華納兄弟探索 (WBD) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 Discovery Communications, Inc., earnings conference call.

My name is Allison 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, Executive Vice President of Investor Relations.

Please proceed, sir.

Good morning, everyone.

Thank you for joining us for Discovery Communications' 2013 first-quarter earnings call.

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 annual report for the year ended December 31, 2012, and our subsequent filings made with the US Securities and Exchange Commission.

With that, I would like to turn the call over to David.

Thank you, Craig.

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

Discovery is off to another great start in 2013, building on the sustained operating momentum we generated across our balanced portfolio throughout 2012.

Our unwavering belief that investing in high-quality content with real stakes, superior storytelling, and compelling characters is paramount to long-term value creation continues to pay off.

The larger audiences we are delivering around the world are translating into significant advertising gains, while at the same time the appeal of our content is providing additional opportunities to capitalize on our diverse distribution platform and the further evolution of the global pay television market.

As we focus on capturing market share and maximizing the full organic growth potential inherent in our asset portfolio, we are also beginning to dig into the operations of our recent acquisitions so we can create additional value and further strengthen our long-term sustainable growth profile.

With our strong market share growth and the recent acquisitions, we now reach more than 2 billion subscribers, up from 1.8 billion last year.

Before I turn the call over to Andy so he can take you through our financial results, let me take a few minutes to discuss a few of the initiatives driving our strong organic growth, as well as some of the opportunities we expect to focus on as we integrate our newly-acquired businesses.

I mentioned on our year-end call that we have delivered four consecutive years of viewership growth across our domestic portfolio and that momentum has certainly continued into 2013 as we delivered the best first quarter in the Company's history.

Viewership across our US networks was up 3% this past quarter among key adult 25 to 54 demo led by the growth at our flagship network, the Discovery Channel.

Discovery built upon its record fourth quarter with 10% growth in Q1 led by Gold Rush, Bering Sea Gold, and Yukon Men -- all of which contributed to Discovery's number one ranking on Friday nights in the quarter, outpacing even the broadcast networks.

Several of our other networks also delivered meaningful growth this past quarter including Animal Planet, which increased its audience another 6%, building upon the 17% growth it generated in 2012 and making it a top 20 network for men in the US.

In fact, Animal Planet has now delivered 16 consecutive months of growth among its key demo, and with returning hits like River Monsters capturing more viewers than it did a year ago the network is poised for continued success.

Two of our recently rebranded networks are also continuing to show real audience gains.

Destination America is quickly becoming a lifestyle destination for viewers with double-digit growth this past quarter following its 35% growth in 2012.

And Velocity, while in only 45 million homes, grew its viewership by over 50% year-on-year, delivering a highly coveted upscale audience to our advertisers.

Driving the potential of our valuable distribution real estate by investing in new brands and breaking new ground that ignites viewers' curiosity remains a priority and we will continue to invest incrementally in these new networks if they demonstrate the ability to attract larger audiences and deliver real value to our advertisers.

Similarly, our domestic joint ventures are also continuing to develop their audiences.

The Hub was up over 50% this past quarter among kids 2 to 11 for total day.

Separately, OWN viewership was up 3% in its key women 25 to 54 demo, despite the difficult comparisons to a year ago, which included the highest viewed program in the network's history, Oprah's interview with Whitney Houston's daughter.

OWN's viewership momentum ratcheted up again in April as viewership grew 9%, led by returning favorite Iyanla, Fix My Life and new hits such as Life With Latoya and Raising Whitley.

In fact, these three series helped propel OWN to a top 10 ranking among all cable networks for the month on Saturday nights in its key women 25 to 54 demo and number one in African-American women, including the broadcasters.

And that is without Oprah on Saturday.

It's a great achievement.

Looking forward, OWN has a great slate of new content scheduled for the remainder of the year including two new series from our partner, Tyler Perry, set to launch at the end of May.

And they both look strong.

Tyler has been working very hard down in Atlanta to bring us two great new series.

We are very confident we will reach our previously stated goal of cash flow breakeven during the second half of this year.

The ratings momentum we are generating across our portfolio and the sustained health of the ad market have not only given us a terrific start to 2013, but it also puts us in a great position heading into what we hope will be a robust upfront.

We recently completed our upfront presentations to advertisers, and while it is too early to predict where we ultimately will end up, with strong scatter volumes, scatter pricing well above last year's upfront, sustained ratings momentum across our networks, and what I think is unquestionably the best ad sales team in the business, we expect to see significant increases in this year's upfront.

The market share and sustained financial growth we are seeing domestically is playing out even more dramatically internationally, where we have made targeted content investments to capitalize on our unparalleled distribution platform and the further penetration of pay television.

We are certainly benefiting from our expanding subscriber base with overall subs up 12% versus a year ago, led by Latin America as well as India and Russia.

But we are also driving viewership with a more robust content offering due to the global investment we've made over the last several years.

We have worked hard to capitalize on opportunities that our broad distribution provides, whether it is expanding the reach of our female flagship, TLC, now in 160 countries including the UK as of April 30 and 300 million homes, making TLC the most distributed women's TV brand in the world; or capitalizing on the global demand for investigative and forensic content by broadening ID's reach to over 150 countries in just the last 12 months; or by recognizing the opportunity for kids programming across Asia and leveraging our top-rated channel in Brazil, Discovery Kids.

The combination of a stronger programming portfolio along with double-digit subscriber growth resulted in overall viewership growth of 16% across our international portfolio.

And this expansion is not confined to one geographic area.

We generated double-digit increases across nearly every region led by Italy and Spain in Western Europe, Mexico and Brazil in Latin America, and Russia and South Africa in our CEMEA region.

The success we have had in growing our audiences speaks to the local market experience we have gained from operating in many of these markets for nearly 25 years.

