華納兄弟探索 (WBD) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2012 Discovery Communications, Inc.

earnings conference call.

My name is Karita and I will be your Operator for today.

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

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

(Operator Instructions) As a reminder this call is being recorded for replay purposes.

I would like to turn the call over to Mr.

Craig Felenstein, Senior Vice President of Investor Relations.

Please go ahead.

Thank you.

Good morning, everyone.

And welcome to Discovery Communications first quarter 2012 earnings call.

Joining me today is David Zaslav, our President and Chief Executive Officer, and Andy Warren, 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 Andy, after which we will open the call up for 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 made 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 effect these expectations, please see our Form 10-K for the year ended December 31, 2011 and our subsequent filings made with the US Securities and Exchange Commission.

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

Thanks, Craig.

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

Discovery is off to a great start in 2012, delivering first-quarter results that built upon the double-digit growth and strong operating momentum we generated throughout 2011.

Importantly, our success continues to be well-balanced with growth spread across geographic boundaries and driven by diversified revenue streams, each of which are leveraging the strength of our content portfolio and robust distribution platform.

On our year-end call, I highlighted some of the elements that contributed to our success a year ago.

From a strengthening programming library that capitalized on a robust global ad market.

And a growing demand for content across emerging distribution platforms.

To the opportunities we are exploiting across our international asset base.

As evidenced by our first-quarter results, these drivers remain firmly in place.

Andy will discuss the specifics behind our financial performance in a moment.

Before he does, let me take a few minutes to highlight some of the opportunities we continue to take advantage of.

And also discuss some of the initiatives that we expect will contribute to sustained financial and operating momentum throughout the remainder of 2012.

Once again during the first quarter, Discovery's long-term strategy of investing in bigger, stronger brands and the highest quality non-fiction content continued to pay off.

With consumers watching more television in total than ever before across conventional and emerging distribution channels.

Simply put, it is a great time to be in the content business.

Even more so, if your programming resonates with diverse audiences and you own the rights to the majority of your content.

Our sustained investment in programming, yet delivering market share growth worldwide, and given the continued strength in the advertising market, we were able to generate total Company global ad growth of 16% in the first quarter.

Domestically, our market share growth, built upon the viewership gains we delivered in each of the last several years, with viewership in the first quarter expanding over 6% in primetime among adults 25 to 54.

This success was even more compelling when you considered that the non-Discovery cable declined slightly, and broadcast was down 7% in the same period.

Equally as compelling is the fact that our success was broad-based and not driven by just one brand.

Discovery channel grew 5% in primetime, led by the continued success of returning hits Gold Rush, the number one show on TV on Friday nights for men, including the broadcast net, Flying Wild Alaska and Sons of Guns.

Discovery also benefited from the strong performances of several new series, including Moonshiners and Bering Sea Gold, along with the premier of Frozen Planet.

Animal Planet was up 18% in the first quarter, led by the growth of several returning series, including the second season of finding Bigfoot, which grew 17% over its premier season.

TLC ratings declined versus a year ago.

But it has built a broad stable of returning hits, including 17 series that are delivering over 1 million viewers.

And TLC is the number one ad-supported cable network for women on Friday nights.

ID continued its blistering pace, delivering its best quarter ever with 35% growth in its key women 25 to 54 demo.

It remains the fastest-growing cable network.

And is now the fourth ranked network in all of cable during the day, behind only USA, TNT and TBS.

We also had viewership gains across all our emerging growth networks, including Science, Military, Velocity, Fit and Health, as well as the soon to be rebranded Planet Green.

We are always looking to drive the potential of our valuable distribution, our beach front real estate, by breaking new ground that ignites viewers' curiosity.

Along those lines we announced at our up-front presentation that Planet Green will become Destination America on May 28, just prior to the Memorial Day weekend.

We believe by combining the very best of travel, adventure, food, home, and natural history into one brand, we can create a new lifestyle destination that viewers will be engaged by and it will deliver huge value to our advertising.

While the rebrand is not for several weeks, we've already begun to focus on this type of programming on the existing network and the result in the first quarter was viewership growth of over 30%.

We've only just gotten started.

Our ratings success was not limited to our consolidated networks.

The Hub delivered 32% growth in total day among kids 2 to 11.

And OWN delivered 14% growth this past quarter.

OWN has already become a Top 30 network for women, with over 95 US cable networks in just over a year.

Up from the number 45 network a year ago.

With the creative team firmly in place, several established returning series, and Oprah once again captivating audiences in the way that only she can, OWN is generating meaningful ratings momentum as we continue to build and grow this network.

In addition to the ratings success, OWN has taken significant steps recently that will help the network improve its financial position moving forward.

Including structuring deals with meaningful sub fees with the majority of MSOs, including most recently extending and broadening its affiliate relationship with Comcast.

In addition, we attacked the cost structure by streamlining the operations and cancelled several series that audiences we're not connecting with.

With an appropriate cost structure now in place, a broad affiliate foundation, 80 million subs growing to 85 million, and most MSOs beginning to pay sub fees on January 1, 2013, together with ratings building quarter to quarter and continued advertising support, we remain confident in the growth potential of this network.

Given the current momentum and operating conditions, we anticipate funding to OWN in 2012 will be less than 2011.

And we expect to achieve cash flow breakeven during the second half of 2013.

