華納兄弟探索 (WBD) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2015 Discovery Communications, Inc., earnings conference call.

My name is Latoya 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 Jackie Burka, Vice President of Investor Relations.

Please proceed.

Good morning, everyone.

Thank you for joining us for Discovery Communications' 2015 fourth-quarter and year-end 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 up the call 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, 2015, 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.

2015 was a year of solid growth for Discovery Communications.

While it was a year that saw secular and economic challenges around the world, including strong currency headwinds, Discovery continued to benefit from our investments in content, brands, and IP and our ability to execute in all types of macroeconomic environments.

We experienced strong growth last year as we continued to execute on our key strategic objectives of growing global market share, launching new products and platforms, and investing in more high-quality content and brands with universal appeal across our worldwide platform, including over the past couple of years expanding and strengthening our content mix to focus in more on must-have categories that are more appealing to consumers, such as sports in Europe and kids in Latin America.

In terms of audience share, our U.S. Network delivery again outperformed the marketplace, led by Discovery Channel, Investigation Discovery, Science, Velocity, and OWN.

We continued to capture more viewers, with our 11% portfolio share across cable.

Most notably, Discovery Channel was the number-one nonsports cable network for men for the year, had its most-watched year ever across all demos, and grew total audience in the US by 12%, with women up high single digits year-over-year.

Investigation Discovery continues to grow and prosper in ways the marketplace still hasn't given full value.

ID was the number-one network for women in total day in the full fourth quarter, and number three for the full year in the United States.

For four years, 16 consecutive quarters in a row, ID has been the number-one network for length of tune in all of television in total day delivery -- just an incredible performance.

This performance also means that ID has significant opportunity to grow CPMs in recognition of this delivery strength.

Last year, ID improved pricing, increased revenue, and drew many new advertisers.

The mystery and crime genre continues to pay and play remarkably well around the world, and ID had its largest international audience ever in 2015, growing 20%.

Going forward, we will continue to roll out ID to additional new markets, and we're just getting started.

Our success was not limited to Discovery Channel and ID.

OWN had its most-watched year in network history, achieving its fourth consecutive year of double-digit prime growth in total viewers.

Oprah is fully engaged, and the channel, together with a lot of original content and Tyler Perry and Oprah's magic, continues to grow in a meaningful way.

Velocity added nearly 5 million subscribers in the US and had prime viewership among men up 24%.

It is totally dominating the popular auto category, where nearly 30% of the advertisers on Velocity are endemic and exclusive to this channel.

Across Discovery's International portfolio, overall viewership was up more than 10% in 2015, driven most notably by the appeal of our female lifestyle brands, such as TLC and Home & Health, and increasingly our new Eurosport platform, which is growing aggressively.

We also expanded the reach with several new channel launches, including multiple localized versions of Eurosport and new free-to-air channels in Italy, Turkey, Finland, and the Middle East.

Recently we launched Turbo Velocity in New Zealand and increased distribution of Turbo Velocity 30% across Latin America in 2015.

Our success across a diverse set of markets illustrates our ability to grow in both emerging and established economies.

Our increases in network delivery in the US and abroad yielded strong ad sale results.

In the US, our sales team drove ad revenues up an impressive 5% in the fourth quarter and 3% for the full year.

Internationally, organic sales were up 12% for the fourth quarter and 11% for the year, driven by strength in Latin America and Southern Europe.

This strength was due to our continued investment in diversifying our portfolio of brands and must-have content.

Perhaps the best indicator of this was our groundbreaking agreement for the Olympic Games across Europe for the next decade.

We have already started to monetize our Olympics investment with our first sublicensing deal with the BBC announced earlier this month.

The value of this deal meaningfully exceeded our business plan and ensures that in the UK Eurosport will be the only place where people will have access to all of the Olympic events for the next decade.

During the year, Eurosport expanded its reach to now more than 150 million homes, up double digits since we took control, and added more than 100 long-term sports rights deals including key renewals like the Australian Open and the U.S. Open.

Many of our rights are exclusive and include reasonable and monetizeable price increases, which ensures that Eurosport will be profitable and will remain profitable.

These steps help drive double-digit increases in viewership on Eurosport across all of Europe.

Discovery's portfolio of brands continues to also drive strong affiliate growth.

Internationally, we redefined the value of our networks with strong affiliate renewals with carriers in markets including Sweden, Singapore, France, and Poland, driven by our growing audience share, investment in local sports rights, and the Olympics.

The strength of our portfolio was particularly evident in two recent negotiations with Telia in Sweden and with Telenor in the Nordics, where we ended up pulling our signal in our drive to obtain strong sub fee increases.

We are taking a much more aggressive stand to fight for the value of our content and to drive meaningfully higher sub fees.

In both instances, after we went dark we ended up with strong renewals and a very favorable economic result.

While being dark on Telenor for 11 days this month means we will yield a small negative impact on our first-quarter results from the loss of advertising revenues for those 11 days, our medium- and long-term results will be much, much better, and we will recognize significantly more value across our portfolio in that Northern European region.

