華納兄弟探索 (WBD) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q2 2015 Discovery Communications, Inc.

earnings conference call.

(Operator Instructions)

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

I would like to turn the call over to Mrs.

Jackie Burka, Vice President of Investor Relations, please proceed ma'am.

Good morning everyone.

Thank you for joining us for Discovery Communications 2015 second-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 from David and Andy, and then we will open the call up for your questions.

Please keep to one question so we can accommodate as many people as possible.

Before we start I would like to remind you that comments today regarding the Company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are made based on Management's current knowledge and assumptions about future events and may 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, 2014 and our subsequent filings made with the US Securities and Exchange Commission.

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

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

Discovery's strong start to the year continued in the second quarter with steady growth across our global portfolio brands and businesses.

Propelled from a strong second quarter into what was a momentous start to the third quarter, I join you extremely confident in Discovery's future growth prospects.

I believe we will look back on July 2015 as a pivotal month in our Company's history as we announce three transformative agreements: the multiplatform rights to the Olympic Games in Europe for the next decade, the deal to acquire 100% control of Eurosport, and lastly a favorable long-term renewal with Comcast for our US network portfolio and distribution on the Xfinity Comcast platform.

These deals together stabilize and enhance our US growth profile, continue our diversification internationally and give us more blue-chip IP content and more distribution so we can continue to drive audience share across all consumer platforms.

Earlier this month we announced an exclusive deal in Europe with the IOC for all of the TV and multiplatform media rights to the four Olympic Games from 2018 to 2024.

Never before has one media Company been granted all rights on all platforms across Europe.

We believe the Olympic Games will be a foundation programming piece for Eurosport and Discovery across the continent.

Eurosport already dedicates over 40% of it's programming schedule to Olympic sports.

And bolstering our rights and offerings with the world's greatest sporting event is a perfect editorial and strategic fit for the linear channel and for Eurosport.com, the leading online sports platform in Europe.

Combined with full access to the Olympic programming archive, our use of the Olympic rings immediately following Rio, and our existing sports Federation agreements, this deal will substantially strengthen the Eurosport platform and bring the Olympic Games to more viewers on more platforms across Europe than ever before.

We will maximize our reach to Europe's 700 million residents across platforms.

Following the June 29 Olympic announcement we have seen an increase in conversations and feedback from our European distributors, advertising partners, and phone and new media players who want to work more closely with us.

Soon after the Olympic deal we struck an agreement to acquire full ownership of Eurosport from the TF1 group.

In 2012 we began our investment with a 20% stake in Eurosport and increased that investment to 51% more than a year ago.

Taking full control of Eurosport allows us to further strengthen the brand and decision-making process, more readily secure important spots rights on a local or pan regional basis, and fully realize the businesses growth potential.

Eurosport's 2 or 3 channels, across 130 million homes, Eurosport.com and now the Olympics for the next decade, makes us the clear leader in sports in Europe.

Finally, the third transaction was signing a long-term distribution agreement with Comcast.

Our renewal with Comcast is significant.

It demonstrates that the distributors continue to place great value on our content and brands with meaningful increases.

And it solidifies our TV everywhere strategy with deployment on Xfinity, the primary TV everywhere platform in the US.

Four years ago we said we would reset our domestic affiliate rate structure with a step up and more meaningful increases to reflect our increased investment in content and the growth of our audience share that our channel brands had earned.

I'm proud to say that we have achieved it.

Prior to this renewal cycle our deals had price escalators at CPI.

But we have now reset all of our affiliate agreements that have come up in the last four years, which is the majority, at a meaningful rate increase that reflects the strength of our brands and our increased market share.

Andy will give you more details, but to today we are positioned for long-term growth in the United States.

Locking up that long cycle money with strong price escalators allows us to focus on other aspects of the business and gives our US business a steady growth rate for years to come.

And there's still real opportunity for value creation even on the affiliate side going forward.

At 13% share of viewing, where we're only getting a mid-single-digit share of affiliate fees even with our increases, there is a still a gap to close in the future as well, which we see as real opportunity in the years ahead, even in a marketplace like the US that is relatively flat and challenged.

Combined with our multiple TV everywhere rights deal signed in the past two years, we are now accelerating the expansion of streaming choices for our content across platforms and diversifying our distribution channels with multiple partners.

It's positive when new entrants come into the market; particularly when you have the number one channel in America for men, with Discovery Channel; several top channels for women; and the top channel for African-American women with OWN, all at a price point which is a very good value which gives us a real advantage.

Today I'm pleased to announce an agreement with Verizon to bring long and short form content from Discovery Channel, TLC, Animal Planet, ID and the Science Channel, including full episodes of prior seasons of hit shows, to Verizon's US mobile subscribers.

This deal extends our platform reach to Verizon customers beyond our traditional pay TV customer base, and adds yet another source to our distribution revenue stream.

While we strive to expand the delivery of our content to new platforms, we also are working to maximize and exploit our traditional business in the US.

Headwinds notwithstanding, the US pay TV marketplace remains one of the world's most important programming and advertising markets.

Long-term we are evolving our approach to integrate advertising more deeply into our content, adding more branded integrations, pushing programmatic buying, and driving higher CPMs from the scattered market place.

In the second quarter in the US revenue growth yet again outpaced cost increases and adjusted OIBDA reached an all-time high.

Hitting these metrics illustrates the strong command and control we have over our business.

We have seen advertising market momentum pick up across all of our channels so far in Q3 as we continue to benefit from ratings outperformance, driven by the flagship Discovery Channel.

Led by new president Rich Ross, the Discovery Channel team has done a fantastic job of creating and building programming that nourishes Discovery's core male viewers while attracting more diverse audiences including women, millennials, Hispanic viewers and family co-viewing.

For the quarter, Discovery's primetime delivery with persons 25 to 54 rose 12%, and 9% with men 25 to 54, and 16% with women 25 to 54.

The network ranked as the number 4 channel in ad-supported cable for persons 25 to 54, up 2 spots from a year ago.

