華納兄弟探索 (WBD) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the quarter-one 2014 Discovery Communications, Inc.'s earnings conference call.

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

At this time all participants are in listen-only mode.

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

(Operator Instructions).

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

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

Please proceed, Sir.

Good morning, everyone.

Thank you for joining us for Discovery Communications' 2014 first-quarter earnings call.

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

You should have received our earnings release.

If not feel free to access it on our website at www.discoverycommunuications.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.

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, 2013, 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 is off to another strong start in 2014.

The consistent financial and operating momentum we have generated over the past several years continued in the first quarter.

Solid organic growth combined with contributions from our new international acquisitions gave us a diversified and balanced performance across revenue streams, network brands and geographic regions.

The sturdy foundation of our global business model continues to give us both sustained long-term organic growth but also great optionality to invest in future growth initiatives around the world.

Our primary focus continues to be the same, exploit Discovery's unparalleled global infrastructure built over the last 29 years, invest in bigger stronger brands with more content on the screen, increase our market share and audience delivery and take advantage of the ad sales and platform opportunities that an evolving global media landscape provides.

Given the deal activity across the industry right now, along with media speculation regarding potential Discovery involvement, I know there is some interest in our investment strategy.

So let me take a few moments at the top to address that question.

Our first priority remains to create long-term shareholder value by producing quality content that grows our audience and can be leveraged globally and across platforms.

There is still plenty of organic growth ahead from the expansion of the global pay-TV sector and with more people viewing more content on more screens than ever before.

It is a great time to be in the content business especially when you own all of your own content.

Where we can put money back on the screen into stronger brands, into new formats and talent, into valuable IP and top creative leadership we will look to make the most of those opportunities.

Secondly, we are opportunistic regarding acquisitions that exploit our strategic advantages, especially our local international sales force and technical infrastructure, and give us more must-have content, a stronger brand portfolio and more penetration in key growth markets around the world.

We are very fiscally disciplined with regards to deploying capital and have great balance sheet flexibility.

Given the strong organic growth opportunity across our asset base we are only focused on assets that will help us sustain that profile over the long term.

Primarily complementary dual revenue stream channels that can provide more scale like Eurosport and SBS, or assets that offer valuable IP or creative talent in must-have programming categories like our recent acquisition of the award-winning production company, Raw.

I will not comment in every auction or sale process that has been covered in the media lately but I am confident of the rigor, discipline and strategic focus we are bringing to the marketplace to help supplement our strong organic growth.

If we cannot find any additional opportunities to strengthen our portfolio or position for the next generation of growth we are committed to returning value to shareholders through our robust stock repurchase plan.

Andy will provide some context surrounding our underlying financial results in a few minutes.

Before he does let me also walk you through the key drivers of our organic growth along with some of the strategic initiatives we are focusing on to maintain momentum in the years ahead.

Discovery's biggest driver is without question our ability to attract more and more viewers to our diverse channel lineup.

Demand for high-quality content with great storytelling and compelling characters has never been higher and our broad reach combined with a sustained investment in stronger global brands is enabling us to attract larger audiences worldwide.

I mentioned on our yearend call that we have delivered five consecutive years of viewership growth across our domestic portfolio.

And that momentum has certainly continued into 2014 as we delivered the best first quarter in the Company's history.

Viewership across our US networks was up 9% in primetime this past quarter among key adult 25 to 54 demo, despite the competition from the Olympics.

This growth was broad based with success from established brands as well as from emerging networks as we identify and invest in new avenues to satisfy curiosity.

The audience gains at our established networks were highlighted by TLC, which delivered 12% audience growth in its key women 25 to 54 demo, led by strong gains from returning favorites, Here Comes Honey Boo Boo and The Little Couple and ID, which generated viewership growth of over 30%.

ID is now the fourth ranked network for women 25 to 54 in total day despite only being in 85 million homes and ID has the longest length of tune of any network on television.

Discovery Channel ratings did decline year on year during the first quarter primarily due to the Olympics impact.

But they have regained their momentum in April with viewership up 12% in primetime versus a year ago led by returning hits Naked and Afraid, Fast N' Loud and Deadliest Catch.

Catch returned for its 10th season two weeks ago and is delivering its largest audience in three years, remarkable staying power for this iconic series.

As we further strengthen our established networks we continue to broaden our portfolio by investing incrementally in an expanding set of emerging brands.

I have said repeatedly that we believe we can 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.

No better example of this than the success of OWN Network which built upon its 25% audience growth in 2013 with viewership up 59% in the first quarter in its key women 25 to 54 demo led by the return of Tyler Perry's hit series The Haves and the Have Nots and Love Thy Neighbor along with the second season premiere of OWN original series Raising Whitley.

Most importantly OWN delivered significant cash flow and equity earnings to Discovery in Q1 and these returns should only grow given the momentum across the network.

OWN is not the only emerging brand that is growing significantly.

Destination America was up 25% this past quarter among people 25 to 54 while Velocity grew its key demo over 40%.

And our newest network, the American Heroes Channel, was up 19% versus a year ago when it was still the Military Channel.

