華納兄弟探索 (WBD) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 Discovery Communications Incorporated earnings conference call.

(Operator Instructions).

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

I would like to turn the call over to Mr. Craig Felenstein, Executive Vice President of Investor Relations for Discovery Communications.

Please proceed, sir.

Good morning everyone.

Thank you for joining us for Discovery Communications 2013 fourth-quarter and full-year 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 to your questions.

Per usual, 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 will turn the call over to David.

Thanks, Craig.

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

2013 was another very successful year for Discovery as the Company delivered strong financial results while further developing our global content portfolio and investing in a diverse set of new and existing strategic growth initiatives.

Discovery's ability to grow consistently year in and year out even as global economies expand and contract, technologies rapidly evolve and competition increases across new and existing distribution models speaks to the universal appeal of our content as well as the sturdiness of our business model and the opportunities prevalent throughout our unmatched global distribution platform., now an average of eight channels in over 225 countries.

The breadth and depth of the asset base we have built continues to offer a number of unique growth prospects and while we have augmented this existing potential with several strategic acquisitions that we expect will deliver additional long-term value, our primary focus remains maximizing the organic opportunities that our unique global infrastructure and an evolving media landscape provide.

Demand for high-quality content with great storytelling and compelling characters has never been higher and our unparalleled reach combined with the sustained investment in building stronger global brands enabled us to once again grow our market share significantly this past year.

Domestically this was our fifth consecutive year of audience growth with viewership across our portfolio up 4% in 2013.

This consistency speaks to the ability of our creative teams to evolve and adapt as audience tastes change and choices proliferate.

It also highlights the success we have had in further strengthening the existing brands like Discovery Channel, Animal Planet and ID, all of which had their most watched years ever in their key demos and the success we have had growing emerging brands such as OWN, Destination America and Velocity.

Since 2008, we have launch seven new brands domestically, more than almost all media companies here in the US combined and we fully believe that if we invest wisely and deliver content that is unique and engaging, you can still attract new audiences and deliver real value to advertising and affiliate partners, we believe.

Last month we announce our newest brand, the American Heroes channel, which will debut in March and expand on the Military channel's promise to honor the great defenders of our freedom while providing a rare glimpse into major events and historical figures that have shaped our world.

The larger audiences we generated in 2013 once again translated into significant advertising gains with 8% ad growth this past year as our best-in-class ad sales team maximized the solid pricing and demand environment while capturing additional dollars through customized ad integrations.

I do want to note that ad growth did slow in the fourth quarter as viewership decreased slightly across the portfolio.

Several hit series on Discovery and TLC returned during the quarter and although they delivered a large audience and won their respective nights, their viewership declined versus a year ago when the portfolio grew over 14%.

The good news is 2014 is off to a great start with January ratings up 11% versus the same period a year ago and we have clearly regained our momentum.

TLC delivered 16% viewership growth in its key demo this past month led by the success of several returning series and the strong debuts of several new series including 90-day Fiance and Gypsy Sisters.

Investigation Discovery, ID, drove viewership up 35% and is now the number two ranked network for women in the United States with 25 to 54 demo in total day despite only being in 85 million homes.

That is a wow -- the number two network for women second only to USA Network.

ID as a network didn't exist six years ago.

In addition, we still have a ways to go to fully maximize the CPM value of ID.

Discovery Channel generated the most watched month in its history on the back of several returning series and the audience we generated from our first critically acclaimed scripted miniseries, Klondike.

Destination America and Velocity were both up over 38% as they continue to attract new audiences with their unique brand and compelling program offering.

January was another very strong month for OWN led by the return of Tyler Perry's hit series, The Have and the Have Nots, which is the number one show for women in America on Tuesday at 9 o'clock.

Oprah and Tyler are really impressive.

OWN also has Love Thy Neighbor along with the second season premiere of OWN original series, Raising Whitley.

January ratings were up over 30% building upon the 25% growth OWN produced in 2013.

Most importantly, OWN is now delivering both cash flow and positive equity earnings to Discovery and these returns should only growth given the value it is generating for advertisers and affiliates.

With ratings strength across the board in January, we are off to a great start to the year.

It is still early but with the regained momentum across our portfolio, a strong upfront under our belts, steady scatter pricing and cancellations in line with a year ago, we are confident that we will deliver significant advertising growth domestically in 2014.

Advertising however is not the only area where we are leveraging the success of the content we have invested in over the last several years.

Towards the end of 2013, we completed our latest round of affiliate negotiations and we are very pleased with the very positive outcome as our distribution partners continue to recognize the strong value of the brands we have built and the audiences we deliver.

I have said this before but it still holds true, there has never been a better time to be in the content business.

People are watching more TV over multiple platforms and because we own the majority of our programming, Discovery is particularly well positioned to take advantage of any opportunities whether with our existing affiliate partners or new entrants to the marketplace.