We are now utilizing that knowledge base to help drive real synergies from our recent transactions.

Having launched our first international network in the Nordic region over two decades ago, we have deep-rooted experience in these countries.

Aside from having built a broad distribution base, we have forced a brand loyalty and developed the critical relationships that come from working in local markets for many, many years.

The networks we acquired from SBS are also extremely well-positioned and provide an excellent complement to our nonfiction channels in terms of genre appeal and demographic reach.

Combined, the newly created SBS Discovery Media business in the Nordics has significant market power.

The acquisition closed last month and I was in Norway, Denmark, Sweden, and Finland last week.

We are already exploring ways to expand our content portfolio and take significant advantage of the attractive consumer demographics these networks deliver.

On the revenue side, we have met with advertisers throughout the region and it is readily apparent that the depth and quality of our content portfolio will enable us to drive ad revenues across these platforms over time.

On the cost side, we are already seeing the benefit of promoting Discovery's wide range of programming across the reach of our newly-acquired content assets.

We've also begun to deliver on the opportunities associated with owning a 20% interest in Eurosport group, including the creation of a joint affiliate sales organization to capitalize on the local distribution relationships Discovery has established over the last 20 years.

Similarly, in a number of markets we are starting to explore how Discovery's local ad sales knowledge can provide a rich complement to Eurosport's almost solely pan-European sales capability.

The good news is we are just beginning to scratch the surface of the benefits associated with these new assets and we are confident that we will further strengthen the tremendous platform Discovery has built over the last two decades.

It is important to note that our international organic growth story remains totally intact and these transactions further bolster our long-term outlook by deepening our geographic footprint, broadening our portfolio with new networks and brands, and enhancing our creative pipeline with new talent, personalities, and formats.

Overall, Discovery is off to another strong start in 2013, and given the market share we are capturing worldwide, the organic growth opportunities across our global distribution platform, and the synergies we expect to exploit due to our recent acquisitions, we fully expect to build on our momentum for the foreseeable future.

Now let me turn the call over to Andy.

Thanks, David, and thank you, everyone, for joining us today.

As David mentioned, Discovery is off to a great start to the year, building upon the strong results we delivered throughout 2012 as we leverage both the large audiences that we are generating around the globe as well as our increasing international subscriber base.

On a reported basis, total company revenue in the first quarter increased 7%, led by 17% international growth and 1% domestic growth.

Note that domestically the prior year included $45 million of additional licensing revenue primarily related to our licensing deal with Amazon.

Excluding licensing revenue and the impact of foreign currency, total company revenue growth was 12% with double-digit gains in both advertising and [deflated] revenue.

Total operating expenses on a reported basis increased 14%, primarily due to higher content amortization that we have previously discussed.

The current quarter also included a one-time compensation expense, as well as additional due-related costs associated with our acquisition of the SBS Nordic business.

Eliminating $8 million of licensing costs in the prior year and the impact from foreign currency movements, total company expenses increased 13% versus the first quarter last year.

Importantly, given the higher content amortization and the timing of anticipated marketing spend, it is expected that operating expense growth, excluding the impact of wholly-owned acquisitions, will remain in the mid-teen range for the next two quarters before meaningfully abating in Q4.

On a reported basis, adjusted OIBDA in the first quarter declined slightly, but excluding the licensing agreements and the impact of foreign exchange, Discovery's continued ability to generate revenue growth in excess of expenses translated into an 8% increase in adjusted OIBDA for the quarter.

Net income from continuing operations increased to $231 million in the first quarter, driven by the strong operating performance as well as a $92 million gain associated with raising our ownership interest in Discovery Japan to 80%.

The quarter also included $46 million of higher equity earnings, primarily due to significantly improved results at OWN.

These items were partially offset by $59 million of losses associated with foreign exchange contracts implemented to hedge the purchase of SBS Nordic, $21 million of higher mark-to-market equity-based compensation due to the increase in the stock price, and $26 million of higher tax expense.

As I mentioned last quarter, we are in the process of restructuring our international operations to ultimately lower our effective tax rate over time.

For the current year we still anticipate an ETR of around 38%.

Free cash flow decreased to $105 million in the first quarter, primarily due to higher content investment as well as increased equity compensation payments and the timing of cash taxes.

The programming spend continues to pay off in terms of ratings momentum and higher advertising revenue, but we still anticipate content spend growth to slow down considerably for the full year, which should contribute to significant free cash flow growth for 2013.

Turning now to the operating units, the US networks continued to perform well during the first quarter.

On a reported basis, total domestic revenue increased only 1% as 8% advertising revenue growth from viewership gains across our portfolio and a favorable ad sales pricing and demand environment were partially offset by 9% lower affiliate revenue due to the additional $45 million of licensing revenue in last year's first quarter that I spoke about earlier.

Excluding licensing revenue, total domestic revenue improved 8% versus a year ago with affiliate revenue increasing 6% due to higher rates and, to a lesser extent, additional digital subscribers.

It is important to note that while licensing revenues were down in the first quarter, we do anticipate a meaningful increase in either the second or third quarters due to the third year of the Netflix agreement.

Current ad market trends continue to be encouraging, with double-digit scatter pricing above the gains that we garnered during last year's upfront negotiations.

We have some nice ratings momentum across many of our networks, and with the healthy macro environment continuing, we anticipate continued high single-digit ad growth in the second quarter of 2013.

Turning to the cost side, domestic operating expenses were up 8% from the first quarter of 2012 which included $8 million of additional costs associated with digital licensing agreements.

Excluding these costs, operating expenses increased 11% compared to a year ago primarily due to the expected higher content amortization associated with the increased programming cash spend over the past two years.

On a reported basis, domestic adjusted OIBDA declined 5% versus last year's first quarter.

