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Discovery Inc.’s Q4 2021 global ad revenues up 10%

David Zaslav, President and Chief Executive Officer of Discovery said, "2021 was by all measures an exceptional year for our company, in which we achieved significant operational, financial, and strategic objectives. We grew our global DTC paying subscribers to 22 million, a tailwind for our strong distribution revenue growth of 11%, while global advertising revenues grew 10% due to continued strength in our key markets and share gains. Additionally, we ended the year with nearly $4 billion of cash on hand and generated robust cash flows, supporting our ability to invest in growth initiatives. Further, the successful recent broadcast of our second Winter Olympic Games across Europe, on the heels of our first broadcast of the Summer Olympic Games, underscores one of our key differentiators: in-language and locally relevant content. All of which position us well to take advantage of the remarkable opportunities ahead for Warner Bros. Discovery, which we believe will be among the world's most dynamic media companies."

Zaslav continued, "We, of course, are pleased to receive unconditional clearance from the European Commission, the expiration of the HSR waiting period, and clearance from other key international markets, and AT&T having received a favorable private letter ruling from the IRS. We also filed our merger proxy earlier this month and have scheduled our stockholder meeting for March 11th. Following the vote, and assuming the deal is approved by our stockholders, we expect to be on track to close in Q2."

Financial Highlights

  • Q4 total revenues of $3,187 million increased 10%, or increased 11% ex-FX(1), compared to the prior year quarter.
    –     Q4 U.S. advertising revenues increased 5% and distribution revenues increased 17%; and
    –     Q4 International advertising revenues increased 10%, or 12% ex-FX, and distribution revenues increased 2%, or 5% ex-FX.
  • Net income available to Discovery, Inc. was $38 million and $1,006 million in Q4 and the full year 2021, respectively.
  • Total Adjusted OIBDA(2) was $1,137 million and $3,817 million in Q4 and the full year 2021, respectively.
  • Q4 cash provided by operating activities was $884 million and free cash flow(3) was $784 million.
  • Full year cash provided by operating activities was $2,798 million and free cash flow was $2,425 million, representing a 64% Adjusted OIBDA to free cash flow conversion rate.
  • Ended 2021 with $3.9 billion of cash and cash equivalents, gross debt(4) of $15.4 billion, and net leverage(4) of 3.0x.

 

 

Three Months Ended December 31,

 

Twelve Months Ended December 31,

Dollars in millions, except per share amounts

2021

 

2020

 

% Change

Ex-FX(1)

 

2021

 

2020

 

% Change

Ex-FX(1)

Total revenue

$      3,187

 

$      2,886

 

10     %

11      %

 

$   12,191

 

$   10,671

 

14     %

14     %

Net income available to Discovery, Inc.

$           38

 

$         271

 

(86)     %

   

$     1,006

 

$     1,219

 

(17)     %

 

Total Adjusted OIBDA

$      1,137

 

$      1,002

 

13     %

15     %

 

$     3,817

 

$     4,196

 

(9)      %

(8)      %

Diluted earnings per share

$        0.08

 

$        0.42

 

(81)     %

   

$       1.54

 

$       1.81

 

(15)     %

 

Cash provided by operating activities

$         884

 

$         553

 

60     %

   

$     2,798

 

$     2,739

 

2     %

 

Free cash flow

$         784

 

$         441

 

78     %

   

$     2,425

 

$     2,337

 

4     %

 

Operational Highlights

  • Ended 2021 with 22 million DTC Subscribers(5), an increase of 2 million subscribers since the end of Q3.
  • Generated $450 million of Next Generation Revenues(5) in Q4, and roughly $1.6 billion of Next Generation Revenues in 2021, growth of 80% versus the prior year.
  • Successfully transitioned the entirety of our discovery+ subscriber base across Europe onto the same technology platform as the U.S., which will deliver a more personalized content and viewing experience, and we expect will drive better consumer engagement and lower churn, as well as enabling an ad-lite advertising offering in key markets, beginning in March in the UK.
  • Broadcast the Olympic Winter Games from Beijing and produced strong results across Discovery's European television network and streaming products. discovery+ drove an increased number of new paid streaming subscribers, the total of which exceeded PyeongChang 2018 by almost 50%. Additionally, well over half of all new Olympics subscribers engaged with discovery+'s entertainment content, reinforcing the increased depth and value of our offering.