The diverse rating success we delivered in the first quarter across our consolidated networks helped us to generate ad growth of 13%.

Building on the 15% growth we delivered in the first quarter a year ago, excluding Discovery Health comparisons.

Remarkably, this was the eighth quarter in a row that we delivered double-digit ad growth.

Underscoring not only the strong ad market, but also the breadth and depth of the brands we have built, as well as the efforts of our ad sales team to maximize the market and viewership opportunities.

This growth gives us a great start to 2012.

And also puts us in a great position heading into what we hope will be a robust upfront.

We recently completed our upfront presentations.

And while it is always difficult to predict where the upfront market will ultimately end up, with strong scatter volumes, scatter pricing well above last year's upfront, sustained ratings momentum across our networks, a diverse brand portfolio, and the best ad sales team in the business, we expect to see significant increases in this year's upfront.

Advertising was not the only area where we leveraged the appeal of our content during the first quarter.

I mentioned on our last call that in 2012, we anticipated additional opportunities to exploit the growing value of our content library.

And this quarter we did just that, announcing a digital distribution agreement with Amazon.

Much like our Netflix agreement, we were once again able to generate significant value from our library content while retaining flexibility with regards to our distributor.

A significant portion of the revenues from this agreement was recognized in the current quarter.

But we anticipate our licensing agreement will continue to enhance our affiliate growth rates as we deliver additional content.

Having ownership of the vast majority of our programming provides us flexibility regarding emerging opportunities.

Discovery remains platform-agnostic with regards to distributing our content.

And we will continue to explore additional opportunities to leverage our expansive content library.

So, with a broad and deep set of content assets, ratings momentum across our network portfolio, a healthy ad environment and emerging distribution alternatives, there's plenty of room for continued growth across our US network operations.

However, the true differentiator for us remains our international business.

Just to provide some perspective, this is a segment that only four years ago was delivering $254 million of OIBDA.

With operating margins around 26%.

And which in 2011 generated $645 million and 45% margins, despite continued investment in developing new brands and compelling programming across multiple geographic regions.

This rapid growth over the last four years highlights both our ability to execute on our strategic plans, as well as the opportunity inherent in the global infrastructure we have built and nurtured over the last quarter century.

And this financial and operational momentum only accelerated during our first quarter.

The largest driver of international growth continues to be the progression of Pay TV globally.

And given our footprint we are uniquely positioned to benefit from further expansion.

Discovery's subscriber base increased by over 10% versus a year ago, which helped drive affiliate revenue growth of 11% on an organic basis.

Our subscriber growth is broad-based with double-digit increases, led by Latin America and Central and Eastern Europe, translating into double-digit affiliate revenue growth across nearly every region.

And we fully expect further Pay TV growth moving forward given the low penetration worldwide, including less than 40% across Latin America, as well as Central and Eastern Europe.

With boots on the ground across the globe, as these platforms continue to proliferate we are ideally situated to maximize the opportunity they provide.

The infrastructure we have built provides us the unique ability to launch new networks and fees to capitalize on market dynamics.

In the past, we have discussed how our global platform enabled us to establish another global flagship in TLC.

Now, in over 153 markets and only in the early stages of its growth cycle.

Today, TLC is in over 125 million homes and it is the number one most distributed women's brand in the world.

From no international distribution less than two years ago.

But that is just one example.

We are continuously looking into launching additional feeds and new networks to capitalize on market opportunities and audience demand.

Our recent launch of Discovery Kids in Asia is another example.

We recognized the white space in the Asian market and believe that there is on opening to replicate the success of our thriving kids business in Latin America.

To further feed our robust portfolio of 26 brands, and further drive advertising growth, we also established a global content group to help drive international viewership through development of original content.

Many of the original shows that are developed by the global group will debut across the globe later this year.

And will have the added benefit of ultimately airing back on our US networks, as well.

The content group also works with our US operations to utilize programming generated across our domestic portfolio of networks.

Our US content is resonating with international audiences.

Whether it is Cake Boss in South America, or Extreme Couponing in Norway, our content group continues to explore ways to further leverage our domestic programming abroad.

Our international team is also continuing to maximize the contributions from our more competitive markets, such as Italy and the UK.

Led by Real Time and DMAX in Italy as well as Quest in the UK, our free-to-air revenues more than doubled this quarter.

And have helped maintain a nice growth trajectory in markets that are becoming more mature.

When you combine the larger addressable audiences across our international platforms, with a more robust programming offering, the result has been substantial viewership gains.

And these additional eyeballs are translating into sustained double-digit advertising growth, including 22% in the current quarter, building upon the 24% we delivered in the first quarter of 2011.

With advertising still only making up one-third of our international revenue, we have plenty of room to grow this revenue stream and increase international margins.

Building new brands and strengthening our content pipeline will always be our first strategic priority.

But at the same time we remain focused on thoughtfully allocating the capital we are generating.

We have a very strong balance sheet.

And as we mentioned last quarter, we expect to generate over $1 billion in free cash flow this year.

We are always on the lookout for value-enhancing opportunities, whether organically or through acquisitions, to complement our existing asset base.

And we continue to return capital to shareholders.

We have returned $1.4 billion in capital to our shareholders under our buyback program.

And with the additional $1 billion buyback just authorized by our Board, we will continue to do so aggressively if it is the best use of our balance sheet.

