華納兄弟探索 (WBD) 2009 Q4 法說會逐字稿

Good day ladies and gentlemen.

Welcome to the fourth quarter 2009 Discovery Communications Inc.

earnings conference call.

My name is Latisha and I will be your operator for today.

At this time all participants are in a listen only mode.

We will conduct a question-and-answer session later in the call.

(Operator Instructions)

The speakers on today's call will be Discovery's President and CEO David Zaslav, Chief Financial Officer Brad Singer and Chief Operator Officer Peter Liguori.

I would like to turn the call to your host today, Mr.

Craig Felenstein, Senior Vice President of Investor Relations.

Please proceed, sir.

Thank you Latisha.

Good morning, everyone.

Welcome to Discovery Communications fourth quarter and full year 2009 earnings call.

As Latisha mentioned joining me today is David Zaslav our President and Chief Executive Officer, Pete Liguori 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 comments from David, Brad and Peter.

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 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 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 fourth quarter performance and current operating environment with you.

We enjoyed our strongest top line growth of the year during the fourth quarter as advertising, pricing and demand strengthens sequentially in our domestic and international operations.

Total revenues increased 7% compared to the prior year led by 16% international revenue growth excluding $19 million of favorable currency impact and complimented by 3% US network growth.

Total operating expenses increased 2% excluding $18 million of unfavorable currency impact as we continue to reduce our SG&A spending.

We lowered our SG&A costs by $16 million in the quarter, but increased our cost of revenues primarily due to content impairment charge increases of $20 million compared to the fourth quarter of the prior year.

Our adjusted OIBDA grew 8% to $390 million compared to the prior year.

Please note our fourth quarter results reflect a deconsolidation of Discovery Kids reducing revenues by $11 million and adjusted OIBDA by $5 million and include $5 million in expenses related to the Oprah Winfrey Network.

Net income increased to $155 million reflecting our improved operating performance and lower impairment charges offset by mark to market increases in our share base compensation.

Our free cash flow more than doubled to $236 million primarily due to improved operating performance and favorable working capital during the quarter.

Looking back on our full year 2009 performance our ability to grow revenues, adjusted OIBDA and free cash flow is a testament to the strength of our business model and our ability to execute in a challenge economic environment.

Our team produced 12% adjusted OIBDA and over 40% free cash flow growth, adjusted for the tax impact of the Kids transaction while delivering a hard fought 2% revenue growth.

Dave will take you through how we were able to achieve these results in such a tough environment.

Our US operations performed well during the fourth quarter.

Domestic revenues grew 3% with distribution revenues increasing 4% from higher rates and expended distribution of our digital networks.

Offset by the deconsolidation of the Kids network revenue.

Adjusting for the Kids network, the affiliate revenue growth was 8% compared to the prior year.

Our domestic ad sales team continued its strong performance growing revenues 2% in improving market.

We were encouraged by the scatter pricing tightening throughout the fourth quarter with premiums to broadcast up front in the high teens to mid-20% range across our networks.

However, while the scatter pricing improved over 1000 basis points in premiums to broadcast up front from the third quarter we were comparing against 20% to 35% premiums in fourth quarter of the prior year.

The tough scatter comparison combined with modestly down broadcast upfront pricing resulted in a 2% increase despite strong national demand.

Our domestic operating expenses increased in the fourth quarter by $26 million compared to the prior year.

The increase was primarily due to approximately $20 million of program impairments at TLC, Animal Plant and Science and to start up expense related to OWN.

For the year, our US domestic team tightly controlled its cost structure reducing SG&A expenses by $42 million or 9% more than offsetting the $24 million increase in cost of revenue enabling us to expand our 2009 adjusted OIBDA margin by 200 basis points by 56%.

Our international team finished the year with our strongest quarter of 2009.

Revenues increased 22% which included a 10% increase in affiliate revenues, a 24% increase in advertising and a 7% increase due to favorable foreign exchange rates.

International affiliate revenue was led by strong growth in Latin America.

Our international advertising revenue continued to accelerate sequentially with 18% growth in the fourth quarter compared to the prior year excluding the favorable impact of foreign exchange and a $6 million favorable one time item related to the settlement of our impact cap dispute.

Ad revenue growth was broad based with all of our regions experiencing double digit growth rates.

Excluding the $18 million negative currency impact to our expenses our operating costs were up 1%.

[OIBDA] revenue increased 8% from the prior year primarily due to higher content amortization and distribution costs.

While SG&A declined 6% from lower marketing and other general expenditures.

Excluding the $1 million positive foreign currency impact our international operations increased adjusted OIBDA 44% and margins increased to 43%.

Our international networks [downsurd] outstanding operating leverage with over 95% of incremental revenue translating into adjusted OIBDA for the fourth quarter.

Fourth quarter kept strong performance throughout 2009 for the international team.

With 10% revenue growth and 24% adjusted OIBDA growth excluding the impact of currency movements.

