華納兄弟探索 (WBD) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Discovery Communications Incorporated earnings conference call.

My name is Ann and I will be your coordinator for today's call.

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

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

(Operator Instructions) We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Mr.

Craig Felenstein, Senior Vice President of Investor Relations.

Please proceed, sir.

Thank you, Ann.

Good afternoon, everyone, and welcome to Discovery Communications fourth quarter 2011 earnings call.

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

Hopefully you've 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 up to your questions.

We urge you to please keep to one or two questions so we can accommodate as many folks as possible.

Before we start, I'd 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, 2010, and our subsequent filings with the US Securities and Exchange Commission.

With that, I'll turn it over to David.

Thanks, Craig.

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

2011 was another fantastic year for Discovery.

The Company delivered double-digit revenue and OIBDA growth, marking our fourth consecutive year of double-digit earnings growth since becoming a public company in 2008.

With the backdrop of global uncertainty, rapid technological advances, and increasing competition across platforms, Discovery's ability to grow consistently over that time period underscores the sturdiness of our business model, the opportunity present across our global distribution platform, and the universal appeal and long shelf life of our nonfiction content.

Discovery's 2011 results demonstrate our continued focus on creating high-quality programming and then leveraging that content around the globe, as well as across a growing number of digital and consumer platforms.

We did benefit from the continued strength of the ad market, both domestically and internationally.

But more importantly, the double-digit growth and the sustained operating momentum speaks to our ability to take advantage of the opportunities provided by our unique infrastructure.

As well as from an evolving media landscape.

Before we take your questions, let me take a few minutes to highlight some of the initiatives that helped drive our success during this past year.

And discuss some of the opportunities we expect to leverage in order to sustain this momentum in 2012 and beyond.

Around the world, demand for high-quality content has never been higher.

Consumers are watching more television than ever before across traditional and developing distribution channels.

Discovery's sustained strategy of building brands and capturing market share by investing on the screen to produce the best creative nonfiction content, with great storytelling and compelling characters, continues to pay dividends.

You've heard me say in the past that while we are a great platform Company, with 14 networks domestically, and between 2 and 13 channels in over 210 countries globally, we are on a journey to become a great content Company as well.

In 2011, we took significant strides toward this goal by strengthening existing networks, extending popular brands around the world, investing in new brands to take advantage of our unique reach, and tapping into new opportunities to further monetize our content library.

Discovery Channel is the most widely distributed network in the world.

The largest contributor of our overall revenues and cash flow.

Approximately 70% of what we create on Discovery in the US gets used in some capacity around the globe.

With that sort of global brand strength, keeping Discovery's domestic content pipeline strong and fresh has been a top priority.

Over the past few years, Discovery's viewership was led primarily by tried-and-true hits, Dirty Jobs, MythBusters, Man vs.

Wild, and Deadliest Catch.

While the sustained success of these shows speaks to the durability of our content, we have been extremely focused on developing new tent poles to engage audiences and drive viewership growth.

In 2011 we added to our stable of big hits with several returning series delivering significant ratings gains versus a year ago, including Flying Wild Alaska, Sons of Guns, and most notably, Gold Rush.

Gold Rush grew its viewership 35% versus its first season, and is the number one show in television on Friday nights, beating all other cable networks and broadcast networks.

Success begets success, as we leverage the larger audiences on these returning series to drive several new series, including Moonshiners.

The net result was that fourth quarter viewership at Discovery was up 17%.

That momentum has continued into 2012 with viewership in January up versus a year ago.

Helping drive the success last month was another new series launched on the back of Gold Rush, Bering Sea Gold, which delivered the highest-rated premier of any series in the history of Discovery Channel.

So, with a bigger stable of returning hits, a great slate of new series, and several blue-chip specials, including Frozen Planet, the seven-part documentary series which is four-plus years in the making, and the successor to Planet Earth.

It will debut in March, and it drew a bigger audience than Planet Earth in the UK when it ran two months ago.

Discovery is truly poised to build upon its success this past year.

We also developed additional tent poles at our other fully distributed networks.

TLC delivered its highest viewership among women 25 to 54 in seven years.

Despite the absence of Sarah Palin's Alaska which aired in the fourth quarter a year ago.

TLC has developed several young series to add to its stable of 25 established hits.

Including first-year series Long Island Medium.

As well as returning series, Sister Wives and Next Great Baker, each of which significantly grew its viewership this past season.

Animal Planet, while down in 2011 from its strong performance in 2010, also developed several new hits this past year to complement the continuing success of River Monsters and Whale Wars, and has a deeper stable than ever before heading into 2012.

Their resurgence is already taking place with the return of Finding Bigfoot, along with the premiere of Gator Boys, helping to drive January viewership up 18%.

Our strongest initiative domestically continues to be the record growth at Investigation Discovery, where we are capitalizing on the opportunity to build this brand and own a popular programming category.

ID remains the fastest-growing network in cable.

It's hard to keep calling this an emerging network as it has certainly emerged.

ID was a top 10 network for women 25 to 54 in January.

Popular series such as Stolen Voices Buried Secrets, On the Case with Paula Zahn, and Stalked drove viewership this past year up over 40% in its key demos, following over 60% growth in 2010.

