華納兄弟探索 (WBD) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Discovery Communications Q2 2016 earnings conference call. (Operator Instructions). As a reminder today's conference call is being recorded. I would now like to turn the conference over to Jackie Burka, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us for Discovery Communications' 2016 second-quarter earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer, and Andy Warren, our Chief Financial Officer. You should have received our earnings release, but if not feel free to access it on our website at www.discoverycommunications.com.

On today's call we will begin with some opening comments from David and Andy and then we will open 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 provision 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 and thank you all for joining us. Discovery Communications had another quarter of strong operating and financial results as we remained focused on maximizing our global linear TV business, strengthening our position on digital and direct-to-consumer platforms and controlling our cost base.

A key element of Discovery's growth profile is our continued success in securing long cycle distribution agreements that provide for steady and predictable revenue growth and the optionality for windowing our content on existing and new platforms.

Today I am pleased to announce we have reached a new long-term comprehensive affiliate deal with Liberty Global, one of our biggest international distribution partners.

The new multiyear deal will deliver our full portfolio of networks to Liberty Global subscribers in 12 European countries and includes new linear distribution for some of our key brands. It also includes broad digital distribution on Liberty Global's Horizon platform that will guarantee our passionate super fans will have access to our content on the screen of their choice.

The Liberty Global deal is a continuation of several recent renewals in Europe where we are fighting for the value of our investments in nonfiction, sports and the Olympic Games. These agreements validate our diversification approach and underscore the potential to drive long-term growth through these long-term affiliate deals.

Our international distribution growth is returning to a double-digit increase for the full year of 2016 and is poised to stay there for many years to come. This ensures cash flows and provides an investment pool to bolster our content to drive the next generation of growth.

There is no question that the addition of sports to our nonfiction portfolio in Europe is bolstering our profile with distributors and reinforcing the must-have nature of our overall suite of brands. Our US and international affiliate revenues comprise about 50% of our total Company revenues. And growth of these revenue streams is now locked in for the next couple of years.

Given the double-digit revenue growth internationally with our new Liberty deal and with recent agreements with Telenor and [Talia] across the Nordics, and the favorable price increases and step ups we have garnered in all of our recent domestic renewals, together they will register strong growth even assuming universe declines in some markets.

This is solid guaranteed revenue growth for half of our Company. It is like a favorable bond. Against our solid distribution revenue base we have more variable ad rates and we also have longer term upside potential as we convert the intellectual property, our content that we control to new and emerging platforms.

Along with the additional contributions to our international affiliate growth, investments in premium and exclusive sports rights also are opening up new opportunities to build our direct-to-consumer platform and businesses. A key example is our recent acquisition of Bundesliga rights in Germany.

As you know, we look at every deal that comes available, but we are always financially disciplined in our approach. A number of things aligned that made the Bundesliga different and very attractive.

First, there was a new law in Germany called the No Single Buyer Rule that gave us an opportunity to acquire the rights on favorable terms so that the investment will be cash flow positive for us.

Second, we acquired a package of 45 games mostly on Friday nights. It is a unique offering of must-have content for German sports fans, similar to Monday Night Football in the US, and it makes our Eurosport pay-TV channel and the Eurosport player the home of Friday night Bundesliga matches.

The deal is also for all platforms allowing digital growth as it will help drive the Eurosport player subscriptions while also providing a huge marketing platform for our whole portfolio.

Finally, Germany is the fourth largest economy in the world and the German pay-TV market has never been healthier with multiple telcos, satellite players and other distributors all vying for the best and strongest IP.

These are important, potent sports rights that we now own across all platforms. As Andy will discuss in more detail, we will do well with this deal from a financial perspective and it will also bring numerous strategic benefits to the business.

Another example of our opportunistic and disciplined sports acquisition strategy for exclusive content is the multi-market deal for Wimbledon that we are announcing today. This agreement solidifies Eurosport as the home of all four Grand Slam tennis tournaments in 25 countries next year. One year ago we had just one market with all four tournaments.

Like the Bundesliga deal these rights bolster our pay-TV offering, fuel our over-the-top sports product and give us exclusive premium content to attract more advertisers and viewers to our platforms. And with Rio a couple of days away our Olympics team is in place, geared up and has started logistical planning for our first Olympic Games across Europe in 2018.

With our focus on securing these exclusive rights we feel that we have the real building blocks and value proposition to begin accelerating our direct-to-consumer sports strategy. And the market potential is huge.

As Andy will outline in more detail, given only about half of the homes in Europe have the main Eurosport pay-TV channel, a little less than 150 million homes, there is significant opportunity for our sports IP to reach people on all devices throughout all of Europe, which has a population of over 700 million people.

Our investments in premium IP in Europe and around the world are a key part of our strategy and we're really seeing the benefits take hold. In the US our expansion into crime and mystery with ID has been a home run. The Velocity and Oprah Winfrey's OWN network delivered top performances this quarter and this past year, further validating our differentiated and diverse portfolio.

Specifically with its focus on Scripted with Tyler Perry and Greenleaf, the new series featuring Oprah and produced by Oprah, OWN's success is only accelerating. Oprah's Greenleaf's success coupled with Tyler's hugely successful Scripted series already on OWN has made OWN the number one channel for African American women and a top 10 cable network in America for all women, which is really incredible considering OWN didn't exist five years ago.

This impressive growth trajectory is being recognized in the marketplace during this year's upfront where we did very, very well. And we have a new Scripted series which is produced by Oprah Winfrey called Queen Sugar and that will be premiering in a few weeks and it also looks absolutely terrific.