But excluding the impact of licensing agreements, adjusted OIBDA increased 6% year-on-year.

Turning now to our international operations, we continued to deliver strong momentum across our global operations with reported revenues expanding 17%, led by 23% ad and 15% affiliated growth.

Excluding the impact of exchange rates, as well as additional advertising sales from the acquisitions of wholly-owned businesses, total revenue growth was 16% with advertising and affiliate revenues increasing 17% and 16%, respectively.

The advertising revenue growth was broad-based, with double-digit growth across nearly every region led by Western Europe, mainly from the continued success of several of our free-to-air initiatives, particularly in Italy and Spain.

On the affiliate front, the revenue increase was driven by subscriber growth, especially in Latin America, from the continued growth in Brazil and Mexico as well as from the consolidation of Discovery Japan.

Operating costs internationally were up 24% on a reported basis.

Excluding costs from the acquisitions of wholly-owned businesses and the impact of foreign exchange, operating expense growth was up 17%, primarily driven by the anticipated increase in content amortization, as well as from the consolidation of Discovery Japan.

Our international segment delivered 13% adjusted OIBDA growth in the first quarter, excluding foreign currency and the impact of acquiring wholly-owned businesses, as the international team continued to generate strong revenue increases while thoughtfully investing in key growth initiatives.

Before we look forward to the remainder of 2013, I do want to mention that the first quarter also included a couple one-time corporate costs related to compensation and the SBS transaction, which we closed at the beginning of April this year.

Turning to the full year, we are encouraged by the sustained momentum across the portfolio and the continued strong ad sales pricing and demand environment in many of our key markets.

As a result, we are leaving our guidance unchanged despite the SBS transaction closing over one month later than originally planned.

For the full year 2013, we still expect total revenues to be between $5.575 billion and $5.7 billion, adjusted OIBDA between $2.425 billion and $2.525 billion, and an income between $1.2 billion and $1.3 billion.

Given the delayed timing of the SBS close, it is now less likely that we will be towards the top end of these ranges, but given the momentum across our businesses, these ranges remain possible outcomes.

We do anticipate narrowing these guidance ranges on our second-quarter earnings call.

Turning to our financial position.

With a strong balance sheet and continued financial and operating momentum we remain committed to further building our core businesses so that we can drive additional long-term growth and enhance shareholder returns, be it through investing in existing networks and platforms or through exploring external initiatives.

While that is our first priority, given the strong free cash flow that we are generating, our gross leverage targets, and our long-range free cash flow per share growth assumptions, we have the unique opportunity to both continue returning capital to shareholders and also investing in our businesses.

As previously discussed, given the capital needs associated with the timing on closing the SBS transaction, we did not begin buying back shares this year until the second quarter, but we still anticipate returning similar amounts of capital to shareholders through buybacks in 2013 that we did in 2012.

Our buyback activity during the second quarter includes $256 million of preferred stock associated with the Advance/Newhouse transaction that we announced last quarter, which is part of the total anticipated share repurchases this year but was not done under the existing $4 billion authorized share repurchase plan.

Since we began buying back shares towards the end of 2010 we have spent over $3 billion buying back shares, reducing the outstanding share count by over 78 million shares, or 18%.

Thanks again for your time this morning.

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

(Operator Instructions) David Bank, RBC Capital Markets.

Two questions.

I guess the first is under the category of no good deed goes unpunished.

8% ad revenue growth is obviously really strong, but when you think about the pricing you achieved in the upfront, the pricing in the scatter market, the ratings momentum you have achieved, I'm kind of curious what are the other factors that are sort of arguably maybe holding back that ad revenue from being a little bit stronger given all those factors?

The second question is, I guess, more for Andy.

Can you just clarify the impact of the Japan consolidation on both revenue and expenses in the international division?

Thanks.

Great.

Thanks, David.

We delivered a little over 8% this quarter, which we felt very good about.

We had market share growth of 3%.

The market was strong; it was up about 20% from the upfront.

But we also began seeding a number of our new networks with advertisers and we still have a ways to go in terms of bringing up the CPM on some channels like Animal Planet that's now a top 20 channel for men; ID that's the number nine channel in America and continues to grow.

So we will continue to get some additional growth out of that.

This quarter continues to look strong, maybe even a little bit stronger than last quarter in terms of pricing.

So if we continue to grow our market share, I think you will see us in the high single, low double in domestic.

David, just to add to that, just remember last year US ad sales were up 13%, so on a two-year basis it's tremendous year-over-year growth.

And to get to your question about Japan, when I'm actually separating or splitting that out separately or quantifying it, because it is a business we were in before with 50% investment and we only increased that to 80%, so on a very bottom-line basis it's a fairly de minimis impact.

But, broadly speaking, as far as the impact on revenue and expenses, for the whole company it's less than 1 point so just to give you a sense of its size.

It's relatively insignificant on a total company basis.

Okay.

So you wouldn't say it really impacted international operations then?

Well, it is consolidated within those numbers but the impact is fairly small.

As I said, it's really less than 1 point for the total company, on both revenue, expense, and profit.

Terrific, thank you very much.

Todd Juenger, Sanford Bernstein.

Good morning.

If I could follow-up just a little bit back to domestic ad growth, I know you don't -- and I'm not expecting that you would disclose anything sort of at a network level.

But I wonder if you just would share any comments about sort of the difference between what I would call the flagship networks versus sort of your digital tier networks.

A lot of the ratings growth, as you pointed out, is coming from the digital tier networks.

We know they have lower CPMs.

I just wondered, when you think about the whole growth of 8%, would you be willing to characterize sort of -- was the mid-tier networks growing sort of faster than that and the flagship networks growing slower?

Or any way you can help us decompose how we think about the growth rates of those different life cycles of networks?