Their performance improved operating margin over 400 basis points points and delivered 83% of incremental revenues to adjusted OIBDA.

Overall the Company's performance during the fourth quarter of 2009 slightly exceed the high end of our revenue and adjusted OIBDA expectations.

As conditions improve globally in the advertising markets.

As we look forward to 2010, we are encouraged that the improved pricing and ad trends we experienced in the fourth quarter have continued through today.

However, we do remain cautious given the recent and potentially recurring global economic volatility.

For 2010, we are forecasting a range of $3.625 billion to $3.75 billion or between a 3% to 7% increase in revenues.

Our outlook incorporates low to mid-single digit US ad growth and high single digit international ad growth excluding foreign currency.

We believe affiliate revenues adjusted for divestitures will grow in the mid- to high single digits both domestically and internationally.

For comparative purposes, please note that our 2010 revenues do not include Discovery Kids which produced $19 million prior to sales of 50% interest and $11 million related to Animal Planet Japan which will no longer be consolidated in our financial statements.

We also anticipate losing approximately $15 million to $20 million of revenues on our representation of the Travel Channel due to its ownership change in the first half of 2010.

Based on current exchange rates we anticipate foreign currency will have minimally impact operations compared to the prior year.

We anticipate adjusted OIBDA of $1.56 billion to $1.64 billion or between 5% and 10% growth for 2010.

Our adjusted OIBDA growth will be driven by our revenue growth.

Majority of the incremental revenue translating into adjusted OIBDA.

We anticipate low single digit operating expense increases in 2010.

Please note that 2009 will be recast and 2010 will not include the revenue and expense of the Oprah Winfrey Network and Animal Planet Japan due to implementation of FAS 167.

We have provided a supplementary schedule that details the 2009 impact in our earnings release.

We anticipate net income from continuing operations of $660 million to $725 million and capital expenditures of $50 million to $60 million.

Our outlook incorporates the current share pricing in calculating the LTIP impact to net income.

We anticipate generating free cash flow between $700 million and $775 million in 2010.

We expect to significantly improve our cash from operations due to the growth in our revenue and operating leverage.

We do anticipate a high level of tax payments in 2010 than are estimated long term 37.5% economic tax rate through the expiration of the section 181 tax deduction for domestic content production which will add approximately $70 million to our tax payments as prior to deductions are accelerated and recouped.

As a result we anticipate our 2010 tax payments will be $425 million to $460 million which was comparable to 2009.

Which included $108 million related to the gain on Discovery Kids transaction.

We also incorporate in our guidance the adverse impact to our working capital of the long term incentive compensation payments accrued in 2009 which will total approximately $120 million.

As a result of the expiration of the section 181 and the LTIP payments, our 2010 anticipated run rate free cash flow is reduced by over $150 million which is reflected in our outlook.

With the stress and financial position we will continue to selectively increase the duration of our capital structure to better match the long lives of our assets and increase our financial flexibility.

Our strength and financial position enabled us to direct our capital resources where they are expected to join the highest return for our share holders in the future.

We will continue to work hard and ensuring the best use of the capital we generate.

The recent volatility in the market may provide us an opportunity to play our capital more efficiently on an internal as well as external basis.

Before I finish up I would like to remind everyone the successor to Planet Earth Life will be premiering the last week of March on Discovery and please be sure to catch the Police Women of Maricopa later this month on TLC as well as the season premier of River Monsters On Animal Planet.

With that I will turn the call over to David Zaslav our President and CEO.

Thanks, Brad.

Good morning, everyone.

We appreciate you joining us for our year end call.

It's a great opportunity to reflect on what Discovery Communications accomplished over the past year and also look ahead to 2010.

Brad has taken you through our fourth quarter results.

A strong end to a year in which Discovery outperformed on nearly every single financial metric.

Despite challenging economic conditions throughout most of 2009, we managed to deliver top line revenue growth while diligently cutting costs leading to double digit adjusted OIBDA growth and free cash flow growth.

Our growth was consistent with revenue and adjusted OIBDA gains every quarter excluding foreign currency.

Our growth was diverse with both domestic and international platforms delivering advertising and subscription increases.

And our growth was balanced with expansion from both revenue growth and targeted cost reductions.

On our call 12 months ago we laid out the rationale for why we were confident Discovery would outperform in 2009 and deliver real financial growth despite a tough macro environment.

I would like to revisit and underscore some of the strategetic advantages that enabled us to deliver strong results in 2009 as they also laid a foundation for why we expect to be successful again in 2010.

The first advantage we cited a year ago, one that was going to be especially valuable given the uncertain economic environment at the time, was that nearly 50% of our revenues come from recurring subscriber fees through our multiyear contractual relationships with our affiliate partners.

Fees that provide top line sturdiness and helped insulate the Company from the choppy and difficult environment.

These affiliate fees delivered sustained growth through 2009 with affiliate revenues up 8% excluding foreign currency and the removal of Discovery Kids.

