華納兄弟探索 (WBD) 2014 Q3 法說會逐字稿

Good morning, everyone. Thank you for joining us for Discovery Communications' 2014 third-quarter earnings call. Joining me today are 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 (technical difficulty) after which we will open the call up for your questions. We ask that you 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.

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

Good morning, everyone, and thank you for joining us today. There's been a lot in the news lately on consumer disruptions to the video marketplace and the emergence of more over-the-top video options. Through all the innovation and press releases, we believe there remains one constant: It is a great time to be in the content business.

Despite shifting behaviors and new digital offerings, more and more viewers are gravitating to high-quality content, and we still believe there are many years of sustainable organic growth from the continuing global rollout of pay television, as well as more new opportunities to display our content than ever before.

I want to start this morning by putting a framework around Discovery's strategy and how we are driving organic growth around the world and building the next generation of businesses and brands. The five pillars of our global strategy have not changed.

First, drive organic growth and leverage our infrastructure across the global pay-TV market. Second, invest in content, formats, and IP that can take market share and attract new audiences across platforms.

Third, take a strategic approach to localization on a market-by-market basis and selectively pursue smart, bolt-on acquisitions to augment our portfolio. Fourth, unlock the value of Discovery's beachfront real estate and distribution advantage around the world. And lastly, continue to deliver strong financial results and drive free cash flow per share growth.

We've been pushing hard on our first principle, to drive organic growth across the global pay-TV market. 25 years ago we launched Discovery Channel in the UK; today we have an average of eight channels in more than 225 countries. Discovery Communications now reaches nearly 3 billion cumulative subscribers in every corner of the globe, distinguishing the Company as the world's number-one pay-TV programmer, with the world's most widely distributed network, the Discovery Channel, which is in almost 500 million homes.

Overall, our global business continues its strong organic growth, with international now accounting for more than 50% of our total Company revenue and growing. That is an important inflection point for our Company, a key differentiator for Discovery, and the foundation of our growth strategy going forward.

That international infrastructure has allowed us to build a global brand factory. TLC is now the world's leading female network, reaching more than 300 million homes in over 200 countries.

ID is one of the world's fastest-growing channels. We announced on Friday that ID has reached 100 million global homes, with new launches in India and Denmark. That is an astounding milestone for a brand that did not exist anywhere in the world just 5.5 years ago. ID remains in the early stages of its growth cycle in every market, including the US.

We are building the next generation of growth with the launch of Velocity worldwide. Under both the Velocity and Turbo brands, we are launching our next global platform as a dedicated auto channel. The goal is to reach over 125 million homes through the end of 2015, creating a very attractive global consumer and advertising brand.

We continue to see strong viewership gains around the world, with our global audience reaching an all-time high in the third quarter, with aggregate ratings up 6% year-over-year. Two areas I would like to highlight for their consistent and attractive organic growth are our pay-TV business in Latin America in India.

Discovery has 13 brands in 49 countries across Latin America that offer a wide range of content to all demographic groups. The portfolio has had its best quarter ever, with ratings up an impressive 20% in primetime across the region, driven by the Discovery Channel; our lifestyle brand, Home & Health; and Discovery Kids, an absolute juggernaut in the region and the number-one pay-TV channel in the key growth market of Brazil. We have a very strong portfolio across Latin America today and are well positioned with multiple channels in the basic analog packages that are attractive to the emerging middle class around the region and should continue to see double-digit affiliate and advertising growth in the years ahead.

India also continues to be a particularly strong market as we roll out new channels and brands, including the recent launches of ID and Turbo. We now have 11 channels in 5 languages and a passionate consumer base for our science, technology, and natural history programming.

Ratings growth in India is up over 100% this year, led by the Discovery Channel, Discovery Kids, and Animal Planet. The market remains one of our most exciting growth opportunities for the Company.

The second element of Discovery's growth strategy is investing in content, formats, and IP that can take market share and attract new audiences across platforms. In September we closed our deal to acquire UK-based independent production company All3Media through a joint venture with Liberty Global. This is a long-term strategy to broaden and deepen our IP holdings through this diversified asset that owns 19 separate production companies working across the nonfiction, scripted, and sports genres.

In the US, TLC remained a top-10 ad-supported cable network during the quarter and just last week had its highest audience in 4 years, with 19 Kids and Counting, making TLC the number-one network for the night. And OWN continues its strong growth trajectory, ranked as the number-one cable network on Tuesday, Wednesday, and Saturday nights for African-American women, highlighted by Tyler Perry's The Haves and the Have Nots, and the newest hit series, If Loving You Is Wrong.

Our newer networks, American Heroes Channel, Destination America, and Velocity, continue to build viewership. American Heroes Channel was up 16%, and Destination America and Velocity were each up almost double digit.

Despite these wins, our portfolio was not immune to the ratings declines across the TV landscape this summer. Improving our ratings is a top priority here in the US.

Our laser focus on quality storytelling is paying off in the fourth quarter, with ratings at Discovery Channel up more than 10% in October, driven by a strong and balanced schedule: Sundays with Alaska, The Last Frontier; Mondays with Fast N' Loud and new hit Misfit Garage; and Fridays with Gold Rush, the number-one show for men on TV on Fridays.