Thanks.

Sure.

Thanks, Todd.

First, Discovery had a good quarter.

It was up about 10%, which was very strong with a lot of new series, and Discovery is mostly male and we were able to take advantage of that.

TLC was down about 1% or essentially flat.

The industry itself was down 2%, so TLC did a little bit better than the industry, but we had less premieres in the first quarter.

We are coming back with Long Island Medium.

We are coming back with Breaking Amish.

In the summer, Honey Boo Boo will come in.

So I think that we expect that we'll see a little bit more momentum on the women's side with TLC.

I think that would have helped us.

The broadcasters were down significantly in prime and in daytime, and that put a little bit of a squeeze on the women's side.

And so we were able to take advantage of that with TLC, but not as much as we would have liked to and we're hoping to in this next quarter.

ID continued to grow because of that.

And when you say digital networks, we have TLC and Discovery that are fully distributed, but we also have Animal Planet that is fully distributed.

And Animal Planet now is a top 20 network.

It's going to take us some time in order to get our CPM up, but we are getting double growth there.

It's growing significantly, but also our CPM is growing, so that is a fully distributed network.

When you say digital, we now have ID in over 80 million homes.

So 80 million homes, the number nine network in America, the number six network in daytime, number five in late night, yet we are still not getting the full premium for that.

So those would be what I would call kind of our big networks with Animal Planet and ID providing some meaningful growth no matter what over the next couple of years.

Then the smaller networks, one we -- we call them emerging because they are continuing to be very fast-growing, but Destination America, Velocity, those do have lower CPMs.

When I said we are seeding we are trying to get advertisers into them so they could feel the value of being on those platforms.

They could see that we can put up some very strong ratings when we have original content, and that once we get them hooked into those channels we will be able to drive the CPM on that.

So I can't really break it out except to say that I think if we can drive a little bit more of our female demo in the next six months, given where a lot of the viewership and advertisers are looking for female, we could maybe even overindex more.

That's very helpful, thanks.

A quick follow-up if you don't mind.

Back to the -- on the emerging networks, in terms of distribution growth, and there has been a lot of focus on affiliate fees and reset of your negotiations and all that.

What is the opportunity there?

You've got ratings up strongly at a lot of these emerging networks.

You've invested a lot to rebrand a few of them.

How real is the opportunity to grow the distribution further, some of those that are in 40 million, 50 million, 60 million homes?

Thanks.

Well, we redid only a few of our deals this year.

We've talked about the fact that they feather in over the next five years.

This year was less than 20%, a little bit more than 10%, so it was a lesser percentage but we were able to get higher increases in those deals.

We were able to get more distribution for Science, more distribution for Destination America, more distribution for Military.

So when we can pick up higher fees and get more distribution, that's a formula that works very well for us because we get the guaranteed revenue on that extra distribution.

But also three of the fastest-growing cable networks in America over the last three years has been ID, which has gone from 50 to over 80; Science, which went from 45 to over 72; and Velocity continues to grow aggressively.

So if we can get the per sub fees on that, then not only do we get the guaranteed economics, we get the asset value and the ability to get advertising.

So we will be looking for that in addition to the very simple what is our actual CAGR on our total sub fee base.

Thanks a lot.

Doug Mitchelson, Deutsche Bank.

Thanks so much.

I'm trying to get that CAGR on your total sub base, so I wanted to make sure I had the math correct around the domestic affiliate rules.

In the fourth quarter you had $288 million of domestic affiliate revenue and in the first quarter you had $308 million, so that's $20 million of growth in 1Q versus 4Q so that's 6.9%.

And, in theory, your sub bases between the two quarters should have been relatively similar and that should have been mostly price.

So am I thinking about that right?

Did your renewals drive that kind of price acceleration, or is there something unusual in either one of those quarters that hampers the comparisons?

Our renewals, as I said, we did very well, but in terms of the percentage, it would bring it up.

It wouldn't bring it up dramatically because in terms of the scale of deals that we did, the number of subs that were under it were not that significant.

There would also be in there, Doug, some additional digital.

We have deals where every time a digital box is deployed every operator has to carry every one of our channels and has to pay us on those channels, but that has been true every quarter.

And we -- to your point, we really haven't seen any better sub growth this quarter than we've seen last.

In fact, it's pretty flat so kind of agree with you.

Then on the --- there's a little bit of a lag, right, when you cut a new deal with your distributors and you improve the distribution of some of your digital channels by moving them to more broadly distributed tiers.

Maybe the Nielsen data lags, but we sort of show some of that take up happening in April versus the year-end deal timing.

Is that right or is the Nielsen data just lag and the take up is immediate?

I think there's a little lag, but the deals don't necessarily mean that we closed the deal at the end of December and they have to launch January 1. In fact, they can't.

There's a 60-day requirement that's pretty standard under the franchise rules where they have to notify customers of what's coming.

So the actual launch of more subscribers for our channels would've happened at the very earliest 60 days afterward and sometimes it's really just a commitment to launch the channels during the year for a longer --- when deals are four or five years long.

So you will see it coming in.

So there could be a little bit of tail to this?

Because I know relative to the international growth you are seeing we are sort of parsing basis points, but we're still curious.

Thanks very much.

Ben Swinburne, Morgan Stanley.

Thanks, good morning.

I just have one sort of housekeeping for Andy, then a question for David.

Andy, the net income guidance, that includes all of the global line stuff this quarter, all the good and the bad guys, right?

Correct.

Okay, great.

David, just picking up on this advertising theme, you've been in the broadcast replacement game for a long time, taking share from the networks.

And I would imagine you think that there's a lot left to do there, so I would be curious on that first topic.

But then when you think about online video do you see any analogy in online video, whether it's YouTube or some of the assets you've acquired, and television to what the cable business was facing 20 years ago looking at broadcast?

