華納兄弟探索 (WBD) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2015 Discovery Communications earnings conference call.

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

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Jackie Burka, Vice President of Investor Relations.

Please proceed.

Good morning, everyone.

Thank you for joining us for Discovery Communications' 2015 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 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 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, 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 and thank you, everyone, for joining us.

A month ago Discovery hosted our first Investor Day to provide a detailed overview of our global strategy and outlook and introduce you to our corporate and international executive management team.

It was great to see so many of you there.

During that presentation you heard me talk about where we've come as a global media Company, where we're going, what sets us apart, and the keys to our continued operational growth and financial success.

Because of our confidence in our financial performance and our free cash flow outlook, much of which is locked in through long-cycle affiliate deals, today I'm pleased to announce that we have increased our buyback authorization by $2 billion, and we will be back in the market buying our shares this quarter.

Andy will share more information on the buyback authorization increase and take you through the financial details in just a moment.

First, let me briefly take you through some of this quarter's top-line performance highlights.

First and foremost, our strong brands and award-winning content in the US market continued to perform remarkably well, generating enduring value.

I'm pleased to report our portfolio of US channels again outperformed broadcast and cable peers and commanded an increase of share of our ad-supported cable.

Discovery Channel had the highest-rated quarter ever for persons 25 to 54 delivery, and has been the number 1 ad-supported cable channel for men four months so far this year alone.

As we showcased at Investor Day, our ability to reach audiences around the world with great storytelling will be on full display on December 2 when Discovery Channel premieres the landmark documentary Racing Extinction, a truly global event reaching 1 billion viewers in over 220 countries on one day.

Only Discovery can do this.

It is our unique advantage.

Among women, ID was the number 1 ad-supported cable channel in total delivery for the month of September -- number 1 ad-supported cable channel for women in September.

Really extraordinary.

And prime delivery on ID rose 16%.

Given our low cost per hour, our ability to top the ranking charts and grow delivery across ad-supported cable is significant for ID.

Our US ad sales were very strong this quarter, up 6% versus last year due to record scatter volume, strong pricing, and improved demand.

And we were able to monetize our ratings improvements at key networks like Discovery Channel, ID, and Velocity.

On the affiliate side, revenues rose 12% in the third quarter.

We continue to see the benefits of the strong price increases we have secured through the current renewal cycle, of which we are now 80% complete here in the US.

The price escalators are locked in for years to come, and we also are adding revenue from new partners such as Verizon Go90, Hulu, and Sony.

At our Investor Day I also said that our leading global distribution platform is Discovery's secret sauce.

That's once again true in the third quarter.

International viewership grew mid-single-digit overall with ID, TLC, and Eurosport up double-digit or better.

Our ability to increase share of viewership internationally helped drive strong organic advertising and affiliate growth.

Organic ad sales rose 12%, and organic distribution growth also was strong, up 8%.

These figures demonstrate our strong international growth profile and best-in-class platform.

Across Europe, we are continuing to build Eurosport's offering by strategically investing in sports rights and increasing production values to bring local fans closer to the action.

As a result, viewership is up 16% this quarter, with some countries like Poland and Germany gaining market share rapidly, where we have added locally popular franchises to our lineup.

Owning our IP, another key to our performance and growth, is also presenting new possibilities.

In a multiplatform world, ownership of our content gives us the ability to tell stories, create brands, build community on new platforms -- and we have found that our content does play in multiple ecosystems.

We have recently seen a dramatic increase in views across Discovery Digital Networks as we nourish audiences with storytelling only we can do across multiple platforms, and we are seeing real engagement with our online channels including TestTube, Seeker, and SourceFed, three of 90 YouTube channels that we have, which now aggregate to over 200 million views a month, 50 million of them on Facebook alone.

To better leverage the value of our content across all of these platforms, we have brought Paul Guyardo to our executive team.

Paul was a leader working for Barry Diller and he spent many years at DirecTV with their marketing and direct-to-consumer business.

As Chief Commercial Officer, Paul is hyperfocused on maximizing our powerful brands and programming revenue across all platforms.