Driving the potential of our valuable distribution real estate by investing in new brands and breaking new ground that ignites viewers' curiosity remains a priority.

We will continue to invest incrementally in these networks if they demonstrate the ability to attract larger audiences.

The ratings momentum we are generating across our portfolio has given us a good start to 2014 with 5% ad revenue growth this past quarter but also puts us in a nice position heading into what we hope will be a robust upfront.

While it is too early to predict where the upfront ultimately ends up, with scatter pricing well above last year's upfront, sustained ratings momentum across our networks and what I think is unquestionably the best ad sales team in the business, we expect to do very well in our discussions with our ad partners.

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

Toward the end of 2013 we completed our latest round of affiliate negotiations and we were very pleased with the outcome as our distribution partners continue to recognize the value of the brands we have built and the must-have content driving the audiences we deliver.

While our investment domestically is certainly paying off in terms of market share gains, new avenues of growth and sustained financial momentum, there is no question that the US is a more mature market.

The faster growth today and the greater opportunities (technical difficulties) where pay-TV penetration is still expanding nicely in many markets and where the investments we have made over the last two decades are allowing us to take full advantage of the burgeoning demand for high-quality content.

It has been 25 years since we first launched our first channel across the UK and the Nordics and we now have more channels in more markets with more subscribers than any other media company.

The unmatched global distribution platform we have built is the backbone of our international growth as it enables us to not only capitalize on the further evolution of pay-TV but given our local market experience we can also quickly identify new opportunities to launch networks and satisfy new consumer demand.

The result has been sustained double-digit subscriber increases and while the rate of subscriber growth will certainly slow overtime pay-TV penetration is still well below 50% in countries like Brazil, Mexico and Turkey.

So there is still room for continued distribution gains across our market position.

As we benefit from an expanding subscriber base we are also driving viewership with a more robust content offering so we can fully exploit the opportunities our unique market position provides.

No better examples than the rollouts of TLC and ID.

TLC and our female flagships now reach over 170 countries and territories and are the most widely distributed female lifestyle brands in the world.

We just celebrated TLC's first anniversary in the UK and ratings in the quarter were up 130% versus the same period a year ago.

ID's content is also resonating globally.

It has now been rolled out to over 150 markets and just last month we launched ID Xtra across parts of Central and Eastern Europe to further leverage the demand for crime and forensic content.

The strength and local feel of the brands we have built along with the subscriber growth we delivered this past quarter resulted in overall viewership growth of 8% across our international portfolio.

This expansion is broad based.

We are not overly reliant on any one region or country with increases across every region led by Brazil and Argentina in Latin America, Italy and the UK in Western Europe, India in Asia-Pacific and Russia and South Africa in our CEMEA region.

The biggest upside internationally resides on the advertising front and with more viewers watching our content than ever before, both from subscriber growth and a more robust programming offering, we are uniquely positioned to capture a greater share of a rapidly growing pay-TV ad market.

As we focus on increasing share and maximizing the full organic growth potential inherent in our asset portfolio we are also beginning to see some of the revenue upside from our SBS Nordic acquisition.

We are still in the early days but the Discovery suite of networks is certainly benefiting from the increased reach we have in the Nordic region as the diversity and depth of our content offering is quite compelling to advertisers.

At the same time we expect to close shortly on a majority ownership position in Eurosport.

And we can begin to combine the power of the Eurosports brands and audience reach with Discovery's network portfolio, local infrastructure and country-specific expertise.

With networks in 54 countries, and a diversified content portfolio of sports programming, Eurosport will complement our existing stable of assets and deliver new opportunities with advertising and affiliate partners.

As I mentioned earlier, these assets only enhance the long-term growth we already are cultivating and they further bolster our long-term outlook for deepening our geographic footprint, broadening our portfolio with new networks and brands and enhancing our creative pipeline with new talent, personalities and formats.

Overall, Discovery is off to another strong start in 2014.

Our primary focus remains strengthening our diverse brand portfolio so we can capture additional market share around the globe and take advantage of a generally stable worldwide operating environment.

Given the operating momentum we are generating across the Company and the opportunities our infrastructure provides we fully expect to deliver sustained organic growth even as we invest in building additional long-term shareholder value.

And now let me turn the call over to Andy.

Thanks, David, and thanks everyone for joining us today.

As David mentioned Discovery is off to a very solid start to 2014, delivering strong organic growth as our content attracts more and more viewers around the globe and we leverage the many opportunities across our worldwide distribution platform.

On a reported basis total Company revenue in the first quarter increased 22% led by 51% international and 3% domestic growth.

Excluding SBS Nordic, which was acquired in April 2013, as well as the impact of foreign currency and licensing revenue from our existing Netflix agreement, total Company revenue growth was 8% with double-digit global advertising growth despite the Olympics and high single-digit global distribution growth.

Total operating expense on a reported basis increased 34% in the first quarter primarily due to the inclusion of the SBS Nordic business.

