Discovery Posts Better-Than-Expected Earnings, Says Pandemic Hit "Key" Ad Markets Abroad

President and CEO, Discovery, Inc. David Zaslav - Getty - H 2020
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Discovery CEO David Zaslav

The company said it "pursued a number of cost savings initiatives that it believes will offset a portion of potential revenue losses and deferrals due to the impact of COVID-19" as revenue fell slightly below estimates.

Discovery on Wednesday reported better-than-expected earnings and unchanged U.S. advertising revenue for the first quarter, which during the back half of March started seeing first effects on TV advertising from the novel coronavirus pandemic. Its revenue came in slightly below estimates.

On the earnings call, management said U.S. TV advertising was down 20 percent in April, with international down 40 percent for the month. May and June were looking somewhat better so far, with the company seeing some signs of stabilization in China, Taiwan and South Korea.

The company also said it has amended provisions in credit agreements "to preserve flexibility" amid the pandemic uncertainty and pursued "cost savings initiatives."

Discovery's financial hit in the first quarter from the pandemic seemed minimal in terms of U.S. ad revenue, while its international operations were more affected given that the pandemic started in Asia and the firm's European businesses include sports, which have been put on ice in most countries due to the outbreak. International revenue decreased 3 percent, with the company noting "the impact of COVID-19 in key advertising markets" and "the discontinuation of certain pay TV distribution agreements in the Nordics" as factors.

Overall, first-quarter earnings fell 2 percent to $377 million and revenue dropped 1 percent to $2.68 billion. Adjusted earnings per share of 87 cents beat the Wall Street consensus of 84 cents, while the revenue figure missed the $2.71 billion consensus. Adjusted operating income before depreciation and amortization (OIBDA), another profitability metric, dropped 4 percent to $1.11 billion amid continued investments in next-generation business initiatives. U.S. distribution revenue in the first quarter rose 2 percent amid affiliate fee increases, but cord cutting and lower U.S. ratings trends continued. 

Total Discovery portfolio pay TV subscribers declined 6 percent from the first quarter of 2019, with subs for fully distributed networks down 4 percent. The declines worsened compared with the fourth quarter of 2019. 

Discovery, led by president and CEO David Zaslav, gave little new immediate color on the virus crisis' business fallout ahead, but TV firms have mentioned improved TV ratings for its networks' portfolios amid the virus crisis. It is also understood that Discovery's direct-to-consumer services, such as entertainment streaming offer dplay, has also seen subscriber demand. 

Discovery had on March 24 withdrawn its 2020 financial guidance due to the pandemic, warning of "unprecedented economic uncertainty" and highlighting the "unknown impact" of the pandemic on its financial results. It mentioned the Tokyo Summer Olympics postponement to 2021 as one pandemic result affecting future results. The firm also revealed it had drawn down $500 million from a revolving credit facility to shore up its balance sheet.

On Wednesday, Discovery said it has moved to "ensure sufficient liquidity and flexibility in light of the current uncertainty surrounding the impact of COVID-19." It added that on April 30, "to preserve flexibility in the current environment," it reached an agreement with its lender group, led by Bank of America, "to amend certain provisions of its revolving credit facilities, including resetting the maximum consolidated leverage 3 ratio to 5.5 times from the third quarter of 2020 until the first quarter of 2021," compared with 5 times currently.

Discovery CFO Gunnar Wiedenfels on Wednesday's earnings call highlighted that the company changed the provisions not because of real concerns, but simply "out of an abundance of caution." 

Discovery also mentioned Thursday that, in response to the pandemic, it "pursued a number of cost savings initiatives that it believes will offset a portion of potential revenue losses and deferrals due to the impact of COVID-19, through the implementation of travel, marketing, production and other operating cost reductions." It didn't share further details.

The firm further noted that "certain sporting events that the company has rights to have been canceled or postponed, thereby eliminating or deferring the related revenues and expenses." Discovery's Eurosport network and its streaming service are key sports offerings in Europe. 

Analysts and other media giants' management teams have predicted bigger TV ad revenue hits across the media sector in the current second quarter than in the first given the continuation of the virus crisis, with the specific fallout depending on how long lockdowns and social distancing measures are kept in place. Unlike Walt Disney and Comcast/NBCUniversal, Discovery doesn't have film or theme parks units that would be hit by the pandemic. 

Discovery in 2018 closed its $14.6 billion acquisition of Scripps Networks Interactive. "The impact of COVID-19 thus far has driven a significant linear ratings tailwind for Discovery's acquired Scripps networks and Discovery's legacy networks," Cowen analyst Doug Creutz wrote in an earnings preview. "However, given an extremely weak ad market, we don't expect the company to be able to monetize the improved ratings to any great extent."

"The world is facing an unprecedented challenge," said Zaslav on Wednesday, adding he was "enormously proud of Discovery's employees who have pulled together and stepped up with resilience, heart and creativity." He added: "They continue to nourish our viewers at a time when our trusted brands and beloved personalities are a unique source of comfort and familiarity. As we navigate through the remainder of 2020, our priority remains on the well-being of our employees, clients, customers and production partners. Furthermore, we will continue to focus on maintaining a healthy balance sheet with robust liquidity and investing in our businesses to position ourselves for long-term growth amid the changes in the pay TV landscape."

Among its content offerings, Discovery has touted such new programming as TLC's 90 Day Fiancé: Self-Quarantined, which debuted in late April and features couples from the 90 Day Fiancé franchise filming themselves.

Zaslav late last year had said that Discovery was "starting to explore a new opportunity" in the U.S. that would aggregate all of the firm's programming in a female-skewing streaming service. "You have some of these platforms launching with eight series, 10 series or a bunch of movies and series to come," he said. "We have hundreds of thousands of hours that people grew up on. … We are looking now at whether we should just aggregate … all of our content in the U.S. and having something that looks very different, is very deep, has great personalities, great brands to curate through."

Discovery last year struck a deal with the BBC for natural history and other factual programming, which will help power a new global subscription VOD service set to launch this year. Zaslav earlier this year said that the company was in the process of determining whether to go global with the service as a separate offering or put it together with other Discovery offerings. 

Chip and Joanna Gaines' upcoming Magnolia Network, a joint venture with Discovery, was originally set for an October launch, but that was recently pushed back by coronavirus-related production delays. The former Fixer Upper duo in an April 26 preview event on DIY Network teased the inaugural slate of 10 original series. However, with virtually no television being filmed amid coronavirus concerns, Magnolia's official debut has been put on hold until a yet-to-be-determined date.

Discovery recently said it was not aware of reasons for volatility in its Series B common stock, highlighting: "Discovery has not selectively disclosed any material nonpublic information to analysts, investors or others, and Discovery is not aware of any sales or purchase of its Series B common stock by any of its executive officers or directors within the last 30 days." After selling his remaining stake in Lionsgate last year, billionaire investor and media mogul John Malone acquired $75 million more stock of Discovery in one of his largest open-market purchases of the stock ever.