華納兄弟探索 (WBD) 2012 Q3 法說會逐字稿

Welcome to the quarter three 2012 Discovery Communications Inc earnings conference call.

My name is Caroline.

I'm your operator for today.

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

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

(Operator Instructions)

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

I'd like to turn the call over to Craig Felenstein, who is Senior Vice President of Investor Relations.

Please go ahead, sir.

Thanks, operator.

Good morning, everyone.

Thank you for joining us for Discovery Communications' third quarter 2012 earnings call.

Hopefully, the timing of our release did not interfere too much with your election plans.

Joining me today is David Zaslav, our President and Chief Executive Officer and Andy Warren, our Chief Financial Officer.

You should have 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.

We appreciate you joining us.

Before we begin the call, on behalf of myself and the entire team at Discovery, I wanted to extend our thoughts and best wishes to everyone who has been impacted by Hurricane Sandy.

It's been quite a week.

Discovery's financial momentum continued during the third quarter as our sustained investment in developing high quality content and building bigger brands with global appeal allowed us to capitalize on the relatively healthy worldwide ad environment and the further penetration of pay television around the world.

Investing in great series and specials in those geographic areas that provide the greatest advertising and affiliate opportunities has been a consistent strategic priority for Discovery, and a key factor in our strong and dependable growth over the last few years.

Our third-quarter results were skewed by several one-off items, which Andy will discuss when he covers our financial performance, but the sustainable organic growth story remains robust.

International expansion continues at a rapid pace as we broaden our global content offerings and capitalize on our unparalleled distribution platform, while domestically targeted programming initiatives are delivering audience growth at several of our emerging networks.

We continue to see market share gains across the portfolio.

Though investing in bigger, stronger brands remains paramount, we remain committed to our success-based investment style.

We do not just throw dollars against a wall and see what sticks.

But rather, by incrementally spending on those brands that have demonstrated meaningful upside, we can maximize the best possible return on our programming dollars.

There's no better example of this than Investigation Discovery.

ID was launched back in January 2008 with the view that mystery and forensic content was compelling enough and had a sufficient audience base to be the linchpin for an entire network.

But before investing significantly in the concept, we wanted to test whether this type of programming would resonate with viewers, so we seeded it with a little bit of money and launched ID off the distribution of Discovery Times.

In the first year, our cash spend only increased marginally, but the reception from viewers was immediate.

We then went out and hired cable veteran Henry Schleiff, spent a little bit on marketing, attracted top story tellers to the genre and continued to incrementally invest in content.

Since 2008, we have more than doubled the number of original hours on ID and the return has been significant.

ID's audience has more than tripled during that period and critically, we have been able to monetize that audience with advertising up more than six-fold over the same time period.

Our investment continues to pay off with viewership on ID up nearly 30% this past quarter in total day among its key women 25-54 demo.

It is now a top 6 network in America, during the day for women and thus far in 2012, it is one of our largest drivers of advertising growth domestically.

We still have significant room to grow before we achieve pricing and volume parody with the ratings ID is delivering.

However, ID has clearly become one of Discovery's flagships.

We will continue to incrementally invest in the brand both in the US as well as around the world.

In just the last year, we have taken ID into over 130 countries.

Animal Planet is another network that has really broken out.

Since 2008, we have increased its original content by nearly 30% and the audience is up a healthy 46%.

When the growth took a breather in 2011, we deliberately held back on further increasing its content budget, to see if the Animal Planet brand would regain its momentum and continue to grow.

The answer was a resounding yes, with viewership up nearly 20% year-to-date.

Including its best ever third quarter led by returning favorites, Call of the Wildman, Tanked, and My Cat From Hell.

Given their momentum, we will continue investing additional programming dollars in Animal Planet, as the audience growth is translating into significant advertising revenue gains.

In addition to Animal Planet and ID, we are also seeing growth in several other emerging networks that we're investing incrementally in during 2012.

Including viewership gains this past quarter of over 20% at the recently rebranded Destination America, 55% viewership gains at Velocity, and over 15% gains at the Science Channel.

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

But when you look at the success across our younger networks, it is clear that our strategy is working.

By investing wisely and delivering high quality content that is unique and engaging, we can grow audience, increase market share and deliver additional value to advertising and affiliate partners.

Similarly, as we invest in our emerging networks, we continue to support our two established flagship brands, Discovery and TLC.

We mentioned on our last call that the third quarter presented some hurdles with the Olympics and soft ratings early in the quarter.

But we captured some real momentum with the most successful Shark Week ever, starting in mid-August on Discovery and followed that up with the successful return of Sons of Guns, and new hits, Bering Sea Gold - Under the Ice and Yukon Men, which helped Discovery deliver viewership gains of 8% post Olympics.

The fourth quarter is also off to a great start, with October viewership up 13% in prime time, led by the premier of Gold Rush, which was the number one show in all of television among Adults 25-54, beating all the cable and broadcast networks on Friday night.

TLC also captured some significant ratings momentum after the Olympics, led by the break-out phenomenon, Here Comes Honey Boo Boo, which tapped into cultural zeitgeist and averaged nearly 2.5 million viewers across its season.

Honey Boo Boo was not the only success on TLC during the quarter.

Long Island Medium returned as the number one ranked program in its time slot, with viewership more than doubling its first season.

Equally as important, we were able to use that success to launch Breaking Amish, which averaged over 3 million viewers and was TLC's highest rated new series in nearly a decade.

TLC was up 17% in prime time during September and that momentum continued into the fourth quarter with October also delivering 17% growth year on year.

With Discovery and TLC gaining real programming strength from great original content and with the emerging nets growing their audiences nearly across the board, we were able to deliver our best October ever.

Viewership for the overall portfolio was up 17% in prime time.

This increased market share along with a strong upfront and a scatter market that looks to be relatively healthy, gives us confidence that we can deliver sustained advertising gains moving forward.

We're also seeing some impressive growth at our joint ventures.

