Discovery Gets More Profitable

Discovery (DISCK) (DISC.A) (DISC.B) just closed out an unusually change-filled year that included massive portfolio moves aimed at positioning the company for growth in an age of internet-led TV viewing. It's too early to know whether these initiatives will pay off, but the company is already benefiting from its larger content and distribution footprint.

Let's take a closer look at the latest results:

Data source: Discovery's financial filings.

What happened this quarter?

Thanks to its $15 billion acquisition of Scripps Networks, revenue jumped higher by over 50% in the fourth quarter. Operating gains were far more muted on an organic basis due to a mixed performance from its domestic and international broadcasting divisions.

Image source: Getty Images.

These were some of the highlights of the quarter:

• After adjusting for the impact from the merger and exchange rate shifts, sales fell 2% as a 1% boost in the U.S. business was offset by flat results internationally and a sharp decline in Discovery's education segment, which it sold during the year.
• U.S. subscriber losses were a major headwind at 4% as TV watching continued to shift away from the pay-TV ecosystem. However, that decline marked an improvement over the 5% loss Discovery posted in each of the last two quarters. Advertising revenue was flat, while distribution fees rose 3%. Operating expenses fell as a percentage of sales thanks to efficiencies gained from the Scripps Networks merger.
• Flat results from the international segment were composed of a 2% distribution fee increase, flat advertising, and a slight decrease in other business. Expenses fell in this division, making it more profitable.

What management had to say

In a press release to investors, executives outlined what they saw as the TV specialist's biggest wins in the broader fiscal year. "2018 was a transformational year for Discovery," CEO David Zaslav said, "highlighted by our operational accomplishments, our strong progress in synergy generation, and our overall solid financial performance."

The Scripps Networks integration, in particular, has helped position the company better as TV watching patterns shift. "Discovery is a differentiated global content company, and we are optimistic that we will continue to build on all of our operating momentum to drive additional shareholder value into the future," Zaslav explained. 

Check out the latest Discovery earnings call transcript.

Looking forward

In a subsequent conference call with analysts, Zaslav and his team issued an outlook for 2019 that tracks closely to the results from the past few months. The U.S. business will be close to flat, management predicts, as gains in the internet-delivered mediums, plus higher advertising prices, offset a continued steady decline in ratings tied to the pay-TV subscriber base.

Financially speaking, Discovery expects to make quick progress on debt, which should free the company up to contemplate larger acquisitions again as early as next year. Overall, the company predicts solid growth in adjusted earnings for the full year, roughly on par with the 8% increase management achieved in 2018. Investors can expect to see further improvements in profitability and cash flow as the company begins to take full advantage of its larger content portfolio and wider sales footprint in the quarters to come.