Discovery Communications, Inc. has reported financial results for the second quarter ended June 30, 2010.
Second quarter revenues of $963 million increased $98 million, or 11%, over the second quarter a year ago led by 10% growth at U.S. Networks and 15% growth at International Networks. Adjusted Operating Income Before Depreciation and Amortization (1) (“OIBDA”) grew 18% to $455 million, driven by a 45% increase at International Networks and an 11% increase at U.S. Networks. Total company Adjusted OIBDA margin increased to 47% for the second quarter from 45% for the same period a year ago.
Second quarter net income available to Discovery Communications, Inc. stockholders of $106 million ($0.25 per diluted share) decreased $71 million compared to $177 million ($0.42 per diluted share) for the second quarter a year ago which included a gain on the sale of 50% of the Discovery Kids channel. The current quarter results reflect the strong operating performance, which was more than offset by a loss on the early extinguishment of debt and termination of interest rate swaps. Excluding these items, net income for the quarter increased $80 million .
Free cash flow was negative $44 million for the second quarter, a decrease of $217 million from the second quarter of 2009 as increased operating performance was more than offset by payments of $138 million for the early extinguishment of debt and termination of interest rate swaps, $60 million increased spending for stock-based compensation and $61 million in higher cash taxes due to higher earnings and the expiration of domestic programming deductions. Free cash flow is defined as cash provided by operating activities less acquisitions of property and equipment.
U.S. Networks’ revenues in the second quarter of 2010 increased 10% to $620 million primarily driven by advertising and distribution revenue growth. Advertising revenue increased 13% mainly from higher cash sellouts and increased pricing. Distribution revenue grew 6% largely from higher rates, subscriber growth primarily from networks carried on the digital tier and lower launch-support amortization, partially offset by the absence of $6 million due to the removal of Discovery Kids following the sale of 50% of that entity on May 22, 2009. Excluding Discovery Kids and the lower launch-support amortization from the 2009 results, distribution revenues grew 8% compared with the second quarter a year ago.
Adjusted OIBDA increased 11% to $379 million reflecting the 10% revenue growth partially offset by 7% higher operating expenses primarily due to increased marketing spending.
David Zaslav, Discovery’s President and Chief Executive Officer said, “Discovery’s second quarter results reflect our strong execution across our portfolio of domestic and international networks. We delivered double-digit revenue and Adjusted OIBDA growth, capitalizing on the greater global demand for advertising while continuing to demonstrate the operating leverage inherent in our business model”
Mr David continued ”At the same time we remain focused on further strengthening our global content, with increased investments in Animal Planet and ID translating into ratings and advertising growth domestically, while TLC is expanding its footprint internationally. Lastly, we significantly strengthened our financial position, refinancing $3 billion of debt at historically low interest rates and greatly enhanced our financial flexibility. The combination of our strong operating performance and financial position has enabled us to introduce a $1 billion share repurchase plan to return capital to stockholders.”
International Networks’ revenues for the second quarter increased 15% to $306 million due to advertising and distribution revenue growth. Advertising revenue increased 38% primarily from higher cash sellouts, increased viewership and subscriber growth across nearly all international regions. Affiliate revenue was up 6% during the second quarter driven primarily by increased subscribers in Latin America. Foreign currency fluctuations had an immaterial impact in the quarter.
Adjusted OIBDA increased 45% to $132 million reflecting the 15% revenue growth and a 1% decrease in operating expenses primarily reflecting a content charge of $11 million in the second quarter of 2009. Excluding the impact of the content charge, Adjusted OIBDA increased 29% reflecting 15% revenue growth, partially offset by a 5% increase in operating expenses primarily due to increased sales commissions.
Education and Other second quarter revenues decreased $2 million to $33 million, primarily reflecting increased education revenue from higher streaming volumes, which was more than offset by lower revenues from Creative Sound Services. Adjusted OIBDA was in-line with the second quarter of 2009 as operating expenses decreased $2 million.
Adjusted OIBDA decreased $11 million when compared to the second quarter a year ago primarily due to increased stock-based compensation expense.
For the full year ending December 31, 2010, Discovery Communications, Inc. expects total revenue between $3,700 million and $3,775 million, Adjusted OIBDA between $1,625 million and $1,700 million, and net income available to Discovery Communications, Inc. stockholders of $650 million to $700 million. Our outlook incorporates current foreign exchange rates for revenues and expenses, current share price for mark-to-market stock-based compensation calculations, the $105 million net of tax impact from the early extinguishment of debt and termination of interest rate swaps and the elimination of approximately $40 million of revenue due to Antenna Audio’s results being included as part of discontinued operations.
The Company’s Board of Directors has approved a stock repurchase program, pursuant to which the Company is authorized to purchase up to $1 billion of its common stock. The Company expects to fund repurchases through a combination of cash on hand, cash generated by operations, borrowings under its revolving credit facility and future financing transactions. Accordingly, the Company’s stock repurchase program is subject to the Company having available cash to fund repurchases. Under the program, management is authorized to purchase shares from time to time through open market purchases or privately negotiated transactions at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors.
The 2009 financial information has been recast so that the basis of presentation is consistent with that of the 2010 financial information. This recast reflects the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 810, Consolidation (ASC 810), which amends the existing standards for variable interest entities, the classification of results of operations of our Antenna Audio business as discontinued operations, as well as the realignment of the Commerce business into the U.S. Networks segment.
In June 2010, the Company completed the issuance of $3 billion of Senior Notes including $850 million 3.70% Senior Notes due June 2015, $1.3 billion 5.05% Senior Notes due June 2020, and $850 million 6.35% Senior Notes due June 2040. The net proceeds were used to repay outstanding debt as well as $114 million in make-whole payments for the early extinguishment of debt.
During the second quarter of 2010, the Company committed to a plan to sell its Antenna Audio business within the next year. Antenna Audio’s results have been reflected as discontinued operations and are included in “Other (expense) income, net” on the Condensed Consolidated Statement of Operations. Assets, liabilities and cash flows of Antenna Audio have not been reflected as discontinued operations as they are not material to the Company’s balance sheets and cash flows.
In addition to the results prepar
ed in accordance with U.S. generally accepted accounting principles (“GAAP”) provided in this release, the Company has presented Adjusted OIBDA and free cash flow. The Company evaluates the operating performance of its segments based on financial measures such as revenues and adjusted operating income before depreciation and amortization (“Adjusted OIBDA”).
The Company believes Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses and also provides investors a measure to analyze the operating performance of each segment against historical data. The Company excludes mark-to-market stock-based compensation, exit and restructuring charges, certain impairment charges, and gains (losses) on business and asset dispositions from the calculation of Adjusted OIBDA due to their volatility or non-recurring nature. The Company also excludes depreciation of fixed assets and amortization of intangible assets and deferred launch incentive as these amounts do not represent cash payments in the current reporting period.
The Company defines free cash flow as cash provided by operating activities less acquisitions of property and equipment. The Company uses free cash flow as it believes it is an important indicator for management and investors of the Company’s liquidity, including its ability to reduce debt, make strategic investments and return capital to stockholders.
Adjusted OIBDA and free cash flow are non-GAAP measures, and should be considered in addition to, but not as a substitute for, operating income, net income, cash flows provided by operating activities and other measures of financial performance reported in accordance with GAAP. Please review the supplemental financial schedules beginning on page 9 for reconciliations to GAAP measures.