The Hub delivered 62% viewership growth this past quarter in total day, among kids 2-11, its best quarter ever.

Lastly, we continue to see big ratings momentum at OWN.

Building upon the 18% increase it delivered in the first half of the year, OWN grew nearly 60% in the third quarter among women 25-54, led by record ratings for its flagship series Oprah's Next Chapter, as well as strong premiers from Iyanla - Fix My Life and Welcome To Sweetie Pie's.

In addition, last month, OWN announced a partnership with Tyler Perry, award winning actor, director, screen writer, playwright and producer, to become Tyler's exclusive home for all new television series and projects, demonstrating the power of the Oprah brand to attract some of the biggest names in entertainment.

Two of Tyler's series will debut next year and will give the network another strong night to build audience share and launch new franchises.

Executing on our investment strategy domestically has allowed us to deliver sustained growth over the last several years, in what is obviously a more mature and competitive US market.

The more robust opportunity continues to be international, where we are launching new channels, growing audiences and building stronger brands globally as we exploit our unparalleled market position in over 200 countries.

Similar to the US, we are focusing our investment in areas that represent the biggest opportunities from an audience, advertising and affiliate perspective.

A good example over the last few years has been our emphasis on broadening the female demographics across our international platform.

The first step was establishing a female flagship brand across the globe, much like we have here in the US.

Given the vast distribution network already in place, we were confident we could take predominantly existing shelf space, utilize a fair amount of library content and strategically increase our programming commitment to create the number one most distributed female brand in the world.

We've done just that.

Over the last two years, our female flagship has been rolled out to over 150 countries, now, reaches nearly 300 million subscribers and is delivering real viewership growth with audience up 51% versus a year ago.

As we mentioned on the last call, our most recent initiative, given the success of crime and investigation genre across our existing platforms, is driving the ID brand in markets where we think it will have broad appeal.

Last quarter, we launched ID in 38 countries throughout Latin America.

And ID is now in over 130 countries globally, reaching more than 60 million subscribers and we think our investment in this genre will be another growth driver for our international business over the next several years.

The investments in TLC and ID along with further investment in Discovery Kids and targeted local content has dramatically increased female viewership and in turn has enabled us to significantly grow Discovery's share of female targeted advertising dollars.

Another driver of ad growth for us continues to be our targeted investments across Western Europe.

While the market is certainly slowing in some of these countries, we continue to deliver double-digit ad growth across Western Europe led by Real Time and DMAX in Italy, Quest in the UK and Discovery MAX in Spain.

Our primary investment focus remains strengthening the pay-TV channels across our international footprint.

But the free-to-air networks we have launched are an excellent example of our ability to identify market opportunities and exploit them with our globally relevant content.

As we look for ways to take additional viewership and advertising share around the world, we continue to exploit the further penetration of pay-TV worldwide.

The subscriber base across our international business expanded over 17% versus a year ago, led by Brazil and Mexico and Latin America and Russia and Poland in Central and Eastern Europe.

With subscribers growing across the globe, we are delivering broad-based affiliate revenue growth with every region this quarter delivering double-digit gains versus a year ago.

Given the relatively low penetration levels worldwide, we fully expect continued pay-TV growth moving forward.

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

Building new brands and strengthening our global content top line to capitalize on our core growth opportunities is still our first strategic priority.

However, given the sustained financial momentum, the free cash flow we are generating, the strength of our balance sheet and the growth profile of our Company, as we invest in our underlying assets, we have also been buying back shares aggressively.

Returning capital to shareholders remains a focus and we will continue to do so if it is the best use of our balance sheet and we will further build shareholder value.

Discovery has delivered sustained financial momentum throughout the first three quarters of 2012, further demonstrating our ability to capitalize on the opportunities across our global distribution platform and the strength of our current operating environment.

At the same time, we are investing further in building out our diverse set of brands and platforms around the world, in order to expand our market share and deliver additional value to our shareholders over the long term.

Now, let me turn the call over to Andy.

Thanks, David.

As David touched upon in his comments, Discovery's underlying financial momentum continued during the third quarter as we further executed upon our strategic initiatives in a relatively favorable operating environment.

Excluding the impact of foreign currency, Discovery delivered another quarter of revenue and OIBDA growth, despite the upside a year ago from the Netflix licensing agreement.

On a reported basis, total Company revenue was slightly below prior year.

But our organic revenue growth which excludes the impact of licensing agreements and currency movements was up over 8% led by 15% international growth and complemented by 5% higher domestic revenues.

Total operating expenses in the quarter were down 5% compared to the prior year, as increased personnel costs were more than offset by lower impairment charges, the impact of currency and the absence of expenses related to the Netflix agreement a year ago.

Excluding the impairment charges, expenses associated with the licensing agreement and the impact of foreign exchange, total Company operating expenses increased 3% versus the third quarter a year ago.

Discovery's continued ability to generate revenue growth in excess of expenses translated into a 4% increase in adjusted OIBDA during the third quarter on a reported basis as margins expanded by almost 200 basis points.

Excluding the impact of licensing agreements, impairment charges and foreign currency, adjusted OIBDA grew 14%.

Net income from continuing operations decreased to $214 million, as the strong operating performance in the current year was more than offset by the net impact of prior year one-time items.

Additionally, the current quarter included increased losses at our equity investments, higher mark-to-mark share based compensation expense due to the appreciation in our share price and increased interest and tax expense.

The higher than normal tax rate in the quarter was primarily due to a restructuring at our international operations, which will ultimately lower our effective tax rate but which will also marginally raise our tax rate for the next several quarters.

Please note that total net income in the current quarter also included a $9 million net of tax loss from discontinued operations due to the sale of our Creative Sound Services business.

Free cash flow increased 12% to $353 million in the third quarter, as the improved operating performance was partially offset by higher content investment and increased cash taxes.

As David mentioned, the increased programming spend in the current quarter is certainly paying off in terms of ratings momentum and higher advertising revenue.

Important to note, there will be a $50 million to $60 million increase in content expense next year, as content amortization catches up with the cash spend in 2012.