Overall, the combination of Discovery's unique content with our IP ownership position, category leadership, and creative and innovative management team ensures we will be one of the leading content creators for years into the future.

No other media company owns such great content and IP to exploit against platforms.

No other media company has such a broad international distribution platform and brands that resonate so deeply with global audiences and super fans.

I remain extremely confident and excited about our future and in Discovery's ability to succeed and grow.

With that, I will now turn the call over to Andy for more details on our financial results and plans to return capital to our shareholders.

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

Discovery continues to execute well on our stated operational and financial goals.

And while, as expected, costs were elevated in the quarter, mostly due to the timing of content and marketing investments, we're extremely pleased with the solid organic top-line growth we generated both in the US and internationally.

All of our key third-quarter financial metrics are in line with the numbers I presented at our September Investor Day.

On a reported basis, total Company third-quarter revenues decreased 1% and adjusted OIBDA was down 9%.

Excluding currencies, revenues were up 8% and adjusted OIBDA was down 1%.

On an organic basis -- so excluding the impact of foreign currency, as well as the impact of Eurosport, Discovery Family and the June 30 sale of SBS Radio -- total Company revenues increased 7% and adjusted OIBDA declined 1%.

As we had anticipated and had previously discussed, after two quarters of strong cost control we saw a significant uptick in costs both domestically and internationally, given this year's cadence of content and marketing investments, which are weighted towards the second half of the year and peaked in the third quarter.

Net income available to Discovery Communications of $279 million was relatively flat versus last year's third-quarter net income of $280 million, as the lower operating performance was offset by a positive swing in our mark-to-market stock-based compensation as well as lower income taxes.

Our third-quarter tax rate decreased by 400 basis points versus last year to 31%, due to some discrete one-time tax settlements during the quarter.

We still expect our effective tax rate to be 33% for full-year 2015 and to be at or below 30% for fiscal 2017.

Our declining tax rate will continue to drive sustained net income growth as well as accelerate our free cash flow growth over time.

Earnings per diluted share for the third quarter was $0.43, and adjusted earnings per diluted share was $0.47.

Excluding currency impacts both above and below the line, adjusted EPS was up 25% for the third quarter and up 11% for the last 12 months.

Free cash flow in the third quarter decreased to $234 million after being up 55% in the second quarter, primarily due to the timing of working capital and content spend.

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

Turning now to the operating units, despite all the talk about domestic secular concerns, our U.S. Networks grew revenues an impressive 8% this quarter as we benefited from another quarter of strong distribution growth of 12% and a significant acceleration in advertising growth to up 6% year-over-year.

We are extremely pleased with our third-quarter ad sales performance.

As David mentioned, our ratings outperformed the industry, and this outperformance helped us benefit from robust scatter pricing and volume as well as stronger overall demand.

Distribution revenues, excluding the impact from consolidating Discovery Family results, did accelerate from the second quarter and were up 7% this quarter.

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 some contributions from our new Hulu deal which started January 1 of this year.

Discovery Family will be fully lapped starting in the fourth quarter, so our 4Q reported and organic growth rates will be the same.

Then, looking ahead, our favorable Comcast renewal will go into effect on January 1 of 2016.

Turning to the cost side, domestic operating expenses in the quarter were up 14% on a reported basis, and were up 11% excluding the Discovery Family consolidation.

Excluding Family, cost of revenues were up 8% due to the timing of content spend, and SG&A was up 15% as we ramped up marketing spend after two quarters of declines.

This led to a 200 basis point decline in reported and organic margins to 57% versus the prior year.

Moving on to our International Operations, our International division saw an impressive organic ad and distribution growth in the third quarter.

On a reported basis, revenues declined 9% and reported OIBDA declined 21%; but excluding currency, revenues increased 6% and adjusted OIBDA decreased 4%.

Changes in FX rates reduced our revenue growth rates by 15% and our adjusted OIBDA growth rate by 17%, as the stronger dollar versus last year -- especially versus the Brazilian real, which fell another 21% during the quarter -- remained a major headwind.

On an organic basis -- so excluding currency impacts as well as Eurosport and the recent sale of SBS Radio -- revenues were up 9% and adjusted OIBDA increased 4%.

