華納兄弟探索 (WBD) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter-Two 2012 Discovery Communications Incorporated Earnings Conference Call.

My name is Ben, 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 this conference.

(Operator Instructions)

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

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

Please proceed, sir.

Thank you, operator, and good morning, everyone.

Welcome to Discovery Communications' second-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 would like to remind you that comments today regarding the Company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations.

In providing projections and other forward-looking statements, the Company disclaims any intent or obligation to update them.

For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2011, and our subsequent filings made with the US Securities and Exchange Commission.

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

Thanks, Craig.

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

Discovery delivered another strong quarter during Q2, as the strategic initiatives we have been driving across the Company over the last several years are generating significant financial growth.

At the same time, we are continuing to capitalize on the growth of pay TV globally, and a macro ad environment that remains healthy throughout the vast majority of the 200-plus countries we operate in.

Discovery's consistent focus on investing in our global platform, building new brands, and leveraging additional growth opportunities resulted in another quarter of double-digit OIBDA growth, excluding the impact of foreign currency.

The steps we have taken to broaden our global content offerings are helping to drive the international expansion, while domestically we are generating significant returns from sustained programming initiatives and audience growth, especially across our developing networks.

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

But before he does, let me take a few moments to highlight some of the initiatives contributing to our sustained operational and financial success.

You've heard us talk in the past about Discovery's long-term strategy of investing in bigger, stronger brands, and the highest quality nonfiction content.

We've increased our success-based content costs by about 7% or 8% annually over the last four or five years.

This sustained investment in programming is delivering market share growth worldwide.

And, given the continued strength in the advertising market across the globe, we have been able to generate 13% total company organic growth in the second quarter.

The biggest contributor to this growth in percentage terms is our international business, which generated local ad growth of 22% this quarter.

This business is a true differentiator for Discovery, and the significant advertising growth highlights the opportunity we have to exploit our global infrastructure by launching new channels, growing our audience, and building stronger brands.

There is no better example than the global rollout of TLC, which most of you are familiar with by now.

Over the last two years, we established TLC as another global flagship.

TLC is the number one most distributed women's brand in the world.

It is now in over 150 countries, it is making money, and we are only in the early stages of its growth cycle.

But that's just one example.

We have a robust portfolio of 26 brands, 137 networks, and 170 feeds around the world, and we are strategically investing in content to further capitalize on our market opportunities to drive audience and advertising growth.

Our latest initiative is to drive the ID brand in markets where we think it will have broad appeal.

Earlier this month, we rebranded Liv, our fully distributed entertainment channel in 38 countries throughout Latin America, to ID, after seeing the success of Crime and Investigation genre across our existing platforms.

We are already seeing a larger audience on that channel.

ID is now in over 100 countries globally, and we think this can be another growth driver for our international business over the next several years.

One of the unique aspects of our international growth story is that it is broad based, with continued growth this quarter from every one of our regions.

I know there is some concern in the marketplace regarding ad trends in Western Europe.

While the market is certainly slowing, we have been able to continue to deliver ad growth led by our free-to-air revenues -- most notably Real Time, which is now the number eight network in all of Italy, DMAX in Italy, Quest in the UK, and our most recent launch, Discovery Max in Spain.

Free-to-air revenues were up nearly 80% this quarter, and have helped maintain a strong growth trajectory in markets where pay TV growth is slowing.

And we have deep content libraries.

These channels are still growing market share significantly.

While free-to-air networks are not our primary focus, they are an excellent example of our ability to identify market opportunities, and exploit them with our globally relevant content.

The other component to our continued 20%-plus ad growth is the further penetration of pay TV worldwide.

The subscriber base across our international business expanded over 15% versus a year ago, and the combination of a more robust program offering, a larger addressable audience, together is driving substantial viewership growth, and in turn, advertising gains.

While advertising is growing more on a percentage basis, the largest absolute driver of international growth continues to be affiliate revenue gains.

Much like our ad revenue growth, our distribution revenue is broad based, with double-digit increases across nearly every region; most notably Latin America, and Central and Eastern Europe.

Latin America is our fastest growing region, with subscribers growing over 20% versus a year ago; led by Brazil, which added almost 1 million subscribers in Q2 alone.

We fully expect further pay TV growth moving forward, given the low penetration worldwide.

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

While the domestic cable business is obviously more mature than the international market, we continue to deliver strong growth as we take market share, and leverage the power of our existing and burgeoning brands.

Over the past few years, we have taken deliberate steps to broaden our portfolio, and take advantage of the shelf space our 14 domestic networks provide.

Since 2006, we have launched seven new networks off of our existing distribution -- ID, Destination America, Velocity, OWN, Fit & Health, Discovery Familia, and The Hub.

There's been lots of talk about cable channel ratings declines.

But when you look at the success of our new networks, it is apparent that if you invest wisely, and deliver high-quality content that is unique and engaging, you can grow your audience, and deliver increasing value to advertising and affiliate partners.

There's no better example of this than Investigation Discovery, which continued its meteoric growth this quarter, expanding its audience by 41% in total day among its key women 25 to 54 demo.