While our investment domestically is certainly paying off in terms of new avenues of growth, marketshare gains, and sustained financial momentum, the faster expansion and greater opportunity remains without questions across our unmatched international portfolio both from further development of our organic asset base as well as from the integration of our recent SBS Nordic and Eurosport acquisitions.

Organically, the distribution pipeline we have built over the last two decades now averages eight networks in over 225 countries and we continue to capitalize on the further evolution of pay-TV as well as the burgeoning demand for cable content.

Pay-TV penetration across the entire international portfolio increased double-digit in 2013 led by 17% growth across Latin America and nearly 20% growth in Asia.

With pay-TV penetration still below 50% in countries like Brazil, Mexico and Turkey there is still plenty of room for continued distribution gains given our market position.

The global distribution we have secured has given us a significant head start internationally and continues to pay dividends.

However, it is the targeted content and infrastructure investments we have made over the last several years that are allowing us to fully exploit the opportunities our unique market position provides and which will continue to enable us to grow as pay-TV penetration eventually subsides.

This past year alone, we launched over 17 new international feeds, offering more localized content, scheduling and languages that provide customized programming which makes our networks more attractive for viewers, advertisers and affiliates.

The strength and local feel of the brands we have built, together with the significant subscriber gains we are experiencing resulted in viewership growth of 22% across our international portfolio in 2013.

Importantly, we are not overly reliant on any one region or country as our audience gains have been very much broad-based with 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 SEMEA region.

More and more viewers across the globe are connecting with our suite of networks as we leverage the success of our domestic programming, investing compelling local content across pay and free networks, and expand the reach of successful brands like TLC, ID, Science and Animal Planet.

We have further invested in content and as markets have further developed, we have also made targeted investments to ensure we have the appropriate infrastructure in place to maximize the returns on the larger audiences we are delivering.

In the last two years, we have opened new offices in countries where local expertise and involvement will drive more value and we formed sales alliances in markets such as Italy, Colombia and the Netherlands where additional scale helps unlock additional revenue opportunities, the result of marrying the market share growth we are delivering with the more efficient ad capabilities we have developed, a total of 23% ad sales growth this past year excluding acquisitions, building on the 19% growth we delivered in 2012.

We fully expect to continue delivering strong organic ad growth moving forward given the strength of our brands, the stability in the ad market and the trajectory of pay television.

At the same time we have created additional value and further strengthened our long-term growth portfolio with the acquisition of SBS Nordic and our recently announced agreement to acquire majority control of Eurosport.

As we have demonstrated over the past several years, we are highly selective when pursuing external assets but both of these businesses expand our portfolio and deepen our footprint across some of the most well penetrated and stable pay-TV markets in the world.

They complement our nonfiction networks in terms of genre appeal and demographic reach while providing synergies that strengthen our relationships with existing advertising and affiliate partners.

Already we have made significant progress in integrating the SBS Nordic assets taking out millions of dollars in costs across the combined platforms.

While most of the expense synergies have been recognized, we are still in the very early days of maximizing the revenue opportunities.

We have, however, seen a marked increase in the number of new advertisers on our existing networks with 75 new ad clients on Discovery and TLC in Sweden and 102 in Denmark since we established a joint ad sales team.

So while early, there is plenty of indication that the diversity and depth of our content offering is quite compelling to advertisers across the Nordic region.

On the Eurosport front, we anticipate closing on the acquisition of a majority ownership position in the next few months and we look forward to further combining the power of Eurosport's brands and audience reach with Discovery's network portfolio, local infrastructure, and country specific expertise to create an unrivaled and powerful offering for viewers, advertisers and affiliates.

2013 was another great year for Discovery as we once again generated strong financial results while further executing operationally and strategically to better position the Company for sustained long-term success.

As we move into 2014, our priorities remain unchanged and with operating momentum throughout our domestic and international portfolio, a current favorable operating environment and growth opportunities across our organic and acquired asset base, we remain committed to further building shareholder value in the year ahead.

Now let me turn the call over to Andy who will provide additional context for our expectations for 2014.

Thanks, David.

Thank you everyone for joining us today.

As David highlighted, Discovery delivered another very strong year in 2013 as we leveraged the audience and market share gains we are capturing around the globe into double-digit ad sales growth and realized double-digit international affiliate revenue growth from our increasing global subscriber base.

On a reported basis, total Company revenue for the year increased 23% and adjusted OIBDA increased 16%.

Excluding the impact of foreign currency, licensing revenues primarily related to our existing Netflix agreement and newly acquired businesses, most notably SBS Nordic, total Company revenue growth for the year was 10% and adjusted OIBDA growth was 9% demonstrating our sustained ability to deliver consistent financial results even as we invest in further building our networks and operations worldwide.

Focusing on the fourth quarter on a reported basis, total Company revenue increased 28% led by 64% international growth and 5% domestic growth.

Excluding newly acquired businesses as well as the impact of foreign currency, total Company revenue grew 10%.

Total operating expenses on a reported basis increased (technical difficulty) in the fourth quarter primarily due to the inclusion of recent acquisitions.