For comparability purposes, my following International comments will refer to our organic results only, so will exclude the impacts of Eurosport, SBS Radio, and foreign exchange.

The 9% third-quarter revenue growth was led by 12% advertising growth and 8% distribution growth.

Ad growth was led by extremely strong 30%-plus growth in Latin America, led by higher volumes and pricing in Brazil, as well as strong trends in Mexico, Colombia, and Argentina.

Southern Europe also grew ad revenues over 30%, led by higher volumes, pricing, and ratings in Italy and solid double-digit growth in Spain.

Excluding Russia, CEEMEA, led by Germany, also continued to grow nicely with advertising revenues up 15%.

Distribution revenues grew 8%, 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, and to a lesser extent increases in subscribers in Central and Eastern Europe.

These country-level results reflects the strong long-term opportunity for our International markets that you heard about from JB Perrette last month.

With just one quarter remaining, we are confident that full-year International organic advertising growth would be in the low double-digit range.

And we can now firmly say that organic affiliate growth for the full year would be in the high-single-digit range.

Turning to the cost side, operating expenses internationally grew 13% in the quarter, primarily due to higher content amortization and increased personnel costs as we continue to focus on localizing our International businesses.

Adjusted OIBDA grew 4%, and International organic margins were down 200 basis points to 36% versus the prior year.

Eurosport's standalone margin in the third quarter was 6%, and we still expect margins to be in the high-single-digit range for the full year.

As we've stated, the benefit of increased investments in sports is expected to double Eurosport's ad revenue from 2015 to 2020 and will help Discovery's entire European business to sustain strong top-line growth for years to come.

Now moving on to our Education and Other segment, which 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 is expected to report a small loss in the fourth quarter as well.

Now taking a look at our overall Company financial position, in the third quarter we only repurchased $52 million worth of preferred shares.

But as David mentioned, we will resume our common share repurchases this quarter and intend to buy back approximately $1.5 billion worth of our stock over the next 12 months.

Given this, the Board has increased our share repurchase authorization by another $2 billion.

Our previous authorization only has $416 million remaining and expires in February of next year, while this additional authorization does not expire until October of 2017.

On our last earnings call we stated we were unlikely to repurchase additional shares through the end of 2015, in an effort to retain capital allocation flexibility for strategic transactions as well as to pay down debt to lower our leverage ratios.

But given our solid and better-than-expected third-quarter revenues and bottom-line results, the successful Comcast renewal, our significant higher level of confidence in our ability to drive accelerating free cash flow, our high and growing cash flow to total debt yield, the continued favorable interest rate environment, and finally that we find the return of buying our shares at these levels to be extremely attractive, we have adjusted our view on leverage.

After very careful consideration we are now comfortable with increasing our gross debt to adjusted OIBDA ratio to the 3.25 to 3.4 times range, versus the 2.75 times target we previously outlined, all while being highly committed to remaining an investment-grade debt issuer.

As we stated during our Investor Day and our previous earnings calls, our capital allocation priorities remain the same.

First, to invest in driving organic growth; second, to invest in strategic M&A, platforms, and IP; and third, to repurchase our stock.

We have been active buyers of our stock since inception of our buyback program in 2010 and to date have repurchased over $6.2 billion of our stock and have reduced our outstanding share count by over 30%.

Turning now to our full-year guidance for 2015, which we updated at our September Investor Day, we are still confident in our ability to achieve every metric that we laid out at the beginning of this year.

To reiterate our constant currency guidance I gave in September, we expect revenues to grow at 9% and 10%; adjusted OIBDA to grow in the mid-single-digit range; and adjusted EPS to grow in the low-double-digit range.

These guidance ranges still include the recent sale of the noncore SBS Radio assets as well as the just over $50 million negative non-FX-related impact from Russia.

We are also today updating our full-year foreign-exchange impacts versus last year's reported results.

At current spot rates, FX is still expected to reduce our constant currency guided revenue for the year by $460 million or roughly 7%; adjusted OIBDA by $180 million, also roughly 7%; while adjusted EPS is now expected to be reduced by $0.26 to $0.31, assuming no further below-the-line currency adjustments.

