華納兄弟探索 (WBD) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Discovery Communications second quarter 2010 earnings conference call.

My name a Mary, and I will be your coordinator today.

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

We will be facilitating 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 presentation over to your host for today's call, Mr.

Craig Felenstein, Senior Vice President, Investor Relations.

Please proceed.

Thank you, Mary.

Good morning everyone, and welcome to Discovery Communication's second quarter 2010 earnings call.

Joining me today is David Zaslav, our President and Chief Executive Officer, Peter 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.

On today's call, we will begin with some opening comments from David and Brad, after which we will open the call for your questions.

Before we start, 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 tot 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 effect these expectations, please see our Form 10K for the year ended December 31, 2009, and our subsequent filings made with the US Securities and Exchange Commission.

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

Thank you, Craig.

Good morning everyone, and thank you for joining us.

Discovery Communication's delivered one of the strongest quarter in our young history as a public company.

Our results build upon the gains we generated at the start of this year, as well as the consistent growth we reported in each quarter of 2009, illustrating Discovery's ability to monetize our content assets in a relatively healthy global advertising climate.

The Company's sustained momentum reflects our focus on execution across our domestic and international portfolios, and the operating leverage inherent in our business model.

As we mentioned on our last call, a year ago, Discovery's growth was led by our escalating and predictable affiliate revenue that provides durability during challenging economic conditions.

And while this revenue stream continues its solid growth trajectory, it is the power of our networks and global utility of our programming, as well as a more robust advertising market, that is driving our double digit growth in 2010.

Brad will take you through our operating results in a few minutes, but we are pleased with the sustained financial momentum our business model is delivering.

It is the strategic steps we have taken, and continue to take, to strengthen our content portfolio, as well as our balance sheet, that gives us optimism we will expand margins and generate additional shareholder value going forward.

With 13 networks in the United States and between two and 12 networks in over 180 countries globally, we have build a unique and unparalleled global distribution platform, with which to deliver value to both our affiliate and advertising partners, as well as to our global viewing audience.

We remain focused on enhancing the quality of our content offering by investing smartly in strengthening our existing networks, while also building new assets to sustain our growth in the future.

Our content spending is focused on those areas that provide the most opportunity from both a ratings and advertising perspective, as well as long term asset appreciation.

Animal Planet is a great example of our creative strategy.

Since its rebrand in the early part of 2008, we have steadily increased the annual programming investment by 65%, and the result has been consistent year-on-year audience growth, and a much broader brand proposition.

Marjorie Kaplan and the creative -- and her creative team have grown Animal Planet into a top 30 network, and had just delivered the second highest quarter in the channel's history with viewership up 10% among its core demographic, led by the return of two of its high rated series, River Monsters and Whale Wars, both of which have expanded their ratings by double digits this season.

And the slate is not limited to just a couple of successful series.

Animal Planet has built a diverse lineup of programming that includes hits such as I Shouldn't Be Alive, Monsters Inside Me, Fatal Attraction, and Pit Boss.

Most importantly, Animal Planet's rating success is translating into real advertising growth.

With national advertisers spending more on Animal Planet, and at higher prices, significantly outpacing our investment in programming.

The same strategy is working at ID, Investigation Discovery.

Much like Animal Planet, ID is key part of our effort to build stronger brands with existing distribution.

We started investing in ID a little over a two years ago, and it has delivered incredible ratings with 29 months of year-on-year delivery gains.

Henry Schleiff and his team have moved ID from forty-ninth ranked network in US for women 25 to 54, to the thirty-ninth rank today, despite being in only 63 million homes.

And this past quarter, ID delivered its second quarter performance, that was stronger than any prior quarter, where it grew 60%.

ID is the fastest growing cable network in America this year, led by hits I Almost Got Away With It, Disappeared, and On the Case with Paula Zahn, as it solidifies itself as the preeminent channel for investigative storytelling.

Financially, the performance is similar to Animal Planet, with the increased programming and marketing investment being more than offset by the increased audience and corresponding advertising revenues.

We are excited about the growth profile for Animal Planet and ID, as well as the Science Channel, which is up 30% this quarter, and we will continue to invest in further building these brands and expanding their audience share.

While we invest in those networks, we remain diligently focused on strengthening our two flagship networks, Discovery Channel and TLC.

I mentioned last quarter that we installed a new leadership team at Discovery towards the end of 2009 led by Clark Bunting.

Clark and his team have been working hard on developing new series, as well as cultivating our existing hits such as MythBusters and Deadliest Catch.

Catch just finished its sixth season and has never been stronger.

It delivered its highest ratings ever this year, drawing more viewers on most nights than the broadcast networks in key demos.

Overall, Discovery's ratings declined slightly in the second quarter, but ratings are up 2% thus far in 2010.

Following the quarter, the success of Catch, as well as new serious Dual Survival, which is really working well on Friday nights, drove ratings up 17% in July, making it our best July in a few years.

We are excited about Discovery upcoming slate, including Shark Week, which kicked off this past Sunday night for its twenty-third season with some very strong ratings, and The Colony, which premiered to strong numbers last Tuesday.

Turning to our flagship network TLC, it is having another strong summer.

As expected, ratings this quarter were down a little due to the difficult comparisons to John and Kate Plus 8 from a year ago.

