included an impairment charge of $10 million at education. The current quarter results also include revenues of $20 million and Adjusted OIBDA of $1 million for Creative Sound Services which was flat with the results a year ago.

Commerce, Education and Other full year 2008 revenue decreased 13% to $196 million primarily reflecting lower commerce revenues as compared to the same period a year ago, which included stronger DVD sales of Planet Earth, partially offset by higher education revenues from the streaming of new products as well as assessment, sponsorship and licensing deals. Adjusted OIBDA increased $9 million to $13 million as the revenue decline was offset by lower operating costs, primarily at education, due to an impairment charge of $10 million in the prior year,. The current year results include revenues of $75 million and Adjusted OIBDA of $4 million for Creative Sound Services, which was flat with the results a year ago.

For the full year 2008 Adjusted OIBDA decreased $12 million as a result of an increase in Corporate expenses, primarily due to costs associated with the transaction described in Other Items as well as costs related to the OWN joint venture.

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