Excluding these newly acquired businesses and the impact from foreign currency movements, total Company expenses increased 8% versus the fourth quarter a year ago predominantly due to the anticipated higher content amortization we incurred throughout 2013 as well as from the additional content write-offs we highlighted on our last earnings call.

On a reported basis, adjusted OIBDA in the fourth quarter increased 21%.

Excluding newly acquired businesses and foreign exchange, Discovery's continued ability to generate revenue growth in excess of expenses translated into a 12% increase in adjusted OIBDA.

Net income increased to $289 million in the fourth quarter, up 29% driven by the strong operating performance in the current year and by $37 million in improved equity earnings highlighted by OWN's first quarter of positive equity contributions, a significant milestone.

These items were partially offset by $56 million of increased amortization primary due to the purchased accounting associated with the SBS Nordic acquisition, $19 million of higher mark to market equity-based compensation due to the increase in the stock price, and $14 million of additional interest expense.

Earnings per diluted share for the fourth quarter was $0.81, 33% above the fourth quarter a year ago.

Adjusted earnings per diluted share, a more relevant metric from a comparability perspective, excludes the impact for non-cash acquisition amortization of intangible assets was $0.92, a 51% improvement versus 4Q 2012.

For the full-year 2013, earnings per diluted share from continuing operations was $2.97, up 18% and adjusted earnings per diluted share from continuing operations was $3.25, an increase of 29% compared to 2012.

Free cash flow increased 4% in the fourth quarter to $316 million as the strong operating performance was partially offset by continued content investment and increased cash tax and interest payments.

For the full year, free cash flow increased 14% to $1.2 billion driven by the strong operating performance partially offset by higher content investments as well as increased interest payments in working capital needs.

Importantly, content spend for the full year excluding newly acquired businesses increased by only mid-single digits and as David discussed, this increased programming spend is delivering global market share growth and higher advertising revenue.

Before moving on to the divisional results, I do want to highlight that while not part of our free cash flow, OWN repaid Discovery $34 million in 2013 including $23 million in the fourth quarter alone.

We anticipate that for 2014, OWN's cash contributions will increase significantly given its ratings and advertising revenue momentum.

Now turning to the operating units, the US networks continued to perform well during the fourth quarter with total domestic revenues up 5% led by 7% distribution revenue growth.

Excluding additional licensing revenue, total domestic revenue increased 4% with distribution revenue up 5% predominantly from higher rates and to a lesser extent, additional digital subscribers.

Advertising revenue increased 4% in the quarter as the stable pricing and demand environment was partially offset by delivery declines at Discovery Channel and TLC.

For the full year, our US ad sales team delivered another year of strong growth translating the 4% viewership gains across our portfolio most notably from Discovery Channel, Animal Planet, ID, Destination America, and Velocity into 28% total domestic ad sales growth which is on top of the 9% ad increase the US Networks delivered in 2012.

Current ad market trends continue to be stable with scatter pricing up double digits from the mid to high single-digit gains we garnered during the upfront negotiations.

With the regain ratings momentum in January that David mentioned and with the healthy macro environment continuing, we anticipate ad sales growth will accelerate in the first quarter 2014 despite competition from the Olympics.

For the full-year 2013, our distribution team also delivered solid results delivering 5% growth excluding the impact of licensing agreements.

They also completed several new affiliate deals with existing operators that secured higher rates across their portfolio, locked in additional distribution for a number of our emerging networks, and obtained real value for granting authenticated content rights.

Turning to the cost side, domestic operating expenses were up 6% from the fourth quarter of 2012 primarily due to the anticipated higher content amortization associated with the cash programming spend over the past few years as well as from the one-time content expenses that we highlighted on the last call related to the termination of the BBC programming agreement and the content impairments associated with the TLC management change.

Excluding these one-time costs, operating expenses at our US Networks increased 3% compared to a year ago.

Domestic adjusted OIBDA increased 5% on both a reported basis versus last year's fourth quarter as well as excluding the impact of licensing agreements and content write offs.

For the full year, domestic adjusted OIBDA also grew 5% on a reported basis while increasing 4% excluding the impact of licensing agreements.

Turning now to our international operations, reported results include the impact of newly acquired business, SBS Nordic, Switchover Media and Fatafeat.

For comparability purposes, my following international comments will refer to the results excluding these acquisitions.

The international segment continued to deliver very strong momentum across our global operations this past quarter with revenues expanding 15% led by 25% ad and 13% affiliate growth.

Excluding the impact of exchange rates, total revenue growth was 18% with advertising and affiliate revenues increasing 26% and 16% respectively.

The advertising growth is broad-based with double-digit increases across nearly every region led by Western Europe primarily from the continued success of our free to air initiatives most notably Real Time in Italy, and by Latin America from higher pricing and delivery across the region.

The fourth quarter was a culmination of a very strong year for international ad sales team which translated to viewership gains we are capturing around the globe and to 23% ad growth excluding the impact of foreign currency.

On the affiliate front, the 16% affiliate revenue increase in the fourth quarter excluding currency 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, affiliate revenue growth would have been up about 10% for the quarter and high single digits for the full year.