But Eileen O'Neill and her team have developed a broad stable of established series, with 16 programs averaging more than one million total viewers in the second quarter, including Cake Boss, The Little Couple, and Say Yes to the Dress.

They are also building new series with Hoarding, Buried Alive, and Police Women of Memphis performing well.

TLC continues to be a top five network for women 25 to 54, and despite tough ratings comparisons, grew its ad revenues this past quarter, which speaks to the breadth of the network's schedule, its creative leadership, and its attractiveness to advertisers.

Based on all that, we announced several months ago that we will roll TLC out into over 100 million homes over the next two years.

Overall, our domestic portfolio is broader than it has ever been.

The ongoing evolution of Animal Planet and ID led to viewership gains across our domestic networks, expanding on the 9% growth we delivered in the second quarter a year ago.

The ratings growth we are generating across those networks, combined with the power of Discovery and TLC, enabled us to take advantage of the increased national demand, and grow our domestic revenues by 13%.

Brad will provide some color on our expectations for advertising going forward, but let me give you a quick update on the recently completed up front, which was strong.

We finished our up front with pricing increases in the mid to high single digit range and sold a little bit more than 50% of our inventory.

This sell out is well over 30% higher than a year ago, when we sold less inventory than usual, given the less attractive pricing environment.

In addition, the majority of advertising dollars were from non-scatter advertisers.

As for what we're seeing today, current scatter pricing remains healthy and strong.

And with a balanced portfolio of powerful brands that reach both men and women demographics, we are optimistic that advertising revenues will grow solidly for the remainder of the year.

Our sustained investment in programming is also paying off internationally.

Ratings across our platforms were up 9% in the second quarter, and with the ad market continuing the sequential improvement that began in the second half of 2009, we were able to deliver 38% advertising growth this quarter.

This growth is broad based, with ad gains up over 20% across each of our regions.

The back half of our year does present some tougher comparisons, especially in the fourth quarter, because we were up 20% last fourth quarter.

However, while there is uncertainty over the continued health of the ad market given some of the economic developments in certain international territories, for now, the ad markets continue to look healthy,and we expect to continue to grow in the quarters ahead.

As we strategically invest in our existing content assets, we remain focused on building additional avenues for value and asset creation, including further leveraging our distribution infrastructure.

We are making significant progress at our two primary initiatives, the Hub and OWN.

The Hub is set to launch on 10/10/10.

Margaret Loesch and her team are doing a fantastic job putting together a broad and appealing programming lineup that advertisers are really getting on board with.

Hasbro has truly been a great partner.

Quickly getting the Hub ready for launch, supporting it with cross-platform marketing support, and being a great creative partner.

We look forward to building a great kids platform that will appeal to consumers, and bring value to our affiliate and advertising partners.

We have also made huge strides at OWN as we head towards the January 2011 launch.

Oprah's creativity, energy, presence, and commitment is powerful and contagious.

OWN has already announced 16 shows that will be part of the schedule in 2011, and we recently completed OWN's up front process for the upcoming season, and it exceeded our expectations.

Power and appeal of Oprah's brand was evident, as OWN secured substantial ad commitments, including several large multiyear deals, as advertisers are excited about Oprah's involvement, and the vision for OWN.

And Oprah.com was also a piece of that overall strategy, and very helpful.

Another example of our focus on creating additional areas of growth is the 3D channel we are building with Sony and IMAX.

We are committed to investing today, albeit at a relatively small level, to gain a first mover advantage on new a consumer platform that's expected to grow in the coming years.

We are excited about the long term potential of all of our joint ventures.

In each case we attracted great partners with enormous creative appeal.

We've built strong management teams and will cultivate each to maximize the reason on our investments.

We are on mission, building quality assets that will deliver growth in the years ahead.

The last strategic area I want to mention is the steps we've taken to strengthen our balance sheet.

During the second quarter, we refinanced $3 billion of debt at historically attractive rates, eliminating any significant capital requirements over the next five years.

With our increased financial flexibility, sustained operating momentum, the board of directors has authorized a $1 billion share repurchase program, so we can return capitol our shareholders.

We will be financially prudent in how we buy back shares, and look forward to building additional value to our shareholders.

Discovery had a great first half the year.

Our dual revenue streams are both growing strongly as we take advantage of our long term affiliate contracts, and exploit the increased global demand for advertising.

Importantly, almost all of this revenue growth is growing -- is falling to the bottom line as we continue to focus on maintaining a stable cost structure, despite the strategic steps we are taking to further strengthen our Company.

We remain committed to further expanding our margins, which are up from 45%, to 47%, and look forward to creating additional value for our shareholders going forward.

And with that, let me turn the call over to Brad.

Thank you, David.

As David highlighted, we delivered one of our strongest performances during the second quarter.

Total revenues increased 11% compared to the prior year, led by a 19% increase in advertising due to a combination of continued favorable conditions, and unwavering execution in the domestic and international markets.

Our domestic operations contributed the majority of the absolute growth with a 10% increase compared to the prior year, complemented by a 15% increase in our international operations.

Please note the second quarter international revenues exclude $12 million related to our antenna audio business, which we designated as discontinued operations this quarter.

Our total operating expenses increased 5% during the quarter primarily due to higher marketing spend at our domestic networks.

Our ability to grow our revenues while maintaining cost discipline and investment in our networks, resulted in adjusted OIBDA growth of 18% to $455 million and margin expansion to 47%.

