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Discovery cost-savings plan to yield financial benefits in 2016, execs say

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Discovery cost-savings plan to yield financial benefits in 2016, execs say

DiscoveryCommunications Inc. executives said a just-announced cost-savingsplan puts the companyon track to expand its profit margin for full-year 2016.

The plan, disclosed in a regulatory filing May 4, isexpected to be completed by the end of the third quarter. The company isoffering voluntary buyouts to U.S. employees, and it expects to incur $40million to $60 million in expenses for severance pay and other costs relatingto personnel adjustments.

Speaking during a May 5 earnings conference call, DiscoveryPresident and CEO David Zaslav said the cost savings will allow the company tofocus investment on content, international growth markets, digital services andOTT products and sports. The company will "relentlessly"cut costs in all non-content areas, he said.

CFO Andrew Warren said the initiatives should yieldfinancial benefits in the second half of this year as well as full-year 2017.Discovery plans to reallocate traditional linear business costs to new mediaplatforms and content development such as mobile short-form videos, sports anddirect-to-consumer initiatives, he said.

"As a result of this commitment to margin expansion, aswell as are better-than-planned U.S. ad sales performance to date, we are alsoraising our 2016 adjusted EPS and free cash flow guidance to being up at leasthigh teens on a constant currency basis," the CFO said. Healso noted that the currency headwinds that have weighed on the company'sbottom line are beginning to subside and appear "meaningfully better"for 2016.

Later during the call, asked about advertising pricing atthis year's upfront, Zaslav said Discovery tends to be one point behind thebroadcast networks on rates.

"That's the way it's been historically," he said. "Late-night,we're No. 1, and so we think there's still some significant upside on that, butwhen you average all of our channels together we tend to be a little bit behindsome of the best broadcast networks."

Discovery on May 5 reported first-quarter total revenues of$1.56 billion, up 2% from $1.54 billion. U.S. networks revenues increased 8% to$807 million, driven by 8% distribution growth and 7% advertising growth.International networks' revenue declined 3% to $711 million due to changes inforeign currency exchange rates. Education and other revenues decreased 19% to$44 million, primarily due to lower external production deliveries at thestudios production business.

Total adjusted OIBDA for the first quarter rose 2% to $577million. Excluding currency effects, total company revenues and adjusted OIBDAgrew 5% and 7%, respectively, as changes in foreign currency exchange ratesreduced revenue and adjusted OIBDA growth by 3% and 5%, respectively.

First-quarter net income available to Discovery came to $263million, or 42 cents per share, versus $250 million, or 37 cents per share inthe prior-year period. The company attributed the improvement to betteroperating results, a decrease in taxes, lower currency-related losses, and again from the sale of SBS Radio, partially offset by higher equity-basedcompensation and a decline in income from equity investees.

The S&P Capital IQ consensus normalized EPS estimate forthe first quarter was 43 cents, while the GAAP EPS estimate was 40 cents in theperiod.

During the first quarter, Discovery repurchased 8.4 millionshares of its Series C common stock at an average price of $25.44 per share,for a total of $214 million. Overall, the company spent $373 million on sharerepurchases during the quarter.

For the full year 2016, Discovery expects adjusted EPSexcluding currency effects to grow at least high teens and free cash flowexcluding currency effects to grow at least high teens.