Operating cost international were about 14% in the fourth quarter excluding the currency impact primary driven by higher content amortization, increased personnel costs as we further expand our global footprint and by the consolidation of Discovery Japan.

The international segment delivered 21% adjusted OIBDA growth in the fourth quarter excluding foreign currency as our international team continued to significantly grow revenues while investing in smart long-term growth initiatives.

The fourth quarter wrapped up another year of exceptional financial and operational execution by our international team with 2013 revenues and adjusted OIBDA both up 16% excluding foreign currency.

These results followed the 18% revenue in adjusted OIBDA growth excluding currency that they delivered in 2012.

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

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

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

During 2013, Discovery repurchased over $1.3 billion of stock.

Since we began buying back shares toward the end of 2010, we have spent over $4 billion buying back shares, reducing our outstanding share count by more than 90 million shares or 21%.

As we look ahead to 2014, we are encouraged by the momentum across our asset portfolio and the continued strong pricing and demand environment in many of our key markets.

Important to note, the current year guidance assumes that the Eurosport transaction closes during the middle of the second quarter and while we have included the expected purchase accounting adjustments associated with the transaction in our guidance, these items our preliminary estimates, therefore we will update you if these assumptions materially change.

Additionally while we do anticipate generating SVOD revenue during the year given how the distribution revenues are recognized in the P&L, we have not included significant SVOD contributions in our expectations.

As new SVOD deals are executed, we will update our future guidance expectations.

With that as a backdrop, for the full-year 2014, we expect total revenues to be between $6.45 billion and $6.625 billion and adjusted OIBDA to be between $2.6 billion and $2.725 billion.

For comparison purposes excluding from these full-year expectations -- any Eurosport contributions, the extra quarter of SBS results, the impact of SVOD, and negative foreign currency headwinds of approximately $50 million at current exchange rates, we expect high single to low double-digit total Company revenue and adjusted OIBDA growth in 2014.

Net income is expected to be between $1.2 billion and $1.3 billion led by the anticipated strong operating performance, improved equity earnings from continued progress at OWN and a lower effective tax rate.

This growth is expected to be partially offset however by approximately $60 million of higher interest expense as we anticipate issuing additional debt this year to maintain our target leverage and by approximately $50 million of additional depreciation and amortization through the purchase price amortization associated with the Eurosport transaction.

We also assume mark-to-market stock compensation expense of approximately $130 million which is in line with 2013 actuals due to additional shares granted as well as expected appreciation in stock price.

Lastly, we anticipate free cash flow to exceed $1.2 billion in 2014 with significant growth in cash flow from operations being partially offset by higher cash taxes of approximately $150 million associated with the potential expiration of the Section 181 domestic content production deduction benefit.

Thank you again for your time this morning.

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

(Operator Instructions).

John Janedis, UBS.

Thank you.

Two questions.

Maybe, David I will start with the first one.

It seems that there is a lot of roaming with Eurosport and I think you have been pretty transparent about the opportunities you see with sports generally.

And so looking ahead, there has been press about Premier League rights and maybe Formula One.

You have always had a longer-term view on investments so can you update us on your appetite for sports related assets going forward?

Sure.

Eurosport we think is a fantastic asset.

It is in 55 countries between one and four channels and it has a lot of rights.

And locked up for the long-term on Eurosport is the Grand Slams for tennis, Tour de France, the Bundesliga, and the winter sports.

So it is very stable and the economics against those sports are very favorable.

So we are going to apply really two levers to it.

One is in every one of those countries we have a local team that is doing sales and that is meeting with distributors to drive better distribution deals.

So we can go very local and if you remember, Eurosport only sells pan-European right now.

So what we did with our international business when we took it from 120 to over 1 billion is we went local.

So one, we think we have some real revenue opportunity by piggybacking on our existing infrastructure.

Then we will look opportunistically -- there is no platform like Eurosport.

In many ways it is the ESPN of Europe.

It is in 55 countries and so as we look at what we can do with it, the question is is there opportunities to get longer-term growth by stepping up in certain markets for more sports?

If we do do it, there is a good chance we will be doing it in a joint bidding with a distributor or player in the market.

We will be disciplined about it but we are going to look at all options because as we look at our portfolio across most of Western and Eastern Europe we already have 10 channels.

We have Discovery as the number one network in almost every one of those markets.

We have TLC, we have Animal Planet, we have some broadcast networks and so we have some real optionality in order to take advantage of this very unique asset.

But we will be disciplined and we won't do any deals unless we think there will be significant long-term growth or as in the case of when we rolled out TLC and ID around the world, that we could pick up that it could be accretive immediately.

So we will be disciplined but we do believe Eurosport together with our assets where we are already the number one cable TV player outside the US by a lot and in Western Europe, we have made a big play and we are finding a lot of success where we are growing over 20% in a market that is relatively flat that Eurosport will be a very big helper to us over time.

Thanks.

