Discovery, Inc. Reports First Quarter 2018 Results

SILVER SPRING, Md., May 8, 2018 /PRNewswire/ -- Discovery, Inc. ("Discovery" or the "Company") (NASDAQ: DISCA, DISCB, DISCK) today reported financial results for the first quarter ended March 31, 2018.

"The first quarter of 2018 was a historic and pivotal period for Discovery. We closed on our transaction to acquire Scripps Networks Interactive, becoming the global leader in real life entertainment and home to an enhanced portfolio of quality and trusted enthusiast brands," said David Zaslav, President and Chief Executive Officer for Discovery. "As our industry continues to evolve, we are uniquely positioned to maximize the value of our traditional pay-TV business while driving new opportunities and growth from our digital and direct to consumer businesses around the world."

First Quarter ResultsFirst quarter 2018 revenues of $2,307 million increased 43% on a reported basis compared with the prior year quarter. Excluding the impact of foreign currency transactions and the Scripps Networks Interactive ("Scripps"), The Enthusiast Network ("VTEN") and the Oprah Winfrey Network ("OWN") transactions (collectively, "the Transactions")(1), revenues increased 14%, as International Networks grew 28% and U.S. Networks grew 3%. On a Pro Forma(2) basis, excluding the impact of foreign currency fluctuations, total company first quarter revenues grew 10%, as International Networks grew 26% and U.S. Networks grew 2%.

First quarter Adjusted Operating Income Before Depreciation and Amortization ("Adjusted OIBDA")(3) increased 16% to $697 million on a reported basis, and excluding the impact of the Transactions and foreign currency fluctuations, Adjusted OIBDA decreased 9%, as 3% growth at U.S. Networks was more than offset by a 37% decline at International Networks, primarily due to the timing of costs associated with the Olympics. On a Pro Forma basis, excluding the impact of foreign currency, total company first quarter Adjusted OIBDA declined 6%, as U.S. Networks' Adjusted OIBDA grew 1% and International Networks decreased 30%, primarily due to the timing of costs associated with the Olympics.

First quarter net income available to Discovery, Inc. ("DCI Net Income") decreased to a loss of $8 million compared with $215 million in the prior year quarter primarily due to lower operating results, higher restructuring charges, other transaction costs associated with the acquisition of Scripps and higher interest expense, which were partially offset by a tax benefit in the first quarter of 2018 versus an expense in the prior year and the debt extinguishment charge last year. Diluted earnings per share(4) decreased to $(0.01) due to lower DCI Net Income. Adjusted Earnings Per Diluted Share ("Adjusted EPS")(3),(4), which excludes the impact of amortization of acquisition-related intangible assets, net of tax was $0.16. Adjusted EPS excluding restructuring costs and other Scripps related transaction costs, primarily legal and financial fees from legacy Scripps, was $0.53, and included $226 million (or $0.37 per share) of after-tax restructuring costs and other transaction costs.

Free cash flow(1) decreased to $112 million for the first quarter of 2018 as cash flow from operations decreased to $160 million while capital expenditures of $48 million were relatively consistent with the prior year. First quarter cash flow from operations decreased primarily due to higher interest payments as well as transaction and integration costs associated with the acquisition of Scripps.

SEGMENT RESULTS

Total Company

U.S. Networks

U.S. Networks' revenues for the first quarter of 2018 increased 42% to $1,174 million on a reported basis compared with the prior year quarter. Excluding the impact of the Transactions, revenues increased 3%, as distribution and advertising revenues grew 2% and 4%, respectively. On a Pro Forma basis, U.S. Networks' revenues for the first quarter grew 2%, driven by 2% distribution growth and 2% advertising growth. Distribution revenue growth was driven by increases in affiliate fee rates, partially offset by a decline in affiliate subscribers. On a Pro Forma basis, subscribers to our fully distributed networks declined 3% while subscribers to our total portfolio declined 5% in the quarter. The growth in Pro Forma advertising revenues was primarily driven by the continued monetization of digital content offerings as well as higher volumes, partially offset by lower linear delivery.

Operating expenses for U.S. Networks on a reported basis increased 59% to $522 million compared with the prior year quarter. Excluding the impact of the Transactions, operating expenses increased 2%, as costs of revenues increased 3% and SG&A expenses declined 1%. On a Pro Forma basis, total operating expenses increased 3% as costs of revenues increased 7%, primarily attributable to higher content spending and digital media production costs, partially offset by a 3% decrease in SG&A expenses primarily due to reduced marketing spending.

U.S. Networks' Adjusted OIBDA increased 30% to $652 million compared with the prior year quarter. Excluding the impact of the Transactions, U.S. Networks' Adjusted OIBDA increased 3% and Pro Forma Adjusted OIBDA increased 1%.

