Filing identity and period
The supplied filing is Discovery, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2021, filed April 29, 2021. It is not a Warner Bros. Discovery, Inc. filing; investors should verify the registrant and period before relying on this summary.
Discovery operated U.S. Networks and International Networks, distributing programming through television, licensing, digital platforms and direct-to-consumer services. Discovery+ launched in the U.S. in January 2021. The company reported approximately 13 million total DTC subscribers at quarter-end.
Financial results
Amounts are in millions of dollars except per-share data. Comparisons are with the three months ended March 31, 2020.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $2,792 | $2,683 | +4% |
| Advertising revenue | $1,415 | $1,402 | +1% reported; down 1% ex-FX |
| Distribution revenue | $1,310 | $1,223 | +7% reported; +6% ex-FX |
| Operating income | $396 | $779 | −49% |
| Net income | $191 | $407 | −53% |
| Net income attributable to Discovery | $140 | $377 | −63% |
| Diluted EPS | $0.21 | $0.55 | Lower |
| Adjusted OIBDA | $837 | $1,113 | −25% |
| Cash from operating activities | $269 | $335 | −20% |
GAAP operating margin was approximately 14.2%, versus 29.0% a year earlier; net margin was approximately 6.8%, versus 15.2%. Adjusted OIBDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Balance sheet and liquidity
- Cash and cash equivalents were $2.008 billion at March 31, down from $2.091 billion at December 31, 2020.
- Debt, net of discounts and issuance costs, was $15.026 billion, including $351 million current and $14.675 billion noncurrent. Gross senior-note principal was $15.466 billion.
- Cash exceeded current debt by about $1.657 billion; the company also had $2.5 billion of undrawn revolving-credit and commercial-paper capacity. No amounts were outstanding under either program, and the company reported covenant compliance.
- Investing activities provided $156 million, including $274 million of investment-sale and maturity proceeds. Financing activities used $469 million, including $339 million to redeem notes due 2021 and $183 million of distributions to noncontrolling interests. The net decrease in cash, cash equivalents and restricted cash was $114 million.
Material changes and management commentary
- Revenue growth was driven in part by Discovery+ and higher U.S. affiliate rates. U.S. distribution revenue grew 12%; however, U.S. linear-network subscribers were down 4% year over year and fully distributed subscribers down 2%.
- U.S. advertising revenue fell 4%, primarily with lower ratings; international advertising improved. Overall advertising was slightly down excluding foreign-exchange effects.
- Higher marketing and support costs for Discovery+ weighed on results. Selling, general and administrative expense rose 63%, with U.S. Networks’ expense up 89%. International content costs also increased, including Discovery+ amortization and European sports spending.
- Adjusted OIBDA declined 19% at U.S. Networks and 27% at International Networks. Operating income also reflected higher depreciation and amortization and a sharp increase in share-based compensation expense, from a $4 million benefit in Q1 2020 to $64 million expense in Q1 2021.
- Other income was $68 million versus a $58 million expense a year earlier, including foreign-currency gains and investment gains. The improvement partly offset weaker operating income.
Outlook, risks and contingencies
- No formal numerical earnings or revenue guidance is provided in the supplied filing. Management said it did not then expect COVID-19 to have a significant impact on demand in fiscal 2021, while emphasizing that effects remained uncertain. The Tokyo Olympics postponement shifted related revenue and significant expenses into 2021.
- Management expected cash, operating cash generation and available credit to fund needs for the next 12 months. It also expected continued significant content investment and future costs to develop and market Discovery+.
- COVID-19, advertising demand, changing viewing and distribution patterns, affiliate renewals, streaming adoption, foreign exchange, content costs, debt and access to capital were identified as risks. The company continued cost-reduction and restructuring initiatives; the full future amounts were not reasonably estimable.
- Debt maturities included $351 million in March 2022 and a further $230 million in Q2 2022. Certain noncontrolling-interest put rights could be exercised beginning in 2021; redeemable noncontrolling interests were $356 million.
- Management did not expect routine litigation to have a material adverse effect. Uncertain-tax-position reserves were $362 million; up to $69 million of related unrecognized tax benefits could decrease within 12 months.
- The company disclosed exceptional stock-price volatility, including trading pressure reportedly associated with financial institutions unwinding Archegos-related hedge positions after margin calls. It said it had not experienced material operating or financial changes explaining the volatility.
Important facts for investors to verify
- Confirm the filing is Discovery, Inc.’s Q1 2021 10-Q, not a Warner Bros. Discovery filing.
- Assess whether Discovery+ subscriber growth and distribution revenue can offset linear subscriber declines and elevated launch marketing and content spending.
- Review the drivers and sustainability of the steep year-over-year declines in operating income, net income and Adjusted OIBDA.
- Check debt maturities, liquidity and potential cash requirements from put rights and distributions to noncontrolling interests.
- Evaluate the filing’s non-GAAP Adjusted OIBDA definition, foreign-exchange effects, and the unusually favorable swing in other income when comparing periods.