Maybe quickly, you have been asked in the past about hypothetical M&A among the MVPDs.

With today's deal, is there any reason for us to rethink I guess maybe your long-term aspirational distribution growth rate in the US and does the deal change the terms of the recently signed Time Warner cable deal?

Thanks, John.

Look, we are going to stick to our knitting.

This is a great time to be in the content business because people are spending more time on TV and on other platforms consuming content.

In the last seven years, we have grown from about 5% market share; in January, we work over 12%.

We have 14 channels that have niche viewers whether it is OWN that is a top 20 network now and a top network for African-Americans; Discovery having its best month; TLC back and strong; Animal Planet now a top 20 network when it was number 40.

For us if we have strong content with great characters and great stories, we are convinced that we will do very well.

We did very well at the end of last year and Comcast is a great company and if they are successful in bringing this deal to the finish line, I am sure that they will do a great job in offering a lot of different products to consumers to consume content including TV Everywhere where they are a leader.

And that will be advantageous for us.

So I think that our scale in the US is very strong.

Our brands have never been stronger and we like our position.

Doug Mitchelson, Deutsche Bank.

This is actually Meghan Durkin standing in for Doug.

I think Andy mentioned that he expects US ad growth to accelerate in 1Q despite the Olympics.

So what more can you tell us about that?

How much acceleration should we expect and how big of a negative impact is the Olympics in the quarter, what exactly happens?

Did you hold back content around the two weeks or is it just an impact from advertising being sucked up over at NBC?

Thanks, Meghan.

Look, we faced some headwinds in the fourth quarter because Discovery and TLC were both down between 13% and 16% and so that definitely had some impact.

But our focus was to really dig in and start the year strong and both Discovery and TLC are up.

Our portfolio is up over 10%, the advertising market is very healthy and strong, pricing is good.

And so we are off to a very good start.

NBC Universal is doing a great job on the Olympics.

That certainly will have an impact but when we factor that in we think the out of the box strength that we have seen and the strength of the advertising market will allow us to perform quite well in the first quarter.

We can't really say where we will be for the year in terms of how strong the advertising market stays but right now the market is good.

And Joe Abruzzese and the team has been able to be quite effective.

So we still have to see how we do with the Olympics.

Andy?

Just to put a little more color on that, Meghan, because we know Olympics is really only three weeks.

Right now as David said, the market is cooperating and is strong, cancellations are low.

So it really depends on the scatter market and ratings but right now we definitely see some acceleration from where the final results were for the fourth quarter.

There is no question the Olympics is having an effect on our ratings but our strategy has worked.

We came out very strong in January with a lot of momentum.

You were spending a lot more time with all of our brands and now we expect that a lot of people in America are going to be spending time with the Olympics.

We see our ratings are down on a few of our networks in a meaningful way but we expected that and when the Olympics end, we are going to push hard to have those viewers come back.

Okay, great.

I will just leave it there.

Thanks.

Todd Juenger, Sanford Bernstein.

Good morning.

A question and a follow-up if I may.

Just start with you guys have been in most markets around the world for a long time so I would love it if you could just reflect on every so once in a while things flare up in emerging markets and people get scared and then things tend to come back and do well and it goes up and down.

How does the underlying growth of pay television in those markets respond to those ups and downs, how correlated would you say especially recently in the environment we are in now is the growth of pay television in emerging markets to the bigger macro ups and downs of those markets?

Then I have a follow-up.

Thanks.

It has some impact.

Having said that, we have been able to grow our viewership over the last year over 22% and get corresponding ad revenue of 23%.

Our brands are strong, our content travels well.

There is no question that when you see the economy struggling, that subscriber growth slows down a little bit and we have seen that and we view this as upside.

In Western Europe with the strength we are seeing in Mexico where pay-TV is only 42% penetrated or Brazil 27% penetrated, if those markets pick up then I think you will see the C class opting on to more pay-TV which will be an upside for us.

But I think if you look at the past two years or three years around our 225 countries, it hasn't been with the exception of Brazil, Mexico, Russia and India, you haven't seen huge growth.

And so I think that it is more upside for us and we have really focused on being disciplined in how we spend our dollars, getting our content driven around the world and being better at ad sales so that we are growing over 20% internationally over the last several years in economies and subscriber growth that is somewhat modest in terms of what the potential would be in a lot of those markets.

Todd, just to add to that, one metric that we look at is the Discovery Channel and how much that sub base has grown internationally.

In 2013 it was up 8%.

So that is a good proxy for -- that is the most widely distributed channel out there that 8% growth is indicative of kind of how the market is still growing at a nice clip.

That is actually very helpful.

Thank you, Andy.

Than a quick follow-up.

Not to spend the whole morning talking about the Olympics but I just wanted to follow up with Meghan because if you look back at the last Summer Olympic Games, one thing that took us at least personally a little bit by surprise was actually the impact on international advertising.

So I guess the question would be both with the Winter Olympics now and then also with the World Cup coming up, is there anything we should think about more in the international advertising markets in terms of any displacement?