It's growth is broad-based, with every night of the week delivering well over 20% growth.

People not only tune into ID, but they keep watching.

It's the number one channel in all of television for length of view.

Making it an even more attractive advertising platform.

We're really capitalizing on its success.

ID was the largest driver of our domestic ad growth this past year and with ratings continuing to rise, we're focused on further driving the CPMs and volume of this network in 2012.

We're also delivering larger audiences at several of our other younger networks, including Science and Military, both of which grew viewership this past year.

We took further steps to create additional value for advertisers by rebranding FitTV, Discovery Fit & Health, and relaunching HD Theater as Velocity.

Both of which deliver key advertiser demographics and are attracting larger advertising dollars.

The net result of our content efforts was market share growth in both viewership and advertising dollars.

Viewership increased 3% across our portfolio in 2011.

This performance, combined with pricing strength, as well as increased demand, helped us to drive mid teen ad growth -- excluding one-time items.

This growth, which built upon the 13% growth we delivered in 2010, speaks not only to the strong ad market, but to the breadth and depth of the brands we have built, as well as the strategy that our best-in-class ad team formulated to maximize the market and viewership opportunities.

Looking out to 2012 on the domestic ad front, we are off to a great start.

While it's still early, with a strong up-front under our belts, a strong and steady scatter pricing environment, cancellations in line with a year ago, and meaningful momentum across our portfolio, we are optimistic that 2012 will be another year of solid ad growth domestically.

Advertising was not the only area where we leveraged the quality and breadth of our content in 2011.

We were able to generate significant additional value from tapping into the existing library we built over the last 27 years.

As I said last quarter when we announced our Netflix deal, this is a great time to be in the content business.

People are watching more TV over multiple platforms.

Because we own the majority of our programming, Discovery is particularly well-positioned to take advantage of these opportunities.

We've said all along that Discovery is platform agnostic, with regards to distributing our content.

In 2012, we anticipate additional opportunities to exploit the growing value of our content library.

We also took several steps this year to further build our joint ventures, establishing real building blocks which should help drive viewership in 2012.

OWN launched in January and the network's focus this year was on establishing a foundation for Oprah's arrival on the network.

The network learned a great deal about its audience.

Developing a wide array of new content and formats, including several series which will be returning this year, such as Our America with Lisa Ling and Sweetie Pie's.

Oprah is now fully engaged with her creative leadership team.

OWN is off to a nice start in 2012 with their hit show Oprah's Next Chapter setting viewing records for the network when it premiered.

Oprah will be featured in additional formats throughout the year.

So, with sustained support from advertisers and affiliates, and with multiple building blocks in place, we're excited to grow this network in 2012.

The Hub also made significant strides during 2011, building its audience every quarter.

In the fourth quarter, our first with apples-to-apples comparisons, The Hub posted 31% gains in total day among kids 2 to 11.

With a great slate of both new and returning series set for 2012, it's poised to build its audience in the year ahead.

We are excited about the momentum across our US network portfolio, and the prospects for driving it forward in 2012.

But the true differentiator for us is the fact that our international business in 2011 delivered $645 million in OIBDA, up from $250 million four years ago.

Making international more than one-third of our business today.

We have significant opportunities for sustainable growth across our international business, given its deep and wide geographic footprint.

We believe we have the best international media business, period.

There remains strong organic growth in paid TV globally, which this year helped drive affiliate growth of 11% in local currency terms.

We fully expect paid TV growth to continue moving forward given that paid TV penetration is low worldwide.

Including below 40% across Latin America, as well as Central and Eastern Europe.

However, that is only part of the opportunity.

Increased penetration not only drives affiliate revenues, but also provides a more attractive platform for advertisers.

We have taken numerous steps to bolster our content and further drive advertising growth.

We said 18 months ago we wanted to build a second global flagship in the female demo to complement Discovery, much like we have here in the United States.

We have done just that with the swift and effective rollout of TLC.

Today, TLC is in more than 115 million homes in over 150 markets, making TLC the most distributed female cable brand in the world.

The response from advertisers and viewers alike has exceeded our expectations.

In many markets like Poland, Norway, Denmark, Sweden, we have a top network for women already, and the business is making money today.

TLC was not our only new initiative this past year.

We also launched 20 new feeds, including several free-to-air networks to capitalize on our market position and platform strength.

Led by Real Time in Italy, which has become a top 10 network for women, in under a year our free-to-air revenues increased over 65% this year, on top of 60% growth a year ago.

So, we are finding additional avenues of growth even in more competitive markets.

Overall, our new initiatives have already created significant value, contributing nearly half of our 18% ad growth internationally this past year.

Our ad sales internationally now exceed $0.5 billion, and we will continue to be opportunistic in taking advantage of the unmatched platform we have built.

It's too early to predict what will happen in 2012, but with penetration of pay TV continuing, advertising continuing to look stable and growing.

A stronger content position from domestic success and international investment, we're poised to build upon our international growth in the year ahead.

As we look to further explore the domestic and international potential inherent in our platform, we remain focused on being diligent stewards of our already strong balance sheet.

We generated over $1 billion of free cash flow in 2011, and delivering free cash flow remains a priority.

