華納兄弟探索 (WBD) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Discovery Communications third-quarter 2013 earnings conference call.

My name is Sonia and I will be your operator for today.

At this point 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 like to turn the call over to Craig Felenstein, Executive Vice President Investor Relations.

Please proceed, sir.

Good morning, everyone.

Thank you for joining us for Discovery Communications' 2013 third-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 people 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.

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.

And with that I will turn the call over to David.

Thanks, Craig.

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

Discovery's consistent financial growth and strong operating momentum continued during the third quarter as our diverse family of brands and deep content portfolio attracted larger audiences around the globe, enabling us to capitalize on a stable worldwide ad environment.

At the same time, we further exploited the evolution of pay television across our unique international distribution platform and took further advantage of some of the opportunities that our recent strategic acquisitions provide.

As we maximize the synergies associated with the SBS Nordic assets, our strategic priority remains exactly the same -- invest in high-quality content with broad and diverse appeal in those geographic locations that provide the most significant long-term advertising and affiliate opportunities.

This underlying focus has allowed us to keep our organic growth story strongly intact, as evidenced by our double-digit revenue and profit growth this quarter, excluding acquisitions.

And this growth is broad-based with advertising and distribution revenues expanding nicely across both our domestic and international portfolios.

Equally as important, by incrementally spending only on those brands and regions that have demonstrated meaningful upside, we can ensure that the majority of the revenue growth over the long-term will fall directly to our bottom-line, delivering sustained organic margin expansion, even as we invest in future growth.

While investing judiciously is important in all facets of our business, it is especially true domestically given the maturity level and competition in the US market.

Over the last several years we have continuously expanded market share, grown ad revenues and delivered profit growth in the US.

Even as we invested in developing many new brands and strengthening our existing flagships.

Since 2008 we have built several new networks off our existing distribution, including Investigation Discovery, Destination America, OWN, Hub and Velocity, while refocusing our existing networks such as Animal Planet and Science and reinforcing our two biggest networks, Discovery and TLC.

Our targeted investment spend domestically has resulted in sustained audience growth with viewership across our portfolio up nearly 60% over the last five years.

This past quarter Discovery's domestic networks delivered their best third-quarter ever with viewership among key adult 25 to 54 demo up 10% in prime time led by 18% growth at the Discovery Channel.

Discovery Channel produced record third-quarter ratings led by the best Shark Week in our history with over 50 million viewers tuning in, remarkable given that it has been on the air for 26 years.

Shark Week's longevity, along with the success this past quarter of returning favorites Deadliest Catch and Fast N' Loud demonstrates the depth and range of Discovery's content and the enduring power of our mission to deliver high-quality content that satisfies curiosity.

And with new hits such as Naked and Afraid joining the stable and a slate of exciting new content in the pipeline, Discovery Channel is poised to continue captivating audiences and delivering value to advertisers and affiliates.

Our two other fully distributed networks also delivered nice viewership growth this past quarter.

TLC was up 4% in its key female demographic led by Sister Wives, Breaking Amish and Here Comes Honey Boo-Boo.

We continue to work to drive our relationship with our viewers through social media.

Earlier this month TLC paired the strength of Long Island Mediums, Theresa Caputo, one of our most popular characters, with the power of Twitter in a season premiere that allowed fans to tweet to win a reading and maybe see their tweet on TV in real-time.

With live cut ends of Theresa throughout the night, TLC had its most social day after, generating more than 1 million tweets and eight Twitter trending topics and starting to prove out that Twitter and TV can be powerful partners.

And Animal Planet increased viewership 5% this past quarter driven by returning hit Call of the Wildman and freshman series Treehouse Masters, both of which delivered over 1.3 million viewers, helping Animal Planet finish as a top 20 network for men for the third consecutive quarter.

The viewership gains across our flagship networks certainly fueled the overall portfolio growth during the quarter, but we also continue to develop our newest growth engines.

ID was up 5% in its key demo as it remains a top 10 network during the day, and is the top ranked network in all of television for length of tune.

Destination America was up 18% this quarter among adults 25 to 54 and is delivering real value for advertisers.

And Velocity, the fastest growing men's lifestyle network on cable, was up nearly 30% versus the third quarter a year ago as it delivered its best quarter ever.

The combination of ratings growth and a relatively healthy ad market enabled us to deliver another quarter of double-digit ad gains during Q3.

And looking ahead with sustained ratings momentum, a strong upfront under our belt, cancellations that are still at low levels and a scatter market that thus far remains robust, we remain confident that we can deliver sustained advertising growth moving forward.

The ratings and advertising success we are enjoying across our consolidated domestic portfolio also extends to our joint venture networks.

The Hub delivered its eighth consecutive quarter of double-digit growth this past quarter among kids 2 to 11 in total day, while OWN continued its torrid pace with its highest quarter ever, growing over 50% in prime time versus the third quarter a year ago.

OWN's multifaceted success has been driven by Oprah, Tyler Perry's two new hit series, and Saturday's powerful lineup of Iyanla Fix My Life, Welcome to Sweetie Pie's and Six Little McGhees.