We are also starting to see additional financial upside as international distributors are increasingly looking for ways to differentiate their offerings to consumers with exclusive content and IP.

This dynamic is a change in the marketplace and creates a significant opportunity for us that really is all incremental growth, since we own all of our own content.

The diversity of our content portfolio enables us to be best positioned to create exclusive content and exclusive channel packages for many current and new distribution partners.

And we are in conversations with many distributors about this around the world.

Some examples of providing our partners with exclusive content are a terrific deal we did with nc+ in Poland, which is part of the Canal+ group, and two deals we did in the Middle East, one with OSN and another with beIN, where we were able to give each distributor exclusive access to different packages of Discovery networks.

And in all three cases we were able to yield significant incremental revenue.

In 2015 Discovery made several senior A+ hires to focus on growing our revenues across all platforms.

We hired a new Chief Commercial Officer, Paul Guyardo; and his team is focused on a three-pronged multiplatform strategy to reach viewers across any and all devices and monetize this additional viewing.

First, in the US we're focused on reaching new viewers and strengthening the offerings of the MVPD ecosystem through TV Everywhere.

In December we launched Discovery GO, an authenticated TV Everywhere product in partnership with several US distributors.

While it is very early days initial results are extremely encouraging, as the number of users, ad streams, and ad dollars are all ahead of plan.

Discovery GO also is helping us reach younger audiences, with almost half of its users in the 18 to 34 demo.

Internationally, we are rolling out a kids' TV Everywhere product called Discovery Kids Play in Latin America, which launched with SKY in Brazil in December and last week with DISH in Mexico.

Second, as we look to reach Millennial audiences by bringing our linear brands to new platforms, we're also creating exciting new content for digital natives, including daily news in short-form docs.

Audiences and advertisers are engaged in what Discovery Digital Networks are doing; and we see it because we have 350 million streams a month.

Finally, we will continue to develop our direct-to-consumer products to complement our linear content and fuel the passion of our superfan.

In Europe we have been aggressively expanding our Dplay and Eurosport Player products, which both recorded double-digit subscriber growth in 2015.

I am proud of all that Discovery achieved in 2015.

While the world is changing, we are changing with it.

And we enter 2016 with strong long-term deals locked in, our content compelling, our brands never stronger, all yielding real business momentum.

Near term, ad trends are very healthy domestically, and we expect double-digit growth internationally, and our global affiliate growth is locked in over the next several years due to contracted price escalators.

Our ownership of world-class content and IP at a lower cost per hour and in popular genres that play well all over the world gives us valuable optionality to monetize our content as media consumption continues to grow across all screens.

This is what sets Discovery apart, and we see more growth in the years to come.

I will now turn the call over to Andy for details on our financial results.

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

Despite continued secular challenges in the US and currency headwinds internationally, we are pleased with the 2015 performance and optimistic about our continued ability to execute on our stated strategic and financial objectives and three-year Investor Day guidance metrics going forward.

For the full-year 2015, all of our income statement metrics were in line with or exceeded our original guidance metrics.

Excluding FX, Discovery's revenues increased 10%, adjusted OIBDA increased 4%, and adjusted EPS was up 13%.

On a reported basis, Discovery's total Company revenues for the year increased 2%, adjusted OIBDA decreased 4%, and adjusted EPS also decreased 4%.

As expected, given that approximately half of our revenues are now outside the US, the strengthening dollar was again a major headwind in 2015 as changes in currency rates, especially the Latin American currencies and the euro, had a year-over-year negative impact of over $460 million or 8% on revenues, and over a $185 million or 8% negative impact on adjusted OIBDA, and a $0.30 or 17% negative above and below the line impact on adjusted EPS.

On an organic basis, or excluding the impact of foreign currency, Eurosport, the SBS Radio sale, and the consolidation of Discovery Family, full-year total Company revenues grew 6% and adjusted OIBDA grew 3% as we again demonstrated our ability to deliver consistently strong financial results even as we continue to invest in strengthening our global IP, platforms, and brands.

Full-year net income available to Discovery Communications of $1 billion was down versus last year, driven by the negative currency impacts on our above and below the line results, partially offset by the benefit of our lower effective tax rate.

Our full-year effective tax rate came down another 200 basis points to 33%, as we remain laser focused on lowering both our effective and cash tax rates by fully utilizing the increasingly international mix of our business.

For the full year, free cash flow decreased 2% to $1.17 billion, primarily driven by timing of working capital, higher content spend, and the negative impacts from currencies, partially offset by lower cash taxes, long-term incentive payments, and capital expenditures.

Free cash flow came in just below our guidance of up low single digits, due to foreign-exchange, as the ultimate year-over-year FX impact on adjusted OIBDA was higher than anticipated and there were additional negative currency impacts on working capital especially in the last quarter of the year.

Excluding the impact of currency, full-year free cash flow was approximately 8% versus 2014.