And this growth was geographically diverse.

The US platform capitalized on the escaladers embedded in our affiliate contracts as well as the 5% expansion of the subscriber base, primarily from further penetration of our digital networks to deliver 9% affiliate revenue growth excluding Kids.

And Discovery's international networks leveraged the continued secular growth trends of pay TV around the globe expanding its subscriber base and delivering 9% affiliate revenue growth this past year excluding foreign currency.

Our cable network affiliate fees gave us a real competitive advantage in 2009 and will continue to provide a strong foundation for growth in 2010 as digital subscribers continue to penetrate domestically and pay TV grows internationally.

The second advantage we cited a year ago was the strength of the Company's brand portfolio.

The ratings momentum the portfolio was generating towards the end of 2008 gave us real confidence that we would continue to grow our market share in the year ahead.

This was even more important than usual given the tough and uneven economy.

It was imperative from an advertising perspective to maintain this momentum throughout 2009.

And I'm proud to say we did that and then some.

Every one of our rated channels delivered increased audiences this past year and we grew our ratings for the portfolio as a whole every single quarter.

Prime time ratings delivery across our domestic networks was up 8% among our key demo in 2009.

While the rest of cable was down slightly and broadcast declined 7%.

We were led this year by the remarkable turnaround at TLC.

This was a channel in 2008 which was completely off course.

We put in a new management team last year, led by Eileen O'Neill, and it is now a top 10 network for women with 10 shows averaging over one million total viewers.

In 2009 it had its highest audience in five years and delivery was up 13% in its key women 25 to 54 demo led by double digit increases from returning shows, Say Yes To the Dress, LA Ink, Jon & Kate, Little People Big World, and 18 Kids and Counting.

As well as new hits -- Police Women of Broward County, Little Couple, Toddlers and Tiaras and Cake Boss.

Animal Planet also had a tremendous year, increasing its viewership 16% among adults 25 to 54 and delivering its best audience in six years.

The Animal Planet rebrand is working.

Ratings gains were led by new hit River Monsters which premiered in the second quarter and was the best performing series ever for the network.

As well as by returning hit Whale Wars, which in its second season delivered 18% growth and is the second highest rated series in Animal Planet history.

Discovery Channel also grew in 2009 up 4% led by the best year ever for returning hits Deadliest Catch, Man vs.

Wild, Dirty Jobs and Storm Chasers.

Several new shows also showed real promise and will be brought back for a second season including The Colony, Ghost Lab, Swamp Loggers, Swords and Pitchmen.

Another big growth story among our cable nets this past year was the continued rating gains at Investigation Discovery -- ID.

ID had its best year ever among nearly every demo including a 27% increase among its key women 25 to 54 demo.

Since its launch in January 2008, ID has grown its targeted audience nearly 200% and delivered 24 months of sustained viewership growth.

ID has moved from the 49th ranked network for women 25 to 54 a year ago in the US to the 38th ranked network today despite being in less than 60 million homes.

ID has established itself as America's leading investigation network.

Led by hits On the Case with Paula Zahn, The Shift, Disappeared, and I Almost Got Away With It, which premiered after the quarter and delivered the largest audience in the history of the network.

We still have a long way to go in our quest to make ID a top 20 network.

But, Henry Schleiff and his team have done a great job establishing ID as a preeminent channel for crime and forensics programming.

The ratings growth is only part of the domestic story.

Our diversified portfolio which reaches a broad range of demos across our networks and delivers a devoted engaged and upscale audience is an attractive value proposition for clients, especially when forced to make tough choices with shrinking air dollars.

Additionally, we have what I think is the best ad sales team in the business led by Joe Abruzzese.

They continue to be innovative and develop additional ways to provide value to their clients and they certainly delivered this past year.

Our domestic ad revenues were up 2% this year.

Pretty remarkable when you look across the media space and see that no other media company delivered sustained ad growth in 2009.

We did so in every single quarter.

However, when I look at the rating success we achieved in 2009 it's apparent the economic downturn hampered our ability to fully monetize our growing audiences and our dynamic brands.

Which is why I'm so optimistic about domestic advertising in 2010.

Our ratings momentum is poised to continue this year with a broad and deep development slate of new and returning series across all of our networks.

In fact, ratings in January were up 12% giving us a great start to the year.

We will also be buoyed by the March premier of Life On Discovery which includes 11 hours of original programming narrated by Oprah Winfrey and produced by the same folks who delivered the hugely successful Planet Earth series.

We do face an advertising hurdle given that our up front pricing was down slightly.

But we anticipate making up these declines with strong ratings and hopefully a continued robust scatter market.

Scatter pricing has steadily improved since last quarter and has further strengthened in January along with increased demand.

With a stronger scatter market, improved visibility and continued ratings momentum we expect to deliver accelerated ad growth domestically in 2010.