Our net income decreased to $106 million, reflecting a $105 million of after tax charges related to the recapitalization of our balance sheet, which I will discuss in a few minutes, and a $46 million gain from the sale of a portion of our Kids network in the prior year.

Excluding these non-recurring items, our earnings increased 61%, driven by our strong operating performance.

Free cash flow was negative $44 million in the quarter as our improved operating performance was a offset by $138 million in costs related to the refinancing of our balance sheet, $60 million in long term incentive plan payments, primarily for the settlement of our outstanding stock appreciation rights, and $61 million in additional tax payments.

We anticipate significant free cash flow generation in the second half the year, with lower payments for tax, (inaudible) interest and long term incentive compensation, as well as improved working capital and operational performance.

For the full year, we expect free cash flow between $650 million and $700 million, which incorporates cash taxes of $325 million to $350 million, interest payments of approximately $200 million, total long term incentive compensation of $145 million based on current market values, and $138 million of debt in swap extinguishment cost.

Please note that cash taxes include approximately $75 million related to the expiration of the accelerated tax deductions on domestic production costs.

Turning to our operating unit, US operations continue to perform well during the second quarter.

Domestic revenues grew 10%, with distribution revenues increasing 6% from higher rates, and expanded distribution of our digital networks, offset by the deconsolidation of the Kids network.

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

Our domestic ad sales team improved their strong first quarter performance growing revenue 13%, primarily through higher pricing in the scatter and direct response markets, as well as greater sell through.

Our overall pricing was mid single digits above the prior year, with scatter premiums averaging high teens above our broadcast up front, and low double digits above the prior year.

We remain encouraged by the continued strength of scatter pricing, as well as the gains we garnered during the broadcast up front that David discussed a few minutes ago.

Our domestic operating expenses increased in the second quarter by $16 million, or 7% compared to the prior year.

The increase was primarily due to higher marking costs at Animal Planet, TLC, and ID, as we continue to build momentum across the network.

The strong revenue growth and selective marketing investment produced adjusted OIBDA growth of 11% compared to the prior year, and increased domestic operating margins to 61%.

In our international operations, revenues increased 15%, which include a 38% increase in advertising and 6% increase in affiliate revenues.

Foreign exchange did not materially impact our revenues and expenses this quarter.

Our international advertising revenue continued the strong pace in the first quarter, with a 38% increase in the second quarter led by pricing and delivery growth in the UK.

Stronger market conditions in Asia and Latin America complimented by greater than 20% growth in EMEA, due to higher sell through.

International affiliate revenue increased 6% due to growth in Latin America, primary from subscriber growth.

Looking ahead, we anticipate international affiliate revenue growth slightly lower for the remainder of 2010, as we continue to reposition certain networks to alternative distribution platforms.

Our international operating costs were flat for the quarter due to a content write off in the prior year.

Excluding the prior year write off, our operating costs increased 5%, primarily due to SG&A costs.

Similar to our domestic operations, our international operations demonstrated strong operating leverage, increasing adjusted OIBDA 29%, including the impact of one-time items in the prior year, and 45% including the impact.

Overall, the Company's performance during the second quarter exceeded our expectations in terms of revenue and adjusted OIBDA.

As we look forward to the rest of 2010, we are encouraged by the advertising demand we experienced in the first half of 2010, and the success of up front sales process in the US.

For 2010, we are increasing our revenue and adjusted OIBDA outlook.

We are forecasting a revenue range of $3.7 billion to $3.775 billion.

Please note that the revenue excludes approximately $40 million related to our discontinued operations that was included in our guidance last quarter.

Our revenue outlook incorporates low double digit to low teen US ad growth and mid teen international ad growth, excluding foreign currency.

We continue to believe affiliate revenues adjusted for divestitures will grow in the mid to high single digits domestically, and as I mentioned earlier, low mid single digits internationally.

For comparative purposes, pleases note that our 2010 revenues do not include Discovery Kids, which produced $17 million in 2009 prior to the sale of 50% interest.

We anticipate 2010 adjusted OIBDA of $1.625 billion to $1.7 billion.

Our adjusted OIBDA growth will be primarily driven by our revenue growth, with the majority of the incremental revenue translating into adjusted OIBDA.

We continue to anticipate low single digit operating expense increases in 2010.

We are lowering our net income outlook to $650 million to $700 million, reflecting the refinancing activity of the second quarter, as well as higher than previously anticipated lower long term incentive expense due to the increase in our share price, partially offset by our greater than previously forecasted operating performance.

Lastly, we significantly strengthened our financial position this quarter, completing the transition to a more flexible and durable investment grade capital structure.

With the closing our $3 billion financing in June, we have successfully extended our average term of our debt to 14 years from four years when we first became a public company and lowered our average cost of debt to slightly over 5%.

With our strength in balance sheet and strong operating performance, we are implementing an initial $1 billion share repurchase program.

Our first priority is to invest our capital in our core business to enhance our shareholder return.

To the extent we cannot find opportunities with attractive financial returns, we will be using the cash on our balance sheet, as well as the cash we generate from operations and other sources of liquidity, to repurchase shares under this program.

The pace of our repurchasing activity will be determined by the scope of our strategic initiatives, and the opportunities presented by market volatility in our shares.