But we do anticipate programming spending growth will slow considerably in 2013.

Now, turning to the operating units.

The US networks continued to perform well during the third quarter.

On a reported basis, total domestic revenues decreased 4% as advertising growth of 7% was more than offset by a decline in distribution revenue due to the execution of the Netflix agreement a year ago.

Excluding licensing agreements, total domestic revenue growth and distribution revenue growth were both 5%.

As we mentioned on our last earnings call, advertising this quarter was negatively impacted by the Olympics, as well as our soft July ratings.

Our reported ad revenue growth slightly exceeded our mid single-digit growth guidance, primarily due to sustained pricing strength and viewership gains across our portfolio after the Olympics.

Current ad market trends continue to be encouraging with sustained double-digit scatter pricing on top of the gains we garnered during this year's upfront negotiations.

We have seen some pockets of softness with regard to volume, but the overall environment remains relatively healthy.

We have some nice ratings momentum across many of our networks.

As such, excluding a one-time revenue item we recognized in the fourth quarter a year ago, we anticipate ad sales growth in the high single-digits this fourth quarter, building upon the impressive 17% organic growth we delivered a year ago.

Domestic operating expenses were down 13% from the third quarter of 2011, which included $22 million in higher content impairment charges and $11 million in costs associated with extending and expanding digital licensing agreements.

Excluding content impairment charges and costs associated with the digital licensing agreements, operating expenses actually declined 4% compared to a year ago, due to lower content amortization and a decrease in marketing spend.

On a reported basis, domestic adjusted OIBDA increased 2%.

Excluding the impact of licensing agreements and content impairment charges, domestic adjusted OIBDA increased 12% over the prior year.

Turning to our international operations, we continued to deliver strong results across our global operations with reported revenue expanding 7%, led by 8% affiliate and 3% ad growth.

Excluding the impact of exchange rates, total revenue growth was 15%, the distribution revenue increasing 16% and advertising revenue up 10%.

The affiliate revenue growth which included 5 percentage points of benefit from lower launch support amortization, was driven by further strong subscriber additions worldwide led by Latin America with sustained progress in Brazil and Mexico and by Central and Eastern Europe, with further development in areas such as Russia and Poland.

Overall, the Discovery Channel, our most widely distributed network, expanded subscribers 8% internationally versus a year ago.

On the advertising front, despite some meaningful slowdown during the Olympics, Discovery delivered growth across nearly all regions led by double-digit gains in Western Europe, mainly from the free-to-air initiatives David mentioned.

We also saw nice growth in the quarter in Latin America.

It is expected that advertising growth will accelerate into the mid-teens in Q4, as these one-time items abate.

Operating costs internationally were up 1% on a reported basis and 9% excluding the impact of foreign currency, primarily driven by higher content amortization as well as increased personnel and infrastructure costs due to additional investment in growth initiatives and the build-out of our global platform to support our long-term growth expectations.

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

Turning to our full year forecast, we are adjusting our revenue expectations to reflect the disposal of the Creative Sound Services business as we now expect full year revenues to be between $4.475 billion and $4.525 billion.

As we mentioned on our last call, we anticipate adjusted OIBDA growth to return to double-digits in the fourth quarter, with full year guidance between $2.125 billion and $2.15 billion.

While we are leaving the bottom end of the OIBDA range unchanged, as always, our overall OIBDA guidance is subject to meaningful changes in foreign exchange rates, ratings delivery and the advertising environment.

In addition to revenue, we are also adjusting net income expectations to reflect the higher stock compensation expense as a result of the increased stock price as well as the higher tax rate I mentioned earlier.

Net income from continuing operations is now expected to be between $975 million and $1.025 billion.

With a strong balance sheet that includes almost $1.6 billion in cash and with our sustained positive financial and operating performance, we continue to return capital to shareholders through execution of our share repurchase program.

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

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

Discovery repurchased over $450 million of stock during the third quarter including $383 million of Class C shares and $71 million of Class A shares.

We still prefer buying a more economical security, but given SEC volume limitations and the attractiveness in our securities, we will continue to repurchase both Classes of stock as need be.

We have bought back over $1.1 billion under our share repurchase program through the end of the third quarter 2012.

Since November of 2010, we have repurchased almost 70 million shares in total, reducing the outstanding share count by over 16%.

That's it.

Thanks again for your time this morning.

Now David and I will be happy to answer any questions you may have.

(Operator Instructions)

John Janedis, UBS.

It's John Janedis.

David, the free-to-air networks have been a great driver in Europe.

Is there any way you can help us size the growth for you versus maybe the growth in the markets where you operate them?

What inning do you think we're in on the growth curve there.

Thanks.

Thanks, John.

The free-to-air has really helped us in a slow market in Western Europe, no doubt and it's because our model is quite good.

We own all the content in those markets.

In particular, those markets have small pay-TV, so we're able to take content that only a small amount of the population has seen and we'll pick up a stick or a broadcast network at a very low price and then we can put content that costs us very little.

For instance, in Spain we have very little original content, it's almost all library.

We've seen a lot of growth with Discovery MAX in Spain and it's continuing to accelerate.

Real Time in Italy is continuing to grow, it's now the number seven network in all of Italy.

We also launched a men's network in Italy and our German free-to-air.

It's a small piece of our overall strategy.

But it's been very healthy for us because our costs are very low.

We have teams on the ground, they're already selling across multiple channels.

So it's given us some more heft and it's given us some more scale in those markets.

It's not -- it really only works in markets where the pay-TV market is quite small.

But we're starting to -- we are continuing to see growth.

I think that will help us over the next year or two in Western Europe.

When the market actually starts to pick up, you'll see an acceleration because of the number of channels that we have in that market.

Okay.

Thanks.

Then, maybe a separate question.

You talked about increasing the number of hours at some of the emerging nets.

Are we at a point now where there's more room to add hours there?

Has there been maybe much of a change in your cost per hour, given the success of the programming?

