華納兄弟探索 (WBD) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Discovery Communications' Fourth Quarter and Full Year 2008 Earnings Call.

My name is Ann, and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of the conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Craig Felenstein, Senior Vice President of Investor Relations.

Please proceed, sir.

Thank you, Ann.

Good morning, everyone, and welcome to Discovery Communications' Fourth Quarter and Full Year 2008 Earnings Call.

Joining me today is David Zaslav, our President and Chief Executive Officer; Mark Hollinger, our Chief Operating Officer; and Brad Singer, our Chief Financial Officer.

Hopefully, you have all received our earnings release, but if not, feel free to access it on our website at www.DiscoveryCommunications.com.

We'll begin today's call with some opening comments from David and Brad, after which we will open the call up to your questions.

Before we begin, I would like to remind you that the comments today regarding the Company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are made based on management's current knowledge and assumptions about future events and may involve risks and uncertainties that could cause actual results to differ materially from our expectations.

In providing projects and other forward-looking statements, the Company disclaims any intent or obligation to update them.

For additional information on important factors that could affect these expectations, please see our annual report on Form 10-K and our subsequent filings made with the US Securities and Exchange Commission.

And with that, I'll turn the call over to Brad.

Thanks, Craig, and we appreciate the opportunity to discuss our fourth quarter performance, current business outlook, and operating environment with you.

Before we begin, please note that similar to our third quarter press release, we have adjusted our financial results for 2007 to include the impact of the DHC Newhouse transaction, the sale of the Travel Channel, and the spin-off of Ascent Media, with the exception of the sound business, to better aid the users of our financial information.

Now, let's review the fourth quarter.

Discovery delivered solid operating results during the quarter despite the challenging economic and capital market conditions, as well as a reverse of the positive foreign exchange impact on our top line from earlier in the year.

Total revenues were relatively flat compared to the prior year fourth quarter, with solid US network growth offset by a decline in our international network revenues, driven primarily by a $33 million unfavorable currency impact, as well as weakness in our low-margin commerce business.

Adjusted OIBDA grew to $362 million.

The prior-year results included a $139 million charge -- content impairment charge, which also favorably impacted current quarter programming expenses comparisons by $19 million.

Adjusted for the impact of the content write-off, adjusted OIBDA increased 23% from the fourth quarter 2007, and adjusted OIBDA margins increased to 38%.

We believe our performance this quarter continues to demonstrate our ability to work hard at controlling our costs even in a challenging revenue environment, with adjusted OIBDA growing $64 million, excluding the impact of the prior-year content write-off, with only $1 million of revenue growth.

Our income from continuing operations for the fourth quarter increased to $105 million, including a pretax benefit of $22 million in long-term incentive plan compensation, offset by a $30 million impairment charge as related to HSW, $28 million of mark-to-market interest rate swap unrealized losses, and $14 million in restructuring charges related to cost reduction and reorganization activities.

We continued to deliver strong free cash flow, with a 23% increase to $128 million for the quarter.

As we look back on 2008, our overall full-year revenues increased 10%; adjusted OIBDA increased 21%, excluding the impact of the content write-off in 2007; and free cash flow increased 172%, starkly portraying the strength and efficiency of our business model, as over 70% of every incremental dollar of revenue went to adjusted OIBDA.

Let's move to our operating units.

Fourth quarter domestic revenues grew 8%, with distribution revenues increasing 13% from increased rates and strong growth of our digital networks, as well as a $6 million decrease in deferred launch fee amortization and $5 million in positive non-recurring items.

Our domestic ad sales team did a nice job growing revenue 6% in a challenging market.

The combination of a strong upfront sales effort and thoughtful inventory management enabled our team to take advantage of our rating success across all of our networks in the fourth quarter.

Cost of revenue increased 4%, adjusted for the prior-year content write-off, which was more than offset by a 9% decrease in SG&A, including $4 million of cost related to the Oprah Winfrey Network.

The strong cost control, excluding the impact of the write-off, resulted in more than every incremental dollar of revenue going straight to adjusted OIBDA.

Adjusted OIBDA increased to $300 million, and excluding the impact of the fourth quarter '07 write-offs, domestic margins expanded by 400 basis points to 52% from the fourth quarter of 2007.

Our international operations performed well despite the currency impact on our top line.

Total reported revenues decreased 4%, which included an 8% increase in affiliate revenues, flat advertising revenues, and 11% unfavorable foreign exchange hit compared to the prior year.

Affiliate revenues' growth slowed sequentially in year on year due to a combination of positive one-time revenue items in the third quarter of 2008 and fourth quarter of 2007 and a negative one-time item in the fourth quarter of 2008.

Advertising revenues were flat, excluding the currency impact, with a 14% increase in our operations, excluding the weakness in the UK, which was down 10 million due to a combination of deteriorating market economics and a contractual limitation.

Excluding the $32 million positive currency impact to our expenses, cost of revenue increased 11% from the prior year as we continue to invest in our content.