How real of a threat or an opportunity do you view online video as an advertising business over the next, say, three to five years?

Thanks, Ben.

On the CPM, the CPM differential between broadcast and cable remains a little over 30%, and that's really good news for us.

In the US market where subscribers are flat and viewership on cable is flat, that provides real wind at our back.

And that applies to all of us, particularly if we can grow market share and continue to push on the CPM.

The story on compressing that CPM I think is getting stronger because the rating points that we are able to deliver, not just us.

Like on a Friday night where we are the number one network, beating the broadcasters; on OWN when Oprah can put on content and she's the number one network for African American women, beating all the broadcasters.

Those stories are --- we have a huge number of those stories where five or six years ago that didn't exist.

The scale of viewership on cable is higher, the demo of viewership on cable is stronger, and so I think it's going to take time.

Probably three or four years.

It will never be even, but we will get that pickup and that, I think, will continue to be a benefit for the US business.

On the online side, the CPMs that we are getting on stream video on the web are quite high.

We have actually been shifting aggressively away from the page view and the unique approach that many of us in this business took.

So we had aggregated over 60 million uniques with a gazillion page views, but with Google and Facebook out there it kind of really commoditized in some ways the ability to sell on those pages.

We still do it, but the prices are not rising; if anything, they are going down.

And so we have really pivoted aggressively towards streaming.

We bought a company called Revision3.

It's the number one nonfiction streaming company in the world.

They were doing about 150 million streams a month when we bought them.

They are now 300 million streams.

JB Perrette, who runs our business, has been pushing our streaming business across every one of our brands.

We launched 12 live streaming channels of live puppy cams and young animals across --- on Animal Planet about six weeks ago and they are doing very well.

And so our number one focus in terms of the digital business right now is on the streaming side because the CPMs are quite strong.

Having said that, it's not clear where it's going to go.

So we are playing in this space, we want to learn everything about it.

We want to continue to look at consumer behavior, but it's confusing right now.

People are still watching more TV than they ever have.

We are able to grow market share in the US pretty significantly over the last couple of years, including this past quarter where we were up 3%.

Last year where we were up 8%.

Outside the US we are growing market share dramatically.

And so we are really playing both ends.

Let's do a great job of telling stories and building characters and building our brands, and let's assume nothing is going on.

Then let's have an aggressive team taking our content and our characters on the web and also through Rev3 doing content a different way.

I think it's going to be a couple of years before we really see what happens.

Michael Nathanson, Nomura.

Thanks.

I have one for Dave and one for Andy.

David, [just let me ask this] question.

When you look at what Netflix has done with the agreements with A&E -- they couldn't come to an agreement with A&E a while ago -- and then Viacom they kind of changed their mind and try and buy shows rather than an output deal, I wonder how you are thinking about your relationship with Netflix and how should we think about what's going to happen when it expires?

Just your view on that.

Thanks, Michael.

When you step back -- and I've said this before, but as we look at all the people that are knocking on our door now for content, for the next couple of years I think there's never been a better time to be in this business than right now.

We own all of our content, which makes us somewhat unique; our content works around the world, which makes us unique; and there's more people that want it for more windows.

In the window you are talking about, we got Amazon and we got Netflix.

We are stronger now, I think, because five years ago we had 4% of the viewership on cable.

Today we have 10%.

We have brands that are stronger.

We have a lot of good content.

We are going to take our third-year option on Netflix because we have seen no degradation in audience.

That's significant incremental margin for us with Amazon and with Netflix because they are buying content that is mostly 18 months and older.

Some of it two, three, four years old.

Our relationship is good.

They like our content.

We like this window.

Our deal doesn't come up for almost another year-and-a-half.

When it does come up with Amazon and with Netflix, we think we will do well as long as we have a lot of really good content that people like.

And we also have a big bulk of it.

In the end, they still need to nourish people.

The idea that Rita said to me a number of times is they don't have everything, but when people go there they will find something good.

And we have a lot of good stuff, so I think will do well, Michael.

In addition, we now have a lot of the cable operators here in the US -- BSkyB just launched their SVoD platform and that's good for us.

So you have LOVEFiLM, you have Netflix, and now you have [Jeremy Derek] launching his own SVoD platform in the UK.

There's a good chance that's going to happen here; we're talking with a lot of operators, so that's a positive.

Then we have TV Everywhere, which is a tighter window.

Which we haven't done deals yet, but we think we can get significant incremental value for that.

Okay.

Let me just turn to Andy for one second.

You mentioned success in Spain and Italy on the broadcast side, which is pretty amazing given how tough those markets are going on in broadcast advertising.

So if you could talk a little bit about what's the sales pitch; how you are getting those dollars?

Is it pricing lift strategy?

Is it just a low base you're growing from?

So anything more on Spain and Italy would be helpful.

Our model, when we say free-to-air, is really different than a traditional broadcast model, because we own all of our content.

When we went into Spain, our cost of content is almost zero.

We have the content; we have it in language.

So we essentially buy a stick and we can put programming on there and we are able to gain market share.

In Italy, and by the way, Michael, we've now reached a point where we have lapped almost all of our free-to-air channels, so the growth that you are seeing is pretty pure.

In addition, Italy we are just finding that our content is working fantastic.

The experience we are having there, that's the reason we went into Spain where it's very strong.

It's the reason that we are finding additional growth in Germany.

This model of taking male content and putting it on a male channel, taking female content and putting it on a female channel, and the amount of content that we have to put into those two baskets -- in Italy our market share was up 70% with our two channels, and that's without switchover.

With switchover now we are number three player in Italy, so second only to [Rye] and Mediaset.

So we are also getting scale, which will help us with our pricing.

Okay, thank you.