And with women 25 to 54 rose 7 spots to number 9.

Discovery held all of cable's top five unscripted series for men -- Deadliest Catch, Naked and Afraid, Alaskan Bush People, Fast N' Loud and Street Outlaws.

More recently Shark Week, which aired a month earlier this year, continues to be a pop culture juggernaut.

With a science-based slate of programming that reinforced the heritage, Shark Week 2015 became our highest-rated ever among persons 25 to 54 and women 25 to 54.

And Discovery Channel's performance in July, outside of Shark Week, was strong as primetime delivery jumped 34% for persons 25 to 54 and 26% for men and 50% for women in the same age bracket, all making Discovery Channel the number 1 channel for men for the month of July.

Internationally, Discovery Channel again reaches a record audience as many of our tent pole shows replicated their success globally.

Discovery Channel showed particular strength in India, Brazil, and Mexico, where our share of audience rose more than 20%.

ID also posted strong viewership gains in the US and abroad in the second quarter.

ID's US delivery rose 7% and it was a top three ad-supported cable network with women 25 to 54 in total day.

Top three.

ID's average international audience rose a record 23% for the quarter, fueled by new market launches on organic viewership growth including the June launch of ID in Sweden.

On TLC we have moved forward with new series that speed to what the TLC brand is best at -- holding a mirror to the culture and telling stories in a thoughtful and sensitive way.

There are no better examples than I am Jazz, a heartwarming new series about a transgender teen and her loving family.

In it's premiere, the series posted 1.8 million viewers and My Giant Life -- a new series that chronicles the remarkable stories of the world tallest women and has averaged nearly 2 million total viewers.

These shows will soon be joined by returning series Our Little Family and The Little Couple.

Meanwhile TLC's viewership overseas continues to grow.

TLC's average international audience rose 15% in the second quarter, led by strong viewership in South Africa, the Netherlands, the UK and Russia.

Just as our global networks and programming are performing well, it is also important to note our IP content investments are similarly making real strides.

All3, which we own through a joint venture with Liberty Global International, was nominated for 11 primetime Emmys this year, including the hit series Undercover Boss, and Penny Dreadful.

Overall we again achieved new record reach in market share gains internationally with 6% audience share growth across our entire global portfolio in the quarter.

Our audience and share gains were led by our pay TV channels in India, Brazil, and Mexico, with the Discovery Kids, TLC and Animal Planet brands driving our gains.

We also saw strong delivery in the UK, Germany and Italy, as we have many pay TV and free to air channels in those markets and a strong and growing share presence.

Latin America once again delivered a stellar quarter with average audience up 13%.

We continue to see broad-based gains in viewership across the region, led by Discovery Kids, Brazil's portfolio was up 23% and Mexico jumped 16%.

Our CEEMEA region posted 5% growth in average audience in the second quarter.

Last week in the region we officially announced an expanded partnership in Turkey with the Dogus Media Group, one of the leading media companies in the country.

Dogus is an important distribution partner for our 12 pay TV channels in Turkey, and with this new strategic partnership we were able to extend our portfolio with positive economics and agreed to purchase our first free-to-air channel in this emerging growth market that expands and diversifies our platforms and windows for our content in Turkey, a key market for us.

We will also partner with Dogus to be our new exclusive representative for our advertising sales.

We're also deploying a free-to-air partnership strategy in the growing Middle East and North African market.

In June we announced plans to launch Quest Arabiya in the region in the fourth quarter through an agreement with Image Nation, one of the leading content creators in the Middle East.

This free to air Arabic language channel will reach 45 million homes with the best locally produced male-oriented factual programming mixed with programs from Discovery's vast global content engine.

Quest Arabiya will expand Discovery's 7 network portfolio in the market which already includes six pay TV Discovery brands and the free to air channel Fatafeat.

Across Europe and Asia our investment in Eurosport continues to demonstrate progress with the business posting a 6% increase in average audience this quarter alone.

As we approach the 2018 Olympic Winter Games will continue to build Eurosport's offering and brand for the long-term across Europe and Asia.

Since taking control of Eurosport a little more than a year ago, we've added 7,500 hours of coverage per year, with more than 3,300 of that live through more than 50 sports rights deals to drive viewership and strength of the offering.

And Eurosport remains meaningfully profitable.

Recent rights include the exclusive television and digital rights for eight major international cycle races, from 2017 to 2021 in Asia-Pacific, Wimbledon in Belgium, the PGA Tour golf in Norway and the Europa league in the Nordics.

Beyond linear we are bullish about the impact of the Olympics and all the local and niche sports content we are acquiring will have on driving adoption of our over-the-top products in Europe.

With the Eurosport Player in 52 countries and Dplay, which recently launched in Norway, Sweden, Denmark and Italy, we're continuing to drive toward our stated goal -- march to 1 million subscribers across those platforms in the next two years.

And we now have over 300,000 subscribers as of the end of last month.

We're making real progress in our goal to maximize the linear platform while aggressively attacking digital distribution around the world.

Our strategy centers on investing in premium content to grow market share, such as the Olympics, maximizing audience reach on pay TV platforms by locking down long cycle agreements, like Comcast, while aggressively pushing our content to new distribution platforms, like Verizon in the US, and finding new ways to monetize our content, like with Dogus in Turkey, and evolving our approach to advertising through the use of data to drive addressability, dynamic ad insertion, and secondary guarantees using set top box data.

All of these efforts are designed to enhance growth in the US, while driving the expansion aggressively of our international footprint.

Based on our 30 year track record of success, the transformative partnerships we've signed in just the past month alone, and our continued global growth horizon, I believe Discovery is well-positioned to grow across our 220 markets around the world for the years to come.

With that I will turn the call over to Andy to detail our second-quarter financial results.

Thanks, David.

Thanks everyone for joining us today.

Discovery's ability to execute on key strategic global growth initiatives, while focusing on tightly controlling costs, led to another quarter of solid results.