Our premium content strategy also is driving our digital business as we are leaning more into short form, streaming and virtual reality platforms that appeal to millennial digital [natives].

For example, Discovery Virtual Reality, VR, which we launched just a year ago now has over 1.4 million downloads and over 60 million streams. And we recently launched our first VR scripted four-part miniseries, The Satchel, in conjunction with Toyota.

This innovative storytelling product brings our viewers closer to real, which has long been our aspiration. And we are a first mover market leader with our virtual reality content, gaining scale quickly and tapping into a potential next-generation growth business for Discovery that younger generations are deeply engaged in.

We also are engaging younger viewers and adding value to pay-TV customers through our authenticated TV Everywhere product, Discovery GO. And exciting millennials with our online brands Seeker and SourceFed, which totaled over 1 billion worldwide streams during the quarter.

In Latin America our TV Everywhere product, Discovery Kids Play, is off to a strong start with great engagement in 11 countries across nine carriers.

Another example of our platform agnostic approach can be seen in Italy where we completed a deal with Vodafone to provide our entire free-to-air portfolio to its subscribers across all platforms.

Beyond our platforms we are engaged with many players regarding other new and emerging products as we remain platform agnostic in how and where we reach our viewers, like our deals with Verizon go90, Sony's PlayStation Vue and Hulu. These opportunities represent potential ways to reach new viewers and new revenue streams to drive growth.

Viewers worldwide have made it clear they value our content. In a recent beta research study in the US that asked which networks people would want in an a la carte world, Discovery Channel ranked number one among all non-cable viewers and many of our other channels were in the top five of their target demos. Discovery Channel is the number one pay-TV brand in most of the markets around the world where we are in business.

As we think about our US business I'd like to highlight some of our unique competitive advantages that will help ensure we continue to have a stable, profitable domestic business going forward. Unlike many other content providers, we have very flexible cost structures and are not locked into long-term syndication type deals, thus we have leers we can pull when and if needed.

We also own almost all of our content and control it across all platforms. That makes us more platform agnostic and gives us a lot of optionally as the world evolves.

Additionally, given the demand for our brands and the value they represent, we believe we are extremely well-positioned if the US shifts toward more skinny bundles in the many years ahead. And with 85% of our economics coming from our top six networks, we could even benefit from smaller bundles especially if they attract new audiences, which has been our experience in markets around the world where we have been on skinnier bundles.

Our mission has transformed over time from linear-only nonfiction programming to a multi-platform offering of nonfiction, sports and kids content today. The common thread has always been and continues to be real world entertainment that engages passionate communities around the globe.

I am very optimistic about the future and our continued ability to deliver strong financial results and enhance shareholder value. I will now turn the call over to Andy for details on our financial results.

Thanks, David, and thank everyone for joining us today. As David mentioned, we were very pleased with the continued financial strategic progress we made in the second quarter. Our strong sustained domestic and international long cycle affiliate revenue growth combined with mid-single-digit global ad growth drove 8% total Company organic revenue growth.

This solid top-line performance, combined with our continued focus on controlling our operational costs, led to a 10% global organic adjusted EBITDA growth, more than triple last year's second-quarter growth rate.

As we have consistently noted, two of our critical competitive advantages are our flexible cost structures and the fact that we own or control the vast majority of our content across all platforms. These give us tremendous operational flexibility and optionally and allow us to fully maximize our profit growth.

While the international advertising growth has recently been slowed by unusual market factors such as Brexit, we booked very strong US upfront ad volume, our affiliate growth remains stable domestically and it is accelerating internationally. And we remain hyper focused on controlling global cost growth.

With our first half of the year constant currency adjusted EPS of 25% we are pacing well ahead of our earlier guidance of high teens growth. Therefore, we are increasing our full-year guidance for constant currency adjusted EPS growth from high teens to at least 20% plus.

Similarly, our first half constant currency free cash flow growth of 42% is also pacing well ahead of our high teens growth guidance range, which clearly validates our operational attraction and excellence.

Before providing more details around the second-quarter results I want to answer directly several of the major questions analysts and investors have been asking us lately.

First, with today's announcement our new distribution deal with Liberty Global, we are now able to provide more information on the Bundesliga soccer right license in Germany that we announced mid-quarter.

We are very mindful of your concerns about these additional costs and their potential impact on Eurosport's profitability. As David mentioned, given the new No Single Buyer Rule, we were able to pick up a primetime package of 45 exclusive games per year over the next four years at attractive rates.

Also, consistent with our imperative that we position Discovery's international business for the future, the deal includes live streaming rights for games that we will now be able to market directly to all German consumers, including the 80% who do not subscribe to premium pay-TV.

With these rights starting in August of 2017 we will recognize half of that annual cost next year. And given the favorable rights pricing terms, we can commit to the Bundesliga being cash flow positive.

It is very important for investors to know that we vet each and every sports rights deal rigorously to ensure that we can both generate a positive return on these investments and meaningfully enhance our strategic content position in key markets.

Eurosport does not, and will never, have negative margins. No sports rights deal that we pursue will lead to Eurosport losing money and Bundesliga is absolutely no exception to this commitment.

Now I will take a moment to talk through the future of our digital business in Europe, especially regarding Eurosport. Like you we don't know exactly how the digital future in a particular [mobile] will progress. But we do know for sure that it is essential that we play and lead on this platform.

Here are a few statistics and market perspectives that we use to inform our strategic and investment decision making processes.

First, data from the Organization for Economic Cooperation and Development, or OECD, indicates that there are around 330 million mobile phone data subscribers in Europe.