The overall rating growth is translating into significant advertising gains and, when combined with the affiliate fees that the channel had previously locked in, OWN was able to deliver additional cash flow back to Discovery this past quarter.

Discovery's third-quarter results also further demonstrate the value of owning the vast majority of our programming as we recognized additional revenue under our existing license agreements.

Owning our content provides flexibility regarding when and how we monetize our content library.

We remain platform agnostic with regards to distributing our programming and continue to explore additional opportunities to extract value while operating within the existing pay-TV ecosystem.

As we continue to build new avenues of growth across the more mature US business, the bigger opportunity remains the potential of our international portfolio where we are diligently applying our targeted investment approach to exploit our unparalleled market position and capitalize on those areas with significant upside from the evolution of pay television and the developing global advertising landscape.

Discovery's thoughtful investment over the last two decades in securing distribution and establishing relationships with key affiliates, suppliers and advertisers in each market has given us a huge head start internationally.

But it is the additional steps we have taken over the last several years to take advantage of our market position that is driving such strong results today and will allow us to continue to grow even as pay TV penetration growth begins to slow eventually.

As markets have developed we have aggressively opened new offices in key countries like Turkey, the Ukraine and India to closely connect with an evolving middle class.

At the same time we have established in-house sales functions in markets where the revenue opportunity dictated a more hands on approach such as Russia, Colombia and Argentina.

On the content side we've increased our programming spend internationally by over 80% since 2010 to capitalize on market opportunities, including broadening the reach of our female flagship, TLC, into over 165 countries, making TLC the most distributed women's brand in the world from a standing start 24 months ago.

Also expanding the footprint of our successful investigative and forensic content into 150 countries with ID.

And we expect to approach 180 countries in the year ahead.

Or launching Kids network recently across Asia.

All in over the last three years we have launched over 60 new feeds and five new languages to satisfy the growing demand for our content and the strong revenue growth we are delivering today is certainly due in a large part to this targeted investment.

The strength and local feel of our suite of network brands, Discovery, Science Animal Planet, ID and TLC, bringing five channels which share content and content that we own and reach a diversified demographic of both men and women is really working.

Together with the significant subscriber growth we are experiencing in many markets around the world, the result is more and more viewers connecting with our suite of networks, providing sustainable market share growth and corresponding ad growth this quarter of 29%.

While it is certainly difficult to predict how the various international markets will perform going forward, we remain optimistic about our long-term growth prospects given the platform we have built, the investments we've made and the growth we are delivering today despite a relatively slow economic climate in many of the countries we operate in.

As we continue to invest in our organic growth initiatives we're also making significant strides integrating our recent SBS Nordic acquisition.

The joint ad sales team we've assembled is closing deals in the spot market while preparing upfront presentations to message during the first quarter that layout the compelling content offering and value proposition we can deliver to ad clients.

On the cost side we have carefully eliminated any redundant positions and consolidated physical locations where appropriate.

While programming teams have identified thousands of hours of content that can be shared across the combined portfolio.

It is still early days, but after digging in we remain certain that the combined entity of SBS Discovery Media further strengthens the unmatched platform Discovery has built up over the last two decades and helps to bolster the long-term growth outlook of our international portfolio.

Overall we head into the fourth quarter of 2013 with continued financial and operating momentum as we execute on our strategic priorities.

Our focus remains building out our diverse set of brands and further developing our global distribution platform for long-term growth while delivering consistent financial results.

At the same time, given our strong balance sheet and the free cash flow we are generating, we're committed to returning additional capital to shareholders so we can further build shareholder value.

And with that I will turn the call over to Andy.

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

As David highlighted, Discovery's financial momentum continued during the third quarter as we delivered double-digit underlining revenue and OIBDA growth by further executing upon our key strategic growth initiatives in a relatively healthy global operating environment.

On a reported basis total Company revenue in the third quarter increased 28% led by 10% domestic and 59% international growth, which included several newly acquired businesses, most notably SBS Nordic, as well as additional licensing revenue primarily related to our deal with Netflix.

Excluding these items and the impact of foreign currency total Company revenue growth was 12%.

Total operating expenses on a reported basis increased 34% primarily due to the inclusion of newly acquired businesses.

Excluding these acquisitions the additional costs related to our Netflix agreement and the impact from foreign currency movements, total Company expenses increased 12% versus the prior year due to the expected higher content amortization and marketing spend during the quarter.

As we highlighted on previous earnings calls, underlining operating expense growth will meaningfully abate in the fourth quarter.

However, due to anticipated several one-time expense items which will result in reported operating expense growth similar to Q3.

These one-time items include a charge related to the recently announced termination of our program and agreement with the BBC as well as additional content impairment expense largely associated with the recent management change at TLC.

On a reported basis adjusted OIBDA in the third quarter increased 20%.

Excluding newly acquired businesses, the licensing agreements and foreign-exchange, Discovery's continued ability to generate revenue growth in excess of expenses while also investing in sustained future growth opportunities translated into a robust 11% increase in adjusted OIBDA.

Net income increased to $256 million in the third quarter, up 24%, driven by the strong operating performance across the Company, $22 million of better equity results primarily due to significant improvements at OWN, and in $19 million gain related to the sale of our Petfinder business.