Similar to the US, the weak economic environment throughout most of 2009 hindered our ability to monetize our viewership growth internationally.

We did manage to translate increased audiences across EMEA, and Asia/Pacific all of which experienced double digit viewership increases into 10% advertising growth, excluding foreign currency.

But the opportunity exists to further expand this revenue stream as the economy continues to stabilize.

There were continued signs of recovery during the fourth quarter with international advertising in local currency up 18%.

But, we remain cautious given the limited albeit improving visibility internationally.

As our international market share continues to expand through increased viewership and reach, the Company remains well positioned to deliver heightened ad growth in 2010 as we capture an increased share of what we expect will be a larger pool of ad dollars in the marketplace.

The last strategic advantage we discussed a year ago was our operating flexibility and our stringent focus on permanently reducing our cost structure.

The tough economy allowed us to be more aggressive and act with a greater sense of urgency.

But as we headed into 2009, we were certain there were additional areas where we could be more efficient and cost effective.

Over the last 12 months the Company took significant steps to restructure our work force, refine our marketing spending and reduce our research costs.

The net results of all these cuts was lower SG&A spending of 10%, excluding foreign currency, the majority of which has been permanently removed from our overall cost structure.

And while we were aggressive in lowering our overall cost space we did not sacrifice the quality of what is at on the screen.

We have been resolute in stating we will continue to invest in quality content because it is the driving force behind our business.

We told you throughout last year that we would offset any increased programming costs during 2009 with cuts to SG&A.

And we delivered.

Our cost of revenues was up 7% this past year excluding FX.

But we more than offset that with lower overhead costs.

The net result was operating expenses down 2% in 2009.

Which when combined with our revenue growth resulted in real operating leverage as margins expanded to 42%.

In the year ahead, we plan to further invest in our brands and original content.

But the focus will remain on success based investment.

Putting our money to work where it has proven to generate a return such as at Animal Planet and ID.

As Brad mentioned, despite this investment we expect margins to continue to rise in 2010.

But that growth should be driven primarily by revenue expansion and a focus on maintaining a stable cost base rather than largely through cost reductions.

Lastly, during 2009 we also took several strategic steps to better position us for long term growth.

The highest profile of these initiatives was undoubtedly the progress we have made at OWN.

Christina Norman has done a great job focusing the strategic direction of the network and Oprah.com and she and her team are wrapping up the programming line up in anticipation of the launch next January.

Just last week we announced five shows which will be part of next year's slate including a behind the scenes series which Oprah will narrate documenting the last year of the Oprah Winfrey Show in syndication.

We are excited about the direction of the network and look forward to showing advertisers the progress we made at this year's cable upfront.

Oprah and I are actively involved in all aspects of the network and we are working together to further define her on air presence following the announcement that she will be ending her long running syndication show in 2011.

We have also made substantial progress at our joint venture with Hasbro including announcing it will be branded The Hub.

Margaret Loesch and her team have been working diligently on strategy and programming development in anticipation of the launch later this year.

The Hasbro team led by Brian Goldner have been great partners and we were excited about the passion they bring to the venture as well as content ideas they developed thus far.

During this past quarter we also announced a partnership with Sony and IMAX to launch the first 24 hour 3D network.

And while it is very early in the consumer life cycle for this technology, we anticipate being a leader in 3D content much like we did with high definition when John Hendricks launched the first high-def channel back in 2002 with Discovery.

Finally, we also have implemented several management changes which we feel will improve our operations going forward including transitioning Mark Hollinger to take over at our international networks.

Mark helped build our international platform over the past 20 years, is a superb operating leader, and he is the ideal choice to lead the division for the next stage of growth.

We have also named Peter Liguori as our chief operating officer.

Peter has been one of the most successful leaders in the media industry over the past 25 years and has an extensive track record for developing innovative marketing and programming and Peter is a world class creative leader.

I will look forward to partnering with him as he helps the Company continue our transition from a great platform Company to a great content Company.

2009 was a challenging year.

Despite an economy that was weaker than anticipated, Discovery delivered on our expectations, achieved real growth and outperformed our peers.

As we head into 2010, in what we anticipate will be an improved operating environment, the Company's sustained ratings momentum, distribution strength and the leaner cost structure position Discovery to deliver continued strong growth in the year ahead.

Before we take your questions I would like to turn the call over to Peter Liguori for a few brief comments.

Thanks, David.

Good morning, everyone.

It's great to be here with you today.

I met several of you throughout the year at my old shop at News Corp and I really look forward to sitting down with you in the future to talk about our story here at Discovery.

I only been here for three and a half weeks so there is plenty for me to learn.

What's fairly obvious is that Discovery is extremely well positioned with a diverse portfolio of strong brands married to an extensive distribution platform.

Discovery always been synonymous with high quality content and David and his team have continued this tradition while taking bold steps to transform the Company further positioning it for long term growth.

