華納兄弟探索 (WBD) 2009 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Discovery Communications Incorporated first quarter 2009 earnings conference call. My name is Dan, and I will be your coordinator for today. Speaking on today's call will be Discovery's President and CEO, David Zaslav, and CFO, Brad Singer. At this time, all participant are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for the call, Mr. Craig Felenstein, Senior Vice President of Investor Relations.

Thank you, Dan. Good morning everyone, and welcome to Discovery Communications' first quarter 2009 earnings call. Joining me today are 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 will begin today's call with some opening comments from David and Brad, after which we will open the call up for your questions.

Before we begin, I would like to remind you that comments today regarding the Company's future 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. They involve risks and uncertainties that could cause actual results to differ materially from our expectations.

In providing projections 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 Form 10-K for the year ended December 31, 2008, and our subsequent filings made with the US Securities and Exchange Commission.

With that, I will turn the call over to Brad.

Thanks, Craig. We appreciate the opportunity to discuss our first quarter performance and current business outlook and operating environment. Discovery demonstrated it's operating discipline during the first quarter driving revenues, growing ratings, and thoughtfully controlling our operating costs, to deliver solid financial results, despite the challenging economic environment.

Total revenues increased 1% compared to the prior year, with US network growth, offset by a decline in our international national network revenues, driven by a $32 million unfavorable currency impact. Adjusted OIBDA grew 9% to $329 million, as we continued to work hard to drive the efficiency of our resources and cost structure. Offsetting the $26 million increase in cost of revenue, reflecting our commitment to high-quality content, with $26 million lower SG&A costs, excluding foreign currency impacts.

The combination of a modest revenue increase and lower operating expense expanded our adjusted OIBDA margins by 300 basis point, to over 40% from the prior year, despite the headwinds from foreign currency. Our operating income decreased to $242 million with the decline primarily due to an increase in our share price, which resulted in $32 million of long-term incentives expense, compared to a $36 million benefit in the prior year first quarter.

Our net income attributable to Discovery increased to $123 million due to improved operating performance and lower interest expense, as well as from a decline in taxes and minority interests, which were higher a year ago, due to the accounting for the Advance/Newhouse transaction in 2008. We continue to deliver strong free cash flow, with more than a two-fold increase from the prior year to $120 million.

Turning to our operating units, first quarter domestic revenues grew 5% with distribution revenues increasing 11%, from rate increases and strong growth of our digital networks, as well as from a $4 million decrease in deferred launch fee amortization. Our domestic ad sales team did a nice job growing revenues 2% in a challenging market. Strong ratings and pricing were offset by lower demand compared to the prior year. The domestic advertising performance continues to demonstrate the attractive value proposition cable hold for advertisers compared to national broadcasters, and the quality of our programming and sales effort.

Cost of revenue increased 13% due to increased content amortization, offset by a 9% decrease in marketing and general administrative costs, resulting in less than a 2% increase in overall domestic costs. Domestic costs included $6 million of expenses related to the Oprah Winfrey Network. Excluding the owned costs, operating expenses in the first quarter were below the prior year.

Adjusted OIBDA for our US networks increased 7% to $275 million, and domestic margins expanded to 54%. Our international operations performed well despite the currency impact on our top line. Total reported revenues decreased 4%, which included a 10% increase in affiliate revenues, and a 7% increase in advertising revenues, offset by a $32 million, or 13% unfavorable foreign exchange hit compared to the prior year.

Affiliate revenue growth was led by subscriber growth in Latin America and EMEA, advertising revenues were also led by Latin America and EMEA, which grew 26% and 11% respectively, offset by a 6% decline in our UK operations due difficult market conditions, including the currency impact. Excluding the $27 million positive currency impact to our expenses, cost of revenue increased 15% from the prior year, as we continued to invest in our content and distribution. Consistent with our corporate strategy, we more than offset this investment with a 16% decrease in our personnel, marketing, and general and administrative costs.

Excluding foreign currency impact, our international operations increased adjusted OIBDA by $24 million, or 34%, on $21 million of incremental revenues, improving operating margins close to 700 basis points to 37% from the prior year. Our commerce, education, and other segment delivered solid results led by our education operations which continue to grow, producing $5 million in adjusted OIBDA in the quarter, due to lower seasonal expenses, and strong revenue gains. Corporate expenses increased $2 million from the prior year, due primarily to $5 million in non-cash stock option expense. The corporate line items also included $15 million in joint ventures proceeds from the sales of Planet Earth DVDs in 2008.

Our performance during the first quarter of 2009 slightly exceeded our expectations. As we look forward for the remainder of the year, we believe consistent revenue growth will continue to be challenging. As domestic and international markets experience an uneven economic environment. Our outlook is greatly aided by our affiliate revenue streams, that provide us with a predictable and growing base of income.