These items were partially offset by [$29 million] of higher tax expense, $12 million of increased interest expense related to the additional debt we issued in March of this year, and $53 million of increased amortization expense primarily related to the purchase accounting associated with the SBS Nordic acquisition.

As I mentioned last quarter, the SBS purchase price allocation to amortizable trademarks, distribution contracts, broadcast licenses and other assets results in additional amortization expense for the last nine months of 2013 of about $130 million with a similar amount anticipated for the 12 months of 2014.

Earnings per diluted share for the third quarter were $0.71, 29% above the third quarter a year ago.

Adjusted earnings per diluted share, a more relevant metric from a comparability perspective as it excludes the impact from non-cash acquisition amortization of intangible assets, was $0.80 compared to $0.55 in Q3 2012, a 45% improvement.

Free cash flow increased 24% in the quarter to $438 million as the strong operating performance and lower tax payments primarily resulting from the extension of the accelerated content cost recovery under Section 181, was partially offset by higher content investment.

Content spend year to date is up only mid single-digits excluding the newly acquired businesses.

And as David highlighted, the increased programming spend continues to pay off in terms of rating momentum and higher advertising revenue.

Before I move on to the divisional results I do want to highlight that, while not part of our reported free cash flow, OWN accelerated its cash repayments to Discovery during the third quarter as the joint venture paid down approximately $20 million of its total outstanding obligation.

For the fourth quarter of this year we expect OWN to further accelerate its cash repayments to Discovery while generating positive equity income for the first time in the joint venture's history.

Now turning to the operating units, the U.S. Networks continued to perform well during the third quarter with total reported domestic revenues of 10%, including 10% distribution revenue growth due in part to additional licensing revenue.

Excluding the additional licensing revenue total domestic revenue increased 8% with distribution revenues up 5% predominantly from higher rates and to a lesser extent additional digital subscribers.

Please note that we do not anticipate significant additional licensing revenue under our existing agreements during the fourth quarter of this year.

The US network ad sales team generated another quarter of strong growth in Q3 translating to higher delivery, most notably from Discovery Channel, Animal Planet and Destination America, as well as higher pricing across all networks into 12% advertising growth versus the third quarter year ago.

Thus far in the fourth quarter the current market trends continue to be encouraging with scatter pricing up double-digits from the mid to high single-digit gains we garnered during our recent upfront negotiations.

We do, however, have fewer premier hours scheduled for the remainder of the year versus the same period a year ago.

But given the strong market conditions we still anticipate high single-digit advertising growth in the fourth quarter.

Turning to the cost side, domestic operating expenses were up 11% from the third quarter 2012 primarily due to anticipated higher content amortization associated with the increased programming and cash spend over the past few years, additional content cost associated with digital licensing agreements and higher marketing costs for series on TLC and ID.

Domestic adjusted OIBDA increased 10% on a reported basis versus last year's third quarter and 6% excluding the impact of licensing agreements.

Turning to our international operations, current quarter reported results reflect the impact of newly acquired businesses SBS Nordic, Switchover Media and Fatafeat.

For comparability purposes however, by following international comments we refer to the results excluding these acquisitions.

Our international segment continued to deliver strong momentum across our global operations this past quarter, with revenues expanding 14% led by 27% ad and 11% inflated growth.

Excluding the impact of exchange rates, total revenue growth was 18% with advertising revenue increasing 29% and affiliate revenue up 14%.

The advertising revenue growth the clearly benefited from the impact of the Olympics a year ago, but we delivered broad-based increases with double-digit growth across every region led by Western Europe, mainly from the continued success of several of our free to air initiatives, particularly in Italy and Spain, and by Latin America from higher pricing and delivery across the regions.

On the affiliate front the year-on-year 14% increase was driven by subscriber growth, especially in Latin America from the continued expansion of pay television in Brazil and Argentina, as well as by the consolidation of Discovery Japan.

Excluding Japan our international affiliate revenue growth would have been up high single-digits.

Operating costs internationally were up 19% excluding the currency impact primarily driven by higher content amortization, increased personal cost as we further expand our global footprint and the consolidation of Discovery Japan.

The international segment delivered 17% adjusted OIBDA growth in the third quarter excluding newly acquired businesses and foreign currency as the international team continued to significantly grow revenues while investing in long-term growth initiatives.

Taking a look at our financial position, with a strong balance sheet and sustained financial and operating momentum we continue to return capital to shareholders through execution of our share repurchase program.

As we have discussed, our first priority remains investing in our core businesses to drive sustained long-term growth be it through investing in existing networks and platforms or through exploring acquisition opportunities.

While that remains our core focus, given the healthy free cash flow we are generating, our gross leverage targets, and strong long-range free cash flow per share growth assumptions, we have the opportunity to continue returning capital shareholders as well as investing in our global businesses.

During the third quarter Discovery repurchased nearly $450 million of stock and we still anticipate buying back a similar amount of stock this year as we did in 2012.

Since we began buying back shares towards the end of 2010 we have spent over $4 billion buying back shares, reducing our outstanding share count by more than 87 million shares or 21%.

Turning to the remainder of 2013, we are encouraged by the sustained momentum across our portfolio and the continued strong ad sales trend we are seeing both domestically and internationally.