Focusing now on our fourth-quarter results only, reported total Company revenues were down 2%, and reported adjusted OIBDA was down 10%.

Organic revenues, however, were up 8%, and organic adjusted OIBDA was up 1%, as expenses in the quarter grew faster than revenue primarily due to higher content and marketing costs.

Net income available to Discovery Communications decreased to $219 million primarily due to foreign exchange and losses associated with the sale of businesses in 2015, partially offset by a decrease in restructuring costs and higher equity earnings.

Fourth-quarter adjusted EPS was $0.38, compared to $0.43 a year ago, while fourth-quarter currency constant adjusted EPS was actually up 12%.

Free cash flow increased an impressive 53% in the quarter to $598 million, primarily due to lower cash taxes and timing of working capital, partially offset by negative impact of foreign exchange.

Moving now to the individual operating units, despite continued concerns about domestic secular trends, our U.S. Networks' fourth-quarter revenues grew a solid 6%, driven by 7% distribution and 5% advertising growth.

U.S. distribution revenues were up 7%, consistent with 2015's previously reported organic quarterly growth rates.

While total portfolio subs did decline by just over 1% year-over-year, we again benefited from the higher rates we garnered from our deals with NCTC, Cablevision, Sony, and others at the end of 2014 and early 2015 as well as some contributions from our Hulu deal.

On the advertising side, we are extremely pleased to report another quarter of mid-single-digit growth with ad sales up 5%.

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

Looking ahead to 2016, given current ad market trends and stronger scatter pricing and our improving total impressions, we expect U.S. year-over-year ad sales growth in the first quarter to again be up mid-single-digits.

While we continue to see strong ad demand and pricing, we're still taking a more conservative view on our full-year ad sales and expect growth trends to moderate in the future quarters, largely driven by the impact of the Olympics in the third quarter.

Fourth-quarter domestic adjusted OIBDA was at 1%, as operating expenses were up 11%.

Cost of revenues were up 12% due to writing off certain Discovery and Animal Planet programming, as our new creative management team focused on pivoting the networks towards more on-brand content.

SG&A was up 8% due to increased marketing spend.

For the full-year 2015, total U.S. revenues and adjusted OIBDA were both up 6%.

Excluding the impact of consolidating Discovery Family, full-year U.S. revenues were up 4%, with advertising up 2% and distribution revenues up 7%, while total costs were up 4%, leading to adjusted OIBDA growing 3%.

Turning to the International segment, our International Networks delivered another quarter a strong organic ad and distribution growth as we executed very well on our stated objectives of high-single-digit organic affiliate growth and low-double-digit organic advertising growth for the fourth quarter and full year.

As already mentioned, the flip side of having a large, growing International business is that currency remained a major headwind on reported results versus 2014.

Foreign exchange reduced fourth-quarter International revenue and adjusted OIBDA growth rate by 13% and 17%, respectively, and reduced full-year revenue and adjusted OIBDA by 14% and 16%, respectively.

Reported results also include Eurosport and the recently divested SBS Radio business.

For comparability purposes, the following International commentary will refer to our organic results only.

They exclude the impact of Eurosport, SBS Radio, and foreign exchange.

Fourth-quarter International revenues were up 11%, led by 12% advertising growth and 8% distribution growth.

Advertising again grew double digits in the fourth quarter, primarily due to higher pricing and ratings in Southern Europe, higher pricing and volume in Latin America, as well as higher pricing and volume in Asia.

Affiliate revenues had another robust quarter of solid growth, increasing 8%.

For the full year, organic advertising revenues were up 11% and organic distribution revenues were up 7%.

Despite the ad sales ban and rules change in Russia, we were able to deliver very impressive growth rates that reflect the vitality of our International brands and business.

Looking ahead, during Investor Day we stated that International advertising and affiliate revenues, excluding currency, would each grow in the high-single-digit range over the next three years.

Given the current advertising strength in many of our markets, especially in Latin America and Southern Europe, where we're still benefiting from share gains as well as pricing increases, we expect 2016 organic advertising -- excluding the impact of SBS Radio as well as foreign exchange -- to continue to grow low double digits.

Clearly, our International revenue momentum remains strong and intact.

Turning to the cost side, organic operating costs internationally were up 18% in the fourth quarter, driven by increased content and marketing expenses as well as higher personnel costs.

Content expenses were higher primarily due to writing off certain programming, with changes in creative and regional leadership in the Nordics.

Full-year organic costs were up 11%.

Adjusted OIBDA grew 1% in the fourth quarter and 5% for the full year.

Eurosport standalone margins for the full year came in as expected at 7%, as we invested in linear and digital sports rights to drive sustained, long-term value.

As previously stated, we will no longer break out the results of Eurosport going forward, as it will not significantly impact the comparability of DNI's results in future periods.

Now, moving on to our Education and Other segment, as expected, this division reported zero adjusted OIBDA in the fourth quarter and a small operating loss for the year.