My focus here will be on taking the Company's diverse brands and refining and accelerating their audience appeal and their brand entitlement.

There is no need for wholesale changes.

We are already headed in the right direction.

My goal is simply to help figure out the best way to get the most out of assets that we have.

We have unique opportunities ahead from further developing the global appeal of iconic brands such as Discovery and TLC to also finding the upside in existing brands such as Animal Planet and Science with their big opportunities.

It's also building new brands from the ground up such as ID or Investigation Discovery and our joint ventures ventures with OWN and The Hub.

As David said, we are focused on continuing Discovery's evolution from what is already a great platform Company with strong brands and into a great content Company with engaged audiences around the globe.

I'm very excited to be part of the team and I couldn't be more excited to be working with David, Brad and everyone they assembled in Silver Spring.

I look forward to meeting all of you again and down the road I hope we will be able to share some more time and I will turn this back over to Craig.

Thanks Peter.

Operator, we are ready to take the questions now.

(Operator Instructions) Your first question comes from the line of Benjamin Swinburne, please proceed.

Good morning, everyone.

Two questions for you.

I guess starting with scatter pricing.

I think, Brad, you mentioned scatter over scatter was a head wind in the fourth quarter but it sounds like there is improvement there.

When I look at your advertising guidance in the US, I think you said low to mid-single digit.

It would seem with your rating strength if we start to get scatter over scatter being up year on year that could prove to be conservative.

I wondered if you were making an explicit assumption about that pricing in your guidance or at least can comment on my thought process.

Then secondly for Peter and David, when you look at the international business of Discovery and compare that to what News Corp built in the Fox International business which is a big business for News Corp.

Is there anything you would take from the News Corp experience that could improve what Discovery is doing internationally?

Or do you believe the strategy of repurposing US content overseas which has been a huge margin driver for Discovery remains core and a way to move forward.

I will take the first one and then turn it over to David and Peter the international operations.

With regard to scatter pricing as you highlighted in the fourth quarter we might have been up 15% to 25% depending on which network but are going up against premiums that were 25% to 35% broadcast upfront.

In the first quarter the prior year which would be 2009, the premiums are not as high as they were in the fourth quarter '08.

Right now, we are running slightly ahead of the 2009 scatter market where we are pricing today.

And our scatter premiums have picked up slightly from the fourth quarter so they are a little higher than that 15% to 20% range.

If that holds and the ratings hold you will be at the higher end of our guidance and that's how it's conceived.

Right now for the first quarter given the math we just walked through we would be running around 5%ish, maybe a little better depending on if the ratings hold throughout the quarter.

And that's -- I think you -- are all the math you want through is consistent with how that's playing out.

Got it.

On your second question looking at News Corp versus Discovery.

I really do feel that Discovery is at a specific advantage.

When you look at the difference between scripted programming especially things like comedy to nonfiction you realize how nonfiction translates overseas almost flawlessly.

The world of science, natural history, investigative work, real people, real families -- there's no international boundaries.

They are the same across the board.

I think these brands especially with the content that's provided are particularly well positioned for overseas growth.

I look forward to working with Mark on exploring the upside with our international distributors.

Thank you.

Your next question comes from the line of John Janedis with Wells Fargo.

Please proceed.

Thank you.

Can you talk about the ratings at the Discovery Channel?

They are a bit mixed this season.

David you mentioned Life but I'm wondering to what extent you have other premieres coming in the next few months and if you changed the number of new programming hours during prime time?

We were very excited about Life and that will be premiering later in March.

We have a big promotion against that because we think it's breakout programming like Planet Earth was.

The same team put it together.

Our series are very strong.

Deadliest Catch will be coming back.

A few of you may have read that we lost one of our captains last night.

And it's been quite a dramatic season.

But overall our series remain very strong.

We have a new leader in, there Clark Bunting.

And we are re-enforcing the creative leadership team and Peter is working with Clark on that very simple mission which we started three years ago which is -- what is Discovery when it's at its best.

So, you will be seeing us leaning in.

We think the curiosity at its very heart which is what Discovery is about, has meaningful upside domestically and around the world.

We were continuing to invest in that and we think we can build in it.

Brad, with the other question related to (inaudible).

Can you help us think about the cost imbedded in your outlook for Hasbro and Oprah.

I'm sorry if I missed it earlier.

Because of the accounting change in FAS 167, neither of those costs flow through our current income statement.

They are just picked up on an equity basis.

Your next question comes from the line of Jessica Reif Cohen of Banc of America Merrill Lynch.

Please proceed.

Thank you.

I had a couple of questions.

I was wondering if you could help us -- can you elaborate more on the international potential.

How much do you see sub-growth growing over the next couple of years?

How much upside is there in affiliate fee rate increases.

I think the Disney channel numbers showed surprising growth from outside of the US.

And how much of a share shift have we seen and how much more there is to go from advertising shifting from broadcasting to cable/satellite?

Let me deal with it generally.