We also recently made a leadership change at the Discovery Channel and announced last week that longtime Disney executive, Rich Ross, a great old friend of mine that I have always admired, will join the Company as President of the Discovery Channel in January. Rich is an extremely talented, creative executive with a history of producing great content, driving ratings, building strong global brands.

He built Disney's TV channels worldwide, and we have high expectations for Rich to chart Discovery Channel's next chapter of growth. He will be starting early in the year.

A key differentiating factor for Discovery is our content ownership, which allows us to be platform-ready and flexible in how we reach consumers. We produce 2,500 hours of content a year. No other company and say that, and we own almost all of it.

We recently reached an agreement with Sony to provide Discovery Networks content on their new platform, an exciting new platform for us to display our brands. And last month we completed a strong renewal with Suddenlink Communications in the US for our entire portfolio of US networks. As part of this deal, we expect Suddenlink's customers to have authenticated access to Discovery's content inside and outside the home and start building those new TV Everywhere offerings of the future.

Three other platforms where we are exploiting our IP for learning and new revenue streams are Discovery Education, Eurosport, and SBS Nordics. Discovery is a leader in digital education, reaching over half of all US schools and 35 million students with our innovative digital textbooks and suite of educational products.

Discovery Education is meaningful to our top and bottom lines and exposes our brand to millions of kids in a really positive, enriching way. That exposure and relationship allows us to build trust and engagement with the next generation of media consumers at a very early age.

In addition, as part of our Eurosport acquisition we also picked up the Eurosport Player, a strong direct-to-consumer over-the-top subscription product or app that has grown consumers significantly in the last few months. We have also begun to do some great work in the Nordics with a new over-the-top product called Dplay in Norway. With high broadband penetration and strong demand for our content across the Nordics, an aggregated service of our combined Discovery, scripted, and sports products has provided a growth in paying subscribers that amounts to nearly a threefold increase in the past year.

Dplay and Eurosports Player give us new incremental revenue streams as well as great data for viewing habits on mobile platforms, how to best distribute and schedule our consumer offerings across linear and digital, and help us develop expertise in building new SVOD products and revenue models that are additive to our pay-TV business.

The third principle is to take a strategic approach on a market-by-market basis and selectively pursue smart, bolt-on acquisitions to augment our portfolio while also looking for opportunities to diversify our content, deepen our local relevancy, and add meaningful scale. Last month we began our latest localization initiative in Southeast Asia.

Our strategy is to shift resources from our current Singapore headquarters to new local offices in growth markets including the Philippines, Indonesia, Malaysia, and Thailand. Additionally, in South Korea we are investing in a new in-country presence and leadership team, following the implementation of the Free Trade Agreement and the ease of restrictions on foreign broadcasters.

In the Nordics we continue to see the benefits of last year's acquisition of SBS Nordics, due to our selling an enhanced portfolio offering to advertisers. In Europe, newly acquired Eurosport is starting to show the benefits of having increased access to compelling sports rights, as we have taken the combined Eurosport and Discovery offering to the market.

In addition, Eurosport previously relied almost exclusively on pan-European ad sales. The benefit of Discovery's local teams means we can increase our inventory to sell local in addition to pan-European, and local ad markets are significantly bigger than pan-European.

For example, a few weeks ago we presented our combined portfolio for the first time to advertisers at our upfront in Germany. We announced that Eurosport acquired the exclusive TV and digital rights for MotoGP in Germany and the Netherlands for not a lot of money. These popular high-speed motorcycle races hold strong appeal to sports fans in both countries and are a good example of how we are surgically strengthening Eurosport's content in two important markets.

Additionally, where we have the rights we are just beginning to sample our new sports content across Discovery's other platforms. Our new Turbo channel will air Bundesliga soccer matches in Poland; and during the US Open we aired the women's final matches on our SBS channel Kanal 5 to all-time high ratings in Denmark because Wozniak, a finalist in the US Open, was Danish.

Again, just some very early examples of the optionality that this platform will give us to co-sell, co-program, and build out a combined pay-TV offering with more meaningful scale in many key markets.

Another part of our strategy is to create the equivalent of a regional sports network in the US by localizing content on Eurosport 2 to make individual channel feeds even more compelling to local advertisers, distributors, and viewers. In Sweden, we have relaunched the network as Eurosport 2 Sweden, with local hockey rights and customized in the local language, with local talent and with a dedicated feed. The distribution that Eurosport 2 provides could be the basis for a number of strong local channels in the year ahead.

Our fourth growth principle is to unlock the value of Discovery's beachfront real estate and distribution advantage around the world. Here we are thoughtfully investing in new TV brands and identifying category whitespace.

We recently increased our stake in The Hub network to 60%, renamed the channel Discovery Family Channel; and the network debuted on October 13 and continues our partnership with Hasbro. With reach of over 70 million US homes, the network features Hasbro Studio kids content during the day and Discovery programming for families and parents watching with kids in the evenings in primetime. In the first few weeks, ratings were up double digits, and there is strong advertiser interest for co-viewing in a quality brand environment.

Our final principle is to continue to deliver strong financial results. Andy will provide more detail on our financial performance, but we had another quarter of double-digit organic OIBDA growth as we expanded organic margins both domestically and internationally; and we remain focused on driving free cash flow per share growth.

