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Discovery Tops Q4 Earnings Expectations Despite Lower Ratings, Continued Cord-Cutting

Company meets Wall Street’s revenue forecast thanks to pricing increases

Discovery reported Thursday it had beaten Wall Street’s earnings expectations for the fourth quarter of 2019, despite lower ratings and continued cord-cutting.

Wall Street forecast earnings per share (EPS) of 93 cents on $2.87 billion in revenue, according to a consensus estimate compiled by Yahoo Finance. Discovery actually reported adjusted EPS of 98 cents on $2.874 billion in revenue, a revenue increase of 2% over 2018’s Q4.

For the three-month period ending Dec. 31, 2019, net income increased to $476 million. Growth there was thanks to lower income tax expense and restructuring charges, as well as higher revenues, which was all partially offset by an increased investment in streaming. That last point led to higher operating costs.

In Q4, advertising and distribution revenues increased both in the U.S. and internationally.

Domestically, ad sales growth was due to pricing increases, which partially offset lower overall TV ratings. Distribution revenue rose thanks to higher rates from affiliates and additional carriage on more virtual MVPDs, which was partially offset by cord-cutting.

Discovery saw its ad revenue increase even more abroad than at home due to the growth of its streaming business and the consolidation of its UK lifestyle channels. The company’s international networks also outperformed its U.S. networks in distribution revenue, with increases driven by content licensing arrangements and higher affiliate rates.

For the full year, which saw HGTV and Food Network’s launch in more than 30 new countries and territories combined, Discovery’s total revenues increased 6% to $11.144 billion. Net income for the year rose to $2.069 billion.

In 2019, Discovery’s TLC delivered its best year ever globally, improving both international share and viewership by 8%. In the U.S., the home of the “90 Day Fiance” franchise was the fastest-growing ad-supported cable network among women in both the 25-54 and 18-49 demos, scoring its best primetime performance in 16 years.

“2019 was a year of promises made and promises delivered,” Discovery president and CEO David Zaslav said in a prepared statement accompanying the financial release. “We achieved more than $3 billion of free cash flow and brought leverage down to the low end of our target range of 3-3.5x net debt to Adjusted OIBDA. Our differentiated local content strategy and global scale, coupled with our unique free cash flow conversion profile, provide distinct financial flexibility that allows us to adapt to changing media consumption habits. Our Board’s confidence in our strategic direction is highlighted by the recent authorization to repurchase up to an additional $2 billion of our shares.”

Discovery stock closed Wednesday afternoon at $26.47 per share, down 95 cents from where it opened. The regular trading day for the U.S. stock markets open at 9:30 a.m. ET.

Zaslav and other Discovery executives will host a conference call at 8 a.m. ET to discuss the quarter and full year in greater detail.

Discovery acquired Scripps, the home to popular cable channels like HGTV and Food Network, in 2018 for nearly $15 billion.