We will only invest additional capital in those opportunities where we see significant upside.

We'll continue to invest in content, but will do so incrementally, such as we have done with ID and our rollout of TLC globally.

At the same time, we will remain diligent in keeping SG&A costs stable, so we can continue to focus our spending on what goes on the screen.

While investing in our existing content and businesses remains our top priority, we also continue to explore additional ways to deploy capital.

Either through strategic acquisitions or through returning capital to our shareholders.

In 2011, we returned just under $1 billion in capital to our shareholders.

With nearly $900 million still available under our buyback program, we will continue to return capital to shareholders aggressively if it is the best use of our balance sheet.

Before I finish up, I'd be remiss if I did not acknowledge that this is Brad's last earnings call with Discovery.

Our new CFO, Andy Warren, will be joining us next month.

I look forward to working with Andy to further drive our business and exploit the growth opportunities that remain ahead for Discovery.

Brad has been a great financial and strategic partner to me and the whole team here at Discovery.

Over the last three years, he built enormous value for us.

He's a brilliant guy.

I will miss him personally as will the whole leadership team.

So with that -- he's going to be with us for another 60 days or so -- but I'm going to pass it on to my good friend, Brad Singer.

Thanks, David.

Discovery continued to produce solid operating results during the fourth quarter, as a favorable operating environment enabled us to enjoy double-digit global ad growth and strong international subscriber gains.

Total fourth quarter revenues increased 11% compared to the prior year.

Led by 11% domestic revenue growth and 13% international growth, excluding the unfavorable foreign exchange impacts.

Our total operating expenses were greater than previously anticipated for the quarter.

The 12% increase included $20 million of higher content cost from changes in amortization rates at a few networks, based on our annual review of airing patterns, and increased impairment charges.

$7 million of unfavorable FX impact due to the significant currency moves in the quarter, which partially reversed in January.

Approximately $10 million of accelerating investments in certain feature initiatives.

Excluding the higher content impairment charges and adverse foreign exchange impact, expenses increased 9%.

As a result of our ability to generate strong global revenue growth, we increased our adjusted OIBDA 8% to $498 million compared to the prior year.

Excluding the impact of foreign currency and the deconsolidation of Discovery Health, adjusted OIBDA increased 12%.

Net income increased 71% to $337 million, reflecting our improved operating performance and lower booked taxes due to the recognition of $112 million of foreign tax credits.

Offset by $20 million in intangible impairment charges related to our commerce operations.

Our free cash flow increased to $324 million in the fourth quarter, as our solid operating performance was complemented by lower tax payments and favorable working capital.

Looking back on our full year 2011 performance, our ability to continue to consistently grow revenue, adjusted OIBDA, and free cash flow, demonstrates the strength and diversity of our operations.

Our ability to execute in a competitive global environment.

Our team produced 12% revenue and 13% adjusted OIBDA growth.

We also generated 21% growth in free cash flow, normalizing for the impact of prior year debt refinancing and timing of tax payments.

While continued to invest in our networks and our operations worldwide.

Turning to the operating units.

Our US operations continued to perform well during the fourth quarter.

Domestic revenues grew 11% with 13% ad revenue growth complemented by 7% domestic affiliate fee growth.

Excluding the impact of Discovery Health and positive nonrecurring items, our ad revenue grew 17% and affiliate revenue 8%.

Robust ad growth due to the strong performance of our domestic ad sales team, and a favorable pricing and demand environment.

For the year, our US sales team again delivered double-digit growth, increasing ad sales 14%, excluding the impact of Discovery Health and nonrecurring items.

This was on top of the 13% increase we delivered in 2010.

Our distribution teams equally distinguished themselves, with 12% sales growth for the year, including the expanded digital licensing agreement.

The attractive current market conditions continued to exist in the first quarter.

We anticipate low double-digit ad growth compared to the prior year which grew 15% in the first quarter 2011, adjusted for the impact of Discovery Health.

Our domestic operating expenses increased 10% in the fourth quarter due to higher levels of content investment, including $16 million of increased content impairment and accelerated amortization.

SG&A expenses grew low single-digits compared to the prior year.

For the year, our US domestic team's strong revenue growth was partially offset by the increased investment in content, producing a 10% adjusted OIBDA increase.

Turning to our international operations, revenues increased 13%, excluding 1% due to unfavorable exchange rates, led by 19% ad and 11% affiliate revenue growth, respectively.

International affiliate revenue was led by strong global subscriber growth, particularly in Latin America.

With our most fully distributed network, Discovery Channel, growing subscribers 10% on a global basis.

Our 19% international advertising revenue growth was led by Western Europe, and benefited significantly from the rollout and continued strong performance of Real Time and TLC.

We also enjoyed significant growth in CEMEA and Latin America.

Excluding the unfavorable currency impact to our expenses, our operating expenses were up nearly 13%.

Primarily driven by increased content investment, and 3% related to the impairment of certain programming assets.

Along with incremental investment in certain growth initiatives.

Excluding the foreign currency impact our international operations increased adjusted OIBDA 15%.

The fourth quarter capped the international team's terrific performance throughout 2011.

With another year of double-digit revenue, and adjusted OIBDA growth.