As we look at the second quarter, we anticipate domestic advertising revenues to be flat or slightly below the prior year, which grew 10% between 2008 and 2007. And we expect mid-to high-single digit ad growth in our international markets, excluding the impact of foreign exchange. Our ability to prognosticate the future has not improved since the last call. We continue to possess limited visibility in the advertising outlook, and are uncertain of the impact of the various government financial policy and Stimulus initiatives.

For 2009, we are maintaining our range of $3.375 billion to $3.5 billion, or between a 2% decrease and a 2% increase in revenue. Our forecast includes approximately $130 million, or a 4% decrease in revenues, related to current foreign exchange rates. As our first quarter demonstrates, we have been able to moderate our administrative cost structure, to enable us to continue to invest in our programming, to produce high-quality content and increase our market share and ratings.

As we update our adjusted OIBDA outlook, we anticipate meeting a portion of any future potential revenue shortfalls, with adjustment to our cost structure. As a result, we are raising the low end of our adjusted OIBDA guidance to $1.325 billion, and maintaining the high end at $1.4 billion. Our adjusted OIBDA guidance includes an estimated $45 million decrease, due to current foreign exchange rates compared to the prior year. Our guidance excludes the impact of further expenditures related to the 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 early 2010.

We will also update our outlook next quarter to reflect the sale of the 50% interest in Discovery Kids, which is anticipated to close before the end of the second quarter. We expect Discovery Kids to produce revenues of approximately $50 million, and adjusted OIBDA of over $25 million in 2009.

Please note that the uncertainty of the overall economic environment may alter our forecasts as we move through 2009. We anticipate net income attributable to Discovery of $475 million to $575 million, and capital expenditures of $50 million to $60 million. We continue to improve our financial positions with a combination of strong operating performance, and utilizing our free cash flow to reduce leverage. We anticipate further strengthening our financial position, the $300 million proceeds from the Discovery Kids transaction, which after tax will be used to reduce our outstanding debt. We continue to have a strong liquidity position with $140 million of cash on hand, $1.2 billion of undrawn domestic revolving loans, and annualized free cash flow of over $500 million.

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

Thanks, Brad. Good morning everyone. Thank you for joining us.

We are very pleased with our first-quarter results, as we started 2009 the same way we ended 2008, delivering strong financial results in the face of a weak macro economy and foreign currency headwinds. While we can't predict when the economy will strengthen, and while we are not planning on improvement as we look out to the remainder of our year, we remain confident that Discovery Communications' distinct strategic advantages, will help the Company continue to outperform in this uncertain environment.

On our last call, I laid out several of these strategic advantages. Today let me highlight how they contributed to growth in the first quarter, and how they provide a foundation of resiliency for the remainder of 2009. First, Discovery has recurring revenues generated from affiliate fees across our worldwide network portfolio.

In these uncertain times, there is real comfort in having more than half our revenues derived from locked in, multi-year contractual sub fees. Our affiliate revenue is generally not subject to economic fluctuations. And we continue to see little sign of pay TV churn increasing during the recession.

Our distribution revenues provide the Company with a sturdiness on the top line, and in the first quarter, as Brad mentioned, they grew nearly 6% on a reported basis, and 10% when you exclude the impact of foreign currency. The affiliate revenue for our 11 US networks was up 11% this past quarter, and continues to benefit from the low single-digit escalators embedded in our contracts, and from an expanded subscriber base, led primarily by continued penetration at our emerging networks.

Our international networks grew affiliate revenues 10% excluding foreign currency. As Discovery continues to capitalize on the secular growth trends of pay TV around the world. We also continued building our global portfolio, with new launches of channels around the world, including Investigation Discovery in the UK and EMEA, Science in Africa and China, as well as Discovery HD in Latin America.

Discovery's second strategic advantage is the strength of the Company's brand portfolio. I am pleased to say that the ratings momentum we generated in the fourth quarter of 2008 continued into the first quarter of 2009. The portfolio's audience growth has been broad based, with ratings gains in key demographics across all our Nielsen-rated networks in the first quarter, and total portfolio growth of 5% in primetime among adults 25 to 54.

Most importantly, our biggest networks continue to perform. Discovery Channel was up 8% among adults 25 to 54, led by new hits American Loggers and Destroyed in Seconds, as well as fan favorite, Man vs. Wild. This momentum has continued into the second quarter, with several new shows delivering solid audiences, including Pitchman and Doing Da Vinci, as well as strong ratings from our returning series Mythbusters and Deadliest Catch.

Deadliest Catch premiered it's fifth season last month to it's highest ratings ever, and was the number one program on cable across all demos. Discovery is a Top 5 network for men on almost every night of the week. Animal Planet finished the quarter up 13% among adults 25 to 54, and experienced it's best ratings in over two years. Much like at Discovery, these strong ratings have continued after the quarter, with a breakout hit, River Monsters. River Monsters delivered the network's best-performing series premiere ever, drawing nearly two million viewers, and placing sixth in it's time slot for all ad-supported cable among adults 25 to 54.