Therefore despite the additional fourth-quarter one-time expenses I mentioned earlier, we are leaving our total year guidance unchanged.

For the full year 2013 we still expect total revenues to be between $5.55 billion and $5.625 billion, adjusted OIBDA to be between $2.425 billion and $2.475 billion, and net income to be between $1.1 billion and $1.15 billion.

Thanks again for your time this morning and now David and I will be more than happy to address your questions.

(Operator Instructions).

Ben Swinburne, Morgan Stanley.

David, I was wondering if you could comment a bit on the domestic TV Everywhere conversations.

And the reason I'm asking is when you look at your results you can see the value of your content coming through in the ad sales and digital licensing.

And when you listen to the cable operators, who I know you are intimately involved with, they talk about the need for TV Everywhere to be pushed more aggressively, yet we seem to not be seeing as many deals as we would expect particularly at your Company.

So if you could spend a minute on what the issue is and how you think this gets resolved and then maybe any timing around that as you head into another renewal discussion at the end of this year I think that would be helpful.

And then I just have a quick follow-up for Andy on corporate.

The press release makes the corporate cost drop sound recurrent, I just wanted to see if you would comment on that as we look into Q4.

Thanks.

Thanks, Ben.

Look, TV Everywhere in concept is terrific for us because we get measured with our spots; currently we only get measured when you watch it on your computer, but pretty quickly we will be measured if you watch it on your pad.

And so it is kind of -- it's an opportunity for us to move with technology and on a fully measured basis.

Our position is that right now the cable operator only has the right to carry our channels through to the TV set.

And giving that playability to the consumer is a real benefit to the cable operator.

And so for us, right now we are just at this little bit of an impasse on value.

We think that there is substantial value in us allowing our 13 channels that represent almost 12% of the viewership on cable to go.

And from our perspective it eventually will happen.

One of the reasons I think it hasn't happened with us as quickly is our deals haven't come up yet.

So most of these get done when you do your deal.

So it includes launching of additional subs for channels and your fees go up and then -- and TV Everywhere and what is the value for that.

And in that value bundle the TV Everywhere has gotten done for a lot of the other guys.

So for us I think we are having discussions about doing it separately.

So you either see that we did a TV Everywhere deal -- or you might see that we did a deal really, which includes TV Everywhere -- or what will most likely happen because we are supportive of TV Everywhere is as we do renewals in the future if we get the right value we will do it.

The most important thing for us is that we've built our viewership going cable from about 5% or 6% to almost 1% -- 12% with real affinity networks.

And when a distributor says TV Everywhere to a consumer, TV Everywhere means to consumers that they can watch the shows they like and the channels they like when they want to.

And I think we're in a very good position because people are really liking our channels and with that kind of scale the distributors are going to need to have us on TV Everywhere for it to be successful.

Great, Ben, it is Andy.

Just to add one point to that, one element we've talked a lot about is the need for measurements of authenticated viewership and Nielsen is committed to -- in 2014 a measurement approach for that that we can monetize on Madison Avenue, but that also is a big question mark.

And then on your corporate cost question, as we have said, we are very focused on cost containment and cost productivity.

Especially in our corporate area.

So, yes, the costs were down year over year in the third quarter and, yes, they will be down again year over year in the fourth quarter.

So it has been an area of focus and we've had some success.

Thank you very much.

David Bank, RBC Capital Markets.

If you guys look at your advertising growth for this quarter and for recent past ones and near-term upcoming, can you quantify the contribution generally of how you see kind of CPM growth, audience growth and then the growth in integrated advertising as playing a role, those sort of three distinct items?

Thanks.

And if it is easier just to talk about the current quarter that is fine too.

Thanks, David.

We are seeing some CPM growth particularly in the US where the market has been pretty healthy.

Outside the US most of our strength so far has come from audience, but the fact that we are growing market share over the last two years and our scale is getting bigger outside the US, we have been able also to push price.

I think you will see more of that in the quarters ahead.

This quarter our viewership was up 12% outside the US and we were able to get 29% advertising growth, it's because we're starting to be able to get a better power ratio.

On the integration piece -- we are very well-positioned for that because we produce all of our own content.

And when you look at our 13 channels, we have the ability, because we produce our content, to do a lot of integrations.

Joe Abruzzese has a terrific team, we have a whole group that focuses just on this and it gets us an added hurdle of benefit when you take a look at the upfront or the scatter and then we are able to bring in some premium advertisers because we can provide unique value.

We're not doing as much of that outside the US, but we are doing more today than we were a year or two ago.

So I think that will be something that we're going to continue to push on and should help us.

Is there any way -- you said it kind of gives you an added hurdle.

Just as a follow-up, is there any way you'd give us sort of a ballpark contribution level for what that hurdle is?

I would say right now in the US it is an added benefit, it's not significant.

But it is not immaterial.

So it is one of those things that we look at as an edge on a lot of our competitors because we do produce our content.

We have an intimate relationship with the advertisers.

So every time we can do it it is added dollars and it is added benefit for the advertiser.