Despite only 30% awareness among pay TV subscribers, ID in less than four years has become a top 10 network for women 25 to 54.

And in daytime, a top six network for women, with only fully distributed networks ahead of it.

It is one of the longest lengths of tune in all of television, remains the fastest-growing network in all of cable in 2012, and has clearly become another flagship network for us.

Equally as important, we are translating that viewership gains into substantial advertising growth.

While we have made considerable progress in increasing the pricing and volume on this network, we still have a significant ways to go to achieve parity with the ratings ID is delivering today.

ID was not alone in ratings success this past quarter.

Animal Planet and Science each grew adult 25 to 54 audience over 15%.

Our most recent launch, Destination America, was up nearly 50% in June following its May 28 launch.

We also saw continued ratings momentum at our joint ventures.

The Hub delivered 54% growth this past quarter in total day among kids 2 to 11, its best quarter ever.

OWN built upon the 14% growth it delivered in the first quarter, with over 20% growth among women 25 to 54 in Q2, and well over 50% growth thus far in Q3.

With all eight of its charter advertising partners re-upping during upfront negotiations, and ratings performance exceeding our recent expectations, OWN remains on track to reach profitability in the back half of next year.

The growth of our emerging networks offset some choppiness during the second quarter at Discovery and TLC, and resulted in our total audience expanding 5% against the industry as a whole, which was down.

The diverse rating success we are delivering, along with our brand strength, set us up nicely heading into our recently completed upfront negotiations.

We garnered mid- to high-single-digit price increases, while achieving the highest dollar volume in our history.

Given the success of many of our younger networks, a priority for Joe Abruzzese's sales team during the upfront process was to generate higher volumes across these channels.

We certainly achieved that, with advertisers recognizing the value and opportunity brands such as ID and Destination America provide.

Looking ahead, the third quarter does present some hurdles with the Olympics and limited premier hours on Discovery until after Shark Week in August.

But with a strong upfront under our belts, a scatter market that remains relatively healthy, and a balanced portfolio of existing and emerging brands, we remain confident that we can deliver sustained advertising growth moving forward.

Building new brands and strengthening our content pipeline remain strategic priorities going forward.

We will continue to incrementally invest in growth opportunities to ensure we are putting our capital to work appropriately, and generating suitable returns on our investments.

Capitalizing on our core growth opportunities is still our first strategic priority.

But given our sustained financial momentum, the free cash flow we are generating, the strength of our balance sheet, and the growth portfolio of our Company, we have increased the pace of our buyback activity to further build shareholder value.

We have returned $1.9 billion in capital to our shareholders under our buyback program, and we will continue to do so aggressively if it is the best use of our balance sheet.

Discovery has had a great first half of 2012, delivering strong financial results while investing in our brands and platforms around the world.

With strategic initiatives delivering additional returns, a relatively healthy global operating environment, and a strong balance sheet, we are poised to deliver sustained operating momentum and continued financial growth for the rest of the year.

Now, let me turn the call over to Andy.

Thanks, David.

Good morning, everyone.

Discovery continued to deliver solid operating results during the second quarter, as further execution of strategic initiatives and a favorable operating environment enabled the Company to deliver double-digit advertising and [exploited] revenue growth excluding the impact of foreign currency.

Total Company revenue in the second quarter increased 7% on a reported basis, while organic revenue growth was up over 10% excluding the negative impact of currency movements, led by 19% international growth and complemented by 6% domestic growth.

Total operating expenses in the quarter were up 6% compared to the prior year, primarily due to increased programming costs from higher content amortization and $6 million of impairment charges related to the ID rebrand in Latin America, as well as some increased personnel costs, primarily at our international sales operations.

Excluding the impairment charge and the impact of foreign exchange, the increase in operating expenses for the Company was still 6% [from the] second quarter a year ago.

Discovery's continued ability to generate revenue growth in excess of expenses translated into a 6% increase in adjusted OIBDA during the second quarter.

Excluding the unfavorable currency impact, adjusted OIBDA rose 11% versus 2Q '11.

Net income increased 15% to $293 million, reflecting the strong operating performance in the current year, as well as lower taxes driven primarily from the benefit associated from reorganizing certain tax entities.

Free cash flow decreased to $138 million in the second quarter, as the increased operating performance was more than offset by higher content investment through the timing of production spending and increased tax payments.

For the last 12 months, however, free cash flow increased 5%, reflecting the improved operating performance and lower stock compensation payments, partially offset by higher tax payments and working capital.

Our full-year expectation for free cash flow in 2012 of over $1 billion remains unchanged.

Turning now to the operating units, the US networks continued to perform well during the second quarter, with revenues up 6%, led by 7% advertising growth and an 8% increase in distribution of revenue.

Excluding nonrecurring revenue items in 2011, domestic ad revenues grew 9%, led by the strong performance of Investigation Discovery, as well as the sustained favorable pricing and demand environment.

Current quarter ad growth was reduced by a couple of percentage points due to softer ratings performance of certain networks.