Also, Pew Research indicates smartphone penetration in major European countries to be between 50% and 70%. This of course means that these people all have smartphone video capability today. We also know that mobile operators are looking for sports content partners to help bundle their respective services.

Second, our own analysis indicates that today there are over 32 million OTT households in the top European markets. And clearly that number will continue to increase dramatically with higher broadband rates and more SVOD services especially around sports.

Third, we know that there have already been over 17 million downloads to date of our free Eurosport news app. These users are our starting point, or funnel, for marketing access to all the digital sports content we have been smartly collecting.

With these market dynamics we can begin to build some strategic planning numbers around these facts to give us a sense of the potential scale and long-term value creation to tell us whether this is a line of business worth pursuing. You will do your own models but here is one of the ways we have been thinking about quantifying the opportunity.

1% of the OECD's 330 million mobile data subscribers at $8 per month will deliver approximately $330 million in additional annual revenues. And a 5% penetration would deliver $1.6 billion.

Recognizing that we have already paid for most of these digital content rights, and we need to continue to invest in the latest platform technologies, a 40% margin would provide between $100 million and $700 million of additional adjusted OIDBDA at these 1% to 5% take rates.

This is not assuming the additional advertising and sponsorship revenues from our Eurosport digital apps as we will certainly sell across platforms. We are also aware that the enterprise value multiples on these digital earnings are higher than those from traditional linear programming.

To be clear, this is not guidance but an example of one of the ways we are exploring the digital future in Europe as we make our strategic investment and content decisions. And one of the reasons that we need to assure that we have the content fully available for digital platforms as we execute our linear sports deals.

Not surprisingly another big question we have been getting is the impact of Brexit. For context, our UK business represents about 5% of total Company revenues and a slightly higher percentage of total Company advertising revenues. We are working through all the potential implications at Brexit on our business. But from an FX perspective we expect minimal near-term impact on our cash flows.

For 2016, our adjusted OIBDA is fully hedged against a weaker pound sterling and 80% hedged against movements in the euro. For 2017 we have currently hedged about half of our euro denominated cash flow exposures as we have rolling 12 to 18 months foreign-exchange hedges already in place.

From a business perspective we have not yet seen a recovery in the UK ad market that we had expected had the Brexit vote gone the other way. But it is still early days. We are continuing to monitor policy developments but do fully expect the UK to remain a key market for us.

Finally, an important question being asked is how the Olympics and Brexit will impact our Q3 results. While we are increasing our adjusted EPS guidance for the year, we need to caution that Q3 will be challenged. The Olympics, as they always do, suck advertising dollars out of that market and Brexit will negatively impact our UK derived ad sales.

Now let's talk about the second-quarter results in more detail. As I stated, on an organic basis, so excluding the impact of foreign currency as well as prior year contributions from SBS Radio which we sold on June 30, 2015, total Company revenues were up 8% and adjusted OIBDA grew 10%.

Net income available to Discovery Communications of $408 million was up 43% from the second quarter year ago, primarily due to improved operating results, currency-related transactional gains, a decrease in taxes and lower stock compensation, partially offset by a decline in income from equity investees and higher restructuring charges.

Our book tax income rate in the quarter was 19% due to a one-time settlement benefit. And therefore we now expect our full-year tax rate to be 28%, fully 500 basis points lower than our 2015 tax rate.

Earnings per diluted share for the second quarter was $0.66, 50% above the second quarter a year ago. Adjusted earnings per diluted share, which excludes the impact from acquisition-related non-cash amortization of intangible assets, was $0.71, a 45% improvement versus last year's second quarter. Excluding currency impacts adjusted EPS is up 31% for the quarter and up 20% for the last 12 months over the prior 12 months.

Second-quarter free cash flow decreased 4% to $301 million as improved operating performance and lower cash taxes were more than offset by the timing of working capital and higher capital expenditures. Second-quarter free cash flow ex FX increased 30% for the last 12-month period compared to the prior 12 months.

Turning now to the operating units, our U.S. Networks had another very solid quarter with total revenues of 7% led by 8% distribution growth and 5% advertising growth and another quarter of double-digit adjusted OIBDA up an impressive 10%.

Our 5% advertising growth was again due to higher pricing and proactively managing and monetizing our inventory to take advantage of the strong demand in the scatter market. This is partially offset by weaker delivery and in particular a weaker than expected Shark Week due to its earlier positioning ahead of the Fourth of July.

As we look ahead to the third quarter we expect advertising revenues to be down low-single-digits versus last year's third quarter, due to the Olympics and the tougher comp, before rebounding back to positive growth in the fourth quarter.

Our domestic distribution revenues again increased 8% while total portfolio subs declined 2% versus second quarter last year. We continue to benefit from the higher locked in rate increases earned in all of our recent affiliate deals.

Domestic operating expenses in the quarter were up 3%. Our focus on controlling base costs led to an impressive domestic adjusted OIBDA growth of 10% with margins expanding by 100 basis points to 62%.

As we look ahead to the rest of the year we now expect expense growth to increase slightly in Q3 due to increased market spend and then abate in the fourth quarter.

Turning now to our international operations. For comparability purposes my following international comments will refer to our organic results only, so I'll exclude the impact of FX and the SBS Radio sale.

International organic revenues and adjusted OIBDA both increased 8%. The 8% second-quarter revenue growth was comprised of 10% distribution and 5% advertising growth.

Our 10% affiliate revenue growth was due to higher affiliate rates in CEEMEA and in Northern Europe where we have been highly successful in leveraging our expanded content portfolio that now includes sports to drive higher contracted pricing step ups as well as increased subscribers in Latin America.

Going forward we expect our international affiliate growth rates to accelerate, so we are raising our growth expectation to the high-single-digit low double-digit range for the back half of 2016.

