DISCOVERY : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

Management's discussion and analysis of financial condition and results of
operations is a supplement to and should be read in conjunction with the
accompanying consolidated financial statements and related notes. This section
provides additional information regarding Discovery, Inc.'s ("Discovery," the
"Company," "we," "us," or "our") businesses, current developments, results of
operations, cash flows and financial condition. Additional context can also be
found in our 2020 Annual Report on Form 10-K.
BUSINESS OVERVIEW
We are a global media company that provides content across multiple distribution
platforms, including linear platforms such as pay-television ("pay-TV"),
free-to-air, and broadcast television, authenticated GO applications, digital
distribution arrangements, content licensing arrangements and direct-to-consumer
("DTC") subscription products. As one of the world's largest pay-TV programmers,
we provide original and purchased content and live events to approximately 3.7
billion cumulative subscribers and viewers worldwide through networks that we
wholly or partially own. As of June 30, 2021, we had 17 million total paid DTC
subscribers. We define a subscription as (i) a subscription to a
direct-to-consumer product for which we have recognized subscription revenue
from a direct-to-consumer platform; (ii) a subscription received through
wholesale arrangements in which we receive a fee for the distribution of our
direct-to-consumer platforms, as well as subscriptions provided directly or
through third-party platforms; and (iii) a subscription recognized by certain
joint venture partners and affiliated parties. We may refer to the aggregate
number of subscriptions across our direct-to-consumer services as subscribers. A
subscriber is only counted if they are on a paying status and excludes users on
free trials. We distribute customized content in the U.S. and over 220 other
countries and territories in nearly 50 languages. We have an extensive library
of content and own most rights to our content and footage, which enables us to
leverage our library to quickly launch brands and services into new markets and
on new platforms. Our content can be re-edited and updated in a cost-effective
manner to provide topical versions of subject matter that can be utilized around
the world on a variety of platforms.
Our content spans genres including survival, natural history, exploration,
sports, general entertainment, home, food, travel, heroes, adventure, crime and
investigation, health, and kids. Our global portfolio of networks includes
prominent nonfiction television brands such as Discovery Channel, our most
widely distributed global brand, HGTV, Food Network, TLC, Animal Planet,
Investigation Discovery, Travel Channel, Science, and MotorTrend (previously
known as Velocity domestically and currently known as Turbo in most
international countries). Among other networks in the U.S., Discovery also
features two Spanish-language services, Discovery en Español and Discovery
Familia. Our international portfolio also includes Eurosport, a leading sports
entertainment provider and broadcaster of the Olympic Games (the "Olympics")
across Europe (excluding Russia), TVN, a Polish media company, as well as
Discovery Kids, a leading children's entertainment brand in Latin America. We
participate in joint ventures including Magnolia, the recently formed
multi-platform venture with Chip and Joanna Gaines, and Group Nine Media, a
digital media holding company home to top digital brands including NowThis News,
the Dodo, Thrillist, PopSugar, and Seeker. We also operate production studios.
During the fourth quarter of 2020, we announced the global launch of our
aggregated DTC product, discovery+, a non-fiction, real life subscription
service. In January 2021, we launched discovery+ in the U.S. across several
streaming platforms and entered into a partnership with Verizon, which is
offering access to discovery+ for up to 12 months to certain of its customers.
The global rollout of discovery+ across more than 25 markets has already begun
with the U.K. and Ireland, where we have partnered with Sky, and India. We also
have a partnership with Vodafone, which will provide discovery+ to existing
Vodafone TV and mobile customers in 12 markets across Europe. Upon launch in the
U.S., discovery+ included an extensive content library comprised of more than
55,000 episodes and features a wide array of exclusive, original series from the
Discovery portfolio of brands that have a strong leadership position. The
service is available with ads or on an ad-free tier, providing us with dual
revenue streams.
We invest in high-quality content for our networks and brands with the objective
of building viewership, optimizing distribution revenue, capturing advertising
revenue, and creating or repositioning branded channels and business to sustain
long-term growth and occupy a desired content niche with strong consumer appeal.
Our strategy is to maximize the distribution, ratings and profit potential of
each of our branded networks. In addition to growing distribution and
advertising revenues for our branded networks, we have extended content
distribution across new platforms, including brand-aligned websites, online
streaming platforms, including discovery+, mobile devices, video on demand, and
broadband channels, which provide promotional platforms for our television
content and serve as additional outlets for advertising and distribution
revenue. Audience ratings are a key driver in generating advertising revenue and
creating demand on the part of cable television operators, direct-to-home
satellite operators, telecommunication service providers, and other content
distributors who deliver our content to their customers.
                                       32
--------------------------------------------------------------------------------