So it is one of those things I think we can build on and it's unique to us and a couple of the other media companies that really produce all of their own content in niche affinity groups.

Thank you, thank you very much.

John Janedis, UBS

David, I know it's early, but did you say that 1Q cancellations are in line with historical levels?

And can you talk a bit about the recent ratings trends in Discovery and TLC?

Is some of the weakness related to the reduction of mirror hours you talked about and do those pick up in 2014?

Sure, thanks, John.

Right now in terms of cancellations they are quite low; they are consistent with what we have been seeing.

So, we had a good upfront where we were mid to high single in terms of the kind of economic increase we were able to get.

So first quarter looks good.

On the ratings side, for October we pulled back a little bit, the broadcasters have been strong, they were coming out with a lot of strong content, football was coming in and we felt like we should hold some of our powder and let the broadcasters have their thing, let -- the viewers wanted to try out a lot of that content.

And so we are now feathering in.

We just launched Gold Rush this past Friday, we launched Moonshiners on TLC, we rolled in some of our new content which you're going to start to see this quarter -- this week and the next three weeks.

So, I think that you will see a real stabilization over the next two months with -- on TLC and Discovery.

On our other networks, we didn't really change our approach because they are much more niche networks and we didn't think the broadcast piece was going to have much of an effect on ID or much of an effect on Destination America or OWN and in fact it didn't.

All right, thank you.

And then just separately, you referenced SBS.

Now that you have owned it for a few months can you talk about what you are seeing relative to expectations?

And are your synergies tracking in line from both the timing and cost savings perspective?

Sure.

Well, it is doing better than we expected, it is a very strong business.

Just to remind everybody, it's about a 30% subscriber fee business.

We have been effective in attacking the cost structure in terms of how we house our people and we have -- we are now in the process of taking advantage of our revenue synergies.

They get a lot more for their advertising than we do.

They also, because of scale, they were operating at 20%, 30%, 35% of market share in terms of viewership, so with distributors they were stronger.

So, on advertising we will see it pretty quickly and on the distribution we will see it as those deals flow and which will be over the next two to three years, there's a shorter cycle.

The revenue synergies, again, will be over time.

I would say probably two-thirds of the cost synergies we have attacked we've been over there a number of times, we've got a really good team, so a little more to come on that.

You see the advertising again before you will see the distribution.

But it is all working as we hoped and we think it is going to be a terrific asset for us.

Thanks very much.

Todd Juenger.

Staying over across the pond, love to hear what is going on with TF1 and Eurosport.

Just generally how is that going and any benefit that it is giving you across your portfolio?

And then assuming you are going to say it is going well, any thoughts on your timing of when you might look to buy in the rest of that stake and if that might happen sooner than later?

Then I have a follow-up, thanks.

Thanks, Todd.

Things are going very well with Eurosport and with the TF1 group, they are great partners, Tom (inaudible), just getting a chance to get in the room with him and see how he sees the market in France and learn from his experience in Eurosport has been very positive for us.

We like the business a lot.

We have been learning about the business, it is unusual.

It is in 59 countries with between one and four channels, so it is a true pan-European sports vehicle.

I would say we think it -- looking at it now from the inside we think it even has more potential really because of the unique nature of it.

All that distribution, in some ways it falls in the category of what do we do and what do we understand.

When I got to Discovery we had all these channels all around the world and the question for us was, how do we maximize those to make the most money and reach the most viewers.

And so Eurosport, like Discovery when I got here eight years ago, has a fantastic platform portfolio.

Nobody comes close.

Nobody even -- there is no one that can tie even half of those countries together with even one channel let alone one to four.

And so, our challenge, us and TF1 together, is how do we take something that is doing well and has a unique platform and make it even stronger?

And so we are going to attack it the same way we attack Discovery -- more local, looking at content in each country, looking at partnerships in each country.

And we have that right to take control and that is -- it's a unilateral right and we will look at that over time.

Okay, thanks.

And just a quick follow-up for Andy.

Andy, you made some comments about the rate of spend on a cash basis in terms of programming -- not always easy to figure out on the outside, the amortization schedule.

Any comments you can make about how the rate of cash of spend on programming this year and past years will translate into program amortization?

How we should be thinking about for the next year or so?

Thanks.

Sure, Todd.

We said earlier this year that you will see -- or kind of moderate our investment in content.

Given the original hours that we invested in in 2011 and 2012, we all know there were some double-digit cash increases and we had some nice payback on that.

This year though, one thing I highlighted was on an apples-to-apples basis we are in the mid single-digit growth year over year which is what our commitment was earlier in the year.

So from an inward perspective you will still see double-digit amort coming through in 2013, but you'll see that abate in 2014 as the single-digit cash investment this year helps next year's amort.

So think in terms of a decreasing cash investment in 2013 and then a decreasing amort in 2014.

Okay.

Thanks, guys.

Doug Mitchelson, Deutsche Bank.

(technical difficulty) growth since it is so terrific.

First, is there a way you can quantify how much the Olympics comp helped your growth?

Yes, roughly if you look at it on a two-year basis, clearly last year there was a lot of advertising money particularly in Europe that was moved out of the third quarter into fourth.