TLC was also up in Q1 in it's key women 25 to 54 demo, led by the season finale of Jon and Kate Plus 8, which was the highest rated episode ever for the series, and outdelivered NBC, Fox, CBS, and CW in key female demos. TLC was a top-five network for women on Monday nights in Q1, and a Top 10 network for women throughout the week. TLC did experience some softness in April, due to fewer premiere hours, and without new episodes of Jon and Kate, and What Not to Wear.

New episodes of those shows are returning, and the development slate from the new management team put in place last year, begins to hit later this quarter. We firmly believe the channel is back on brand and headed in a good direction. TLC's female demo remains an excellent complement, to Discovery channel's male and adult demo, which together deliver a great balance for our portfolio. Discovery's broad ratings momentum and diversified portfolio reaching multiple demos, combined with cable's overall value proposition versus the broadcast network, are key factors for client making difficult decisions, of where to place their limited ad dollars.

Before moving on, I know many of you are focused on the current state of the ad market, let me give a synopsis of what we are seeing. Q3 cancellations are expected to run around the same level as Q2, which was about 13% or 14%, although we picked some backup in scatter. But it is still early in the process, and we are working closely with advertisers to ensure we are fulfilling their needs.

As far as the up-front is concerned, we remain cautious yet optimistic. Last month, we held up-front presentations in Chicago, New York, and LA. It is difficult to predict where the ad market will ultimately end up at this point, but our programming, brand portfolio, and strong platform gives us a great story to tell. And when combined with what I truly feel is the best ad sales team in the business, we have a real opportunity to grow market share in the up-front and through scatter.

Discovery's third strategic advantage is it's unparalleled global distribution platform and geographic diversity. As Brad mentioned earlier, excluding foreign currency, our international networks delivered 9% revenue growth, and 34% adjusted OIBDA growth this past quarter. And while we can't control foreign exchange movements, with operations in over 170 countries around the world, Discovery still has meaningful opportunities for organic growth. Excluding the UK, advertising revenues were up 13% in local currency terms, and affiliate revenues were up 10%, led by growth in our EMEA and Latin America regions.

But as many of you know, the strength of our distribution platform is not limited to just our international markets. You have heard us talk about our domestic distribution, and how senior management's focus is on creating more compelling consumer propositions, that can build bigger brands, drive future growth, and create value for our underdeveloped assets.

Last week we took another step in realizing some of the potential of our distribution capabilities with our announcement of a new kids joint venture with Hasbro. Discovery will receive $300 million for 50% of Discovery Kids. Equally important, we are combining our valuable distribution with Hasbro's great brands, like Transformers, Stretch Armstrong, GI Joe, My Little Pony, Monopoly, and Mr. Potato Head, and with Hasbro's creative intellectual property, and a proven track record in the kids space.

The joint venture also has a locked in merchandising advance of $125 million for the channel over the next five years. Creating a third revenue stream on top of the affiliate and advertising revenues the channel generates today. We couldn't be more excited to partner with a great company like Hasbro, and we look forward to growing this already-profitable channel, into a more meaningful contributor in the years to come.

At the same time, we continue to focus on growing several of the other networks in our portfolio, including Investigation Discovery, which has delivered 14 straight months of growth in key demos, and continues to be one of the fastest growing networks on cable. Animal Planet which has progressed nicely since it's rebranding last year, delivering double-digit ratings gains thus far in 2009, and own the Oprah Winfrey Network, where we unveiled the first development at our up-front presentations last month.

The last advantage I want to mention is our continued operating flexibility, and the ability to manage our cost base. As evidenced by our margin expansion to over 40% this quarter, we remain diligent in controlling our spending, as we expand our revenues. Discovery's contractual revenue streams allow us to invest in our brand, where other may cut back, but we won't spend unwisely. This past quarter we invested in additional programming for Animal Planet and ID, both of which I mentioned earlier are generating real ratings momentum. TLC as we rebuild the original programming lineup, and Science as we aim to establish a stronger presence, and increase that category both in the US and around the world.

As we evaluate our content spending, we will only invest additional capital, if we feel we can get a strong return on our investment through higher ratings, enhanced brand strength, and ultimately increased ad revenue. But as we invest in programming, we are determined to manage our overall cost structure. This past quarter alone, we significantly lowered our personnel costs, marketing spend, and administrative costs across the globe. The net result was 13% lower SG&A costs, excluding the impact of our mark-to-market share based compensation.

In these uncertain times, it is critical to have a strong handle on costs. But we will not sacrifice the long-term growth potential of our businesses and platforms for short-term financial results. So you will continue to see us invest on the screen, while focusing on reducing nonstrategic costs. Our solid first quarter results provide a strong start for 2009. And while we can't control what will happen with the economy, we remain confident that the power of our brands, the reach of our distribution platform, the diversity of our revenue streams, and the operating revenue we have across our Company, will allow us to continue to outperform the marketplace.

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

Ladies and gentlemen, (Operator Instructions). Please stand by for your first question. Your next question comes from the line of Michael Nathanson from Sanford Bernstein. Please proceed.

