Discovery, Inc. Reports Second Quarter 2019 Results

PRNewswire 6-Aug-2019 7:00 AM

SILVER SPRING, Md., Aug. 6, 2019 /PRNewswire/ -- Discovery, Inc. ("Discovery" or the "Company") (NASDAQ:DISCA, DISCB, DISCK)) today reported financial results for the quarter ended June 30, 2019.

Second Quarter 2019 Highlights

• No. 1 most watched TV portfolio for women 25-54 in the U.S. in June 2019⁽¹⁾;
• Concluded a robust and record advertising Upfront, delivering pricing and volume increases across the portfolio;
• Completed the UKTV Lifestyle Business joint venture unwind transaction in which the Company formally received control of lifestyle channels Really, Home and Good Food; and
• Launched nine additional networks on YouTube TV in the U.S. and signed a multi-year live and on demand carriage agreement with fuboTV.

"We delivered another quarter of strong operating and financial performance, with the benefits of the Scripps Networks acquisition flowing through all areas of our global business, while also accelerating our pivot to digital and direct-to-consumer offerings with IP that powers people's passions," said David Zaslav, President and Chief Executive Officer of Discovery. "With an exceptional team in place, strong top-line performance and a healthy balance sheet, we are confident in our ability to continue executing on our strategic priorities to drive long-term growth and shareholder value."

Second Quarter 2019 Financial Results
Second quarter revenues of $2,885 million increased 1% compared with the prior year's quarter, as a 5% increase in U.S. Networks revenues was partially offset by a 3% decrease in International Networks revenues and a significant decrease in Other revenues due to the sale of the education business⁽²⁾. Excluding the impact of foreign currency fluctuations⁽³⁾, total Company revenues in the quarter increased 4% and International Networks revenues increased 3%.

Second quarter net income available to Discovery, Inc. was $947 million, or $1.33 per diluted share⁽⁴⁾, compared with $216 million, or $0.30 per diluted share, in the prior year's quarter. The increase in net income was a result of higher operating results and a one-time, non-cash tax benefit recognized in the quarter. The Company carried out a number of internal restructurings across several jurisdictions within the International Networks segment. The net effect of these restructuring activities was a one-time, non-cash income tax benefit of $455 million from the recognition of a deferred tax asset.

Adjusted Operating Income Before Depreciation and Amortization ("Adjusted OIBDA")⁽⁵⁾ of $1,281 million increased 5%, as a 15% increase in U.S. Networks Adjusted OIBDA was partially offset by a 15% decrease in International Networks Adjusted OIBDA. Excluding the impact of foreign currency fluctuations, total Adjusted AOIBDA increased 7% and International Networks Adjusted OIBDA decreased 7%.

Adjusted Earnings Per Share ("Adjusted EPS")^(4,6), which excludes the impact of amortization of acquisition-related intangible assets, net of tax, was $1.61. Adjusted EPS excluding the previously mentioned tax benefit of $455 million, or a decrease of $0.64 per share, and, after-tax restructuring and other charges of $8 million, or $0.01 per share, was $0.98.

Cash provided by operating activities increased 21% to $674 million compared with the prior year's quarter, primarily reflecting lower restructuring expenses and favorable working capital, partially offset by higher cash taxes due to the absence of acquisition-related charges. Capital expenditures increased $44 million to $78 million, primarily due to transformation projects related to technology infrastructure and software development, and expenses related to real estate consolidation. Free cash flow⁽¹⁾ for the second quarter increased 14% to $596 million.

SEGMENT RESULTS

U.S. Networks' revenues for the second quarter of 2019 increased 5% to $1,863 million compared with the prior year's quarter, as advertising revenues increased 6% and distribution revenues increased 5%, partially offset by a $14 million decrease in other revenues. The increase in advertising revenues was primarily driven by increases in pricing and, to a lesser extent, inventory, as well as the continued monetization of digital content offerings, partially offset by lower overall ratings and the impact of audience declines in the aggregate on our linear networks.

The increase in distribution revenues was primarily driven by increases in contractual affiliate rates and additional carriage on streaming platforms, partially offset by a decline in overall subscribers. Total portfolio subscribers for June 2019 were 3% lower than June 2018, while subscribers to our fully distributed networks were flat.