Though current ad market conditions continue to be attractive, with limited premier hours on Discovery until Shark Week in August, and given current ratings performance, we anticipate mid-single-digit ad growth in the third quarter of this year, with, of course, possible variability from ratings performance.

Domestic operating expenses were up 4% from the prior year, with the majority of the increase due to expected higher content amortization, partially offset by lower SG&A expense, which included a decline in marketing spend.

On a reported basis, domestic adjusted OIBDA increased 8%, and excluding the impact of the prior year nonrecurring revenue items, adjusted OIBDA was up 10% over last year.

Turning to the international operations, the momentum across our global platform continues, with revenues on a reported basis expanding 10%, led by 11% ad and 8% affiliate growth.

Excluding the impact of exchange rates, total international revenues grew 19%, with advertising revenue increasing 22% and distribution revenue up 15%.

On the advertising front, our Company delivered particular strength in Western Europe from the free-to-air initiatives David mentioned.

In Latin America, the growth was led by Brazil and Mexico, and in our Asia-Pacific region, India and Australia were the primary growth drivers.

The affiliate revenue growth, which included 3 percentage points of benefit from lower launch support amortization, was driven by continued strong subscriber additions worldwide, with the Discovery Channel, our most widely distributed network, expanding subscribers 8% internationally versus a year ago.

Latin America, led by sustained progress in Brazil and Mexico, and Central and Eastern Europe, with further development in areas such as Russia and Poland, continue to be the main drivers of international subscriber growth.

Operating costs internationally were up 13%, primarily driven by higher content amortization, as well as by increased personnel and infrastructure costs due to additional investment in growth initiatives, and the buildout of our global platform to support our long-term growth expectations.

The quarter also included $6 million of impairment costs related to the rebranding of Liv in Latin America to ID.

Excluding this impairment and the impact of foreign currency, operating cost growth was still 13%.

International segment delivered 16% adjusted OIBDA growth excluding currency impact, as the international team continued to generate strong revenue increases while thoughtfully investing in key growth initiatives.

Turning to our full-year forecast, we are leaving our revenue, adjusted OIBDA, and net income expectations unchanged, despite the negative impact from foreign currency since we guided last quarter.

It is very important to note that given the positive impact of the Netflix agreement in the third quarter of last year, and negative currency expectations this year, we expect overall adjusted OIBDA growth to be in the low-single digits for the third quarter of this year, with a resumption to strong double-digit adjusted OIBDA growth in the fourth quarter.

Excluding the Netflix impact a year ago and foreign currency headwinds, OIBDA growth in third quarter would be well in excess of 10%.

Turning to our balance sheet, we further strengthened our financial position this quarter by completing the issuances of a 10-year $500 million debt offering with a 3.3% interest rate, and a 30-year $500 million offering with a 4.95% rate.

These issuances provided us additional financial flexibility, while lowering our average cost of capital, lengthening our average maturity profile, and taking us to a more appropriate leverage level.

With a strong balance sheet that includes $1.7 billion in cash, and with sustained financial and operating performance, we continue to return capital to shareholders through the execution of our share repurchase program.

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

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

Discovery repurchased over $400 million of stock during the second quarter, including $389 million of Class C shares.

Given the liquidity constraints around repurchasing the Class C shares, we also repurchased $15 million of Class A shares during the quarter.

We still prefer buying the more economical security, but given SEC volume limitations as well as the long-term attractiveness of our securities, we will continue to repurchase both classes of stock.

We have bought back over $800 million under our share repurchase program thus far in 2012.

Since November of 2010, we have repurchased over 60 million shares in total, reducing our outstanding share count by over 15%.

Thanks again for your time this morning, and now David and I will be happy to answer any questions you may have.

(Operator Instructions)

Doug Mitchelson, Deutsche Bank.

David, I've got a question on international ad growth and a question on domestic ad growth.

22% international local currency ad growth is really something with incremental growth coming now from TLC and free-to-air.

When does that growth start to tail off and will the newer growth initiatives like international ID launches be enough to sustain mid- or high-teens ad growth?

That's international.

Okay.

Thanks, Doug.

We're seeing some real strength across the board and it really has to do with the fact that we have been investing long-term.

We now have Discovery, Animal Planet, Science, TLC, and we're getting ID built around the world and our market share is growing, which is very helpful.

At the same time, the pay TV universe is growing; it grew 15% in the quarter.

Part of it is that we're very well-positioned around the world with an average of six channels in 210 countries.

But when you look at some of the real growth markets, Brazil, Mexico, Russia, India, Turkey, in a lot of those markets, we have 10 or 11 channels with a number of successful networks.

Part of it is a market share story, Doug, part of it is that pay TV itself is growing.

Finally, we're getting a little bit better at selling advertising.

Some of these channels are new, so ID is just getting in there, TLC, so we're becoming more known in the marketplace.

But also, when you see that our cost in international has grown a little bit, it's because early on, we went to a number of agencies and markets to sell advertising.

Now that we're getting bigger, we're going into a number of those countries with our own boots on the ground.