Excluding this acquisition and the impact from foreign currency movements total Company expenses increased 9% versus the first quarter a year ago primarily due to anticipated higher marketing costs while content expense growth returned to normalized levels, up 8%.

On a reported basis adjusted OIBDA in the first quarter increased 5%.

Excluding SBS Nordic, as well as the impact of foreign currency and licensing revenue, adjusted OIBDA grew 6%.

Net income available to Discovery Communications of $230 million was in line with the first quarter a year ago which included $31 million of other income due in large part to a $92 million gain associated with the step-up value from raising our ownership interest in Discovery Japan 80%.

Excluding other income net income was up 21% primarily driven by the strong operating performance in the current year, a lower tax rate and a $43 million decline in mark-to-market equity-based compensation partially offset by $51 million of increased amortization expense primarily due to previous accounting associated with the SBS Nordic acquisition.

Earnings per diluted share for the first quarter was $0.66, 5% above the first quarter a year ago.

Adjusted earnings per share, a more relevant metric from a comparability perspective that excludes the impact from non-cash acquisition amortization expense of intangible assets, was $0.75, a 19% improvement versus Q1 2013.

Free cash flow in the first quarter of $213 million more than doubled versus a year ago as the strong operating performance and lower tax payments were partially offset by higher content investment and stock-based compensation costs.

It is important to note that content spend excluding SBS Nordic increased only mid single digits even as we continue to drive market share growth across the globe.

Before moving on to the divisional results I do want to highlight that while not part of our reported free cash flow, OWN repaid Discovery $16 million in the first quarter versus receiving $14 million of funding in the same period a year ago.

Therefore, a $30 million year-over-year improvement.

Turning now to the operating units, the US networks continued to perform well during the first quarter with total domestic revenues of 3% as advertising and distribution growth were partially offset by a $6 million decline in other revenues due to a decrease in content licensing sales as we increased the programming being shared with the international networks rather than selling to third parties.

We anticipate a similar negative trend in other revenues for the remainder of the year.

Advertising revenues increased 5% in the quarter as a strong pricing environment and higher delivery across the majority of our networks more than offset softness at the Discovery Channel during the Olympics.

Looking ahead to the second quarter given the relatively stable current ad market trends with scatter pricing up high single to low double digits from last year's upfront negotiations, and with the ratings I mentioned that David mentioned, we anticipate ad sales growth will once again be in the mid-single-digit range despite headwinds from the cancellation of our Everest Live event and the sale of HowStuffWorks platform.

Excluding these items we would've anticipated acceleration in ad sales during the second quarter.

Distribution revenue growth domestically was 4% on a reported basis and 6% excluding licensing revenue as we recognized the higher rates we were able to secure during our latest round of affiliate negotiations.

Please note that while the organic growth rate for affiliate revenue will continue to be in the same improving range for the remainder of the year the reported affiliate growth will be negatively impacted by the additional licensing revenue that we recognized in the second and third quarters of 2013 but offset by any new licensing deals that we may complete during the remainder of the current year.

Looking at the cost side, domestic operating expenses were up 5% from the first quarter of 2013 primarily due to anticipated higher marketing spend, most notably on the Discovery Channel for our scripted series Klondike.

Domestic adjusted OIBDA increased 2% on a reported basis versus last year's first quarter and 3% excluding the impact of license agreements as the increased marketing costs partially offset the realized revenue growth.

Turning to our international operations, important results include the impact of SBS Nordic.

But for comparability purposes my following international comments refer to the results excluding this acquisition.

The international segment continued to deliver strong momentum across our global operations this past quarter with revenues expanding 11% led by 24% ad and 6% affiliate growth.

Excluding the impact of exchange rates total revenue growth is 13% with advertising revenue increasing 23% and affiliate revenue up 10%.

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 in Italy, Spain and the UK and by Latin America from increased volumes across the region.

Our Discovery suite of networks also benefited in the Nordic region from the greater reach we now have in the market following the SBS transaction.

On the affiliate front the 10% affiliate revenue increase in the quarter excluding currency was driven primarily by subscriber growth especially in Latin America and the continued expansion of pay-television in Brazil and Argentina and in Central and Eastern Europe from additional subs in Russia and new launches in Turkey and the Middle East.

Please note that moving forward as we include the SBS Nordic affiliate growth in our organic results we anticipate organic international affiliate growth to be in the high single digits for the remainder of the year.

Turning to the cost side, operating expenses internationally were up 10% in the first quarter excluding currency primarily driven by higher content amortization and increased personnel costs as we further expand our global footprint.

The international segment delivered 18% adjusted OIBDA growth in the first quarter excluding foreign currency as the international team continued to significantly grow revenues by thoughtfully investing in key long-term growth initiatives.

Taking a look at our financial position, with a strong balance sheet and sustained financial and operating momentum and given our gross leverage targets and long-range free cash flow per share growth assumptions we had the opportunity to continue to return capital to shareholders as we invest in our global businesses.

Discovery was precluded from buying back shares until our February earnings call but we have repurchased over $450 million of stock thus far this year.