We more than offset our content investments with a 16% decrease in SG&A.

Similar to our US operations, our international team converted more than every dollar of incremental revenue into adjusted OIBDA.

Excluding foreign currency impact, adjusted OIBDA increased 36% to $109 million, and adjusted OIBDA margins improved 800 basis points from the prior year.

Our commerce, education, and other segment had a mixed performance, with our education operations continuing to deliver improved performance, offset by softness in our commerce business due to tough prior-year comparables from Planet Earth sales and a slow holiday season.

Please note the prior year included a $10 million content write-off in our education group.

Corporate expenses increased slightly from the prior year due to a $2 million in non-cash stock compensation expense, as well as costs related to our public company transition activities.

You may have heard many of our peers discuss their 2009 expectations in the current environment.

We share many of the same considerations, such as a challenging domestic and international economic environment, limited visibility and advertising outlook, and uncertain impact of various government financial policy and stimulus initiatives.

We have complete deference to the areas of our business that we do not control, but we still plan to execute our business in 2009 based on the areas that we do control, including managing our diverse networks with quality programming and thoughtful scheduling, controlling our costs and investments, and working hard to maximize our market share based on the dollars available in the markets we participate in.

For 2009, we are forecasting a range of $3.375 billion to $3.5 billion, or between a 2% decrease and a 2% increase in revenues.

Our forecast includes approximately $130 million, or a 4% decrease in revenues related to foreign exchange rates.

Excluding currency considerations, we are forecasting mid to high single-digit distribution growth and a low single-digit ad revenue growth, primarily driven by our international markets.

The composition of our revenue streams aid us in our planning process, as approximately half of our revenue is provided by predictable and stable affiliate [face].

As we provide guidance, we are looking at relatively flat US ad sales in the first quarter and low single-digit growth in the international ad markets compared to the prior year.

We anticipate adjusted OIBDA of $1.3 billion to $1.4 billion for 2009, with the implied ability to reduce certain portions of our cost structure, most notably SG&A, to meet potential shortfalls in our revenue expectations.

Our adjusted OIBDA guidance includes an estimated $45 million decrease due to current foreign exchange rates compared to the prior year.

Please note that the uncertainty of the overall economic environment may alter our forecasts as we move through 2009.

We anticipate income from continuing operations of $475 million to $575 million and capital expenditures of $50 million to $60 million in 2009.

Our guidance does not include costs and investments related to Oprah Winfrey Network.

We anticipate investing approximately $70 million to $80 million during 2009.

The income statement impact will be dependent on the timing of the launch, which is currently anticipated to be late 2009 or early 2010.

During future earnings calls, we will provide separate investment and financial impact [inaudible].

We continue to improve our financial position with a combination of strong operating performance and utilizing our free cash flow to reduce our leverage.

We've paid down over $100 million of debt during the fourth quarter, ending with operating company leverage of approximately 1.7 times debt to adjusted OIBDA and total company leverage at 2.8 times.

I would highlight that we have paid down over $380 million of debt over the past 12 months, and the combination of improved operating performance and lower outstanding debt reduced our total and company operating leverage by 40%.

We have a strong liquidity position, with $100 million of cash on hand, $1.2 billion of undrawn domestic revolving loans, and an annualized current run rate of free cash flow of over $500 million.

When compared to $456 million in maturities in 2009, we believe we are well positioned to meet our debt service requirements, as well as invest in our core businesses.

I will now turn the call over to David Zaslav, our CEO.

Thanks, Brad.

Good morning, everyone, and thank you for joining us.

Given the challenging economic news you've heard over the past month, we've been looking forward to presenting our results and providing some clarity on the operational trends we're seeing across our global businesses.

Brad has already taken you through the financials and the performance we delivered in the fourth quarter in the face of a weak macro economy and foreign currency headwinds.

Discovery's fourth quarter results were a solid end to 2008, a year in which the Company delivered strong top-line revenue growth and vigilantly controlled costs, leading to a consistent margin expansion.

Importantly, our growth was balanced, with gains domestically and internationally driven by advertising and subscription revenues.

While we are pleased with the financial results this past year, it was the strategic steps the Company has taken over the past 12 months, as well as the past two years, that positioned Discovery to outperform our peers in 2009.

For the US networks, the primary focus this past year was threefold --

Number one, rebuild the programming and development pipeline at our three fully distributed networks -- Discovery, TLC, and Animal Planet, with content that delivers on the brand promise for each channel.

Two, reposition several of the emerging networks that have a strong distribution platform -- our beachfront real estate with more compelling consumer propositions that can build bigger brands and drive future growth.

And, three, ensure the predictability and stability of our revenue and cash flow through mutually beneficial long-term contracts with our affiliate partners.

Discovery Channel is clearly the biggest driver for this Company, and John Ford and his team have succeeded in getting the channel back on brand and growing audience share in a meaningful way.

The Channel had a solid foundation, with four strong series -- MythBusters, Dirty Jobs, Deadliest Catch, and Man vs.

