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Why Is Discovery (DISCA) Down 9.4% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Discovery Communications (DISCA). Shares have lost about 9.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Discovery due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Discovery Q2 Earnings Miss Estimates, Revenues Up Y/Y

Discovery reported second-quarter 2019 adjusted earnings of 98 cents per share that missed the Zacks Consensus Estimate by a penny.

Adjusting for tax benefit worth $455 million or 64 cents per share and after-tax restructuring and other charges of $8 million or 1 cent per share, earnings were $1.61 per share, up almost 144% year over year.

Revenues increased 1.4% year over year to $2.89 billion and beat the consensus mark of $2.88 billion. The year-over-year growth was driven by an increase in advertising (56.1% of revenues) and distribution (41.8% of revenues) revenues.

Top-Line Details

Advertising revenues increased 3.6% year over year to $1.62 billion. Distribution revenues increased 1.7% from the year-ago quarter to $1.21 billion.

Other revenues were $60 million compared with $96 million in the year-ago quarter.

U.S. Networks (64.6% of revenues) revenues increased 4.7% from the year-ago quarter to $1.86 billion. Advertising and Distribution revenues were up 5.8% and 5.2%, respectively.

Growth in advertising revenues was primarily driven by an increase in pricing and to a lesser extent, by inventory. Moreover, continued monetization of digital content offerings benefited the top line.

Distribution revenues were primarily driven by an increase in contractual affiliate rates and additional carriage on streaming platforms, partially offset by a decline in overall subscribers.

Per Nielsen, Discovery had the #1 most watch TV portfolio for “women 25-54” in the United States in the reported quarter.

International Networks revenues (35.4% of revenues) decreased 2.9% year over year to $1.02 billion. Advertising and Distribution revenues were down 1.5% and 2.6%, respectively.

However, at constant currency, International Networks revenues grew 3%, as advertising revenues increased 5% and distribution revenues 3% on a year-over-year basis.

Advertising revenues increased due to higher pricing in certain markets in Europe and to some extent due to the consolidation of the UKTV Lifestyle business and expanded digital content offerings.

Distribution revenues were driven by expansion in Latin America primarily due to contractual price increases and subscriber growth. The company also witnessed subscriber growth in certain European markets.

Quarter Highlights

During the second quarter, Discovery completed a record advertising upfront, which improved pricing and volumes across the portfolio.

In June 2019, Discovery and BBC dissolved their 50/50 joint venture, UKTV, a British multi-channel broadcaster. Following the closure, the company gained formal control of lifestyle channels — Really, Home and Good Food. BBC took full control of UKTV’s seven entertainment channels.

Further, the company launched nine additional networks on YouTube TV in the United States and signed a multi-year live and on-demand carriage agreement with fuboTV.

Operating Details

In the second quarter, selling, general and administrative (SG&A) expenses increased 3.2% from the year-ago quarter to $709 million.

Adjusted operating income before depreciation & amortization (OIBDA) increased 4.8% from the year-ago quarter to $1.28 billion.

U.S. Networks’ operating expenses decreased 8% year over year to $737 million, as cost of revenues decreased 10% and SG&A expenses 4%. The decrease in cost of revenues was primarily attributable to content synergies related to the integration of Scripps Networks. SG&A expenses declined due to lower personnel costs from restructuring and the integration of Scripps Networks.

International Networks’ operating expenses increased 3% to $734 million. Cost of revenues increased 4%, primarily attributable to higher expenses associated with expanded digital content offerings and to some extent due to the consolidation of the UKTV Lifestyle business.

SG&A expenses increased 16%, primarily due to higher professional service fees, technology costs and personnel expenses as a result of expanded digital content offerings.

U.S. Networks adjusted OIBDA increased 14.5% from the year-ago quarter to $1.13 billion. International Networks adjusted OIBDA declined 14.9% from the year-ago quarter to $286 million.

GAAP operating income surged 40.2% year over year to $911 million.

Balance Sheet

As of Jun 30, 2019, cash & cash equivalents were $1.32 billion compared with $745 million as on Mar 31, 2019.

Moreover, as of Jun 30, 2019, long-term debt was $14.82 billion, lower than $14.96 billion as of Mar 31, 2019.

Free cash flow was $596 million, up from $498 million reported in the previous quarter.

Guidance

For the third quarter of 2019, Discovery expects U.S. advertising growth in the 3 range. U.S. affiliate is likely to grow 5%.

While international advertising is expected to grow at least high-single digits, international affiliate growth is expected to increase mid-single digits in the third-quarter.

Discovery also expects a full quarter of contribution from the UKTV Lifestyle business, which should add an additional two to three percentage points of growth to international advertsing.

Discovery expects foreign exchange to negatively impact 2019 revenues by approximately $185-$195 million and OIBDA by $80-$90 million on a year-over-year basis.

Management reiterated its 2019 guidance for U.S. affiliate revenue growth, which is expected in the mid-single digit range.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, Discovery has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Discovery has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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