And given our current expectations for uses of capital we anticipate that we will continue to be aggressive with share repurchases for the remainder of the year.

In total, as we begin buying back shares toward the end of 2010, we have spent over $4.6 billion buying back shares, reducing our outstanding share count by 23%.

Turning to the full year, note that current guidance still assumes that the Eurosport transaction closes very soon.

And while we have included the projected results and produced accounting adjustments associated with the transaction in our full-year expectations these items are preliminary estimates which we will update if the close timing shifts or either items change materially.

We remain encouraged by the momentum across our asset portfolio and the continued strong pricing and demand environment in many of our key markets.

Therefore, we are leaving our guidance unchanged despite meaningful foreign currency headwinds since we last reported as well as higher corporate costs associated with accelerated stock compensation and professional fees.

For the full-year 2014 we still expect total revenues to be between $6.45 billion and $6.625 billion, adjusted OIBDA to be between $2.6 billion and $2.725 billion and net income to be between $1.2 billion and $1.3 billion.

Again, thanks for your time this morning, and now Dave and I would be happy to answer any questions you may have.

(Operator Instructions).

Doug Mitchelson, Deutsche Bank.

Thanks so much.

David, you just had your upfront and usually you have a pretty good view as to what programming hours are going to be in the forward year versus what you produced in the prior year and what the cost might be.

So you talked about the strategic priority of investing your global footprint, can you give us a sense of what kind of increase in programming hours and programming costs you are thinking about for next season, or as we look forward?

And Andy, you mentioned Eurosports is soon to be, soon to close very soon in guidance, when do you think about close, what are the steps for that deal to be completed at this point?

Thank you.

Thanks, Doug.

We had a good upfront.

And we are off to a good start in terms of our content for the year.

For the quarter we were up 10% with real momentum at TLC, ID, American Heroes Channel, Destination America, Velocity, OWN.

To be up 10% in prime and 5% in total day while the rest of the industry was down 5% in prime and down 4% in total day, really reaffirms our core mission of growing market share.

And all of that content, or most of it, we own and get to take around the world.

The fact that our content has been more successful is a helpful factor for us in terms of how much we need to invest.

The more returning series we have, the more quality content we have on brand that is resonating, we can temper down our content investment.

So whereas two and three years ago we were in the mid-teens in investment as we were really trying to find our voice on a lot of the channels, we then went to high single, we are now at mid single.

So I would say between mid single and high single.

And we are feeling quite good about our creative team domestically and internationally, which is really key for us.

Growing market share domestically and around the world.

And Doug, regarding the question on Eurosport.

At this point we have received all of our regulatory approvals, so we're going through standard closing procedures and processes, which is why we anticipate closing soon.

All right.

Thank you, both.

Ben Swinburne, Morgan Stanley.

Thanks, good morning.

Just wanted to clarify, you said for the rest of the year domestic affiliate growth excluding licensing in the same improving range, just wanted to understand if that means continued sequential acceleration?

Just wanted to clarify that.

And then my question, David, you talked about the biggest upside for our Company, or at least internationally, is in ad sales and Andy said that the growth was led this quarter by Western Europe, Italy, Spain, UK free-to-air.

I think for a lot of people those are just tough markets to understand the dynamics internally particularly because they are free-to-air networks driving your growth.

So if you can, maybe spend a minute just telling us why the growth has been so strong, how sustainable it is, what the opportunity is in those markets as a free-to-air operator sort of coming in from the US position that you have had.

I know you have cable assets, cable network assets in those markets, but it's sort of a different approach that you've taken and it seems to be working.

So maybe spend a minute on the opportunity in those countries that tend to be driving a lot of your growth.

That would be helpful.

Sure.

First on the affiliate side.

We were able to find some meaningful success with our new deals at the end of last year.

So our affiliate rate has gone from 5% to 6%.

You'll see that go up throughout the rest of the year so that locked-in affiliate subscriber fee growth rate will rise.

It is a function of higher increases we were able to get plus additional distribution with fees for a number of our channels.

So we feel very good about that and you will see that coming through on a quarter-to-quarter basis and growing.

On the ad sales side we are really seeing double-digit growth everywhere.

And so the first piece is that Latin America has been very strong.

So we have seen Western Europe but Latin America continues to be very strong for us, Brazil and Mexico in particular where we have 5 of the top 15 channels in Brazil including the number one channel in Brazil with Discovery Kids and in Mexico as well where we have 5 of the top 20 channels, so we are very well positioned there.

In Western Europe the idea of free-to-air is a little bit of a misnomer.

We are getting our growth both from our pay-TV business but the free-to-air channels are really -- it's a different model for us.

We're not doing news.

We're not doing sports and we are not doing a lot of original content.

It's that we have a huge library of content in language that we can, where we can launch a channel in Spain and have a very low cost base.

And because Spain and Italy and Germany are very low penetrated on pay-TV we really have kind of a hybrid asset.

We have a very low-cost free-to-air channel that allows us to take advantage of a very strong advertising market.

We already have an ad sales team in place because we've been in those markets for 10, 15 years.