Thanks. I wanted to dig deeper about advertising nationally. I think you said it was up 13% organically, X the UK. What markets drove the 13%, so where did you get some outperformance? And what was the UK growth rate? And do you see any improvements in the UK into the second quarter?

Michael, it is Brad. I will comment and turn it over to Mark and David. The growth was 13% outside of the UK, which the UK declined 6%. So that is excluding it, the growth was primarily in Latin America, which is the largest growing, and then in EMEA. And so the market within Latin America, Mexico, and Brazil were good markets.

In EMEA, you had central Europe that did fairly well, as well as Germany produced nice growth for the quarter. And I think Mark may provide more color.

Yes. I think in the UK, it continues to be a very tough ad market overall. We are actually managing our audience there. As you know from past calls and oast information we have provided, under our current ad sales deal in the UK, we are under an impact cap.

And we are managing the business this year in a way to really push audiences as much as possible, into times when we can monetize it better. That is part of the reason why you see that UK number down. As Brad says, Latin America has been a particularly strong performer for us, our audience is up substantially there. And we are still seeing quite a bit of strength in the ad sales markets in Latin America, particularly Brazil, Mexico, and Colombia.

The second quarter in the UK, are there any signs of improvement for you? Was any of the decline due to the contract that is still in debate I guess? The negative six, also contractually --?

The negative 6, last year we had an impact cap that we were disputing at [Portia]. We always had a cap. This year, there is no dispute on the cap.

Okay.

It just does limit our ability to monetize up to a certain amount. And so as Mark said, we are managing it to our impressions to where we could monetize on the [data].

Next question, operator.

Your next question comes from the line of Anthony DiClemente from Barclays Capital. Please proceed.

Thanks. I have a couple. Couple for Brad, first off. Just on margins, can you just talk about the levers, and just elaborate because you saw margin expansion in the quarter. I don't think any other media companies are seeing that, and especially so dramatically internationally.

Second question would be, Brad, on the Hasbro deal, my understanding is that you guys are getting $300 million cash from Hasbro upon closing of the deal. But that there is no real ongoing investment that is coming off your P&L, that they are including all the programming costs from their P&L.

I want to make sure I have that right. Third and finally for David, I have always thought your content has global utility, and as compared to other content in media which, is very US-centric, I was wondering if you could give us an example or two, about how that global content is finding it's way into the financial model. Some examples of how you have been able to leverage some of the Planet Earth stuff in Europe or Asia, or if that is sustainable in your view going forward the next couple of years? Thanks.

Okay. Anthony. I will take the first couple and turn it over to Dave and Mark with regard to global content.

With regard to margins, we grew our revenues, if you take out currency, we grew our revenues $21 million. Basically we were able to hold our costs flat. I think overall, it went down about $24 million. We had a $3 million reduction cost. The way we constructed our guidance, as well as how we are running accounting is, you would pay for increased content costs with decreases in administrative costs, such as marketing, personnel, and general admin costs.

So it has really been one of holding the costs flat while you grow revenues, rather than absolute reduction in costs, because we are reinvesting it in our content, as well as distribution globally. And so that is really the best way to think about it, is the revenues that we do grow flow very efficiently down to the adjusted OIBDA line item.

Got you.

With regard to Hasbro, the $300 million we do receive upon closing, it will be taxable to us. The ongoing investment, the entity, the joint venture itself is expected to be self-funding over the next several years, the way we have constructed it with our partner Hasbro. In the event that it is not self-funding, we do have a $15 million cap from each partner, in terms of what is required to be funded. But the expectation is that will not be needed. And I would highlight it is not going to be consolidated by us. As a result of the deal, it will become an unconsolidated equity interest in the joint venture.

Understood.

I think you hit on one of our advantages that our content does travel very well. Particularly Discovery Animal Planet and Science. And we are now pushing ID aggressively, because we are finding that that content works well. And over the last three years or so, we have pushed up dramatically the amount of shared content, because we find the Deadliest Catch, Mythbusters, the best shows on Discovery work well all around the world. So in some cases, like Deadliest Catch, it is in all 173 countries. In other cases, there are certain cultural issues with a few markets. But by and large, Discovery works very well all around the world.

That is been a big helper to us, in terms of sharing marketing promotion and content, and we still have room to go there. We now have more of a global programming approach, the Discovery Animal Planet, Science, and ID, that allows us to really focus on spending on content that will work around the world, because curiosity is universal. And so I would say Discovery is really our lead horse there. And Animal Planet has been doing well, and we are following suit with Science now, which is in 80 countries, and ID which we just launched throughout EMEA, and into Latin America.

Next question.

Got it.

Your next question comes from the line of Jessica Reif-Cohen from Bank of America/Merrill Lynch. Please proceed.

Thank you. David outlined on the call over the last few years you guys have really honed in on key areas that you can really improve the programming, or you have converted channels. Can you walk us through the financials of the upside potential of either a Science or an ID? What was the revenue and cash flow a year ago? Where do you think you can take it over the next few years? What can you to margins? How many channels do you think are right for this kind of change?

