Business context and reporting period
The filing is Discovery, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2019, filed November 7, 2019. Although the request metadata names Warner Bros. Discovery, the filing itself identifies the registrant as Discovery, Inc. Discovery operates U.S. Networks, International Networks and a production-studio business, distributing media content across television, digital and licensing platforms.
Key financial metrics
Amounts are in millions of dollars except per-share data, percentages and subscriber figures.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2,678 | $2,592 | $8,270 | $7,744 |
| Operating income | $619 | $369 | $2,304 | $1,223 |
| Net income | $297 | $135 | $1,702 | $382 |
| Net income attributable to Discovery | $262 | $117 | $1,593 | $325 |
| Diluted EPS | $0.35 | $0.16 | $2.21 | $0.47 |
| Adjusted OIBDA | $1,126 | $1,060 | $3,566 | $2,991 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2,167 | $1,647 |
- Q3 revenue increased 3%; operating income rose 68% and Discovery-attributable net income rose 124%. Operating margin was approximately 23.1%, versus 14.2% a year earlier. Adjusted OIBDA increased 6% (9% excluding foreign-exchange effects).
- For the nine months, reported revenue increased 7% and Adjusted OIBDA increased 19%. However, against management’s pro forma combined 2018 revenue comparison, revenue decreased 1% (9% growth excluding foreign-exchange effects). The reported comparison is affected by Scripps Networks being included only from March 6, 2018.
- Nine-month net income includes a one-time, non-cash $457 million deferred tax benefit from legal-entity restructurings; the reported effective tax rate was 2%. Q3 tax expense was $147 million, or 33% of pretax income, including the tax impact of a nondeductible goodwill impairment.
- Cash from operations was $2,167 million for nine months. Capital expenditures were $189 million; a simple operating-cash-flow-less-capital-expenditures proxy is $1,978 million, not a company-reported free-cash-flow measure. Cash ended at $813 million, down from $986 million at year-end 2018.
- At September 30, debt was $15,496 million principal, or $15,368 million net of unamortized discounts, premiums and issuance costs. Net debt on that carrying-value basis was approximately $14,555 million. Current assets were $4,313 million versus current liabilities of $2,837 million. The $2.5 billion revolving facility had no borrowings; the company reported covenant compliance.
Material changes versus comparable periods
- Q3 advertising revenue increased 4% to $1,413 million and distribution revenue increased 4% to $1,201 million; other revenue fell 15% to $64 million. Content and selling, general and administrative costs declined, and restructuring charges fell to $8 million from $224 million.
- U.S. Networks Q3 revenue rose 3% and Adjusted OIBDA rose 12% to $1,005 million. Contractual affiliate-rate increases and streaming-platform carriage supported distribution, while overall portfolio subscribers were 4% lower year over year (fully distributed networks were down 1%).
- International Networks Q3 revenue rose 4%, but Adjusted OIBDA fell 7% to $237 million as costs and expenses increased. Excluding foreign-exchange effects, management reported 5% Adjusted OIBDA growth.
- International Networks recorded a $155 million goodwill impairment after weaker Asia-Pacific outlook assumptions and underperformance of certain sports investments. Nine-month reported other revenue decreased 54%, primarily reflecting the prior-year Olympics sports-rights sublicensing.
- Debt repayments and refinancing reduced the current portion of debt to $611 million from $1,819 million at year-end 2018. The company issued $1.5 billion of long-dated notes and used proceeds in part to redeem or repurchase nearer-term notes; nine-month debt repayments were $2,652 million and financing cash outflow was $1,992 million.
Outlook, risks and unusual items
- Management expected cash on hand, operating cash generation and revolving-credit availability to fund cash needs for the next 12 months. It gave no specific revenue or earnings guidance in the provided filing text.
- Management planned continued significant investment in content. The filing identifies risks from changing viewing habits and streaming competition, audience and subscriber declines, advertising-market conditions, distributor contract renewals and consolidation, foreign exchange, international political and regulatory uncertainty, and the ability to realize Scripps integration savings and synergies.
- U.S. agreements with major distributors expire at various dates from 2019 through 2024. Delayed renewals, service interruptions or less favorable terms could pressure both distribution and advertising revenue.
- The filing cites uncertainty around Brexit and its potential effects on advertising, subscribers, distribution, employees, currency and regulation. It also discloses ongoing tax audits and $425 million of reserves for uncertain tax positions.
- Other notable items include $300 million of Q3 share repurchases; $215 million invested in or advanced to equity investees during the first nine months; and the UKTV joint-venture dissolution, after which Discovery took full control of three lifestyle channels and entered a 10-year BBC content-licensing arrangement.
- The 2019 adoption of lease accounting added recognized operating-lease assets and liabilities; at quarter end operating-lease liabilities were $698 million. The company also recorded approximately $370 million of lease liabilities associated with its planned headquarters move.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is for Discovery, Inc., not a Warner Bros. Discovery-branded filing.
- Separate underlying performance from acquisition and one-time effects, especially Scripps Networks comparison timing and the $457 million deferred tax benefit.
- Track U.S. subscriber declines, distributor renewal outcomes, and whether pricing and streaming carriage offset linear audience erosion.
- Assess Asia-Pacific performance and the assumptions behind the $155 million goodwill impairment; the filing notes that valuation estimates depend on significant unobservable assumptions.
- Monitor debt maturities, leverage and refinancing costs, alongside content spending, share repurchases and cash generation.