We saved some money and we think that we can get some upside and we'll continue to get upside.

A market like that is Russia, Brazil, those are markets where we're selling our own advertising now.

Overall, we feel very strongly about our growth trajectory around the world.

ID is another example of a channel that works well around the world that we feel good about.

Internationally, we feel like we're very well-positioned.

You occasionally give a market share number.

Is there still plenty of headroom as your market shares are moving higher?

Do you start to worry about running into a wall at some point?

I think we're really in the third or fourth inning here.

We've just got TLC distributed.

It's now the number one most distributed women's brand in the world.

We're starting to see the benefit of having a strong female brand in almost every market.

We saw that here in the US because we get to see every advertiser.

In most cases, TLC right now is continuing to grow, because we're getting to know how to nourish that audience around the world.

In some markets, it's really taking off.

In Italy, we're very, very strong.

In Western Europe, we've been able, with TLC, to take advantage of a very big market share story that has, in a difficult economy, given us substantial growth.

We had very small presence in Spain, but we had a ton of content.

We put that content on a free-to-air channel at very low cost and we're gaining a lot of market share with a very successful channel called Discovery Max in Spain.

Overall, we think there's a lot of opportunity for us to continue to grow market share.

On domestic, if you produce mid-single-digit growth in 3Q or are going to, despite the Olympics, and given your upfront commentary, is it fair to say investors should expect 4Q reaccelerates back up to high single-digit domestic ad growth?

We're not going to predict fourth quarter, but I do think fourth quarter will be very strong.

We have the anomaly of the Olympics, as well as we have a lot of strong content on Discovery that's out of cycle.

We had Gold Rush on Friday nights that was the number one show on television, including the broadcasters.

We have a very good development slate and a lot of that will be coming up in the fall.

We feel very good about fourth quarter and I think you can expect to see some strong numbers on the advertising side, assuming that the market stays as is.

Is there any way to figure out what the Olympics impact might have been?

Is there any ballpark?

3%, 5%?

It's hard to tell.

The Olympics have come out very strong.

We stayed a little bit flexible.

At this point, we're holding back a number of our premieres because we just feel that the Olympics, right now, has a significant amount of cultural momentum.

If, in fact, the Olympics loses a little bit of steam, then we think we have some upside.

In addition, when we come back after Shark Week, if our content is a little bit stronger, then you'll also see, on the ratings side you'll see some more upside.

But we've tried to be conservative here in our approach.

Thanks for all the answers.

Doug, it's Andy.

Just to add, importantly, for the fourth quarter, we do expect a resumption to double-digit OIBDA growth in the fourth quarter.

That's a key outlook for us in the back half of the year.

Understood.

Thank you.

Ben Swinburne, Morgan Stanley.

Just following up on the domestic trends in Q3, David.

Is any of the deceleration coming from market trends or any weakness in demand overall in TV in the US?

Would you really chalk it all up to some ratings softness in the Olympic comp?

We're not seeing any softness in the market.

The market remains strong.

We had a very good upfront.

We'll talk a little bit more about it later, but overall it was more demand than we've seen in the past.

It was similar to last year in terms of the amount of inventory that we've moved, about 55%, and the pricing was quite good.

More importantly, we got a very strong receptivity to all of our networks this time.

One of the key objectives was to get more advertisers into Destination America, more into ID, more into Science and Military, and so the acceptance of the strength of those brands was an important success metric for us, for this upfront.

Great.

If I could ask one follow-up internationally, you've been in the cable business for a long time, you're looking at the international opportunity as being early days still.

I'm just curious, when you think about moving to free-to-air in some markets, it would seem like that's, to some extent, a hedge as you think about long-term growth in pay in markets like Italy, for example.

Are you saying you think you can maximize Discovery's profit or revenue pool in those markets by playing sort of both platforms?

Do you expect that pay TV penetration to resume growth as the economies heal over there?

Just a little more on your thought processes moving to the free-to-air side of the equation.

Free-to-air is pretty limited for us, but when we've used it, we've been able to uniquely be successful.

Strategically, when you take a market like Italy or Spain that's either mature or a small pay TV universe, and you have, one of the strengths that we have, is we have over a 25-year library of content that we own all of the rights to.

For us, free-to-air is a little bit different.

We pick up a stick, a channel, and we could essentially program that, like in Spain, our cost is very little.

If you look at other markets like Turkey, Russia, big growth markets like Brazil or Mexico, those are not markets where we would launch free-to-air because we're riding a very aggressive pay TV market that feels a lot like the US 10 years ago.

All of those wins are in our favor there, where we're seeing sub growth, we're seeing viewership in general moving to cable, we're seeing our market share growing.

In those markets, we'll be much more traditional and in some of the more mature markets in Western Europe, this has been a very specific strategy, but a very effective strategy.

Thank you very much.

David Bank, RBC Capital.

Two questions -- one on the programming expense side and one on the advertising side.

On the expense side, it sounds like you are calling out on the call and in the press release, a little bit of a step up in cash programming expenses for the quarter.

