Discovery Swings to Quarterly Loss on Scripps Acquisition Costs

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Discovery Communications CEO David Zaslav

CEO David Zaslav touted the upside from the Scripps deal during an analyst call.

Discovery Inc., led by CEO David Zaslav, on Tuesday reported a first-quarter loss of $8 million, or 1 cent per share, compared with earnings of $215 million in the year-ago period on costs related to its acquisition of Scripps Networks Interactive in March.

The company cited "lower operating results, higher restructuring charges, other transaction costs associated with the acquisition of Scripps and higher interest expense, which were partially offset by a tax benefit in the first quarter of 2018 versus an expense in the prior year and the debt extinguishment charge last year."

During an analyst call, Zaslav touted the upside from the Scripps acquisition. "We love our hand, our differentiated position and focusing on nourishing audiences with content they love," he said.

The Discovery boss also reiterated his preference for inexpensive skinny bundles, especially those without pricey sports channels and regional sport networks. "The industry should be able to find a better way to accommodate what consumers really want," Zaslav said.

He offered no direct comment on AT&T reportedly planning to roll out a new $15 monthly streaming service, but the exec predicted the U.S. market will eventually offer a non-sports, entertainment-heavy skinny bundle for price-conscious consumers. 

"I can't predict whether the moment is now, but the moment is coming," said Zaslav. "Consumers can't subsidize these massive sport rights anymore. It's not fair, and we're suffering from it. The idea that you have to pay so much money to get the bundle, it will end. It will be driven by one or two players moving quickly, or an entrepreneurial company popping up."

Eurosport, the pan-European sports network controlled by Discovery, has a package of Bundesliga rights that includes live Friday matches in the prestigious German soccer league. But Zaslav told analysts his company would be reluctant to bid on additional European TV soccer rights against rivals willing to lose money to build up their subscriber bases.

"Bundesliga was difficult for us. It was a good experience. But it also taught us a lesson in what we do and what we can do," said the exec.

During the first quarter, overall revenue increased 43 percent to $2.3 billion due to the Scripps acquisition, with the company's U.S. networks unit posting a 42 percent gain to $1.74 billion, driven by a 55 percent advertising improvement to $627 million, or 3 percent when adjusted for transactions. 

First-quarter international networks revenue jumped 47 percent to $1.09 billion, or 28 percent when stripping out the Scripps acquisition and currency effects.

Discovery in March closed its acquisition of Scripps, creating a powerhouse in the unscripted and lifestyle content field that combined assets like the Discovery Channel, TLC, Animal Planet and OWN with Scripps' HGTV, Travel Channel and Food Network channels.

The Discovery acquisition came during increased content industry consolidation, with big companies getting even bigger to gain leverage over competitors and allow for cost cuts. That comes as the number of U.S. pay TV subscribers has fallen amid cord-cutting and competition from digital outlets like Amazon Prime, Netflix and YouTube.

"The first quarter of 2018 was a historic and pivotal period for Discovery," said Zaslav in a statement that accompanied the latest financial results. "As our industry continues to evolve, we are uniquely positioned to maximize the value of our traditional pay TV business while driving new opportunities and growth from our digital and direct-to-consumer businesses around the world."

May 8, 9:30 a.m. Updated with comments from an analyst call.