In the case of Spain we are newer to that market.

But we are taking advantage of infrastructure.

I think it is fair to say that the growth has been very broad also in Asia and India and Russia, continues to be strong in Eastern Europe.

So I think the free-to-air is helping us but it's all been lapped.

And what we're seeing now is pure growth.

And the fact that our market share in this past quarter grew an additional 8%, in the quarter before we grew mid-teens to almost 20%, we're seeing continued growth and we think it's very sustainable because it's broad based.

Thanks for the color.

Anthony DiClemente, Nomura.

Thanks a lot.

I just have a couple for Andy.

Andy, you mentioned the Mount Everest events that were canceled and then the sale of HowStuffWorks.

I'm wondering if you can size for us in terms of revenue and OIBDA what those couple of items had previously been expected to contribute to your 2014 guidance outlook?

And then also Andy, just want to ask about the free cash flow generation.

I think if I take the midpoint of your OIBDA guidance and I take historically what your EBITDA to free cash flow conversion has been, I get to pretty close to $1.3 billion of free cash flow in 2014.

Is that in the range?

I know you don't give free cash flow guidance but can you speak to that thought process on free cash flow?

Thanks.

Sure.

On the first piece we clearly would've had more acceleration in the second quarter ad sales with Everest.

We do expect to still see some acceleration in the second quarter relative to first but as I said we will expect overall to be in the mid-single-digit range.

With regard to free cash flow we are definitely seeing some nice flow through as you say and a big driver of that is tax.

Even though 181 was a huge benefit last year, on an apples-to-apples basis our focus on tax and deferred taxes and reducing our effective tax rate is really allowing us to see more and more flow through.

But for this conversation we are still going to focus on the $1.2 billion plus the free cash flow for the year as we continue to invest in content and take a look at how do we strengthen our international portfolio.

Okay.

Thanks a lot.

David Bank, RBC Capital.

Okay, thanks very much, guys.

You walk through some pretty robust ratings trends at ID, Destination America, Velocity, American Heroes.

We talked about the strength of the domestic portfolio particularly at TLC on the more developed network side and you kind of went through the overhang of Everest and HowStuffWorks.

I guess given these ratings trends do you think it's realistic to expect to be able to return to high-single-digit ad growth in the back half as you can monetize these ratings and some of the comps, change on the basis of Everest and Stuff?

Are we looking at the potential to get back to high-single-digit ad growth?

So first, this quarter we were up 5%.

The last time we went against the Olympics we were up 3%.

And we were up 5% against a quarter last year where we were up 8%.

And part of that had to do with the fact that Discovery got hit pretty hard by the Olympics.

The rest of our networks fared better but Discovery, which is a significant piece, Discovery and TLC together, in terms of higher pricing and volume got hit.

We did rally and we are up about 12% in prime in April, so that's a good sign.

For us the good news is we are really in this for the long term.

So when you look at ID and you look at Velocity and you look at TLC we are kind of in -- we view these things differently.

We're generating content that we take all over the world.

So when you see a show on ID it is now in over 150 countries.

It does take time to get pricing.

Even though ID is the number four network in America for women we still don't get the pricing that we think we deserve on that.

The good news is we are doing much better this quarter than we did last.

And we're doing much better than we did a year ago.

And as we went into this upfront ID had much more strength and credibility.

It has the longest view on cable in terms of time people spend with it.

So the good news here is our overall mission of investing more in content, more in brands and growing our market share is really a long-term play.

You're going to see sustainable growth in our pricing on ID for the next two years at least before we get to where it should be.

And so that will continue to bear fruit.

Velocity and Heroes Channel, and Destination America, they are kind of lower on the ladder which is a goody and a baddy.

The baddy is we can't fully take advantage of the fact that these channels are doing really well and gaining significant share.

The goody is that every quarter we are able to gain on price and it becomes more of a sustainable play.

People still only watch six to eight channels.

And they're spending a lot more time watching ID, Velocity, TLC, Animal Planet.

They're watching our channels.

Eight years ago we were about 4.5% of the share of viewership on cable.

Today we are almost 13% of the viewership on cable.

And so to us that is the characteristic, that is the piece of data that is most important.

The advertising market can go up and down but share is something that is pretty steady if you can get people spending time with your brand.

So we look at these channels and we think they are real growth opportunities for us.

And the same is true outside the US.

We have launched ID in 150 countries and TLC in 170 and our pricing is getting better this year than it was last year and it will continue to bear fruit for us.

So when you do see our numbers being high and a lot of those might be the TLC and Discovery are up a little bit and these other are up a lot you can do the math and see that we won't be able to get the full value of those right away.

But we will be getting those values over the next few years.

And just to add, David, a little more color to that.

But the good news is, as David said, our audience share is up year over year and continues to grow.

We still see some good scatter volume in the marketplace.

And we still see scatter pricing up high single digits to low double digits relative to the last broadcast upfront.

On the challenging side, cancellation is up a little bit, options are being taken a little bit more than the prior year.

So it's really going to depend on the scatter market and the ratings in the flagships, as Dave said.