On a reported basis total Company second quarter revenues increased 3% and adjusted OIBDA was down 2%.

As expected, given our increasingly international business mix, the stronger dollar remained a headwind and changes in currency rates reduced both our reported revenues and adjusted OIBDA growth rates by 8%.

Therefore, excluding currency, revenues and adjusted OIBDA were up an impressive 11% and 6%, respectively.

On an organic basis, so excluding the impact of foreign currency as well as the inclusion of Eurosport and Discovery Family, total Company revenues grew 4% and adjusted OIBDA grew 3%.

Our organic margins were flat year over year at 44%.

Our strong costs and content spend application discipline and management continues, but note that we do expect to see a significant uptick in costs domestically and internationally in the third quarter, given the timing of certain content and marketing investments.

This 3Q cost uptick is embedded in our full-year guidance.

Note also that because the difficulties in separating Eurosport France from the rest of the Eurosport results, we will continue to break out the impact of both transactions until the end of this year.

It's important to remind people, however, that when we break out and report the combined Eurosport results for another few quarters, the benefits of our owning Eurosport extend far beyond the standalone Eurosport results to the rest of the Discovery portfolio in Europe and Asia, to the combined distribution and ad sales leverage in each country.

Net income available to Discovery Communications of $286 million was down versus last year's second-quarter net income of $379 million; primarily due to unusually large amounts related to higher foreign currency losses, of $54 million from the revaluation of both our euro denominated debt and monetary assets in Venezuela; $28 million of lower gains related to selling SBS Radio this year, versus gains related to How Stuff Works and Eurosport last year; and higher restructuring and other charges this year of $19 million, primarily due to content impairment charges from canceling TLC's 19 Kids and Counting.

This all was partially offset by a lower income tax expense as our effective tax rate decreased another 300 basis points year over year to 32%, as we remain extremely focused on lowering both our effective and cash tax rates.

We expect our effective tax rate to be 33% for 2015, and still expect it to be at or below 30% for FY17, which will continue to drive sustained income growth as well as accelerate our free cash flow.

Earnings per diluted share for the first quarter was $0.44 and adjusted earnings per diluted share, a more relevant metric from a comparability perspective that excludes the impact from acquisition-related non-cash amortization of intangible assets, was $0.49.

Excluding negative currency impacts, adjusted EPS was up 4% for the quarter, and up 11% for the last 12 months.

Free cash flow in the second quarter increased an impressive 55% to $313 million, due to lower cash taxes, working capital improvements, lower cash interest payments and lower capital expenditures.

We still expect our full year free cash flow to be up low single digits versus 2014 and accelerate nicely in 2016.

Turning now to the operating units, the US networks grew revenue 5% as we benefited from another quarter of strong distribution growth, up 12% versus last year's second-quarter, and a small increase in ad sales.

Our advertising revenues were up slightly versus last year second quarter as higher pricing and the consolidation of Discovery Family offset lower delivery.

Total US delivery did improve from the first quarter, led once again by the flagship Discovery Network, but was still down low single digits versus second quarter of last year.

As David mentioned this quarter marked our highest ad sales quarter in the Company's history as we benefited from the overall market shift from an advanced upfront ad buying to higher priced scatter volume, as we also sold a record amount of scatter ad volume.

Looking ahead, we are bullish on our third-quarter ad trends, as our improved delivery, especially at Discovery, is allowing us to continue to take advantage of the healthier scatter market, and we expect our third-quarter US advertising revenue growth to modestly accelerate to low single-digit.

It is still too early to have a solid read on Q4.

Distribution revenues, excluding the impact from consolidating Discovery Family results, were up 6% this quarter, as we again benefited from the higher rates we garnered from our new deals with NCTC, Cablevision, Sony and others at the end of 2014, as well as from contributions from our new Hulu deal which started January 1 of this year.

Organic growth decelerated from the first quarter, due to tougher year-over-year SVOD comps and a decline of approximately 1% in the pay subscription universe.

Given the one-time nature of the SVOD comp, we expect organic affiliate growth to accelerate slightly into the second half of the year, assuming that the rate of subscriber losses does not pick up.

I also want to address the financial impact of our recently announced Comcast renewal.

We are extremely pleased with the rate structure of our new comprehensive long-term agreement that again recognizes the value of Discovery's networks.

Pricing for the new deal goes into effect January 1 of next year and includes a healthy initial step up followed by continued rate escalators over the life of the deal.

This deal, along with our other recently completed deals, help stabilize and accelerate our US affiliate growth trajectory to high single digits in 2016 and significantly enhances our domestic affiliate revenue and cash flow growth expectations.

Turning to the cost side, domestic operating expenses in the quarter were up 1% on a reported basis but were down 3% excluding the Discovery Family consolidation.

Excluding Family, costs of revenue were up 2% while SG&A declined 11%.

Our laser focus on controlling costs led to domestic adjusted OIBDA growth of 7% on a reported basis versus last year's second-quarter, and up 4% excluding Family, while margins on a reported basis and excluding Family both expanded by 100 basis points year-over-year to our all-time high margin rate of 61%.

Moving on to international operations, International Division drove another solid quarter of organic distribution growth, but did experience a near-term slow down in organic advertising, that is already reversing in the third quarter.

On a reported basis revenues grew 1% and reported adjusted OIBDA declined 11%.

Excluding currency, revenues increased 19% and adjusted OIBDA increased 7%.

As changes in FX rates reduced both revenue and adjusted OIBDA growth rates by 18% as the strong dollar versus last year remained a major headwind.

On an organic basis, so excluding currency impacts as well as Eurosport, revenues and adjusted OIBDA both increased 7%.

For comparability purposes, my following international comments, we refer to our organic results only, so it will exclude the impact of Eurosport and FX.

The 7% second quarter revenue growth was led by 7% advertising growth and 7% distribution growth.

Ad growth was led by another quarter of 20% plus growth in Latin America, led by strong volume, pricing and delivery in Brazil, as well as strength in Argentina and Mexico.