Discovery's off to a great start to 2012, with strong first-quarter results and sustained operating momentum across our domestic and international operations.

Our focus remains on building additional long-term value by investing in our brands and platforms, while also delivering continued financial growth and returning capital to shareholders.

Before I finish up, let me welcome our new CFO, Andy Warren, who will be a great partner as we look to further drive our business and exploit the growth opportunities that remain ahead for Discovery.

I will now turn the call over to Andy.

Thanks, David.

And thank everyone for joining us today.

I'm really excited to be part of Discovery.

It is a Company that I've long admired.

And I look forward to talking with each of you over the next several months.

As David mentioned, Discovery delivered solid operating results during the first quarter, as continued execution, the strength of our content, and the favorable operating environment enabled the Company to build upon the momentum that the team generated throughout 2011.

First-quarter revenue growth of 16% was broad-based with double-digit increases across the US and international networks.

And double-digit gains for both advertising and affiliated revenue streams.

Note that the current quarter includes $50 million of additional revenues from the new licensing agreement with Amazon and the expanded licensing agreement with Netflix.

Excluding these agreements our total Company revenue growth was 11%.

Total operating expenses in the quarter were up 12% compared to the prior year, primarily due to higher content amortization, increased personnel and marketing costs.

As well as $8 million of additional expenses associated with the Amazon and Netflix licensing agreements.

Excluding the additional costs related to licensing agreements and the impact of foreign exchange, the increase in operating expenses was 11% versus the first quarter a year ago.

As was indicated on the year-end call, expense growth is expected to be weighted to the first half of the year, with the full-year increase in the low to mid single digits.

Discovery's continued ability to generate revenue growth in excess of expenses translated into a 19% increase in adjusted OIBDA during the first quarter.

Excluding currency impact and the Amazon and Netflix licensing agreements, adjusted OIBDA increased 9%.

Net income decreased to $222 million as the improved operating performance in the current year was offset by $102 million gain in the prior year resulting from the contribution of the Discovery Health into the Oprah Winfrey Network.

Excluding this net of tax gain, net income increased 9% versus the first quarter a year ago.

Please note that during the first quarter, Discovery began recording 100% of OWN's net losses, as the accumulated operating losses at OWN fully depleted their equity balance.

We will therefore, going forward, continue to record 100% of the OWN results through equity income as long as OWN has depleted equity.

The net impact for the quarter of recording 100% of the losses was approximately $10 million net of tax, or $0.03 per share.

Free cash flow grew 10% to $227 million due to increased operating performance and lower stock comp payments, partially offset by higher tax payments.

The new content licensing agreement with Amazon did not impact free cash flow in the first quarter and will be received pro rata over the term of the licensing arrangement.

On a per share basis, free cash flow increased in the quarter from $0.50 to $0.58 per share, reflecting the increased free cash flow and the impact of the share repurchase program.

Turning to the operating units, the US Networks delivered substantial growth, with revenues up 16% led by a 23% increase in our distribution revenue, primarily driven by the incremental revenues and the licensing agreements.

Excluding the impact of these licensing agreements distribution revenue growth was 5% year on year.

Much like when the Netflix agreement was executed in the third quarter 2011, the current quarter includes a significant portion of the revenues to the Amazon agreement, as revenues are recognized upon delivery of the content through our distribution partner.

And we delivered the bulk of the programming at the front end of the contract.

Next quarter, as additional content is delivered under both agreements, we expect that they will, combined, add 200 to 300 basis points of incremental growth to our domestic affiliate revenues.

As David touched upon, the US Network ad sales team delivered its eighth consecutive quarter of double-digit added revenue growth, up 13% over the prior year.

This is on top of the 15% organic growth that was generated in the first quarter 2011.

And was led by the increased delivery across our networks as well as from the sustained favorable pricing and demand sales environment.

The attractive current market conditions continue to exist in the second quarter.

And we anticipate high single-digit ad sales growth with, of course, possible variability from ratings performance versus the prior year which grew 13% organically.

Domestic operating expenses were up 13% from the prior year, with the majority of the increase due to the expanded higher content amortization, along with increased marketing for Frozen Planet.

And the $8 million of expense related to the new and expanded licensing agreements I mentioned previously.

On a reported basis, domestic adjusted OIBDA increased 18% versus a year ago.

Excluding the impact of the licensing agreements adjusted OIBDA was up 6% over the prior year.

Turning to the international operations, the momentum across our global platform continues as revenues on a reported basis expanded 18%, led by double-digit ad and affiliate growth.

Excluding the foreign currency impact, total revenues grew 20% as distribution revenue increased 16% and advertising revenue increased 25%.

The affiliate revenue growth was driven by continued strong subscriber additions, particularly Latin America, led by Brazil and Mexico.

And across CEMEA in areas such as Russia and Poland.

The Discovery Channel, our most widely distributed network, expanded subscribers 10% internationally versus a year ago.

On the advertising front we delivered double-digit ad growth across nearly all of our regions, with particular strength in Western Europe and Latin America.

The sustained advertising growth in the more mature markets of Western Europe was driven by success of our free-to-air initiatives such as Real Time in Italy and the launch of Discovery Max in Spain.

As well as by the global growth of TLC, with particular strength in the Nordic region.

Operating costs internationally were up 14% excluding currency fluctuations.