Jessica Reif Cohen, Bank of America Merrill Lynch.

Thanks.

I have a couple of questions on the international side.

First, on the businesses outside the US, what is your channel share versus the audience share?

Is there a way for us to think about how your current portfolio is positioned, whether you overindex or underindex?

And how much room is there to add channels?

So that's the first question.

Okay.

First, I think that we are sort of -- we are in the beginning stages of trying to take advantage of the fact that we have between six and 14 channels in 220 countries.

So we are clearly the number one platform media company in the world and our challenge domestically and internationally was to take advantage of that.

We've done a good job here in the US, but we have a long way to go.

I think you'll see a lot of growth from us here in the US because we still -- we have 14 channels and we only have about 10% share.

Outside the US, the story is even stronger.

We were able to light up TLC around the world, reaching over 300 million homes in a year and a half.

And the growth that we are seeing on TLC around the world continues to be significant.

ID we are rolling out, so we are beginning to take advantage of our channels, Jessica.

I think you are going to see meaningful market share growth.

We had 25% market share growth in the fourth quarter.

We had 16% market share growth in the first quarter.

But I guess to step back when I look at our international business, it's probably the biggest growth engine and the most compelling story that we have.

Right now, we are hitting on all cylinders in a real sustainable fashion.

So looking at this past quarter, subs were up 12%, market share up 16%, ad sales up 25% and affiliate revenue up 15%.

So you got all those arrows up.

At the same time that when you look at the 220 countries that we are serving locally, more than two-thirds of those countries are either in recession or flat.

On top of that, we have invested in TLC, ID, taking Kids into Asia, launching new broadcast channels.

And when you digest all of that investment and the fact that more than two-thirds of the countries are in recession, we are showing 17% growth and 25% advertising growth, and we are growing share.

So what's most striking to me is we have a sustainable model where we can grow between 15% and 20% in --- when we are dealing in markets that are mostly flat or down, and that's the market condition we are expecting.

And with our local teams, one of the things that you have seen is the cost increase, it's because we are putting --- we put local ad sales teams into Colombia.

We put a local ad sales team into Italy.

That more investment that we think will pay off with more sustainable growth.

The kicker here is if over the next couple of years, things stay exactly the way they are, or even if they get a little worse, we think we could show double-digit or certainly sustainable growth the way that you've seen the last two quarters for us.

The wildcard is, which we're not expecting, is if the marketplace turns.

If Western Europe starts to pick up, if a lot of these countries that are flat or in recession turn, and we have been growing 15%, 17%, 18%, that's going to be the real fuel for extraordinary growth for us because we are gaining market share.

We've got more channels.

We've got local teams on the ground and we are growing aggressively in markets that are not good.

So to me that's really --- that's our game.

I actually have a follow up to one of your comments, David, from -- on SBS.

Can you give us any more color on cost and revenue synergies?

Where do you think these margins for the SBS properties can go over time relative to your core international businesses?

Well, specifically, we certainly have cost synergy because we have been in business there for 20 years.

We were over there last week.

We have different sets of offices.

We have --- we are looking at people, we are looking at delivery, so there will be some meaningful cost synergies.

But also we now have over 40% market share in Norway with significant broadcast assets and cable assets, so the power ratio of SBS in terms of advertising was a lot higher than our power ratio.

So there will be some revenue synergy in terms of advertising, and we expect that when we go to market together that there should be real opportunity on the affiliate side.

We are already seeing that there is going to be -- in addition to that, when you take Eurosport and you lay Eurosport on top of our opportunity universe in those four markets we even have more, whether it's how we sell, whether it's how we bid on content.

So we feel like there will be a step back in margins this year as we digest this, but we are very happy with what we saw.

It's a great management team; the business is performing very well.

It didn't close as quickly as we would have liked, but we are off and running and we are running hard.

Just to add to that, Jessica, even though we only closed SBS a month ago and Eurosport now four months ago, in both cases in the early stages here we're very happy with what we see the opportunities for both revenue and cost synergies.

Both are at least at or above our deal expectations, so the early signs are very positive.

All right, thank you.

Richard Greenfield, BTIG.

I really wanted to follow up on Jessica's question in terms of kind of not specifically SBS margins, but just the overall international margin.

You were at 45% last year.

If it wasn't for Discovery Japan I assume you would have been down in the 40% range versus the 41% you reported.

Just trying to understand, as you look out over the, next call it, several years, if you took a three- to four-year view, that 40%-ish margin is 1,500 basis points behind where your US margin is currently.

How do you think about where international margins should be as you get to the scale that you are going to have following this acquisition?

Is this 40% to 50% over a four- or five-year time frame?

How do you think about the overall opportunity relative to where your US business runs?

Richard, it's Andy.

Look, it's a good question.

We knew going into this year that SBS, and we stated this, would be about a 500 basis point dilution to the overall international margin.

That plus the content amortization catch up as well.

But now that we have a new baseline that we are going to work off of, given the conversation around synergies, given the conversation around infrastructure is largely in place international -- as Dave mentioned, we have feet on the ground now in over 50 countries, adding to the sales teams in Colombia and Italy, etc.

So we now think we can get a lot higher percent of profit flow through for every incremental dollar, especially as the percent of ad sales becomes higher and higher.

So we feel very confident that from this now lower base we have established with the content amort with SBS we can meaningfully grow margin in 2014 and beyond.

It's a huge focus of the international team.

The other thing that you will see is the situation that we are having with Animal Planet and with ID and that we had with TLC a few years ago, as the channels start to grow, you have to get on the media planners' budget.

And you don't get on at a very high rate.

You have to build yourself up.

And so we've launched a lot of new channels and we've grown a lot of market share outside the US.

We now have local teams on the ground and we are seeing meaningful growth.

