Business context and reporting period
Registrant discrepancy: The supplied filing is Discovery Communications, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013—not a filing by Warner Bros. Discovery, Inc. The summary below describes the registrant named in the filing.
Discovery operated U.S. Networks, International Networks and Education businesses. It generated revenue principally from distribution fees and advertising. The filing was signed July 30, 2013.
Financial results and position
All amounts are U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1,467 | $1,126 | $2,623 | $2,211 |
| Operating income | $564 | $488 | $978 | $936 |
| Net income attributable to Discovery stockholders | $300 | $293 | $531 | $514 |
| Diluted EPS | $0.82 | $0.76 | $1.45 | $1.33 |
| Adjusted OIBDA | $668 | $544 | $1,166 | $1,052 |
- Q2 revenue rose 30% and six-month revenue 19%. Advertising increased 40% and 27%, respectively; distribution revenue increased 23% and 12%.
- GAAP operating income increased 16% in Q2 and 4% for the first half. Operating margin was approximately 38.4% in Q2 versus 43.3% a year earlier, and 37.3% for the first half versus 42.3%. Adjusted OIBDA increased 23% and 11%, respectively.
- For the first half, operating cash flow was $470 million, compared with $389 million. Investing used $1.964 billion, including $1.832 billion for acquisitions; financing provided $680 million. Cash fell from $1.201 billion at year-end to $375 million.
- At June 30, cash was $375 million, current assets $2.265 billion and current liabilities $1.002 billion. Reported debt, net of discount, was $6.478 billion; cash less debt implies approximately $6.103 billion of net debt. The $1.0 billion revolving facility was undrawn, with approximately $999 million unused after letters of credit. Management said available cash, operating cash flow and revolver capacity should meet needs for the next 12 months.
- Segment revenue for the first half was $1.479 billion in U.S. Networks, $1.096 billion in International Networks and $51 million in Education. Adjusted OIBDA was $849 million, $449 million and $11 million, respectively.
Material changes versus prior comparable period
- The April 2013 acquisition of SBS Nordic for approximately $1.8 billion materially increased International Networks revenue and expenses. Newly acquired businesses contributed $195 million of Q2 revenue and $48 million of Adjusted OIBDA; for the first half, they contributed $206 million and $48 million. Excluding acquisitions and foreign-exchange effects, company revenue grew 13% in Q2 and 9% in the first half; Adjusted OIBDA grew 14% and 6%.
- International Networks’ reported revenue rose 61% in Q2 and 40% for the first half; excluding newly acquired businesses and foreign-exchange effects, it grew 13% in each period. U.S. Networks revenue increased 13% and 7%, respectively.
- Costs of revenue and selling, general and administrative expense rose with content investment, revenue-related costs, marketing and personnel. Depreciation and amortization also increased, principally from acquired intangible assets.
- Interest expense increased $19 million in Q2 and $32 million for the first half, reflecting higher debt. The effective tax rate was 38% in both 2013 periods, up from 30% in Q2 2012 and 32% for the first half of 2012.
- Discovery consolidated Discovery Japan after acquiring an additional 30% interest and recorded a $92 million remeasurement gain on its previously held interest. This, partly offset by $56 million of foreign-exchange derivative losses related to the SBS Nordic purchase, contributed to first-half other income of $37 million versus expense of $2 million.
Outlook, commentary, risks and unusual items
- No specific financial guidance was provided in the supplied filing. Management described investment in content, distribution growth, advertising sales and expansion of international networks as strategic priorities.
- Management attributed revenue growth to contractual distribution-rate increases, advertising delivery and pricing, subscriber growth in Latin America, and audience and advertising gains in Western Europe. It noted the U.S. pay-TV subscriber base had remained flat over recent periods.
- Key risks include renewal of distributor agreements on acceptable terms, dependence on major distributors, advertising demand and subscriber trends, foreign-exchange and international-market exposure, and successful integration of acquisitions. The filing says U.S. Networks obtains approximately 90% of distribution revenue from its top 10 distributors and International Networks approximately 50% from its top 10.
- Discovery reported $509 million in advances and a note receivable from OWN, expected possible future funding, and noted OWN’s early operating results had been below its initial plan. Harpo held a future put right with a cumulative cap of up to $400 million; no liability was recorded for that right. The company reported no OWN impairment in the first half.
- Discovery’s Hub operating-performance guarantee had a maximum potential exposure of less than $80 million at June 30, 2013, expected to decline to zero during 2014. Management considered an adverse impact unlikely. Routine legal proceedings were not expected to have a material adverse effect.
- The company repurchased $265 million of common stock and $256 million of preferred stock in the first half. It had $1.3 billion of remaining common-stock repurchase authorization. Separately, $188 million of cash was held in foreign subsidiaries intended to be permanently reinvested abroad; repatriation could trigger U.S. tax.
Important facts for investors to verify
- Confirm the issuer and period: this is Discovery Communications, Inc.’s Q2 2013 10-Q, not a Warner Bros. Discovery filing.
- Assess how much reported growth reflects acquired businesses, particularly SBS Nordic, versus underlying organic growth, and monitor post-acquisition integration and returns.
- Review the effect of increased debt and interest expense alongside cash depletion from acquisitions and share repurchases.
- Track OWN funding, receivable recoverability and put rights, as well as the declining Hub guarantee exposure.
- Evaluate distributor renewal concentration, advertising and subscriber trends, and foreign-exchange exposure; the filing provides no quantified forward earnings guidance.