Wild -- and great long-term franchises, such as Shark Week.

The key was to maintain the ratings on the established series while developing the next generation of hits to replenish the pipeline.

The Discovery Channel development slate, which took about nine months to get to air, has already produced several new series that are outperforming their timeslot, including Time Warp, Storm Chasers, Destroyed in Seconds, and Extreme Loggers.

Loggers is a good example of how we can control program spending.

It premiered as a three-episode pack and was only greenlit for full series after it demonstrated real audience appeal.

Unlike many general entertainment series, we have the ability to invest success-based capital in runs rather than be locked into large upfront commitments.

The combination of existing hits and new premieres drove delivery among Discovery's key male demo, up 11% in Q4, and the hits have continued in 2009.

January ratings were up 11 -- were up 12%, and last week, Dirty Jobs, Man vs Wild, and Treasure Quest, one of our new series, all ranked among the top 25 non-scripted cable shows in the broad 25-to-54 demo.

The other significant driver at US Networks is TLC, which many of you know experienced some significant ratings declines in the first nine months of 2008.

Eileen O'Neill, a strong creative talent, who in the past was responsible for the development of two of TLC's biggest hits, Jon & Kate Plus 8 and 18 and Counting with the Duggars, was moved from Planet Green to TLC.

And through better scheduling, windowing, and promotion, Eileen reconnected with the TLC's core audience.

She managed to improve ratings almost immediately, actually growing audience in Q4 by 16% among the key women 25 to 54 demo from a decline of 11% in the third quarter.

More of her development slate will begin hitting in 2009, and we are excited to have this channel back on brand with strong leadership.

At our third fully distributed network, Animal Planet, we've changed the brand and the programming mix to attract a more monetizable demo, adults 25 to 54, and we have seen some early positive signs, most notably from Whale Wars, which was the best performing series in the network's history and will return for season two in June.

Ratings at Animal Planet have been up double-digit since we relaunched the brand last February.

Still a ways to go, but this channel presents us a big opportunity if we can get it right.

We also spent the past year focusing on rebranding several of our emerging networks.

The first, ID, Investigation Discovery, was launched off of Discovery Times in January and grew ratings 43% in 2008, among the fastest-growing cable channels last year.

We also launched Planet Green off of Discovery Home, and after its much-celebrated debut in June, we have been in an interim phase as we moved Eileen from Planet Green to TLC.

We'll be announcing a great new general manager shortly and look forward to refocusing on this increasingly relevant genre.

And, lastly, we began working on converting Discovery Health into OWN, the Oprah Winfrey Network.

We just hired Christina Norman, the former president of MTV and VH1, to run the joint venture as CEO, and we now have a great executive management team in place.

Development is coming along very well, and we plan on showing some of our first show concepts to advertisers at the upcoming Upfront.

Internationally, 2008 was focused on continuing to grow our distribution base, building out our local ad sales capabilities, and strengthening our programming mix and category leadership.

As I mentioned last quarter, we are in over 170 countries, and in many of those countries, pay TV penetration is below 50%, as compared to over 90% in the US.

In 2008, our international paying subscribers increased by 16%, with broad-based growth, including EMEA up 22%, Latin America up 20%, and Asia Pacific up 10%.

The net result was distribution revenue growth of 13% this past year, excluding FX.

Given that we have been on the ground in several of these markets for 20 years, we have relationships, technical capabilities, and scale that allows us to grow distribution revenues more competitively than if we were just trying to build a platform today.

We have five channels or more in nearly three-quarters of our markets, and as pay TV penetrates, our portfolio rises with it.

Today, we are focusing much of our effort on growing our local ad sales capabilities in key growth markets.

Since 2006, we have created a number of in-market ad sales teams, particularly in Central Europe, implemented new ad sales systems, and have invested in more sales people in specific growth markets.

The net result in 2008 was ad revenue growth of 22%, excluding the UK, which is a pretty tough market right now.

Another factor helping us drive our advertising is our programming line-up.

We grew ratings for our overall portfolio by 7% in 2008 among adults 25 to 54 despite tough competition this year in many regions from the Olympics.

In Europe, where we are focusing much of our ad sales effort today, ratings grew 13% this past year.

In addition, we have continued to diversify our portfolio with new brands and genres that are now delivering more than half of our international audience.

A good example is our launch of ID in the UK and Russia this year.

Taking ID globally is part of our strategy to further leverage our US pipeline for global brand development and portfolio diversification.

Creating compelling programming with global appeal allows us to further capitalize on our growing distribution platform, build market share, and ultimately drive global ad revenues over the coming years.

So that was 2008, but let's take a look and talk about 2009.

On a macro level, I know many of you are concerned about the state of the ad market looking forward, so let me give you a synopsis of what we are seeing.

We told you that Q1 cancellations of upfront commitments were up from a year ago but still at normalized levels.

Q2 cancellations came in higher than Q1, but they were in line with our expectations, and they're still manageable.

