DISCA Discovery Inc

SILVER SPRING, Md., Aug. 7, 2018 /PRNewswire/ -- Discovery, Inc. ("Discovery" or the "Company") (NASDAQ: DISCA, DISCB, DISCK) today reported financial results for the second quarter ended June 30, 2018.

"We delivered solid financial results in our first full quarter as a combined company and continued to make great progress with our integration of Scripps Networks Interactive and our pivot to digital, mobile and direct to consumer products and services," said David Zaslav, President and Chief Executive Officer for Discovery. "As the global leader in real life entertainment, we are uniquely positioned in the media marketplace to deliver long-term value for our passionate superfans, shareholders and business partners around the world."

Second Quarter 2018 Results
Second quarter revenues of $2,845 million increased 63% on a reported basis compared with the prior year quarter. Excluding the impact of foreign currency fluctuations and the Scripps Networks Interactive ("Scripps Networks"), Motor Trend Group, LLC ("MTG") and the Oprah Winfrey Network ("OWN") transactions (collectively, "the Transactions")⁽¹⁾, revenues remained consistent, with a 5% increase in International Networks, offset by a 1% decrease in U.S. Networks and the sale of the education business⁽²⁾ on April 30, 2018. On a pro forma⁽³⁾ combined basis, excluding the impact of foreign currency fluctuations, total company second quarter revenues increased 1%, as International Networks revenues increased 5% and U.S. Networks revenues increased 1%, partially offset by a 69% decrease in Education and Other revenues.

Second quarter Adjusted Operating Income Before Depreciation and Amortization ("Adjusted OIBDA")⁽⁴⁾ increased 69% to $1,214 million on a reported basis compared with the prior year quarter. Excluding the impact of the Transactions and foreign currency fluctuations, Adjusted OIBDA remained consistent with the prior year quarter with a 12% increase at International Networks, which was offset by a 4% decrease at U.S. Networks. On a pro forma combined basis, excluding the impact of foreign currency fluctuations, total company second quarter Adjusted OIBDA increased 5%, as International Networks' Adjusted OIBDA increased 14% and U.S. Networks Adjusted OIBDA increased 1%.

Second quarter net income available to Discovery, Inc. ("DCI Net Income") was $216 million, compared with $374 million in the prior year quarter, as improved operating results were more than offset by higher restructuring and other charges associated with the integration of Scripps Networks, higher interest expense and a gain related to the sale of the education business versus a small loss last year related to the sale of the Raw and Betty production studios. Diluted earnings per share⁽⁵⁾ decreased to $0.30 due to lower DCI Net Income. Adjusted Earnings Per Diluted Share ("Adjusted EPS")^(4),(5), which excludes the impact of amortization of acquisition-related intangible assets, net of tax was $0.66. Adjusted EPS excluding restructuring and other charges as well as this year's gain on disposition versus last year's small loss on disposition was $0.77, and included $140 million (or $0.20 per share) of after-tax restructuring and other charges and $64 million (or $0.09 per share) of after-tax impact from this year's gain on disposition versus last year's small loss on disposition.

Free cash flow⁽¹⁾ increased to $522 million for the second quarter of 2018 as cash flow from operations increased to $556 million while capital expenditures of $34 million were relatively consistent with the prior year. Second quarter cash flow from operations increased primarily due to higher operating results due to the Transactions offset by higher content costs, higher interest expense and higher restructuring costs.

SECOND QUARTER SEGMENT RESULTS

U.S. Networks' revenues for the second quarter of 2018 increased to $1,780 million on a reported basis compared with the prior year quarter. Excluding the impact of the Transactions, revenues decreased 1%, as distribution and advertising revenues both remained consistent, while other revenues decreased 33% due to lower program and merchandising sales. On a pro forma combined basis, U.S. Networks' revenues for the second quarter increased 1%, as distribution revenues and advertising revenues each increased 1%, while other revenues decreased 10%. The growth in pro forma combined distribution revenues was primarily due to an increase in contractual affiliate rates, partially offset by a decline in affiliate subscribers and to a lesser extent, lower contributions from content deliveries under licensing agreements.