So with all the opportunities and new platforms, we remain confident Discovery is very well positioned now and for the future with our strong global brands, ownership of popular nonfiction categories, diversified worldwide assets, and strong operating and financial track record. We firmly believe we can deliver sustained, long-term growth and continued shareholder value creation.

With that, I will turn the call over to Andy for details on our financial results.

Thanks, David; and thank you, everyone, for joining us today to discuss our third-quarter performance. Discovery's ability to execute on our key strategic global growth initiatives while focusing on tightly controlling costs led to another quarter of solid results.

On a reported basis, total Company revenue in the third quarter increased 14%, led by 32% international growth, which was partially offset by a 1% decline in our domestic networks, primarily due to digital licensing revenues in the prior year. Total operating expenses on a reported basis increased 18%, mostly due to the inclusion of Eurosport, leading to reported OIBDA growth of 8%. Excluding the impact of Eurosport, digital licensing revenues, and foreign currency movements, total Company revenues grew 7%.

With our strong and successful focus on controlling costs and ensuring that revenues grow faster than expenses, our organic expense growth was up only 4%. Behind this 4% expense growth was a 5% increase in cost of revenues, as we remained disciplined about our investment in programming while still continuing to gain audience share globally, and a 3% increase in total Company SG&A.

With revenues growing 300 basis points faster than costs, our organic adjusted OIBDA grew 10%, with underlying margins expanding by 100 basis points versus last year. Net income available to Discovery Communications increased 10% to $280 million, driven by the improved operating performance as well as an increase in equity investment earnings and lower mark-to-market equity-based compensation, partially offset by higher restructuring costs related to the Eurosport integration.

We also lowered our effective tax rate from last year's third quarter by 400 basis points to 35% this quarter, as we remain extremely focused on lowering both our effective and cash tax rates by fully utilizing our increasing international business mix.

To this end, as we continue to grow our foreign assets and content production capabilities in critical international markets, we now have line of sight to our being able to reduce our global effective tax rate to below 30% for fiscal 2017. This sustained year-over-year reduction in our tax rate will not only drive net income growth but also accelerate our free cash flow and capital availability growth as well.

Adjusted net income, which is a more relevant metric from a comparability and valuation perspective, as it excludes the impact from non-cash acquisition amortization of intangible assets, was $313 million this quarter, a 9% improvement versus last year. Earnings per diluted share for the third quarter was $0.41, 17% above the third quarter a year ago. Adjusted earnings per diluted share was $0.46, a 15% increase.

Looking at the last 12 months, adjusted net income increased 21% to $1.3 billion, while adjusted earnings per diluted share increased 27% to $1.87.

Free cash flow in the third quarter of $393 million declined by 10% versus a year ago, as the improved operating performance was more than offset by higher cash taxes, mostly due to the expiration of the accelerated content cost recovery under Section 181.

Over the last 12 months, free cash flow decreased by 3% to $1.1 billion as the higher tax and content payments more than offset the stronger operating performance. However, free cash flow per share, a critical metric for us and one that most influences our strategic planning and execution, was up nicely over the last 12 months as the decrease in our share count due to our aggressive stock buybacks more than offset the declines in free cash flow.

Content spending during the third quarter, excluding Eurosport, increased mid single digits even as we continue to drive viewer market share growth across the globe.

Before moving on to the divisional results I do want to highlight that, while not part of our free cash flow, OWN continues to increase its cash flow generation and repaid Discovery a net $17 million in the third quarter.

Turning now to the operating units, revenues at the US networks were down 1% on a reported basis due to digital licensing revenues recognized a year ago. Excluding the impact from licensing revenues, organic domestics revenues grew 3%, with advertising and distribution growth partially offset by a $3 million decline in other revenues, again primarily due to lower content licensing sales as we are sharing more programming this year with the international networks versus selling to third parties.

Domestic advertising revenues increased 1% in the quarter. We faced a tough comp versus the 12% advertising growth in the third quarter of last year; but healthy volume and price increases this year more than offset lower delivery. Distribution revenues excluding licensing revenue increased 6% during the third quarter as we again benefited from the higher rates we were able to secure during our last round of affiliate negotiations.

Looking at the cost side, domestic operating expenses declined 4% from the third quarter of 2013 on a reported basis, and declined 2% excluding the impact of SVOD. This is primarily due to an 11% decline in SG&A, partly offset by a 7% increase in content amortization versus last year.

Our ability to tightly manage costs led to flat reported domestic adjusted OIBDA despite the decrease in reported revenues, and led to organic adjusted OIBDA growth of 6%. This resulted in organic margin of 59%, up fully 200 basis points versus the third quarter a year ago.

Turning to the other main segment of our business, our international division continued to deliver strong results, growing reported revenues 32% and increasing reported adjusted OIBDA 25%. Reported results include the impact of the Eurosport acquisition and foreign currency headwinds.

Foreign currency had a significant negative impact on our results in the quarter, given the continued strengthening of the dollar versus the euro and other key currencies. The euro and the four Nordic currencies comprise over half of our international OIBDA; so with the euro down 7% in the quarter and the Nordic currencies each down between 5% and 7% against the dollar, the profit impact was significant. Therefore, for comparability purposes, my following comments on our international business will refer to our results excluding both Eurosport and FX fluctuations.