Is that a quarterly lumpiness throughout the year or is it a -- do we expect to see a --- or could you tell us do we expect to step up on annualized amortization going into next year?

If you could give a little bit more color around that.

The second question is, there is clearly a cyclicality of content in any given period and you have some tough comps and you have the Olympics and you have a lot of moving parts here.

But we're swinging from really down in some of the flagships to expectations of really up.

What kind of minimum ratings growth do you think you need on the flagships, domestically, at TLC and Discovery to get back to that high single-digit growth, given the expected performance in the emerging networks, which seem to be really strong?

Can you talk about just at a minimum, what do Discovery and TLC, on a sustained basis, have to do?

Thanks.

David, it's Andy.

I'll answer your first question.

There's really no call out on the cash timing.

We knew that it would be a little bit of acceleration of cash content expense in the second quarter.

We'd said for a while now that first half expense would be higher than second half.

We still believe that overall from an expense profile.

There's no cash timing call out.

It just was timing of cash distribution in the second quarter.

David?

On the flagships, there is cyclicality to it.

We had a very strong fourth quarter and first quarter on Discovery.

We were up high single-digits and we had a lot of our content really working, a lot of new content that was working quite well.

In the summer, we were a little bit out of cycle.

In the last two weeks in July before the Olympics, we were up 15% and that was without a lot of our premieres and our good stuff.

I do think it goes up and down.

We expect that Discovery and TLC will grow.

We have a very specific audience that we're going after, but we're also not just about ratings.

One of the keys for us is the ability to take quality content and move it around the world.

It's very efficient for us on Discovery, on TLC, on Animal Planet.

For us, ratings isn't the only metric, but we do expect that those networks should grow and will grow mid-single and if we're more successful than that, double-digit.

We have very good creative teams in place there.

At the same time, we've been one of the only media companies to effect a strategy that's built around the idea that we can still build meaningful audiences on new channels.

ID didn't exist four years ago.

It's now a top 10 network in America.

It's been probably 10 years since a top 10 network has launched and we did it from scratch.

We're seeing a lot of strength at OWN, we're seeing strength on Science, Animal Planet.

Destination America is working very well, particularly in the travel category where there's a lot of good advertisers.

We're definitely focused on having TLC and Discovery grow, but we're also very excited about the fact that we have a number of other channels that are growing as well.

Andy, just to clarify, I just want to follow up and make sure I understand.

Whatever's going on in terms of the programming investment that you did signal going into the quarter, is there anything we could take away in terms of longer-term amortization changes?

Has anything changed from prior assumptions and programming investment trends?

No, David.

We continue to see opportunities to invest, especially in our emerging channels that David has talked about, but there's no change here in the views we've given in the past and our content structure for the second half and going into '13.

Longer-term, we've been investing about 8% or 9% and with that, we've been able to launch TLC around the world, to invest in all these channels we just talked about and it's all success-based investment.

Next year or the year after, if that number goes up, we're going to be very happy.

If that number goes up, it means that the content is working even better and therefore we're investing more and we're gaining more market share.

But so far, if you look over the last couple of years, it's been pretty steady in the 8% to 9% and that's where we expect it to be unless we can hit a few more strong veins of program content.

Thanks you so much, guys.

John Janedis from UBS.

David, the shelf life for programming seems to be getting a little bit shorter.

When you look out over the next couple of years, do you see your number of new prime time hours increasing somewhat on both the mature and emerging networks?

It's hard to tell.

On the one hand, you're right that content seems to be cycling a little bit shorter.

On the other hand, we have a new window with Netflix and Amazon where we're able to take content that's 18 months and older and in our case, the majority of that is two years and older, and create significant economics.

On that score, we've been looking at that Netflix, Amazon window and it's been very successful for us with no degradation of viewership.

That is all incremental.

It's a little too early at this point for us to figure out whether we're going to do more premieres.

At this point, we haven't.

Particularly on our smaller networks, we're able to do much less and still get the benefit of significant repeat and using content on multiple channels.

On Discovery and TLC that have audiences that DVR a little bit more and are much stronger brands and stronger channels, on that, we're able to repeat a little bit less.

But in general, we haven't made any decision to make any meaningful change.

Thanks.

On a related topic, you mentioned Netflix and Amazon.

How do think about future opportunities from them or other players in both the US and abroad?

We did a deal with Netflix that was a three-year deal, a two-year deal with an option to extend for a third year.

We have a very good relationship with Netflix.

That new window of 18 months and older, which is the deal we did with Netflix and Amazon domestically, looks to be working very well so far for us.

If it continues, then we're very happy that we have an opportunity to exercise a third year on that.

There are a number of other players that are looking for content in that window and in a nearer-term window with TV Everywhere.

I think that's one of the reasons why it's such a good time to be in the content business right now if you own your content.

Every one of those windows provides additional consideration for us and there, potentially more growth.

Since we own our content, we get almost all that.

Outside the US is a little bit different.

It really depends on the market.

So far, we haven't done any of those deals outside the US.