And of course how we do in the upfront in the next several weeks.

The other thing that we have done is, we could bring more money if we went for volume.

Our view is that ID is now in 85 million homes, it will be an almost 90 million homes over the next 18 months.

It is a top-five channel in America and rather than concede price we are holding price.

Destination America is doing really well for us as is Velocity.

And so in many cases we're deciding not to take extra money in order to hold price and we think that also will provide more sustainable growth and more value for us in the long term.

Terrific.

Thank you very much.

Jessica Reif Cohen, BofA Merrill Lynch.

Thank you.

I have a question on international and a couple on domestic.

David, I totally appreciate that you aren't getting into any specifics of what's been in the press, but maybe just a comment on your medium-term strategy outside the US.

How much opportunity do you think there is to build new channels?

Where do you think you will need to buy, or what kinds of things do you think you need to buy to strengthen the portfolio?

And then domestically, just a couple of small ones.

Do the newer deals include TV Everywhere rights and if not, why not?

Can you comment on any interest you have in doing some OTT deals a la what Disney did with Dish and probably DIRECTV, we understand is reaching out?

And then finally just a follow-up on that SVOD comment that you guys made earlier.

Do you, not selling until, it sounds like there won't be a VOD revenue until the fourth quarter.

I just wasn't sure, did you say because you want to keep your content for your own use?

Can you clarify that?

Thanks.

Sure.

Thanks, Jessica.

First on the international side, the good news is we are the largest platform media company in the world.

We have on average eight channels in 230 countries.

And in most of those countries of those eight channels we have done a really good job of getting five or six of those to be quite good and we've been growing market share.

We still have some work to do.

We're in like the fourth inning in terms of our overall growth strategy internationally.

We have the real estate, we have the sub fees and we are making the channels better, so we don't need to buy anything.

Our market share is growing, we have a good reputation around the world, our brand is well known.

In most countries Discovery is the number one brand for men.

TLC is doing extremely well and profitable.

ID is doing very well as is Animal Planet.

What we are really trying to do is be opportunistic.

We've spent a lot of money and a lot of time over the last eight years getting local.

So we now have local teams in virtually every country.

We have creative teams, we have strategic teams, we have sales teams and distribution teams.

And so the opportunity to evaluate an asset, to have synergy and to be for the right asset to put it together with ours, is -- we are very uniquely positioned.

And so we have been looking.

But we are -- because we don't feel like we need to make any acquisitions we've been quite careful.

So there's been a lot in the press about some of the things we've been looking at and the truth is we look at everything.

But we only want to buy assets that are going to really help us strategically and get us to grow faster, or as fast in the long term.

And so we have passed on a lot of stuff.

And sometimes when we look at assets we look at assets with a distribution partner often because that partner could provide additional value to us.

So when we evaluate a deal we look at the synergy of a transaction, whether we think there is upside to build in that market and how strong the asset is.

But also we have very good relationships with distributors and the ability to do a tagalong where we can do deals to get additional carriage, maybe better carriage, maybe better economics from a distributor when we on occasion look at joint bidding, those are the kind of things that we think about.

We don't need to do anything.

This quarter we grew 23% with double-digit affiliate.

Our international business is really in full stride.

So that's kind of how we see that.

On the domestic side our deals, we were able to get better economics with rolldowns.

And we did do TV Everywhere.

And we were able to get the aggregate basket of value we got was quite good and we are very happy with it.

And you will continue to see that flow through.

It represents the fact that we now have over 12% of the viewership on cable and very strong affinity brands.

On the OTT side, I have said it before and it continues.

This is probably the best time to be in the content business when you your own content.

At least for the near term, for the next three to four years because there is more and more buyers and more windows for our content.

And in the US now to have an OTT buyer is just somebody else that wants to pay significant dollars to have access to some or all of our channels and access to some or all of our programming.

We are platform agnostic here in the US and around the world.

And when we have an opportunity to bring in extra dollars in ways that we think provide long-term value we will.

In other cases we have only done two SVOD deals outside the US.

We could do a number of SVOD deals and just bring in more dollars but we've decided strategically that we are better off really driving our cable channels right now and aligning with our distributors because in some of those markets, where, like Brazil where only 26% of the market has pay-TV, we don't want to mix up our brand yet until that market and other markets are more penetrated.

Finally, SVOD is a real opportunity for us.

We didn't do a deal with Amazon but we still may.

We have a good relationship with them.

We have a good relationship with Netflix.

We have a good relationship with Hulu.

The fact that our market share is growing means we have more shows.

Tyler Perry has a show on OWN that is the number one show for all of women on cable on Tuesday nights with Haves and Have Nots.

Naked and Afraid is doing great for us, Gold Rush.

So we have a lot of good shows and they are getting better.

But we think that our content has real value.

And when you put on any of those platforms you need a bulk of content and you need quality content.

We think we have both.

And so we think you will see some SVOD deals from us.

You may see them soon.

You may see them later.

But right now the only issue for us is there is a gap in the value that we think all of our content is worth with all of our brands and the value that some of the distributors think.