Longer term, as we outlined at our Investor Day, we conservatively expect our constant-currency adjusted EPS and reported free cash flow to both grow at a low-double-digit CAGR from 2015 to 2018.

In conclusion, while there is currently much uncertainty in the marketplace, I remain extremely bullish on our global market positioning, our long-term strategic outlook, and our continued ability to achieve our stated financial goals.

Now we'll open the line for questions.

(Operator Instructions) Ben Swinburne, Morgan Stanley.

Thank you; good morning.

Two questions.

David, can you talk about the direct-to-consumer over-the-top work you've been doing in Europe, which I think has been successful, and whether Paul's hire is a sign you might be thinking about going into the US with that strategy?

Because obviously he comes with a lot of retail success at DirecTV and building subscription businesses, so I didn't know there was a connection there.

And then I'll just ask my second.

Andy, on the leverage change, do you plan to operate at that 3.25 to 3.4 gross leverage range?

Because you're not there today.

And if you do, how quickly do you think you're going to get there?

Or is that a kind of a ceiling based on the opportunity set in front of you?

Just any more color on that would be helpful.

Thank you.

Thank you, Ben.

The direct-to-consumer business is something we're just getting started with.

But we have invested over the last year and a half primarily through our Eurosport partnership and in Northern Europe with the Eurosport app and with Dplay.

We're learning a lot.

Both of those platforms are growing meaningfully.

We do have a target in place, which we're calling March to 1 Million.

We have a couple of hundred thousand subscribers now, and if we can get to 1 million at the $6 to $8 a month, we could generate close to $100 million in revenue, which I think gets our whole Company's attention in terms of culture.

The exciting thing about the Eurosport app is that we're growing our direct-to-consumer business but it's not coming at the expense of the linear channel.

In fact, the linear channel grew more than 15% in the past quarter.

So people are signing up for the U.S. Open, and they're watching maybe a choice of 18 courts.

Most of it is when they are outside the home.

And then when they are in the home they're watching one of the three Eurosport channels in most cases.

So we're finding that it's additive.

We're learning a lot.

The good news for us is we've improved our IP.

So we did a lot of deals for Eurosport that were in the low-single-digit increase for rights, where we stayed away from the big soccer.

We've acquired a lot of kids' rights, where we're a leader in kids in Latin America and now in Asia.

And we own all of our content on Discovery, on TLC, where we've really focused more on being on-brand with stronger, bigger content.

So we have a lot of optionality.

I think it's just -- it's early days, but we do have a lot of flexibility here in the US to make a move if we want to.

And we're looking at it.

We're looking at it.

Thanks.

Ben, to answer your question on the leverage, we expect to accrete our leverage up to the 3.25 to 3.4 times by year-end 2016.

It's just so important to highlight that even at that level our free cash flow to debt yield is still going to be mid to high teen, the highest in the industry; our interest coverage ratio is going to be the highest in the industry; and we feel extremely comfortable given our growth profile and cash flow that's the right kind of leverage target and capital structure for us.

But we do expect to be at that level over the course of the next 12 months.

Just one more point.

I think that we've worked really hard to build content in these super fan groups -- sports, kids, Oprah, Tyler, Discovery, science, ID.

I think having Paul Guyardo come over -- he spent a lot of time at HSN with Diller; he ran this business for DirecTV -- it just gives us some real expertise.

And Paul has brought in some additional people into the Company that think a little bit differently, and I think we need that.

We're going to be driving our linear business where we're growing share, but we're going to be trying to be really opportunistic about how do we take our content on mobile, how do we take our content directly to consumers in a way that can provide additional meaningful growth.

Thank you, both.

Alexia Quadrani, JPMorgan.

Thank you.

Can you update us on your interest in acquiring free-to-air networks internationally?

I guess, is there a particularly more attractive strategy now, owning more free-to-air, now that you have the Olympic rights?

And then just a follow-up question about the third quarter, maybe for Andy.

Is there any color you can give us in terms of how much Shark Week, the success there, contributed to the ad growth in the quarter?