In mature markets, like some of the markets in Western Europe, it's very possible that we will be doing some of those deals, because you have a highly penetrated pay TV market that looks a lot like the US.

The Netflix-type deals become incremental with, at least at this point, no sense of degradation of viewership.

That's very different than when you go to Latin America where Brazil is 25% penetrated or Mexico, 42% penetrated and you're seeing huge growth.

In Mexico there was almost 1 million subscribers added in the last quarter.

In those populations, there is a C class that's adopting onto pay TV that hasn't had pay TV before.

We're not convinced that doing an 18-month window and presenting content to those viewers is a good idea.

It may be, but we're just not convinced.

In the emerging markets, we'll probably stay away for a period of time and ride the pay TV window alone.

But in some of the more mature markets, we'll look at it as being an incremental opportunity.

Thanks a lot David.

Todd Juenger, Sanford Bernstein.

Another one on ratings and then one on the JVs.

The choppiness you mentioned at Discovery and TLC in Q2, just wondered if you have any insight on, for instance, in June when Discovery and TLC had tougher months, where those viewers went?

How many of them landed on your other networks?

How many of them landed on competitive networks and how you feel about trading those viewers back and forth like that and then where you expect them to come back from?

Then on the JV losses, the minority positions just came in really light in the loss there for the quarter.

I know ratings are way up, but that was an extraordinarily much lower loss than we had seen earlier in the year and just wondering if that's indicative of the future there.

I know they're buying less services from you so that's part of the financial improvement there, but any other color on what's driving that improvement?

Thanks.

On the ratings piece, we really feel like it's cyclical.

We didn't have many premieres and our strongest content was not in play in June.

What you'll see coming after Shark Week on Discovery is some of our better content getting even stronger as you go into September and October, so we're quite confident.

On TLC, we have a number of our strong shows that are performing well and you're going to be seeing more of them as the summer goes on.

We just launched a new night of wedding programming with the number one network for women on Friday nights with wedding programming and we have a whole slate of new wedding programming coming on Thursday.

One, we feel pretty good about where we are creatively.

But where it goes, I'm sure that we pick up some of it from our other 12 or 13 networks here in the US, but people here -- this is the most competitive viewing market in the world.

We have over 200 channels.

Our job is to put on great shows with strong characters and great stories.

When we do, we build very big audiences.

In the last two weeks in July, Discovery was up 15% because we put on some more good content.

That's how we see it on that.

Before I pass it to Andy, on OWN and The Hub, in terms of the actual numbers, both have really accelerated.

The Hub has seen not only ratings growth, but Margaret Loesch has started to get a real sense of how to program that network to the kids audience 2 to 11.

My Little Pony has taken off in a big way culturally, which has been a help and Transformers.

On OWN, there's a great leadership team that's really stable now in place.

Eric Logan and Sheri Salata, very strong, Oprah's engaged and that network has grown every month from the beginning of this year and now performing even better than we thought it would.

It was up 14%, then 20%, now 50%.

It's more than 25% year-to-date.

More importantly, every advertiser that signed up before we went on the air has re-signed up to be part of OWN.

We feel very good about it and we're looking for to OWN being profitable next year.

We're feeling very good about Hub.

A lot of work went into that, a lot of hard work by the leadership teams there to figure out the audience and how to nourish them.

We've got a ways to go on both, but they're both doing quite well.

The significant improvement in the other income expense line was driven by OWN.

That's really twofold -- one, in the first quarter, if you remember, we had the close down costs of Rosie.

We accrued all of those expenses in the first quarter.

But also, it's driven by just better performance at OWN.

OWN, operationally, expense-wise, advertising-wise, as David said, rating-wise they had a better quarter and so that flowed through to us.

As we look forward, though, to third and fourth quarter, important to highlight that we do expect slightly higher losses in that line, mostly driven by investing into the strength and the momentum at OWN right now, put more marketing, more content expense.

We will have a slightly bigger pick up of losses there, but again, it's investing in momentum and the second quarter was very good.

Thank you.

Very helpful.

Jessica Reif Cohen, Bank of America Merrill Lynch.

On the buyback, I know you guys commented on that, but the pace does seem to be picking up Q2 and into Q3.

Can you just comment, will Q3 -- it looks like it will be another quarter over $400 million.

Yes, Jessica, as you have heard me say before, my number one metric that I look at and I drive is free cash flow per share.

When we model out and when David and I, and we talked to the Board about this, when we model out buying the stock today and the free cash flow per share going forward in our forecast and creating that IRR, as long as that IRR is strong and double-digit, we're a buyer of our stock and actively enthusiastic about that.

You saw that momentum in the second quarter and we do anticipate continuing that.

Ideally, we would continue to put money into growing organically and continue to look at perhaps acquisition opportunities.

But in the meantime, we will continue to allocate capital towards re-buying shares, especially given our free cash flow per share growth profile.

On the acquisition front, because you mentioned that in the press release and also earlier in the call, what kinds of acquisitions would be of interest to you, I mean, if you could just talk theoretically?

Hi, Jessica.

Theoretically, clearly international is our strength.