Total international revenues grew 10% as advertising revenues increased 12% and affiliate revenues grew 8%. International advertising continues to be the fastest-growing segment of our business and significantly outperforms the overall international ad markets.

While there were some small pockets of softness in the third quarter in Russia and neighboring countries as well as certain countries within Asia, we were able to grow organic advertising revenues a very healthy 12%, as the majority of our regions saw ad revenues up double digits. Growth was led by Western Europe as we continue to benefit from the success of our free-to-air initiatives in Italy, Spain, Germany, and the UK, and by the Nordics, where we still grew ad sales in the high single-digit range as we continue to see a scale-driven pricing benefit across our networks, despite lower net ad sales in Sweden due to their lower put levels.

Latin America remains an incredibly healthy growth market for us, driven by Brazil and Mexico, as is Central and Eastern Europe where higher pricing in Poland more than offset political instability in Russia as well as the issue that some advertisers in Russia have started to move dollars out of cable TV to broadcast ahead of the cable TV advertising ban that goes into effect on January 1 of next year.

Asia was soft again this quarter as the tourism category has been negatively impacted by local geopolitical issues in certain key markets.

Taking a step back, we expect international advertising to remain the top growth driver of our global business, as we see double-digit organic growth continuing for the foreseeable future. Our unparalleled global distribution platform will allow us to continue to benefit from the rapid evolution of the global pay-TV market as we increasingly take share and increase CPMs at our existing networks, while simultaneously rolling out our homegrown brands like TLC, ID, and Velocity to more and more markets around the world.

On the affiliate front, the 8% affiliate revenue increase in the quarter was driven primarily by subscriber growth, especially in Latin America from the continued expansion of pay-television in Brazil, Mexico, and Colombia, and in Central and Eastern Europe from additional subs in Russia and Africa, and from new channel launches in the Middle East, Turkey, and Africa.

Turning to the cost side, operating expenses internationally were up 7% in the third quarter, primarily driven by higher content amortization and increased personnel costs as we further expand our global footprint. Our ability to grow global revenues in excess of global costs led to 16% adjusted OIBDA growth in the quarter. Very importantly, we delivered another quarter of a strong organic margin expansion internationally, with margins on the base business up over 100 basis points year-over-year.

Finally, taking a look at our overall 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 expect to continue returning capital to shareholders as we invest in our global businesses. During the first 9 months of this year we bought back over $1 billion worth of our stock, including another $298 million during the third quarter, and we still plan to return more capital to shareholders in 2014 than we did in 2013. Since we began buying back shares towards the end of 2010, we have now spent over $5.3 billion buying back shares, reducing our outstanding share count by around 25%.

Turning now to our full-year forecast. Primarily due to the considerable foreign currency headwinds I previously discussed, as well as the significant geopolitical issues in Russia and lower-than-expected domestic ad sales, we now forecast total Company revenues to be between $6.3 billion and $6.35 billion; adjusted OIBDA to be between $2.5 billion and $2.55 billion; net income to be between $1.15 billion and $1.175 billion; and adjusted net income of $1.275 billion to $1.305 billion. We also now expect our 2014 free cash flow to be approximately $1.125 billion for the year.

It is extremely important to highlight that if it were not for the non-controllable currency headwinds and the negative impact of the Russian geopolitical situation, we would have been at or close to the bottom end of our previous guidance ranges. Also important to note that these updated guidance ranges utilize current foreign currency exchange rates and assume a stabilization of our US ratings. They also include approximately $20 million of anticipated 4Q content impairment charges, mostly associated with our recently announced cancellations of Honey Boo Boo and Sons of Guns, as well as the nominal benefit of our now consolidating the Discovery Family Channel, which for the past many quarters had reported largely breakeven results.

Thanks again for your time this morning, and now David and I will be happy to answer any questions you may have.

(Operator Instructions) Michael Nathanson, Moffat Nathanson.

Thank you. I have one for David and I guess one for Andy on numbers. David, in the past month or so there has been a lot of concern about the creation of smaller cable bundles within the US. I wondered, given the diversity of your portfolio, do you think this is a legitimate concern?

And what is your philosophy on working with operators looking to create a smaller bundle? Then I have one for Andy.

Okay. Look, there's a lot of, I think, press release activity in the marketplace. In the end, I think if the marketplace moves that way it is likely to move pretty slowly. People are still watching more TV than they ever have in the curation of the bundle is very effective.

The unbundling, I just don't see it happening. I think if it does move in that direction over time, we own all of our content, which is an advantage. We are taking advantage of it with Eurosport in Europe; we are taking advantage of it a little bit with Dplay in the Nordics.

But here in the US, I think you will see the pay-TV model maybe working this way; but even then they will be working that way with distributors in a way that is not too disruptive. ESPN has gone in a way that is very limited for broadband.

So I think there are a lot of releases here. It is unlikely to have a significant impact in the near term.

In the next 4, 5, or 6 years, as content goes directly to consumers, we have great super-fans of our content domestically and around the world. And if it moves that way in any meaningful way, we will be able to take, I think, very strong advantage of it because of the affinity groups we have, the quality of content that we have, and the fact that we own it.