And with that in mind, how should we think about Q4 advertising domestic trends?

Hi, Alexia.

Look, right now we feel very good about the growth characteristics of our International business.

We're growing share.

Because we've been able to grow share we feel like we have a real ability, and you're seeing it in our ability to drive price on advertising, and -- together with sports in Europe and kids in Latin America and more scale -- to drive pricing on distribution.

And you'll start to see more of that.

Because we're in 220 countries and we have on average 10 channels, we have a fair amount of synergy.

So we're always looking opportunistically.

But we don't need any additional assets.

If in fact -- we have free-to-air channels in a number of markets in Europe that we can take advantage of with the Olympics.

We just launched a free-to-air channel acquired in Turkey, which gives us some optionality.

So I think if we can -- we'll be looking at the question of: can we grow as fast or faster by acquiring additional assets outside the US?

And we'll look at everything, but we don't feel like we need to do anything.

We do think that we're probably the best buyer for a lot of assets, because we have knowledge in the marketplace, we have infrastructure, and we have synergy.

But we don't need anything.

Just, Alexia, to provide some color on the third-quarter ad sales, look, as you know, Shark Week was an absolute home run for us.

And while we moved it from August to July, it was still in the third quarter, and it was just a huge ratings and ad sales driver for us.

The third quarter, if you take -- ex- the inclusion of Family -- was up about 4.5%, really driven by solid demand, solid pricing.

We even actually cut back a little bit of inventory to drive a better viewer experience, which showed up on our ratings.

So overall, a very healthy overall quarter for us.

Your question about fourth quarter, look, the market's similar to what we saw in the third quarter.

And we expect our ad sales to be up solidly year-over-year.

Thank you very much.

Doug Mitchelson, UBS.

Oh, thanks so much, guys.

I think first, just a boring question, to continue on advertising.

Any sense of how the calendar upfront is shaping up?

Any thoughts on first-quarter cancellation options?

I know you said fourth quarter was pacing well.

But just trying to read the tea leaves as we start to think about 2016.

Then I think for David, on Eurosport, given you've closed the rest of it -- and I think you've given obviously a lot of confidence at the Analyst Day, a lot of detail at the Analyst Day and today -- but I think investors are curious.

How much more do you want to invest in Eurosport?

Is there more cycles coming, because you are anticipating strong future results, whether it's direct-to-consumer or the leverage?

And any examples on the execution side of whether or not that acquisition is benefiting you at this point would be helpful.

Thank you.

Sure.

It's really too early, Doug, to get a sense of where the calendar upfront is going or cancellations.

We don't see right now anything that gives us a sense that things are better or worse.

The only thing that we see that's attractive is the advertising market in the third and fourth has been consistent, and is better than it was in fourth, first, and second.

On the Eurosport side, we've been quite aggressive about going out and doing deals.

So far what we've learned a couple of things.

We've learned that we can grow viewership significantly without buying big-time soccer.

We've also watched as big-time soccer has grown in terms of rates across Europe -- 60%, 70%, 80%, 100% in terms of fees; and in many cases it's big distributors that are fighting for that; and in many cases there has to be more than one distributor that gets it.

So it's created a feeding frenzy around that content.

The good thing for us is we've ducked our heads on that.

And because so much economics has gone to soccer, and because we're the only player that can offer a pan-European platform, we've been able to sweep in 60-plus deals of very compelling rights -- whether it's speed skating, ski jumping, most of winter sports, summer track and field, more cycling, more tennis -- at mid-single-digit.

And we're even having discussions with some players that bought soccer that are looking to pick up some extra economics by selling some of these niche sports.

For us, those niche sports are looking like those are the drivers that are quite attractive for the Eurosport app.

Those are the super fan groups that love -- that want to see all the speed skating or want to see all the cycling.

So right now I think we're quite comfortable that we already committed that Eurosport will not go upside down; it will be profitable.

We took the profitability margins down from in the 20%s to single digits, and we think over time that we should be able to not only be profitable but we should start to get some of the benefit of the app, which is all incremental, and the viewership gains that we're getting now, which we'll get the benefit.