Turning to our second-quarter international advertising results, while we benefited from higher volume and ratings in Southern Europe and higher pricing volumes in CEEMEA, growth in these markets was partially offset by declines in Northern Europe, our largest advertising region.

Northern Europe was impacted by the UK's lower ratings and softer demand due to uncertainty ahead of the Brexit vote. Given softer ratings and the fact that this uncertainty has not lifted post the decision to exit the EU and visibility remains limited, we expect an ad sales deceleration in the third quarter, which will also be impacted by the Olympics.

We now expect total second-half 2016 organic international advertising growth to be in the mid- to high-single-digit range. International operating expenses grew 9% in the quarter primarily due to higher sports content and production costs.

Looking ahead we expect organic expense growth to moderate in the back half of the year as we are able to fully leverage our pre-existing sports rights and local market people and infrastructure.

Now taking a look at our share repurchases, in the second quarter we repurchased a total of $377 million worth of shares. We have now spent over $7.4 billion buying back shares since we began our buyback program at the end of 2010.

On a stock split adjusted basis we have reduced our outstanding share count by 33%. We still plan to buy back a total of $1.5 billion worth of shares in 2016 as we continue to find the mid to high teen IRR return on this investment highly attractive.

Despite increased global uncertainties we remain very comfortable with our current gross leverage ratio of 3.3 times given both our high degree of confidence and our free cash flow growth forecast, as well as our robust 15% and growing free cash flow to debt yield.

Additionally, OWN's free cash flow, while not included in our reported operating results, continues to accelerate and supports our capital structure. We retain a lot of flexibility around capital allocation and are highly committed to remaining an investment grade rated Company.

Importantly, we are well within the financial ratios prescribed by all three rating agencies for our current investment-grade BBB- debt rating.

For the full year 2016, despite the anticipated difficult third quarter, I am very pleased, as previously mentioned, to raise our guidance for adjusted EPS from high teens to at least 20% plus. At the same time we are reiterating our guidance for constant currency free cash flow growth of at least high teens as well as our commitment to driving solid constant currency margin expansion.

Importantly, today we are also increasing our 2015 through 2018 three-year constant currency adjusted EPS and free cash flow growth CAGRs from the low-double-digit guidance we outlined at our Investor Day last September to now growing at least low teens or better.

Even taking into account uncertain global ad and media market dynamics, we were able to very confidently today raise these three-year financial growth commitments given our increased visibility in three specific areas.

First, our global affiliate growth rates, which make up 50% of our revenue base, given our continued success in executing strong affiliate deals around the world with sustained pricing escalators.

Second, with the restructuring efforts already completed we have made significant progress in controlling our SG&A cost base and therefore slowing our total cost growth profile.

And finally, our book and cash tax rates continue to trend down and are much more favorable than we had expected last September.

Lastly, I want to update the expected ERV or foreign-exchange impact on our full-year reported results. Thanks to our hedging strategy the expected FX impact on our cash flows has not changed much since our last call, despite recent weaker currencies in the UK and Europe.

Assuming current spot rates stay constant for the rest of the year, FX is now expected to reduce our constant currency revenues by $150 million to $160 million and our constant currency adjusted OIBDA by $80 million to $90 million.

We also not expect a positive FX impact to adjusted EPS of $0.02 to $0.06 due to the net effect of this year's adjusted OIBDA impact and the year-over-year change in the below the line FX impact.

In closing, I am extremely pleased with Discovery's progress in the first half of 2016 and our outlook for the rest of the year. I remain extremely optimistic about our evolving global portfolio of well loved brands in over 220 countries around the world, our optionally given our ownership and context and flexible cost structures, and our overall financial and operating momentum.

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

(Operator Instructions). Kannan Venkateshwar, Barclays.

A couple of questions. David, on the strategic front, when we look at the cost structures in the US, the variable cost structure has obviously been an advantage helping you manage cost and margin. But internationally your cost structure seems to be moving more and more towards fixed costs with the higher investment in sports.

How should we think about the strategic view you have about international? Is this a bigger bet on digital sub growth or a linear ecosystem growing?

And secondly, Andy, from your perspective the comment on Bundesliga breaking even from a cash flow perspective, does that include any assumption on OTT penetration? Thanks.

Great, thanks, Kannan. So, look, I think our Company has really -- if you look at where we were 3 years ago, 3.5 years ago with the beginning of a cycle of all of our deals coming up with distributors here in the US and around the world, and mostly our IP being nonfiction. We really we made a strategic decision that we were going to invest more in content.

We were going to focus our brands to be really around tribes or super fans, get Discovery back on brand, science; we have driven Oprah to be number one for African American women. But we also felt that we needed to grow our IP to have strength to really drive our long-term affiliate fees in an aggressive way.

And we had said all along that sports was a real lag mover, that a lot of what you saw with ESPN in the 1990s is the way we see the sports market. And the way that you saw the kids market in the 1990s is the way that we saw Brazil.

So we have emerged now with much stronger IP and we are spending more for it in Europe on the sports side, but we have been very disciplined around it. Almost all of our deals have been low-single or mid-single increases. And we have said we will be profitable on Eurosport with our sports bets.

On top of that we have the ability to sell that same sports IP to other platforms. As you go to Latin America, we have invested more in IP, but Scripts never went down to Latin America, so we have the number two or three channel for women in Latin America which is home and health, so that is the equivalent of home, food and health down there. And we also invested in kids IP.

