Business context and reporting period
This is Discovery, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2021—not a filing under the later Warner Bros. Discovery name. Discovery operated U.S. Networks and International Networks, including linear TV, content licensing and direct-to-consumer services. Management reported 20 million paid DTC subscriptions at quarter-end; its definition includes certain wholesale and partner subscriptions.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2020 periods.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3,150 | $2,561 | $9,004 | $7,785 |
| Operating income | $329 | $531 | $1,504 | $2,027 |
| Net income | $197 | $330 | $1,106 | $1,037 |
| Net income attributable to Discovery | $156 | $300 | $968 | $948 |
| Diluted EPS | $0.24 | $0.44 | $1.46 | $1.40 |
| Adjusted OIBDA (non-GAAP) | $726 | $954 | $2,680 | $3,194 |
- Q3 revenue grew 23%; advertising rose 12%, distribution 15%, and other revenue increased to $313 million from $56 million. Nine-month revenue grew 16%.
- Operating margin was about 10.4% in Q3 versus 20.7% a year earlier; nine-month margin was about 16.7% versus 26.0%. Adjusted OIBDA margin was about 23.0% versus 37.3% in Q3 and 29.8% versus 41.0% for nine months.
- Q3 earnings fell despite revenue growth, as costs of revenue rose 52% and SG&A rose 49%. The nine-month increase in net income included higher other income and lower tax expense; it did not reflect stronger operating income.
- Operating cash flow was $1.914 billion for nine months, down from $2.186 billion. Investing used $30 million and financing used $811 million. Capital expenditures were $273 million; operating cash flow less capital expenditures was $1.641 billion (derived, not a company-defined free-cash-flow measure).
- At September 30, cash and equivalents were $3.116 billion; debt was $15.217 billion gross and $14.785 billion net of unamortized discount, premium and issuance costs. Cash less gross debt implies net debt of about $12.1 billion. Debt declined from $15.848 billion gross at year-end 2020. The company had $2.5 billion of undrawn revolving-credit capacity and no revolver or commercial-paper borrowings.
- Current assets were $6.656 billion and current liabilities $3.335 billion. Management said cash, operating cash generation and credit availability were expected to meet cash needs for the next 12 months. The company reported compliance with credit covenants.
Material changes and management commentary
- Advertising recovery, contractual affiliate-rate increases and discovery+ contributed to revenue growth. Distribution gains were partly offset by declining linear subscribers: U.S. linear-network subscribers were down 8% year over year (down 4% excluding the sold Great American Country network).
- International Networks’ Q3 Adjusted OIBDA was a loss of $79 million, versus income of $127 million a year earlier; nine-month Adjusted OIBDA declined 46% to $287 million. The Olympics and other sporting events drove higher revenue, but also substantially higher content costs. U.S. Networks Q3 Adjusted OIBDA was nearly flat at $963 million; nine-month results declined 6%.
- Discovery+ launch-related content, marketing and technology costs increased. Management said content investment and development and marketing costs for the service were expected to remain significant. No quantified financial guidance was provided.
- The Tokyo Olympics, postponed from 2020, occurred in July and August 2021, shifting related revenue and significant expenses into 2021. Management did not expect COVID-19 to have a significant impact on 2021 demand, while noting the pandemic’s duration and effects remained uncertain.
- Other income was $78 million in Q3 and $255 million for nine months, including gains on derivatives and investment value changes. The nine-month total also included a $77 million gain on the Sharecare investment before its reclassification as a publicly traded investment. These items contributed to the difference between operating and net-income trends.
- Discovery agreed to combine with AT&T’s WarnerMedia business, with a mid-2022 target close subject to Discovery shareholder and regulatory approvals and other conditions. AT&T shareholders were expected to own 71% and Discovery shareholders 29% of the combined company on a fully diluted basis. AT&T was to receive approximately $43 billion, subject to adjustment, in cash, debt securities and WarnerMedia debt retained. The filing warned that closing, integration, synergies and regulatory conditions were uncertain; specified termination circumstances carry a $720 million Discovery fee or a $1.8 billion AT&T fee.
- Upon closing, Discovery expected to assume responsibility for substantial additional debt, described as up to approximately $43 billion, including WarnerMedia debt and transaction financing. The filing also described a $10 billion term loan entered by an AT&T subsidiary, expected to be guaranteed by Discovery and certain subsidiaries upon closing.
Risks, contingencies and unusual items
- Key risks include the WarnerMedia transaction not closing or being delayed, integration and synergy shortfalls, increased leverage and interest costs, DTC competition and execution, continued linear subscriber declines, advertising and affiliate-market changes, COVID-19 uncertainty, foreign exchange and international regulatory exposure.
- Discovery held $358 million of redeemable noncontrolling interests; certain put rights could be exercised in 2021 and require cash. Uncertain tax-position reserves were $407 million; up to $75 million of related tax benefits could decrease within 12 months.
- Management said routine litigation was not expected to have a material adverse effect. The filing also disclosed regulatory risk to TVN in Poland, including possible ownership restrictions. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether DTC subscription growth and monetization offset continuing linear subscriber losses, and how the 20 million subscription figure is defined and trends.
- Whether Olympics-related costs and discovery+ content and marketing spending normalize, and how segment profitability develops after these expenses.
- Cash generation, debt maturities and refinancing capacity; in particular, the $349 million note due in March 2022 and the implications of the proposed combination’s additional debt.
- WarnerMedia transaction approvals, final consideration and debt, termination-fee exposure, ownership split, closing timing and expected integration costs and benefits.
- The contribution of investment and derivative gains, tax benefits and disposition gains to reported earnings, versus recurring operating performance.