And we've seen in some markets already that when you put Eurosport together with our 10 traditional channels, we get benefit.

And by selling Eurosport locally we're getting benefit.

So I'd say so far so good.

And just, Doug, some financial parameters on that.

One thing that we've spoken about is this investment in sports not only is going to allow us to at least double our Eurosport-specific ad sales over the next five years, but as you know the combination of the sports and the Olympics and our share of viewership across pan-Europe is going to really help drive the top-line affiliate as well.

And we will -- after Rio the Olympic rings will go on our Eurosport channels.

We also have Eurosport.com, which is the number 1 online site for sports scores and clips; the rings will go on that.

We're working very effectively with the IOC.

It's very early days but we're having some very interesting conversations on multiple platforms about the fact that we own the Olympic IP for the next decade.

Great.

Thank you very much.

David Bank, RBC Capital Markets.

Hey, guys; thank you very much.

David, Andy, we tend to track what is reported, right?

We're pretty focused particularly on the linear ratings that we see and trying to figure out what's driving ad revenues.

But from your guys' perspective there are integrated revenues and there are digital revenues in particular that I think are probably ramping.

Can you give us a sense how much of the ad revenues are coming from that linear viewership right now versus the nontraditional and, in a sense, the non-tracked-by-Nielsen C3 or LIVE+7 ratings?

Yes, sure, David.

Look, there's no question that you're right, we are seeing a ramp of our nonlinear ad sales.

Looking specifically at the third quarter, the majority is still very much from linear.

David talked about the traction we're seeing, the 200 million monthly views.

Clearly there is a growing, growing opportunity for us to monetize that.

But specifically for the third quarter, it still is very much our linear ad sales driven by pricing and demand.

The good news -- the bad news is we haven't done a great job in monetizing that.

And when you look at the overall effort, it's about breakeven, with all the effort that we've made.

That's the bad news.

The good news is that more and more we're talking to advertisers that like the scale that we have.

We're changing our approach in how we're selling, to take advantage.

We see a lot of players like Vice who have done, candidly, an extraordinarily good job of monetizing their streams.

So this is another thing that Paul and our team is looking at, that we've been, I think, best-of-class with linear and over the next two to three years if we could really build up our capability and our expertise in digital, I think that will be a significant upside.

Because we haven't been great at it.

Thank you, guys.

Michael Nathanson, MoffettNathanson.

Thanks.

I have two; let me do one for David and one for Andy after that.

David, you guys have been very honest the past two years about calling the cable market tepid for advertising.

And as you mentioned, this was your fastest growth in two years.

So I wonder, when you really dig into the quarterly data this quarter, was it you think GRPs, volume, pricing and scatter led to the results?

And do you think perhaps this is a turn for either cable or for yourself in terms of those dynamics that drove the market?

It's way too difficult to prognosticate where the advertising market is going.

It moved away quickly in the fourth quarter; we didn't quite know why.

It flattened out, and now there is no question that volume has been much stronger and pricing has been good.

A piece of that, candidly, is that we're outperforming.

There are a number of players in the industry that are -- ratings have dropped significantly, and so there's been a meaningful ADU issue in the marketplace.

So if you want to put money to work, the fact that our ratings are up -- and more importantly our share is up -- we didn't have that issue, so we were open for business.

The other thing is that our channels are on-brand.

Discovery has never been stronger, and the ability to get aligned with the number 1 network for men and now we have ID, which was the number 1 network for women -- ID is still meaningfully underpriced.

And when you look at the CPM differential between broadcast and cable in general, it's still over 30%, and we can deliver with Gold Rush.

We can be number 1 for men and beat the broadcasters.

ID's length of view was so high.

We have super-fan groups around Oprah and Tyler and Science.

So I think that being on-brand has really helped us, and we have a good momentum story by having gone back to brand and the fact that our share is growing.

So we're just going to have to see.

I think right now Joe Abruzzese and his team are doing a very good job, and so are our programming teams in the aggregate here in the US.

So we're going to continue to ride this out and hope that the advertising market stays.

We'll see.

Okay; thanks, David.