Our 2011 total revenues grew 13% and adjusted OIBDA grew 18%.

Following 22% growth in 2010, excluding the impact of foreign exchange.

As we look forward to 2012, we are encouraged by the fact that the beneficial pricing and ad trends we have experienced in 2011 are continuing in 2012 in the US and for the majority of the markets in our international operations.

For 2012, we are forecasting revenue in the range of $4.45 billion to $4.6 billion.

We anticipate adjusted OIBDA of $2.05 billion to $2.15 billion, primarily driven by our revenue growth.

Operating expenses are expected to increase low to mid single-digits in 2012, driven by higher content amortization, as well as continued investment in growth initiatives.

Based on the timing of our investment initiatives, we anticipate expense growth to be more weighted in the first half of 2012.

For comparative purposes, the midpoint of our guidance, excluding the recognition of the large digital distribution agreement in 2011 and 2012, implies revenue growth of 9% and adjusted OIBDA growth of 12%.

Our net income is expected to be between $975 million and $1.075 billion.

As our anticipated strong operating performance will be offset by a more normalized tax rate.

Please note that 2011 included a gain of $129 million in the first quarter associated with OWN, as well as $112 million tax credit recognition in the fourth.

We anticipate generating free cash flow in 2012 at approximately the same levels as 2011.

While we expect to significantly improve our cash from operations due to the growth in our revenue.

Our increased operating performance is anticipated to be offset by higher cash taxes or approximately $200 million due to the expiration of Section 181 domestic content production deduction.

The Section 181 impact is a combination of the elimination of the current year deduction, and the 2011 recapture prior year accelerated amortization.

We also incorporated into our free cash flow guidance the beneficial impact to our working capital of the long-term incentive compensation payments that will likely be at least $75 million less than 2011.

As well as the incremental working capital due to our growing operations.

With our sturdy financial position, and strong operating performance, we invested almost $1.2 billion since the beginning of the year in strategic initiatives and thoughtfully returning capital to our shareholders.

We returned almost $1 billion to our shareholders, repurchasing 27 million shares of our Class C shares.

Since the initiation of our share repurchase plan in August 2010, we have effectively repurchased 44 million shares, reducing our outstanding share count by 10%.

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

To the extent we have not found opportunities with attractive financial returns, we will likely accelerate utilizing the cash on our balance sheet, as well as the cash we generate from operations to repurchase shares.

In closing, I hope everyone tunes in to Discovery for our stunning series, Frozen Planet.

As well as the return of Long Island Medium on TLC, and Tank on Animal Planet, and Deadly Sins on ID.

Before we take your questions, I want to thank all the terrific people at Discovery for making a great Company to work in.

A special thanks to David and our Board for giving me the opportunity to be part of Discovery.

Since this is my last earnings call, I just want to thank all of our shareholders and analysts who have helped make being a public Company CFO enjoyable.

With that, David and I will happily take your questions.

(Operator Instructions) Michael Nathanson, Nomura.

Brad, congratulations and all the best to you.

Let me ask you guys on advertising, because I think it's fair to say that many of your peers so far have come in below what we thought on advertising domestically.

And it looks like soft scatter was one of the reasons why.

So can we just stop and ask some questions on advertising?

One question would be, did you sell more this upfront versus last upfront?

And was that one of the reasons why this quarter was better?

Thanks, Michael.

We did sell more in the upfront than we have in the past.

But we also moved early on scatter.

And we found that scatter, really the pricing was quite strong throughout the quarter, remained strong.

But a lot of the momentum, the fact Joe and his team were able to get 17% growth, is our networks were strong.

Discovery's really back with a lot of momentum.

And we hit all demographics with Discovery male, TLC female, a lot of our other networks working.

We also built some of our new networks this year, not just ID but Fit & Health and Velocity and Science, all having a little bit of a stronger profile on the advertising side.

And not only do we hit all demos, but ID is enormously strong in daytime.

So we tend to really lean on prime time.

But ID provided a great vehicle for us as a top network in America in daytime.

And so it's all of that, together with Joe Abruzzese, I think, being the master of managing inventory and motivating a great sales team.

And so it was a great result for the year and a very strong performance in maximizing our rating points in the quarter.

Okay.

Can I ask you just two follow-ups?

One was, how much did ID contribute as a percentage of growth?

In the past it's been about 25% to 30% or so of growth in the quarter.

Is that a fair assessment this quarter?

We don't speak to specifics.

But with ID now in 80 million homes and having it be a top 10 network, it's going to take a while for us to get the CPMs where we think they should become.

But we have a team really focused on that and it is becoming a bigger contributor.

And we expect over the next two to three years, as we get paid commensurate with the value that we're providing, that it'll be an even bigger growth provider.

Michael, to put it numerically, about two-thirds of the growth was price and volume to the market, and about one-third was audience.

And last, what about the NBA strike?

I know you guys don't have any NBA, so do you see money may have been coming from NBA targeted dollars coming to you guys?

It's hard to tag any of that as being a benefit.

I'm sure generically it was helpful, that that male demo was available.

But we can't draw any direct lines as to whether that was helpful or how much.

Okay.

Thanks.

Spencer Wang, Credit Suisse.

Since, Brad, it's your last call, I'll focus my questions for you.