Scatter pricing remains double digit above Upfront levels, but the gap has narrowed, and pricing is now below year-ago Scatter pricing levels.

The biggest difficulty is the low level of visibility, with commitments forming within weeks, rather than months in years past.

It is difficult at this point for us to predict where the ad market will ultimately go, but we'll continue investing in quality content, grow our brand entitlement, and focus on gaining market share.

While we can't control what happens in the economy, and while things may deteriorate before they improve, we have several strategic advantages, which will help us outperform regardless of the environment.

First and foremost, 48% of our revenues come from locked-in multi-year contractual sub fees, not subject to the uneven economic environment, and it provides the Company with a real sturdiness on the top line.

Our US nets have escalators built into the deals, delivering low single-digit pricing growth, and we will also benefit from the additional penetration, especially on the digital tier, where we have seven channels.

Internationally, we will capitalize on the secular growth trends of pay TV around the world, which benefits us through affiliate and advertising revenue growth.

No other media company can match our guaranteed revenue stream, which we expect to grow in 2009 despite the challenging economy.

The second strategic advantage is the strength of the Company's brand portfolio, led by Discovery Channel, the most widely distributed television brand in the world.

The portfolio has ratings momentum across all three of our fully distributed networks, which will help us to continue to improve our market share of whatever ad dollars are available in the marketplace.

In addition to our programming strength, our diversified portfolio reaches a broad range of demos across our networks, with loyal, engaged, and upscale viewers in a variety of quality environments.

That depth and diversity plays a big part in the value proposition, which clients are making -- when clients are making difficult decisions of where to place their limited dollars.

Our strategy, as always, is to be in the front of the line with solutions and innovation across brands.

Our programming and brand portfolio, combined with what I truly feel is the best ad sales team in the business, gives us a real opportunity to grow our market share in a tough economy.

The next strategic advantage Discovery has is its unparalleled global reach and market diversification.

With over a third of our revenues derived from operations in 173 countries around the world, we still have the opportunity for growth, even if some of the more developed markets are slowing or contracting.

Many of the pay TV markets we have invested in over the past 20 years are poised for additional distribution and ad revenue growth, giving us the chance to expand where others aren't as well positioned.

The last advantage is our continued operating flexibility and management of our cost base.

In my first few months here, we eliminated certain business lines and costs that were not value enhancing, but those changes were more structural in nature.

Unlike some of our peers, we have not gone through several stages of cost cuts through the years.

There are areas we can continue to make more efficient and cost effective.

Many we would evaluate regardless of the economy, but given the current climate, there is an impetus for us to be even more aggressive.

One area that we will continue to invest in is programming.

We are investing in our core networks, increasing our programming spend at our emerging networks, including OWN, and continuing to invest internationally.

The revenue we have locked in across our businesses allows us to judiciously invest in our brands, ultimately gaining market share in these difficult times.

We will offset any increased program spending with savings on our SG&A line, managing our cost structure to provide additional flexibility without sacrificing the long-term growth potential of our businesses and platforms.

As much as we grew in 2008, it was still very much a year of transition for our Company.

We put new management teams in place at many of our networks, launched several new channels, and expanded internationally and while going through the process of becoming a fully public company.

Now, as we look ahead, we feel the steps taken, not just in 2008 but over the last several years, sets us up to outperform and grow in the difficult climate we are faced with in the short term, while also positioning ourselves to take full advantage when the economy does ultimately turn around.

And with that, Brad, Mark, and I are happy to take your questions.

(OPERATOR INSTRUCTIONS)

And the first question comes from the line of Doug Mitchelson from Deutsche Bank.

Please proceed.

Thanks very much.

Very nice results, guys.

David, this is an extraordinary environment.

I would think that at some point you would be able to take advantage of upheavals at competitors and peers.

Are you seeing any shifts yet in the competitive environment or any pullbacks from peers as a result of the soft economy?

And are you seeing any increase in opportunities to invest at good prices in new media or international acquisitions that would suit you?

Thanks.

Well, the first part of your question, I think the opportunity for us -- this is, I think, true for cable, in general -- is that in a difficult economy, most companies are facing an issue where they can't sell enough of their content, of their products.

For us, we have this chance to gain market share because people are spending more time at home, they're consuming more TV, and so our number-one focus is not to focus on anybody else but the focus on our brands -- Discovery, TLC, Animal Planet, our emerging networks, and our international program channels -- to really -- to grow market share, to grow our ratings so that we get a stickier and stronger group of people watching our channels.

In terms of opportunities for acquisition, we're always looking for opportunities, and in a difficult market, often opportunities do present themselves.

We think we have a good sustainable growth story for the next few years with the assets we have, but we do look and we are open to opportunities, and we're always on the look.

All right.

Thank you.

Next question, Operator?

And the next question comes from the line of [Jessica Reef Cowen] with Bank of America Merrill Lynch.

Please proceed.

Thank you.

Two questions.

David, can you elaborate on what you're doing with the emerging or niche networks to drive their brands or end results?