Segment Results
U.S. Networks

 

Three Months Ended December 31,

 

Twelve Months Ended December 31,

Dollars in millions

2021

 

2020

 

% Change

 

2021

 

2020

 

% Change

Advertising

$            1,098

 

$            1,048

 

5     %

 

$            4,188

 

$            4,012

 

4     %

Distribution

832

 

709

 

17     %

 

3,297

 

2,852

 

16     %

Other

95

 

21

 

NM

 

177

 

85

 

NM

Total revenues

$            2,025

 

$            1,778

 

14     %

 

$            7,662

 

$            6,949

 

10     %

Costs of revenues, excluding depreciation & amortization

507

 

509

 

—      %

 

1,841

 

1,843

 

—      %

Selling, general & administrative(6)

414

 

323

 

28     %

 

1,881

 

1,131

 

66     %

Adjusted OIBDA

$            1,104

 

$               946

 

17     %

 

$            3,940

 

$            3,975

 

(1)      %

 

NM: Not measurable

Fourth-Quarter 2021

  • U.S. Networks revenues increased 14% compared to the prior year quarter to $2,025 million.
    –     Advertising revenue increased 5% primarily due to higher pricing, the continued monetization of content offerings on our next generation platforms, and higher inventory, partially offset by secular declines in the pay-TV ecosystem and lower overall ratings.
    –     Distribution revenue increased 17% primarily driven by the growth of discovery+ and increases in contractual affiliate rates, partially offset by a decline in linear subscribers.
    –     Subscribers to our fully distributed linear networks at December 31, 2021 were 4% lower than at December 31, 2020. Total subscribers to our linear networks were 8% lower, or 5% lower excluding the impact from the sale of our Great American Country linear network.
    –     Other revenue increased $74 million primarily driven by a nonrecurring item.
     
  • Total operating expenses increased 11% compared to the prior year quarter to $921 million.
    –     Costs of revenues were flat as more efficient spend on our linear networks was offset by third-party app store fees and content investment in discovery+. 
    –     SG&A expenses increased 28% primarily due to higher marketing-related expenses to drive the growth of discovery+.

  • Adjusted OIBDA increased 17% compared to the prior year quarter to $1,104 million.

International Networks

 

Three Months Ended December 31,

 

Twelve Months Ended December 31,

Dollars in millions

2021

 

2020

 

% Change

Ex-FX

 

2021

 

2020

 

% Change

Ex-FX

Advertising

$        607

 

$        554

 

10 %

12 %

 

$      2,027

 

$      1,571

 

29 %

25 %

Distribution

520

 

510

 

2 %

5 %

 

2,112

 

2,014

 

5 %

4 %

Other

37

 

41

 

(10) %

(7) %

 

400

 

128

 

NM

NM

Total revenues

$     1,164

 

$     1,105

 

5 %

8 %

 

$      4,539

 

$      3,713

 

22 %

20 %

Costs of revenues, excluding depreciation & amortization

574

 

615

 

(7) %

(6) %

 

2,784

 

2,004

 

39 %

35 %

Selling, general & administrative(6)

383

 

294

 

30 %

32 %

 

1,261

 

986

 

28 %

24 %

Adjusted OIBDA

$        207

 

$        196

 

6 %

15 %

 

$         494

 

$         723

 

(32) %

(27) %

 

NM: Not measurable

Fourth-Quarter 2021

  • International Networks revenues increased 5%, or 8% ex-FX, compared to the prior year quarter to $1,164 million.
    –     Advertising revenue increased 10%, or 12% ex-FX, primarily driven by improved overall performance in all regions as advertising markets continued to recover from the impact of COVID-19.
    –     Distribution revenue increased 2%, or 5% ex-FX, primarily due to the growth of discovery+, partially offset by lower contractual affiliate rates in some European markets.

  • Total operating expenses increased 5%, or 7% ex-FX, compared to the prior year quarter to $957 million.
    –     Costs of revenues decreased 7%, or 6% ex-FX, primarily due to lower sports rights costs in Europe.
    –     SG&A increased 30%, or 32% ex-FX, primarily due to higher marketing-related expenses and personnel costs to drive the growth of discovery+.