I was wondering if, Brad, you could give us some more color on what's prompting the change in the amortization rates?

Are you guys effectively shortening the amor life for certain programmings?

Any color there would be helpful.

And then what are you assuming in your revenue guidance for 2012 with respect to FX and any incremental visual deals?

Thanks.

Sure.

With regard to amortization rates, every year we do once a year a study of our airing patterns to see what's the appropriate rate to amortize.

And so for the big fully-distributed networks that generally hasn't changed.

We do 50% the first year, 25% the second, 15% the third, and 10% the fourth.

The younger networks, because they are younger, generally have some change.

So we had about a $10 million adjustment to several of the younger networks, and it reflects the full-year amortization that you take that one quarter you do the study.

And that's what happened.

It's usually been de minimis.

This year it happened to be about $10 million.

With regard to FX, it has about almost no impact.

Over the course of 2012, it will have more of an impact in the first half of the year and less in the second half, is how it will run through based on current rates.

And with regard to digital distribution deals, our guidance only incorporates what we have signed today and announced.

It doesn't have anything that we are working on or have not announced yet.

Great.

Thanks a lot, Brad.

Ben Swinburne, Morgan Stanley.

Two questions.

One, and maybe you mentioned this in the prepared remarks, but if you had any guidance for your cash investment in programming in '12, roughly growth rates versus '11, that would be helpful.

And then, David, as you look to TV Everywhere, I'm wondering if you think there's an opportunity to potentially open up some contracts earlier than they were normally expiring, given we're seeing such an increased demand from distributors to put the stuff on, on an authenticated platform?

I know your contracts will start to renew next year and build over the next couple of years.

But do you think there's an opportunity to start doing some deals earlier to help generate incremental revenue and also give distributors access to more programming across more platforms?

I'll take the first one, Ben, on just the cash investment.

What our guidance would imply is a high single digits cash investment in programming for next year.

On the TV Everywhere, Ben, our deals come up beginning at the end of this year, and then they're staggered.

But we are in agreement with all of our distributors that our existing deals do not provide for them to have any rights to TV Everywhere for any of our content, which is a good thing.

We own all of our content, and with our networks and our brand stronger, we love TV Everywhere.

We think it's a good opportunity for viewers to consume more of our content.

We're happy about the fact that distributors are deploying it.

Right now we're in a discussion of what's the value.

We think there is a substantial value there.

And if we can agree on value, then you'll see our content on TV Everywhere.

And it might be a TV Everywhere deal, it might be a deal where we give TV Everywhere and we extend early.

But it really is going to depend on us coming to an agreement with the distributors on what's fair value for all of our content on TV Everywhere.

Which today is not just streaming of content on other platforms, but it's the ability to pull down and watch specific shows that you've missed.

Thanks so much.

Doug Mitchelson, Deutsche Bank.

Brad, obviously a melancholy moment.

I assume you are going to the buy side because you want to talk to all of us more often without this Reg FD thing in the way.

We need at least one arcane accounting question for you.

On Section 181 impact, can you walk us through how that carries forward into 2013?

Is that an easy comp in 2013 for free cash flow to the extent there's a catch-up in '12?

And then for David, I think this is implicit in the comment that you're going to continue to do online deals, but just hoping for an update on what you're seeing in terms of potential for online cannibalizing traditional viewing.

You mentioned in the last call you continue to study that data.

So any update on what you're seeing there would be helpful.

Thanks.

Sure, Doug.

The way it works for Section 181 is you had an immediate deduction of your domestic content.

And now we're going to be deducting it over the four-year amortization cycle, which would be what I outlined as 50% the first year, 25% the second, 15% the third and 10% the fourth.

So your previous deductions that you accelerated will reverse over those four years.

And your current deductions will then build over those four years.

And so you'll have a lessening effect each of the next four years as you move forward.

And anyone who produces domestic content, our peers, too, will all have the same considerations as they go through it.

On the new platforms, as you'd expect, we're in discussions with a number of players that are interested in a window similar to Netflix, which is 18 months plus.

And then as we just discussed, TV Everywhere, which is a tighter window.

It's really too early to tell, Doug.

From the data that we've seen so far, the viewership is pretty spread across a lot of our different shows.

And we have not seen anything that would indicate to us that this is cannibalizing us.

We're excited about this window, this 18-month window.

It provides meaningful incremental value to us.

We like the fact that there other players in the marketplace.

But we're going to watch it.

It's one of the reasons we structured our deal with Netflix as a two-year deal with a right for us to extend for one year because we want to take a hard look at behaviorally, how is our content consumed.

And then what impact, either positive or negative, it has on viewership.

So far we haven't seen any.

All right.

Great.

Thank you.

David Bank, RBC Capital Markets.

Brad, I want to say goodbye.

And as a goodbye gift I have two questions for you.

Hopefully since you can't not pick me for the next call.

The first question would be real quick.

Can you give us a sense of how Opera equity income or loss trends in your guidance for next year?

And the second is, if you look at next year in your content amortization versus cash spend, can you talk about how the delta looks between those two items next year versus this year?

David, what I'd say is we don't comment on any of our individual networks in terms of their profitability.