Asia PAC has also recovered nicely and grew advertising over 10%.

The majority of the reasons our advertising growth rate decelerated from the first quarter were one-time in nature, namely tough comps related to the World Cup last year as well as a slowdown in the UK due to elections in May, but we are now seeing a nice acceleration into the third quarter.

We're also hurt in 2Q by lower audience share in Norway.

Looking forward we still have forecast full-year organic advertising growth to be in the low double-digit range though it will depend upon no further share losses in Norway.

Distribution revenues grew 7%, driven by another quarter of double-digit growth in Latin America, due to higher rates and the continued expansion of pay television in key markets like Brazil, Mexico, and Argentina.

We still expect organic affiliate growth in the back half of this year to be in the mid- to high single-digit range.

Turning to the cost side operating expenses internationally grew 7% in the second quarter, primarily due to higher content amortization and increased personnel costs as we further localize our international businesses.

Adjusted OIBDA grew 7% and international organic margins were in line with last year at 38%.

Eurosport's standalone margin in the second quarter was 11% and we still expect margins to be in the high single-digit range for the full year.

We continue to see significant strategic value of investing in additional sports IP in order to bolster and enhance both the Eurosport and total Discovery European platforms.

And while these investments will drive real long-term portfolio value, they will also continue to depress margins at standalone Eurosport and will also limit margin expansion going forward for total DNI.

Our Education and Other segment reported a small operating loss for the quarter.

Given our strategic focus on producing and utilizing more content from our in-house owned production studios, which has no margin associated with it, and our continued investment in Education's digital textbooks to drive the long-term value of this industry-disrupting business, this segment in total will continue to operate at a small loss for the remainder of the year.

Now taking a look at our overall financial position, in the second quarter we repurchased a total of $207 million worth of shares.

We have now spent over $6.2 billion buying back shares, since we began our buyback program at the end of 2010.

And we have reduced our outstanding share count by 30% as we continue to find the return on repurchasing our own shares extremely attractive.

As we have previously stated we remain highly committed to our BBB rating and we will manage our capital planning and allocation with this commitment in mind.

The rating agencies have recently taken a more conservative view on the media industry, and given our current debt to EBITDA threshold is at the higher end of target levels for a BBB company, we are now focused on preserving cash for the remainder of this year.

Therefore, we now expect to have less total available capital for FY15 than we had previously stated.

Including the $52 million worth of stock that we will soon buy from Advance/Newhouse under a pre-existing buyback agreement with them, we will have spent $575 million on total share buybacks this year, and are unlikely to repurchase any additional common stock for the remainder of this year.

Given our capital allocation priorities remain first and foremost to invest in driving organic growth, and second to invest in strategic M&A, platforms and IP and third to buy back our stock.

For the remainder of 2015 we need to retain flexibility for additional potential strategic investments, such as our recently announced accretive and growth driving investment with Dogus in Turkey, while continuing to pay down debt.

As we look toward 2016, however, we forecast having meaningfully more capital available and expect the amount of capital allocated to share repurchases to increase significantly next year.

Turning to full-year guidance, excluding currency impacts, we are pleased to reaffirm that we still expect revenue growth to be in the high single to low double-digit range and adjusted OIBDA growth to be in the low to mid-single digit range.

Given our solid operating performance, and lower tax rate trends, we are raising our full-year adjusted EPS, excluding currency, growth expectation to be low double digits.

These guidance ranges still include the sale of the non-core SBS radio assets, which closed at the end of the second quarter, as well as the $50 million negative non-FX related impact from Russia.

Before we move on to Q&A I want to update our full-year foreign-exchange impact on our 2015 results.

While the dollar has been less volatile there is slightly higher currency headwinds versus when we last reported, in large part due to Venezuela.

At current spot rates FX is now expected to reduce our constant currency guided revenues by $440 million, or roughly 7%, and adjusted OIBDA by $160 million, roughly 6%, versus our 2014 reported results.

In addition, we are now disclosing that FX will have a $0.23-$0.28 impact on adjusted EPS versus last year reported results, assuming no further below the line currency adjustments.

Looking at our international networks mix of currency exposures, the revenue mix in 2015 remains the same at around 30% euro, 30% nordic, 20% US dollar, 10% British pound and 5% Brazilian real.

Our international network's adjusted OIBDA currency mix is forecasted to be around 25% euro, 25% nordic, 15% real, 5% Russian ruble, 5% US dollar, and still slightly short the British pound as our international headquarters are in London.

Lastly as a reminder, while we have successfully hedged a portion of our currency exposures and did realize gains in these hedges in the first half, we only hedged about 60% of our international transactional exposures.

We also do not hedge translational exposures, as these derivatives do not qualify for hedge accounting.

In conclusion, as I look across our portfolio I couldn't be happier with how we are currently positioned.

Our current exposure to higher growth international markets is 50% and growing, and while we will continue to benefit from the global evolution of pay TV and continued audience share gains as we leverage our marquee content across our unmatched global distribution platforms, about half of our global revenues are locked in for the next several years through long-term affiliate agreements, both domestically and internationally.

David and I look forward to discussing our compelling and highly unique portfolio positioning in more depth at our investor day on September 29.

Now we would like to open the line up for questions.

(Operator instructions)

Anthony DiClemente.

Thank you very much.

I have one for David and a couple quick ones for Andy.

David, congratulations on the Comcast renewal, you mentioned that in your prepared remarks and you also mentioned the importance of data so I thought I'd ask about that.

My understanding is that your content, as you said, will be deployed as part of the Xfinity TV Everywhere app.

Do you guys have access to that viewership data?

Some of your peers have network apps that are specific to the networks.

Just wondering as part of your deal do you have the rights to launch your own authenticated network app as part of the deal?

And if not, why not do that or do you plan to do that?

And then I'll come back for my questions for Andy.

Comcast was one of the final pieces of this overall strategy over the last four years, where we grew our viewership from 5% share of viewership on cable to 13% and to try and get more value and bigger increases.

