The slight acceleration in sub losses in the quarter, particularly when combined with the inability of the narrow-moat firm to gain carriage in either Hulu or YouTube OTT television packages, is troublesome.
began 2017 on a weak note as both revenue and EBITDA came in below both consensus and our projections. As the miss can be explained by the ongoing foreign headwinds, we are more worried by the slight acceleration in sub losses in the quarter, particularly when combined with the inability of the firm to gain carriage in either Hulu or YouTube OTT television packages. We are maintaining our narrow economic moat rating and our $34 fair value estimate as we await more clarity on the sub losses and the attractiveness of Hulu with Live TV and YouTube TV relative to PlayStation Vue, Sling TV, and DirecTV Now. Currently trading in 4-star territory, the stock may offer an attractive entry point to those investors with a longer-term investment horizon and higher risk tolerance.
Neil Macker, CFA, is an equity analyst for Morningstar.
Overall revenue improved by 3% to $1.61 billion (up 5% organically) year over year, slightly below our estimate. On the U.S. side, revenue increased 3% to $781 million, driven by a 5% increase in distribution revenue. The firm saw a slight acceleration in sub losses which were down 3%. While management noted that these losses were weighted toward the smaller channels, the 3% loss is above the estimated 2.4% overall market sub decline. Advertising growth of 1% was impressive versus losses at peers like Time Warner and AMC. Discovery benefited from higher pricing and improved monetization of the GO platform. U.S. adjusted EBITDA margin improved to 60% from 59% a year ago as cost-control improvements and revenue growth more than offset higher content and marketing costs. Excluding the impact of foreign exchange and acquisitions, international revenue increased 8% year over year on 3% ad growth and 10% affiliate fee growth. While the international segment continues to suffer due to foreign exchange, the strong organic international growth (particularly in affiliate fees) demonstrates how Discovery differs from Scripps and other small media peers that remain more highly leveraged to the U.S.
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