Before I finish up, I hope everyone is enjoying Shark Week on Discovery, as well as the upcoming premieres, Say Yes to the Dress Atlanta on TLC, the return of Pit Boss on Animal Planet, and Wicked Attraction on ID.

(inaudible) take your questions.

(Operator Instructions) And our first question comes from the line of Doug Mitchelson from Deutsche Bank.

Thanks so much, good morning.

David, you walked through areas of growth opportunity in your prepared remarks.

One area you did not discuss was the affiliate renewal cycle in the US, I think in 2012 to 2014, I'm curious, given Comcast was willing to cut a new affiliate deal with CBS well before their deal was up for renewal, if -- whether you're seeing any interest from your distribution partners in cutting renewals early, and would you agree with the view that those affiliate renewals are also an area of meaningful growth for the company.

And then for Brad, I'm not sure if you have these numbers handy, but if you could walk us through the unusual items hitting free cash flow this year, that would be helpful.

Thanks, Doug.

Let me get your first question.

In the US, as you alluded to, we have a very stable affiliate structure where the majority of our deals are up after 2012, we have no big deals up by then.

And we do feel like it's a meaningful opportunity.

It's one of the reasons why we continue to invest in our channels and are building our brands.

The stronger our channels are, by getting -- taking TLC and moving it from number 18 channel in America and the number eight channel generally, and a top five for women.

That makes us stronger.

And as we build ID and Animal Planet and OWN and HUB, all of those will be taken into consideration.

The more value we provide to viewers, the bigger our viewership high, I think the more value we will have to our distributors.

So, we don't have any -- we don't discuss it, but right now, we don't have any current plans to go into the market, because our deals are not up for fair period of time here in the US.

Outside the US, about 50% of our deals are locked through 2011, and we've done a number of those deal already this year.

And as Brad kind of alluded to, one of things we are focused on strategically is there's some markets where we've exclusive with Discovery.

In almost every market around the world, Discovery is the number one non-fiction channel.

But in some markets, it's exclusive to one distributor.

And so strategically, we feel that in those markets, if we can break that exclusivity, in some cases by maybe changing the overall cost structure so that we could offer Discovery and all of our other channels to other distributors in the market, that we'll be better balanced and will be stronger in the long term for growth.

And so it's a long way of saying we do see our renewals as an opportunity.

Last year, we grew our overall market share double digit around the world, and so if we keep investing in our content and keep growing, we should do quite well on renewals domestically and internationally.

Hello Doug, it's Brad.

With regard to free cash fund one-time items, I detailed, I think in my remarks, but just to go over it, it's really three components.

The first component is when we repurchased or refinanced our debt, we paid $138 million in May copayments as well as swap termination costs.

Those go through cash from ops, that's how it's accounted for.

The other -- the second component is a long term incentive compensation.

This year, because the share price is up and we had the stock appreciation rights that we ended up settling on for [$145 million].

All things being equal next year at the current share values, we're around $80 million.

So, you've got about a $65 million increase this year that you don't have next year.

And then the year after that, in 2012, all things being equal, you have around $30 million, because it is a legacy from when we were a private company.

And then the third component's taxes.

You had a expiration of, it's called Section 181, of the tax code that enabled us to accelerate the amortization on domestic content.

Because it expired, we had to pay $75 million in 2010 in additional taxes that we wouldn't have to pay next year.

So, those are the three components.

They add up to about $275 million to $300 million of detriment to our free cash flow when you add all those things together.

Thank you, that's very helpful.

Thank you.

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

Thank you.

I wanted to go back to that comment, David, that you just made about the repositioning of Discovery.

I guess that's what Brad alluded to also before in his comments.

So is that -- how much of a hit do you expect to take?

It sounds like you're going to take a short term hit for a longer term gain.

I was just hoping you could give us some more color on that.

And then also David, you mentioned in your prepared remarks that you feel pretty confident about the rest of this year for advertising, maybe domestically, at least.

I was just wondering if you can give us a little more color on how much visibility you actually have.

What are you guys thinking about 2011?

You had a great up front.

How do you feel scatter will hold up going into 2011?

Thanks.

Okay, first, Discovery is very strong here in the US and strong around the world.

There are a few markets, and it's not significant, where Discovery was, as a legacy, exclusive, maybe three or four markets.

And in some of those markets, we're trying to wind out of those.

Particularly in markets where there are a number of distributors, and we have an opportunity to have Discovery and our other brands on all platforms in a country.

And so in terms of overall impact, it's quite small.

I don't know, probably in the near term, two to three percentage points of growth rate, it could be over the next six months or so.

And then as the repositioning on additional networks -- additional affiliates comes in, you would get back to where you are and then hopefully, ahead of where you were.

Part of what that is, is we've been building our overall strength as an advertising -- as a company that can really affect our advertising outside the US.

As you remember, four years ago we were basically Pan European and Pan Asian.

And we're starting to build some good competency in monetizing our advertising.

So, in some of those markets, by being on other platforms, it really give us a chance to have much more scale and to have -- and reach, which will help our advertising line, as well as our affiliate line.

So in the long term, we think that that really works for us.

On the -- in terms of your second question, the market still feels quite strong.

We're projecting for this year low double digit, low teen advertising growth in 2010.

Scatter pricing remains at about 15% plus above up front pricing.

And we feel pretty good about our brands, about the strength of them and how advertisers are lining up with those.

It's a little bit early for 2011, although we did have a very strong up front.