We have been rebuilding our ad sales team.

It's only in the last two years that we've really been selling locally in those markets and we are finding that and building the strength of our team around the world.

We still have the majority of the money that we make outside of the US is in affiliate fees.

On the affiliate side as we build our brands and we grow our ratings that enhances our hand as our deals come up.

About 70% of our deals are locked through the end of 2011.

And so we will have an opportunity as we build those brands to take advantage of the fact that our channels are stronger and continue to grow.

On the advertising side, we showed in the fourth quarter that we have been able to build on our strength by having good people on the ground and by selling locally.

We put up a strong number -- 18% growth in the fourth quarter.

And we still haven't taken full advantage of the additional viewership and market share that we've gotten around the world.

In terms of the overall growth of subs, it really depends on the market.

But there are a number of markets that are like the US in the late 90s.

We are seeing significant growth in India.

Significant growth in Brazil and in Chile.

A lot of the emerging markets are very strong.

And then it's a mixed bag.

There are some markets like southern Europe and the UK that are about as mature as the US.

But on balance there are a number of big markets where we are well positioned with a number of channels in low channel position with good sub fees where as the market grows we will grow with it just by the fact that we were there early and we have market share.

Brad did specifically about first quarter trends in advertising.

Can you give us color what you are seeing internationally in advertising?

Jessica, it's a little early to tell the favorable trends we had in the fourth quarter seem to be continuing.

But that market isn't as fully developed in terms -- there is not a large upfront in many of the countries or anything that is in analog to that sales process so it does come together later.

It's encouraging what we experienced in January but we just don't have the same visibility that we have in the states.

And then one time question I guess for Peter.

You mentioned -- and welcome -- you mentioned that science you see a lot of upside.

Can you give more specifics about how you plan to drive the channel.

Yes.

Just in my first few weeks here going out to the creative community it is remarkable how many big name storytellers look at all of the Discovery Networks especially a fascination with science overall.

And just discussing what opportunities there are for content on science you do see storytellers responding to it.

David and Debbie and Clark have Steven Spielberg doing some work specifically on the Science Channel to bring to life what most normally be considered a dry topic but bringing to life the stories around science innovation and the future of science.

So when we look at that network, it's going to be able to move more from an explanation of science to the life of science that we experience every day.

So I'm highly encouraged by the reception that the creative communities had for that channel.

Thank you.

Next question, please.

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

Please proceed.

Brad, did you give an expectation for domestic advertising growth in the current quarter?

We did not.

What I did highlight Anthony is it's running right now in the mid-singling digits -- little better than 5% potentially.

Again we aren't done with the quarter and our ratings aren't done.

We have the Olympics to go through.

Based on where we are at today that would be our expectation.

Thanks.

On your comments about use of free cash flow, I wonder, Brad, if there are any acquisition or M&A opportunities that you see globally out there and if not any reason you wouldn't be in there buying your stock back right now?

Right now we probably have several thing that we're looking at.

They return in the billion dollar range that could be potentially an aggregate in the several hundred million range.

There are opportunities that we think are good returns on the capital we'd invest.

If we cannot find productive uses that generate good returns you should anticipate that we will be repatriating money back to our share holders over the course of this year.

What types of things are those?

Are there international cable networks that are out there?

The ones that we were looking at right now are either potentially buying in parts of joint ventures we don't own, bringing in some capability and they have basically for the most part been internationally oriented.

Okay.

Thank you.

And then one for David.

Just more broadly on your digital strategy.

I think you have been a bit more reluctant to release some of your content onto new digital platforms.

Wondering if you could update us all on your strategy for monetizing online content in view of the relationships you have with your cable operators.

Thanks for the questions.

We have held back -- we have a great library -- 20 year library -- we own virtually all of our content.

But we haven't put out much longform because we really are holding it back for a business model that works which is our cable channels.

More importantly we found that we can very effectively get our content out there in best of and clips and in different ways by having channels on YouTube where people upload myths that they can bust and have a communication back and forth with the MythBusters.

It's a much more effective way to build our brands as people play on all of these platforms.

That's number one.

Number two, we are really getting aggressive in the -- in what I would call the social viral community.

As we look at one of the advantages we have -- because we are nonfiction across our 13 channels in the US and around the world, as you take a look at Facebook and YouTube and Twitter, we have a chance to lean in on those platforms because we have real people that have real fan bases whether it's the captains from Deadliest Catch or Jamie and Adam from MythBusters or a lot of the great characters like Buddy from Cake Boss.

We have been pushing all of our characters who have a real connection with viewers domestically and around the world to participate on all of the social platforms and that seems to be working quite well for us.

And as we look at new media we don't just look at ways of pushing our content out.

We look at it as ways to reaching out to fan groups that can re-enforce from a marketing perspective the importance of our personalities and our brands and our shows.

Thank you.

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

Please proceed.

Thanks very much.

So a couple for Brad.