One of the things that we do is, first, we have a different strategy than a number of other media companies.

We're real believers that you can still build channels and with good stories and good creative people and great characters you can attract real audiences to these new channels.

We we've had real success by investing in Animal Planet, in Science, ID, which is now the number six network in America for women.

So we are investing in about seven channels but we have 13.

So what we're trying to do is in the channels that we haven't figured out yet exactly how to grow, we're reducing our spend and on the channels that we think we have the right recipe we're increasing it.

One of the advantages we have with the channels that we've been leaning into, which is ID and Animal Planet and Science, is that all three of them play very well around the world.

We have Science now in over 150 countries.

We've launched ID in the last year to over 130 countries and we have Animal Planet in almost 200.

So when we invest, we view it as a worldwide investment because we can take it all over the world.

But we are very careful and in some of the channels that aren't generating significant value, we don't feel like we have the right brand or the right recipe, we're holding back.

David Bank, RBC Capital Markets.

First question is on your guidance or your discussion of ad trends in the fourth quarter, you kind of called out mid single-digits ex a one-time -- high single-digits ex a one-timer in the fourth quarter.

Could you just remind us of what that was -- order of magnitude and what it was?

The second question is, it's tough to get specific about one network but I'm going to try and take another pass at it.

Can you give us a sense of what percent of the growth of the overall business over the last couple of years that ID has driven?

What is the likelihood that once that starts to kind of slow down, you see Destination America and you see Velocity, basically that you see 'catching lightning in a bottle' and not worrying about anniversarying the 'lightning in a bottle' of ID.

Thanks very much.

Thanks, David.

I'll take the second question and then Andy, you --

Sure.

On ID, I think we really have a very strong horse here that's going to deliver sustainable growth for a long period of time.

Even if the ratings don't grow and they grew 30% in the last quarter.

We expect they will grow aggressively, because we have a strong niche and we've seen growth every week and every month for the past four years.

But the reason is that the CPM that we're able to get for that -- for ID is still quite low.

Because of the way that the marketplace works domestically and internationally, it takes a few years before you can earn up the full value of your CPM.

So we started ID when we flipped it from Discovery Times, it was probably getting a third of the CPM that a successful cable network gets.

So little by little, we've been pushing it.

We've had some success, but a lot of the upside over the next two to three years -- I mean, right now, for the kind of ratings that we're delivering in daytime in women is just very valuable.

The spread between what other cable networks are getting and what we're getting is really very, very significant.

So that will take a couple of years.

We also think we'll get the growth of that.

In terms of the amount of growth that it's provided for us in the last few years, it's small.

In fact, there's been margin compression over the last few years because we've been investing in ID.

So the next two, three and four years is when you're going to see the big benefit of that because we have successful series that are returning but more importantly, the CPM is growing.

It continues to grow every month.

We're going to be patient with it.

But that's going to be a sustainable grower for us.

Behind that, we do have a number of networks that are continuing to grow.

We have Science Channel that's growing very effectively for us.

Animal Planet was the number 30 or 32 network in America for men.

It's broken now -- now the number 18 network for men in September.

So, we're seeing a lot of growth because we're believers in investing in our content and the creative teams that we have here at the Company.

If you take a look at where we are -- we've said that we're trying -- over the last several years, we're going to drive Discovery.

We felt we were the best platform media Company in the world, but what we really needed to do was build the right creative culture.

We think we're well on our way to doing that.

Our strategy was to lay low in the Olympics and then come out strong with our creative content and build from there.

We were strong out of the Olympics.

We had a great September.

And October was the best October Discovery has ever had.

We were up 17% across the board in an industry -- a cable industry that was down a few percentage points and broadcast down.

So I think we're going to continue to push on that.

But if we can continue to grow our market share like that over the next several months and year or two ahead, you're going to see very big, sustainable growth, particularly as we take a lot of that content around the world.

So, Andy, on the --

Yes, David.

Regarding your question of the one-time item a year ago.

In the fourth quarter, we announced or disclosed that we had about a $5 million one-time pick-up from ADU recognition in the fourth quarter.

That's non-recurring in the fourth quarter this year.

Jessica Reif Cohen, Bank of America-Merrill Lynch.

I have one for each of you.

David, on -- could you just give us your thought process on M&A in general?

Along the lines of what you discussed in this call, on a free-to-air, how do you think about free-to-air acquisitions versus pay-TV, when you think about stuff outside the US?

Okay.

Well, look, we have -- we've been very careful because we're looking -- we only want to buy assets if we think they can help us grow faster.

Because we have somewhat sustainable growth, we think in the 13 channels we have here in the US, and maybe more importantly in terms of our strategy, our international advantage.

But the key to our Company is dual revenue stream.

That's the key to our domestic and international business.

The reason why we're so profitable with free-to-air is because we have 8, 10, 11 dual revenue stream channels in a lot of these markets that we've been in for 5 or 10 years.

We have a ton of content that's all paid for in those markets.

So free-to-air is really a very different model than when you think about free-to-air.

We're not buying a free-to-air channel and then creating original content and buying content.

So for us, free-to-air there is sort of an accessory.

I think long-term it will stay that way.

Free-to-air is not the core of how we see ourselves as a Company.

As we look at M&A, I would say -- as I've said over the last few years, our number one target is international.

We've grown our international business from 2007, we were making $250 million.

This year we'll make significantly more than $700 million.

Our margins are expanding.

The subscribers are growing.

We're well positioned.

But most importantly, we've got great teams on the ground in most markets now selling for us.

I'm spending over 40% of my time outside the US, because I think that's a lot of where the future and the differentiator of our Company is.

So to the extent that we could find assets outside the US that will help us grow faster, that we could evaluate quickly, that we have real synergy with, that would be our first priority.

Having said that, we haven't been -- we don't want to overpay.

We haven't been able to find those assets yet, but we're hopeful.

Thank you.

Then the second question is, actually, I just wanted to follow up on a comment Andy made earlier about advertising.