But I think that we will find a way to true-up that gap.

Just to add two points, Jessica.

On the international front, as we talked about, a strategic imperative for us is to grow our base organic margins.

If you look at the first quarter takeout SBS and excluding foreign exchange which was a negative year-over-year impact we grew our base international margins 100 to 200 basis points.

And as you look forward, second quarter, third quarter, fourth quarter which includes SBS, we still expect to have in that base including SBS margin growth and accretion year over year.

So margin expansion is a key part of our strategy and a big price of our operating imperative.

And just to add to David's comments on SVOD nothing about our current thinking that says it's going to be fourth quarter.

As Dave said, it really depends on when the right deal and the right economics get done.

That could be anytime.

Great.

Thank you.

Todd Juenger, Sanford Bernstein.

Hi, thanks.

At this point I'll try and keep just a couple of quick ones.

On OWN, you mentioned multiple operating metrics' strength and the return of some cash, but then the equity income line, which I know includes more than OWN, actually showed a sequential deceleration.

So I just wondered if you could walk us through any of the impact in there and then what we should think about that going forward?

The other quick one is just you mentioned the Olympics impact in Q1 on some Discovery ratings.

Just as we look forward in the summer, don't want to get surprised on this, anything we should think about in terms of World Cup and what that does for global advertising both here in the states and then around the world?

Thanks.

On OWN, Todd, we couldn't be happier with how that asset is performing.

The $30 million swing year over year on cash flow is just tremendous for us and that's the metric that we most look at and most follow year over year.

With regard to the other income, fourth quarter is particularly strong based on the recognition of some of the Time Warner deal that we got done.

But the performance of OWN right now is ahead of our expectations both from an earning perspectives and particularly on a cash flow perspective.

So right now it's really all positive signs from the key metrics that we look at and the imperative of it delivering value for us.

And we are taking Oprah's content outside the US.

We have launched a lot of the OWN content in South Africa and Australia where it is doing extremely well and overall the channel it is outperforming, the advertisers are all with us, we now have all the distributors.

And Oprah is really in full stride with a great brand that is really resonating with both men and women here in the US and starting to resonate around the world as we roll it out.

Todd, what was your second question?

Please repeat it.

So the second question was just as we think about advertising over the summer, you had mentioned Olympics as a small factor in Q1.

Just wanted to make sure World Cup, if there was anything we should think about that in terms of what it means for you guys in terms of global advertising book here, Europe, Latin America.

Thanks.

Yes, Todd, it should be relatively small impact.

Some markets will be more meaningful but overall it will be a small impact.

All right.

Great.

Thanks.

Michael Nathanson, MoffettNathanson.

Thanks.

I just have two housekeeping for Andy, and/or if Dave wanted to jump on this.

SBS posted 11% EBITDA margin this quarter.

Is that typical for the first quarter for that asset?

And kind of in line with what you thought it would be, so just an update on that margin this quarter.

Yes, Michael, it's in line with expectations.

It is their lowest margin quarter of the year.

Obviously we didn't have the business consolidated with our results in 2013 but it is in line with expectations and right now SBS is performing in a kind of at or slightly better than we would of thought.

The cost and synergies are better.

The one thing that was arguably a little worse than we would have thought in the first quarter was the Olympic impact, particularly in Norway and Sweden given the performance of those athletes in those markets.

There's a lot of ratings and viewership that went to those broadcast networks.

But net net net the asset is performing at or better than we had expected and the first quarter is clearly their low point on overall margin based on advertising flow and timing.

Okay, and then just let me ask more of an amortization.

You've been calling out the stepped-up amort from SBS.

When Eurosport closes any sense of what the incremental amort will be from Eurosport on top of the SBS, so any sense of that at this point?

Yes, Michael, for this year given the timing of when we close Eurosport, it should be about $20 million and on an annualized basis going forward think about roughly $35 million of intangible amort.

Okay.

Thanks, Andy.

Richard Greenfield, BTIG.

Hi, I really wanted to just follow up on Michael's question.

When you look at SBS you have now owned it for a year and while you didn't report Q1 last year was just wondering could you give us a sense of what the growth profile of SBS looks like, revenue, EBITDA, anything?

I realize you had some impact of the Olympics in Q1 but just anything to give us a sense of what the organic growth of that asset would have looked like on a year-over-year basis.

And then essentially a similar question, now that you are going to own more than 50% of Eurosport could you give us a sense of what the growth profile on that looks like of that asset in Q1 year over year?

Thanks.

Sure.

On SBS, Richard, the growth again is in line with our expectations.

It was basically in-line flat to last year.

Again the Olympic impact was significant.

For us we expect to see some dilution of our overlong top-line growth given the fact that it is a slower growth asset.

But again we do think we are going to have a meaningful margin accretion based on the performance of our synergies both on the top line and cost.

So the growth rate of that business should be slightly better than our expectation of deal case, which really speaks to the value in the multiple that we paid on a relative basis based on actuals is actually quite good and better than our due diligence and deal scenario.