Primarily driven by higher content amortization, as well as by increased personnel and infrastructure costs due to additional investment and growth initiatives.

And to build out our global platform to support our long-term growth expectations.

Excluding the impact of foreign currency, our international segment delivered 20% adjusted OIBDA growth, as the international team continued to generate strong revenue increases while thoughtfully investing in key growth initiatives.

As we look forward to the remainder of 2012, we are encouraged that the improved pricing and ad trends realized in the first quarter have continued through April, both domestically and internationally.

For the full year 2012, we are raising our revenue and adjusted OIBDA expectations to incorporate current conditions as well as the impact of the Amazon licensing agreement.

We anticipate total year revenues to now be between $4.55 billion and $4.65 billion.

And adjusted OIBDA to be between $2.125 billion and $2.2 billion.

It is very important to note that we expect overall adjusted OIBDA growth in the mid single digits for both the second and third quarters of this year due to the timing of certain expenses.

As well as the positive impact of the Netflix agreement in the third quarter of last year.

For the resumption to double-digit adjusted OIBDA growth in the fourth quarter.

We now anticipate net income of $1 billion to $1.1 billion, reflecting the increase in the operating guidance.

Partially offset by higher expenses associated with the mark-to-market equity-based compensation.

As well as higher equity losses due to the earlier-than-expected accounting change regarding now recognizing 100% of the OWN operating results through our equity income line.

Turning to our financial position, for the strong balance sheet that includes over $1 billion in cash, and with sustained financial and operating performance, we continue to return capital to shareholders through execution of our share repurchase program.

As David highlighted, our first priority remains investing in our core businesses to enhance shareholder returns and drive sustained long-term growth, be it through investment in existing networks and platforms, or through exploring external initiatives.

To the extent we have not found sufficient opportunities with attractive financial returns, we have accelerated utilizing the cash on the balance sheet as well as cash generated from operations to repurchase shares.

Discovery repurchased $288 million of the Class C shares during the first quarter.

And has in total brought back $1.4 billion under a share repurchase program.

Overall, over the last year-and-a-half, we have effectively brought back over 50 million shares, reducing the total outstanding share count by 13%.

Given the successful share repurchase activity to date we are increasing our share repurchase authorization by an additional $1 billion in order to enable us to continue to thoughtfully repatriate capital to our shareholders.

We will continue to operate our buyback program under a 10b5 plan each quarter.

And shares will be purchased according to a predetermined grid, with forecasted free cash flow per share governing our share repurchase activity.

This metric in essence drives the IRR expectation in all current and future share repurchases.

That's it.

Thanks again for your time.

And now David and I will be happy to answer any of your questions.

(Operator Instructions) Benjamin Swinburne from Morgan Stanley.

One for David and one for Andrew.

David, I'd say most people would probably weigh in that Discovery has been very deliberate in thinking about licensing digitally.

But we've had this debate during earnings so far between Time Warner, Viacom and DISH calls talking about how much content can move online before you start to impact potentially your value proposition to your distributors.

I know you speak to your distributors on a regular basis, and you've got some big renewals coming up as you enter 2013.

So I'd hope you would be willing to weigh in on how you're thinking about that balancing act to make sure you're maximizing your long-term value versus taking more of a short-term approach in how you gradually expanded your Netflix and Amazon relationships.

And then I just had a clarification for Andrew.

The high single digit ad growth guidance or pacing for domestic, was that for the remainder of the year or for 2Q?

I just wanted to make sure I heard it right.

Thanks, Ben.

Let me talk about the digital opportunity.

This really is a great time to be in the content business because we created essentially a new window.

We worked very hard to figure out what works for us.

And for us this new window, being 18 months and older, is significant because we use our content domestically and around the world during that window.

And so giving it to Netflix and to Amazon, where they have 18 months, two years, three years, four-year-old content and getting real value for it, has been significant in terms of the value it provides to us.

As we look at what impact that has on our viewership, to date we haven't seen any impact on the viewership on our traditional channels.

And part of that may be that we're only six months in.

It's very early days.

But it's also interesting that a lot of the shows that are being consumed on those platforms are shows that are no longer on Discovery or TLC or Animal Planet.

And so we did keep the deal short so that we have some flexibility.

Our Netflix deal was two years with a one-year option for us to go for a third.

And that dovetails with our deals that come up, Ben, so that if there was a real problem we could pivot.

But so far, we see it as a real opportunity and additional window that's providing significant value to us.

In addition, we have TV Everywhere out there which provides another opportunity for us to monetize our content.

It hasn't materialized yet in a meaningful way but it's an attractive platform that would be, if Netflix and Amazon and LOVEFiLM, if those platforms are 18 months and older, from our perspective, then TV Everywhere would be more of a catch up and provide some additional incremental value.

and so, for us, we've been able to grow market share and take advantage of those platforms, so it's been a good experience so far.

Then regarding your question on ad sales, that's a 2Q number only.

Given that it's early May we have good line of sight into 2Q.

So that's a 2Q forecast only.

Okay.

And I know you said that the favorable conditions continue in 2Q but that is, at least technically speaking, a little bit of deceleration.

Is that conservatism or anything else you're seeing?

I just wanted to see if those two comments together.

The high single digit is still a very good number.

It's coming off last year's 13.

We still have several weeks, a month-plus of scatter to book.