Given our continuing 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 digital textbooks to drive the long-term value of this industry-disrupting business, this segment will continue to operate around breakeven even though it is expected to grow revenues in 2016.

Now taking a look at our overall Company financial position, in the fourth quarter we resumed our share buyback program and repurchased $375 million worth of common stock.

During 2015, we bought back a total of $950 million worth of common and preferred shares.

Since the inception of our buyback program in 2010, we have now repurchased over $6.6 billion of our stock, reducing our outstanding share count by over 33%.

As we look ahead at 2016, our capital allocation priorities remain the same as we best position ourselves for the future: first, to invest in driving organic growth; second, to invest in strategic M&A, platforms, and IP that have a strong return on investment; and third, to repurchase our stock.

As we stated on previous calls, we are firmly committed to remaining an investment-grade rated Company and are comfortable with our gross leverage ratio being in the 3.25 to 3.4 leverage range.

We will, therefore, likely raise additional debt in 2016.

We still intend to be a very active buyer of our stock in 2016, as the IRR on repurchasing our stock remains very compelling given our long-range plan free cash flow per share growth expectation.

Given this, we expect to continue to allocate a substantial and growing amount of our available capital to share repurchases in 2016 and future years.

Now, let's focus on our financial expectations going forward.

As we first announced in our September Investor Day, we still expect our constant-currency adjusted EPS CAGR for 2015 through 2018 to grow at least in the low-double-digit range.

I also want to clarify that our expected free cash flow CAGR over the same three-year period will be on a constant-currency basis as we are firmly committing to real operating execution and performance versus uncontrollable foreign-exchange movements, which could ultimately have a positive or negative impact on our cash flow results.

We still expect this constant-currency free cash flow CAGR to also at least be in the low-double-digit range.

Looking specifically at 2016, constant-currency adjusted EPS and constant-currency free cash flow are both expected to grow robustly in the low-double-digit to low-teens range.

We also expect our full-year effective tax rate to come down another 300 basis points to approximately 30%, one year ahead of our previous 30% effective tax rate commitment by 2017.

Finally, we're again quantifying the expected foreign-exchange impact on our 2016 results.

At current spot rates, FX is expected to negatively impact revenues by approximately $185 million to $195 million, and adjusted OIBDA by approximately $115 million to $125 million versus our 2015 reported results.

While the strong dollar will likely to continue to negatively impact our reported results in the near term, currency rates obviously fluctuate up and down; so when FX rates do reverse direction -- as they always over time revert back to the mean -- this will have a very positive impact on our reported results.

In closing, I want to emphasize that while we are cognizant of the current challenges in the media space, given our continued global audience share growth, global ad sales momentum, strong base cost productivity, declining effective tax rate, and accelerating share repurchase expectations, I am even more confident today than I was back at our Investor Day that we will certainly achieve or overdeliver on our three-year financial growth commitments.

As an example, at our Investor Day we forecasted that U.S. ad sales would be down low single digits in 2015 through 2018; yet our current ad sales trend is up mid single digits.

Several other important trends including US ratings, US sub universe declines, and our effective tax rate are also better today than we forecasted back at September.

I really do feel great about our portfolio and financial momentum going into 2016.

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

(Operator Instructions) Doug Mitchelson, UBS.

One for David, one for Andy.

Good morning.

David, I was just hoping you could give us more details on the Company's digital efforts.

I guess where I'm going is: How are you balancing investing in these digital efforts versus delivering the bottom-line results you guided to?

And what should investors expect in 2016?

Are there any milestones we should be looking for to consider whether or not the digital efforts continue to be successful?

And for Andy, you talked about global affiliate growth locked in over the next several years due to contracts.

Certainly there is increased investor concerns in media in the US around cord-cutting and skinny-bundle impacts and distributor consolidation, I think.

I'm just hoping for clarification on the one comment you just made around the sub trends are better than you thought they would be when you gave guidance back in October.

Is that an improvement in the marketplace?

Or just you were conservative in your guidance and the trends are unchanged?

Just any reaffirmation that distributor consolidation, in particular the AT&T deal, won't have any impact on trends as you look over that guidance period?

Thank you.

Okay, great.

Thank you, Doug.

Okay, first, we're off to a very good start where we're attacking digital in, I think, a very sensible way.

We've hired a new team, which is headed up by Paul Guyardo; and we have an attack team going hard at TV Everywhere and we're starting to reap some real results.

We're working very closely with Neil Smit and X1, which is a great platform, and we're finding our viewership there is increasing.

It's really paying off for us.

We've always said TV Everywhere is a great platform where we can monetize, and we are.

I think we are the only company in the US that has created our own aggregated app with D GO, which has all of our channels on it.

And we've now been authenticated with commercials through a number of distributors.

It's early days.

Time Warner is just launching it as well.

But the results early have been quite good.

The demo is very young.

The engagement is substantial.

And we have a team that's really working on that, and people are getting closer to our brands and we're talking to our customers.