Thanks.

Look, the Olympics is a moment where families come together around the world and it most certainly has an impact.

It is probably biggest in the Nordics for us where we don't have the Olympics.

We have market share in Norway, Denmark, Sweden and Finland of between 25% and 42% and we don't have the Olympics and so in some of those markets, we are seeing more viewership decline.

But it also depends on the brand for instance Discovery has historically had much bigger impact in terms of people moving away from Discovery to go to the Olympics.

I would say it is all consistent with what we have expected so far.

And World Cup, any different?

And then I will you go.

No, I think the thing, probably a little bit more modest across the board for us because the number of hours.

It doesn't take people away for three straight weeks or two and a half -- almost three straight weeks like the Olympics does.

Got it.

Thanks, guys.

Anthony DiClemente, Nomura.

Thanks a lot.

Just two questions I suppose both for David.

The first one was in terms of your ratings resurgence in January, I would just be interested to hear was there anything that -- any string that you pulled, any levers that you pulled in terms of getting ratings to turn around?

How should we think about that?

And then I have a follow-up.

Well, we did make a change on TLC about five months ago.

We focused very hard on what is TLC when it is at its best.

The good news is we now have TLC as the most distributed female brand in the world.

So we looked at where we were successful outside the US and what the audiences were getting nourished by.

The new creative team there I think has taken it up a level and so we are very happy with TLC which was up almost 20% in January and is faring well so far in February.

On Discovery, I think it is really more about we have a lot of very good shows that are coming back.

March I think will be a very good month for us in terms of when our premiers are coming of our stronger series.

You will probably see more of an acceleration in March and April but the brand is strong and the content is strong.

Okay, great.

And then just once again quickly, David, on Comcast, Time Warner Cable, is it the kind of thing where if Comcast is at a modestly higher rate card per subscriber perhaps because they have a little bit less scale as it is than Comcast that if Comcast were to acquire Time Warner Cable that the per subscriber fee would modestly adjust downward to the Comcast rate card?

Is that the way that we should be thinking about it in terms of your or content companies affiliate fees post closing?

I can't speak to any specific agreements but it really depends, it depends on what the contract says and that is really all I can say.

Okay, all right.

Okay.

Thanks a lot.

Michael Nathanson, Moffett and Nathanson.

Alexia Quadrani, JPMorgan.

Thank you.

Just a couple of questions.

First if you could give us a bit more color on the nature of your distribution agreements in general not naming any specific names.

But if I remember correctly, I think it is more of a steady increase over the life of the contract not so much of a step up initially.

Is that the case?

Is that what you are experiencing?

What is the average life of these contracts?

Sure.

The answer is yes although we are open to -- when we look at the economics of a deal, we look at it over the full-term which tends to be somewhere between four and six years.

Our deals come up about 20% a year which we have talked about.

This past year we did very well, we were able to get significant increases.

We were also able to get significant increases in distribution of some of our more strategic channels.

So ID for instance, which is now the number two network in America for women in its all day rating, is now in 85 million homes and within the next 12 months it will be in 90 million homes.

And so that is a key strategic initiative for us, it gives significant economic value but it also gives us additional advertising value.

So that is a channel that was in 50 million homes four years ago, will be in 90 million homes by the end of the year and at least in January, USA Network was the only network that delivered more women for the month.

So those are the kind of things that we look at, but we did focus primarily on getting meaningful increases in the sub fees.

And then we looked at some of the other things that are of strategic value.

Outside the US, the deals tend to be shorter, usually about three years.

Okay.

Just to follow up on your comments earlier about the SVOD, the licensing revenues.

I think that you said the guidance does not include any additional new deals, but we should still see some further licensing revenues I believe for the next couple of quarters; is that correct?

And that would be in your guidance -- from contracts already signed?

That is right, Alexia.

What we've included in the guidance right now, we have not assumed any larger deals being done.

There is a little bit of runoff for the current deals that would impact 2014, but it is a very small amount.

And as we look at SVOD, we look at where we were when we did those deals which was about 9% of viewership on cable.

In January we were over 12%.

We have been focused on our content both to make our channels better, but how do we create content that we can take effectively around the world and also are more valuable in all of these windows.

So things like The Have and the Have Nots, which is a scripted series which is number one for women on Tuesday nights on OWN is an example of a product that is great on cable, repeats well but could be very attractive on SVOD.

Klondike as well.

We found that the viewership was up 30% in season seven.

So we did very well on it.

It was very strong for the brand but those six hours scripted series are things that I think will help us with that window domestically and around the world.

And so we haven't built that in but we think our 14 channels, the brands and the bulk of what we offer to players in that window whether it be domestically or outside the US are valuable and so we will be looking at that.

We haven't been aggressive about participating in that window outside the US because in many of a markets we've been more driven by pushing pay-TV but as the markets mature, we have some good optionality there.

Thank you very much.

Michael Nathanson, Moffett and Nathanson.

Let me ask one for David and Andy, you guys both together.