And ratings mix certainly impacts that, as well.

So we feel good about that number.

It's a solid high single digit.

And, again it's coming off a big number last year.

Got it.

Thank you very much.

Doug Mitchelson from Deutsche Bank.

David, I think what's throughout this quarter was international.

I'm curious how much Western Europe and the UK might have been a drag on international ad growth.

As strong as ad growth was, could it have been even stronger if those marketplaces were healthier?

And separately, I think TLC has been pretty impactful on your growth of international this past year.

Do you have enough new networks and feeds in the pipeline that you see new growth drivers stepping in as TLC's growth cycles out?

Thanks, Doug.

The international business is really accelerating and it's a number of things.

One is the subgrowth that we're seeing.

And you see that on the affiliate side.

But it also reflects itself in the overall reach and, therefore, viewership.

So you see Discovery is the Number 1 most distributed channel in the world, and it grew 10% and our overall distribution grew 16%.

So that's a helper.

And just to give you a sense, Brazil grew 766,000 subscribers in the first quarter.

That's more subscribers than the US has added in between three and four years.

So we're seeing real growth across Latin America, Russia, India.

And that's a helper.

But more importantly is we've become a strong content company outside the US.

And the strength of our brands are really resonating.

So if you go into Latin America where we have on average 11 channels, we have 4 of the Top 15 channels.

We have Home and Health, which is essentially the Home and Garden of Latin America.

And that's a top network for women.

We have Discovery Kids which in Brazil it's the Number 1 cable network in all of Brazil.

It's the USA Network of Brazil.

But it's strong throughout Latin America.

Discovery, Animal Planet and we've launched TLC.

So you see us around the world building those channels.

TLC now all around the world is a strong female network.

Discovery getting stronger.

Animal Planet getting stronger.

And specifically in Western Europe and the UK, we've actually deployed -- it's specific to only a few markets but in the UK, we've been able to grow our overall market share by having a broadcast network there where the cost to us is very low because we have our existing content.

We also launched a broadcast network in Italy called Real Time, which is a female network, the equivalent of TLC.

And that is now the Number 8 network in all of Italy, including the broadcasters.

So Western Europe and the UK for us has not been a drag at all.

We've been able to grow those markets because we've been able to significantly grow market share and take advantage of a robust advertising market, although maybe not growing.

We've gotten a bigger share.

And when you look at India where we just launched our new Kids Network, or Latin America and Russia where we just launched an office and two more channels, we're finding that market share is probably two-thirds of our growth.

And one-third of it is the underlying jet stream of subscriber growth.

Terrific, thank you.

Jessica Reif Cohen, Bank of America Merrill Lynch.

A couple of questions.

On OWN, my recollection was that the first two years you pretty much gave the channel away to the Pay TV operators.

And you just made a comment that sub fees really kick in next year.

Can you talk a little bit about that and what we should expect on the affiliate fee side from OWN?

Sure, thanks, Jessica.

First, I wanted to talk a little bit about what the real story is at OWN.

There's been a lot of noise out there and I wanted to give you my sense of the report card and where we are.

When we started OWN, it had virtually no sub fees.

We've added about 10 million subscribers.

Some of those subscribers will come on this year from Comcast.

But the majority of distributors have now signed up for substantial fees for OWN and those will kick in on January 1.

So we've added 10 million subs and we've put together a very strong subscriber fee structure.

We have strong blue chip advertisers in place, supportive of what Oprah and I and Eric and Sheri are driving.

The recipe of what we're doing there in terms of trying to find the right blend of content to nourish the audience, we're making real progress.

We're, on average, about a Top 30 network.

In March, we were the Number 27 network in America.

Despite what you read we're making real progress.

We grew 14% in the first quarter.

We're up 17% this quarter.

And when you look at us from a standing start, 14 months -- and I've launched a lot of networks -- here we are 14 months later beating two-thirds of the existing networks in the US.

And we're ahead of a number of women's networks that have been out there for 5 or 10 years, and have been pushed and driven to nourish an audience.

And we've gone by them.

We've got a long way to go.

I feel better about where we are than I ever have.

We've done a lot of good work to get the cost structure in position.

We're listening to the audience.

Oprah's having a lot of fun.

She's working very hard.

We said today on the call that we're convinced that by the end of 2013, this business will be cash flow positive.

And we'll spend less money this year funding the business than we did last year.

We're committed to the business.

We think this has an opportunity to generate significant asset appreciation for us and for Oprah over the long term.

We are a long-term driven Company.

We're growing assets like TLC around the world long term.

That's now accretive.

ID, which was not making a lot of money for a long time, we invested in, we believed in it.

It's now a Top 10 network in America, the Number 4 network during the day.

What we do is we build brands, we grow brands.

And what we see gives us a lot of confidence that this will be a significant asset for us.

And along those lines, my second question really is along the lines of what you just said.

Given the growth you've seen since you've gotten there, your channels are in a completely different place than they were.

Can you help us think about, as your contracts come up over the next couple of years, what range we should be thinking about for affiliate fee growth?

You're at the lower end now relative to your peers.

What do you think the growth rate can get to over the next one, two, three years?

Thanks, Jessica.

Look, our core job is to become a stronger content company.

Which really means that we want people spending more time with our brands, more time with our channels, and to feel more connected to the shows that we have and the characters that we have.

And we've been doing that.