U.S. Networks' operating expenses decreased 8% to $737 million compared with the prior year's quarter, as costs of revenues decreased 10% and SG&A expenses decreased 4%. The decrease in costs of revenues was primarily attributable to content synergies related to the integration of Scripps Networks while the decrease in SG&A was primarily due to lower personnel costs from restructuring and the integration of Scripps Networks.

U.S. Networks' Adjusted OIBDA increased 15% to $1,126 million compared with $983 million in the prior year's quarter, driven by the previously mentioned increase in revenues combined with the decrease in operating expenses.

International Networks' revenues for the second quarter of 2019 decreased 3% to $1,020 million compared with the prior year's quarter. Excluding the impact of foreign currency fluctuations, revenues increased 3%, as advertising revenues increased 5% and distribution revenues increased 3%, partially offset by an $8 million decrease in other revenues. The increase in advertising revenues was primarily driven by higher pricing in certain markets in Europe and to a lesser extent, the consolidation of the UKTV Lifestyle Business and expanded digital content offerings. The increase in distribution revenues was driven by growth in Latin America, primarily due to contractual price increases and subscriber growth related in part to new channel launches along with the timing of certain content licensing arrangements, and subscriber growth in certain European markets.

International Networks' operating expenses increased 3% to $734 million compared with the prior year's quarter. Excluding the impact of foreign currency fluctuations, operating expenses increased 8%. Costs of revenues increased 4%, primarily attributable to higher expenses associated with expanded digital content offerings and to a lesser extent, the consolidation of the UKTV Lifestyle Business. SG&A increased 16%, primarily due to higher professional service fees, technology costs and personnel expenses as a result of expanded digital content offerings.

International Networks' Adjusted OIBDA decreased 15% to $286 million compared with the prior year's quarter. Excluding the impact of foreign currency fluctuations, Adjusted OIBDA decreased 7%, primarily driven by the increase in total operating expenses.

The Other segment saw a significant decrease in revenues for the second quarter of 2019 primarily due to the sale of the education business. Adjusted OIBDA was consistent with the prior year quarter.

Corporate and Inter-Segment Eliminations
Adjusted OIBDA for the second quarter of 2019 decreased 36% compared with the prior year's quarter, primarily due to higher technology costs and professional service fees.

OTHER ITEMS

Share Buyback Authorization and Transactions
In April 2019, the Company's Board of Directors authorized additional common stock repurchases of up to $1 billion. In May 2019, the Company made an upfront cash payment of $96 million to enter into two prepaid common stock repurchase contracts for the Company's Series C common stock. Under these contracts, if the price of Discovery's Series C common stock is below the strike price at expiration, the Company will receive a fixed number of shares of its Series C common stock. If the price of Discovery's Series C common stock is above the strike price at expiration, the Company can elect to receive $50 million of cash per contract or that number of shares of Series C common stock at the then-current market price equal to $50 million. The first contract settled in cash for $50 million during the period of June 26 to June 28, 2019 as the price of Discovery's Series C common stock during that period was above the strike price. The second contract is scheduled to settle during the quarter ending September 30, 2019. The contracts are accounted for as equity transactions.

Debt - Senior Notes
In May 2019, Discovery Communications, LLC ("DCL"), a wholly-owned subsidiary of the Company, issued $750 million aggregate principal amount of 4.125% Senior Notes due 2029 and $750 million aggregate principal amount of 5.300% Senior Notes due 2049. Net proceeds to DCL were $1.48 billion, net of underwriting discounts, debt issuance costs and other expenses. DCL used the proceeds from the offering to redeem or repurchase approximately $1.3 billion aggregate principal amount of DCL's 2.750% Senior Notes due 2019 and 5.050% Senior Notes due 2020 and to pay accrued and unpaid interest, premiums, fees and expenses in connection with the redemptions.

UKTV Lifestyle Business
In June 2019, the Company and BBC dissolved their 50/50 joint venture, UKTV, a British multi-channel broadcaster, with the Company taking full control of UKTV's three lifestyle channels and BBC taking full control of UKTV's seven entertainment channels.

FULL YEAR 2019 OUTLOOK⁽¹⁾
Discovery will provide forward-looking guidance in connection with this quarterly earnings announcement on its quarterly earnings conference call and webcast referenced below.

CONFERENCE CALL INFORMATION
Discovery will host a conference call today, August 6, 2019 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 passcode: DISCA.