Before we get into the financials, just from a broad strategic perspective, our first focus would be to grow these ourselves. We are a strong content company, we have a lot of great creative people here, we have a huge library of 20 years of content that is long tail.

And so our first thought is about how do we develop thee ourselves like ID, going into investigation, and crime, and building a successful network that we can own 100% of, and you saw this quarter continued growth. These emerging networks are still, they have long-term agreements that roll out on all digital boxes. So we are getting the benefit of that growth and the small incremental fee increases.

So we are looking at each of those channels, and trying to determine what are they when they are at their best, and do we need someone to help to get a much bigger voice in the market. In the case of the Oprah Winfrey Network, it was an easy one. There by partnering with Oprah, maybe the best brand in media, and all of her energy and talent, we think that we can create something much bigger out of health.

Similarly, we have been struggling for the past year and a half, looking at kids, and saying that there are very big competitors, that they are very successful in many cases because they have three revenue streams, but also at the very basis that they have a very big audience. And how do we get from where we are to have a meaningful business with kids, that could really contribute to our growth. So that led us to Hasbro, we really came to the conclusion that it was going to be much more difficult ourselves. Hasbro was a good fit for us, and for that journey.

We still have FitTV, domestically, we still have Military Channel, and we still have HD Theater, which is the highest distributed HD channel in the US. So our focus is going to be to continue to look at those. At the same time, we have a lot of things that we are doing right now. So we have Planet Green, we have Science that we are investing in and expanding, we have ID in the crime and investigation space. We are moving forward very well with Oprah and OWN, and now we have Hasbro. So we feel like we have a lot on our plate now. And in fact, all those, FitTV and Military are also profitable right now. And so we are not in any hurry to do any additional conversions, but we will be looking at them.

And Jessica, the way the financial impact has worked among the emerging networks is our revenue growth is faster than our deployed distributed networks. So as you look at it, what you have is a double-digit kind of low teens revenue growth rate, and the OIBDA because of operating leverage, grows almost twice what the revenues grow. And that is really the experience that we have had based on the first quarter performance, among the younger networks right now.

Now the bigger investments that Dave was talking about, whether it is an OWN or a Hasbro, that will be different from the existing networks, such as Science and ID, that we have up and operating already.

And those two benefit from the fact that we have a significant, we have a very significant library in crime and investigation that we are able to draft off of. In the case of Science, there is a real advantage in being able to push back and forth between Discovery and Science.

Can you just, what percent of your affiliate revenue comes from digital versus, what percent is digital?

Digital roughly speaking is about 20% of total. In terms of domestic revenue.

On a broad basis, think of it this way. Discovery, TLC, and Animal Planet represent about 80% of the domestic revenue of all of our channels, and about 85% of the operating cash flow. So that is why we think we have real opportunity.

Okay. Thank you.

Your next question comes from the line of Rich Greenfield from Pali Capital. Please proceed.

Yes, just wanted to get a couple of clarifications. One, what are the after-tax proceeds on Hasbro? I assume you have a pretty low cost basis in that network. And how should we think about that in terms of valuations, is that something you sold for basically for effectively after tax, a high teens multiple of EBITDA, or high-single digit multiple per sub, just wanted to know how you though about valuing a developing network like that?

Second, why is Hasbro unconsolidated, whereas Oprah is consolidated? Lastly, a question, given David's comment about the size of Discovery and TLC, meaning how much of it is of your EBITDA, versus a Discovery Kids being only $25 million of EBITDA based on what you said earlier? Just wondering, when you look at Animal Planet that seems to be by far the biggest swing factor. That is a pretty small portion relative to Discovery and TLC. When you look at Animal Planet, how big is the upside of getting an Animal Planet up a Discovery and TLC over the course of the next couple of years, when you think about the financial and margin impact of where it is, versus where it could go? Thanks.

We will try to remember all the questions. I will let David start.

Why don't I start with the last one. We certainly believe that Animal Planet has significant upside. You are right, it doesn't contribute that much, and it is fully distributed to 96 million homes. So by definition, since it's on in every home, and it has pretty good channel position, and it has low operating cash flow, that is one of the things we have attacked. It is not an easy project.

Animal Planet has been around a long time. It was pretty flat for a lot of years. So it is a journey for us. We created a new, more aggressive brand. We have gone after a different demo. We are not going after a young demo anymore. We are going after a 25 to 54 demo, in terms of adults, and also skewing a little bit female. We have found some early success, we are encouraged. But it is a journey, Rich. And so we are optimistic, and we are continuing to listen to the audience, and see if we can build it.

I will say that I think it is going to take us a while. But with Whale Wars and River Monsters, and overall growth, I would say that we are off to a good start. The other channels that we have, we also think as I have said that we have some real potential. And we are going to continue to push on those as well. But I agree with you that Animal Planet, given that it is in 96 million homes, is right in front of us.

Rich, I will try to remember, I wrote down your questions, so hopefully I will address them all. With regard to Discovery Kids, the after-tax proceeds will be slightly under $200 million based on where we think the tax outcome of the transaction.