But we incorporate it into our guidance.

I think that's a consistent comment, whether it's an equity pickup or it comes through above the line.

With regard to the delta between amortization and cash, it generally runs -- this year, it ran around $30 million to $40 million.

It should be somewhere in the same area, because you're always slightly behind in terms of your spending.

Because the spending is modestly increasing at the high single digits.

Okay.

So a similar delta.

Thank you.

Jessica Reif Cohen, BofA Merrill Lynch.

I have a question on affiliate renewals.

David, you said they start coming up at the end of this year.

Can you size what percentage of your subs come up over the next one, two, and three years?

And talk once more about positioning.

A lot of the cable operators have reported, and they talked about, or they've given guidance of high single digits in programming expenses.

Is this the right range to think about for you guys?

Or, given your ratings growth since the last contract, should you be at a completely different level?

Hi, Jessica.

We don't break out when our deals come up.

But our focus has been over the last couple of years, and it's going to continue to be for this year and next year, is to make our channel stronger.

All of our channels come up at the same time, which is helpful.

And we have building on some of our niche channels.

We have Discovery Espanol is either the number one or two network in America for men in the Hispanic space.

Having TLC continue to be number one or two for women, one or two nights a week.

Hopefully even maybe three as we approach those negotiations.

Having Discovery back really strong.

We're the number one network in America, including the Broadcasters on Friday nights.

Making Science a more compelling niche channel.

Having ID be a top 10 network for women.

All those, I think, give us a stronger hand.

And when we look, we see we're growing our market share.

And how does that market share align with the amount of value that we're getting from the distributors?

And so we expect to go to those distributors, hopefully with a lot more value, and they get to sell our channels.

And we'll be looking for more value and we think that we'll do well and we'll see how it goes.

Okay.

And then in the guidance, is there any implications of rebranding Planet Green or reinvesting or rebranding any other channel?

Our guidance has a broad enough range that we have a certain growth initiative, whether it's rebranding or doing anything along those lines internationally, domestically, that incorporates our current plans.

Okay.

Best of luck, Brad.

Richard Greenfield, BTIG.

A couple questions.

The first one, David, you definitely sounded more upbeat about OWN.

But this is a channel that has had pretty constant management upheavals over the last couple of years.

And I think consumers are still struggling to even know the channel that OWN is actually on.

I was just wondering, from just an agreement standpoint, what are your rights actually to terminate the joint venture and actually use that channel position in some other way?

Meaning, could you turn Oprah into an online network and repurpose the actual channel position?

And then, secondly, a question that ties onto something Brad mentioned recently at an investor conference,.

If Discovery was actually offered rate card to distribute its entire suite of networks, bundled with some of the other channel groups in somewhat of a new MVPD, non-facilities-based MVPD, would you do that?

And what are the issues surrounding doing it?

Thanks.

Thanks, Rich.

First, let me talk about OWN.

We took a platform that was in 80 million homes and we've done a very good job of building the two revenue streams.

We've done deals with most of the distributors for meaningful subscriber fees.

And on the advertiser side, we have good advertising support.

We're up for about a year.

The mission is to grow an audience.

If we grow a meaningful audience that wants to spend time with OWN, and we think that we will, this will be a very significant asset.

It takes time to do that.

We now have Oprah.

She was on the air this past Sunday night, she was on last night with an Oscar special, she's on with a Whitney special tonight.

She's very engaged.

We have a good team, a team that she has confidence in and I have confidence in now.

And over the next year or two, if we build that audience, this is going to be a very strong asset.

So we feel good about that.

On the rate card piece of the overbuilder, look at it this way.

We're completely platform agnostic.

This is a great time to be in the content business because we got people that want our content in new windows, we got operators that want our content for TV Everywhere, we've got our traditional business of cable through the cable and satellite guys.

And if there are other players there that come, that want to provide us meaningful value to distribute our content, we're going to focus on we always do.

How will that content be distributed?

Are we getting fair value for it?

In the end, if there are bundles that are provided, much like if you go down to Latin America, and some of the emerging markets, there are new tiers that are developing that are low startup tiers to where there is an emerging middle class.

And on those tiers we tend to do very well.

Because, instead of being much more robust, there are fewer channels and we have a lot more of the space.

If in fact there are traditional distributors or new distributors, offer smaller packages, and we have an opportunity to get fair value and have a meaningful amount of the space, then that's likely to be attractive to us.

We'll have to see each one as they develop.

And both the economics and the impact that it might have on the traditional business.

Do you think that latter point could actually happen at some point over the course of the next 12 months, and we could see some of those players actually emerge with you?

A number of the traditional cable operators are starting to offer -- Time Warner has -- smaller packages of services.

Which, as long as a lot of our channels are carried -- which they have been in some of the early rollouts and some of the traditional distributors -- that's a favorable to us.

It's like, we have seven HD channels.

Every time a consumer gets HD, that's good for us.

We have a lot of HD channels.

It's a very favorable environment.

So if there's only 30, 40, 50 channels, and we have 7 of them, that's a good environment for us.

If there's another tier that has fewer channels, and we have a big piece of it, and the economics are strong for us, that's favorable.

If it's a new technology that provides meaningful economics to us, that's favorable.