Although we utilize certain brands and content globally, we classify our
operations in two reportable segments: U.S. Networks, consisting principally of
domestic television networks and digital content services, and International
Networks, consisting primarily of international television networks and digital
content services. Our segment presentation aligns with our management structure
and the financial information management uses to make decisions about operating
matters, such as the allocation of resources and business performance
assessments.
WarnerMedia
In May 2021, we entered into an agreement with AT&T Inc. to combine
WarnerMedia's ("WarnerMedia") entertainment, sports and news assets with our
nonfiction and international entertainment and sports businesses to create a
standalone, global entertainment company.
The proposed combination transaction will be executed through a Reverse Morris
Trust type transaction, under which WarnerMedia will be distributed to AT&T's
shareholders via dividend or through an exchange offer or a combination of both
and immediately thereafter, combined with Discovery. In connection with the
combination transaction, AT&T will receive $43 billion (subject to adjustment)
in a combination of cash, debt securities and WarnerMedia's retention of certain
debt. We are in the process of establishing an interest rate derivative program
to mitigate interest rate risk associated with the anticipated issuance of
future fixed-rate debt.
Upon closing, all shares of Series A, Series B, and Series C common stock and
Series A-1 and Series C-1 convertible preferred stock will be reclassified and
converted to one class of Discovery common stock. AT&T's shareholders will
receive stock representing 71% of the new company and Discovery shareholders
will own 29% of the new company. The Boards of Directors of both AT&T and
Discovery have approved the transaction.
The transaction is anticipated to close in mid-2022, subject to approval by
Discovery shareholders and customary closing conditions, including receipt of
regulatory approvals. Agreements are in place with Dr. John Malone and
Advance/Newhouse Programming Partnership to vote in favor of the transaction.
The transaction requires, among other things, the consent of Advance/Newhouse
Programming Partnership under the Company's certificate of incorporation as the
sole holder the Series A-1 Preferred Stock. In exchange for Advance/Newhouse
Programming Partnership providing its consent to the proposed combination
transaction, which will result in the forfeiture of its significant approval
rights pursuant to the terms of the Series A-1 Preferred Stock and
reclassification of the shares of Series A-1 Preferred Stock into common stock,
it will receive a premium in the form of an increase to the number of shares of
common stock of Discovery into which the Series A-1 Preferred Stock would be
converted. Upon the closing, such premium will be recorded as a transaction
expense. No vote by AT&T shareholders is required.
The merger agreement contains certain customary termination rights for Discovery
and AT&T, including, without limitation, a right for either party to terminate
if the transaction is not completed on or before July 15, 2023. Termination
under specified circumstances will require Discovery to pay AT&T a termination
fee of $720 million or AT&T to pay Discovery a termination fee of $1.8 billion.
In anticipation of this combination, in June 2021, Magallanes, Inc., a wholly
owned subsidiary of AT&T Inc., entered into a $10 billion term loan that will be
guaranteed by the Company and certain material subsidiaries of the Company upon
closing of the transaction.
Impact of COVID-19
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak
to be a global pandemic. COVID-19 continues to spread throughout the world, and
the duration and severity of its effects and associated economic disruption
remain uncertain. We continue to closely monitor the impact of COVID-19 on all
aspects of our business and geographies, including the impact on our customers,
employees, suppliers, vendors, distribution and advertising partners, production
facilities, and various other third parties.
Beginning in the second quarter of 2020, demand for our advertising products and
services decreased due to economic disruptions from limitations on social and
commercial activity. These economic disruptions and the resulting effect on the
Company eased during the second half of 2020. We currently do not expect the
pandemic will have a significant impact on demand during fiscal year 2021. Many
of our third-party production partners that were shut down during most of the
second quarter of 2020 due to COVID-19 restrictions came back online in the
third quarter of 2020 and, as a result, we have incurred additional costs to
comply with various governmental regulations and implement certain safety
measures for our employees, talent, and partners. Additionally, certain sporting
events that we have rights to were cancelled or postponed, thereby eliminating
or deferring the related revenues and expenses, including the Tokyo 2020 Olympic
Games, which were rescheduled to July and August 2021. The postponement of the
Olympic Games deferred both Olympic-related revenues and significant expenses
from fiscal year 2020 to fiscal year 2021.
                                       33
--------------------------------------------------------------------------------

In response to the impact of the pandemic, we employed and continue to employ innovative production and programming strategies, including producing content filmed by our on-air talent and seeking viewer feedback on which content to air. We continue to pursue a number of cost savings initiatives, which began during the third quarter of 2020 through the implementation of travel, marketing, production and other operating cost reductions, including personnel reductions, restructurings and resource reallocations to align our expense structure to ongoing changes within the industry. The nature and full extent of COVID-19's effects on our operations and results is not yet known and will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and the extent of future surges of COVID-19, vaccine distribution and other actions to contain the virus or treat its impact, among others. We will continue to monitor COVID-19 and its impact on our business results and financial condition. Our consolidated financial statements reflect management's latest estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Actual results may differ significantly from these estimates and assumptions.

                                       34
--------------------------------------------------------------------------------

RESULTS OF OPERATIONS
Foreign Exchange Impacting Comparability
The impact of exchange rates on our business is an important factor in
understanding period-to-period comparisons of our results. For example, our
international revenues are favorably impacted as the U.S. dollar weakens
relative to other foreign currencies, and unfavorably impacted as the U.S.
dollar strengthens relative to other foreign currencies. We believe the
presentation of results on a constant currency basis ("ex-FX"), in addition to
results reported in accordance with U.S. GAAP provides useful information about
our operating performance because the presentation ex-FX excludes the effects of
foreign currency volatility and highlights our core operating results. The
presentation of results on a constant currency basis should be considered in
addition to, but not a substitute for, measures of financial performance
reported in accordance with U.S. GAAP.
The ex-FX change represents the percentage change on a period-over-period basis
adjusted for foreign currency impacts. The ex-FX change is calculated as the
difference between the current year amounts translated at a baseline rate, which
is a spot rate for each of our currencies determined early in the fiscal year as
part of our forecasting process (the "2021 Baseline Rate"), and the prior year
amounts translated at the same 2021 Baseline Rate. In addition, consistent with
the assumption of a constant currency environment, our ex-FX results exclude the
impact of our foreign currency hedging activities, as well as realized and
unrealized foreign currency transaction gains and losses. Results on a constant
currency basis, as we present them, may not be comparable to similarly titled
measures used by other companies.
Consolidated Results of Operations
The table below presents our consolidated results of operations (in millions).

© Edgar Online, source Glimpses