And then a big picture question.

Balance sheet then if you might start returning capital or have some deals lined up, what's the right long term leverage target?

And then you talked about advertising and didn't mention sellout at all.

Can you give us a sense what the sellout levels were in the first quarter or 2009 last year so we get a sense if there is upside there as well.

And I have a question for David.

Let me take them in order and I will turn it over to David.

In terms of balance sheet what we said in the past and I think we are still in the same place is that we will like to maintain investment grade credit rating.

Generally will be three times-ish or slightly less is the maximum leverage -- we could go up to three and a quarter if you read what the credit analysts say.

Right now where we are at in our leverage is under two and a half times so we are definitely in the comfort range and I think we like to maintain a sensible cost of capital.

We don't want to decline our leverage much more from where we are today either.

With regard to sellout and expectations our sellout did increase in the fourth quarter.

We saw it accelerate from starting late third quarter into the fourth quarter so we are selling more in the cash market -- that has continued in the first quarter.

And that's been part of the success.

We are ahead in the first quarter of where we were a year ago in terms of our pacing.

And so that is part of the process which is -- pricing is firming up, the cash market is greater than it was a year ago and our ratings are up and that's what is translating into an increase in advertising.

But you are fighting a little bit of a low single digit upfront that made up a portion of the advertising base.

Got it.

Thanks.

For David wanted to further the digital conversation a little bit because the iPad had a lot of people talking about the potential of over the top video and I know you had a discussion about putting your shows online in terms of downloads or streaming or ad supported.

Any thoughts about the potential if an Apple or an Amazon came forward and wanted to wholesale your channels and aerate themselves online, a pay TV package, would you support that?

We are always looking for different ways to reach consumers.

If there are strong business models that can carry our content whether in long form or short form we are aggressive in pursuing them.

We are in talks with everybody.

We believe our content has significant value and we want to make sure we get paid meaningful value for our content, And we also recognize the value of the cable business and the value of the cable operators that are paying us more and more for our channels.

It's that balance.

Are there any contractual obligations that would hold you back from on-line streaming?

No.

We have a right what we want with our content and we are going to figure out the best way to reach our viewers and to go with the best business models we can find to create the most value.

Thank you very much.

Your next question comes from the line of Richard Greenfield of Pali.

Please proceed.

Hi.

Few questions.

First for Peter.

Was wondering how you think about the opportunity -- you have HD Theater, Fit TV and Military Channel.

None of which seem particularly core or have a lasting brand image right now.

And was curious how you think about the potential of those three networks and what you can do with them.

Two a question on OWN.

Where is carriage right now for Discovery Health and do we know yet there -- is any specific plans to have broader carriage by the time the network launches in early 2011 and then lastly for a question for Brad on Life versus Planet Earth.

Planet Earth ratings were a surprise and expected it to be as big as it is.

How will Life be monetized and are you in a better position to monetize it -- fully monetize ratings success versus Planet Earth and how does it flow through to DVD.

How is the timing on that?

Let me take the OWN one first because it quick and then I will pass it to you.

Right now Discovery Health is 75 million homes.

And we will see growth on that, Rich, before Oprah launches just by the natural growth that we will get so figure 77 million to 78 million homes by the time we launch maybe close to 80 million homes.

But that doesn't take into account the fact that we are building -- we have a fantastic brand.

We have Oprah behind us and great programming and a great leadership team and we will go out there and will be looking to get more carriage for the channel.

And to get a different compensation structure for the channel over time.

So our expectation is that over time the channel will grow and it will grow significantly and over time we will be able to get meaningful fees for high quality content.

And a great brand.

Let me discuss the HD [D of doll].

The position is not necessarily being core.

It's part of the core strategy to have a diverse portfolio content.

With all of that being said in taking a look at some of those networks we will approach it on a couple of levels.

First we are going to look at natural growth within our cost structure to make sure that we are investing in content that can in fact bring more attention and more value to those networks.

And then two, we will continually recognize that there is strong distribution in place of those networks and that's beach front property.

And if there are any larger strategic opportunities to take a look at those networks we will evaluate them on an individual basis.

Fortunately again those networks are locked in with many long term deals and it allows us the time and ability to look at certain investment opportunities.

And one last thing on HD because it's an important point for us strategically.

We have seven HD channels in the US.

We were a very early mover.

We are now in 45 countries in HD.

Maintaining our lead as platform Company is critical to us.

And I think it's starting to pay dividends.

It's hard when you look at the research to really completely line it up.

But at least anecdotally when you see how people view content when they get an HD set they spend a lot of their time on the HD tier and that tier might have 30, 40, 50 channels but we have six or seven of those.

And so over time having that platform advantage and the fact that our content looks great in HD, we think domestically and around the world we will help us grow rating and help us grow brand value.

And it's one of the reasons why we were so quick to get out with 3D and wanted to be the first to launch a 24 hour 3D channel.