You said something about volume being softer.

On the other hand, it sounds like given your ratings, your upfront performance, you guys are doing okay.

I just wanted you to clarify what you meant by that.

Yes, Jessica.

We had a few weeks of softness in early October.

It's stronger now and the volume has picked up.

There's was a couple weeks in the early parts of October that were a little soft.

Okay, thank you.

Doug Mitchelson, Deutsche Bank.

A couple questions.

One, for David or one topic for David.

I think you're probably starting to get deeper into negotiations with distributors on renewals.

I think you've noted about 20% of distribution up at year end 2012.

So, I'd be interested in any characterization you would share of how those discussions are going.

Do they understand the value that Discovery's created since the renewals?

Are they looking at value the same way you're looking at value?

Anything you could share would be helpful.

Okay, great.

We have a little bit less than 20% of our deals coming up and they come up over the next five years, but we feel very good about where we are.

Our ratings across the board on our channels have never been this strong.

Discovery is very solid.

TLC has broken out.

We have Animal Planet strong, maybe more importantly, as you look at all the additional channels we have, we have Discovery Espanol, the number one channel to the Hispanic audience for men.

We have Science with a great affinity audience, we have Velocity with an affinity male audience, ID with middle aged and older women.

So we have a great diversity.

We have great affinity groups.

But more importantly, it's a far cry from where we were when we did our deals where we had a strong Discovery, when TLC was the number 20 or 25 network in America and then we had 11 more channels.

So all of our channels come up at once.

Our market share was about 4%, now it's over 9% and growing.

We have a great equitable argument.

We've reduced the overall cost of how we spend our money everywhere but content and brand.

We're spending a lot more money on our channels.

It's delivering for the operators.

So we feel that this is a good moment for us.

It's been our strategy to make our channel stronger and to grow our market share, and I think it's happening at a very good time.

We expect that it will be recognized with meaningful value from the distributors because they're getting meaningful value from us.

I know I'm sort of chasing a question that you're not in a position that necessarily you want to answer for investors at this point in time.

But can you point us in the right direction as to how we should think about value.

If we use your ratings, as you said, your market share has more than doubled.

But I imagine, the expectation isn't that you're going to double your rates.

Is there anything that you can point us to that we can use for the math behind what we should think the rate increases would be?

We don't like to talk about negotiations.

What I would say is that we think that we should be getting significantly more value from the operators for our channels.

That value will come primarily in terms of increased sub fees.

But there are other ways that the distributors can give us value.

For instance, ID was in 48 million homes four years ago.

Today, it's in 80 million homes.

Science was in 45 million homes, today it's in 72 million homes.

So more carriage for our channels as well.

But we're in some of those negotiations.

We're looking forward to them.

In addition, there are a number of operators that are interested in TV Everywhere.

We haven't done TV Everywhere deals with anybody.

The good news for us is we own all of our content.

We created a new window for Netflix, which is working quite well for us, primarily 1.5 to 2 years and older.

The TV Everywhere window is tighter than that.

If we do reach deals, that will provide additional value and that could potentially accelerate when we do our deals.

One of the things you see in the performance of the Company is a little lumpiness in the way that the Netflix deal comes through.

It was a very favorable deal for us.

That deal -- we haven't seen any degradation in audience.

In fact, for some of the series that we have provided that are much older, we've seen some lift.

As you know, we have a right next year in the beginning of the year to opt into a another year of the Netflix deal on very attractive terms, which if we elect would then be, again, lumpy with a very big lump next year for that additional year that we opt on to.

Just to add one comment to David's notion on Netflix.

While that not only gives us great opportunity to monetize some of our library, it is very lumpy from a P&L perspective.

But from a cash flow perspective, it's extraordinary.

Those cash flows are more steady throughout the period of time.

So it allows us to really maximize the value of our cash flow.

If you look at the third quarter, our free cash flow was up 12%.

That's very much driven by that.

The cash flows of Netflix really is -- and Amazon both, really have a great cash profile.

I'll look at that, gentlemen, thank you.

Benjamin Swinburne, Morgan Stanley.

I just had a clarification question for Andy and then a bigger picture one for David.

Andy, just on the programming costs for next year, could you just repeat what you said?

I just think I missed it.

I don't know if you said it was up 15% next year.

No, what we said was programming expense to be up $50 million to $60 million next year, as we amortize the increased investment we made this year.

So as I've said, I think, on this call and prior calls, we have invested in content this year, obviously hitting a great payback on that given our international growth and given the ratings we're seeing across our platforms.

But we will have amort pickup next year as we expense the cash we spent this year.

But very importantly, we expect next year's cash spend to be reduced significantly from this year.

A lot of that's driven by the fact that we've increased the number of original hours on our core programs, so therefore, we don't have as much of that next year, year-over-year, so we should have a much more levelized low level of cash increase on content spend.

Okay.

I don't know if you have it in front you, but do you have what the content expense and cash growth will be in 2012, just so we have the base?

Well, it's double-digit on both.

Okay.

So the expectation is double-digit increase on amort next year but low single-digit on cash next year.

Got it.

Okay, thank you.

Then, David, one of the things that everyone is focused on beyond the macro is just what's happening with ratings trends.

I was just wondering if you could chime in on that.

It's obviously focused on the broadcasters.

Is it something that you think is benefiting your business currently in the fourth quarter?

Do you see the ratings erosion as a sign of a measurement issue or maybe something larger that is impacting the business.

We would love to get your thoughts.

It's hard to tell.

I think that our strategy clearly is different.

We have invested significantly in about seven channels, primarily 6.5 years ago when I got here this Company was primarily Discovery.

So we've invested in TLC which is now a top five network for women.

We've invested in Animal Planet.

We invested in ID, a top 10 network in America.

We invested in Velocity, Destination America, OWN.

So we're believers.

We believe that viewers are not -- that if our strategy was just to make sure that we held or would grow one network or two networks, that a better bet is to try and grow those two networks, but also invest in a number of other brands that people get comfortable with and spend time with.