You saw 25% ad growth, but it's even going to get higher because a lot of the channels that we are selling, they are early stage.

We're getting good market share, but our ability to drive price will be something that will take over the next three to four years for us to get full value for.

And in terms of the programming spend overseas to get there, in terms of how that impacts the margin?

Well, the programming spend that we have right now it's pretty steady.

The good news for us is, when it comes to Science and Animal Planet and ID -- ID in particular is working really well.

We didn't know that it would work the way Animal Planet and Science has worked in terms of taking almost, very little local content and just using existing content that we have with sort of a global approach.

TLC does have a meaningful amount of local, but you see it in the numbers.

It is less than we thought.

We thought it was going to be about 40% share and it's more at about 60% share.

And it will probably stay about where it is right now.

So, overall, I think you will see --- we don't expect that we're going to have to invest significantly more.

It's about where it is now.

Thank you.

John Janedis, UBS.

Good morning.

David, historically you have talked about Discovery being synonymous with nonfiction programming.

I'm just wondering, with the introduction of some scripteds there at the upfront, what was the driver?

Does that give you an incremental opportunity there to monetize the audience and should we expect more if you get the ratings?

Look, our ratings are up at Discovery and we are having a lot of momentum.

It's important for us to be open to what do the viewers want and how do we continue to nourish them.

That's what this business is all about.

People only watch eight to 10 channels.

The fact that our share was up 8% last year and 3%, it means they are spending more time with our channels and you have to earn that.

Fiction, we've seen in the marketplace that viewers have really related to fiction on occasion on nonfiction channels.

We have been very successful with Alaska and with Gold on Discovery.

We have the number one show with Gold Rush.

Bering Sea Gold has been very successful for us; Last Frontier in Alaska.

So for us to do Klondike on Discovery we thought was a good first swing at the fiction, which is a lot more expensive, to see if we do something in our wheelhouse and we get behind it will the Discovery audience --- will they love it?

Will they lean into it?

Will they feel like that makes them feel closer to Discovery?

And we're going to have to see; it's an experiment.

I think it's going to do very well, but it's a very small piece of our overall strategy.

It's much more expensive.

It doesn't repeat as well, and so, for us, it's a big tent pole.

You might see us using scripted, if this works, as a tent pole strategy, sort of the way we use Frozen Planet or North America as part of that overall approach to -- in grandizing the brand.

But it's not going to change who we are where we are nonfiction with those brands.

You will see us playing more in the fiction area with things like SBS, where we have broad entertainment sports networks where that's the foundation of what we do in those four markets where we have between 30% and 40% market share.

Thank you.

Anthony DiClemente, Barclays.

Good morning, thank you.

Just question for Andy.

Andy, David mentioned taking the third-year option on your Netflix deal.

I think that that comes up later this year, but I was wondering if you guys could clarify exactly when that would be.

Like what quarter would that option kick in?

Then I'm assuming that that's contemplated in your full-year guidance.

Is it, is it included?

Or the expectation for taking the third-year option is included in your full-year guidance, is that correct?

Yes, Anthony, it's both in our full-year guidance and it will be either in the second or third quarter.

It really all depends on when we take the option.

So we are not going to say which quarter yet, but it will either be second or third, and it is included in our full-year expectation.

Okay, and it would go for one full year subsequent to that?

It would extend?

That is correct.

And then on that theme, I guess for either of you, can you talk about are there other online distributors?

You said there were plenty of players knocking on your door.

Are there others?

What would the structure and type of content look like for other players out there in addition to Amazon and Netflix perhaps?

Thanks.

Sure.

Hi, Anthony.

Look, the TV Everywhere is a big piece of the windowing strategy.

We haven't done any of those deals yet.

We're talking to operators.

The good thing about TV Everywhere is it's measured on the web and it will be measured next year on the pad.

I just met with a bunch of operators in DC the other day.

There's a real drive to push into that space.

We just haven't done deals yet.

We all agree there's value.

We think there is more value there.

We have 10% market share.

We have a lot of great content, and so I think there's a question of when that will happen and it's a fight over value.

On the SVoD piece, I wouldn't be surprised if a number of the operators get into that space.

Netflix has been very effective.

Amazon has been effective.

So I think it will be good for us; the more people that want to pay for our content the better.

Then there's over-the-top.

There continues to be discussion of over-the-top.

Eventually it will happen.

I don't know if it's going to be this year, next year, in four years, but the idea of more people wanting to pay more money to get access to content that we own is a good thing.

Now it's a good thing over the next couple of years.

The bigger question is four, five, six years from now how good of a job do we do as an industry getting the right economics for each of those windows?

And do any of those windows get much bigger because people spend a lot more time, and does that mean that we end up doing better or worse?

There's no question we're going to be doing better in the next couple of years.

I just want to follow up on that.

That is a good point in terms of if over the next few years SVoD sort of takes share from ad-supported as the form of monetization online of choice.

You've taken a strategy, David, in terms of really windowing out the SVoD deals you've done in terms of longer-tail library content.

Could you see that changing if the SVoD business really becomes for consumers and viewers the business model of choice vis-a-vis ad-supported online?

Look, we all have to follow the consumer, what does the consumer do, but we have to do it rationally by figuring out what are the right economics.

We don't want to undermine an existing business that is very effective for us.

We are about 50% subscriber fee.

We could be doing deals in some markets that are very low penetrated on cable around the world, like Brazil, to make a little bit more money, but Brazil is still only 26% pay penetrated.

They grew over 20% in this past quarter.

That's the place that we are going to make a lot of money.

And when people first get introduced to television, we want them to be introduced to cable TV, which is the core of what we do.

We don't want them to be confused by some other offering, so I think we have to be careful as an industry as to how we approach this.

The fact that traditional distributors are getting into the space is a good thing.