For example, science, can you just talk about what you think the up side is for these channels, and is this a global opportunity?

And, secondly, can you give us your early thoughts on how the Upfront will unfold?

Sure.

Okay, on the emerging networks, we've now tried to establish, I would say, three strong brands.

We have science, which -- where ratings are up significantly.

We've been investing in new content.

We're promoting it on our other networks.

We think it's a very strong brand.

It has a good niche audience of men.

It's about 70% men.

And we have taken it around the world.

It's in about 80 markets, and we plan to continue to do that because science, like discovery, translates very well globally.

And so that's one of our -- I would say, one of our big plays for growth over the next several years.

In addition, we have ID, which is our crime channel.

That's a little bit of a different model because we were able to use a huge amount of library that we had that we took off of Discovery because we felt like it wasn't on brand for Discovery, forensics and crime, and it's playing extremely well.

The ratings were -- it was one of the fastest-growing networks last year.

We're also launching that around the world.

Crime is working very well for us internationally.

We took a lot of that programming, and we put it on some of our networks, and it popped, and so we've been launching ID and will continue to push it around the world.

We have Planet Green, which, as I mentioned, we're going to be announcing.

We have a new president that's going to start fairly soon.

We'll announce that shortly, and she's very strong.

And we are taking a hard look at each of those brands.

It's beachfront real estate, but we have seven channels in between 55 and 72 million homes.

And from our perspective, every one of those should be important.

In addition, I said that we have about five channels in three-quarters of the markets that we're in internationally, so that's over 120 markets where we have five channels.

Discovery is very strong.

We have Animal Planet all around the world, and we're starting to make progress in advancing that channel, but we're looking hard at how do we advance that portfolio with stronger brands, as well.

So I think we're making progress, but we have a ways to go to really advantage our real estate.

Oh, and the Upfront, we are planning, first of all, Jessica, to do an Upfront.

I know a number of programmers aren't.

We found it very successful last year.

We were in New York, Chicago, LA, Dallas, Atlanta.

It was a great chance for us to connect with our advertisers.

It's also a chance for us to show the fact that we think we have some great momentum.

Our ratings were up significantly in the fourth quarter.

They continue to be up in the first quarter.

In the aggregate quarter to date, our entire portfolio was up about 9%, and cable, in general, was up about 3 to 4%.

So we feel like we're on brand, we have a good sense of how to nourish our audiences, and we want to take that on the road and take advantage of that.

There really is no transparency for us to predict what kind of economics will show up in the Upfront and what the pricing will be, but we'll be there, I think, with a very good story and a great sales team to try and take advantage of whatever the marketplace is.

Thank you.

Next question, Operator?

And the next question comes from the line of Richard Greenfield with Pali Capital.

Please proceed.

Hi.

I wanted to follow up on Jessica's question.

Getting down to the next level of networks, which you didn't discuss -- FitTV, Discovery Kids, Military -- what is the plan exactly for those networks as you look out over the next year or two?

And you've got an HD network with beachfront real estate, but yet you now have simulcasts in almost every market.

And so what do you do with HD Theater?

Is that a rebrand for 2009 to take advantage of what's going on in HD right now?

And then just a quick housekeeping point.

Just on the Oprah Winfrey cost, you've been expensing -- I think roughly $4 million a quarter has been hitting the P&L.

There's a comment in your numbers, or Brad made the comment about the 75 -- $70 to $80 million of cost in 2009.

Is there still going to be a $4 million to $5 million kind of quarterly hit, or are you excluding even that from your 2009 guidance?

Just trying to reconcile what was in '08 versus what will be in or not in 2009?

Thanks.

Okay, Brad's going to answer the question on OWN.

Hey, Rich, with regard to OWN, we run about $1 million, $1.5 million a month in operating costs for the Oprah Winfrey Network.

That is not in our guidance.

So that would be -- if you're modeling out, that would be in addition to a deduction from the OIBDA we have.

The $70 million, $80 million is all in the amount of money we expect to spend during 2009, and that's between content investment, potentially marketing as we add up to a launch.

And so how it hits the P&L will really be dependent on when the network has actually launched.

So if it's in 2009, you'll have some content amortization hit, and you'll have a heavier marketing spend.

If it's in early 2010, some of the marketing may be bled into the next year, and the content amortization would then start.

But the $18 million, the quarterly run -- or the monthly run rate, that is part of that $70 million to $80 million?

That is correct.

And with that, the second question you had, I'll turn back over to David.

Okay.

Well, first on the HD, we -- John Hendricks launched Discovery HD.

It was really the first channel, HD channel that launched.

As a result of that, it has the -- as much or more carriage than anybody in the HD space and has very good channel position.

We are focused on what do we do with that strong channel position in order to create something that has significant value, and we're looking at that strategically.

In addition, when we look at our emerging networks, first of all, they're all profitable, which is an advantage for us because they have sub-fees.

But now the question becomes, how do we make them more profitable and make them more important channels that people can really relate to and feel a real loyalty to?