  • Adjusted OIBDA increased 6% or increased 15% ex-FX, compared to the prior year quarter to $207 million.

Free Cash Flow
Fourth quarter 2021 cash provided by operating activities increased to $884 million from $553 million in the prior year quarter. Free cash flow increased 78% to $784 million, primarily driven by higher Adjusted OIBDA and improvements in working capital.

Full year 2021 cash provided by operating activities increased to $2,798 million from $2,739 million in the prior year. Free cash flow increased 4% to $2,425 million, driven by improvements in working capital, partially offset by higher content spend related to DTC and the Olympics.

Other
BT Group Joint Venture
In February 2022, the Company confirmed that it was in exclusive discussions with BT Group to create a 50:50 joint venture by combining its Eurosport business in the UK and Ireland with BT Sport, subject to a definite agreement and regulatory approval. The companies are aiming for the joint venture to be operational in 2022.

Interest Rate Derivative Contracts
As previously disclosed, in anticipation of the proposed transaction with WarnerMedia, the Company executed various interest rate derivative contracts with a total notional value of $15 billion during the third quarter of 2021. These contracts did not receive hedging designation for accounting purposes and the change in the fair value of these contracts is recognized in "Other (expense) income, net" in the consolidated statements of operations. The financial impact was a loss of $108 million during the fourth quarter of 2021 and a loss of $2 million for the full year.

Change in Amortization Method for Acquired Customer Relationships Intangible Assets
Due to changing trends in the media industry, the Company reassessed the useful lives and amortization methods for all acquired customer relationships and elected to change the amortization method from the straight-line method to the sum of the years digits method, effective October 1, 2021. The change resulted in an additional $196 million of amortization expense for the fourth quarter, recognized in "Depreciation and amortization" in the consolidated statements of operations.

Group Nine Media
In December 2021, Group Nine Media and Vox Media announced a merger agreement. The fair value of the transaction resulted in a non-cash impairment of $85 million, recognized in "Other (expense) income, net" in the consolidated statements of operations.

2022 Outlook (7)
Discovery may provide forward-looking commentary in connection with this earnings announcement on its quarterly earnings conference call. Details on how to access the audio webcast are included below.

Earnings Conference Call Information
Discovery will host a conference call today, February 24, 2022 at 8:00 a.m. ET, to discuss its fourth quarter and full year 2021 results. To listen to the audio webcast of the earnings call, please visit the Investor Relations section of the Corporate website at https://corporate.discovery.com/.

Cautionary Language Concerning Forward-Looking Statements
This press release contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties and on information available to the Company as of the date hereof. The Company's actual results could differ materially from those stated or implied due to risks and uncertainties associated with its business, which include the risk factors disclosed in its 2020 Annual Report on Form 10-K filed with the SEC on February 22, 2021 and its Annual Report on Form 10-K for the year ended December 31, 2021, expected to be filed on or before March 1, 2022.

Forward-looking statements include statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future, and can be identified by forward-looking words such as "anticipate," "believe," "could," "continue," "estimate," "expect," "intend," "may," "should," "will" and "would" or similar words. Forward-looking statements in this release include, without limitation, statements regarding investing in the Company's programming, strategic growth initiatives, changes in the pay-TV ecosystem, the timing and effects of its pending transaction with AT&T Inc. and WarnerMedia and related transactions, and the impact of COVID-19. Actual results may differ materially from the results predicted due to risks and uncertainties, including the Company's ability to complete, integrate, maintain and obtain the anticipated benefits and synergies from its proposed transaction to combine the Company's business with AT&T's WarnerMedia. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

These risks, as well as other risks associated with the proposed transaction, are more fully discussed in the registration statement on Form S-4 filed by Discovery with the Securities and Exchange Commission ("SEC"), which includes a preliminary proxy statement/prospectus, the proxy statement/prospectus filed by Discovery with the SEC and first mailed to Discovery stockholders on February 10, 2022, and the registration statement on Form 10 filed by Spinco with the SEC, which includes a preliminary information statement, in connection with the proposed transaction. Discussions of additional risks and uncertainties are contained in AT&T's and Discovery's filings with the Securities and Exchange Commission. Neither AT&T nor Discovery is under any obligation, and each expressly disclaims any obligation, to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or otherwise. Persons reading this announcement are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof.

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