And so, as we look at ourselves today we now have made most of our pivot. We don't need more sports content in Europe, we can be opportunistic. We have three sports channels in each country. We have been able to get big step ups and better than double-digit increases. And you see our affiliate fees now growing double-digit outside the US. You are going to see that accelerate even further in Europe.

And we are finding that having kids as well as a great female content, together with Discovery being number one in those markets, is giving us a lot more strength in Latin America. And so, our cost structure is really stabilized here in the US; we have Oprah working, we have Discovery number one in the US and we have our channels on brand.

And I think we basically stabilized in Latin America and in Europe because we have enough sports IP now we think to go directly to consumers to service all platforms whether it be the phone guys or whether it be satellite providers or content or going directly ourselves.

So, I think we are in much better position with real long cycle sustainability on our affiliate domestically and internationally. And when I look at our bouquet of IP, we like our hand.

And it is important for us now to get that kids IP, to get Discovery, which was last -- two weeks ago determined to be the number one channel that people in America would want as a channel over the top. To take advantage of our brands and our IP on other platforms which would be a cherry on top.

Yes, and clarifying the Bundesliga economics was one of the more important goals of this call. As we said, it was a unique opportunity to gain these 45 games, primetime games at very favorable terms. And we committed to that being free cash flow positive and that does not include any additional OTT penetration that may be derived from those rights.

So again, very favorable outcome. A favorable economic result. And again, to the degree that it drives, and it will, higher OTT penetration, that is just all upside.

All right, thank you.

Michael Nathanson, Nathanson.

I have one for Dave, one for Andy. (Inaudible) the German soccer league team. David, I guess one of the push backs when you think about Europe is sports rights are shorter term than US rights, if this is a four-year deal.

How do you protect your operations from the inflation cycle and maybe the shorter-term football rights versus where we are in the US? So how are you thinking of that impacting your economics of this deal?

Good question. Most of our sports rights, we have the Olympics -- after Rio we will get the rings and the Olympic library and we will be in the business with the IOC throughout Europe for the next four Olympic Games. And I am heading over to Rio tomorrow.

Most of the rights we have gotten are in the six- to eight-year range and we have gotten all of our rights on all platforms. Four years is shorter than we would like. But having four years start in 2017 we think is attractive and we don't need the Bundesliga on renewal.

Right now we have -- we're the leader in tennis, we have all the winter sports, we have track and field, we have cycling and we have Moto DT in all German speaking countries. And so, getting the Bundesliga is we think for us kind of a real jumpstart and it allows us to play a lot of games in terms of mobile and other providers that we think could be quite attractive and we can learn a lot from it.

We don't have any affiliate deals right now that are dependent on that and we will be charging independently for the Bundesliga. So it will be a separate piece sort of the way Turner -- the way it has been done here in the US.

So for us it is really a one-off; it is an ability to get the equivalent of Monday Night Football to go into a very strong market and to take advantage of all the strong IP we have. And the fact that this is the most competitive market in all of Europe, not just in terms of having a good advertising play.

But you have a number of mobile players in that market, you have, you have some very strong cable guys competing. And on top of that you have Sky Deutschland fighting. And so there is a significant amount of interest in getting, as I said before: one, there is no requirements, governmental requirements that would restrict us from offering certain things exclusive, certain sports exclusive, we did it in France with [Volere].

And so we can make this available to everyone, we can make some of our sports exclusive, we can emerge with an exclusive deal for some of the Bundesliga games. So, it just gives us a lot of vitality and it takes us through 2021 and then we will see what happens, we do not need it.

Okay, let me just ask Andy, now that you have Liberty Global done, what percentage of the Eurosport footprint is now in a contract for the next three to five years and does that underpin the confidence in your guidance?

Oh, look, Michael, it absolutely does. It is about two-thirds locked in right now. And look, it absolutely underpins both our guidance for 2016 as well as our increased guidance for 2015 through 2018.

That line of sight we have now, and to a much greater degree than we thought a year ago around international affiliate, is one of the biggest drivers of our strength and views of both this year and the next three years.

What we are going to need to do for you when we get -- when we fully lap this sports journey, but here we are a few years in and we are operating three Eurosport channels, we have gone from 120 million subs to almost 150 million subs.

Our viewership is growing, we have a direct-to-consumer product, we have increased our IP. And Eurosport still remains -- it has a lower margin but it is still profitable, it is in the double-digit profitability range and we have said that we will keep it profitable.

But when we look at that profitability we say this is what we are making on Eurosport in advertising and the affiliate revenue that we assign simply to Eurosport. But the way that we are doing those deals is we are packaging Eurosport together with our 10 or 12 channels in each country.

And that is where you see the 10% affiliate growth, that is not driven by subscriber growth. There hasn't been increased fees generically paid by distributors in Eastern Europe and Western Europe. We have been getting significant step ups and long-term sustainable growth rates because of the overall package.

And on top of that we have the Olympics which we said was going to be profitable, but now based on the deals that we have done, and we are only about 27% or 28% of the way there, but on the deals we have done already, they're substantially more attractive and we think not only will we make money but it will be quite profitable for us.

Thanks.

Anthony DiClemente, Nomura.

I think the Euro questions have been taken, so I wanted to ask -- I want to follow up on direct-to-consumer. David, you are learning a lot about direct-to-consumer in Europe with Euro Player. How does that inform your strategy here in the US?

I wonder how do you think about direct-to-consumer apps for your fans? I think you called them super tribes. And so, what do your learnings in Europe say about your path to going direct-to-consumer in the US?

And then second question for either David or Andy. I noticed the All3Media content partnership -- you guys didn't mention that in your prepared remarks. I wonder if you could just touch on the strategic rationale for that.