It's almost 40% of our business now.

It's grown.

Four years ago, it was $250 million, last year it was $650 million.

This year it'll be dramatically more than that with real meaningful strategic advantage.

Our content works well, we have more channels than anybody else.

We have local teams on the ground and so building on that strength is a key strategic initiative for us.

In addition, it's an important hedge.

The US has slowed down.

We're growing in the US because we're growing market share and because we have a good team monetizing, with Joe Abruzzese, the sales that we get and we have a strong leadership team on the distribution side, that over the next few years, we think will do very well when our deals come up.

But when you have markets that are underpenetrated, like Turkey and Russia and India and all of Latin America, where we've been for so long and were so strong, to the extent that there are any meaningful opportunities where we can acquire something.

But because of our position, we're likely to have more synergy than others and because we're on the ground, we can make pretty quick assessment.

But we're only going to buy something if we think it will help us grow faster.

We have been looking very hard at a lot of things, but we haven't bought anything yet because we haven't found anything that's going to help us grow faster.

We did make a small acquisition of Revision3 this past quarter.

That's a video stream business.

It's a leader in the video stream business and that's consistent with us viewing ourselves as a company that satisfies curiosity on all platforms.

They're a very aggressive entrepreneurial company in Silicon Valley and we're excited about having them as part of us.

Thank you.

Michael Nathanson, Nomura.

David, I have two.

Let me start with the first one.

Given what you did at NBC and now Discovery, I wonder if you have any views or your strategies have changed looking at the DIRECTV/Viacom battle from last month on affiliate fees.

Does that make you change your philosophy or strategy with your own deals going forward?

So I just want to know what your view of that is.

I don't really have a view on specifically what happened with Viacom, but we have a very clear strategy domestically and internationally.

We've been saying it now for six years, which is what's most important is that we build strong brands, grow our viewership, and try and get affinity groups.

It's not just the ratings of your channels, but it's how strongly do the groups of people that watch the channel feel about your channel.

The fact that Discovery is the number one most valued brand on cable is important to us.

The fact that we built a network, ID, that has women that feel very strongly about it as a channel that they love.

The fact that we've launched seven channels in the last five years, the fact that our market share is up significantly and candidly, we have a very strong equitable argument.

We were investing about $600 million, we're now investing over $1 billion.

Our strategy is simple and that's that we want to bring more value to the viewers, we want to be more important to the viewers, and if we are, we think that when we do our deals, we'll be able to get substantially more value because we're spending more money and we've earned it by having our channels be more important.

Is going dark an option that you'd consider?

I don't want to speak about the negotiations that we're going to have, but we feel very good about where we are in terms of the hand that we have because we think our channels in the aggregate are very strong.

All 13 come up at once.

We have good relationships with the distributors, but we'll be pushing hard to make sure that we get fair value.

Okay.

Let me just ask you, just a point of clarity about the upfront.

At one point, you said you guys had sold more volume and then you said a number in the Q&A of 55% sell out.

Can you help us square that?

Did you sell the same volume on the mature TLC, Discovery networks and add more volume on the others?

How do those two comments work together?

It's really a little less on some channels, but remember we have more inventory based on some of the new launches we have.

Overall, more volume, but again, good mid- to high single-digit pricing and that 55% was right where we wanted it to be going into what is still a robust scatter market.

The point is that it's not 55% across the board.

There are a number of our channels that we're catching up on.

It's going to take probably two to three years before we can get full value on ID, although we're making progress.

The same is true, we're working our way up with a lot of these brands.

But they're new and as a result of that, they're not getting, we believe they're not getting the CPM that they deserve.

In some cases, for some channels where we got the right value, we took more.

In cases where we think we could do better by going into scatter where we can push the CPM up higher and faster, we took less.

But overall, we feel very good about how we did.

Okay.

Thanks.

Anthony DiClemente, Barclays.

Thank you very much.

First, for Andy, on free cash flow, your cash taxes stepped up by about $200 million in 2012.

Wondering if we're at a more normalized level there as we try to model out free cash flow into 2013.

If there's any anomalies in the calculation that you would point out, whether it's taxes or working capital?

And then one for David, just following up on the question about distribution and the negotiations, wondering if it's possible that any of your existing deals are opened up an extended early because of TV Everywhere or authentication?

Is that possible?

I'm just wondering if not, then why not?

Is that a commentary on the environment or anything?

Wondering if you think we see those deals open up before expiry?

Thanks.

Anthony, on the tax question, if you remember last year, there was a real anomaly with a Section 181 catch-up and so this year, we don't have that benefit.

It hasn't been extended yet by Congress.

If it is, that would be a real good guide.

Right now, we're assuming it has not been renewed.

That last year was a real good guide, that's the difference between last year and this year on the tax side.

As far as going forward, no real call outs other than one huge benefit we have of being such a globally diverse company, is our ability to maximize tax entity and structures.

We are taking a look at our global content rights and how we can structure those in a way that's most tax-advantaged for long-term.

But for today, 35% is roughly the right number to think about.