As I mentioned, we sold, I think more in this up front than we ever have.

And one of the reasons for that is that the market was strong, but also, we were able to get advertisers to really commit to a lot of our additional brands, which was important to us and will be important to growth.

And as you think about the scatter, Jessica, the majority of increase of our up front sales came from up front only advertisers and not our scatter advertisers.

So, it's not like we took a significant portion of our scatter and moved it forward.

It was primarily the up -- we got deeper into the advertisers who are up front, who typically buy in the up front.

Brad, can I ask one last question?

On -- can you give us any kind of outlook on operating expenses for 2011?

No.

I think it's premature to go into our 2011 guidance at this point.

Alright, thank you.

Thank you.

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

Thanks very much, two questions.

The first is, I know it's a -- was relatively small operation, but can you give us an idea of what the contribution of antenna was before you guys sold it?

And second question is, I know it's really difficult by network to give any sort of quantitative answer, but could you qualitatively give us a sense of how much real revenue growth is being driven by ID and Animal Planet as they start to become position stronger versus the more legacy flagship channels?

Dave, it's Brad.

I'll take the question.

Antenna audio, we haven't sold it yet.

We put it into discontinued operations because we're working with someone we have the intent to sell it, and we do believe that will happen this year.

The revenues were a little over $40 million, and the EBITDA is little bit, I'd say low single digits, so it's not a meaningful contribution to EBITDA and is a fairly low margin.

It's a nice business, it's just not -- when you look at our numbers, from a revenue perspective, it makes the international comparisons a little bit tougher if you did not include it.

And so we just put into discontinued ops for clarity purposes in comparability with next year.

With regard to contribution of growth on Animal Planet and ID, what we've publicly said is Discovery and TLC make up around high 60% to 70% of our revenue in cash flow domestically.

So, the contribution of Animal Planet and ID is as they grow faster, does become greater, and it's mostly seen in the in the advertising numbers.

And so when you have advertising numbers and both of them are up well in excess of 25% growth, but it's off a lower base.

And from ID, again, it's not a fully distributed network like Animal Planet, so that's also off a base that's lower, and those numbers are well in excess of 25% also.

And so both of them are nice contributors.

If we put a total on -- if we have 13% advertising growth, they probably -- they could have contributed several hundred basis point to that growth.

But when you look at that in terms of where is our opportunity for domestic growth, traditionally we have the ability to drive Discovery and TLC where we're competing kind of hand to hand combat in the marketplace and doing well.

On the other hand, we view Animal Planet as really an aggressive underperformer, and we've been really focused on that over the last couple of years, and we're starting to get some nice momentum.

It's a fully distributed channel with good channel position, and so it hasn't fully realized its opportunities.

So over the next two to three years, if we can continue to invest in the content and connect with viewers, we think there's meaningful upside there.

And ID was kind of surprise for us, that we've -- it's a good niche.

We're now the leader in investigation.

Henry's doing a great job, and it's just really growing.

And again, you can build the channel to be a top 25, 30 or 20 channel in America.

Its entitlement in terms of economics are quite significant.

As Brad said, it's really, on the advertising side, meaningful.

Thanks very much, guys.

Thank you.

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

Thanks, I have one for Brad and one for David.

Brad, just on Oprah, just wondering if you could update us on the launch cost that you've spent to date on the Oprah network and then how much Discovery currently plans to spend.

And then I have one for David.

Sure, Anthony.

To date, we've spent around $75 million since inception on investment in the Oprah Winfrey network.

The contract we currently have has a maximum of $1 million commitment that we're obligated to.

We are in the process of revising that contract.

It likely will go up, and so the total cost we have not disclosed yet, but since the network will be launching later than originally scheduled, the cost to launch the network, it will be higher than we had originally contemplated.

Peter's has been spending a lot of time with Oprah and the whole team.

Why don't we use this as a moment to talk about where we are with that, Peter?

So far, OWN very strong, when you look at where we are on advertising front.

Very solid CPNs, good absolute volume on an ad front.

The network, just by way of example, just continues to show the strength of the Oprah brand.

When you look at oprah.com, on the last month she's kind of quadrupled her page views and more than doubled her unique viewers, visitors and visits.

Based on the back of the show that hasn't even launched yet, based on the back of your own show.

And it just goes to show you the power of the brand.

They're effectively spending in investing in programming.

As we have a little more time for launch, we're able to have a solid library of programming, and we anticipate a very effective launch.

So launch is in January, but then when can she appear on her own show?

Is that in the spring or the fall?

She cannot do a talk show until the fall of next year, but she'll be on the network via a few once a week shows such as Master Class.

She'll be on the network with a Behind the Scenes show, which as she would categorize it, it's her first and possibly only reality show.

And it will focus on the behind the scenes production of her last year doing the Oprah Winfrey Show, and she'll be highly prevalent throughout all the interstitials.

In fact, she shot some yesterday, she was very excited about it.

She's deeply involved in every aspect of the network, and truly does work her magic on a daily basis.

Thanks, Peter.

Thank you, and then just one bigger picture for David.

The question would be a pattern that we've seen in the past over time for media companies like yours that I would say are in growth mode, is that -- at some point the comps do start getting tougher, as I think that they do for Discovery coming up here.

And even if it's just because of law of large numbers, organic growth gets harder and harder to achieve, and sometimes what happens is media companies really start looking more actively and intensively at acquisitions in order to satisfy that need for growth.