We own all of it, so we don't have to go to anybody for it. But I think it is going to get a little more overplayed over the next couple of months; there will be a lot of announcements.

And there's questions: What's the price? What's the platform? Will people aggregate together?

In the end there will, I believe, be a rationalization. We have a strong marketplace here in the US. Basic cable is very effective; it is also going to be a lot cheaper than if you try and aggregate a few of these direct-to-consumer products.

David, let me just ask Andy. I don't think you gave us -- you gave us an update on your expectations for international advertising growth. What were you assuming for the fourth quarter for domestic advertising growth?

Michael, we are not providing any forecasts on that right now. There's a lot of moving parts for now with the international ad sales. While pricing is good, there is a lot around volume right now, a lot more being bought closer to air.

So for us, we had a strong delivery in October, but we are not going to give any guidance yet in the fourth quarter, just given how close right now bookings are to air time.

Okay. Thanks, Andy.

Alexia Quadrani, JPMorgan.

Thank you very much. Just digging in a little bit further in your commentary on the domestic advertising environment, do you find that softness in the third quarter was largely just ratings -- because of softer ratings? Or was it really because there was any, I guess, smaller budgets or any change in the way allocation spending was?

I don't know if you had any further insights on that; that would be helpful.

Sure, Alexia. Look, in the third quarter if you looked at overall viewership for the summer on cable, it was down. It is coming back a little bit.

We have seen this outside the US. I think it is too early to call it a trend. There are a lot of markets where we have seen viewership come down and then come back up.

So certainly ratings -- and in our case our ratings I think were lower than we expected -- had an impact. Pricing is fine.

The scatter market I would say held up okay in the third quarter. In the last month or so, we feel that it has gotten little bit softer.

So pricing is still, I would say, pretty steady; maybe even good. But there is a lot more scatter out there, not just from us but from everyone.

And people are booking closer to time. We have been booking on some of our networks -- for this past weekend we were booking on Thursday and Friday for the weekend.

So normally we would be able to give you a real good sense of where we would be through the end of the year here domestically; but the visibility is not what it has been. That doesn't mean it is going to be bad, but I would say for the first month there was some softness in terms of the volume. And whether that picks up in the next 2 months or not, we are going to have to see.

If we do, our ratings are doing better; Discovery is doing better; we have some good premieres coming up; we had some strength on TLC with some series coming back strong. I think we will do fine.

The question is: Will the scatter volume be there? And we just don't have that much visibility right now.

Thank you very much. Just to follow up on your commentary in the prepared remarks about the SVOD, are you guys still in conversations, I guess, with other SVOD players for a domestic deal here?

And the Sony deal that you had highlighted, just any color you can give us in terms of the potential financial impact of that in 2015.

Okay. On Sony we were able to structure, I think, a very favorable deal for us and for them. I think it is an innovative platform, and I think they got good value and we felt like we got very good value. So I think that worked out very well.

On SVOD in general, here in the US we continue to talk to Amazon, to Hulu, to Netflix. We think they are strong players in this marketplace. It is an extra bite at the apple which provides incremental value; and for us it almost all drops to the bottom line.

Over time I think we will get significant value. The question is whether we will get it directly from them or whether we will get it by pursuing it ourselves. I expect that -- right now it is really just a value issue. We could have done deals with all of them, but we felt that our content was more valuable.

Thank you very much.

Todd Juenger, Sanford Bernstein.

Hi, thanks. Good morning. David, I would love to pick up right where you just left off and just give you a chance to respond to something I hear a lot; I am sure we all do. So just thinking about, as you contemplate the SVOD window, how do you respond to those who say the fact that Discovery hasn't found a deal that works yet with those players is somehow a signifier of a decreased relevance of Discovery's content in an increasing on-demand world?

I wonder how you respond when people say that. Then I have a follow-up. Thanks.

Thanks, Todd. Well, we would significantly disagree with that on a couple of levels. One, SVOD is really determining itself what it is. If SVOD ends up being HBO, and it's basically movies and a couple of original scripted series, then the answer may be that for that platform we are not at the top of the list.

And in that case I think there are likely to be others that will take the strong quality content that we have and, in a similar model, reach consumers. So that's -- one is: What will Netflix and Amazon be? Will it be mostly movies and a few scripted, or will it be a broader offering?

We represent now -- over the last 7 years we have grown our reach here in the US from about 5% of viewership on cable to almost 12%. And on any given night, one of our channels is either the number-one or -two network in America.

On Tuesday nights, we're the number-one network in America with Tyler Perry's content on OWN. Later on Tuesday night we are the number-one channel in America with 19 and Counting, where we get over a 3 rating in the demo on TLC.

On Friday nights we're the number-one network on TV, including the broadcasters, with Gold Rush. And these are -- they aren't scripted series, but a lot of -- well, except in the case of Tyler where we have two very strong scripted series -- but they are thematic programs that have very strong viewership, very strong DVR, and a lot of social.

So when you look across our 14 networks, we have a lot of great content. So the question is: How do we reach consumers, and how do we get the value that we deserve for it?

I think over time we will get a substantial amount of value in that window. It may present itself with -- TV Everywhere is another bite at that apple.