But the last one we will have to look at and make sure that it doesn't undermine the existing infrastructure.

Thank you.

Alexia Quadrani, JPMorgan.

Just circling back on your comments on TLC strength in Europe.

Can you give us a bit more color on which of your major countries, how the major countries performed in that region?

And then more specifically, any notable change so far in 2012 from the strong Q4 performance you've seen in Europe?

TLC -- it's continuing to grow.

What we call Real Time in Italy is essentially our female.

We don't call it TLC in Italy but it's one of the top networks for women, and it's continuing to grow and it's profitable and we're doing very well with that.

In Norway, Denmark, Sweden, very strong.

In Poland, strong.

We're seeing growth pretty much across the board.

We just launched in Latin America where it's too early.

We have a very strong female network already in Latin America called Home & Health, which is a top 20 network.

And so we're going to see over the next six months whether we get the same kind of traction in Latin America.

But throughout Europe, it's been quite strong.

And really no change so far in 2012 in terms of looking at any signs of deterioration in those markets?

No.

If anything, we're continuing to grow, so it looks good so far.

All right.

Thank you very much.

Vasily Karasyov, Susquehanna Financial Group.

My question is about international distribution revenue.

It looks like it accelerated in local currency terms in 2011 and that was probably not the conventional wisdom a year ago.

And that's probably because of your expansion in Latin America.

So my question is, do you expect more expansion in Latin America or you're pretty much done at this point?

And then as a result of this, should we expect reacceleration in international advertising revenue growth soon as you monetize the new subscribers?

Let me take the first part of it and then Brad will get it.

I just spent last week in Bogota, Colombia, where we have 11 channels.

We just opened an office there, we have about 16 people.

It's a strong market for us.

We were there really to focus on building our advertising business in Bogota.

But we also announced that we did a joint venture with the Colombian government.

We met with President Santos and together we announced the first joint programming arrangement between the Colombian government and a programmer.

And so Latin America is a very big market for us.

There's more than 20% growth across the board.

In some of the markets, more like 30%-plus.

And so we have 11 channels in Brazil, 10 channels in Mexico, 10 in Argentina.

So that's a market we've been in for a very long time and we're going to invest.

We also have, in addition to Discovery, Animal Planet, we just launched TLC, we have Home & Health, but we also have Discovery Kids, which is unique.

It's only in Latin America.

But in many of the markets, for instance in Brazil, Discovery Kids is the number one cable network in all of Brazil.

It's like the USA of Brazil.

And Discovery Kids does very well, particularly with the six and under group.

And there's a lot of co-viewing with women.

And so Latin America is an area that we're continuing to push on.

To answer your question on the acceleration, part of why the growth rate is higher is in the beginning of 2011 and the latter part 2010, we had renegotiated one of our contracts where we had a reduction because we took Real Time off of the pay platform in Italy and put it onto the free-to-air.

We traded affiliate fees for much higher advertising fees.

And so that helped our growth rate in advertising, but had a detrimental effect on the affiliate rate.

Now, once you lapped yourself annually, that's when you saw us back to that double-digit affiliate growth.

And that's really driven by the subscriber growth globally.

And what we've seen over the last couple years is we've had a double-digit Discovery sub growth, and that's what drives it.

It hasn't really accelerated, it just maintained a pretty steady, robust rate.

And in terms of advertising, advertising's been very solid.

Part of it is we outperformed the market.

Especially in Western Europe, which something like the UK is not a robust market.

But because if we do things like launch TLC and have Real Time, we grow our market share, as well as have new channels.

That's what enabled us to continue to outperform markets, as well as take advantage of growing markets like Russia or Latin America or India.

So hopefully that answers your question.

Brad, should we expect reacceleration in 2012?

We incorporated into our guidance, is the way we phrased it, which is, we think in many parts of the world that you have the same conditions that exist into the future.

But it has a range of outcomes within there.

Thank you very much.

Good luck.

Anthony DiClemente, Barclays.

One for Brad and one for David.

Brad, sorry if you said this, but what was affiliate fee growth excluding digital revenue in the quarter?

And then looking forward, I think you said last quarter that you'd expect the digital revenue to add 200 to 300 basis points to the distribution growth rate.

Is that smoothly reported throughout 2012?

If you could give us a little bit as we model out affiliate fees in 2012 on a quarterly basis, that would be great.

I know you have a tough comp in the third quarter.

And then I have a follow-up for David.

Sure.

Anthony, it added 200 basis points to the growth rate.

So it's consistent.

That's why we had 80% growth rate and it added 200 basis points.

It is not smooth next year.

It depends on when we deliver titles.

So you're going to have some lumpiness in some quarters but over the course of it, if that's 200 to 300 basis points.

Okay.

That's helpful.

Thanks.

And then, David, you've talked a lot about your content strategy.

I'd love to hear more about your sales effort and what Joe Abruzzese is doing.

Because if we look at your performance versus the peers, and then index that to your ratings, there's really a multi-quarter outperformance story.

And so I'm just trying to get behind what's going on at the sales organization.

Have you hired more salespeople?

Is it how you're motivating the sales force?

What's the magic that Joe's adding to the mix here?

Thanks.

We do have a very good team.

