Discovery Communications Reports First Quarter 2017 Results

SILVER SPRING, Md., May 9, 2017 /PRNewswire/ -- Discovery Communications, Inc. ("Discovery" or the "Company") (NASDAQ: DISCA, DISCB, DISCK) today reported financial results for the first quarter ended March 31, 2017.

"Improved ratings across many of Discovery's key distinctive programs and brands, coupled with strong global distribution growth, led to solid organic growth in the first quarter," said President and CEO David Zaslav. "Beyond our linear business, we continue to focus on new strategic partnerships and investments to help drive our multiplatform growth strategy and ensure that we reach our global superfans on every screen."

First Quarter Results

First quarter revenues of $1,613 million increased 3% compared to the prior year primarily due to 5% growth at International Networks and 3% growth at U.S. Networks.  Adjusted Operating Income Before Depreciation and Amortization ("OIBDA")⁽¹⁾ increased 5% to $603 million primarily due to 6% growth at U.S. Networks and 7% growth at International Networks.  Excluding currency effects, total Company revenues grew 5% and Adjusted OIBDA grew 4%.

First quarter net income available to Discovery Communications, Inc. ("DCI Net Income") decreased 18% to $215 million as higher operating results and lower income tax expense were more than offset by higher losses from equity investees primarily due to the timing of our solar investments, which had a negative impact on net income in the first quarter but are expected to have a positive impact on net income for the full year, a $34 million (or $0.06 per share) after-tax debt extinguishment charge and higher restructuring charges than in the prior year.  Diluted earnings per share⁽²⁾ decreased $0.05, or 12%, to $0.37 due to lower DCI Net Income, partially offset by fewer shares outstanding.  Adjusted Earnings Per Diluted Share ("Adjusted EPS")⁽¹⁾, which excludes the impact of amortization of acquisition-related intangible assets, decreased $0.05, or 11%, to $0.41.  Adjusted EPS excluding currency effects decreased $0.05, or 11%, and Adjusted EPS excluding currency effects and the debt extinguishment charge increased $0.01, or 2%.

Free cash flow increased to $208 million for the first quarter of 2017 from $47 million in the prior year as cash flow from operations increased significantly to $255 million from $62 million while capital expenditures increased to $47 million from $15 million.  Cash flow from operations increased primarily driven by improved operating results and lower cash taxes due partially to the timing of cash tax payments.  Capital expenditures increased primarily due to timing and higher technology and infrastructure spending.  Free cash flow excluding the impact of currency effects increased 167%.  Free cash flow is defined as cash provided by operating activities less purchases of property and equipment.

SEGMENT RESULTS

U.S. Networks

U.S. Networks' revenues for the first quarter 2017 increased 3% to $829 million, driven by 5% distribution growth and 1% advertising growth.  Distribution revenue growth was primarily driven by higher rates partially offset by a slight decline in subscribers and, to a lesser extent the growth was driven by contributions from other distribution revenues.  Other distribution revenues were comprised of content deliveries under licensing agreements.  Advertising revenues increased 1% primarily due to higher pricing and continued monetization of our GO platform, partially offset by lower delivery and the impact of the Group Nine transaction⁽¹⁾.  Excluding the impact of the Group Nine transaction, advertising revenues would have increased 2%.

Operating expenses decreased 2% compared to the prior year primarily due to lower content amortization and impairment costs, lower personnel costs, and the impact of the Group Nine transaction, partially offset by higher marketing and research costs.  Adjusted OIBDA increased 6% to $501 million due to higher revenues and lower operating costs.

International Networks

International Networks' revenues for the first quarter increased 5% to $747 million and Adjusted OIBDA increased 7% to $194 million.  Changes in foreign currency exchange rates reduced International Networks' revenue growth by 3% and increased Adjusted OIBDA growth by 3%.  Excluding currency effects, total revenues increased 8%.  Distribution revenues, excluding the impact of currency effects, grew 10% mostly due to higher affiliate rates in Europe as a result of our continuing investment in sports, as well as a higher number of subscribers and higher affiliate rates in Latin America.  Advertising revenues, excluding the impact of currency effects, increased 3% due to growth in the Nordics (primarily due to the absence of the Telenor blackout that occurred in the first quarter of 2016) as well as growth in CEEMEA and Latin America, partially offset by declines in the U.K. and Asia due to ratings and market challenges.