In terms of valuation, I think the valuation of the multiple, we believe was appropriate. It may seem like a higher multiple than where we may currently trade, or most cable networks trade, but if you look at it, it was an underutilized asset. The multiple I don't think really reflects the capability that that asset has. Concerning it will be in 60 million homes, and it really is an attractive distribution platform.

To that point to give you a piece of data, which is I would say somewhat different from all of our other channels. About 90% of the revenue of that channel was sub fees, and ad revenue was only 10%. So we really hadn't pushed on that ad revenue. So it was probably, it was an underperformer a little bit.

Most of our networks that we have in the US try to be at least 50/50 between advertising and distribution, just in terms of how effectively the asset is being developed.

With regard to the accounting, and why OWN is consolidated, and why Discovery Kids joint venture will not be, that is really just the nature of the accounting rules. In OWN there are certain idiocyncracies of how we fund it, and other government and management elements of the structure, while in Hasbro you don't have the same types. And it really is a more joint venture-oriented, but has a few things that causes Hasbro to actually consolidate the entity. And it's really that straightforward, even though if you looked at it economically, the ownership, they are very similar.

There is one practical difference between the two. With OWN, Oprah is the Chief Creative Officer. And that is because we have meaningful and significant input, but ultimately, Oprah's vision for Live Your Best Life, we were very confident in. Hasbro has a great creative team, but I think it is important for us to note that in that case, we will build a leadership team, and the creative control will be with that leadership team, and the leadership team will report to a Board.

Next question, operator, please.

Your next question comes from the line of Vasily Karasyov from JPMorgan. Please proceed.

Thank you. My question is about distribution revenue, domestic distribution revenue. How would you expect that the change sequentially from Q1 to Q2? And then could you please talk if you are facing different advertising trends for your three major channels in the US, is it easier maybe for some of them, and is it tougher for the others? Thank you.

In terms of the distribution revenue between first quarter and second quarter, we have a tough comparable in the second quarter. We had a one-time item in 2008. I think it was about $8 million that was favorable, that won't be repeating in the second quarter of 2009. So you are going to have the growth rate will be lower than it was in the first quarter.

But the same trends continue where you will have digital subscriber, slight growth. You will have increases from the escalations, and so those things will be relevant, as well, as lower deferred launch amortization. So you should have still healthy increases, but there is a one-time item that will make the growth rate look lower.

David, do you want to comment?

Well, on the distribution piece, just to add to that, we don't have any deals coming up with any of our largest distributors until the end of 2012, so that you will see that stability. We will be floating with how digital rolls out, and if it continues to roll out the way it has over the last few quarters, then you will see comparable growth. What was the other question?

And one thing I will say, though, is we were just talking about US, or you want us also to comment on international distribution?

Just US, thank you.

And then with advertising and between the networks, one of the elements that drives it is the demographic that you network appeals to. And so when you have networks that are more male oriented, such as Discovery, and you have certain segments, such as automotive or finance, that may be under more pressure than other segments, that does impact the demand side of the advertising. But then you have Animal Planet and TLC, which may have more of a female demographic which balances it out nicely. So what we have is a portfolio effect across all of our networks, and that really helps us to be consistent, in terms of the advertising performance.

It gives us the advantage in two ways. An ID tends to skew more female, Science skews more male. It allows us to see virtually every advertising customer, because of bouquet that we have, and the diversity of what we have. But it also to the extent that the male demo is a little weaker, and it has been because of financials and autos, then you have other meaningful assets that are in the female demo, and so it gives us some balance, which is helpful.

Thank you.

Your next question comes from the line of Michael Morris from UBS. Please proceed.

Hi, thank you. Going back to your comments about advertising, David, you mentioned you are cautious, yet optimistic. At this point, given that you have done some up-front presentations, do you have a feel for what the appetite is for up-front commitments? Maybe can you comment on what you are seeing at this point this year, in terms of being able to make a commitment compared to where buyers were last year? And then also on the cancellations you referenced 13% and 14% second quarter and third quarter, how does that compare to the prior year?

I am sorry, one other thing. On your free cash flow huh a negative impact from deferred taxes this quarter. Will that be recurring? Is that something that was a timing issue in the quarter, or is this something that is going to unwind over time? And what can we expect there going forward? Thank you.

Let me address the up-front first. As I said, we did go out and we had a good story to tell. We took out a lot of our original content, we are investing in content as a strategy of trying to continue to grow market share. We think even in a difficult environment. We saw market share growth in the first quarter. And if we can continue to see that, even if we can't monetize it as effectively because of the economy, that that stickiness of viewers coming to our channels will be a benefit that we will be able to get in terms of growth that is sustainable in the future. It really is an odd market, I have to say. In my 25 years. It is odd, because you really don't have the ability to see very far forward. So it is unusual to say that here we are, and we don't really have a sense of the up-front.