So, just a long winded way of asking the question of, could you update us or your acquisition philosophy and if you're looking for acquisitions right now?

Okay, thanks.

First, gestationally, we still have a lot of growth left.

Because if you look at us, we're a fantastic platform company with 13 channels here in the US and on average, four or five channels in the 180 countries.

But we're not a great content company yet, and that's our journey.

And so trying to make Animal Planet better, ID, Science, OWN, grow TLC and Discovery, launch TLC around the world, build stronger and better channels, you see that in terms of our -- how we're doing a better job investing in content and the quality of the creative leadership, whether it's bringing Peter Liguori in or Clark Bunting or Eileen or Marjorie or Henry.

We're really in this mode of, we have several years where if we do a good job building our brands and building our content, we have great real estate with great channel position.

We should be able to -- it's in our hands to grow.

So, we don't feel in any rush or any need to pick up additional assets to have sustainable growth.

Having said that, we're performing well.

We have a great domestic cable factory, and we're one of the few media companies that actually does business around the world, we're really in 180 countries.

As you go around the world, we're not in joint ventures.

We have a long leadership that understands the culture, the language, and so we are primed as a company that can take advantage of that infrastructure.

So we are looking opportunistically, and we have been.

We haven't found anything yet.

We're only going to make acquisitions if we think they can help us grow faster.

And so we'll look domestically and internationally, but our focus will be to grow with what we have.

And if we find something that makes sense and we can grow faster, we'll buy it.

Thank you.

Thank you.

Your next question comes from the line of Ben Swinburne, Morgan Stanley.

Morning, guys.

I have a question for David and one follow-up.

Actually about -- it's's about Nielsen data, and I'm curious to what your view is.

When you look at top 40 cable nets, the Nielsen rated networks, maybe a little bigger than that number, but the major cable nets seem to be showing ratings that are flat to down, if you look in the last six to 12 months whereas in the years prior, they were clearly growing, taking share.

They're still taking share, but the growth rate seems to have rolled over, and I'm just curious, when look at that data and you look at Nielsen's overall TV viewing data, that's going up.

So, I guess the question, David is do you think that's just noise in the data, or do you think we're seeing the long tail of cable, which you guys definitely participate in, gain share that's just not being picked up in those ratings numbers yet?

Peter's an expert on this.

I will just give you my ten seconds.

Sure.

People are spending more time watching TV.

I think that gives opportunity to -- that people are starting to sample more channels, and if you can put something strong on the air like an ID, that you have a chance to grow.

But Peter is spending a lot of time with Nielsen, and he's also really focused on growing our content.

Let's look at it two ways.

First, we can all debate the accuracy of Nielsen, but it is the currency that we live with.

But we just look at our own channels, and when I go through the board and say that we were off on Discovery 17% in July and down just a teeny bit in the quarter, but looking at the strength of Animal Planet where we had seven straight quarters of growth, ID best second quarter ever, Science best quarter ever.

We're noticing growth.

We are noticing it with our ability to invest, we can grow our share and our audience.

As to those (inaudible), look, when you look at what's is going on in cable, there -- it's basically there are now so many channels out there that you're certainly going to see certain plateaus and certain small valleys and certain peaks.

It's our goal to make sure that we're hitting more peaks and avoiding the valleys, and I just think you're seeing a natural state of where the networks are investing to make sure that they have summer viewership and continued originals throughout the year and cable's continued aggressive spending.

I don't really think there's significant changes in viewing habits by any means.

What is going to go on down the road?

There are going to be more distribution sources for content.

And for us as a company, as long as we're creating great content, we're going to be able to figure out what is the optimal way for us to monetize that content.

So we're in that business to win it.

And Peter, does it -- how are you thinking about Nielsen's move to include online viewing, I think it's December, but later this year.

Is that something that changes how Discovery thinks about putting content online?

I think you guys have been pretty cautious with long form stuff.

I'm just curious if that changes at all.

No, it doesn't change it.

Again, it's our philosophy to take a look at the various modelings and determine what is the optimal way for us to monetize our content and work with our advertising and affiliate partners on it.

Do I think it's a smart move on Nielsen part?

Absolutely.

Television viewing is being spread across distribution platforms and frankly, I think Nielsen is feeling the heat of others looking into this space on how they could effectively monitor and measure what's going online.

But again, as long as we are producing terrific content, we have ever confidence that we've going to be at the forefront in terms of monetizing that content in an increasing digital world.

And if I could just squeeze one more in for Brad on the buyback, Brad, remind where you and David and the manage -- and the board think leverage should be for Discovery.

I realize that's a dynamic position, not necessarily on a given day, but what's the right leverage level for this business, and do you have any timeframe, or does the board have any timeframe for how long before you actually would achieve that?

The way to answer the leverage question is we have a ratings target or a stability of our current ratings, and based on the various rating agencies, that generally means three times or less leverage, and we're about 2.3 times leveraged today under the current calculations.

So, we have room within our leverage parameters.

And the way we think about it, whether it's timing or absolute leverages, our goal, as we mentioned, is number one, to further our business by making good strategic investments.

So, however, the pace will be dictated by what our opportunities are about there, and we are consistently looking for ways to expand our business domestically and internationally.

The pace will also be impacted by what's going on in the market, and so we'd much rather, just like any other investor, buy shares when the price is low, (inaudible) price, it may be at its 52 week high.