So I think a really very positive turn in terms of TV Everywhere and our own authenticated app.

Outside the US, it's really two things.

Our Eurosport app is growing quite effectively.

We won't reach 1 million subs in 2016, but we do have a march to 1 million, and we're hoping to reach 1 million by 2017.

And 1 million at $8 a month would be an incremental $100 million.

We have a lot more IP for Eurosport that we've been able to aggregate at a very reasonable price increases.

Eurosport will stay profitable, and this could be meaningfully incremental.

When you think about Europe being 700 million people, the ability to drive a direct-to-consumer business here could be quite substantial.

If we can get to 1 million, I think culturally it could be a tipping point for us.

If we can get to 1 million, why can't we get to 3 million?

And we have the IP.

Finally, there's Dplay, which we have in Northern Europe and we're rolling out throughout Europe.

We've been doing that on our own and we've been doing quite well, but we're learning more and more.

This is my own belief, that there will be some more consolidation in a positive way, that there's nothing stopping major distributors in Northern Europe -- where we have 30% or 45% of market share -- to work with other major programmers.

I think that will probably happen around the world over the next four or five years, rather than having a number of individual apps to come together.

And we're having some of those discussions, and I think to the extent that we do come together with others that we'll even be more powerful.

But when you look at the full portfolio of what we're doing direct-to-consumer and TV Everywhere, I think we're doing more and we're doing it at lower cost than anyone, because we own all of our content.

And finally, we're not leaving the youngest demo out with our streaming business.

We're not making money on that business today, but we're not losing money.

But we have 350 million streams.

So when you think about that 350 million streams and you think about VICE and you think about BuzzFeed, that 350 million a month is growing.

It's a Millennial audience.

They're spending time with us.

And candidly, we haven't done a great job monetizing those streams.

The CPMs on them are quite good, and now we have a whole team that is attacking the ability to engage with Millennials and make money on those streams.

So I think we're in a very good spot.

And over 2016 and 2017, I think you'll see some meaningful results, and we'll keep you posted.

Doug, to get back to your question on U.S. affiliate, back at Investor Day for the three-year period we assumed that -- I think conservatively -- that the sub decline would be about 2.5% a year.

If you look at in 2015 we were down 1% of our portfolio, if you look at what the affiliates have reported in the last reports, clearly the trends are better.

So look, I think we were arguably conservative back in September, and the recent trends are better than that.

Then regarding your question on consolidation, look.

As far as the deals with Charter and Time Warner and Cablevision, the impacts there should be de minimis given the rate structures.

Regarding DIRECTV and AT&T, they are both paying at their rates that they always have in the past; and when that deal comes up, we'll have a sense of how that will play out.

But right now the rate structures seem to be very much in line with what we've had in the past.

All right.

Thank you very much.

Anthony DiClemente, Nomura.

Thanks very much for taking my questions and good morning.

First for David.

David, as we settle into 2016 here and look back on last year a little bit, with Apple we saw this issue of when Eddy Cue and Apple sit down with the content providers and your peers and they all -- the programmers -- are dead set on keeping all of the networks in the bundle, whether it be a streaming bundle the likes of which people thought Apple might launch, those networks would include sports -- and it just got to a point where the cost to the consumer would have been too high for expanded online streaming offering.

Where do you think we are in that conversation?

And from here is there anything that could change?

What has to happen for the industry to get closer to seeing more over-the-top services with fewer core networks included in those services, such that they are actually appealing to the customer?

Then, Andy, I just wondered.

If you look at your deals with go90, Hulu, and Sony, can you quantify how much those are adding on a quarterly basis?

Like, how much do they contribute to affiliate fee growth in the fourth quarter?

And then in your 2016 guidance maybe you can help us with -- I think you said high single digit for overall U.S. affiliate fees.

That's your long-term, and then it sounds like that's intact for 2016.

Then just clarify what's included in that for those three deals.

That would be really helpful.

Thank you.

Thanks, Anthony.

Well, look, I think in 2015 there was all this noise around skinny bundles.

And I've said before that the majority of programmers have contracts at least for the next several years that maybe there could be a little bit of that, but that the ability to really start changing the way you offer services, it's going to be another cycle, which will be several years.

Having said that, we're very well positioned for that skinny bundle in two ways.

One, we have 14 channels that represent 11% or 12% of the viewership.

But we're only reaping about 6% of the cost, so we're relatively inexpensive.

So when Eddy was looking for channels, and we have the number-one channel for men with Discovery, the number-one channel for women with ID, and we have all these affinity networks, your top network with TLC and Science -- you can pick up 14 channels for less than the cost of one regional sports network.

So one, it's a very efficient piece.

Two is, if we needed to go to our top eight, we make 86% of our revenue and more than 90% of our EBITDA from our top eight networks.

So if it ever did happen here in the US, we would be well positioned.

I don't believe it's going to.