We did have that one discrete item in the second quarter that was helpful.

That would be a good cash guide next year, but broadly speaking, the main answer to your question is Section 181 last year.

Right.

Broadly speaking, if I just model out your free cash flow trajectory similar to your cash flow from ops trajectory then that's reasonable?

Yes.

Okay.

Okay.

Hi, Anthony.

On the distribution side, if you take away TV Everywhere in terms of the terms, the deals start coming up at the end of this year and they flow in pretty evenly over the next four or five years.

As I've said earlier, TV Everywhere is something that we think is valuable.

Many of the distributors would like it and they would like authentication.

We haven't reached agreements yet with anybody.

We are in some tests with Comcast.

We like that model.

There's two ways we could do TV Everywhere.

We could get valuable consideration for TV Everywhere alone or we could open up the deals early and do a roll-up renewal that includes TV Everywhere.

Both have been discussed, we haven't decided which we're going to do and we'll do the one that we think creates the most value for shareholders.

Okay, thanks.

Tuna Amobi, S&P Capital IQ.

Quick clarification, Andy, your comments on the higher losses for OWN in the back half, I was wondering if that was relative to Q2 or relative to the first half?

That would be helpful.

Definitely Q2.

That operating improvement that we saw in the second quarter will continue, but we are going to put a little bit more money behind it, especially on the marketing side.

It will be slightly more relative to our Q2 performance.

Okay and still on the OWN theme, David, I think it's fair to say improvement in OWN has been remarkable so far this year and maybe you guys aren't telling the story enough.

But as I think about the ratings and the breakeven target that you've given, is there something in there that perhaps you think may derail the sustainability of this trend that we're seeing?

Can you point to maybe a couple of things that you've done that you think can make these kinds of gains to be sustainable or not?

Candidly, we are significantly ahead of where we thought we would be, last quarter, where we had started to really build ratings.

We have a good leadership team in place.

Most importantly, the viewers are coming back, they like what they see, it's very simple.

We're doing less of what's not working, we're doing more of what is working.

Oprah's much more engaged.

She has a team in there that's in love with the brand and we've been trying to figure out over the last year how do we nourish the viewers?

We get to talk to them through Oprah.com, which is a great advantage.

It's a very strong online vehicle, one of the top for women.

Between the leadership team and the new content that we have and a lot of the new content that we have coming up, we're quite confident that we've begun to really find the recipe for a strong women's network.

We think that the OWN brand now is starting to be what Oprah and I talked about when we were all excited about this.

The Oprah brand is one of the best brands in media and for women, it may be the best brand in media.

Separately, with regard to the upfront strategy, one might have thought that you guys may have played it a little bit more conservative.

Granted mid to high single-digit is higher than I guess what the industry saw, but with all these new channels and rebranding and whatnot and the ratings momentum, can you maybe elaborate a little bit more on why you chose that strategy?

I think you said the scatter market is relatively healthy.

A little bit few more data points on that would be helpful.

Thank you.

We feel quite lucky having Joe Abruzzese, probably the best sales, we think, the best sales leader in the business.

We were on the high end of the market in terms of the upfront and we were very strategic.

Not only were we on the high-end of the market in terms of the pricing and the volume but we were also able, through Joe's team, to put the dollars in the places where we thought it would be most valuable to us and to give ourselves opportunity to go into scatter with some of our brands where we thought that they would be more valuable there or where we had more ratings momentum to take advantage of it.

Overall, we were very happy with the upfront.

Thank you so much.

Barton Crockett, Lazard Capital Markets.

I wanted to ask about the outlook for the third quarter ad growth internationally.

You talked about how you see a bit of a slowdown domestically, partially an Olympics impact.

Is there anything like that happening internationally or does the Olympics impact really not matter over there?

It really doesn't matter over there, Barton, as much.

We still expect double-digit growth there, a little less visibility based on the market.

But we still expect double-digit growth out of international.

Okay and just to follow up on the FX impact in this quarter, which was quite pronounced.

I know you guys talk about 40% of your international segment revenues being dollar denominated.

Could you parse down for us a little bit more about where you actually saw the FX headwinds in the quarter?

It's really twofold.

Relative to a year ago, the euro weakened 13%.

When you look at our FX impact, not only is it the transactional impact, but the translation as well.

From an accounting perspective you take your short-term assets, like receivables, and you actually translate them at the lower currency rate.

That also flows through to the income statement.

It's not just the transactional piece, but the translation as well.

The accumulation of those two, given a significant move in the euro translated into this meaningful amount of FX impact in the quarter.

As you flat line the FX going forward, does the impact remain similar into third and fourth quarter or does it fade?

It fades relative to the year over year variance.

The guidance we gave assumes really a constant currency from today, so we haven't really assumed any big fluctuations in the market today.

But it will wane a little based on just the year over year fluctuation in the currency.

Okay.

Great, thank you very much.

Thanks, everybody, for joining us.

We appreciate it.

If you have any follow-up questions, please give us a call.

Thanks.

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

That concludes the presentation.

You may now disconnect.

Good day.