And you named three of them -- Military, Kids, and FitTV -- all three of those we're looking at strategically.

How far can we take them with what they are?

What are the other options strategically by ourselves or with others to make those more important, and that's something that will play out over the next year or two.

Meaning you're not opposed to selling one of those if that was the best way to maximize value?

We are a platform company that builds great content and brands, and that's the core of what we do.

So the idea of selling channels is -- it's not at the top of our list.

It's not off the table.

But our primary focus would be to use that real estate to build strong networks that have great connection to viewers that will have sustainable growth and good economics attached to them.

So that's our focus, more along the lines of what we did with ID, what we did with Planet Green, or what we did with Oprah, one of the best brands in media [we'd own].

Thanks.

Next question, Operator?

And the next question comes from the line of John Janedis with Wachovia.

Please proceed.

Hi.

Thank you.

David, you touched on this a bit, but can you talk more about the cost structure?

I think you've said about it in the past 30% or so of your costs are related to programming, and so I'm thinking including Oprah, your guidance assumes total costs are up only slightly.

What are the leverage and what kind of growth in programming expense are you assuming for the year?

Well, our programming costs will go up a little bit because we are going to be investing.

But as I mentioned earlier, we have been -- Mark Hollinger, for the last six months, has really been focused on our overall cost structure, and we've been spending a lot of time looking at where could we be more effective and efficient.

And we do have the advantage that this was a private company for 15 years.

It hasn't been reorganized, and there hasn't been a ground-up focus on costs.

What we've done here is we've done what I would call a left-right analysis.

To the right is our programming and all content and brand building.

That's going to be our growth, domestically and internationally.

That's where we're going to get the sustainable growth from.

To the left side is all of our cost and our overhead, and we're looking at corporate overhead aggressively, and we're looking at every cost.

And we think that there's still some room for us to take that down.

We demonstrated that a little bit last year, and we think we can demonstrate it this year, as well.

Brad?

John, to be more specific, our programming costs will probably go up on the income statement level around $50 million, something along those lines.

What our guidance would imply is that we'd reduce SG&A by at least that much.

And so when we're just talking about which levers we would pull, it really is marketing dollars, people, comp and benefits, and really how we run our businesses in terms of the other [inaudible] of administration.

So all those things we focus on, and as a team, everyone's looking at it very hard, and we think that we can accomplish that, just like we have in the past year.

And some of it is making changes that make us really more productive.

If we look at research and we have research in six or seven places in our company, there are ways that we could run research more effectively and more efficiently in terms of economics, and those are the kind of things -- reorganizing in some ways to be more efficient and more productive.

Okay, and maybe just one other quickie.

Could you talk about the put right to Harpo?

What is the first put date, and is it -- what is its value based on?

Is it revenue or cash flow or something, or a combination?

I believe -- and I'd have to refer back to the contract.

I believe the first [inaudible] 2014, and it is based on a fair market value.

And was the launched pushed out slightly?

No, our focus was always that we would launch around the end of the year, and so we're still focused on late '09, early 2010.

We're making -- Christina Norman was here on Monday presenting to the Board.

She's very strong.

We have a strong leadership team in place.

Oprah's been very involved, and we feel like we're really on track.

All right.

Thank you.

Next question, Operator, please?

And the next question comes from the line of Anthony DiClemente with Barclays Capital.

Please proceed.

Hi.

Thanks for taking the question.

This one is just for Brad on free cash flow.

I think you did $1.10 per share in fiscal '08.

If we assume a similar EBITDA to free cash conversion, I get to about $480 million, or $1.15 a share, free cash flow in '09.

Are there any other moving pieces that we would need to know about in that calculation that would kind of throw off the conversion?

And then the second question for -- along the lines of free cash flow, what are your priorities on uses of free cash flow over the next couple of years?

Is there any chance for return of capital to shareholders?

And then in terms of acquisition possibilities, David and Brad, is there anything that you see out there that looks appealing given distressed valuations in media?

Thanks.

Hey, Anthony, with regard to free cash flow, hopefully, we'll do a little bit better than what you just outlined just based on the guidance we have out there.

When you think of the different components, working your way from adjusted OIBDA down, we'd expect cash taxes to be somewhere about $300 million to $340 million, so it's in that range.

Interest will be somewhere around $230 million to $260 million, and that's based on us paying down debt in the current interest rate environments.

CapEx will be between $50 million and $60 million is what our guidance is.

And then working capital -- and you do have some timing, which can throw it off, but we think it's going to be in the 150-ish, $175 million in terms -- somewhere in that ballpark.

So those are the moving pieces.

The biggest part of the negative working capital piece is really that we spend more in content than what we amortize, and so that will play into it, as well as just if you grow revenues, you have a little bit of AR pick-up that you have to fund.

So that's how we think of free cash flow, and hopefully, those are components.

And I gave you kind of round ranges.

That could move a little bit on either side, but hopefully, that can help you build your models.

With regard to how -- what we would do with our free cash flow, during the next 12 months, you should anticipate that that would be probably solely used for paying off our debt.