 

On a pro forma combined basis, total portfolio subscribers declined 5%, while subscribers to our fully distributed networks declined 3%. The growth in pro forma advertising revenues was primarily driven by continued monetization of our digital content offerings, and to a lesser extent higher pricing, partially offset by lower audience delivery on our linear networks.

Operating expenses for U.S. Networks on a reported basis increased to $797 million compared with prior year quarter operating expenses of $323 million. Excluding the impact of the Transactions, operating expenses increased 5%, as costs of revenues increased 3% and SG&A expenses increased 7%. On a pro forma combined basis, total operating expenses increased 1% as costs of revenues increased 1% and SG&A expenses remained consistent. The increase in pro forma combined operating expenses was primarily attributable to higher marketing spending due to the timing of premieres partially offset by lower personnel costs.

U.S. Networks' Adjusted OIBDA increased 73% to $983 million compared with the prior year quarter. Excluding the impact of the Transactions, U.S. Networks' Adjusted OIBDA decreased 4%. On a pro forma combined basis, Adjusted OIBDA increased 1%, as increases in distribution and advertising revenue were partially offset by increases in costs of revenues.

 

International Networks' revenues for the second quarter of 2018 increased 30% to $1,051 million compared with the prior year quarter. Excluding the impact of the acquisition of Scripps Networks and foreign currency fluctuations, International Networks' revenues increased 5%, driven by a 6% increase in distribution revenues and a 60% increase in other revenues, while advertising revenues remained flat. On a pro forma combined basis, excluding the impact of foreign currency fluctuations, International Networks' revenues increased 5%, driven by a 6% increase in distribution revenues, a 2% increase in advertising revenues and a 37% increase in other revenues. Pro forma distribution revenue growth was primarily driven by increases in digital subscription revenues in Europe and higher pricing in Latin America, partially offset by pricing declines in Asia. Pro forma advertising revenue growth was primarily due to increased sell through resulting in higher sales volumes and higher pricing in certain markets in Europe. Pro forma other revenues increased primarily due to higher content sales.

Operating expenses for International Networks on a reported basis increased 24% compared with the prior year quarter. Excluding the impact of the acquisition of Scripps Networks and foreign currency fluctuations, operating expenses increased 2%, as costs of revenues increased 2% and SG&A increased 3%. On a pro forma combined basis, excluding currency effects, operating expenses increased 2%, as costs of revenues increased 4%, primarily driven by spending on sports content and associated production costs, while SG&A decreased 3% due to lower personnel costs.

International Networks' Adjusted OIBDA increased 42% to $336 million compared with the prior year quarter. Excluding the impact of the acquisition of Scripps Networks and foreign currency fluctuations, International Networks' Adjusted OIBDA increased 12%. On a pro forma combined basis, excluding currency effects, Adjusted OIBDA increased 14%. The increase in pro forma combined Adjusted OIBDA was primarily driven by increases in revenues, partially offset by increases in costs of revenues.

 

Education and Other revenues for the second quarter of 2018 decreased $30 million and Adjusted OIBDA decreased $5 million, primarily due to the sale of a majority stake in the education business on April 30, 2018.

Corporate and Inter-Segment Eliminations
Adjusted OIBDA for the second quarter of 2018 decreased 15% compared with the prior year quarter. Excluding the impact of the acquisition of Scripps Networks and foreign currency fluctuations, Adjusted OIBDA decreased 4%. Excluding the impact of foreign currency fluctuations and on a pro forma basis, the Adjusted OIBDA loss decreased 9% compared with the prior year quarter due to reductions in personnel costs as a result of the integration of Scripps Networks partially offset by increases in technology costs.