The one for Andy is, I know that you are confident, Dave is confident, and the Board is confident about the future of your Company.

But as you saw with the summer, sometimes the market gives you these opportunities to buy things really cheaply.

So I wonder: why not keep your powder dry on buybacks and maybe wait for another time when you can actually come in and get a really fat pig?

So talk about the timing of the buyback now versus maybe keeping it on the sideline for better opportunities.

Yes, Michael, look, it's a very fair question and one that we talk a lot about.

The good news is this.

We talked about earlier this idea that we're going to -- we expect to buy back about $1.5 billion of our stock the next 12 months.

The good news is, given our still prudent but slightly more aggressive leverage target as well as our really expanding cash flow profile, we're still going to have a lot of powder on top of the $1.5 billion.

So we still sit here today and say: our stock is cheap; it's a smart allocation of capital; and we still have an enormous amount of capital available beyond that for some opportunistic either buying of IP or investing in scale.

So it certainly is not one or the other.

The good news is -- and maybe surprising for investors -- is that we still can achieve both, given what we see as our cash profile and given the slightly increased level of leverage.

Okay, thanks, Andy.

Thanks, David.

Todd Juenger, Sanford Bernstein.

Hi, good morning; I'll keep it to one question because it's potentially a rather large one, depending on how you chose to answer it.

I'd love to explore International, particularly the affiliate fees a little bit with you, if you don't mind.

Just -- the world is a big place, but when we think about having confidence going forward, anything you could do to decompose the sources of growth there?

A lot of your press release talked about subscriber growth in the emerging markets.

How much is that as a percentage of your growth going forward, as opposed to say more stable parts in the world, like Western Europe, where you think about pricing cadence and deal renewals and Eurosport and new additions like that?

Anything you could share on the mix of how that goes.

And in the Western Europe part of the world if there is anything you can say in terms of pace of renewals, pricing expectation on renewals, I know we all find that very helpful.

Thank you very much.

Thanks, Todd.

First, the cycle internationally in general tends to be more like three years versus five or six or seven years here in the US; that's first.

And this won't surprise most of you, but there really is a difference historically in pricing of distribution deals.

The way that it's worked historically is that you get your extra pricing by growth.

So price has been relatively flat over the last 10 years for most of us in the content business, and it's because distribution was growing pretty aggressively almost around the world.

We still see aggressive growth, meaningful growth, in Latin America -- particularly Brazil and Mexico, although Brazil has slowed down a little bit with the economy.

And India we're seeing meaningful growth, and Eastern Europe.

There are a lot of other markets that are more mature now, like Western Europe and a number of the markets in Japan.

What we've been able to do or our strategy, which is starting to come through and will take a shorter time than it did here in the US, where the cycle is longer, is we have been scaling up in Europe over the last four or five years.

With the Olympics, with Eurosport, but more importantly just with the overall scale expansion -- because we've been growing our market share double digit for the last six consecutive years in Europe and Latin America -- we now sit with distributors, and we started about a year and a half ago where, in Western Europe, since there is very modest sub growth it's not going to work for us.

So the good news is we have enough scale, we believe, to drive price, and we've been able to do that as our deals come up.

The same way we had an attack plan to drive a step-up in pricing here in the US, we have that outside the US.

We're not executing it everywhere, because there are a number of markets where you're getting better than double-digit growth just because gestationally these continue to be higher growth markets.

And then those markets we'll play the old game, where we're continuing to grow share, we're getting our channels carried, distributors are promoting us, and we're getting double-digit growth.

In the more mature markets, we are being quite aggressive.

Look, in Sweden, we pulled our signal and we were off for four days, and then we went back on; we were able to get better than double-digit increase.

Across much of Europe on renewals we have been very clear that our scale is up, our investment is up, and we need significant increases.

So you'll see those come in over the next couple of years.

Thank you.

You know, one other point, Todd, that I think we could provide that I think is meaningful is that TV Everywhere and SVOD is becoming a big part, particularly TV Everywhere and VOD, across those mature markets.

We have a 20-year library in language, and we also have the Olympic IP, and we also have sports IP.