If we are talking to an existing distributor, a customer of ours that has big scale and is paying us for our content in traditional manner, then at that point doing a deal with that distributor for more money to give them more windows, by definition it will be more difficult to undermine that relationship because it's with the same person.

But we have to make sure we get the right economics because, you're right, if in five years we are not getting the right economics or the business models aren't effective on some of those platforms and they begin to take some scale away from traditional television, then we'll be worse off.

On the other hand, today people are watching more television than they have and we're getting paid for every one of those platforms, so it feels awfully good.

That's good.

The bad is if we get overconfident, then we don't get the right economics on those additional platforms.

Thanks a lot.

Michael Morris, Davenport & Co.

Thanks.

Good morning, guys.

Couple quick ones on affiliates and then one on content.

Domestic affiliates, I believe last year your core affiliate rate, ex-digital, grew somewhere in the 4.5% to 5% range.

So my first question is did your affiliate --- your subscribers who were not under new contracts so far this year did they continue to grow at a similar pace there?

Yes, they did.

Okay.

Then, David, you mentioned the number of subscribers up for renewal this year, you categorized it as a little more than 10%.

Can you talk (multiple speakers)

That was last year, sorry.

Last year was less than 20%.

We have basically said directionally that it's about -- over the next five years it's basically even.

So if you were to model it out and you modeled out 20% a year, you wouldn't be too far off on either side.

So when you said that less than 20%, those weren't the sort of January 1, 2013, subscribers, or that was kind of like at that date?

I know it's not always exact, but so to speak.

The deals that we did last year in aggregate represented a number of subs that was less than 20% of our total base in the US.

Okay and so (multiple speakers) go ahead.

That's it.

Okay.

And so as we look into the number of new subscribers or updated contracts into 2014 over 2013 you think that 20% is the right number we should be using?

Ballpark, yes.

Okay.

Then just on the content side, to follow up a bit on the scripted content; you did acquire into both scripted and sports in Europe.

Would you consider acquiring into either of those in the US?

We always look opportunistically.

I think we are very late to the party on sports.

It's very expensive and there's a lot of great players playing in that space and fighting that fight.

We think what we have with Eurosport, which we have a right to take -- to take a control right in in about 19 months, is very different.

It's in 59 countries.

It's the only pan-European sports platform that exists, so it's a very unique platform with unique leverage.

So sports is difficult.

I don't see us playing in a meaningful way in fiction on our existing platforms in some way that would skew your models, but if there were channels available here in the US we always look.

We think we have enough scale here right now, but for the right price we always look at everything.

Our focus is going to be much more outside the US.

That's where we think we have a real advantage, both in terms of teams on the ground and scale.

Great, thank you.

Operator, we have time for one last question, please.

Tuna Amobi, S&P Capital IQ.

Thanks so much for taking the questions.

David, you used the word robust in your characterization of your upfront outlook, so I just wanted to get a sense how robust you think this will be.

Clearly, you guys have been taking share for several years now and it seems to me that your position this year is relatively better than last year in the upfront environment, so I'm wondering how this whole changes your strategy.

Any kind of color that you can provide would be helpful.

For Andy, so you laid out three criteria for your M&A strategy and I was very curious that you were willing to take a significant margin hit in the SBS and yet you made the point it was EPS and free cash accretive.

I am wondering, given that dynamic, is this something that one can expect would --- it's not common the kind of margin compression that SBS would result.

I mean timeframe, it sounds like from your comments, would take a few years to normalize.

And I'm wondering why you think that's kind of the right approach in terms of how you view assets and if that is something that is peculiar to the international market or it's something you will also consider in your US acquisition criteria, if that makes sense.

Thank you.

Let me start.

The upfront, to some extent, is outside of our control.

We are going with a significant amount of momentum.

The market right now is strong.

Pricing is strong, but we are more of a follower than a leader with that.

That's because we're in the cable business and that's the way it works here in the US, so we will see where CBS or some of the bigger broadcasters go.

Depending on where they come in; we will make the decision depending on how up the pricing is.

Whether -- last year we did about 55% of our inventory, but we did very, very well with scatter and the question is, depending on how high we can get an increase on the upfront, that will determine whether we do 45%, 48%, 50% or 55% and how much we bet on scatter.

So I think we have all the right winds at our back going in.

We are just going to have to see how the marketplace is.

It feels good now; we will have to see.

On SBS, just a couple of points and then I will pass it to Andy.

That's a dual-revenue stream business and it's very unusual.

30% of it is sub fees, number one.

Two, we think we have a lot of synergy and it's not going to take us a very long time.

We think we can move those margins pretty quickly.

And, three, it does play against our model.

If we had bought an asset like this in one market that had a unique language where we couldn't use it across other countries, it would have been more difficult.

The fact that you have Norway, Denmark, Sweden, and Finland and you can produce content and share it across those markets, and we could use their content, they could use ours, we think gives us a real chance to grow our international business.

And also to reinforce the geographic diversity that we have.

Those are very stable markets.

We think that we can grow them and we can use the synergy to do it.

Yes, you're right; we have laid out three kind of deal criteria that we look at.

One is free cash flow and EPS accretive day one; two is an unlevered IRR of at least low teens; and three is by at a multiple that is less than ourselves and ideally less than [10].

SBS clearly meets all of those three criteria.

And so I would just add to David's point, while it is margin dilutive day one, we do very much believe in our ability to grow margin.

Not only with that business but with the overall amalgamation of D&I in total.

So we are very, very bullish on what our margin profile can look like long term.

We think this is the right kind of step back in margin year one with a lot of thought around how to gain that through ad sales leverage, top-line leverage, infrastructure in place, and then synergies.

Okay, thank you.

Thank you very much, everybody, for joining us.

Please follow up with any questions that you have.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and good day.