So say it is 5% to 10% of an improvement in the third quarter that helped the 29%, and then conversely you will see on a two-year basis a similar kind of growth rate year over year, so there will be roughly call it 20% plus in the fourth quarter.

Michael Nathanson, MoffettNathanson.

I have one for Dave and one for Andy.

David, I wonder, you've made investments in Western Europe and you mentioned that Italy and Spain were definitely a bit better this quarter.

What are you feeling about kind of a churn in Western Europe?

Do you see potential green shoots of growth or was this more of an Olympic comp question?

So I wonder kind of what your view is of the economic churn there.

Thanks, Michael.

Well, look, the good news about the way we have been able to build this -- our economic attack across Western Europe is we're the biggest cable program player in Western Europe, we make more money than anyone else in Western Europe, we have more channels than anyone in Western Europe.

But because we can use our content across those countries so efficiently and because our channel position and sub fees are strong, we have been able to get sustainable growth not just in terms of sub fees but more importantly we've been able to grow more than 20% in ad revenue across Western Europe when the majority of those countries are flat or in recession.

And so, for us that is a big part of our growth strategy is maintain sustainable high-growth in a flat or recessionary environment.

Now two weeks ago I was in Madrid and Munich and London.

And you read about things getting better.

Candidly, the buzz is better.

As you go into those countries and you meet with the advertisers and you sit down with the government and you ask what are they seeing, what do they expect -- everyone seems to think things are better.

Having said that I would say it is pretty stable.

Italy is still really struggling, France is struggling, Spain they are saying that maybe they're going to make the turn and go to plus 1%.

We will have to wait and see.

I would say it is certainly not getting worse, but for us I think we are in great shape.

If a year from now, two years from now, three years from now you start seeing Western Europe improving and we are going to -- you are going to see a ton of energy against us, because our market share is growing in those markets, our pricing power is growing in those markets and we are growing 20% in those markets given these conditions.

So we feel very good about Western Europe and for us with a long approach to this we see Western Europe as the new emerging market.

We've bought assets there, we have launched channels there and in the aggregate Western Europe is bigger than the US.

So Latin America is huge for us, but Western Europe we've been very opportunistic and we've been very careful in terms of how we spend our money.

That could be a big growth engine for us.

Okay, and then can I ask Andy one on SBS?

I know it is lumped in in a quarter with a couple of other assets.

Can you give me a sense of the organic revenue growth, SBS, and what EBITDA growth was for that asset alone?

Yes, Michael.

If you look at the press release we have a table that kind of lays this all out.

For the third quarter all the acquisitions together were about $33 million of OIBDA.

And that's -- while we are not highlighting specifically what their growth was they've had some very nice growth year over year.

And their performance, as David mentioned before, is at or better than our expectation going into the acquisition.

So their performance is strong and, again, if you look at the table we lay out specifically with the acquisitions -- what their impact was in both international and total Company.

Right.

But I just wonder what the base was off of last year so we could look at our forward models and try to figure out if we're modeling the correct growth rates of these assets for the next couple quarters.

We look at it in total, so we are not going to split it out, Michael.

But if you look at it in aggregate, it is -- again, the growth rate has been strong and it has been better than our expectation.

But we're not going to specifically layout SBS.

Okay.

Then let me ask you this question, seasonality is three -- how would 3Q compare over the four quarters as a contributor to EBITDA?

Is it lighter, is it stronger?

So in terms of run rates just what (multiple speakers) for seasonality?

Yes.

Yes, you know, it is similar to what you see with our business.

There is certainly some seasonality.

You will see growth in the fourth quarter is based on advertising and holiday spending.

So you will see the seasonality exists there as you see in other parts, particularly in the ad supported businesses.

So you will see a greater contribution, a greater performance out of SBS in the fourth quarter.

Okay.

Thanks.

Alexia Quadrani, JPMorgan.

You mentioned earlier that we should not -- we are not likely to see any more additional licensing revenue in the fourth quarter this year.

I guess can you talk about -- I don't know if it's too early, but should we expect some coming in 2014?

I can't remember what your renewal cycle is; I think you might have a renewal left in the first quarter.

Yes, for the fourth quarter it is going to be very small, Alexia.

I mean the revenue we had in the third quarter was largely driven by the extension of the Netflix option we had, but it will be a very immaterial amount of SVOD revenue in the fourth quarter.

And for next year it will depend on what deals we do.

We haven't done deals outside the US; we did one very small one.

But there -- we are really contemplating where could we take advantage of that new window, which is almost all incremental margin for us with companies like Amazon or LoveFilm, which is Amazon outside the US and Netflix.

So we are looking at that.

We also have some deals coming up inside the US that we could do.

We have found that there has been no degradation of audience from the deals that we have done.

And we think as we go into those discussions there's a lot of interest in our content, we have series that are doing better, we have brands that are stronger, we have a lot more content.

So right now it is a very good time to be exploiting that market.

Having said that, there are some markets where TV is really just growing.

I was down in Brazil last week and if you go to -- if you are in the Sao Paulo or you are in Rio and you're looking at what is going on with the cable market, you have a whole C-class that is opting onto television for the first time.

And so, for us, we are in that first starter C-class package.