Okay, thanks. Fair enough. Andy, if you don't mind, just a quick one. As we think about program investment into 2015, I just wonder, given probably a little softer revenue environment right now than you wish and you are putting together budgets for next year, are you thinking that you need to increase investment and recover ratings; or that you need to maybe lighten up on investment a little to protect margins; or something in between? And where should we think about content investment for next year? Thanks.

Sure. Todd, I'll tell you, if you look at what the last -- for the last couple quarters we have increased our base content spend -- call it mid single digits. So we came down from the higher investment period of 2012 and 2013, and we have been much more at this mid single-digit range.

I would say that that is very much our null hypothesis for the next several and many quarters. I think it is the right level of increase for us as we continue to expand our networks internationally and as we look to have and nurture new content domestically.

I don't see it being really any more than that. We don't need to, to still generate our market share growth. So think in terms of base content spend being mid single digits for the foreseeable future.

Got it. Thanks, guys.

Jessica Reif Cohen, Merrill Lynch.

Thanks. I will follow along the same path as everyone else, one for David and then for Andy. David, Rich Ross is a really interesting hire for you guys. Given his success at the Disney Channel, I am just wondering: What should we look for at Discovery?

Is there any change in content strategy? Like, what will he -- what are his priorities?

Well, the good news with Discovery is I think we have some real upside. We have three nights where we are at the very top within the cable universe for men. But when we look at Discovery and we see what Discovery can do, there are a number of markets where our market share are more than 2 or 3 times what it is in the US in a number of our markets.

So I think building on the -- Discovery is still the number-one cable brand in America, by the surveys of cable operators the brand that viewers most value. So I think that even in a flat market like the US there is upside if we can up our game a little bit with more quality content, with some better storytelling, better characters.

Because when we get it right, the viewers show up and it works everywhere in the world. Rich is a great programmer, very strong creative. He and I spent a lot of time talking about what Discovery could be and the opportunity to grow it, and I think Rich is going to do a great job.

We are going to line up behind him, and I think Discovery can have a real chance to get even stronger and for the brand to get even stronger.

Yes. Well, he had an amazing run at Disney. Then, Andy, I guess this is like a two-part question.

But how does The Hub consolidation affect the fourth-quarter numbers? You said it was breakeven until now.

And can you give us an idea of the impact of that Russia ban on advertising? What does that mean for 2015?

Sure. Jessica, on the first question for The Hub, it is about $20 million to $25 million of top line per quarter is what The Hub has been driving, mostly around distribution versus ad sales. As you said, it really has been for the last many quarters largely a breakeven profit line, as the costs for The Hub has predominantly matched the revenues.

With regard to Russia, look, it is less than 2% of our global revenues; again, predominantly distribution revenue versus ad sales. For this year, relative to our previous guidance, the reduction of our guidance has been predominantly driven by two things -- uncontrollable things.

First of all, foreign exchange that we talked about, an unprecedented level of strengthening of the dollar the last several weeks. That has been about a $100 million impact on the top line for the year relative to what we thought back in July.

Then Russia is about $20 million, so those are two big impacts, for sure. But again, the key highlight with Russia is less than 2% of global revenues and predominantly distribution revenue.

And for the near term, the subscriber growth in Russia is quite strong, so we will get the benefit of that. And as Andy said, next year we will lose the benefit of the ad sales piece.

Thank you.

David Bank, RBC Capital Markets.

Okay, thanks very much. Hey, David, I was wondering if you could talk a little bit about the contribution to the overall domestic growth rate from what I guess you had called the developed portfolio of the flagship channels, versus the developing portfolio, and how you see those trends. How the contribution has evolved maybe over the last couple of years and how you see it evolving over the next couple.

Then for Andy, you gave us a comment about sustainable double-digit I believe international ad growth for a while. But double-digit is a pretty wide range. Is there any way you could put a little bit more context around that comment? Thanks very much.

Great. Thanks so much. About 70% of our revenue is from Discovery, TLC, and Animal Planet; but it used to be 85% or 88%. We have launched more channels in the last 4.5 years than all media companies combined here in the US, really because we believe if we deployed that capital that we could still grow audience.

So ID is the number -- is a top-five network in America that didn't exist a few years ago. It is the number-two network in daytime, number-two in late night, and it is still growing. OWN is the top network for African-Americans and a top network for women and still growing.

Velocity is a great niche network that we are seeing substantial growth out of. We have AHC, which we are moving aggressively into the history space and military space in a way that is showing real growth, and Destination America.

So that 5% growth of market share that we had that has grown to almost 12% probably would have been 5% to 6.5% or 7%. So I think that strategy has really worked for us, and it raises two issues.

One is, one of the reasons I think we got a great opportunity with Rich is I think we can do a better job on our flagships of growing our audience. The last year or so has been relatively flat. So I think that we with the right creative leadership we could really drive that.

The second is this environment where we have deployed all of this capital to launch all these new channels, we have done it because it has been a healthy marketplace. And the ability to do that and continue to do that in the future -- the whole Comcast consolidation in the industry raises some questions about the ability of independent programmers -- we're the largest independent programmer in America -- to continue to invest in new channels and new niche content that can attract viewers.

David, your question regarding the look forward on international ad sales, we feel still extremely bullish and good about our ability to outperform the market as our share of wallet continues to follow share of viewership. I would think of the third quarter as being a proxy for what we see for the next four-plus quarters.

