M arket d igest 9 distributed content 175 countries

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M ARKET D IGEST - 9 - distributed content (175 countries and 60 unique feeds) through its own extensive distribution channels. Discovery is also looking to the future of video distribution through new over-the-top outlets like Dish’s Sling, short-form digital distribution over channels like YouTube, and mobile over services like Snapchat. However, we see the merger as unlikely to resolve the problem of audience erosion at Discovery’s legacy U.S. networks. Following the merger, management may need to decide which lower-rated networks to pare down, rebrand, or sell off. On June 4, Discovery announced that it would spend $2 billion for the international rights (excluding the U.S.) to the PGA Tour across all platforms for 12 years, beginning in 2019. Discovery intends to monetize the PGA Tour rights through a combination of sublicensing, advertising, affiliate fees, and digital subscription rights. The estimated costs are $50 million in 2019 and 2020, and $100 million in 2021, with further increases in subsequent years. Discovery plans an additional $20-$30 million per year in start-up costs to build out the product, along with a new PGA OTT video streaming service platform, over the first three years of the deal. Discovery completed the sale an 87.5% controlling equity interest in its education business to private equity firm Francisco Partners for $120 million in cash on April 30. Discovery did not incur a loss on the sale. Discovery Education will be run as a separate business under current management. Discovery retains a minority 12.5% equity interest in Discovery Education. EARNINGS & GROWTH ANALYSIS We are lowering our 2018 adjusted EPS estimate by a penny to $2.25 and our 2019 forecast to $2.47 from $2.49. Discovery has a unique portfolio of assets, including owned content that it has steadily diversified from nonfiction programming into sports, children’s and other entertainment-oriented programming. It also has an unmatched international television distribution capability of basic ad-supported cable and free-to-air channels. The company averages 10 channels across 220 markets, reaching three billion subscribers. Of course, the company has also opened up digital channels with its own Discovery GO over-the-top digital streaming and Eurosport Player applications, also including YouTube, and subscription video on-demand with Hulu. With the Scripps Networks acquisition, Discovery has added a strong portfolio of U.S.-based free-cable channels anchored by HGTV and The Food Network. As noted above, management plans to exploit the Scripps Networks intellectual property by leveraging its content across Discovery’s international networks and digital platforms. In 1Q18, U.S. Networks pro forma revenue increased 2% to $4 billion. Segment pro forma revenue growth was driven by 2% growth in both advertising and affiliate revenue. Ad revenue benefited from the growth of Discovery GO, new digital offerings, and higher volumes, partly offset by lower delivery for the linear television channels. The subscriber loss rate at the combined portfolio was 5%, in line with recent trends. Adjusted OIBDA at the U.S. Networks rose 1% in 1Q18.
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