So the ability for us to have a win-win -- which is you take our channels, but in addition we'll give you some more content for TV Everywhere, because we have a ton of it -- it's a win for them, it's a win for us, and it helps us further substantiate the pricing rather than just the old shootout at the OK Corral.

Anthony DiClemente, Nomura.

Thank you very much and good morning.

David or Andy, you had a nice acceleration in the US distribution revenue from 6% last quarter to 7%.

It seems like there has been some stability in terms of US video subscribers in the quarter.

I know it's tough to track quarter to quarter; but following a pretty tumultuous quarter last quarter, I just wanted to ask about that.

I know that rate is a driver of that 7%.

But are you guys seeing any of that stability in terms of the paid subscriber counts that you see, that you track and get paid for?

Thanks.

And then I have a follow-up.

Thanks, Anthony.

As you know from our Investor Day, we assumed as the industry started to show very slight decline that that was going to continue.

There is a lag because we tend to get paid two to three months later.

But looking at the earnings reports from the distributors, I think it was very encouraging.

Some of them have gained subs; others are declining at much lower rates.

If that flows through, that will be meaningful upside for us to what our plan is, because we've assumed that there'll be a slight decline.

And even at the numbers that we were seeing in the recent earnings reports, that's better than what we have in our plan.

So we'll just have to see.

It's a -- for us, the good news is we're very protected on the bundle.

We could've gotten more price and structured deals where there was more flexibility to move some of our channels.

We opted to have the maximum security for our channels and get price.

So we will track pretty closely what the universe estimates are, because we did build into our deals over the last four years less flexibility to play -- to move around our channels.

Thanks a lot, David.

Then, Andy, on the organic International ad growth acceleration, up 12% in the 3Q versus 7% in the prior quarter, a nice acceleration.

You pointed out in your prepared remarks -- or David or Andy, you did, I think -- the specific country strength in Brazil and Latin America.

Just wanted to ask: how sustainable is that 12% as we go forward into the fourth quarter and next year?

How should we be thinking about -- is it safe to assume double digits?

Anything you can give us on the forward outlook for organic International advertising would be helpful.

Thanks.

Well, Anthony, we certainly don't want to give too much expectation today about 2016.

But look, we're very encouraged by that 12% trend, and I think it continues to speak to our share of viewership being meaningfully higher than share of wallet.

We talked about the third quarter, the second quarter being a bit of an anomaly; so us being back in the double-digit range is where we should be.

For me, I continue to think that's where we're going to stay for a while.

We just have so much growth potential and opportunity across so many of our key markets and regions, and so I think the third quarter trend not only is encouraging but I think indicative of a lot of the core ad sales metrics we're seeing across our International markets.

Great.

Thank you, guys.

Kannan Venkateshwar, Barclays.

Thank you.

Andy, just one question on the buyback.

Just wanted to check, given that the Investor Day is just about a month old now, what changed in the last month for you to go to the other extreme of actually increasing the leverage target and levering up to buy back stock versus what you guys mentioned during the Investor Day?

Kannan, look, this is something that we've thought about and debated the merits of for quite some time, quite frankly.

We had one of our Board meetings in October.

And look, when we look at our portfolio we look at our free cash flow growth; we look at the fact that 80% of our US affiliate deals are done with tremendous rate CAGRs; when we look at our cash tax rate and what we're doing there to drive that down -- when we compare ourselves not only to those operating metrics but then we compare ourselves to our peers around, as I mentioned I think before, our interest coverage ratios, our free cash flow to debt yield, it's the right capital structure for us.

We have a derisked US business model.

We have an accelerating cash flow model.

I'm extraordinarily comfortable with the seat I'm in that we can sustain this higher level of leverage, still being fully committed to and maintaining our investment grade, and allow ourselves to drive a higher level of return on equity while still being very prudent with our debt and capital structure.

So it just was very much the timing of not only Board discussions but then just operationally how confident I feel now about our growth profile.

All right, thank you.

Ladies and gentlemen, thank you for calling in to the Q3 2015 Discovery Communications earnings conference call.

This concludes today's conference.

You may now disconnect.

Have a wonderful day.