We had 12% growth, and that was really driven by still sustained high teen growth in Latin America, Central and Eastern Europe, Western Europe, as again we continue to see great organic growth there and even some good pricing leverage as well.

If you look at the Nordic region, we were able to deliver 8% growth in Nordic as the power ratio, kind of the new focus of that acquisition; we got the cost synergies, now we're moving on the revenue synergies. So we are seeing really some outsized and some sustained growth out of Nordic.

So I would think in terms of sustained double-digit going forward, like you saw in the third quarter. I would think in terms of still very strong growth in our core growth regions in that 10%, 11%, 12%, 13% growth. That's what we would expect for the next many quarters.

Okay. Thank you very much for that.

Ben Swinburne, Morgan Stanley.

Thank you. Good morning. Andy, on your tax comments, can you just give us a sense for your cash tax expectations over time? I think you said you would get I think below 30% by 2017 on a GAAP rate.

And if that has any implications for whether or not an inversion might make sense for the Company at some point, now that you got this line of sight.

And then for either of you or David, on the SBS acquisition, should we be thinking about that high single-digit growth rate as representative of those assets? Because I believe that'd be a decent acceleration from how they performed before you acquired them. Just trying to get a sense for whether that's SBS specific or pan-Nordic, for lack of a better term.

Sure. Well, Ben, look, on the tax front, I couldn't be more happy and enthused about the progress that we are making on our global tax structures and rate expectations. We do now see line of sight -- and the first time we have ever given a long-term perspective on our tax rates -- so we definitely see below 30% for fiscal 2017.

Good question on the cash tax rate. While 181 has had a big impact this year in a negative way, by about $150 million, given the timing of cash taxes relative to that ruling, as we look forward we see roughly cash taxes being at or 1% below the effective tax rate as we look to maximize the value of deferred tax structures. So certainly our cash taxes will be at or slightly below whatever effective tax rate, once we work through this 181 cycle.

So with regard to -- and also regarding inversion, look, it doesn't change our view on that. We have said before, while inversion can make some sense, the key notion is inversion can make a very good deal great; it can't make a bad strategic deal good.

So we have taken a hard look. We are very confident in our ability to still drive down our effective and cash tax rates, given our international structures and given our now ability to generate more and more content in tax-advantaged jurisdictions. So we don't need inversion to get to a significant amount of tax rate reduction over time.

Thank you.

With regards to the organic growth story around acquired assets, look, for SBS clearly part of our thinking there was around the power ratio, around the ability to leverage that market positioning and grow our already established channels in that market. We are seeing that now.

I think for Eurosport it is a very different notion. It is much more about going from a pan-European sale to a local sale. I think we can definitely drive a lot more ad sales growth out of that asset across those different markets than we are seeing with SBS.

It doesn't mean we're not happy with the SBS ad sales growth. In fact, 8% is clearly meaningfully higher than market and I think reflects that power ratio that we are going to be able to drive for the next many quarters.

But definitely think in terms of, for Eurosport and maybe other acquisitions that we look at, there is not only the notion of the combination of market leverage but also the idea of leveraging our local infrastructure, leveraging our local ad sales teams, to drive much more localized ad sales growth.

It sounds like, based on your long-term commentary or medium-term commentary, the macro slowdown in Europe hasn't impacted your growth rate in that region broadly yet at all. Is that fair?

Absolutely fair. It just comes back to this whole notion of our overall viewer market share is so much higher than our share of ad sales, the share of viewership versus share of wallet. We still have a long way to catch up, and that is what really is driving right now our outperformance.

Look, one of the advantages for us is that there was a real retraction across Western and Eastern Europe; and over the last several years we have gone in hard.

And we also have a huge amount of content, quality content, that we bring into the marketplace that works well when others have retreated with investment. The amount of quality content that we have in-language that we can bring into the market is significant.

So we see our share advantage continuing to grow, and as our share advantage grows we get the advantage of that but we also pick up, as our scale grows, some power ratio advantage. So we are pretty optimistic about Western and Eastern Europe.

Thank you.

Vasily Karasyov, Sterne Agee.

Thank you. David, when you were talking about softness of cable ratings in Q3, unlike a couple of your peers I don't think you mentioned the potential impact of Nielsen measurement and sample changes. So I was wondering if you disagree that there is a big impact in that, in the decline from what Nielsen is doing.

And I wonder if it is because of your different key demos. So if you could comment on this, I would appreciate it.

We are talking to Nielsen behind the scenes. I think our job is to drive our channels and deal with the existing currency, which is Nielsen.

But when we look at actual set-box data we see a different story. And we do think that Nielsen is quite antiquated.

I gave an example on our last call that in Norway viewership was down almost double digit, and then they came up with a new cue-tone measurement system where you wear a device and anytime you see something, a show, if it is with commercials -- whether you see it at a bar, whether you see it on your iPad, whether you see it at your guest home, whether you see it on your computer -- you get credit. And viewership in Norway is up mid-teens now, for the last couple of months.

So it is clearly a viewership issue, and the people are consuming content a little bit differently, and they need to catch up. But we will work that behind the scenes.

From our perspective we need to grow our share and we can't look and say: Whoa, it's Nielsen. We have been able to grow our share every year and we continue to believe we can grow our share every year.