We haven't added to the team.

We have a good performance-driven comp structure.

But I think part of it is that the channels are getting better.

And a lot of the channels that we had are getting very low CPMs.

And we're building those channels and the brands are getting stronger.

It's not just ID.

Whether it's Velocity or Science, we're building stronger channels at Animal Planet.

So I think that the overall focus on just building market share, building brand.

We did focus specific teams on each of the channels.

And Joe has been very aggressive about looking at our CPMs, because in the long term, the CPMs is what's really going to drive us.

And we think we have a lot of headroom on that, particularly with some of our younger channels and so we measure that.

But also it's good inventory management by Joe.

He's moved aggressively in scatter early.

He did a very good job with the upfront, which I think was good for everybody.

But overall I think it's mostly Joe doing a good job and our channels having momentum.

Okay.

Thank you very much.

Tuna Amobi, Standard & Poor's.

First, for Brad, I wanted to send you off with my own two questions, as well.

Both related to the guidance.

On net income, if your guidance is correct, this would be actually the first year that the streak that David talked about on consecutive growth in net income will be broken.

So as I look deep, it seems to me that most of that may have to do with the other expense items.

Granted, that interest expense, you're looking for an increase.

So I'm trying to understand what else is in there that would account for that disparity in net income?

And also on the free cash, if you ex out the Section 181 issue that you talked about and the incentive compensation on the working capital, is there anything else on the working capital swing that may account for why we're not seeing a major bump up in free cash?

Those clarifications would be helpful and then I have a follow-up for David.

Sure.

Net income this year in 2011 had one-time items that were positive.

So we're not going to have those in 2012.

We had over a $100 million gain when we contributed to Health Network to form Oprah Winfrey Network.

It was a book gain, not cash.

And we also had a tax credit related to our tax reorganization of $112 million.

Those two things are not going to happen in 2012.

So in 2012 you have the nice operating growth performance but you don't have these special one-time items that were positive in 2011.

In terms of free cash flow, working capital we have the $75 million lower long-term incentive plan payments.

But we also, because we're a growing entity and we're growing our revenue, that takes working capital.

So you're going to have somewhat of almost an equal amount of increase, whether it's accounts receivable or other parts of working capital, to fund your growth.

And that goes into when we think of our overall free cash flow.

Okay, that's helpful.

And for David, as you think about this beta survey, the most recent one showing that you guys also have surpassed ESPN as the most important cable brand, I believe this is the first time that you've actually done that.

So looking ahead, as you enter your affiliate negotiations by the end of the year, is that something that you think that gives you a stronger hand?

Is it something that perhaps enhances your leverage as you talk to the cable operators?

I'm not saying that you necessarily are shooting for the kind of CPMs that ESPN is getting.

But I would imagine that given this study, I would expect that you would be talking that up more than you appear to be doing.

And how should we think about that as you enter the negotiations here?

As I said, all of our channels come up at once.

We do think that Discovery as an overall brand around the world is premier, and has been.

But the fact that subscribers in a cable operator study came back and said that Discovery was the most valued brand on cable, that's a helpful piece of information.

And it says that Eileen O'Neill, who's been building that channel with the new creative team that we have there, together with having a number of new hits, has done a good job of connecting with the consumers.

So I think it's certainly helpful.

Our goal is to get more people spending more time with our channels.

And so when we sit down with all of the distributors that they recognize the value that we're bringing them.

And it's certainly helpful that their study shows us as number one.

Thank you.

David Miller, Caris & Company.

David, as you may know, Lionsgate is putting up for sale, or at least they are intimating that they are putting up for sale, their 51% interest in TV Guide.

That's a fully distributed piece of analog real estate.

I know you can't comment specifically on whether you're interested in TV Guide, but if other fully distributed pieces of real estate like that come up for sale, is that something you're willing to take a look at?

Or do you feel like your platform is already pretty much the way you want it just from a profile perspective?

And then I have a follow-up for Brad.

Thanks.

Thanks, David.

We look at everything.

And if we think that there are assets out there that will help us grow faster, we have a great business development team, and we have the balance sheet to do it.

We don't comment on specific assets.

But we do look at everything.

And we've been spending a lot of time.

I've said for a long time that one of our priorities is to continue to build on the fact that we have a very unique international infrastructure with teams on the ground all over the world.

So I think for us, our first hope would be if we could find more sustainable growth with strong assets that we could partner with our existing infrastructure outside of the US.

But we do look here, and we're opportunistic if something presents itself.

Okay, great.

And then, Brad, on the recognition of foreign tax credits as a result of the re-org of certain international operations, could you just expound on that briefly, if you don't mind?

I'm not sure I really am understanding what's going on there.

Thanks.

Sure.

In November we reorganized certain parts of our international organizations to strategically align the structure.

As well as defer non-US earnings.

So as a result of the reorganization, we were able to utilize the tax credits to all the transitionary costs as well as some ongoing costs.

And so it's a GAAP entry.

What you're going to have is it will play itself out over the next three or four years, the utilization of those credits.

Got you.

Wonderful.

Thank you.

Thank you for joining us, everybody.

And please give us a call with any follow-up questions.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes the presentation.

And you may now disconnect.

Have a good day.