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 11 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 OIBDA. Adjusted OIBDA is defined as operating income excluding: (i) 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, (vii) third-party transaction costs directly related to the acquisition and integration of Scripps Networks, and (viii) other items impacting comparability, such as the non-cash settlement of a withholding tax claim.

The Company uses this measure 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 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. 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 the methodology to calculate growth rates excluding foreign currency effects.

Effective January 1, 2019, our definition of Adjusted OIBDA was modified to exclude all share-based compensation, whereas only mark-to-market share-based compensation was excluded previously. Over time, the Company has moved to a higher percentage of equity-classified awards (in lieu of liability-classified awards, which require mark-to-market accounting) under its stock incentive plans and expects to continue this action in future periods. Since most equity classified awards are non-cash expenses not entirely under management control, the Company has elected to exclude all share-based compensation from Adjusted OIBDA beginning in 2019. The revised definition of Adjusted OIBDA will be used by our chief operating decision maker in evaluating segment performance in 2019. Accordingly, prior period amounts have been recast to reflect the current definition.

Methodology for Calculating Growth Rates Excluding the Impact of Currency Effects
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, which is a spot rate for each of our currencies determined early in the fiscal year as part of our forecasting process (the "2019 Baseline Rate"), and the prior year amounts translated at the same 2019 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 expenses, as defined for Adjusted OIBDA, excludes share-based compensation and Scripps Networks transaction and integration costs due to their impact on comparability between periods.

Adjusted EPS
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.

Free Cash Flow
The Company defines free cash flow as cash flow from operations 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.

CAUTIONARY STATEMENT CONCERNING FORWARD_LOOKING STATEMENTS
Certain statements in this press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, integration of acquired businesses, new service offerings, financial prospects, and anticipated sources and uses of capital. Words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes," and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:

• Changes in the distribution and viewing of television programming, including the expanded deployment of personal video recorders, subscription video on demand ("SVOD"), internet protocol television, mobile personal devices and personal tablets and their impact on television advertising revenue;
• Uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies;
• Continued consolidation of distribution customers and production studios;
• A failure to secure affiliate agreements or renewal of such agreements on less favorable terms;
• Rapid technological changes;
• The inability of advertisers or affiliates to remit payment to us in a timely manner or at all;
• General economic and business conditions;
• Industry trends, including the timing of, and spending on, feature film, television and television commercial production;
• Spending on domestic and foreign television advertising;
• Disagreements with our distributors or other business partners over contract interpretation;
• Fluctuations in foreign currency exchange rates, political unrest and regulatory changes in international markets;
• Market demand for foreign first-run and existing content libraries;
• The regulatory and competitive environment of the industries in which we, and the entities in which we have interests, operate;
• Uncertainties inherent in the development of new business lines and business strategies;
• Uncertainties regarding the financial performance of our equity method investees;
• Our ability to complete, integrate and obtain the anticipated benefits and synergies from our proposed business combinations and acquisitions, including our acquisition of Scripps Networks Interactive, Inc., on a timely basis or at all;
• Future financial performance, including availability, terms, and deployment of capital;
• The ability of suppliers and vendors to deliver products, equipment, software, and services;
• Our ability to achieve the efficiencies, savings and other benefits anticipated from our cost-reduction initiatives;
• The outcome of any pending or threatened litigation;
• Availability of qualified personnel;
• The possibility or duration of an industry-wide strike or other job action affecting a major entertainment industry union;
• Changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission and adverse outcomes from regulatory proceedings;
• Changes in income taxes due to regulatory changes or changes in our corporate structure;
• Changes in the nature of key strategic relationships with partners, distributors and equity method investee partners;
• Competitor responses to our products and services and the products and services of the entities in which we have interests;
• Threatened terrorist attacks and military action;
• Our level of debt;
• Reduced access to capital markets or significant increases in costs to borrow; and
• A reduction of advertising revenue associated with unexpected reductions in the number of subscribers.

These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles. For additional risk factors, refer to the "Risk Factors" section in our 2018 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Press Release, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other 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; direct-to-consumer streaming services such as Eurosport Player and MotorTrend OnDemand; digital-first and social content from Group Nine Media; a landmark natural history and factual content partnership with the BBC; and a strategic alliance with PGA TOUR to create the international home of golf. Discovery's portfolio of premium brands includes Discovery Channel, HGTV, Food Network, TLC, Investigation Discovery, Travel Channel, MotorTrend, 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.