You mentioned Klondike and I think the series did really well for you.

Is there a shift you think for Discovery to add more scripted content?

And if so, how does that impact your programming cost assumptions for the next couple of years and operating margins domestically?

If you just answer maybe the needs to change the programming mix at Discovery and how does that impact margins and expense growth?

Thanks, Michael.

Klondike delivered over a 3 rating for us.

It was very good for the brand, got a good response from advertisers but that is not the core of what we do.

The same way we do Planet Earth, that we do Life as a big series to talk about the strength of Discovery, it's reinforcing the fact that Discovery is the number one most valuable, most valued brand in the US and by cable operator studies and by viewer studies.

And so as part of that, we need to do big natural history programming and we think every once in a while we need to do something scripted that really reflects the DNA of what Discovery is.

We think Klondike did that.

We like the nonfiction business; we like the economics of the nonfiction business.

We also like the way that content moves around the world and repeats and so I think from time to time, you will see us playing in the scripted space but you will not see us accelerate or lean into that.

Michael, from a financial perspective, as David said, while we can't pull events whether they be scripted or live events or important, it does not change our view that high single digits is the right kind of content growth profile that we are going to have going forward.

To me it is more of a reallocation and still the importance of singular tentpole events is kind of what this is all about.

We had assumed I think that (inaudible) programming growth this year versus last year because last year you did spend more.

Is that still the right assumption though, there is a deceleration domestically in expense growth around cost of revenues?

Yes, let's put it between cash and cost.

On the cash side as we said at the beginning of 2013, we are going to be in the mid- to single-digit growth in content spend.

We did that.

We think on the cash side for 2014, it will be kind of mid to high single-digit.

On the expense side while we had the bigger and more expensive piece in 2013, we definitely see that abating in 2014.

So very much in line with what we said before as far as mid-single-digit expense in cash content spend in 2013 and lower expense in 2014.

Thank you, guys.

Despite the mid-single-digit increase, we are becoming much more efficient in moving our content around the world and with TLC distributed, we have ID now in over 150 countries, that will be in close to 200 countries over the next year.

And the fact that we are much more effective at sharing our content around the world we think we are getting a bigger bite at the apple.

So as we see our market share growing over the last few years outside the US at 20+%, we think we have a very good shot of maintaining that and we are very strong coming out this year.

So we are accelerating in terms of how we see investment in content to grow our market share.

We just think we can do it much more efficiently than we have been because our brands are stronger, we have a lot more that is working but more importantly, we are sharing content across Discovery, TLC, Animal Planet, Science more effectively.

Ben Swinburne, Morgan Stanley.

Thank you.

Good morning.

David, you've been around this business for a very long time.

I know you talked a little bit about how the Comcast Time Warner cable deal may or may not impact you.

I'm just wondering if you think over the longer-term this drives greater consolidation on the media side?

It sort of seems like over the years distribution consolidates media then responds or vice versa.

So I'm wondering if you think the argument around consolidation and content makes more sense now particularly in the US?

And then on a separate topic for Andy or Dave, when you look at your international affiliate revenue growth outlook which I think was kind of midteens last year on an organic basis, we've got Europe getting better but maybe some of the EMs getting worse.

Do you think that meaningfully changes in 2014 and beyond?

Do you expect that to accelerate or decelerate when you look at the international affiliate outlook?

On the consolidation side, I will leave that to the distributors but we have seen some consolidation in Europe.

I think our expectation in terms of how we see the Company is that we have been in a race.

One of the reasons why we have launched seven new channels over the last five years while we have invested in content is both because of consolidation and because content is moving on to other platforms.

If you have strong brands and great shows we think that could be more growth and more opportunity but if your content isn't strong enough, that consolidation in Europe, consolidation around the world could be a challenge.

And so when we say we think this is the best time to be in the content business, that is based on the idea that we own all of our content, our brands are fresh and growing and people are spending a lot of time with our shows.

And so whether there is a lot more consolidation or a little bit, our expectation is that there will be some and the way that we will be more effective in that environment is to have our content strong and to own it so that as new windows open up we have the ability to sell as we have been across those windows.

From a financial perspective, remember the consolidation of Discovery Japan skewed the 2013 numbers to be that midteen.

It actually was high single-digit excluding Japan and we expect that to continue in 2014.

Great, thanks, guys.

Jim Goss, Barrington Research.

Thank you.

A couple of them.

First, I wonder if you could comment on the pace of integration of SBS in terms of the margin potential you think you can eventually achieve like will it match the rest of the international businesses and over what time period?

Secondly, you talked about an average of something like eight networks and many international markets into which you could sell ads.

I know Discovery, Animal Planet, TLC and ID are ones you've highlighted.

What are the other four that might typically comprise a channel line-up in your international markets?

Let me take the second one and then Andy will talk about the first.

If you go to Latin America, we have a channel called Home & Health which is a top five network in Latin America for women.

It is the equivalent of like a Home & Garden but we got down there many years ago and have built that channel which is quite strong for us as a female brand.