And does that tell us anything about yours and Malone's content strategy in terms of -- I think it is for dramas in terms of moving away from maybe your traditional comfort zone? And will you use that content from the partnership on Discovery platforms or is it more likely that you will license or resell that content? Thanks.

Thanks, Anthony. We certainly have a lot to learn. We hired Paul Guyardo who worked for Barry Diller and ran his new media and marketing operation and he is now our Chief Commercial Officer. And he has deployed Discovery GO here in the US.

And it isn't -- at this point it isn't deployed on all the cable systems, it is deployed to about 30 million cable homes in the US. But it is an authenticated app, it is all 14 of our channels and we are learning a ton.

One is about 60% of the viewership on Discovery GO is in the 15 to 25 age demographic. So a very young demographic is watching our content. Our female content is a big surprise, it's doing exceptionally well. We really thought it was going to be mostly our male content, which research has always shown that people love Discovery, they love Velocity.

And so, we have hired Paul, we are going to roll that out by the end of the year probably everywhere in the US and I think that will be a helper to us in terms of economics. But we are also getting to see what are people watching when they could watch anything.

In Europe we are learning a fair amount on our Eurosport app. Right now our Eurosport app is everything. And we are finding that we have significant churn. But when we are talking to customers we are finding that they came in for the French Open and then they left. And then they came in for the US open and they left. And they came and four Tour de France and they left.

And so, we have hired Mike Lang who was head of development and strategy for Rupert and Chernin. He also ran MGM. He was one of the architects of creating Hulu. And he has moved to London and he has built a direct -- is building a direct-to-consumer team. And we are making some announcements; we have hired some very strong people. And it is an independent operation that will be driving our Eurosport app and all the great IP that we have.

And one of the things that we are learning is that it may be that these niches, that getting a seasons pass for tennis where you get all the tennis majors. A seasons pass for cycling, you get all the cycling. Seasons pass for winter sports. There is some research that is showing that that might be a more interesting product.

And so, we are doing a lot of research. Because there is 55 countries in Europe in the French Open we offered it five or six different ways and we are now evaluating where we were stronger, where we were weaker, where was there more or less churn.

So we are feeling quite good about it, especially because our cost of IP for our direct-to-consumer business is zero because we own all of it. And the fact that we now own so much strong IP I think works well for us.

And so, the final thing I would say is that when we look at Discovery and we look at science and we look at the auto category with Velocity, which around the world is called Turbo or DMAX, we are looking very hard at whether we create things like a science club for [$2.99].

We already have more science content than anyone in the world and Guyardo and Lang are looking at creating a science club for $2.99 or $3.99 and you get that app and you get all this science and stem content and you get it in language around the world.

Or we can do that with animals on Animal Planet, or we can do that with some of the sub niches on Discovery. Maybe one of the most interesting pieces of data we got is we started pushing -- we are the leader with Eurosport.com online. We started to push a new app that instead of going to Eurosport.com you have your own app on your phone.

We already have a 17 million people that have downloaded and are regular users of that app. And so, that is for free, but that becomes a group that we now get to talk to us we want to find out what they want when we want to up convert them to pay.

So, we have got a whole lot to learn, we have got two fantastic leaders in the Company that are really in the marketing and direct-to-consumer business. And I think you will be hearing a lot over the next [two] years.

If we can make this work you are going to see huge -- I think huge growth. And I think you guys will give us a lot of credit for it because it is kind of the next generation of our IP.

Finally on All3, it is a great partnership with Mike Fries and us, we own it 50-50. We have a fair amount of scripted content in there. And the thing that differentiates all three from a lot of the production companies that are primarily US is that you could do deals in Europe where you hold onto the digital rights where you get the digital rights back in a year, two years or three years.

So we see that as a profitable business that we can continue to grow and scale up, but ultimately those digital rights are rights that we could use on Dplay across Europe, that Mike could use on Liberty Global together with our content.

And we view it as a profitable content business, but an IP farm that could really generate more value for us in the aftermarket of mobile and direct-to-consumer as well as working with Mike and providing a better environment for Liberty Global customers.

Yes, there is an announcement today from all three and Liberty Global on a (inaudible) they are doing on dramas that doesn't include us. That is Liberty and Virgin Media and [all three], that is not us.

One other point, Anthony, on All3Media, just to remind people, not only was it absolutely (technical difficulty) to keep all the strategic value that we wanted to achieve, especially around, as David said, IP curation and first looks and optionality. But remember the deal structure itself was incredibly capital efficient.

We did the deal, as you know, with Liberty Global, we both write an equity check for about a quarter of the value of the Company. We are able then to within the JV structure do an additional 50% with debt and leverage that certainly makes it more capital efficient. So, it is a very strong IT and strategic play and also being very capital efficient.

Thanks very much.

Ben Swinburne, Morgan Stanley.

David, just to come back to Europe since that is the big news this morning and a driver of the higher long-term guidance. When you re-cut this liberty deal were there any restrictions on your direct-to-consumer flexibility?

I am thinking about, for example, taking your linear networks on I think it is DMAX or future products direct-to-consumer in any of the markets? Were you able to keep all that and get the step ups that you have laid out here?

And any comment for us on your Sky relationship? I mean you probably have lots of different deals with Sky around Europe, but I would imagine that is a huge part of what is left to do. And then I just had a quick follow up for Andy.

Well first, the economics isn't driven just by Liberty Global, we just happen to be announcing Liberty Global. We have been able to do very favorable deals in Latin America; we were able to do very favorable deals in Europe. As you know, we pulled our signal on three occasions in the last six months.

So it was a cultural change of not only is our IP better but we are going to stand up for the value of our content. And that has reverberated in Asia as well.