We have the advantage that, when we do grow that share, we take it outside the US and get a multiple on that share. So for us it is a much more efficient investment.

But we still believe in the US, and we have just got to focus on telling more great stories and stronger quality content. Because when we deliver it, the big audiences come.

Thank you.

Anthony DiClemente, Nomura.

Hi, thanks. One for David, and one or two quick ones for Andy. David, I think Putin is trying to force a reduction of non-Russian-owned cable networks that reside in Russia to 20% or below. I know this isn't until 2016, but is there a way that you can solve for that in terms of Russia?

Maybe can you re-domicile your Russia cable network somewhere outside of Russia? Or how can you avoid being forced to sell those?

Then, Andy, just wondering. You mentioned in the release free cash flow is impacted by cash content payments, which I presume were higher than reported. So can you just talk to us about that difference between cash content costs and reported content spend, and over what time period that disparity could unwind?

And then, sorry for the third one, but final one is just on the scatter market softness. Just wondering if you guys would attribute it more so to a shift to digital platforms, or more so to economic sluggishness in the US, or to what it would be attributed to. Thank you.

Okay. Hi, Anthony. On Russia, look, just as a backdrop, the good news for us is we are in almost 230 countries; it is almost like a mutual fund, a portfolio. So there are a lot of markets that are performing much better than expected, and so in the aggregate we are very pleased with the international business and we are pleased with Eastern Europe.

The issue we have in Russia is we have been there for a long time and we have been able to get very substantial traction with our brands and our content. And the world is changing there, and it looks like it is going to change for some time.

So for the near term, we are not going to be hurt too badly because the majority of our dollars comes from the subscriber fees. Those will continue to grow and we will get the advantage of that through the end of 2016.

What you talked about takes effect at the end of 2016, with this restructuring. One is we expect it probably will happen, although it's 2 years away and you never know.

If it does happen, there are many markets that we deal with where there are foreign ownership restrictions on broadcasting cable; usually they are on broadcast, but there are some markets that have them both. The question then is, do you have great brands and great content that people really want in the market?

And in the countries where we have that, we have been able to get a very meaningful stream of revenue as licensing revenue for our brand, as licensing revenue for our content. And we have been able to do workarounds.

Whether ultimately we can do that in Russia, it remains to be seen. We have, I would say, more powerful content and more buy-in in Russia than we have in a lot of other markets because we have been there for so long.

When you wake up in Russia and you put on Discovery or you put on Science, you put on Animal Planet, they are three of the top channels on pay-TV there, and they are viewed as Russian channels. So we are optimistic that we can get some significant workarounds. But the question -- we will just have to see how it plays out.

On scatter, it is very hard to tell. I mean all of the feedback that we are getting -- and I spent a fair amount of time over the last couple weeks with Joe Abruzzese, who runs sales for us, one of the best in the business -- is there is no question that the last month that things have slowed. There is no question on the volume side.

There is no question that there is more scatter in the marketplace. And there is no question that advertisers are holding their wallets closer, even on the movie side, and coming in in late bursts.

We really can't say where it is. Our sense is it's a little more cautiousness about how to deploy capital.

But we have the holiday season coming up, and we are just going to have -- we may be surprised that it does very well, and we may continue to be slow the way it is. We can't really tell where it is going right now.

Anthony, to answer your question on the cost amort versus cash, we still have, as you saw in the third quarter, a few-point disparity with expense being higher than cash, really driven by two reasons. One, there is still a bit of a catch-up based on the prior-year level of increased investment; but also the fact that we do have more live events. We have more tentpole events that have a shorter amort window.

So while that gap has shrunk significantly the last several years -- and it used to be a teen level of expense growth, now we are down to high single digits -- I do think it will be still probably a year-plus until we really have parity between the mid single-digit cash growth and the mid single-digit amort growth. There is still going to be a bit of a mismatch based on the two factors that I mentioned.

That's helpful. Thank you.

Kannan Venkateshwar, Barclays.

Thank you. Just one question from me. Recently there was a lot of commentary coming out of Comcast on their perspective on the content agreement with Discovery and so on. Just wanted to get your thoughts on how you are going about that renegotiation; I believe that comes up next year. Thanks.

Yes, thanks, Kannan. Look, we continue to examine from our perspective that transaction, and we have some concerns. We are looking at it closely.

Everyone should be concerned. We have seen similar market dynamics before.

We're in 230 countries. In countries where there is a dominant monopsony power it creates real challenges for consumers; and in many cases, in almost all cases, there is a retraction of investment in content. So you look at Comcast, they are in 17 of the top 20 markets; they pass 70% of broadband in America with probably the best speed. And it raises real issues that all of us are looking at in the business.

I think that is why in terms of the timing things are getting pushed out; and I think rightfully so. The Justice Department and the FCC are now talking -- looking at this very, very carefully. We are now looking at probably early summer. There is real issues that this raises.

And our deal comes up next year, as David Cohen mentioned; and we always deal with our distributors in the normal course. Our deal is up in less than a year with them, and we will see how it goes.

We have issues, and I think all the content players in the industry as well as the broadband players should be looking at this very carefully.

All right.

Okay. Thank you, everyone. Thanks for joining us this morning. You can give me a call if you have follow-up questions.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.