We also have Discovery Kids in Latin America.

In Brazil, Discovery Kids is actually the number one network in Brazil.

It is the equivalent of the USA Network.

Brazil does a ton of co-viewing and for 6 and unders where we also beat all of the other kid's networks by a fair amount.

We also have the Science Channel.

As you said, we have ID, Animal Planet, Discovery.

In a number of markets we've launched channels called Turbo which is similar to what we have with Velocity which is a very efficient product for us.

We take content like Wheeler Dealers which is very big in Europe, we bring it over here.

We put it on Velocity and so that whole auto category men, Turbo is something that we are finding has a very efficient push around the world.

Then we have some broadcast networks which as we have talked about in the past, we really see as a hybrid even though we don't have sub fees on those, we launch those in markets with low pay-TV penetration and those we tend to take our 14 channels here in the US and our average of 10 channels around the world, take that content and figure out a fun mix of male, female content at a very, very low cost to reach a bigger audience.

On the SDS side, clearly the cost synergies are largely behind us and are definitely higher than our deal scenario and deal expectations, the cost initiatives around facilities and people costs, etc.

So that is actually pacing ahead of where we saw it.

The revenue synergies are still in process and are viewed today relative to a year ago as those also are going to be higher.

So net net, SBS is performing better than our deal case and the IRRs look stronger than we even thought going in.

As far as all-in margins, we are definitely going to grow the SBS margins and we have already from where they were before.

They won't get to where the total [V&I] is only because the general entertainment nature of that business and that is a different cost model but to be clear, we are definitely growing the margin profile of SBS and it is performing better than we had expected when we did the deal.

Okay.

Actually one more quick thing.

Can you go the other way around too with Eurosport bringing that into the USA given there might be some interest given the [multi-patent] nature of the country?

Sure.

We have a significant platform advantage throughout all of Europe.

It is beachfront real estate having between one and four channels where we can do sports, gives leagues the choice of either going country by country or doing a broad deal with us.

It also in a competitive environment, we have one or two players competing with three players competing for sports rights, the ability for us to come and co-bid with a big broadcast player where they pay a significant amount of the freight and we pay a little bit and together we have a compelling offer is attractive.

We don't have that platform advantage here in the US and in fact, it is pretty late to the party.

ESPN does a great job.

Fox is doing a great job.

Brian and Steve are doing a very good job with NBC Universal and Time Warner is in the game.

So we have a very good channel in velocity that we like very much.

It is very profitable for us.

The cost of content is very low and the way that we will use sports is that we will take some content from Eurosport that we have the rights to.

We have taken some of the race content that Eurosport has rights to and we put it on on weekend mornings on Velocity for very low cost as an experiment with Eurosport.

But we see outside the US, Eastern Europe, Western Europe, we have launched Eurosport in Asia and in Australia as being markets where it is not very competitive, we have scale, scalability in terms of our access to content and in many cases, we have rights.

The other thing that Eurosport has which has some accessibility is we have online rights to all the sports that we have and they have a very nice business related to that but there is some nice optionality.

If you look at what David Stern has done with the NBA by going direct to consumer, there is some very nice optionality on all the sports rights that Eurosport has that we can look at.

But the US market is pretty flooded, pretty aggressive and very expensive so I think we will bow out of that for now.

Operator, we have time for one last question please.

Barton Crockett, FBR.

Thank you.

Thank you for taking the question.

I wanted to ask a little bit more about the international outlook.

I noticed you had the great growth in 2013 but a lot of that was kind of audience growth, some of that is probably from new initiatives like your free to air launches.

How sustainable do you see the audience trajectory into 2014 and how does that factor into our guidance?

Then kind of on a similar topic, Viacom coming out of their earnings call for the December quarter was saying that they saw green shoots in the TV ad market in Europe and I think last quarter you guys were feeling pretty good about the possibility of the macro feeling better there.

Could you update us on your current feeling about the TV ad environment in Europe?

We see it really as stable.

There are markets like Spain that are getting a little better, maybe the UK a little bit better.

France and Italy, maybe flat to worse.

So I would say in the aggregate we are seeing the market pretty stable from where it has been over the last two years.

Again if the market does pick up and I hope that Philippe is correct that it starts to blossom.

If it does with the market share gains that we are seeing with the local teams we have on the ground and the brand strength, we will be able to take advantage of that and that is part of our strategy.

We have seen Western Europe as the new emerging market.

We have picked up assets.

We have been very disciplined about growing share, about building our brands and about investing and we have gotten some good return.

Our assumption is it is going to stay like this for the next two to three years.

If it gets better then it will be reflected in a better performance.

Andy?

Our base assumption for international is still double-digit revenue and OIBDA growth for 2014.

So we still see a sustained solid double-digit performance out of the base business internationally.

Okay, great.

I will leave it there.

Thank you.

Thanks for your time this morning everybody and please give us a call with any follow-up questions you might have.

Thanks.

Thank you for joining in today's conference.

This concludes the presentation.

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Good day.