We will do that domestically and around the world.

Because our content looks great in HD and as people move to that closer to real in terms of the way they view content that they will continue to view us as place to go to see content that looks great closer to real.

And your last question with regard to Life and how we approached it, I think our sales teams have been very thoughtful in terms of working with potential advertisers and what's the best structure of how we partner with them and we have done a good job of monetizing it and having the ratings expectations that hopefully is in line with what happens.

And Life is no surprise to us in terms of the success.

I think people are working hard and we have high expectations for it and we believe it should be delivered and our teams are working to monetize that deliver.

And you expect it to be out before the end of the calendar year?

The DVD won't be out until the second half of the year but it will be out -- if the economics David mentioned are -- we don't get 100% of the economics it's still through part of our partnership with the BBC.

We expect to monetize it in the second half.

The one thing we did clean up this time is last time there were two versions.

We were selling and the BBC was selling it.

And there was an Attenborough version from the BBC and then there was our version.

And then this time there will be one version sold in the US.

It will be the Oprah version.

It will be our version.

And it will be jointly sold by both of us and there will be a split.

So it will be coordinated and will get a piece -- some piece of everything that's sold.

Thank you.

Question, operator.

Your next question comes from the line of Imran Khan of JPMorgan.

Please proceed.

Yes, hi.

Thank you for taking my question.

Two question, one for Brad and one for David.

Brad, trying to understand I think you talked about international advertising guidance of high single digit.

Why are you assuming international ad revenue growth rate will decelerate.

Are you seeing a trend or are you taking conservative view because of the macro-economic trend.

And for David more high level question.

What kind of revenue base you need in international market to take your OIBDA margins international market closer to the US level?

Thank you.

With regard to our outlook for the international advertising we do take a conservative view in terms of our outlook.

We have been achieving -- the third and fourth quarter we were at 9% in the third quarter and 18% in the fourth quarter.

Fourth quarter is typically our strongest quarter.

So going into this year as we did our budgeting and we did a bottoms up the high single digits maybe low double digits.

That seems like the range we were comfortable looking at it from a ground up level.

If the economies do improve around the world then we may do better than that.

On the margin side, international we'll never be able to sync up with -- the US is just an incredibly efficient operation.

We serve 96 million homes out of essentially one factory.

We were really -- we are a true international Company.

So we are doing business.

We aren't sending our content around.

We are doing business running channels all around the world.

We have gotten more efficient.

We think we can get more efficient in the way we do our marketing and how we use our content.

Having said that, we think there is an opportunity to increase our margins.

In addition as Brad said as revenues grow both in terms of our sub fee revenue and our ad revenue we built a very strong engine in terms of having the overwhelm majority of that come down to operating cash flow.

But having said all of that we will always have additional cost.

We still do a fair amount of local content in the markets and that's one of the reasons we are able to build market share.

Here in the US, Discovery has about a 1.5% market share.

You go to some countries we have a 5% market share.

And part of that that strength is in order to maintain that we need to do some local content which we will continue to do.

Time for one more question, operator.

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

Please proceed.

Thank you.

I was wondering if you could help the frame the digital subscribers you have.

Subscribers that are accessing Discovery content on digital tiers internationally.

It's obviously a long run rate of the growth as platforms have just been upgraded.

I'm just wondering since more programming will be likely available if you can help us think about that.

I will give it to you generically.

We have an average of five channels in 173 countries and in most cases three or four of those channels are on the lower tier.

So it is in many of these markets it's the paid TV tier that is beginning to accelerate the way it did in the US in the mid- to late 90s.

In those markets where they have a traditional analog paid TV tier there is also digital that is being rolled out throughout a lot of the emerging markets and in Asia.

In every case because we have distribution teams on the ground we were adding our channels into those markets on digital.

But the big driver for us in terms of the overall -- our advertising upside and in the next year or two -- will be more of the growth of the traditional paid TV tier around the world but we are well seated on the digital side.

I don't have the exact number of digital.

David, a good way to think about it is our most fully distributed network is Discovery internationally and Discovery gross encountered high single digits it has through 2009.

So the digital growth rates are higher than Discovery because it's the most fully distributed analog in some countries only.

And so it really varies country by country.

With certain parts like western Europe which will have a higher digital penetration and other parts of the world you will have lower digital penetration and some are satellite reached which is all digital.

It really -- you have to look at it market by market and how they are approaching it.

The other thing you see that is a companion to this -- we saw this in the US -- is as the pay TV penetration grows, advertisers get more and more comfortable going from the broadcast platform to the paid platform and the CTMs also grow because of that as advertisers come.

We saw that here and are seeing that in a number of markets around the world which as a trend over the next few years should be helpful to us and the other players in that space.

Thanks for the color.

Thank you everyone.

We appreciate your participation in our earnings call.

Operator you can end the call now.

Thank you for joining today's conference.

This concludes the presentation.

You may now disconnect.

Good day.