It's been working for us domestically and internationally.

I think it helps that as you look at the way people watch television.

You know, on Friday night, we're the number one network for women on TLC, we're the number one network for women on Sunday nights.

That often, when you ask women what shows they watch, they can name one show but they know that TLC gets them and that's the place to go.

The same thing for Discovery on several nights.

People love ID and they can't name the shows but they just want to hang out there.

So I think that the fact that people are spending more time with brands on television.

As you see broadcast coming down, we're seeing real growth.

So we believe that's probably going to continue.

I can't speak to what's going to happen to broadcast, but we certainly see a trend that our brands are growing.

The better job we do with the characters and the stories and understanding who our audience is on each of these channels, we're able to grow.

17% growth in October is really significant.

But if you look at the last three years, our market share has grown virtually -- has grown literally every quarter over the last three years.

We're starting to accelerate now.

We did have a soft patch, which we talked about at Discovery and TLC, which it showed itself in this quarter.

In July, TLC and Discovery were soft.

We made a very determined strategy that we were not going to use our best content during the Olympics, particularly after the first day or two when the Olympics came out strong.

So we domestically and internationally, we said we would stand down.

But our strategy was, as soon as the Olympics ended we were going to come back strong and we believed because the audience was disenfranchised in terms of what they watch and how they watch it for three weeks, because everyone was watching the Olympics that we would be able to pick up market share.

It has really worked for us.

It's accelerating.

So we're going to continue with that strategy, because I think that's how we're going to grow domestically and around the world.

Todd Juenger, Sanford Bernstein.

One quick one on OWN again.

I just wonder if you could maybe reconcile for us or help us understand.

The ratings are just so high, I guess somewhat surprised to see the increase in the loss line of the other.

I don't know if there's other stuff in there, or something on with the timing, but just given how strong the ratings are that big sequential increase in the loss, anything you could help us with what's going on there would be number one.

Then second, just a quick one on the tax stuff, Andy, we knew you were working on that.

I guess some of us forgot that sometimes to make progress you've got to take a step backward.

Do you have an idea -- not asking for a long-term forecast, but just how big if you could bound sort of the magnitude of where you think the tax rate could come down to over the long term, just some indication of how the size of that opportunity you think that is.

Thanks, guys.

Sure.

Todd, the first question regarding OWN.

Yes, the losses were higher but they were non-cash losses.

The first part of the loss we knew about.

We talked in the last call about higher marketing and we're getting a payback on that if you look at the 60% increase in ratings.

The second part though of the losses that flowed through our other income line were content write-offs at OWN.

As the new content's performing so well, we're just writing off some old library product.

So that flowing through there, but again, it's important to note, that's non-cash.

The real key emphasis on OWN right now, is the progress we're making on the funding piece.

In the first half of OWN, we've funded $84 million, in the third quarter, only $29 million.

In the fourth quarter, we look for less than that.

So we're clearly in line with our 2012 funding being less than 2011.

So the progress we're making there both from an operating and ratings perspective is tremendous, but really from a cash flow perspective we're really right on if not better than what we had highlighted six months ago.

When you think about OWN, not only is the overall performance -- economic performance stronger, but the ratings are stronger and there is this moment where you're fighting to get people -- people only watch six or eight channels, you're fighting to get people to spend time with your channel and OWN has begun to really find a rhythm.

The length of view is the second highest in our portfolio.

So when people find it, they hang with it and they like it.

Oprah has been very -- working very hard.

She's on the air much more often.

But more importantly, we're getting a lot of our rating points right now from Iyanla and from Sweetie Pie's and from a lot of the other original hours that we have on OWN.

Our hit rate is dramatically higher.

We were trying to figure out what OWN is.

With a lot of time by the leadership there, Sheri Salata and Eric Logan and Oprah herself and talking to the audience through Oprah.com, we have a good sense of what they want.

Now we're giving it to them.

So let's get the stuff out that's wrong.

Let's do more of what's right.

Then when you add to that as a topping, Tyler Perry.

Maybe one of the great talents in Hollywood because he writes, he produces, he stars in.

We went down to visit his facility in Atlanta.

He does it all himself.

He writes it all himself.

He has a great relationship with Oprah.

This is something that Oprah really wanted, we really wanted it, Tyler wanted it.

I think it's going to create more balance, more humor, more diversity on the network.

You think about it, Tyler Perry and Oprah Winfrey together on OWN.

So we're feeling quite good about that.

Next year will be a good year.

Todd, regarding your tax comment, look, it's well said.

You often take a step back to move forward on tax.

We did transfer intangible assets from the US to the UK.

Those transfers had some temporary increase in the effective tax rate based on how we recognize that transfer.

There's a gain associated with that.

But long-term, the effective tax rate goes down from that and there's other things we're pursuing as well given our global structures.

So look, what I would say is this, today, we're about a 36% effective tax rate, both cash and effective.

My goal would certainly be to get that down several hundred basis points and the goal being kind of the low 30%s.

Michael Nathanson, Nomura.

I have one housekeeping for Andy and then one for David, thematically.

Andy, could you just give us a help on the adjustments you made for the outlook.

How big was Creative Sound Services in terms of the change?

How big was the mark-to-market in terms of your updates?

So when you guys adjusted your view for net income this year, can you walk me through those moving pieces?

Sure.

The Creative Sound Services was about $75 million of revenue.

So that's fully eliminated.

The mark-to-market's about $20 million given the increase in the stock price.

So those are kind of the two higher.

Then tax -- the tax was slightly higher based on the adjustments I just talked about, the transfer of some of the intangibles creates a short-term effective tax rate increase.

Okay.

So it certainly [another] revenues and we assume like mid near double-digit margins, basically 15%, 20% for -- Sound Services?

No, that was basically a profit neutral business.

Okay.

So that doesn't really hit net income.

Okay.

Then, Dave, a question for you.

You guys have been so successful in investment in programming, look at the growth you have globally in ratings.