We do have some maturities coming up, and we would be funding it in this kind of environment.

Just solidifying the balance sheet, I think, makes a lot of sense and not putting -- not combining any type of financial risk into our operations for the current year.

In a more stabilized environment, I think we'd find also other constructive uses of our capital.

I don't think returning capital to shareholders is off the table.

That is something we'd look long and hard at and is a good way at the appropriate prices and the appropriate methodology to build long-term shareholder value.

But, clearly, our primary goal would be to invest in our core business at things that make our share -- are accretive to our shareholders.

And that's, I think, a pretty good segue into having David talk about if there's any acquisition opportunities or something along those lines.

Our primary focus is our existing asset base domestically and internationally.

We're very happy with the assets that we have.

We have digital networks here in these -- in the US.

Our emerging networks that show -- that have real substantial growth because of the growth of the digital tier.

Internationally, we're in a number of emerging markets, where we're really seeing some growth still, and we are on the ground in 173 countries, which gives us some real diversity.

As we think about what we would acquire, it would have to be something that would help us grow faster, so and when we think about that, the circle really comes more around international, where we're in a lot of markets -- where aggressively where other media companies aren't, and if we could pick up additional assets and use our infrastructure in those markets to build faster growth, that's the kind of thing we'd be looking at.

But our primary focus is our existing asset base and making them bigger and stronger and more connected to the viewers.

Next question, Operator?

Thanks.

And the next question comes from the line of Alan Goold with Natixis.

Please proceed.

Thank you.

I've got two questions.

First, Brad, you said programming costs will be up at that $50 million on the income statement this year.

In '08, you had the $76 million decline in content amortization benefit from the impairment charge in '07.

Just -- I thought that you would've -- I thought program costs would be up at least at $76 million plus whatever additional, plus some extra for higher of content spending.

The $76 million is a little bit confusing.

That was -- the way the comparison works is that was the amount in 2007 that was written off or amortized in the amount of -- for the content that was written off, so actually, the foregone amortization, so just the foregone amortization into 2008 is around $60 million.

That foregone amortization on the content write-off in 2009 will be about $30 million.

So it's a $30 million delta.

So then you have costs on top of that, Alan.

So sorry it's confusing.

The way we recorded the comparative is probably a little more punitive by using a $76 million number because it goes to the historic amortization in 2007.

Oh.

I know that what I just walked through is probably more -- I don't think it illuminated it any greater, but those are the actual numbers.

It makes sense to me.

Okay, and then the second question is can you explain what's happening in the UK with this -- when you can monetize your ratings gains in the UK?

What's happening with this litigation issue?

Mark oversees our international business and is intimate with the UK.

And this may be even more confusing than [inaudible] the explanation on the amortization.

Exactly.

The dispute that we're having over this contractual limitation continues.

It's not resolved yet.

However, it really impacted pre-2009.

So the impact of the dispute we are, in essence, done with.

For 2009, there still is a contractual limitation on our ability to monetize the audience; however, that cap, in essence, has increased for 2009, and we are managing to it in a way that we think will generate better return.

We also have a couple of new channel launches in the UK, with ID having launched there and with [Qwest], a free-to-air service that will launch in April or May of this year.

So the impact of the dispute is done with.

The contractual limitation does still exist, although we have more headroom under it for 2009.

Okay.

Thank you.

Next question, please?

And the next question comes from the line of David Bank with RBC Capital.

Please proceed.

Thank you very much.

Good morning.

A couple of questions.

I guess the first one is, David, in your comments you mentioned that while Scatter was -- while Scatter was kind of below last year's Scatter on a year-over-year basis, cancellations were -- and cancellations increased, it was also in line with your expectations.

What were your expectations for cancellation levels?

That's the first question.

The second question is the impact of the kind of potential, I don't know, the timing of the Oprah cost rollout, what impact does that have on 2010?

Will there be sort of a spike in Oprah-related amortization in 2010 that eventually normalizes, or can you talk about how that works through for next year?

And I guess, lastly, you talked about the UK.

Your international ad revenues, I think, are up.

I'm not if this was the fourth quarter number or your guidance, but I think you said they were up 22% ex the UK.

That was full year, yes.

Full year, okay, ex the UK in organic terms.

And you excluded the UK, you said, because there was a bunch of things going on in that market.

One was, obviously, I'm assuming, the contract issue.

What else was going on there, and is it a softer economy?

And if so, why shouldn't the rest of the world get more like the UK, or what makes the UK get stronger like the rest of the world if it's the outlier?

Okay, well, first, on the issue of cancellations, on the first quarter expectation was that it would be in the 5 to 6% range and it was in the 6% range, which was really not out of line with what we've seen in the past.

In the second quarter, it was up at around 12%, which is manageable for us, and we have and will work through it.

It wasn't terrible, but it was more than we've seen over the last three or four years, certainly.

So that's the -- that's where we are in terms of the cancellations.

