Business context and reporting period
This filing is Discovery Communications, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017—not a filing by Warner Bros. Discovery, Inc. The company operated U.S. Networks, International Networks, and Education and Other businesses. Dollar amounts below are in millions except per-share data.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,745 | $1,708 | $3,358 | $3,269 |
| Operating income | $630 | $586 | $1,117 | $1,075 |
| Net income | $380 | $415 | $601 | $684 |
| Net income attributable to Discovery | $374 | $408 | $589 | $671 |
| Diluted EPS | $0.64 | $0.66 | $1.01 | $1.08 |
| Adjusted OIBDA | $717 | $702 | $1,320 | $1,276 |
| Cash provided by operations | Not separately presented for the quarter | $443 | $390 |
- Q2 revenue rose 2%; distribution revenue increased 5%, while advertising revenue fell 1%. Operating income increased 8%, but net income attributable to Discovery declined 8%, reflecting higher equity-investee losses and foreign-exchange expense.
- For the first half, revenue increased 3%, operating income 4%, and Adjusted OIBDA 3%; attributable net income declined 12%. Distribution revenue grew 6%, while advertising revenue decreased 1%.
- Q2 operating margin was approximately 36.1%, versus 34.3% a year earlier. Adjusted OIBDA margin was approximately 41.1% in both quarters. First-half operating margin was approximately 33.3%, versus 32.9%.
- At June 30, cash was $206, total debt net of discount and issuance costs was $8,263, and current liabilities were $1,466. Cash declined $94 from year-end. The $2.0 billion revolving facility had $700 drawn; commercial paper outstanding was $73. Management stated available cash, operating cash flow, and revolver capacity should cover needs for the next 12 months.
- First-half cash used in investing was $293, including $270 in investment payments and $78 in property and equipment purchases. Cash used in financing was $295, including $501 of stock repurchases, partly offset by debt issuance and other financing receipts.
Material changes versus the prior comparable period
- Distribution growth was driven chiefly by contractual rate increases; U.S. subscriber declines partly offset growth. International distribution benefited from rate increases, including following added sports-content investment.
- Content costs rose: first-half content amortization was $901 versus $855, and reported costs of revenue increased 4%. International Networks’ costs of revenue rose 9% for the first half, with sports rights and production costs cited as key drivers.
- International Networks first-half revenue grew 4%, but Adjusted OIBDA was nearly flat at $430 versus $427; Q2 Adjusted OIBDA fell 4% to $236.
- First-half equity-investee losses increased to $95 from $31, mainly because of renewable-energy investments. Those investments produced $112 of tax benefits in the first half, including investment tax credits and deductions.
- Cash used in investing increased from $49 to $293, mainly due to investment spending, including $196 in solar-project entities. Stock repurchases were $501, down from $750 in the prior-year half.
Outlook, commentary, risks, and unusual items
- No quantified company-wide revenue or earnings guidance is provided in the supplied filing text. Management expects to continue investing significantly in content and says liquidity is sufficient for the next 12 months.
- On July 31, 2017, after quarter-end, Discovery announced an agreement to acquire Scripps Networks Interactive for a stated transaction value of $14.6 billion, including assumed net debt of approximately $2.7 billion. Consideration was structured as $63 cash and $27 in Discovery stock per Scripps share, subject to a stock-price collar. The transaction was expected to close by early 2018, subject to shareholder, regulatory, and customary approvals; cash consideration was expected to be funded with new debt and cash on hand. Fully committed financing had been secured.
- Discovery recorded a $54 debt-extinguishment loss in the first half after issuing $650 of notes and repurchasing $600 principal amount of existing notes. It also recorded a $4 loss on the April sale of Raw and Betty studios.
- Harpo exercised a put notice for up to $100 of its OWN interest. Valuation remained unresolved at June 30, Harpo could withdraw the notice, and Discovery had recorded no liability. Discovery also reported a $301 note receivable and advances to OWN, and stated it could provide further funding if necessary.
- Key exposures include distributor contract renewals and subscriber losses, advertising demand and audience ratings, foreign-exchange movements, rising content and sports-rights costs, equity-investee performance, and the financing and execution of the proposed Scripps acquisition. The filing discusses Brexit-related uncertainty for international distribution, licensing, currency, and regulation.
- Management reported disclosure controls were effective and stated that risk factors had not changed materially since year-end 2016. Routine legal claims were not believed likely to have a material adverse effect.
Important facts for investors to verify
- Confirm the filing entity and historical period: this is Discovery Communications’ 2017 Q2 filing, not a Warner Bros. Discovery filing.
- Review the Scripps transaction’s final financing, approvals, closing terms, and resulting leverage and share dilution; it was announced after the reporting date.
- Track distribution renewals, subscriber trends, and advertising ratings and pricing, particularly as these affect both distribution and advertising revenue.
- Assess the sustainability and cash/tax consequences of renewable-energy investments, including the reported investee losses, tax benefits, and remaining funding commitments.
- Monitor debt maturities, revolving-facility availability, share repurchases, and the potential cash requirement from the OWN put and other redeemable noncontrolling interests.