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Oprah Winfrey Network finally making money for Discovery

David M. Zaslav, President and Chief Executive Officer of Discovery Communications speaks at the Television Critics Association Cable TV Sum
David M. Zaslav, President and Chief Executive Officer of Discovery Communications speaks at the Television Critics Association Cable TV Sum

By Liana B. Baker

(Reuters) - The Oprah Winfrey Network is making money four years after its debut, as stronger ratings and advertising growth helped turn around the joint venture with Discovery Communications Inc sooner than expected.

The news was a bright spot for Discovery, which has invested more than $500 million in OWN, as it posted weaker-than-expected second-quarter results and cut its earnings forecast on Tuesday.

The media company's stock fell 4.3 percent to $80.74 on Nasdaq at mid-afternoon.

Discovery Chief Executive David Zaslav said OWN, which it formed with talk-show host Oprah Winfrey, benefited from two popular new series by producer Tyler Perry, "The Have and Have Nots" and "Love Thy Neighbor."

"OWN is now cash flow positive and starting to pay down the investment Discovery has made in the venture," Zaslav said.

The network, which replaced Discovery's Health channel in January 2011, had expected cash flow to break even in the second half of the year.

Lazard Capital Markets Barton Crockett said it was encouraging that one of Discovery's biggest bets was paying off.

"We knew that OWN was working because ratings have been great. The fact that it is bouncing back into positive isn't a huge surprise," he said.

Winfrey, known as the "queen of talk," had admitted in a TV interview to making "101 mistakes" when launching the network. The mix of in-depth interviews with celebrities and feel-good programs did not initially translate to the ratings success Winfrey had seen on broadcast TV for years.

Under President Erik Logan, OWN has since gone through layoffs, executive departures and a reshuffling of its programming lineup to add more scripted shows. It also has been selling some of Oprah's talk shows overseas, including to the United Kingdom.

On Tuesday, Zaslav said it had signed on 30 new ad partners and had the "highest growth of any cable network in the second quarter." Viewership by OWN's target demographic of the 25-54 age group grew 39 percent in the second quarter, the company said.

EPS MISS

Discovery said it now expects 2013 revenue of $5.55 billion to $5.63 billion, below its previous forecast for $5.58 billion to $5.70 billion. The company blamed unfavorable currency fluctuations and costs from its $1.7 billion acquisition of Scandinavian media company SBS in December.

Zaslav brushed off concerns that the merger of big ad companies Publicis and Omnicom would pressure Discovery's advertising rates. He said the deal was "probably a good thing" for the company.

"As long as we continue to grow our audience, we're going to find very receptive buyers," he said.

Net income rose to $300 million, or 82 cents per share, from $293 million or 77 cents per share, in the year-ago quarter.

Excluding special items for licensing agreements and foreign currency fluctuations, earnings per share of 83 cents missed the analysts' average estimate by 7 cents according to Thomson Reuters I/B/E/S.

Crockett, the Lazard Capital Markets analyst, said Wall Street was not expecting the charge related to the SBS acquisition and noted that it helped explain why Discovery missed EPS estimates.

Gabelli & Co analyst Brett Harriss said he was expecting improved profitability at Discovery's U.S. networks, where advertising was up 10 percent, but noted the company's higher-than-expected operating expenses.

"U.S. advertising was great, but programming and marketing costs were up," Harriss said.

Discovery said operating expenses rose 17 percent at its U.S. unit, which it said offset revenue growth at that division.

Total revenue rose 30 percent to $1.47 billion. Analysts had expected $1.48 billion.

(Reporting by Liana B. Baker; Editing by Gerald E. McCormick, Maureen Bavdek, Lisa Von Ahn and Richard Chang)

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