With regard to Eurosport we are actually not going to highlight that specifically now.

We will certainly as we go forward and start highlighting the year-over-year variances.

We will stick more specifically to Eurosport in its performance but right now it's not something that we are going to highlight in any granular way.

From a narrative perspective, Rich, Eurosport has been sold on a pan-European basis in the 54 countries.

So the first thing we are going to do is sort of what we did seven years ago, eight years ago when we attacked our international business.

Because our international -- when we were making $100 million year, we were selling only pan-European.

We already have local sales teams in every country, we have very good relationships with the distributors, we have infrastructure in every country.

So the first thing we are going to do is get the -- take advantage of all the infrastructure we have in place already, which we think will be very efficient and effective in driving the overall performance of Eurosport both in terms of deals that we are able to get with distributors because we package there between one and four channels in each of those countries with our 8 to 10 channels.

Also it will be very easy for us at little or no cost to be selling locally because we already have teams in place.

And so we will apply a localized attack which will help both in terms of cost and revenue synergy and then we will take a look at the overall asset.

The good news for us is for the next couple of years the cost of the content is quite stable at this point.

Because they have locked in tennis, the US Open, the French Open, the Australian Open.

They have locked in cycling, which is Tour de France and the key cycling events and winter sports.

Those are a kind of the three big pillars of Eurosport and those are locked in terms of cost structure for the next couple of years.

So the question then is as we drive this asset on a cost and revenue synergy side, is that all we do and just build the brand and build the asset that way, or are there opportunities in local markets with distributors or other players to enhance the business by getting more aggressive.

We're going to take our time.

We love the asset.

We think it complements our existing infrastructure.

It also gives us more scale in every market.

And one of the hidden assets of Eurosport is we own all of the IP of all of those sports in Eastern and Western Europe on every platform.

And as you look at where the world is going, for the next three years the world is probably not going to change that much and we just got more people wanting to spend more money in more windows for our content and that is the good news.

But if the world does change, the more IP you actually own the better strategically positioned you are.

And so we own all of our content in our 20 year library.

And now to be in a position where we have meaningful live sports that are very popular with key affinity groups that we own all of the rights to, on all of that IP, becomes a nice hedge asset for us and maybe an important one in the years ahead as you look to offer some of those sports that are real affinity sports maybe directly to customers.

Can I just follow up on Andy's comment?

Andy, you --

Yes, please.

I think we just, did we cut off Rich?

I think we did.

Sorry Rich.

Michael Morris, Guggenheim Securities.

Thanks, good morning guys.

Couple on advertising.

Andy, you mentioned cancellations being up a little bit.

Could you provide a little more color on that?

Is that coming from someplace in particular?

Anymore details there would help.

And also, David, can you talk about just the advertising environment in general?

It seems to be slowing a bit for TV.

How much do you think is sort of the macro environment, and/or are you seeing competition, an increase in competition, from new digital competitors?

And then just one other, Andy, in the past you had mentioned high-single to low-double-digit EBITDA growth with the growth this year excluding some of the nonrecurring or new items.

I think that compares to the 6% in the quarter.

Can you just highlight if that does compare to the 6% and what the swing factors are for your acceleration if it is still the case this year?

Thanks.

I'll just start with the advertising market.

It feels pretty steady.

I wouldn't read into the slightly up on the cancellation.

It's pretty steady as she goes.

We feel like the market remains strong.

Pricing is good.

We are heading into an upfront with real strength across our channels, so we are feeling good about it.

It's too early to tell where the upfront is going to go.

This quarter is pretty steady, looking good.

The advertising market remains pretty strong and pricing remains quite good.

Michael, on the cancellation front, it's up slightly.

I would say a year ago was probably below normal levels and now we are kind of at normal levels, so it is a small uptick.

Again to David's point, it's certainly not a cause for great concern.

On the overall organic OIBDA growth story, we are still very much in line with that high-single, low-double-digit growth for the year.

6% for the first quarter was depressed a little bit for a few reasons.

One, if you look at our corporate costs.

They were actually on an apples-to-apples basis flat year over year.

We continue to focus on cost productivity and driving down our SG&A structures and we have done that.

But there were two items in the first quarter that did meaningfully impact our overall growth rate.

The first was around professional fees, we have spent a fair amount of money on our tax restructuring efforts with great payback.

You saw in the first quarter our effective tax rate was down to 34%, so we're definitely seeing traction on the effective and cash tax line.

But it does cost some money to make those kind of organizational and the structural changes happen.

Some of the cost is in the first quarter.

The other piece was our founder, John Hendricks, an amazing man, retired in the first quarter.

And so there was some costs associated with his retirement and some acceleration of compensation and equity that also impacted our results.

So, net net net we're still very much in line and believe strongly in our high-single-digit to low-double-digit overall organic profit growth story.

Thank you everybody for joining us.

We appreciate it.

If you have any follow-up questions please call Jackie or myself and we will be happy to help.

Thanks.

Ladies and gentlemen, thank you for your participation in today's conference.

That concludes the presentation.

You may now disconnect.

Good day.