FULL YEAR 2018 OUTLOOK⁽¹⁾
Discovery will provide forward-looking guidance in connection with this quarterly earnings announcement on its quarterly earnings conference call and webcast referenced hereafter.

 

NON-GAAP FINANCIAL MEASURES
In addition to the results prepared in accordance with U.S. generally accepted accounting principles ("GAAP") provided in this release, the Company has presented Adjusted OIBDA, Adjusted EPS and free cash flow. These non-GAAP measures should be considered in addition to, but not as a substitute for, operating income, net income, earnings per diluted share and other measures of financial performance reported in accordance with GAAP.  Please review the supplemental financial schedules beginning on page 19 for reconciliations to the most comparable GAAP measures.

Adjusted OIBDA and Adjusted OIBDA Excluding the Impact of Currency Effects
The Company evaluates the operating performance of its segments based on financial measures such as revenues and Adjusted Operating Income Before Depreciation and Amortization ("Adjusted OIBDA"). Adjusted OIBDA is defined as operating income excluding: (i) mark-to-market share-based compensation, (ii) depreciation and amortization, (iii) restructuring and other charges, (iv) certain impairment charges, (v) gains and losses on business and asset dispositions, (vi) certain inter-segment eliminations related to production studios, and (vii) third-party transaction costs directly related to the acquisition and integration of Scripps Networks.

The Company uses Adjusted OIBDA to assess the operating results and performance of its segments, perform analytical comparisons, identify strategies to improve performance and allocate resources to each segment. The Company believes Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. The Company excludes mark-to-market share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions and Scripps Networks transaction and integration costs from the calculation of Adjusted OIBDA due to their impact on comparability between periods. The Company also excludes depreciation of fixed assets and amortization of intangible assets, as these amounts do not represent cash payments in the current reporting period. Certain corporate expenses are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. Total Adjusted OIBDA should be considered in addition to, but not a substitute for, operating income, net income and other measures of financial performance reported in accordance with GAAP. Refer to the comments that follow for our methodology for calculating growth rates excluding the impact of currency effects.

Adjusted EPS and Adjusted EPS Excluding the Impact of Currency Effects
Adjusted EPS is defined as earnings excluding the impact of amortization of acquisition-related intangible assets per diluted share. The Company believes Adjusted EPS is relevant to investors because this metric allows them to evaluate the performance of the Company's operations exclusive of the non-cash amortization of acquisition-related intangible assets that impact the comparability of results from period to period. Refer to the comments that follow for our methodology for calculating growth rates excluding the impact of currency effects.

Methodology for Calculating Growth Rates Excluding the Impact of Currency Effects
In addition to the Transactions, the impact of exchange rates on our business is an important factor in understanding period-to-period comparisons of our results. For example, our international revenues are favorably impacted as the U.S. dollar weakens relative to other foreign currencies, and unfavorably impacted as the U.S dollar strengthens relative to other foreign currencies. We believe the presentation of results on a constant currency basis (ex-FX), in addition to results reported in accordance with GAAP provides useful information about our operating performance because the presentation ex-FX excludes the effects of foreign currency volatility and highlights our core operating results. The presentation of results on a constant currency basis should be considered in addition to, but not a substitute for, measures of financial performance reported in accordance with GAAP.

The ex-FX change represents the percentage change on a period-over-period basis adjusted for foreign currency impacts. The ex-FX change is calculated as the difference between the current year amounts translated at a baseline rate, a spot rate for each of our currencies determined early in the fiscal year as part of our forecasting process (the "2018 Baseline Rate"), and the prior year amounts translated at the same 2018 Baseline Rate. In addition, consistent with the assumption of a constant currency environment, our ex-FX results exclude the impact of our foreign currency hedging activities, as well as realized and unrealized foreign currency transaction gains and losses.

Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies.

Selling, General and Administrative Expense
Selling, general and administrative expense, as presented, excludes mark-to-market based compensation and Scripps Networks transaction and integration costs due to their impact on comparability between periods.