We've been growing market share year after year.

Our overall share of the cable viewership pie has grown significantly.

We also have meaningful affinity groups around Science, around ID, around Discovery, around TLC.

So we feel that we have a very good story.

We were investing about $550 million in content when I got here.

Today we're investing over $1 billion in content.

And so we have a very good story.

Our deals come up beginning at the end of this year, and they feather in between the end of this year and 2015.

As we've said before you'll see a steady flow there.

It's not particularly lumpy.

We don't have a ton coming up at the end of this year.

But our goal is going to be to sit down and talk about the fact that our channels are stronger and we think we have a good hand.

We think it's recognized by the distributors who are making more money selling our channels.

And with the exception of OWN, where we've done almost all those deals already, our other 12 channels come up all at once.

Which we think is a value to us.

So we think we're going to do well and we'll see over the next couple of years how we do do.

And, Jessica, just to elaborate on that for a minute, as David said the affiliate deals roll in over time.

There are three up at the end of this year so there's no impact in 2012.

Should be relatively small impact next year.

While we feel very good about our position and our stance today, relatively small impact next year.

And again, these roll in over the next several years.

Primarily because the size of the distributors aren't the big ones.

One last thing.

You made some SVOD deals in the US.

What about international?

How much of an opportunity is that?

Sorry, which deals, Jessica?

The SVODs -- Amazon, Netflix, et cetera.

The US is a mature market.

And carving out this window of 18 months and older, we're very comfortable with at this point.

And we think it's working quite well for us.

And so we're excited about having more and more players want to play in that space, and TV Everywhere.

Outside the US, it's really more of a country by country.

It works, it's much more effective in a mature market where you have viewers that have learned how to consume television the traditional way, and this becomes an add-on.

So we're just going to see market by market.

We own the content and we'll make the decision market by market.

Thank you.

Michael Nathanson from Nomura.

I have two for Andy.

One question would be, the $50 million loss you had this quarter from other net, which is OWN, hub, what would the number be?

I know you had some restructuring at OWN and some program writedowns so what's an ongoing number of the $50 million?

How could we think about if this was a normal quarter for the $50 million?

Yes, Michael, we're not going to quantify OWN specifically.

I did say that this accounting nuance of our now picking up 100% of the operating losses relative to what we expected was a $10 million after-tax impact.

So about $0.03 per share.

It is important just to describe that accounting nuance for a minute because I know it's a question that some of you have had.

When OWN started with contributed equity, as they ramp up and incur losses, those losses deplete their equity.

The accounting nuance is that once their equity is fully depleted, like it was in the first quarter, we as the funding partner now have to pick up 100% of those losses.

And we will continue to do so, pick up their losses and eventual profits until they get back into a positive equity position.

So we will continue to talk about 100% of losses and profits from OWN going forward based on this accounting nuance.

But we did have $50 million of other income losses in the quarter.

It was predominantly OWN, but we aren't going to quantify it specifically.

Can you just help us with the run rate then for the year of where you get to for the whole year for that line?

Yes, it certainly will be less going forward.

It was an unusual first quarter in that there was the Rosie write-offs, there was a lot of restructuring costs associated with right-sizing their cost structure.

So those were unusual events in the first quarter that added to that loss profile.

But there will definitely be less losses going forward.

Okay.

And then one question for you is reprogramming costs within the US.

I know it's lumpy because you had writedowns last year.

But what's a good way to think about the underlying programming expense growth for the year and maybe seasonality of that for the rest of the way?

It clearly is higher in the first half.

Basically it's amort catch-up of prior-year investments.

I think it's important to look at what our cash was on content for the first quarter.

That was up high single digits.

So that's probably a better indicator of what that will look like going forward.

But clearly there's a bit of an amort catch-up here in the first half that will abate in the second half as we catch up on prior-year investments on content.

Okay, thank you.

David Bank from RBC Capital Markets.

Two questions.

The first, a little bit of a follow-up on Oprah, David.

You gave us a target, I think, of free cash flow breakeven I think the middle of next year.

And I was wondering if you could give a little bit more commentary around profitability of the channel, expectation of when it's no longer a drag on earnings.

And maybe to put some context around it, if you took the ratings and cost structure as they are today, and you layered in the affiliate fee increases that you have contracted but maybe not recognizing yet, would that be enough to basically get you to profitability?

And the second question -- Andy, sorry to make you go back to a year ago, but a year ago in the second quarter you guys, I think, had an $8 million non-recurring benefit on the advertising side.

Is that part of what's causing a drag on the pacing?

Or is that ex that impact?

Not a drag, but is that impacting the pacing comp?

Thanks, David.

On OWN, I had said we're confident that in the second half of 2013, that it will turn cash flow positive.

And I don't want to get into a lot of detail but we have substantial fees, sub fees coming in, we have good participation with advertisers, we have growing ratings.

The channel right now is the Number 30 channel.

We're on plan or ahead of plan all throughout this year.

And so the expectation here is not that the channel needs to morph to find dramatic additional rating increases.

We expect that it will continue to improve based on the continued improvement that we'll be able to get the profitability when you count in the subscriber fees and the advertising.

And we feel good about that.

I don't want to get into anymore detail but we're making a lot of progress.

We're building an audience.

On average we have a weekly cum of about 15 million people coming into OWN.