And so Comcast together with all of our deals, to be in a position where we now can look forward and see high single-digit affiliate growth in the US with all of our channels being carried, with very limited exposure to this issue of skinny bundles because almost all of our deals require that all of our channels be carried to a very high percentage of subscribers, it puts us in, I think, a very good position and makes the US for us as we look forward a growth market.

And when we say high single we're putting in there an expectation that the US -- we recognize that it's mature, it's been declining and about 1% and we think we can get high single even if that accelerates a little bit.

And so the big piece here is that we've really -- we have a very good affiliate revenue stream now, and as I mentioned, we still only represent about 5% or little bit more than 5% of the economics even though we're 13% of viewership.

Before we were at 3%, or 3.5%, so we are quite a good bargain when someone is looking for our content, whether it be new over-the-top platforms and so on.

On the data piece, there is a data relationship with Comcast that we established and I think that's critical because the data inside the box is very important.

Comcast's platform is probably if not the best, it certainly is up there.

The X1 platform is terrific and a leader in TV Everywhere but it also is one of the real leaders in data capture.

Which could help us, I think, on the monetization side.

So, we -- we're all in on TV Everywhere with Comcast and with Neil.

We're glad to have that deal behind us.

The other piece is that we own all of our own content.

Which is quite unusual.

And I think it's going to be a very important element as you look at the future of a mature market.

Because we own all of our own content we don't have long-term commitments to sports, we don't have long-term commitment to off-network and we put our content of platforms, we get all the money.

So it gives us a chance to move our content onto platforms but its also, to the extent that the marketplace moves in a particular direction, we have real ability to maneuver from a cost perspective and we don't have any long tail expensive programming costs.

Got you.

Thanks.

Thanks, David.

And for Andy on the comment you made about cost uptick in the 3Q, wondering if you could just clarify how does that break down US versus international?

And specifically which costs I think you talked about programming being part of that -- timing of programming?

And then the $0.23 to $0.28 of FX impact, could you give us how that compares to what your prior expectation was as of last quarter?

And then sorry about this but a last one -- it sounds like 3Q is going really well on the ad side.

Just wondering, is it more so a function of ad demand and health in the scatter market, or is it more so better audience delivery given the strength that you guys have seen in terms of ratings in the month of July?

On the first question, I'm very happy with our cost trends right now.

I really feel like, to play off some of David's comments, the fact that we do have more content cost flexibility, we are definitely demonstrating a lot of command and control around other non-content costs particularly in SG&A and we are seeing that benefit over the last several quarters.

To your point, though, in 3Q we do expect double digit increases for both domestic and international, predominantly on the content side and a little bit of the marketing side, as we are going to put some more support and tailwind behind some of our new program launches.

So, there will definitely be a cost uptick in 3Q but we definitely want to highlight the fact that as I think about our cost structures and I think about going forward, I feel really good about our sustained level of productivity in driving SG&A in particular to be kind of in that low single to mid single digit range.

The second question about the foreign-exchange impact, the $0.23 to $0.28 is the latest view and that's a few cents higher than we would've thought back on our May conference call.

It is really highlighting more the fact that while euro has been relatively stable, given our global reach and global expansion of our platforms, clearly some of the other currencies, in particular Venezuela and Brazil, have continued to be some additional headwind.

So, we definitely do want to going forward continue to highlight for everyone what the impact is on our adjusted EPS.

It's really the combination of both our performance and the market.

Our delivery has been strong particularly with Discovery.

Our sellout has been strong.

Some of the overall ad sales trends around cancellations are at normal levels.

We're seeing some nice pricing on the scatter market.

And the fact that a lot of other networks have been more sold-out given some ADU constraints and given our relative ratings performance, we add more capacity and so we have more impressions to monetize.

For the first time, I would say, and it's too early to make any projections for where fourth quarter will be, but the marketplace has absolutely picked up.

And the fact that we have rating points is allowing us to take advantage of that.

Scatter pricing has been fine for a long time but the volume wasn't there.

Fourth quarter was quite weak; we pointed that out and it was a surprise.

Second quarter was okay.

But, third-quarter really seems to be accelerating.

It's too early to tell whether that will continue but it feels good right now.

Just to play off that, 6 months ago we all sat around, everyone in the industry, and said where has the money gone, there's clearly less volume in the broadcast up front from a year ago.

And what we see today is just that a meaningful shift out of broadcast, both into calendar and scatter, and we're seeing the benefit of that scatter today not only from the standpoint of volume, our highest record ever of scatter volume in the second quarter, but also because we are still seeing some good sustained pricing in the scatter market that's helping us get an uptick in the third quarter.

So, some overall nice dynamics.

Kannan from Barclays.

A question on the Olympics.

Now that the deal is done and as you look forward into your affiliate renewals and the whole cycle when it comes to Eurosports moving forward, what is the operating leverage you see from this process, especially when it comes to Eurosports margins?

You are still at the high single digits margin profile and once this process is completed are we looking at a substantial bump over where Eurosports was when you acquired this asset?

I think exactly how the Olympics will play out long-term and the impact -- some of it -- one of the reasons why we were really keen about getting the Olympics for the next decade and we get the rings and the library and access right after Rio, is that we have it on all platforms.

And so the one element here is positioning ourselves for the future where between Eurosport where we own all the sports IP and we have Olympic sports, many of which are top sports, and in particular countries plus the Olympics, it positions us where for the long-term for the next 10 years we have must-have IP.

And we seen the response in the market in a meaningful way by a number of different players on all platforms, interested in talking to us about the Olympics but also sports content that leads up to the Olympics.

So if you take you from Michael Phelps every event, right up to the gold medal, and so there's real value in that and we're trying to figure that out.

When we look at how the Olympics is done in Europe, and I was involved with the Olympics for 15 years in the US, NBC was quite effective in evolving the Olympics from being just a free-to-air product to free-to-air and cable, including getting incremental fees and incremental and lifting up the whole bundle of the NBC channels, and then moving it on to other platforms.