But the truth is we really don't have a send of the up-front. Everything seems to be happening on a much more short-term basis. We are having a lot of discussions that we had good attendance. There is a lot of excitement for what we are doing, and for cable in particular, I think the cable segment. But we are just going to have to see how that develops and manifests itself. We really can't see, there is just no transparency.

I think the last question you had was on deferred taxes. Our cash taxes will likely be very close to our book taxes this year. And so there should not be a difference as it washes throughout the year. In any given quarter, you may have a little bit of difference.

And on the cancelation question, it ended up being as I said between 13 and 14. We did pick some of that back up in scatter. But it is meaningfully more than it was the prior year, and in the prior years.

And then if I could just follow up to go back, you said it is too early, this is a unique year. Maybe in a typical year, last year, about how much of your inventory do you think you would have already had committed to at this point, versus where you are now?

Oh, none. I mean, so the up-front just hasn't moved yet. So we are just in that period. Normally the broadcasters will move, and then we will come in right behind them. So we are still some time away. I wouldn't read anything into it.

Okay, great. Thank you.

Your next question comes from the line of David Bank from RBC Capital Markets. Please proceed.

Thank you. Good morning. A couple of questions. The first one is you addressed, kind of cancellations, and general thoughts about the up-front. But can you talk a little bit about what you are seeing in terms of pricing right now, and how it changed throughout the first quarter into where we are in May. And you are looking for what kind of looks like a little bit of a sequential decline. Obviously it could be some conservatism in advertising. But some of us I think got the sense that there was a little bit of a pickup in March in the advertising market. And I am wondering if you saw that, and if so, does it appear sustainable?

And the second question is, can you just, I think, Brad, you mentioned part of the growth in the quarter on affiliate fees had something to do with a reduction in amortization. Was that, did I hear wrong, was that a contra-revenue item? And then also as part of that, I guess next quarter you have a one-time $8 million benefit. Can you give some clarity as to what that is, and after that, would we expect to return to the same run rate that you had in the first quarter on affiliate revenues? And thank you so much for taking so many questions.

Thanks, David. Let me do them in reverse order. It is easier. The $8 million benefit in was 2008, not in 2009.

Okay.

So that was really an adjustment to two of our contracts that it came from.

Okay.

And the deferred launch amortization is really, it is a contra-revenue. So are you correct. And it amortizes down each year. For launch costs that were paid years ago, when you were launching the networks, that you amortize against the revenue you receive on those contracts. So since we haven't been paying launch costs, the amortization every year seems to be declining. And that is just the math behind where it will ultimately in theory get to zero.

So is that on a run rate basis? The first quarter is a good run rate for the rest of the year?

Well, we do have increases throughout the year, and we do have sub growth throughout the year.

Understood. As a baseline. Okay.

As a baseline, that should be a fairly pure baseline. There are no one-time items in that affiliate in any meaningful way.

Great.

With regard to advertising pricing and then also the sequential comment of how we are pacing from the prior year, in terms of pricing, the pricing in 2008, we did experience greater premiums to the scatter market in our pricing. Our current pricing does not have the same level of premiums to the scatter premiums. But they are above the up-front pricing in all respects. So that part has tightened in terms of the pricing.

The performance in the first quarter compared to the second quarter, first quarter US ad market we were up 2%. Our statements of where we would be flat, maybe down a couple million from the second quarter of 2008, we haven't closed out the quarter yet, so it does come together later than it did last year. That is based on our expectations today, and what we have booked, and what we have working right now.

The second quarter I will highlight is much bigger than the first quarter. And so the absolute dollars you are chasing, as well as you had a significant increase of 10% between 2009 and 2008, 2008 and 2007, so you are going up against tough comps. So the market you referenced feels like someone else made a comment in March that it feels like it has gotten stronger. It is an active market, but it is a lot of dollars that we are ultimately selling in. We are going up against a fairly high comparable from the prior year.

So has the tone gotten more positive? I mean, the tone, has it gotten stronger sequentially?

Yes, it is hard to say. I mean, the money is coming in really week to week. There are some weeks that are really strong. It's hard to read, there are two or three weeks where it is strong, and therefore we can extrapolate, and say it is going to stay strong. We are just playing very aggressively in the market. And we have a very strong team. And we are really just trying to get as much money booked at the best price we can. And we really just don't have transparency at this point, to say we know it is going to continue. We hope it is going to continue.

Thanks for all the answers, guys.

Your next question comes from the line of Doug Mitchelson from Deutsche Bank Securities. Please proceed.

Thanks. First I was curious how valuable the Mr. Potato Head synergy is going to be? Two more serious questions. One, Mark, you mentioned that in the UK you were pushing audience back later in the year to where you could monetize it more aggressively. How much did that help costs in the quarter? When will that reverse?

And then I know we are all sort of beating up on the advertising. But one concept I was curious about, with the cancellations for 3Q looking similar to 2Q, and I think last year advertising started to soften generally for cable networks in the third quarter , partly the Olympics competition, but partly the economy. Wouldn't it follow then that it is possible that 3Q advertising might end up looking a little better than 2Q, because again your cancellation options year-over-year are the same. Up-front year over year is the same. So then it is just the scatter market. I know it is speculative, but do you think that concept makes sense?