The other piece that is helping our affiliate line, which I think has more sustainable opportunity for us, is that more and more content players want some exclusive content in order to de-commoditize their platforms.

So, whether it is a mobile player or whether it is a satellite operator or whether it is a cable operator in a particular market, more and more they want some exclusive content so that when you buy their service you get something you don't get anywhere else.

And we have been able to take advantage of that with (inaudible) in the Middle East and [OCN]. So, we did our full package of services in the Middle East and then we offered some extra content to [BN] and some extra content to OSN. That was all incremental and that is exclusive content. We have a huge library.

We did the same thing with Volere in France. And so, more and more we are having discussions where we provide our basic services into the marketplace. But then because we have a real opportunity we can just create a kid science channel. We can create a male channel very quickly in the market. We can launch another female channel. We can launch a young female channel. And we can do it at very low cost with our library. So that is one of the things that has been helping to drive it.

We don't comment specifically with respect to Sky or any of the other players in the marketplace in terms of when their deals are coming up or what the status is.

Okay, fair enough. Andy, just quickly, a clarification. I thought you said that you would recognize half the cost of Bundesliga next year. I think it is a four-year deal, so I was just wondering if you could clarify on that. And then on US affiliate revenue, which was healthy in the second quarter, should we expect similar sort of 8%-ish growth in the back half? Thanks.

Hey, Ben. Yes, Bundesliga, it is really half the annual cost will be recognized in 2017. It is a four-year deal. Because it is only six months of 2017 it will be one half of one year as license fees.

Okay, got it.

And so, that is the way to look at it. But, yes, it is a four-year deal. And look, on the affiliate line, no question that our pricing escalators certainly reflect the 8% plus growth that we are now at.

The question is, you all can model this yourself, is what would happen obviously with the sub universes and what those declines may or may not be. And again, a lot of our penetration rights protect us. But clearly the pricing escalators in [all the] deals we have done reflect that sustainability of growth.

I mentioned this in my comments, but when you look at 50% of our revenue being long cycle, it is for us -- I think we have worked really hard over the last 3.5 to 4 years to get significant increases. And it is paying real dividends for us now.

In an environment where there are universe declines we are still growing very, very healthy and we will even if universe declines increase. In markets where there weren't increases we fought to get the increases in Latin America and Europe. And we sit now with 50% of our revenue very strong, almost like a bond.

And so, if you have 50% of our revenue growing at 8%, 9% or 10% then the question is what do we do with our IP and our existing platforms? And what happens to the advertising market? If we grow 2 then maybe we are a 5% growth business. If we can grow around the world 5% then we are 6% or 7% or 8% growth business.

If the advertising market -- or we do a better job programming our channels and we can get advertising around the world up to 8% or 9% then we are a double-digit growth business.

And so, I think we are really going to focus in now. We have done a really good job on focusing on our brands, we have done a good job of getting our IP strategy in place with kids in Latin America and sports in Europe and in Asia now we have sports and kids at a much lower cost.

But the incremental on top is if we can now create extra revenue by going to other platforms, that is all incremental. And so, we're going to spend a lot more time on the other 50%, which right now is ad sales and viewership share of all of our brands, as well as taking all of our IP to every other platform in every market in the world to get more dollars.

Thank you both.

Todd Juenger, Bernstein.

Given the time, I'll try and keep it quick. Andy, I think just a clarification. I thought I heard you say, but I want to make sure I heard you say it, that your portfolio subs -- I think you said they were down 2% year over year for the quarter. I think in Q1 you said that was 1%.

I don't know -- first of all I don't know if I heard that right. But if I did hear that right I don't know if that is anything peculiar to your particular mix of networks or if that tells us something about the universe of overall US paid subscribers.

And again, just trying to keep it quick. The second question, I think you characterized your upfront as strong. I didn't know if you would be willing to make that any more specific in terms of either CPMs or ultimately actual dollars collected. Thanks.

Sure. Yes, Todd, the -- we did say down 2% versus the down 1%. That nominal acceleration of 2% is kind of a combination of cord cutting and cord shaving. But again, even including the down 2%, we still had -- it is really a growth of 8%. So it really speaks to the extent in which our affiliate pricing contracts have been sustained. What was the second question?

The upfront.

And the upfront, Todd, was -- look, it was very strong for us. Without getting into too many details, broadly speaking pricing was high-single. We were able, given that pricing dynamic, to sell out a little more of our inventory while still leaving room for the strong scatter.

And so, net-net really couldn't be happier with the pricing. David mentioned the dynamics around OWN. We also put a lot more of the ad volume into our digital platforms. And so, couldn't be more happy with how the upfront played out and how we are able to monetize that strength.

Terrific, thanks.

Alexia Quadrani, JPMorgan.

Just one quick follow-up on your commentary. The move of Shark Week, which you highlighted, hurt ratings a little bit in the quarter. I assume that is not a permanent move, that it goes back to the normal timeslot next year.

And I guess just given the comments you just gave right now on the underlying -- the advertising market is very strong upfront. You are [ending your] (inaudible) you have made in content (inaudible). Should we assume -- I guess what is your assumption for the longer-term kind of domestic advertising growth for you guys?

Thanks, Alexia. Well, first, Shark Week was down this year. It was still the number -- maybe fourth most successful Shark Week. But we think it should be most -- much better. We got it to a whole different level in the last two years and it dropped off.

Part of that I think is we made a mistake, we moved it too early. We did it for two reasons. One, we wanted to get out of the way of the Olympics. And two, we thought it could be helpful to us to align with the July 4 weekend.