Operating expenses increased 5%, or 9% excluding the impact of foreign currency exchange rates, primarily due to increased sports and other content and production costs. Excluding the impact of foreign currency exchange rates, Adjusted OIBDA increased 4%, reflecting revenue growth, partially offset by higher operating expenses.

Education and Other

Education and Other revenues for the first quarter 2017 decreased $7 million compared to the prior year primarily due to the timing of production deliveries at the Studios production business. Adjusted OIBDA decreased $5 million primarily due to lower Studios revenues and additional investments in the Education business.

Corporate and Inter-Segment Eliminations

Adjusted OIBDA for the first quarter 2017 decreased $6 million compared to the prior year due to higher personnel and legal costs. 

STOCK REPURCHASE

During the quarter, the Company, pursuant to its existing stock repurchase program, repurchased 5.2 million shares of its Series C common stock at an average price of $26.97 per share, for a total of $140 million.  On February 16, 2017, the Company repurchased 1.2 million Series C convertible preferred shares from Advance/Newhouse Programming Partnership ("ANPP") at $49.89 per share (or $24.95 per share on an as converted to common basis), for a total of $60 million pursuant to the previously announced share repurchase agreement described below between the Company and ANPP.  In total, the Company spent $200 million on share repurchases during the first quarter of 2017.

Through March 31, 2017, the Company had repurchased a total of 155.0 million shares of Series C common stock and 2.8 million shares of its Series A common stock under its stock repurchase program.  In aggregate, including the 34.4 million Series C convertible preferred shares acquired from ANPP and from Advance Programming Holdings, LLC, this represents $8.2 billion of the Company's shares since buyback activity was authorized in 2010, at an average price of $26.48 per share on an adjusted basis⁽¹⁾.  Note that the aggregate share numbers have not been adjusted to reflect the stock dividend that was distributed in August 2014.

On May 22, 2014, the Company entered into a share repurchase agreement with ANPP to repurchase its shares of the Company's Series C convertible preferred stock, on a quarterly basis, in proportion to the Company's repurchases under its stock repurchase program in a manner that is intended to maintain ANPP's current ownership percentage of the Company.  This agreement was amended by letter agreement on August 25, 2014.

OTHER ITEMS

On April 28, 2017, the Company sold its production studios Raw and Betty to All3Media, a U.K.-based television, film and digital production and distribution company. The Company owns 50% of All3Media and accounts for its investment in All3Media under the equity method of accounting. The Company expects to record a small gain for the disposition of Raw and Betty in the quarter ending June 30, 2017.

On March 13, 2017, Discovery Communications, LLC ("DCL"), a wholly-owned subsidiary of the Company, issued $450 million principal amount of 3.80% senior notes due March 13, 2024 and an additional $200 million principal amount of its existing 4.90% senior notes due March 11, 2026 in a registered public offering.  DCL used the proceeds from the offering to repurchase through a cash tender offer $511 million aggregate principal amount of DCL's 5.05% senior notes due 2020 and $89 million aggregate principal amount of DCL's 5.625% senior notes due 2019. The repurchase resulted in a pretax loss on extinguishment of debt of $54 million.

FULL YEAR 2017 OUTLOOK⁽²⁾

Discovery will provide forward-looking guidance in connection with this quarterly earnings announcement on its quarterly earnings conference call and webcast referenced hereafter.

NON-GAAP FINANCIAL MEASURES

In addition to the results prepared in accordance with U.S. generally accepted accounting principles ("GAAP") provided in this release, the Company has presented Adjusted OIBDA, Adjusted EPS and free cash flow.  These non-GAAP measures should be considered in addition to, but not as a substitute for, operating income, net income, earnings per diluted share and other measures of financial performance reported in accordance with GAAP.  Please review the supplemental financial schedules beginning on page 10 for reconciliations to the most comparable GAAP measures.