Why would you want to slow down cash spending next year?

Why not keep going at the level you've spent?

Is there a chance that you revisit that if things change for programming next year?

First, we've been finding a lot of success, Michael, with -- we have three series on TLC that are getting almost a three rating.

Two of them, they're getting actually over a three rating.

We have a lot of returning series.

For us, unlike a lot of the other models, when we get returning series the additional cost on return is not that high.

We won't have to go out and look for a lot more content on a number of these brands because we have a lot more returning.

So that's pretty efficient.

We're not going to be reducing.

We're just -- the increase is going to be -- we're not going to need to increase in a meaningful way.

If we feel that we do because there's a big opportunity, we will, but we're much more efficient.

We also worked very hard over the last several years to get really good creative teams in place.

We made a lot of mistakes.

We learned from those mistakes.

We have a really good sense of the brands at this point, probably much better than we ever have.

It's still a hit or miss business, but we're feeling much better about where we are.

With more returning, we have much more confidence in the sustainability.

When you look at Discovery, four years ago it was Dirty Jobs, it was Man Vs Wild and it was MythBusters.

Today, we have five series now that -- some of those are gone and we have five series that are bigger than all three of those put together.

Gold Rush is bigger than three of those series all put together.

Our series are fresher.

That's true across the board.

With ID, Henry's got a great formula.

So we just think we could be more efficient and effective and less waste.

Richard Greenfield, BTIG.

A couple of questions.

One, when you look at Hub, curious how your agreement with Hasbro works.

If Hasbro was in any event acquired by a third party, how does that impact The Hub and its access to content and characters related to Hasbro?

Then just two, David, you spoke about your excitement surrounding Tyler Perry and what that's going to do to OWN ratings.

Just curious, in terms of -- it seems like there's a change relative to kind of the original kind of lead your best life aspirational side.

I was wondering, as you look at OWN and how you're positioning it with advertisers, is this now going to be more of a general entertainment network, a la like a TBS where his programming has been before.

Just wondering how you're going to position it from an ad rate and sub rate card perspective.

Thanks.

Thanks, Rich.

The Hub's doing great, by the way.

It's up over 60% in the last quarter and Margaret Loesch is doing a terrific job.

Quickly, we have great optionality.

If the Company was to be acquired, we have kind of one way optionality into what we do, which gives us some good flexibility.

But the business is doing very well and we're happy with it.

Tyler Perry, it's really consistent with the vision.

If anything, we were much too teachy and preachy and earnest when we started.

The mission for Oprah and I now is that we have a lot of great stuff like Super Soul Sunday and Lifeclass and Master Class.

But we also, we're having a lot of fun with Sweetie Pie's and with Tyler's type of stuff and with a lot of the content that's on there.

The audience said to us, we want to have fun, we want to laugh, we want to see families, we want to see families struggle.

We want to see families have fun.

We want some comedy.

Tyler, I think, fits squarely within.

We're also getting a very large African American audience on OWN, dramatic African American audience.

When Oprah interviewed Rihanna, we had more African American women watching OWN, than ABC, NBC, CBS and FOX put together.

So Tyler appeals to everyone, but that appeal to the African American audience will be another helper.

Anthony DiClemente, Barclays.

I just had one quick one left for Andy.

Which is do you guys -- I'm sorry if you did this -- did you update your 2012 free cash flow guidance number, Andy?

Then as you look into 2013, I guess is there anything changing -- as I compare net income to free cash flow in the model, is there anything that would sort of change that general ratio in terms of working capital or cash versus non-cash as we look into 2013.

Just trying to get free cash flow in the model accurate.

Thanks.

Okay.

We did not actually update free cash flow or anything.

But it's still looking at about $1 billion for 2012.

Okay.

With regard to 2013, we'll provide much more perspective on 2013 on the year-end call.

But the only thing I'll highlight as far as a different thought as you model year-over-year, think in terms of less, while a slightly increase in content spend, certainly less of an increase than we had in 2012.

So, it will be slightly up, but up a whole lot less than we had this year.

But again, we'll provide much more perspective and granularity on that on the year-end call.

Alexia Quadrani, JPMorgan.

I'm just following up on your comments earlier about the advertising market.

I think you mentioned it slowed a bit in early October, then strengthened a bit.

I guess sort of just stepping back, would you say that the fourth quarter advertising market, the health of it, scatter over scatter is still a little bit stronger than it was in Q3 or not necessarily given the slow start?

Yes.

The domestic advertising market, it feels quite strong now.

There was a period for about two weeks where the volume -- the pricing was there but the volume wasn't there.

We did hold price.

But the volume has come back and the price is still more than double-digit over -- high double-digit over upfront.

So, we're feeling good about that domestically.

Internationally, this quarter we had 10% ad growth which for us is -- was a drop, but we have good visibility into next quarter and we expect that we'll be mid-teens or better.

The market feels quite strong for us.

As you look at last quarter, we faced a couple of issues.

One was the Olympics.

We clearly made the strategy that we weren't going to do original programming domestically or around the world and so that hurt us.

It hurt us I think in a good way because we've come back strong.

But there's no question that those three weeks did have an impact.

The fact that the Olympics went across most of Europe in Real Time, probably had more of an impact than maybe something like Brazil will have which was a different time zone and the Winter Olympics is always much smaller.

In addition, interestingly, we found strength in most markets with the exception of Asia.

So, really what it was, was the Olympics and Asia.

Asia was two or three campaigns that moved out of the third quarter.

So we saw a significant movement.

Asia now looks good.

We feel good about next quarter.

We expect that we'll be returning to mid-teens or better.

You'll see the growth trajectory continue as you would expect.

I would assume foreign exchange is probably a bit less of a hit in the fourth quarter, is that fair?

Well, that's certainly the expectation.

Right now, we don't have a preview on where rates are going.

FX has been a real bad guy for us this year, a multi-tens of million impact on OIBDA.

We have so many different moving currencies that affect us.

So, to date, it's been certainly a negative impact.