And so those are the things that would affect the pace, and that's kind of how we think about it.

So, you've done a terrible job keeping the stock low.

But the market seems to consistently provide opportunities to (inaudible).

So that leverage calc is then on a gross -- is that a gross trailing 12 month EBITDA number?

Is that the way they look at it?

That is how the rating agencies look at it.

Okay, great.

Thanks a lot.

Thank you.

Your next question come from the line of Imran Khan, JPMorgan.

Yes, thank you very much for taking my questions.

A couple of questions regarding margins.

So, your domestic adjusted OBIDA margins came in at 61%.

I was trying to get a better sense, if you could give us some color, how should we think structurally long term, where can margin be?

Maybe the other way ask the question is, Discovery and TLC has significantly higher margins than military and ID.

And David, in the past, you talked about how international margins were lower than the domestic margins because of some structural result.

Can you give us some -- as we think about the business long term and obviously, you have a great momentum on that side, how should we think international margins, like where can it go?

And then finally, in terms of share buyback, do you have any preference on which class of shares you will be buying?

Thank you.

Imran, it's Brad.

I'll take the first part about the domestic margins, and I'll turn it over to David on the international.

With domestic margins, it is 61%.

The growth in those margins will be dictated by revenue growth rather than any absolute reduction in costs, and we've been running around a 70% incremental margin as revenues come in.

So, as long as the margin is below 70%, the margins will keep growing from the 61%.

At any given quarter, we may be making investments in marketing.

We -- our incremental margins may go down if we decide to invest heavily in a certain network, and we think over the long term, they will be much more beneficial.

So, what I would say is that 70% incremental margin, well, that's been our Company average this year.

I think it's a good long term number, but we make investment decisions for what we think are the right long term things to do.

So, that's the best way to think about it.

Before I turn over for the international markets to David, with regard to which class of shares we target, I think we're going to think about it, what provides us with the best economics in terms of how we deploy the capital.

And that's how I would ask you to think about it.

On the international side, we're about 43%.

We're really different from most media companies, because a lot of our content just uniquely travels well.

Our best content on Discovery works all around the world, and so when we invest in content, we're not investing on a domestic rental model, we actually own the content and we can push it all around the world.

The same is true for Science and for Animal Planet and to some extent, for ID.

And so when we look at our opportunity, it's never going to be like the US, because the US is -- we have one infrastructure and it serves this huge market here.

But we operate out of the UK and out of Singapore, and we are affecting some more efficiencies.

We are looking much more to have a global approach to marketing, a global approach to programming.

We just -- Mark Hollinger, who took over about six months ago has put in a new head of global content, Louise Luis Silberwasser, who built our Latin America content business.

And some of those efficiencies, I think will play strongly for us.

And as Brad said, we're holding our costs pretty effectively in place, so when you see the advertising growth that we're seeing now, that will lend itself to stronger margins.

But I don't see -- we're not going to be -- there won't be a approach in the US, but we think they have some good running room ahead of us to continue to build on.

Got it, thank you very much.

Thank you.

Your next question comes from the line of Richard Greenfield.

Hi, two questions, one just housekeeping question.

Brad, last quarter, I think you mentioned that free cash flow was going to be between 700 and 800.

The only thing that has changed, because you knew about taxes and stock comp, I assume is just the one-time debt refinance cost.

So, effectively, is free cash flow guidance this year really going up from 700 to 800 to effective 788 to 938?

Are we thinking about that right?

And then two for David, just as you think about TLC, how do you think about the opportunities to leverage the program globally?

It seems like some of the things you are doing are rebrands overseas.

Some of them are new channel launches.

How much of the content -- you've got things like DC Cupcakes now on the network, how much of that translates globally?

And just talk about how you think about the programming strategy globally for TLC?

Thanks.

Hello, Rich, with regard to free cash flow, if the current quarter, we had $138 million related to debt cost.

We get a tax benefit in the third quarter, so some of that's going to be favorable to us.

So what I would say is our tax cost came down from the year from where we had estimated by about $65 million, and that was more than offset by the more than $138 million of cash out the door before (inaudible) extinguishment of debt in the swaps.

So, to your example, like-like, yes, the free cash flow guidance, all things being equal, would be around $75 million higher, not quite the number that you threw out there.

And to answer your question on global content using TLC by way of example, the goal is this.

How can we create a flagship woman's network worldwide, recognizing the particular vagrancies of market by market taste?

So what we're able to do is lay a foundation of strong female programming that we migrate from domestic TLC overseas while keeping some money available to the international markets for internationally produced shows that are in fact going to cater to the taste of those markets.

The ability to generate revenue, via the domestic foundation, the domestic content foundation, allows us that sort of flexibility flexibility.

Not only are the changes that David outlined in terms of having Louise be firmly involved in what we're doing domestically, but being someone who will be in charge of international content.

We have also added Lee Bartlett to our team.

Lee has tremendous experience with international producers and international and worldwide deals given his experience at ITV.

He's going to help us tremendously in terms of relationships and in terms of efficiency with us cutting deals with international producers and the ability to have a global perspective on those deals.

So, we're excited about the opportunities coming up, not only for the creative, but the way economically we're going to approach those deals.

So, when you look Discovery Channel today, how much of its programming gets used overseas or at leverage globally versus how do you think, would that be a much smaller number for TLC, or will that move towards the Discovery numbers over time?