Adjusted OIBDA and Adjusted OIBDA Excluding the Impact of Currency Effects
The Company evaluates the operating performance of its segments based on financial measures such as revenues and Adjusted OIBDA.  Adjusted OIBDA is defined as operating income excluding: (i) mark-to-market share-based compensation, (ii) depreciation and amortization, (iii) restructuring and other charges, (iv) certain impairment charges, (v) gains and losses on business and asset dispositions, and (vi) certain inter-segment eliminations related to production studios.  For the current period presented, the Company no longer excludes amortization of deferred launch incentives in calculating total Adjusted OIBDA as this expense is not material.

The Company uses Adjusted OIBDA to assess the operating results and performance of its segments, perform analytical comparisons, identify strategies to improve performance and allocate resources to each segment.  The Company believes Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses.  The Company excludes mark-to-market share-based compensation, restructuring and other charges, certain impairment charges, and gains and losses on business and asset dispositions from the calculation of Adjusted OIBDA due to their volatility.  The Company also excludes depreciation of fixed assets and amortization of intangible assets as these amounts do not represent cash payments in the current reporting period.  Additionally, certain corporate expenses are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives.  Refer to page 6 for our methodology for calculating growth rates excluding the impact of currency effects.

Adjusted EPS and Adjusted EPS Excluding the Impact of Currency Effects
Adjusted EPS is defined as earnings excluding the impact of amortization of acquisition-related intangible assets per diluted share.  Note that given the change in conversion ratio for our preferred stock, the preferred shares are now only included in the diluted share count.  The Company believes Adjusted EPS is relevant to investors because this metric allows them to evaluate the performance of the Company's operations exclusive of the non-cash amortization of acquisition-related intangible assets that impact the comparability of results from period to period.  Refer to page 6 for our methodology for calculating growth rates excluding the impact of currency effects.

Free Cash Flow and Free Cash Flow Excluding the Impact of Currency Effects
The Company defines free cash flow as cash provided by operating activities less acquisitions of property and equipment.  The Company uses free cash flow as it believes it is an important indicator for management and investors of the Company's liquidity, including its ability to reduce debt, make strategic investments and return capital to stockholders.  Refer to page 6 for our methodology for calculating growth rates excluding the impact of currency effects.

Methodology for Calculating Growth Rates Excluding the Impact of Currency Effects
The impact of exchange rates on our business is an important factor in understanding period to period comparisons of our results. For example, our international revenues are favorably impacted as the U.S. dollar weakens relative to other foreign currencies, and unfavorably impacted as the U.S. dollar strengthens relative to other foreign currencies. We believe the presentation of results on a constant currency basis ("ex-FX"), in addition to results reported in accordance with GAAP, provides useful information about our operating performance because the presentation ex-FX excludes the effects of foreign currency volatility and highlights our core operating results. The presentation of results on a constant currency basis should be considered in addition to, but not a substitute for, measures of financial performance reported in accordance with GAAP.

The ex-FX change represents the percentage change on a period-over-period basis adjusted for foreign currency impacts. The ex-FX change is calculated as the difference between the current year amounts translated at a baseline rate (which is based on a spot rate for each of our currencies determined early in the fiscal year as part of our forecasting process) (the "2017 Baseline Rate") and the prior year amounts translated at the same 2017 Baseline Rate. In addition, consistent with the assumption of a constant currency environment, our ex-FX results exclude the impact of our foreign currency hedging activities as well as realized and unrealized foreign currency transaction gains and losses. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies.

Conference Call Information

Discovery Communications, Inc. will host a conference call today, May 9, 2017 at 8:30 a.m. ET to discuss its first quarter results.  To listen to the call, visit http://discoverycommunications.com or dial 1-844-452-2811 inside the U.S. and 1-574-990-9832 outside of the U.S., using the following passcode: DISCA.

Cautionary Statement Concerning Forward-Looking Statements

This press release contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties and on information available to the Company as of the date hereof. The Company's actual results could differ materially from those stated or implied, due to risks and uncertainties associated with its business, which include the risk factors disclosed in its Annual Report on Form 10-K filed with the SEC on February 14, 2017. Forward-looking statements include statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future, and can be identified by forward-looking words such as "anticipate," "believe," "could," "continue," "estimate," "expect," "intend," "may," "should," "will" and "would" or similar words. Forward-looking statements in this release include, without limitation, statements regarding investing in our programming and strategic growth initiatives. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

SOURCE Discovery Communications, Inc.