International Networks

International Networks' revenues for the first quarter of 2018 increased 47% to $1,098 million. Excluding the impact of the acquisition of Scripps and currency effects, International Networks' revenues increased 28%, driven by 10% growth in distribution revenues, 11% growth in advertising revenues and significant growth in other revenues. On a Pro Forma basis, excluding currency effects, International Networks' revenues increased 26%, driven by a 9% increase in distribution revenues, 11% growth in advertising revenues and a significant increase in other revenues. Pro Forma distribution revenue growth was primarily due to increases in digital revenue and higher contractual rates in Europe following further investment in sports content, contributions from content deliveries under licensing agreements in Asia and increases in rates in Latin America, partially offset by decreases in subscribers in Latin America and decreases in contractual rates in Asia. Pro Forma advertising revenues increased primarily due to increases in pricing and volume across key markets in Europe and increases in ratings from coverage of the Olympics, partially offset by lower pricing and delivery in Latin America and Asia. The significant growth in other revenues is primarily due to sublicensing of Olympics sports rights to broadcast networks throughout Europe.

Operating expenses for International Networks on a reported basis increased 74% compared with the prior year quarter. Excluding the impact of the acquisition of Scripps and foreign currency exchange rates, operating expenses increased 51% as costs of revenues increased 66% and SG&A increased 17%. On a Pro Forma basis, excluding currency effects, operating expenses increased 44% as costs of revenues increased 58% and SG&A increased 15%, with all cost increases primarily due to the timing of costs associated with the Olympics.

International Networks' Adjusted OIBDA decreased 29% to $137 million. Excluding the impact of the acquisition of Scripps and currency effects, International Networks' Adjusted OIBDA decreased 37%, while on a Pro Forma basis, excluding currency effects, Adjusted OIBDA declined 30% primarily due to the timing of revenues versus costs associated with the Olympics.

Education and Other

Education and Other revenues for the first quarter of 2018 decreased $2 million and Adjusted OIBDA increased $9 million, both primarily due to the sale of the Raw and Betty production studios on April 29, 2017.

Corporate and Inter-Segment EliminationsAdjusted OIBDA for the first quarter of 2018 declined 10% primarily due to increased personnel costs following the consolidation of Scripps. Excluding the impact of the Transactions and the impact of foreign currency fluctuations, Adjusted OIBDA decreased 8% due to increased cloud playout costs and personnel related to data analytics and information security. On a Pro Forma basis, excluding currency effects, Adjusted OIBDA decreased 2% compared with the prior year quarter.

OTHER ITEMS

Scripps Networks Interactive, Inc.On March 6, 2018, Discovery merged with Scripps pursuant to the Agreement and Plan of Merger by and among Discovery, Scripps and Skylight Merger Sub, Inc. dated July 30, 2017. The merger consideration consisted of: (i) for Scripps shareholders who did not make an election or elected the mixed consideration, $65.82 in cash and 1.0584 shares of Discovery Series C common stock for each Scripps share, (ii) for Scripps shareholders that elected the cash consideration, $90.00 in cash for each Scripps share, and (iii) for Scripps shareholders that elected the stock consideration, 3.9392 shares of Discovery Series C common stock for each Scripps share, in accordance with the terms and conditions set forth in the merger agreement.

Discovery EducationOn April 30, 2018, the Company closed the previously announced sale of a controlling equity stake in its Education business to Francisco Partners for cash of $120 million, and will be unconsolidated as of this date. The Company will retain a 12.5% equity interest and license the Discovery Education brand to the business.

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 15 for reconciliations to the most comparable GAAP measures.

Adjusted OIBDA and Adjusted OIBDA Excluding the Impact of Currency EffectsThe 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) 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 of Scripps Networks and planned integration.

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, depreciation and amortization, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions, certain inter-segment eliminations related to production studios, and third-party transaction costs directly related to the acquisition of Scripps and planned integration from the calculation of Adjusted OIBDA due to their impact on comparability between periods. 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 EffectsAdjusted 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 EffectsThe 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 based on 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.

Free Cash FlowThe 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 AdjustmentsThe total company, 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 of consideration transferred 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.

Conference Call InformationDiscovery, Inc. will host a conference call today, May 8, 2018 at 8:30 a.m. ET to discuss its first 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 the passcode: DISCA.

Cautionary Statement Concerning Forward-Looking StatementsThis 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 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

View original content:http://www.prnewswire.com/news-releases/discovery-inc-reports-first-quarter-2018-results-300644398.html

SOURCE Discovery, Inc.