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Discovery (DISCA) Q2 Earnings Lag Estimates, Revenues Up Y/Y

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Discovery (DISCA - Free Report) reported dismal results for second-quarter 2018 wherein both the top- and the bottom-line figures fell short of the Zacks Consensus Estimate.

Revenues surged 63% year over year to $2.845 billion. The Zacks Consensus Estimate was pegged at $2.852 billion. Excluding the impact of foreign currency and the Scripps Networks Interactive, Motor Trend Group and the Oprah Winfrey Network transactions (collectively called “Transactions”), revenues remained consistent with the year-ago period. On a pro forma basis, revenues advanced 1% from the year-ago quarter.

Distribution revenues (41.7% of revenues) increased 38.4% from the year-ago quarter to $1.186 billion. Advertising revenues (54.9%) rose 94.2% to $1.563 billion. Other revenues were $96 million compared with $83 million reported in the year-ago quarter.

The company posted adjusted earnings of 66 cents per share (excludes the impact of amortization of acquisition-related intangible assets, net of tax), which declined 2.9% from the year-ago period. The figure also missed the Zacks Consensus Estimate of 84 cents per share.

The bottom line was negatively impacted by higher restructuring charges associated with Scripps Networks’ integration and higher interest expense, which offset the improved operational efficiency of the company.

Nevertheless, management is optimistic about the integration process of Scripps, which is already five months old and proving to be accretive to the company’s financials. Discovery currently holds the “second largest share of TV viewing” after NBC Universal.

Segment Details

U.S. Networks (62.6% of revenues) increased 100% from the year-ago quarter to $1.78 billion. Excluding the impact of “Transactions”, revenues decreased 1%, as distribution and advertising revenues remained flat due to lower program and merchandising sales, Other revenues decreased 33% year over year.

On a pro forma basis, U.S. Networks' revenues grew 1%, driven by 1% growth in distribution and advertising revenues, while Other revenues decreased 10%.

Distribution revenue growth was driven by increases in affiliate fee rates, partially offset by a decline in affiliate subscribers. Advertising revenues primarily came on the back of continued monetization of digital content offerings as well as higher volumes, partially offset by lower linear delivery.

On a pro forma basis, Discovery’s fully distributed networks’ subscribers declined 3%, while subscribers of the company’s total portfolio fell 5% in the quarter.

International Networks revenues (42.3% of revenues) increased 30% year over year to $1.051 billion. Excluding the impact of the acquisition of Scripps and currency effects, segment revenues increased 5%, driven by 6% growth in distribution revenues and 60% improvement in other revenues. Advertising revenues remained constant.

On a pro forma basis, International Networks' revenues increased 5%, driven by 6% increase in distribution revenues, 2% growth in advertising revenues and 37% increase in other revenues.

Discovery’s pro-forma International Networks’ distribution revenues benefited from higher digital subscription revenues in Europe and higher price in Latin America, slightly offset by declining prices in Asia.

Pro forma Advertising revenues benefited from increased pricing and volume across key markets in Europe.

Education revenues (0.6% of revenues) declined 68% year over year to $14 million in the reported quarter.

On Apr 30, 2018, Discovery closed the previously announced sale of a controlling equity stake in its Education business to Francisco Partners in a cash deal worth $120 million. The company will retain 12.5% equity interest and license the Discovery Education brand to the business.

Operating Details

In the second quarter, adjusted operating income before depreciation & amortization (OIBDA) increased 69% from the year-ago quarter to $1.214 billion. Excluding the impact of the “Transactions” and foreign currency fluctuations, adjusted OIBDA increased 5%.

U.S. Networks grew 73% and International Networks grew 42%. However, Education and Other decreased $5 million owing to the sale of the majority stake in the segment.

On a pro forma basis, excluding the impact of foreign currency, adjusted OIBDA increased 5% from the year-ago quarter’s figure. International networks’ adjusted OIBDA increased 14% and U.S. Networks’ adjusted OIBDA increased 1%.

Balance Sheet & Cash Flow

As of Jun 30, cash & cash equivalents were $392 million compared with $812 million as of Mar 31.

Long-term debt was $17.68 billion, as compared to $19.21 billion at the end of the previous quarter.

Cash flow from operating activities was $556 million.

Zacks Rank & Stocks to Consider

Currently, Discovery carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector include Micron Technology (MU - Free Report) and, Inc. (AMZN - Free Report) and Weight Watchers International Inc (WTW - Free Report) all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for Micron, Amazon and Weight Watchers International is projected to be 8.2%, 26.5% and 17.5% respectively.

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