If you look at Europe, the US is about 300 million or 330 million people, our rights in Europe are over 700 million people, but in almost every one of those markets it's sort of where the US was in 1992, basically almost only free-to-air in each country, and they had been sold to free-to-air players and to the PBS -- to the public stations, in each market.

So we are now the holder of that content and we will look to monetize it together with all of our assets.

So, I think it's -- a little bit of a false piece of data to look at just where Eurosport is.

You'll need to take a look at what is our affiliate revenue in the aggregate doing?

What is our advertising revenue in the aggregate doing, and what is our sponsorship advertising revenue in the aggregate look like?

And as we mentioned earlier we're pushing hard and over the top.

I think we're the only company in Europe that's going directly to consumer with sports and we have over 300,000 subscribers now that are paying is between $6 and $8 a subscriber in order to get the Eurosport programming.

So for the French Open instead of watching 3 courts if you had 3 Eurosport channels in your country, you could watch 15 courts.

On cycling, you could follow 15 cyclists.

And so we're really looking to restructure our Company for significant growth in the future by better IP.

While at the same time growing our linear platforms and I think the Olympics together with Eurosport allows us to do that.

And just elaborate on the question about margin, from a purely financial perspective, while Olympics will dilute margins for Eurosport and DNI, it is absolutely going to be both cash flow, OIBDA and NPV positive.

So when we look at the financials of the Olympics standalone, I could not be more enthused about the deal we did, the rights we have, and the impact it's going to have on our overall portfolio.

One follow-up question.

You guys do have affiliate deals coming up much prior to the Olympics.

So, when should we start seeing some of these [C bumps] as a result of the Olympics?

Is there a 2016 kind of event or is it further out?

The cycle for our affiliate deals outside the US are shorter.

They tend to be about 3 years versus in the US where they are 5 to 7 years.

And you'll see it in two forms, you'll see it in an overall bundling.

I oversaw the sale of the Olympics when I was at NBC.

And we were able to get several hundred million dollars for each Olympics.

We're not saying that's exactly what were going to be able to do in Europe, but we do think that we'll be able to get some -- get meaningful fees for it whether it's by in the way that we carve it up, charging for over the air, us carrying it on cable, putting it on other platforms.

And so some of it will be in the form of affiliate revenue and some of that will be in the form of rights fees where we'll be giving away some of those rights to carry the Olympics and the Olympic programming that leads up to it.

Yes, I think you see a similar kind of cadence that you saw from us in the US.

As David said earlier we committed 4 years ago, as we were going into our renewal cycle, and as we catch up on the share of wallet catching up to share of viewership, you're going to see an accretion on our US distribution rates.

And you saw we went from 4% in 2013 to 5% in 2014 to 6% in 2015 -- and you can see our growth accelerating in 2016, as we said it's going to be high single-digit.

I think the same kind of cadence will exist now for DNI.

The combination of Eurosport, the combination of Olympics, and that leverage that we'll have, will allow us to continue to accrete on the affiliate line for the next several years out of international.

The other element that's helpful here is we moved into Eastern and Western Europe and viewed it 4 or 5 years ago as the new emerging market.

And we've gone local in those markets, we've launched free-to-air channels at a very low cost where we use our content to reach some markets that have low pay-TV, and we've done some more local content in markets.

And we're the largest pay-TV player around the world, but internationally, but in Europe, we are now by far the largest pay-TV media company.

And the scale that we've been able to get by the growth of our pay-TV, together with free-to-air, puts us in a much better position as we sit down with distributors.

And what's happened is a lot of other companies that are local, because of the fact that most countries are either in recession or flat and it's been a long haul, a lot of the local companies have spent less on content which has helped us gain share, and a lot of the players from outside have taken cost out and done the opposite, rather than go local and spend more on content reduced, and so our market share is up.

So we think that Eurosport and the Olympics together with our market share being up, and people spending more time with our channels, gives us over the next several years some upside as we push for higher pricing and we intend to do that.

And we have started to.

Thank you.

Doug Mitchelson, UBS.

Thanks so much.

David with affiliate revenue now in good shape in the US, the play in the model is on the advertising side and you're well aware of concerns that investors have for media, so I'm curious how you feel non-fiction programming's position looking forward, versus the secular concerns that viewing is moving en masse to general entertainment OTT platforms like Netflix.

And then you also mentioned Discovery can close the gap further and I'm thinking you're suggesting that OTT platforms is a place where you can get better pricing than you have in the traditional deals and perhaps that suggests that you've got a good shot at getting into Apple TV phase 1, but am I thinking about that comment right, that Discovery can continue to close the gap on affiliate revenue in the United States?

First, we pivoted about a year and a half ago back -- hard back to core brand.

And I think that's one of the reasons why a lot of our channels are much stronger in July to have Discovery be the number 1 cable channel in America for men.

There been several months in the last 8 months where Discovery has been, with a core structure that's very different from entertainment and sports channels to be the number one cable channel, and remember, 80% of that content we get to reuse around the world, we don't rent it for just the US.

So, it's a very effective model.

We also have seen that the amount of time that our content is DVR'd has gone up significantly.

Which is a (technical difficulty) much people want our content.

And we're excited about going full-in to TV Everywhere.

We think we will learn more about that, our deal with Verizon, in Europe we're talking to a lot of different players, so I think we're at a value gap right now.

We were able to reach it with Verizon.

We think our content is more valuable.

We could be on every SVOD platform if we wanted to, but since we own all of our content we could also go directly to consumer, which is very possible.

We're doing it throughout -- we're doing it in Europe now with sports across all of Europe, we're doing it in -- with entertainment content and sports content in a number of countries in northern Europe and in Italy, and so we have all that flexibility.

My only point on the upside is that in a declining market where people are choosing channels, the fact that we're 13% -- our 14 channels are 13% of viewership on cable, and we're only 5% of the money, that's not something to brag about.

We were much lower.

The good news is with gotten a significant step up and big increases.