But right now, we're not looking at or forecasting any big change between now and year-end.

Michael Morris, Davenport & Company.

I'll try to be quick here.

One on international.

One on Oprah.

Your subscriber base growth was 17% internationally.

But your affiliates and ads are both below that, I assume because you're growing more in lower priced markets.

What's the outlook for that turning into a tailwind at some point?

Is it simply a question of the health of the macro economy in those markets or is that something that you could see, say, within the next year or two where you're growing faster than the subscriber growth?

Then, I have one quick follow-up.

Michael, that is what we're seeing.

So for instance, Brazil and Mexico are growing aggressively but they're going after the C-Class.

So where we might have -- in Brazil, we have 11 channels and we have five of the top 20 channels in Brazil.

All of those channels were carried, but we made the decision that in order to kind of opt in to the C-Class, where they're only offered 25 channels, that we would allow for four or five of our channels to be carried out of 20 or 25 or 30, rather than trying to push 11 because we didn't think we'd get them all in.

Others have decided not to participate.

We think that was a mistake, because we're seeding our brands all around the world.

We're putting our best brands forward in those smaller tiers.

What's happening is, not so much in Brazil, but more in Mexico and more in Russia, that those -- little by little, there's kind of a grow-up where you start with your 30 channels and then trying to get you to come up to the 50 or 60.

So we'll get the advantage of that.

We'll also continue to get the advantage of the growth.

But a lot of the growth is in C-Class, in some of these emerging markets.

So we may be getting less, but the growth is really substantial.

It's important that we're a part of it and it builds our relationship with the distributors in all those markets.

Because we have actually more market share among the C-Class because of the strategy of pushing down into it.

Great.

That's helpful.

Then over on OWN, I know you guys have targeted breakeven next year.

When you look at the difference between now and then and what's going to drive that, can you give a little insight how much is coming from, let's say, distribution growth versus ad growth versus cost control as you get from where you are now to getting to that breakeven point?

Michael, clearly, the business is performing at or better than we had hoped it would.

When we provided that perspective six months ago, we were right in line with again, if not better than we had thought.

We're not going to really get into 2013 right now, just to clarify.

We really talked about a breakeven in the second half of 2013.

We'll update some of that perspective and guidance on the year-end call.

But the business is clearly performing and performing at or better than we had hoped.

Vasily Karasyov, Susquehanna Financial.

It's Vasily Karasyov from Susquehanna.

Andy, what should we expect in terms of pace of buyback?

Will it change, depending on the stock price?

Some of your peers made comments recently that it does impact them.

Then David, you mentioned when you were discussing how you re-purposed a lot of successful networks that you made some mistakes.

I would be just curious to hear some of those lessons learned over the past several years.

Thank you.

Sure.

Well, Vasily, on the stock purchase, as you saw, we did over $450 million in the third quarter.

As we look at how we allocate capital, first and foremost, it's to drive organic growth.

Secondly, it's about finding perhaps the right acquisition and the right allocation of capital, preferably internationally.

Then thirdly, if we maximize the first two, we'll continue to look at returning capital to shareholders through the share repurchase program.

So look, I've had a bullish view on this.

I use free cash flow per share as the model we use internally to determine kind of the IRR.

To date that's been a good return for us.

We continue to be an active buyer of our stock.

If you look at the -- in the October time frame, we had a predetermined grid going into October, because it's a closed window for us.

As the stock performed nicely and went up, we're buying fewer shares as you would expect from a grid like that.

But, look, for us, it's all about forward-looking free cash flow per share and buying off that expectation.

With, again, that being the third allocation of capital relative to organic growth and acquisitions.

I think some of the best things that we've done at Discovery is create a culture where you raise your hand and you say that what you thought was your best idea is not the best idea.

Ultimately, the best idea is what the audience likes and what nourishes them in our business.

So when I got here, TLC was the number 23 or 24 channel in America.

We hired a whole team to go out to LA.

It was my strategy that if we made TLC sexier and cooler and hipper, that it would go from the number 24 channel to a top 10 channel.

We did that and six months later, TLC was the number 30 or 32 network in America.

We lost a third of our audience.

The people that loved TLC left.

We took a hard look at what the TLC brand was and what we did wrong.

It led us to a great recipe.

What we did wrong was that TLC is about Middle America.

It's about real values.

It's about heart.

It's about great story telling, about families that live a life that's different than the way they live in New York and LA.

I had to go back to the Board and say I made a mistake.

This isn't the right team.

We've got to make a change.

We hired Eileen O'Neill.

We drilled down for another three months on what the brand was and we found a very unique strategy in TLC, which is forget New York and LA.

TLC is about Middle America and it's about heart.

Here we are now -- we had one point last month where three nights a week, we were the number one cable network in America for women with Honey Boo Boo, with Wedding programming on Friday and on Sunday night with Long Island Medium and Breaking Amish.

Sunday night's still the most competitive night on TV, we're averaging over a three.

So that was one.

Two was Planet Green, which I really thought that -- I looked at FOX News.

I looked at the fact that it was a new idea of having an affinity group that was built in, that had a certain way of looking at the world and that we could do the same thing by creating a channel called Planet Green that was about the environment.

We spent a fair amount of money.

We had to raise our hands and say it's not working.

So we shut it down.

We relaunched it as Destination America.

We spoke to the audience about what they want.

We spoke to advertisers and distributors.

We came up with Destination America.

It's up dramatically.

We're making more money.

So that's the way the culture works here.

I think we've gotten better at it.

It even works on a micro basis.

We waste a lot of money by continuing to do shows that we think are good ideas, but halfway through we figure out are not so good.

But we continue to do them.

So, we now have a creative culture that's more about raising their hand and say, let's shoot this, it isn't going to work and let's do something that the audience is going to like better.

Thank you everyone for joining us.

Please call Adam or myself with any follow-up questions.

Thanks.

Thank you for your participation in today's conference call.

This concludes the presentation.

You may now disconnect.

Have a good day.