And based on the rating trends that we have right now we're comfortable that we'll make the turn in the second half.

And to answer your question on the $8 million, yes, that does actually dilute our year-over-year growth rate.

It is impactful to the second quarter last year, so yes, it impacts the growth rate.

Okay, thank you.

John Janedis from UBS.

David, you often talk about the opportunity at ID and the gap between the network and getting networks with similar ratings.

But with the ratings growth there that you're seeing, have you been able to close the gap?

Or has the network just grown so quickly that the gap is harder to close?

Thanks, John.

ID, I love to talk about ID because in my 25-plus years in the business, I haven't seen anything like it.

If you look over the last 10 years, ID is now, from a standing start of four years ago, the Top 10 network in America and the Number 4 network in daytime.

And to answer your question, no.

Joe and the team have done a very good job of beginning that journey of growing the CPM to monetize the ratings growth within ID.

But it's probably going to take us another two to three years to do that.

It is improving.

There's no question that the advertising community is recognizing that if they want to reach women during the day, that ID is a fantastic vehicle.

It has the largest length of view of any cable channel in the US.

The other thing that's really interesting about the ID growth trajectory is, of the people in America that have ID, and it's in about 80 million homes, only 50% of them know they have it.

Now that's up from 30% about a year-and-a-half ago or a year ago.

But you will see growth from ID by -- you're seeing it by word of mouth.

Have you seen this channel?

You've got to watch it.

So we think we're going to continue to grow the overall audience.

But more importantly, even if the audience was flat, we would see substantial growth for the next two to three years, as Joe and the sales team get through this catch-up process of getting real full value for a very strong female service.

Okay, thanks.

And David maybe on Destination America, can you talk a bit more about it?

The content seems like it may have a lot broader appeal than maybe Planet Green.

What kind of investment are you going to put in there?

And is there an opportunity for broader distribution over time?

We're going to start off small.

The great thing about Destination America is it was really generated through talking with advertisers about how do we create a service that's more friendly.

And if you look at our core strategy, within the US, we're about all of America.

So TLC has become a top network for women by really servicing women in America.

But primarily, not New York and LA.

America.

A lot of Discovery, although it's broader based, does come from servicing all of America.

And so Destination America is, we think, within the sweet spot.

The great thing about it is we have this huge library of content that will work very well under Destination America.

It already is.

We're up 30% by just changing the mix of content that we already own.

So the investment will be small but we expect that we're going to be able to do a success-based growth strategy where over the next couple of years, as it grows, we'll invest more money.

But it will be small and we think the results should be pretty good to start.

Thanks very much.

Spencer Wang, Credit Suisse.

Two questions.

First, I just want to drill into the US distribution revenue -- for Andy.

So if we take out the $50 million and the digital licensing revenues, the growth was about 4.7%.

So we assume that there was a little bit of uplift from digital subscriber growth.

Is the core affiliate rate growth per sub in the 4% to 4.5% rate.

That's the first question.

And then second on advertising and the upfront this year.

Some of the online video providers like YouTube and Hulu and VEVO are making a more active push this year.

Do you think online video for the upfront is incremental to the market?

Or do you think that marketers allocate some of what they spend from linear to online?

Thanks.

Let me take the second one in terms of online video.

It's too early to tell.

There's a lot going on there.

We made an acquisition.

It was small in terms of the overall economics for us, not material.

But we acquired Revision3.

One of the reasons we did is they had about 100 million streams viewed last month.

And 100 million streams in a month is significant.

It's not highly-produced content, it's a different approach that we take.

We think that there may be something there.

We don't know.

We love the management team.

And so, when you take our entire library and a small asset like Revision3, it allows us to be contemporary and play in that space and build some competency there.

There's no sign that economics are moving there in any meaningful way.

But we have to watch it.

And that's why we set up a camp there where we can play within that space and get to know the whole crew there.

On the distribution side let me pass it over to Andy.

The affiliate number, the 5% was a combination of both digital rate and subscriber growth.

Say about 4% of the total 5% was rate growth, though, in total.

Great.

Thanks, Andy.

Anthony DiClemente, Barclays.

I have two.

At the risk of putting too fine a point on your 25% constant currency international ad growth, you mentioned the subscriber growth of 10%.

So it leaves about 15% that's either coming from impressions per user or pricing.

I'm wondering which of those two is a bigger driver.

I would say it's probably pretty balanced.

One of the things that you see when you saw our cost structure go up a little bit, is that four years ago we were selling Pan-European and Pan-Asian.

So we set out on the strategy of doing local sales in each market.

In many of those markets we have boots on the ground.

But in certain markets we just had an agency representing us.

One of the things you've seen in terms of cost is we've taken over some of that.

So I would say in terms of our ability to monetize our content, it varies region by region.

But we were probably a C or C-minus five years ago.

Today we're probably a B, in some markets maybe a little bit better than that.

But we're doing a better job of dealing with the power ratio and getting our fair share.

And some of that is because we've set up our own operations in Russia, in each of the markets in Latin America.

Taking back, as we get more scale, our own sales team.

And of course, you look at markets, like Brazil is 24% penetrated, Mexico 36% penetrated.

If you can remember back to the US, not only is there broad CPM differential but viewership on cable tends to cascade.

As you hit that 30% and 35% penetration, more and more people start spending time on the cable platform, so viewership on cable grows.