So if Net Brazil launches to approach the C-class with 12 channels we have five of those channels.

And that is how people are being introduced to TV and it is quite hot there.

And then they get -- over time they try and get -- the cable operators or distributors try and push them up to a broader package.

So in some markets there is a real concern about doing some of the SVOD deals so early on.

And so, we are going to -- we are taking a long look at how do we grow our business in the long-term and we are doing SVOD deals means extra dollars, extra value, extra eyeballs we will do them.

And where holding off for a period of time is better for us in terms of long-term branding and growth, we are going to do that.

Okay, and just a follow-up question I think on your earlier comments about the level of current cash investment and programming.

It sounds like given the rating success you have had in terms of the level of cash investment should we assume sort of roughly the same level next year?

Yes, what we've said is that going forward model out high single-digit growth year over year in content spend and correspondingly an increase of high single-digit on the content amort.

That is kind of our long-range planning and modeling around maximizing the value of the content, maximizing the value of our global reach.

So high single-digit is kind of our long range thinking and planning.

Okay, thanks very much.

Richard Greenfield, BTIG.

When you look at the broadcast cable ad dollar shift, the broadcasters seem to be cheering quite a bit that if you look at their live ratings, yes, they are down meaningfully, but if you go to live plus three or live plus seven it is all going to be okay.

Discovery doesn't seem to talk about the big benefit from DVR viewing; it seems like you do a lot better in live year over year than your broadcast peers.

And just wondering as you move into the upfront and even into just overall 2014/2015 advertising, how do you think that changes or accelerates the shift in ad dollars?

Thanks, Rich.

Well first, we are not at the top of the list of channels that have high DVR shows.

Having said that, we are moving in that direction because if you look at OWN, a lot of -- Oprah's Next Chapter, Tyler shows, Sweetie Pie's -- if you look at Discovery, we have more and more series.

So we are finding that we are getting a more meaningful pick up on the DVR plus three.

Having said that, 80% to 90% of the viewership on the DVR we do get picked up in the first three days.

I think the broadcaster will benefit more than we will if it goes to seven, but we will get some benefit.

The overall viewership trend that helps us in a market that is flat here in the US is that -- one, we are growing our market share, which is important; two, is we are growing women.

With OWN, ID, TLC, Animal Planet, Destination America, we have a real suite of women's networks so that as viewers move off of broadcast the viewers that are sometimes in the most demand are women and we have really built up a very strong offering in that area.

And the fact that the CPM is still significantly different.

And so, look, I think broadcasters had a good start to the season, they have been -- last quarter they were down 22%; starting in this season they are up a little bit.

And with DVR they are up a little bit more, good for them.

I think it is good for all of us, more people are watching TV, more people are engaged in shows.

We are often not the first choice, we are often the second or third choice and that is a good thing.

People -- they may watch The Voice and then they get a little bit bored and say what is my favorite and what are my two or three other favorite networks.

And if we get a good amount of that second, third viewership on Animal Planet, on ID, on a lot of our channels that is how we make a lot of our bread-and-butter.

So overall I think of it goes to seven it will help the broadcasters more, but it will help us some.

And right now it is pretty good for us.

Thank you.

Barton Crockett, FBR Capital Markets.

As you are coming onto the renewal cycle domestically in the fourth quarter I was wondering if you could update us on how you feel about the current state of negotiations?

And what do you see about the potential for you guys to see something like we've seen with the other operators, a bit of a blackout.

You haven't had that historically.

Do still feel confident you won't see that?

And then how do you feel about the potential for you guys to eventually move closer to the kind of high single-digit core affiliate growth rates that you see at many of your peers?

Thanks, Barton.

Well, look, I think we are having a great run.

We have built a terrific creative team and we have invested a lot of money in our content.

And our viewership share has gone from 5% when we did most of these deals or 6% to almost 12%.

OWN is the number one or two network for African-American women in the US beating BET, which is a fantastic network, two or three nights a week.

We have -- TLC is a strong network; Discovery, the most valued network on cable according to the cable operator surveys.

ID a top 10 network in America.

So we have come a long way.

Science a great affinity network, Hub.

So we have come a long way and we have done it the hard way and the old way, old-fashioned way.

We have invested more money in people, invested more money in content.

And when we sit down with the cable operators, who we have very good relationships with they recognize that.

Our cost of content has gone up a lot more than our subscriber fees.

And we're probably the only guys that that is the case for.

And one of the reasons for that, I believe, is our deals haven't come up yet.

And so, what we've been doing is we've been good actors, we've done what we've said we were going to do, we've got more and more people loving our channels.

And now when we sit down and renegotiate our deals we're going to be looking for fair value.

And fair value for us is going to be substantially more than we were getting before because we have doubled our market share, our channels are working, we've invested a lot of money.

And the cable operators and the distributors have gotten a lot of value out of that, they have been selling our channels.

And so, I think we have got a great hand, all of our deals come up together so that when we sit down with a distributor, if we do have a collision then we have all 13 of our channels.

We have the number one network for Hispanic men with Discovery Espanol.

So we have really been building these affinity niche groups.

So our expectation is that we will get meaningful value in return for the strong performance for our channels.