But I think the other piece of good news for us is that when people are looking to launch channels they can get our channels, whether they took 8 of them, or took 13 of them or 14 of them, and even if we charge more it's a lot less expensive than most of the channels.

There are a lot of the entertainment and sports channels that are in the inverse.

They might have 5% of viewership and the 20% of the money.

So I think that makes us quite attractive.

But also as we continue to make our case over the next several years we grew share in the last couple of months.

A lot of others are losing share.

And so the fact that if we can continue to gain share as our deals come up, we'll continue to do what we've done over the last four years which is make the value argument that we're under indexing on economics, and trying to continue to drive our affiliate line even in a marketplace that has some decline on subscribers.

That's pretty interesting commentary, David, if I could follow-up on the comments around direct-to-consumer, based on what you're seeing in the United States, I think you talked about 1%, 1.5% in core subscriber declines, obviously broadband only homes are growing, at what point do you think is optimal to consider launching a direct-to-consumer offering in the United States?

Is it now, 3 years, is it 5 plus years?

We're looking at everything.

I think that the marketplace is actually quite stable.

I think there's a lot of noise in the marketplace.

But I was at NBC when viewership on the networks were declining.

They're still declining.

The fact that subscribers are going down 1% -- maybe it grows to 1.5%, that's not a good thing.

The fact that we have higher fees locked in and we could be in a position where we could say now that even if the advertising market is weak and it ends up being flat, we still have a mid single growth US business which is only half of our Company.

And most -- a lot of our growth is coming from outside the US, where there's still double-digit or better growth, and the kind of general growth dynamics that we saw in the US historically.

The idea of going directly to consumers is something that we have every opportunity to do.

We own all of our content.

We have super fan groups, so I think we are very well-positioned, we're looking at everything.

But I think the marketplace at least for the next three years, is going to stay relatively stable and we'll probably have more people buying our content and we'll be in a position if we want to at any moment, to start picking off some of those super fan groups.

That's what we do in Europe.

Viewership on Eurosport is up, but the people that absolutely love tennis, or love cycling or love Olympic sports, or winter sports, they're signing up for Eurosport.

And what we're finding is in most cases they're watching more Eurosport, but when they're out of their home they want to be able to watch the sports they like.

So for the near-term at least we're double dipping, and the idea of having more than 300,000 people that we have their credit cards, we have a direct relationship, we can talk to them about what they like about our app, what they don't, we're learning an awful lot so that if you want to move into any other region we can.

Thanks so much for all the help, David.

Ben Swinburne, Morgan Stanley.

Thank you.

Good morning.

I have a question for David and that a follow-up for Andy.

David, on the Olympics can you just educate us a little bit on the sub-licensing and any kind of regulations around keeping Olympic content on broadcast free-to-air.

I know you have a lot of markets for you have free-to-air and a lot you don't.

Does this sort of re-trans kick into this conversation if you look at the duration of your Olympic deal?

With your free-to-air networks do you start thinking about signing for re-trans fees in some of these markets?

Any help would be great.

Sure.

It is complex and I think it's one of our advantages when you looking at Europe you're looking at 55 countries and 20 languages.

And different regulations in each country.

The good news for us is that's what we do for a living.

We are already in all 55 of those countries.

We have teams on the ground.

We have an infrastructure that converts into every language and so for us it is what we do for a living.

On the Olympics side, there are specific restrictions that the IOC has on how much has to be free-to-air, for summer and for winter, and in some countries there are requirements that are in addition to the IOC requirements on free-to-air.

We own all the rights and so for instance in the UK, if the BBC has the rights then we would sit down with them, historically and we can talk about how much we want to give them.

We would look in most cases to preserve all the rights, other than free-to-air, so we could sub-distribute the free-to-air rights.

In many markets we have free-to-air channels that meet the requirements.

In Italy, in Germany, in Spain, in the UK, in Norway, Denmark, Sweden, Finland.

So, there are a lot of markets where we have the free-to-air rights, and in that case we'll have to decide, are we better off to selling it to someone in that market, the free-to-air only, maybe we sell 60% of the rights, hold back 40% for cable, and then hold back all the rights for phone and other devices to go directly.

We have plenty of time to think about it.

The good news is it's been just free-to-air, and so when you look back at the early 90s when Ebersol came up with this idea of, you can be your own producer, you could watch this on broadcast, swimming, but you could see diving and you could see cycling and you could see judo on cable.

We could bring that to Europe and I think it could be quite effective, and we have the ability to make those decisions, and we have the ability in many cases in many of the big markets to go all in ourselves, if we want to, and so I think that gives us very good optionality.

Great.

And Andy, just to clarify on the affiliate revenue growth in the US, I want to make sure I heard you right.

You're saying high single-digit in 2016.

Is there any licensing revenue trends contemplated in there or are you excluding that?

And then it sounded like that was the step up so -- does it decelerate from there?

I want to make sure that we heard you right because you gave a lot of good information.

That's right, Ben, we are looking at high single-digit next year, that does not contemplate any licensing revenues.

It's really all about the step-up.

It's all about price escalators and even embedded in that we've assumed a slight acceleration of decline in the sub base.

And then just on the rating agency comment, you said that they changed the view of how they're looking at media companies.

So for us equity investors can you help us with, what is your leverage today if you look at it as a rating agency?

And sort of where does it need to be so we can help triangulate all of the moving pieces here?

Yes, the agencies are definitely taking a little more conservative it view on the sector in total.

When they think about the ad trends and they think about what's happening with subscriber trends, they've taken a little more conservative view.

Today we're at about 3.3 times leverage.

They like us to be kind of in the low 3 times.

So, there's definitely a little bit of debt pay down here that we want to pursue in the next six months, just to get more in line with where they need to be.

The 3.3, by the way, is to your question the agency defined leverage.

On the subscriber fees, we're not guiding for beyond next year.

Okay.

The high single doesn't reflect a one-time only, in terms of where we are.