And sitting down with the distributors themselves, with all the talk of the skinny bundle and as appealing as it seems, most consumers seem to want the big bundle.

I think probably the most encouraging thing is that cable seems to be -- their numbers have really turned around, as Andy said.

We haven't really -- we've seen it but we haven't seen the full effect of it, because there's a few months gap between when they announce and when we actually get paid.

But it's very encouraging that there seems to be a change in the universe dynamics.

It's also, as you look at the U.S., I think our U.S. business now looks like a meaningful growth business.

We have advertising market much stronger than we expected; our viewership is growing; and the universe decline and the skinny bundle noise seems to have dissipated to a reality which is not too much on skinny bundle and universe may be turning around.

So I think quite encouraging for the next couple of years.

I'd like over-the-top to happen in a meaningful way, because I think ultimately we have really good services.

Our channels are on brand, and they're reasonable, and we'll be one of the big recipients of that.

But I think it's going to be a while.

Anthony, to address your U.S. affiliate questions, without giving specific numbers, SVOD in 2015 and 2016 would be less than 1% of total U.S. affiliate.

So it certainly is not a growth driver in 2016 versus 2015.

Also just to clarify, Sony actually is non-SVOD.

It's in the overall -- yes, it's in the U.S. affiliate, but we don't really categorize that as SVOD.

Then your other question about high single digit, what we said in the past was that the pricing clearly is accreting higher, and we've seen that now for a couple years going, and we'll see it again in 2016.

What we said was that it would be high single digit predicated upon a stable universe.

So we had some expectations of what that universal decline would look like.

So we're not giving any specific 2016 affiliate guidance, even though very clearly the deals we've done and the deals that we anticipate doing will accrete price and continue to drive growth there.

Okay.

I guess maybe this is just a little bit redundant, but is your guidance contingent upon any specific renewal for 2016 specifically?

Well, look, we're not going to talk, Anthony, specifically about any deals that we have coming up.

We certainly have expectations about what those deals would look like.

At this point we have a lot of confidence in those outcomes given the deals that we've done the last several years.

Again about 80% of our U.S. subs have been renewed in the last several years.

So yes, we have an expectation.

We're not going to say specifically what they are or how much it is.

But again, the confidence is the deals that we've done over the last three years.

Got you.

Thank you very much.

Jessica Reif Cohen, Bank of America.

Go to the next question.

Ben Swinburne, Morgan Stanley.

Thank you.

Can you hear me?

Yes, we can.

Okay, great.

Andy, just on the guidance, if you could help fill us in, I don't know if you'd even want to comment on OpEx growth expectations domestically and internationally, just to help us think about margins for the year.

You can obviously ex-currency probably easier.

And then maybe just to clarify from Anthony's question on affiliate revenues: Can we assume that the Comcast agreement will be represented in the first-quarter results, since I think that deal was signed last summer?

I just wanted to see if you would comment there.

Then, David, I thought your comments on the Telenor situation was really interesting.

You know better than anybody that there are big differences between European distribution and US distribution dynamics.

But how do you look at the increasing tension between programmers and distributors in Europe as you move forward?

Do you view it as an opportunity to maybe accelerate your business and maybe you were underpaid historically?

Or do you think that's going to create more volatility in the results?

What could you tell us, since you're much closer to that than we are?

Thanks.

Thanks, Ben.

With Telenor and with Telia we were able to get meaningful step-ups and increases.

Remember that Europe and Latin America are a little bit different than the US, in that historically Latin America has been mostly no price increases; your increases came from sub growth.

And Europe was working like that until two years ago.

So we started to drive that idea in the last two years, and we've been getting increases.

But in the last 12 months we've taken the position that we need much more substantial increases.

Putting Kids together with our channels in Latin America and sports together with our suite and free-to-air and IP and all of our content together in Europe has helped us get bigger increases.

But in order to get it we really need to stand up for the value of our content.

So we had to pull our signals twice.

I think there's two buckets.

One, is you're going to see us fighting for significant incremental affiliate revenue.

And between the Olympics and Eurosport and the strength of Discovery and the strength of our female portfolio around the world, we think that we can get that.

And you'll start to see our affiliate line growing in a meaningful way over the next -- it's long cycle -- over the next year, two years, three years, just like we did here in the US.

And we have some optimism that maybe we could even do meaningfully better than that, because our IP we think is quite good.

But we're going to have to fight for it.

I think the reverberation of pulling those signals in Northern Europe has been valuable.

And the deals that we've done recently have been very, very favorable.

That's one.

Two, you bring up a point that is a new phenomenon, but it's all incremental to us.

The idea that distributors in Europe are starting to compete more aggressively is a real helper to us.

What they are starting to do, which we didn't anticipate, is that whether you're a satellite, cable, or phone player, for the first time over the last 12 months they have felt that owning the pipe directly to the handset or to the home is not enough.

They need to decommoditize that pipe by owning unique, exclusive content.

This is really a new idea here.

