Discovery Communications Inc. (NGM: DISCA). Discovery sees the advertising market recovering from the COVID-19 trough and 4Q can expect a bump from political advertising though management remains cautious in the face of COVID-19 uncertainties.
Management has been increasing investments in digital distribution, which we expect to continue in 2020. The company also continues to integrate its 2018 Scripps Networks acquisition. The combined company is also the third-largest U.S. television broadcaster (by audience). To that end, the company has begun to innovate with new digital streams like Food Network Kitchen. It is also boosting its market presence with partnerships such as those with Amazon in the U.S. and ProSieben in Germany.
Revenue declined 4% year-over-year to $2.56 billion as favorable foreign exchange movements added one percentage point to growth. Advertising revenue declined 8% as the pandemic reduced demand. Distribution revenue was flat.
Third-quarter adjusted OIBDA declined 5% to $951 million. The adjusted OIBDA margin narrowed by 180 basis points to 41%. The 3Q19 GAAP results included a $0.21 goodwill impairment which skewed the year-over-year comparison.
EARNINGS & GROWTH ANALYSIS
Management expects to again see sequential improvement in advertising revenue in 4Q as the core advertising market recovers from the COVID-19 trough and the company gets bump from political advertising around the U.S. presidential election. The concern over COVID-19 economic effects continues however, as cases and infection rates have begun to ramp higher again in the U.S. and Europe, Discovery’s principal markets.
As cable subscribers who ‘cut the cord’ are negatively impacting both the company’s tradition cable distribution and advertising revenue streams, Discovery is pivoting to a more digital direct-to consumer-model both through its own applications including Discovery GO and Eurosport and through other third party digital channel aggregators including YouTube, Hulu, Dish’s Sling, and Sky in the U.K.
Management believes that its reality-based content gives it a competitive advantage versus the mainstream channels’ fictional scripted programming. In particular, it believes that this content engages viewers to respond actively rather than passively, e.g., by spurring them to make a recipe featured on the Food Channel or to purchase featured products. Management’s sees its investments in direct-to-consumer technology as leveraging the opportunity inherent in this ‘view-to-transaction’ paradigm by making it more of a seamless subscriber reality.
An 8% decline in Advertising revenue more than offset 2% growth in Distribution revenue. The Ad revenue decline was driven by a slowdown in demand due to COVID-19 effects and, to a smaller extent, by a decline in Pay-TV subscribers. Distribution revenue climbed with contractual rate increases.
At International Networks, 3Q20 segment revenue fell 5% to $902 million. Positive foreign exchange movements added one percentage point to revenue growth. Adjusted OIBDA fell 46%, or 41% in constant currency.
Philo had just 700,000 subscribers at the end of 2Q20. Management looks forward to both broadening digital streaming distribution across new OTT and ‘skinny bundle’ third-party offerings and its own direct-to-consumer digital channels.
On September 25, 2019, Discovery’s Food Network announced the new Food Network Kitchen, a direct-to-consumer video streaming service that offers both live and on-demand interactive cooking videos with top Food Network chefs, recipes, and other content. Food Network Kitchen is a joint venture with Amazon and will be available through all of Amazon’s media devices including the Alexa virtual assistant, Echo Show smart home speaker, and Fire TV as well as through Apple iOS and Google Android devices. Food Network Kitchen has tiered consumer access with a limited selection of videos and recipes for free and the full suite of premium content for $7.00 per month or $60 for a one-year subscription. Integration with Amazon Alexa enables enhanced search and step-by-step recipe instruction and, of course, the home delivery of recipe ingredients from Amazon. The service will also enable the delivery of kitchen equipment in 2020. Food Network Kitchen launched at the end of October 2019.
FINANCIAL STRENGTH & DIVIDEND
Debt coming due within one year is only $336 million. The company is at the midpoint of its target leverage range of 3- to 3.5-times.
As the company is now within its target leverage range, it resumed share repurchases after a 2Q20 hiatus. Discovery repurchased 11.2 million share for $228 million in 3Q20. It bought back 23 million shares for $637 million in 2019. Share count fell 6% in 3Q year-over-year.
MANAGEMENT & RISKS
Robert Miron has been chairman of the board since May 2014, has been a company director since September 2008 and previously served as chairman and CEO of Advance/Newhouse Communications and Bright House Networks.
The shares are down 35% in the last year, compared to an 8.5% increase.
On November 10, HOLD-rated DISCA closed at $22.92, up $0.80.