And the advertisers, it becomes more palatable.

It starts with direct response, but given the price differential advertisers start to move over.

And so, in the emerging markets, whether it be India, throughout Latin America and Russia, you're starting to see that as an additional wind.

And, Anthony, just to add to what David said, the 16 number also benefited from the lower launch amort in the quarter.

So it was actually about 11% in absolute growth, 15% when you include the lower amort.

Okay, thanks.

Alexia Quadrani from JPMorgan.

Can you give us any color how you're thinking about how additive TV Everywhere may be to your affiliate revenues when you renew some of those deals, or even before?

And just following up on your earlier questions on content, your digital deals for content, are you hearing any pushback from MSOs about these deals?

And do you think it becomes a bigger issue or an issue at all in your upcoming affiliate negotiation?

Okay, thanks so much.

On TV Everywhere, the good news is that we're in agreement with all of our distributors that in order to do TV Everywhere we have to reach an agreement.

And at this point we haven't reached a deal with anybody to provide TV Everywhere.

We are supportive of TV Everywhere as a business model.

It allows us, pretty soon And therefore it becomes an advertising opportunity in order to maintain our overall viewership share.

But we haven't reached a deal yet.

And so, we are supportive and the discussion now is about value, and we think the value is significant.

And it will be over the next couple months that we figure out between us and the distributors how to fairly parse that value, and how that value could come to us.

Whether it be in terms of subscriber economics or additional distribution.

There are a lot of different ways we could exchange value for TV Everywhere.

So we're encouraged by it.

We hope we can reach some deals over the next year.

In terms of the content, we were disciplined about the type of content that we put in.

And we carved out a very specific window, which is 18 months and older.

Before we did the deal, we sat down with all of our distributors and talked about what we were doing.

And so we didn't get a lot of pushback from providing this deal.

I think part of it has to do with -- and maybe different than others -- that we didn't put all of our best content on.

We only put content that was 18 months and older.

And if you look at it in the aggregate, most of the content is two and three years old.

We don't think it will have an impact.

But having said that, given how fast the world changes and moves, we did keep the deals tight so that if we find ourselves before our deals come up that in some way it does present a problem, that we have an opportunity to readdress that issue.

But at this point we don't see that and we see the economics as incremental, which is a positive for us.

Thank you very much.

Richard Greenfield from BTIG.

When you look at the benefit you're getting from digital revenues, curious if there's some way you could put it into context.

I know it's been a couple quarter now for Netflix.

How much viewership of your content do you think you're actually getting on these new platforms, specifically Netflix?

I realize it's probably too early for Amazon.

And how do you think that relates to the price you're generating from that content?

Is it actually too much, is it too little?

And what are you getting in terms of early data?

And then just quickly, if you ex out the digital deals in this quarter, you did have a little bit of margin contraction.

Could you just give us anymore color on when we should expect to see that turn because of the cost?

Do we expect that to turn in the third quarter or does that make sense?

Thanks.

Thanks, Rich.

First of all, the issue of, Netflix and Amazon, we think, have created a great service to consumers where they can view content that they otherwise wouldn't be able to see.

And obviously because of the demand for it, consumers are enjoying it.

From our perspective, and you won't be surprised by this, in the content business I strongly believe that content drives all of those platforms.

Whether it be, I've talked about the deals that we did in the content business with Apple.

As compelling as those platforms are, or the devices, without the content, whether if it's a wire or a platform, I'm not going to say it's a dumb pipe but it is a device.

And without great content it's just a device and the sexiness of it doesn't last.

And so the value that we provide to Netflix or Amazon or to TV Everywhere or any of these with Apple is to really, in the long term, drive the demand for those platforms.

Because in the end, the way that you can manipulate whatever is on there is only fun if you want to consume the content that's on the platform.

So we think that the value of our content is very high.

We have seen meaningful consumption but it's been a surprise.

Some of our best shows are continuing to be consumed primarily on traditional linear television.

And there is some older shows, some ones you would never expect, where there's a lot of energy behind.

Can you give us some examples?

I don't want to get into detail but there's a fair amount of viewership of shows that we're not even carrying, and haven't carried for a while on our networks.

So I think it's very early days.

Consumers are trying to decide how they want to use those platforms in different ways to consume.

So for us it's good and we expect that over time, as long as there's a competitive environment, that we'll be able to get good price for our content because our content is strong and it's demanded by consumers.

On the margin piece, we did say all along that the first half we would spend more, whether it's on marketing for Frozen Planet or investing in TLC or ID.

And that the margins would grow in the second half, particularly in the fourth quarter.

But let me pass it to Andy for final.

That's right, Rich.

The OIBDA margin was impacted by really two timing events.

The catch-up on the content amort, as well as, as Dave said, the premier of Frozen Planet and the marketing support of that.

We definitely expect in the second half for the OIBDA margin to get back to normal levels.

But is there any way to look at what organically margins did this quarter if you ex out the one-time events?

Really flat.

Okay, thank you.

Now I would like to turn the call over to Craig Felenstein for closing remarks.

Go ahead.

Thanks everybody for joining us.

We appreciate your time.

And if you have any follow-ups please give us a holler in New York and we're happy to take care of you.

Thank you.

Thank you, ladies and gentlemen for your participation in today's conference call.

This concludes the presentation.

You may now disconnect.

And have a good day.