So we sell our 10 channels, and then we get a distributor coming to us saying: Do you have other great IP you could sell just to us, that we could promote that we have just this content in the market?

So we have been able to do -- we've done four of those deals in the last six months.

None of those were in our plan four months ago, five months ago.

It's all incremental to us.

Our channel is in-language.

And I think that if it continues, if you had the BTs fighting with the SKYs, in each market if you have this competitive dynamic, and we can raise our hand and say we had kids IP, we have sports IP, we have excess drama and nonfiction IP, that that could be a whole incremental vein of revenue for us.

We're starting to see us.

If it continues, we'll be able to break it out for you in the years to come.

But it's very positive.

So what we see internationally is double-digit growth, even though it's basically been flatlining for the last couple of years -- and that will continue.

Advertising remains strong.

We have this new vein of opportunity with these distributors wanting exclusive content, and the Olympics is going to help us with that.

So I think quite favorable.

The big negative is currency.

Our International business is really -- it's doing extremely well.

The big issue is currency.

Helpful.

Thank you.

Ben, to address your OpEx questions, I appreciate there's a lot of moving parts here with some write-offs and one-time items in the fourth quarter.

So let me just provide some clarity and perspective.

For 2015, apples-to-apples constant currency, SG&A total Company was up low single digits, with content costs up low double as we invested in Rich Ross and Discovery and Sports, etc.

As I look into 2016, we see constant currency OpEx, SG&A up again only low single digits, with cost of revenue being up high single.

So total costs up, call it mid single for 2016.

Just again to clarify the foreign-exchange impact in 2016, we're saying that for OIBDA it will be about $115 million to $125 million.

As David said, look, clearly foreign exchange has been a very challenging element for us given the size of our International portfolio.

The good news I'll say on FX is, if you look at some of the movements in currency last year, some of these markets really can't get any worse.

You look at Venezuela, for example, Venezuela we went from a 5-to-1 exchange rate at the beginning of 2015 to a 200-to-1 at the end of 2015.

So in some of these markets we've taken the full brunt of the hit.

We'll see what happens from here; but think in terms of OIBDA being about $115 million to $125 million.

Then lastly on Comcast, yes, the Comcast deal is effective January.

So that new deal will be in our first-quarter reported results.

Thank you, both.

(Operator Instructions) Vasily Karasyov, CLSA.

Thank you.

Good morning.

I wanted to ask about OWN.

First, could you please speak in a little more detail about operating trends there, specifically advertising, revenue growth, and the affiliate, maybe relative to your U.S. Networks, reported networks?

And then what's your view on the ownership structure right now?

Is it optimal?

Do you expect it to evolve at all?

And what would that depend on?

Thank you.

Okay; thanks so much.

OWN is doing very, very well.

It's top 20 network for women.

It's the number-one network for African-American women.

On Tuesday nights we're the number-one network for all women in cable.

The channel is on-brand, with some great content from Oprah.

So we have a happy audience that we're nourishing, that are spending a lot of time with us, and Oprah is very engaged.

We grew our audience double digit.

We have a very strong leadership team there with Erik and Sheri Salata working very closely with Oprah.

She worked with them for many years at HARPO.

So I feel like we're on a very strong trajectory.

In terms of affiliate fees, more than 80% of the affiliate fees are locked with meaningful increases, and the channel is in almost 90 million homes.

So we took a channel that was in 75 million homes and had no sub fees four years ago; it's in almost 90 million homes.

It's making a lot of money.

It's a top network, and Oprah has created a great success.

The channel is owned 50-50.

As we disclosed when we did the deal, Oprah has some staged puts that she can elect to take or not.

The first election opportunity is this year, and they're staged throughout the next six or seven years.

And we love the channel.

If, over time, the channel ends up -- we have an opportunity to own more of the channel, that's only a good thing for us.

We're very confident in it.

We think it has a great niche and some very strong IP.

And over time, as our interest grows, if we have an opportunity to consolidate it, that would be very favorable for us.

But in the meantime it's a 50-50 venture with Oprah having rights to put interest to us over time beginning this year.

She's very happy with the venture.

We're very happy with the venture.

And it's quite a success story.

Thank you.

Just to put some financial metrics behind that, look, again, the results for us continue to get better.

We do -- as I think everyone knows, all the free cash flow comes to us in the form of a loan repayment.

That amount in 2015 was $85 million, $20 million more than it was in 2014.

The loan has gone from over $500 million two years ago to $380 million.

We expect that loan to get fully repaid over the next several years.

So, look, the financial trends are very good for us.

As David said, we don't consolidate today.

So while we talk about our free cash flow growth and how we're accreting that important line, the cash flow growth out of OWN is not included in that; but yet it certainly is part of our treasury and part of our overall capital availability.

So the trends are very good financially for us as well.

Thank you.

Alexia Quadrani, JPMorgan.

Thank you.

David, just following up on these exclusive custom package deals you spoke about in International markets in (inaudible) freemiums, can we assume they are accretive to your profitability just given the incremental cost of this exclusive content?

