Discovery Boosts Profitability in the First Quarter

Investors have been cautiously optimistic that Discovery's (DISCK) (DISC.A) (DISC.B) March 2018 acquisition of Scripps Networks would help it navigate to success in the rapidly changing pay-TV industry. The deal brought it valuable assets like a huge content portfolio and one of the world's biggest network audiences, but it will be some time before shareholders can be confident that it achieved the desired results. However, in Discovery's first quarterly report from its first full fiscal year with that expanded portfolio, investors saw some signs of improving efficiency and stable growth.

Here's how the headline numbers compare with the prior-year period.

Data source: Discovery's financial filings.

What happened this quarter?

Discovery's organic revenue fell because of sluggish advertising sales in the U.S. and lower results in international markets. The TV network giant notched far higher profitability, though, as the financial benefits from the Scripps merger started to emerge.

Image source: Getty Images.

Among the key points from the quarterly report:

• Discovery's growth picture was mixed, and results were impacted by difficult comparisons to the year-ago period. Overall, after adjusting for the impact of the $15 billion Scripps Networks merger, core revenue fell 5%.
• Subscriber numbers fell by 4%, about the same pace as they slid in prior quarters. Discovery offset those declines with higher distribution fees and increased advertising prices. As a result, the U.S. segment posted a 3% revenue boost for the period.
• The international division shrunk 15% after accounting for the merger. The drop reflected an elevated prior-year period that included advertising related to the 2018 Olympic Games.
• As it did in the previous quarter, Discovery revealed positive financial impacts from the integration of the Scripps Networks business; profitability rose in both the U.S. and international segments. Overall, adjusted core earnings jumped 21%, far outpacing the 5% revenue decline.

What management had to say

CEO David Zaslav said in a press release that Discovery's latest results represent "a solid start" to the year. "We continue to power people's passions through our loved brands," he said, "and our owned global [intellectual property] in genres that nourish audiences around the world." Commenting more broadly on the company's value proposition, Zaslav said, "We are a differentiated media company have the right strategy, assets, brands, and management team necessary to drive additional shareholder value."

Looking forward

Zaslav and his team affirmed their full-year guidance, which calls for modest growth in the U.S. market as streaming services, distribution fees, and higher advertising prices offset steady declines in the pay-TV subscriber base. Management is encouraged by the success of recent deals, including one with YouTube, that are extending the reach of Discovery's lifestyle programming content.

Executives believe profitability should continue improving over the next few quarters, but spending on content and other growth initiatives will make the bottom-line gains much smaller than the spike it delivered in the first quarter. Discovery still projects healthy cash flow in 2019, but management intends to direct most of that money toward accelerating the business's transformation into a media company suited to the internet-delivered programming future.