It will be slightly smaller than Discovery, just again, I think you rightly pointed out.

The show like DC Cupcakes might in fact be challenged in specific markets --

Discovery is 70% to 80%, and it will be leaned more toward 80%.

We're doing more and more globally that we're finding effectiveness.

So you have Science, Discovery, and Animal Planet that we really have this unique model of being able to travel super efficiently.

And then you have TLC, and as Peter said, if we can get to a point where 40% to 50% of that is content that Eileen's team is developing here in the US that we can take around the world, then Peter will be working with all of our regions around the world to figure out how to enhance locally those women's channel.

One of the reasons that this is important for us is we have found here in the US, when we have a strong Discovery and a strong TLC, we have a strong female and a strong male channel, both top five, top four networks.

That gives great strength in the advertising community because we see all the advertisers, and it give us strength on the distribution side.

We saw that internationally in Latin America where we have, Discovery is the number one non-fiction male channel, but we also have Discovery Kids, which is the number one channel for Kids six and under.

But it is also the number one women's network from 6:00 in the morning until to 6:00 at night, and we have home and health that's a top 15 network for women down there.

And so when we go out the advertising community by having a strong Discovery and some female -- really strong female product, it helps us and stabilizes us.

So, that's one of the reasons why Peter is working so hard to build this female channel for us.

And it is going to be harder.

We're not going to be able to take all of it around, but I think it will be worth it if we can make it work.

Thanks.

Operator, we have time for one more question.

Thank you.

Your next question comes from the line of Tuna Amobi, Standard Poors Equity.

Great, thank you so much for squeezing me in.

So, I have a few as well.

On the digital revenue side I think I haven't really heard much about the initiatives there.

I know our doing quite a bit, but given your content, I believe you guys are as well positioned as anyone out there in terms of actually monetizing the content.

So, I wanted to get a sense of what your perspective, David, is with regard to digital.

I know you're participating in TV everywhere.

When do you think all the initiatives that you're pursuing on the digital front will begin to scale?

Is it my impression also that because maybe your content plays better on the long format, is that why perhaps you've not been out there maybe doing that as much as -- with some the short form content that some of your peers are doing?

So any color around digital in terms of the revenues, scalability, et cetera would be helpful.

And just a question on the buyback,the $1 billion, obviously, that's a step in the right direction.

But it would appear to me, given the free cash flow detriment that was talked about, notwithstanding, are you guys as positioned or better positioned to do a much more aggressive buyback?

So, wanted to get a sense why you $1 billion was a right amount, and specifically, also on the dividend side, I wanted to see if dividend perhaps could have been the a way to go.

Why did you feel that buyback was a better option as opposed to dividend?

And essentially, why did you think $1 billion was a good place to start.

Thanks for taking the question.

Let me just start off with the digital.

We have -- this past month, we had about 40 million uniques.

We have a lot of content that we are pushing in short form on the web through How Stuff Works, through discovery.com, tlc.com.

And so we've been pretty aggressive with that, and we're having a better year.

The advertising on the digital side has picked up.

We're sold out on the video side.

Having said all that, we're still not making money online, but it's important for us, we feel, to have our content on every platform so that we can grow market share.

But we are very stingy about putting long form content on the web.

We're lucky in that we have all of this non-fiction content that we own.

So, we've digitized it, we move it in short form, we have it on YouTube, we're very aggressive with Facebook, but we haven't been really pushing hard about -- to get our content in long form, because we think that there isn't a great model for that yet.

On the TV Everywhere, it's a good first step.

We need, as content business, to try and figure out how to create a model for people to consume content in ways that make it effective for us to produce it and something that people want to view.

And I think TV Everywhere is a good first step, but it's really -- it's early stage.

We're participating, but it's very small samples, and we're waiting to see how it works.

It's the right direction.

I think for us, one of the things that we're playing around with now that we have some excitement about is social media.

We are a non-fiction Company, we have real characters, and we're spending a lot of time with Twitter, with Facebook, whether it's Kate or whether it's the Cake Boss or the Captains or Bare Grills, we have real people that people admire, and it gives us a chance to use new media as a place to reach out to people.

And so we are kind of pushing hard to see if we can use social media as a way to reach out to fan bases and then bring them back into being lovers of our brand.

And with your question with regard to the buyback (inaudible), the $1 billion program is an initial program.

And so it's consistent with my prior remarks, which is we want to be disciplined when we look at our strategic opportunities, we want to maintain our financial flexibility.

And so we will look at things that hopefully will -- we will deploy capital in those areas first as they will be very beneficial to shareholders if we do effectuate anything.

To the extent that we don't, this is a very good mechanism to deploy our capital back to our shareholders.

With regard to other forms or other mechanisms like a dividend, it doesn't roll out a dividend, but while we're still striving to maintain financial flexibility, the buyback is the best mechanism to do that.

That's very nice to know.

And the buyback, are you willing to put a time in on that?

Say next year completion, or you just want to leave it open right now?

It really is governed somewhat by what else we are looking at strategically, and --

Okay, thank you so much.

-- that's the best way to think about it.

Thank you.

That concludes our call, everyone.

Thank you for joining us, we appreciate it.

Thank you for your participation in today's conference.

This concludes the presentation, and you may now disconnect.

Have a great day.