I guess, can it eventually come to the US, or not really realistic, given so many more distributors in the market?

Then just a follow-up for Andy, if I can, on the domestic advertising outlook for 2016.

I know in 2015, you talked about reducing some advertising load.

I just wondered if you cycle through that for 2016.

Look, for International we've acquired all this content with the assumption that we were going to use it on our linear channels, that we were going to use it on TV Everywhere, on VOD, direct-to-consumer.

We have this huge library of content in kids, in sports, in nonfiction and drama that we own.

So the deals that we've done is almost all incremental, because we haven't bought any content to provide these exclusive packages.

So whether they come in the form of launching an additional two or three channels in a market, in-language, or whether it comes in providing exclusive content, it's content that we already own and so it's all incremental.

I think it's less likely to happen here.

We will see how things develop.

Right now, TV Everywhere is our number-one priority, giving our content to the distributors.

Here we are in the US, we're having high-single-digit affiliate growth, universe is starting to hold its own, and our viewership is growing.

We have a very healthy U.S. business.

So I think a part of that is going back to our distributors and working with them on TV Everywhere, working with them on VOD, working with them on authenticated apps, which benefits both of us.

So I think that we've started to tilt.

We've got a long way to go, but we've started to tilt in a very positive direction with TV Everywhere, which is a very attractive instrument versus kind of the blunt-force instrument of some of the SVOD platforms that have no advertising, no branding, and are operating outside the existing infrastructure.

Alexia, just a couple ad sales comments.

Look, if you told me a year ago that we'd be having the ad sales performance today with fourth quarter up 5%, the third-quarter strong, some very good mid-single-digit growth as we said going into the first quarter, I would have been thrilled.

We're clearly -- the scatter market's there, volume is strong, pricing is strong, far better than we had expected and clearly better than we thought back at our Investor Day.

With regard to the ad load, look, today, we already have an ad load that's less than the industry average.

Yes, we have pulled back ad loads on some of our networks, which I think is one reason why our delivery continues to outpace the industry.

So all of our guidance that we've given and some of the first-quarter numbers that we've had reflect the fact that on some of our networks we have pulled back inventory.

Thank you.

John Janedis, Jefferies.

Hi, thanks.

Maybe a related question, Andy.

Thanks for the comments on the ad side of the business, but can you give us a better sense of how you are thinking about the Olympics impact?

Meaning, is the assumption that it has maybe a direct couple of hundred basis point impact on the quarter., and then money may also get pulled into or pushed out of other quarters?

And is it your sense that the dollars flowing to digital have decelerated?

If so, is it a measurement issue?

Thanks.

Hey, John.

I just wanted to hit one point on the Olympics.

When we did the Olympics, we said that the Olympics would be profitable.

We completed our first deal with the BBC, which was very favorable; we created a kind of a partnership.

We didn't -- we have the Olympics all across Europe from 2018 through 2024, except for in France and the UK where the IOC had already done deals in 2018 and 2020.

As part of our BBC deal, we got back the rights to the Olympics in the UK in 2018 and 2020, where they'll have one free-to-air channel and one red-button digital channel.

But we'll be the only place to get all of the Olympics in the UK for the next decade.

We were able to get pricing that was significantly more favorable than is in our plan.

And it also allows us now to do a pan-European feed of the Olympics from an advertising perspective also, because we can reach almost all 700 million people.

So I would say that from something that we felt, in terms of modeling, that would be profitable, given the conversations that we're having across Europe, owning the Olympic IP, we feel confident that it will be meaningfully profitable over the decade; but also that it will be a big helper to us as we build our mobile strategy, as we build our direct-to-consumer strategy, and as we look to drive affiliate revenue.

Because all distributors now that we were doing short-term deals with, they want to go longer-term to include the Olympics.

Just to add a couple more comments there, John, with regard to our Olympic rights that we have, as David said, it will be cash flow positive over the 10-year window.

It will have a de minimis impact on our 2016/2017 results.

The early activity that the team is delivering on is clearly better than what our expectations were when we did the deal.

With regard to the US Olympics, which may be a part of your question, yes, we do expect it to have an impact certainly on our total ad sales in the third quarter, as obviously that's a large amount of ad sales to fill.

With regard to the move to digital, look, clearly what we're still seeing is the trend out of print, out of radio, out of outdoor into TV and into digital.

So when we think about TV ad sales clearly doing better than people thought six, 12 months ago, I think it does come down still to reach.

If you look at Racing Extinction, for example, reached 31 million viewers.

That kind of reach is invaluable and very hard to achieve on digital.

So those kind of shows and assets for us clearly drive a lot of ad sales volume and pricing.

I think we're still seeing some of the more secular trends into TV and digital, with Olympic impact being really isolated for us only in the third quarter.

Thank you very much.

Ladies and gentlemen, that concludes today's call.

Thank you for your participation.

You may now disconnect.

Have a great day.