That's not like we're getting a big step up year and then there's something coming after that.

We're not guiding, we're saying that we were able to get a step over the last four years in each deal with significant increases and you'll see that coming through in the years ahead.

And we're telling you that next year we'll be high single.

Yes and just to elaborate on that all the deals we done including the Comcast deal, certainly have year-over-year price escalators.

So while there's a nice step up in year one, beginning in January with Comcast, clearly all of the deals including Comcast have continued escalators beyond 2016.

(Operator instructions)

Rich Greenfield, BTIG.

A quick couple of questions.

David, I think you mentioned that you didn't have long-tail commitments but as I look at what you're doing now in Europe, with the Olympics, it seems like you are actually getting into some of the sports very long-term big number commitments despite the rapidly changing landscape.

And then when you look at your commentary about the ability to hit subscription numbers, clearly we've gone from a video subscription base that's been growing to a video subscription base that's now declining, what gives you confidence that a 1%-ish decline or even a little bit larger than that is reasonable?

Why can't it be 4% or 5%?

And the same thing with advertising, it seems like both advertising and subscription have gone from growth to flat to negative.

What gives you confidence that you can keep them in a moderation on the decline side or even towards flat?

Why don't I get each of them quick.

First of all on the advertising side, we saw flat to slightly negative in fourth and first, we're now seeing a rising advertising.

So, I can't opine on where the advertising market is going to go, but I can say that the pricing in scatter has been good and that the market has picked up.

I don't know if it will continue to.

On the affiliate side, we've been able to get step ups so over the last 4 years when your new deal comes in, we get a step up and then we get increases and even assuming that there is some decline, we see some very good affiliate growth over the next several years and that were okay.

And so the way that we look at it is I say that okay if we got high single affiliate growth, even if there's some decline, and if the advertising market is even weak, then we still have a mid single growth business here in the US.

And having that with a cost basis that's very manageable and probably lower than most, where we get to reuse our content around the world, we then use that mid single growth business to fuel 65% or 70% of the content we need around the world, where we're seeing much higher growth, and most of those countries outside the US are not experiencing what you're talking about, they're getting advertising growth, they're getting affiliate growth.

Our market share is growing.

And so I think we've really stabilized the US business.

I feel good about it.

If you put in a lot of the parade we still have a nice mid single growth business.

We're not assuming that there's a dramatic tilt and tip, but I don't see any -- despite all the headlines and discussions, anything that would make me in any way concerned that there is a tilt, a meaningful tilt or tip over here.

This is a mature market that's showing some decline.

And we've stabilized it and we put ourselves in a position for growth here.

On the Europe side we've actually done the opposite of what you've said.

The only big ticket item that we've gotten is the Olympics.

We paid a little less than $1.5 billion for 4 Olympic Games, where we have very little cost until 2018.

And we begin to get the Olympic library and the rings to use on Eurosport and use on Eurosport.com, which is the leader online, beginning right after Rio.

The rest of the sports rights that we've gotten, and we done over 50 deals, are most of the money goes to soccer.

Soccer is like the NFL times 2 in Europe and distributors are fighting over who gets to get the soccer.

We've opted out of that game, and we think we can get everything else, and we can do it on a very reasonable basis and we can monetize it on our European platform and we can monetize it direct to consumer and online.

We carry the clips of soccer on Eurosport.com which is the equivalent of ESPN.com here in the US, it's the leading online site, but we don't need to own soccer.

And so we have the Olympics together with a dominant position in everything else, which I think now that we own the Olympics and we have a relationship with the federations, we don't see that the prices of speed skating is going to go up dramatically.

And in fact in some of the markets where some of the people have bid on soccer, they bid so much money, that they've come to us and said, do you want to buy some of our other sports rights because we just had a step up with such increases on soccer.

So, we think Eurosport will be EBITDA positive in itself and will lift our overall portfolio, and when you think of Eurosport as being in 130 million homes and then another 2 or 3 sports channels, and you think of where ESPN was years ago, we haven't begun to monetize the subscriber economics.

We haven't begun to aggressively -- we only started selling locally four months ago.

We haven't begun to monetize the advertising piece.

And we have the IP and the Olympics.

If we could do a little of what Iger has been able to do over the last 15 years in gaining significant subscribers building on the dominant platform that he has, and using it to build the rest of his Company, we could have a hell of a business and he did it in a marketplace that has 330 million homes.

With a leader in sports and have the Olympics for the next decade in a market that has 700 million homes.

Built we're not going to do the NFL.

We're not going to do soccer.

Very helpful.

Thank you for the taking the time to answer that in full.

Michael Nathanson, Moffett Nathanson.

Andy, in terms of the ratings agencies, I think some of us assume that in the out years, your company and other companies borrow money to buy back stock.

Do you know if that is a practice that you think more conservatively the agencies would frown upon in general?

Just basically taking out leverage to buy back equity?

No, Michael.

I think it really comes down to an overall growth level of leverage.

I think how that capital is deployed is very much up to the management teams.

For us when I think about why there is a more nominal constraint for us in 2015, I see an enormous amount of capital growth and accretion in 2016 based on much higher cash flows and our ability, then, to put leverage on that growth.

And so to me I don't see a constraint medium and long-term and I see us having full flexibility in how we allocate that capital.

This is really more of a short-term nuance just based on where our leverage is today relative to where we want to be at year end.

David, somehow you have not talked about in regard to Comcast, is addressable advertising?

Either in VOD or in TV Everywhere?

So you talk a bit about your view on when you start to monetizing some of those eyeballs that are off linear feed and when does that become a source of growth for you and for other people?

I think what Neil and Brian have built with their platform in X1 is quite compelling.

And the type of viewership they're getting and the acceptance of the platform.

So, I think the first step for us was to get on it.

I think the addressability of advertising -- we do have that with some others to the extent that we were able to get that and work with Comcast on that, that will be an upside for us.

That was our last question.

Thank you for participating in the Q2 2015 Discovery Communication Inc.

earnings conference call.