Doug, I will take the first one, and turn it over to Mark for the second one. Regarding the third quarter, there are a couple things that hopefully will be helpful to us. One is we had not a great ratings performance in 2008. So by our networks producing good ratings, it will make the performance, because we won't have as much audience deficiency, much better, all thing being equal.

And so while David said the visibility may not be, isn't what you would like it to be, we do have activity, we do have ongoing dialogues, and our sales team will maximize every dollar that is out there in the most appropriate fashion, and manage our inventory as best as you can expect.

On the UK, Doug, I think while pushing some of the content into the last half of the year we will have a little bit more content cost than the last half of the year, we have been so rigorous on the UK over the last couple of years in the face of obviously what has been a very, very tough market. So we have been religious about taking costs out there. We continue to do that. So I don't think you are going to see any big increase in costs. We continue to see everything that we can take out of that market for the time being, given how tough it looks.

Great. Thank you.

Your next question comes from the line of John Janedis from Wachovia. Please proceed.

Good morning, thank you. Two quick ones, guys. First, historically there have been instances where the broadcast nets have somewhat capped upside on the CPMs in the up-front. Given the pricing gap and audience issues at the networks on the TV side, to what extent could pricing between cable and TV networks maybe decouple going forward?

Separately, can you give us an update on Planet Green? It seems like it got the team in place there. I am wondering if you expect the channel to start to ramp later in the year? Thanks.

On the first question, there is still a significant gap, about 30% between the CPM on local and broadcast and cable, which makes cable more attractive. We also think our niche audiences, and the composition and engagement of our audiences, make our earnings on a number of our channels more valuable. So we are going to continue, and I think cable in general we will continue to play that card.

And we have the ability since we produce almost all of our own content to maybe work more uniquely with advertisers. So those are the things that we are going to push to try and have some continued advantage over the next few years.

On the issue of Planet Green, we were able to get [Laura Michael Chicon], who I worked with when I was on the Board of Sundance years ago. She was very strong, she ran Sundance, Sundance also had a green block, a very creative executive, and she is now in the process of continuing to build that team. I think we just need to give her some time. She is very strong.

We love the brand, it stands for a lot of the values of Discovery Channel, and Discovery Communications, and it affiliates well with Discovery. We just did a recent special with Tom Brokaw, and the ability to repeat that, or run longer versions on Planet Green is advantageous.

Thank you.

We have time for one more question, Operator.

Your last question comes from the line of David Joyce from Miller Tabak Company.

Thank you. You have been continuing to invest in your niche programming. What can you talk about in terms of trends of purchased versus truly produced in-house programming? How have things been changing, and has this economic environment been playing better into your hand in terms of ownership there?

Well, philosophically, we have always owned our content. One of the things we have changed is we are trying to own it now on almost platforms and around the world, we are much more focused when we produce content, particularly for Discovery, Science, ID, and Animal Planet, on taking advantage of the global nature of it.

We are trying to take advantage across the board of how we spend our money. And spending our money on programming is one of the areas where we think in this kind of an environment, where other are spending less, that we can push on the production community to get a better value. We have Discovery Studio which Mark runs, which he can talk about in a second, which we have expanded, which is producing a lot of the content for our channels.

Yes. I mean, look, we have ramped up Discovery Studios, and we are actually producing more hours for more of our networks in-house, than we ever have before. It is a pretty small fraction of the total inventory that we use, with as many networks as we have, and as many markets as we are in. We literally needy thousands of hours a year. The good news is that even for the programming that we have produced for us on the outside, the basic model of our being able to commission that product, and therefore, own all rights and still maintain this sort of nothing in the current market that has really changed our ability to do that.

We have been able to drive a little bit of cost down on a cost-per-hour basis in some of those deals. But the basic ownership model, whether it is again, through stuff we are producing ourselves through Discovery Studios, or through external producers, still is the basic model, and really remains unchanged despite the economy.

We have spent a lot of time looking at this, and we have expanded Discovery Studios really with the strategic focus of bringing more creative talent inside the Company. Having said that, the philosophy at each of the channels is that if we have an idea, if we have an idea for River Monsters, or we have an idea for Pitchmen, for Discovery, we want John Ford at Discovery, or Marjorie Kaplan at Animal Planet, to think about who is the very best producer that could be most successful, to make that show as good as it could be, to get the best audience and the most engagement.

And we have decided we don't want to hamstring that, to say, well, that is a great idea for Pitchmen, but we have to produce it. By doing that, we think we get the best, creative content on the air. And we have created kind of a scorecard. We have looked hard at all the producers that we do business with. And not just how they perform on our network, but how they perform on other networks. That is data that we use, in terms of cost and performance of shows, in picking producers.

I appreciate the color. Thank you.

Thank you everybody, for joining us. If you have any followup questions, please let us know.

Thank you.

Thanks.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.