And if we don't then we are going to have to stand for the value that we deserve.

We have been doing it around the world and we will do it here.

We did very nicely in our deals last year, but a very small percentage of our deals came up.

We got higher increases, we got channels rolled down, we got some issues on channel position addressed and we didn't even use TV Everywhere.

So I think we've got a great hand, and if we have to we will stand up for ourselves because it is our time.

Okay, that is great color.

Thank you.

Michael Morris, Guggenheim Securities.

I'm hoping you could talk a bit more about your Free to Air initiative internationally.

You highlighted it as a driver of international ad growth.

And I guess a couple questions are how much of that is -- are you organic now in terms of that growth or was there some additional channels there in terms of the year over year growth?

And how much did that contribute to that 29% growth?

Also, do you see more opportunities for Free to Air channels either in Europe or in other geographies?

And what is the risk that it cannibalizes your pay-TV -- or your traditional dual revenue stream channels?

Thanks.

Thanks, Michael.

Well first, this is all real growth because we fully lapped all of our lunches.

So what you are seeing now is pure year over year.

The Free to Air is pretty limited.

We have done it in markets like Spain that has low pay-TV or Italy that has low pay-TV and Germany.

Germany has a massive market but there is only 3.5 million pay-TV subscribers.

And we have been in that country for 15 years with great content.

Remember, when people say Free to Air they tend to think of a broadcast network.

We really have what I would call a hybrid model.

We buy a Free to Air channel say in Spain.

But then our cost of content is virtually zero because we have 15-20 years of content in language that has never been seen in that market or by the overwhelming majority of the population.

And as we continue to churn out that content in other countries for channels that are in language.

And so, when we go into Spain we start making money immediately.

So we launched Discovery MAX in Spain and it is getting about a 2% market share from nothing.

So -- but our cost of content is incredibly low.

And so, it is quite profitable for us.

So we launched a number of Free to Airs in Italy, we're looking to launch another one in Spain, we launched a second Free to Air in Germany.

All of them are profitable and they become nice marketing vehicles for us because we could promote to our pay-TV channels in those markets.

In Italy, and particular, the market is down 10% and we are up dramatically.

We have our women's broadcast network in Italy is one of the top four networks in all of Italy.

And it is been a huge success for us so we launched a male channel over the air there, and that has been a big success for us.

And then we promote to Discovery, we promote to Animal Planet, we promote to our channels that are on Sky.

It also helps us because when we sit down with the Sky there are some markets that only have one or two players.

In Italy it is Sky Italia and it is Berlusconi.

But Berlusconi is quite small.

And so, it gives us some optionality.

They didn't want to give us a significant increase for our women's channel on the Sky platform, so we put it on broadcast and it became a huge asset for us.

They now want to carry it, an HD version of it on Sky Italia because it is so popular.

Having said all of that, in -- as you look at Latin America, as you look at Russia and the Ukraine, as you look at India and Indonesia, those are growth markets where playing the dual revenue stream game -- that is the game we know how to play, that is the game we are going to play.

And we're not going to go into any market that has broad pay appeal with Free to Air channels.

And, Michael, just to add a little more financial color, if you look across all of our regions the last quarter, we had strong double-digit ad sales growth in every region, and in three of those regions we don't have Free to Air.

So while Free to Air is a nice helper, the core business, the dual stream business has had tremendous ad sales growth in really almost every market.

So the real story here is consistent solid growth across our platforms.

The final thing that you see is suppose we are in a market and we have 5% market share and then we launch a broadcast network which gives us a couple more points.

We are approaching in some of these markets with scale and we have reached in some of these markets, Italy in particular, where we have enough scale that even in a down market we can push price.

And so, sometimes that's part of the thinking in some of these markets and that we can bring along some of the pay-TV channels and price as well.

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

Vasily Karasyov, Sterne, Agee.

Andy, I have a couple for you.

One is about SBS Nordic advertising revenue seasonality.

How much of a sequential ramp in advertising revenue should we see this year?

Is it comparable to last year?

Was the Olympics a factor or not?

If you could give us any color we'd appreciate it.

And then you mentioned that OWN is doing very well currently.

Could you give us an idea when you expect to start recognizing only your portion of the income there?

Thank you.

Sure, Vasily.

On the first one, very similar kind of answer, Olympics had an impact -- arguably a little less so for SBS just given the market dynamics there.

But the seasonality is very real and you will definitely see a meaningful higher proportion of ad sales in the fourth quarter and therefore our overall revenue growth for SBS in the fourth quarter.

So the dynamics are very similar.

With regard to OWN, look, as David said, we are incredibly happy with the OWN performance.

The $20 million net pay down of debt in the third quarter is tremendous and that will accelerate further in the fourth.

With regard to our picking up 100% of what we expected to be profits in the fourth quarter, that will continue for a very long time because the nature is -- while they still have negative equity we pick up 100% of their profit and losses.

So as OWN moves to a profit profile, which again should be happening in the fourth quarter, we will get 100% of that for the foreseeable future until their equity balance is fully restored.

All right, thank you very much.

Thank you, everybody, for joining us, we appreciate your time.

If you have any follow-up questions please let us know.

Thanks again.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.