Free Cash Flow
The Company defines free cash flow as cash provided by operating activities less acquisitions of property and equipment. The Company uses free cash flow as it believes it is an important indicator for management and investors of the Company's liquidity, including its ability to reduce debt, make strategic investments and return capital to stockholders.

Pro Forma Adjustments
The discussion and tables beginning on page 11 compares our actual and pro forma combined results as if the Transactions occurred on January 1, 2017. Management believes reviewing our actual operating results in addition to combined pro forma results is useful in identifying trends in, or reaching conclusions regarding, the overall operating performance of our businesses. Our combined U.S. Networks, International Networks and Corporate and Inter-Segment Eliminations pro forma information is based on the historical operating results of the respective businesses as applicable to each segment and includes adjustments directly attributable to the Transactions as if they had occurred on January 1, 2017, such as:

1. The impact of the purchase price allocation to the fair value of assets, liabilities, and noncontrolling interests, such as intangible amortization;
2. Adjustments to remove items associated with the Transactions that will not have a continuing impact on the combined entity, such as transaction costs and the impact of employee retention agreements; and
3. Changes to align accounting policies.

Adjustments do not include costs related to integration activities, cost savings or synergies that have been or may be achieved by the combined businesses. Pro forma amounts are not necessarily indicative of what our results would have been had we operated the acquired businesses since January 1, 2017, and should not be taken as indicative of the Company's future consolidated results of operations.

Actual amounts for the three and six months ended June 30, 2018 include the results of operations for the Discovery and Scripps Networks, OWN and MTG businesses for the period since each respective transaction. Scripps Networks was acquired on March 6, 2018, OWN was consolidated on November 30, 2017 and MTG was consolidated on September 25, 2017.

Conference Call Information
Discovery will host a conference call today, August 7, 2018 at 8:30 a.m. ET to discuss its second quarter results. To listen to the call, visit https://corporate.discovery.com or dial 1-844-452-2811 inside the U.S. and 1-574-990-9832 outside of the U.S., using conference ID: 7895109 and passcode: DISCA.

Cautionary Statement Concerning Forward-Looking Statements
This press release contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties and on information available to the Company as of the date hereof. The Company's actual results could differ materially from those stated or implied, due to risks and uncertainties associated with its business, which include the risk factors disclosed in its Annual Report on Form 10-K filed with the SEC on February 28, 2018.

Forward-looking statements include statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future, and can be identified by forward-looking words such as "anticipate," "believe," "could," "continue," "estimate," "expect," "intend," "may," "should," "will" and "would" or similar words. Forward-looking statements in this release include, without limitation, statements regarding investing in the Company's programming, strategic growth initiatives, and the timing and effects of the Scripps Networks acquisition and related transactions. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

About Discovery
Discovery, Inc. (Nasdaq: DISCA, DISCB, DISCK) is a global leader in real life entertainment, serving a passionate audience of superfans around the world with content that inspires, informs and entertains. Discovery delivers over 8,000 hours of original programming each year and has category leadership across deeply loved content genres around the world. Available in 220 countries and territories and in nearly 50 languages, Discovery is a platform innovator, reaching viewers on all screens, including TV Everywhere products such as the GO portfolio of apps and Discovery Kids Play; direct-to-consumer streaming services such as Eurosport Player and Motor Trend OnDemand; digital-first and social content from Group Nine Media and a strategic alliance with the PGA Tour to create the Global Home of Golf. Discovery's portfolio of premium brands includes Discovery Channel, HGTV, Food Network, TLC, Investigation Discovery, Travel Channel, Turbo/Velocity, Animal Planet, and Science Channel, as well as OWN: Oprah Winfrey Network in the U.S., Discovery Kids in Latin America, and Eurosport, the leading provider of locally relevant, premium sports and Home of the Olympic Games across Europe. For more information, please visit https://corporate.discovery.com and follow @DiscoveryIncTV across social platforms.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SOURCE Discovery, Inc.