The UK, I'll give you some general data, and then I'm going to pass it to Mark.

The UK is experiencing a pretty tough recession, and so the overall advertising market is difficult.

On top of that, the marketplace has kind of been splintered.

It started out that you had Sky, then you have a competitor in Virgin, and then they have a free-view product, which they sell, which you can go to a store and pay $50 and get a box and get 30 channels, and that in a short period of time over the last few years has aggregated to about 10 million subs, which is significant for the UK, where SKY is in 10 million -- has 10 million subscribers.

So the market in terms of distributors has been pushed, and there's this big entrant of a free-to-air distributor, all in a market that's experiencing overall recession.

And, finally, they have an odd way of selling in the UK, where they actually aggregate your rating points, and then you monetize it in the following year.

So that's the general issue that most people face, and Mark will take you through what we faced.

One thing, also, to highlight before Mark discusses the UK in a little bit more detail is that just from a lifecycle of where we are in advertising relative to the market, the UK is the only international market where we actually have more ad revenue than affiliate revenue, and so we've been there long enough that it's a very mature market, and the base that we're looking at in every other country is so much lower that the growth -- it's easier to have a growth rather than getting from a very high base with a big denominator as you're thinking of growth.

So I think that perspective is -- just the sheer math behind that is helpful when you're considering when we talk about growth rate.

The only other point I'd make is that the UK looks like a very -- is a very mature market.

As you look at Mexico, Brazil, Columbia, you look -- Russia, Romania, Poland, they're more like the US in 1997, 1998.

To the extent that there's a downturn, they certainly will feel it.

But there's significant growth of subs.

Advertising is moving from broadcast to cable.

There's still a big pricing differential.

The UK looks a lot like the US, maybe at this point, worse, candidly.

So, Mark?

Yes, I mean just to add a little bit of color on both of those points, in terms of the structure of selling in the UK, there is an odd regulatory structure that came out of the merger of a couple of the ITV franchises, Carlton and Granada, into ITV.

The government was worried at the time about the power of ITV in the ad sales marketplace, put a number of restrictions in place.

Those are probably outdated at this point.

They still exist.

That definitely puts the UK in a different, more regulated, less sort of free market environment than a lot of other ad sales markets.

There is some talk about maybe there will be a change in that over the course of the next year or two.

The other point that David and Brad have made is the maturity of the market, both from an ad sales perspective in terms of -- also from a distribution perspective.

We're still seeing a lot of the markets where we're seeing ad sales growth.

We're seeing ad sales growth because we're also picking up additional households.

That is really not the case in the UK anymore.

So I would say those are the two areas where that really is a [inaudible - technical difficulty].

And just getting back to your own question, with regard to costs and revenues, in 2010 or late 2009, whenever it does launch, you will have the cost pick-up and you'll have marketing costs, but you'll also have content amortization costs.

Along with those costs, we'll have revenues, so you can think of the income statement will expand from both of those activities, and so you should anticipate that revenues will go up from a standing start as well as the costs will go up.

Can you give a sense of the $75 million to $80 million -- since I assume you're capitalizing, what's the amortization period of the start-up costs?

You know, if it's consistent with our other networks, you'd have usually a four-year amortization, which is like 50% in the first year, 25% in the second year, 15% in 10, but we will determine the appropriate amortization as we put the products into--.

Thanks for taking all the questions.

We have time for one last question, Operator.

And our last question is from the line of David Joyce with Miller Tabak and Company.

Please proceed.

Thank you.

I was just wondering if you could give some color on what investment is required as you go through adding these new local ad sales forces internationally?

For the most part, it really is people.

I mean part of it, if you think about it, it's people in each of the different markets, and each market has -- the size of the market really determines the number of people that we would add to it.

So it isn't a significant cost.

The only thing that is a significant cost is upgrading systems, and so over the next couple of years, we will upgrade one of our big ad systems in Europe.

That will be over a couple-year period, and that may be several million dollars.

But these aren't really large operating cost initiatives, and usually they're paid for fairly easily out of the revenue streams.

And, essentially, we're pretty far along.

We went from a model two years ago where we were selling mostly Pan-European and Pan-Asian.

We started spot-beaming our channels into each market and selling over the last two years, and a lot of the cost of putting either boots on the ground or picking a good agency and getting that accomplished in a particular market, most of that is behind us.

So, at this point, we started -- it's about taking advantage of the competency that we've built in each of those markets and putting stronger ratings on the screen so that we can continue to build our revenue market by market.

It's understandable that that would be very variable in expenses, so I was just wondering if they were going to be layered on with the rest of the effort to roll out the cable networks that grow the networks, work on the affiliate side?

Well, again, most of the cost of those -- of that sales team you see now, because most of those -- in most of the markets we are now in operation, we're selling, so you won't be seeing a significant spike in our overall cost of boots on the ground.

Great.

Thank you.

Thanks, everybody, for joining us, and if you have any follow-up questions, just give us a call.

Thank you very much.

Thank you.

Bye bye.