Discovery Communications Earnings: Advertising Strength Powers Improved Results

Subscribers continue to drift out of the pay-TV industry, but Discovery (NASDAQ: DISCK) is doing its best to adjust to that weak sales environment. The network this week announced fourth-quarter results that, despite a massive one-time goodwill charge, showed healthy growth in both its U.S. and international segments. Discovery also passed an important milestone in moving its merger with Scripps Networks Interactive (NASDAQ: SNI) through the regulatory process.

More on that acquisition in a moment. But first, here's a look at how the headline numbers compared to the prior-year period:

What happened this quarter?

Discovery's pool of cable subscribers shrank at the same painful rate during the prior quarter. However, those losses were more than offset by higher advertising prices and increased distribution fees.

Here are the key highlights of the quarter:

• U.S. network revenue growth improved for the third straight quarter thanks to an 8% bump in advertising sales and a 7% increase in distribution fees. Those gains came despite a 5% decrease in the pool of total subscribers.
• Operating expenses spiked 13% in the U.S., mainly thanks to a string of recent acquisitions, along with increased programming costs. As a result, profitability dipped to 54% of sales from 55% a year ago.
• The international division expanded at a healthy pace as ad volumes, ad pricing, and distribution fees all marched higher. Increased content costs, particularly for sports broadcasts, held profitability down to 27% of sales from 28% last year.
• After reviewing the outlook for cash flow from its European division, Discovery concluded that its market value was well below the amount reflected in its financial statements. Thus, the company took a goodwill impairment charge of $1.3 billion, which resulted in a reported net loss of nearly $2 per share compared to a net profit of $0.51 per share in the year-ago period.

What management had to say

CEO David Zaslav commented on the broader 2017 results, which he said amounted to a historic year for the company. "We took significant steps to position ourselves for success in a changing industry," Zaslav said, "while driving growth from our traditional linear business and accelerating our investments in new growth areas like digital and mobile in an effort to reach superfans on every screen."

"Solid global advertising and distribution revenue growth helped us achieve our 2017 strategic and financial objectives," Zazlav added.

Looking forward

Executives announced that their proposed merger with Scripps Networks cleared an important regulatory hurdle this week as the Department of Justice closed down its investigation. That leaves just one ongoing review, with regulators in Ireland, left to finish before the deal can close.

Zazlav and his team still believe that will happen before the end of the first quarter of 2018. Shareholders who allow their stock to be converted into partial ownership of the combined entity have to hope that the $15 billion acquisition delivers the synergies that Discovery has targeted. Otherwise, there might be significant accounting writedowns in future years that are similar to the one that just swamped 2017's profit results.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Discovery Communications. The Motley Fool recommends Scripps Networks Interactive. The Motley Fool has a disclosure policy.