But I think in retrospect doing a lot of the research I think that was too early. That there were a lot of people still working. When we have done it in August we get a huge boost in day and late night because people are just hanging out and the kids are -- it's kind of the dog days of summer. So, I think you will see next year it will be going back into late July or early August where we found the most success.

The only -- one other thing I would say about the overall ratings and advertising market. Advertising market feels strong. Scatter is better than double-digit above last year, the volume is quite good.

We have been hurt in the US by the strength of the news networks. They are up almost 100%. A lot of the viewership that is going for those networks is coming from some of our channels; Discovery is still the number one channel in America for men. But there is no question that both our male and female channels are getting hurt a little bit by that.

So, we are looking forward to the Olympics being over and early November for the elections to be over, because we think we have a good hand with our brands and a good hand with our channels.

In terms of longer-term, we can't predict. I would say we took some more money because the pricing was quite good. We were able to get more dollars into -- and better pricing into some of our more successful channels like ID that has broken through now and is the top three or four channel in America for women and it is number one in daytime and late night, we were able to do a lot better with that.

And Guyardo has -- working with [Aberze] has done I think a good job of leveraging some money into digital, which should show up as incremental and value next year. Scatter right now is strong.

I think the biggest narrative that has changed, and I don't know how long it will change, is that TV is a pretty good place to move products for advertisers. And a number of advertisers moved to digital and they weren't able to move as much product and they weren't able to get the kind of metrics that they were comfortable with.

And so, more money has moved back to TV. And the ability through things like X1, the ability through working with a number of the data services to really get better quantification for who is watching and target advertising on television is improving, as well as TV Everywhere getting a little bit better.

So, overall I think right now there is some momentum that TV is a pretty good place, a more favorable place to move money and more sustainable, more dependable. I think over time digital is probably going to make more of a comeback but that whole en vogue of digital has I think worn off a little bit and those that went in too hard I think got hurt a little bit.

So, for now it is good, we can't really make any long-term predictions, but we are certainly way ahead of where we thought it would be.

Thank you very much.

Doug Mitchelson, UBS.

I was just curious; you said on the US app getting to the full market by the end of the year would be a helper for economics. Just curious how that flows through from your affiliate deals if that was sort of a separate -- separately priced product.

And then lastly, David, you talked about advertising and viewing a lot being sort of a core focus as it always is. You often give us sort of international viewing and talk about how your focus is on global viewing, not just US viewing. Any sort of update on sort of viewing by region and overall international would be really helpful. Thank you.

Okay, the -- Discovery GO, we are talking about an authenticated app where we are working together with the distributors. So we have TV Everywhere which we have now deployed everywhere possible. And we have our own authenticated app which allows us to get incremental advertising, but also reach a very strong millennial population, so our CPMs on that are quite good. Our viewing globally is up.

One of the things that -- it is a little bit of tale of two cities. Northern Europe is a challenge, it has been a challenge for the last year and it continues to be a challenge. Advertising was actually down in Northern Europe. If you took Northern Europe out we were double-digit growth everywhere else in the world.

And so we are finding that Northern Europe, through very high penetration of high-speed, very expensive cable, high penetration of HBO and of Netflix and a very strong appeal of US content with a high English-speaking population that loves the US stuff. That it is having a significant impact on viewership in Northern Europe.

SBS has been a good transaction for us; it is a free cash flow machine. It has been very efficient in terms of the price we bought it at and the synergy we got. But of all markets around the world it seems to be the one that has the most challenge in terms of viewership on traditional platforms.

The good news is it doesn't feel at all like a contagion. In fact, Netflix penetration and SVOD penetration outside of Northern Europe is much lower than everybody thought. Local content is working better for those players throughout most of Western Europe and Latin America.

So our viewership overall is up, it is up in the mid-single range. And we are fighting very difficult economies around the world. I mean you have almost every country in either Latin America or Europe either flat or down. And advertising tends to follow GDP. The reason that we are still growing is that our share is growing and we have some efficiency and we have been able to get some -- a little bit of market power as we have gotten bigger.

But we don't see the economies improving anytime soon. And we don't see Northern Europe improving anytime soon. But the rest of the market feels rather healthy to us and our ability to continue to get double-digit feels sustainable.

Great, thanks so much.

Vasily Karasyov, CLSA.

Just wanted to follow up on the domestic subscriber conversation. Is there any difference that you see, A, by your channels because you quote 2% decline for the portfolio. Is there one particular channel that drives that or is it across the board similar declines?

And then, do you see any difference in terms of subscriber dynamics by type of distributor, I mean satellite versus telco versus cable?

Thanks, Andy can get into more detail. But in the aggregate we were down 2%. You are seeing I think a little bit of a change up. I don't want to call who the winners and losers are. I mean you can do it, we see announcements of a number of guys gaining. Some of that hasn't flowed through.

We don't know whether -- there are a number of platforms. In some cases we have some consolidated players that are looking to transition some from one platform to another. And so, we are getting some movement whether it is a sustainable 2% or whether that ameliorates based on the press releases that we are seeing from some of the bigger distributors that are saying that they are growing.

We are also being helped a little bit by TV Everywhere. And X1 is quite a compelling product and that is a big helper to us. And with Charter now and Time Warner coming together and Rutledge being an aggressive proponent of TV Everywhere, I think that will also be a helper.

But what happens to the universe as some of the platforms are losing and some are gaining, we have a little bit of a lag, well it remains to be seen. Right now it is looking like 2%, we will let you know in the next two quarters whether that was high or low.

Thank you.

And from a network [perspective], Vasily, the -- look, it is kind of a mix. The bigger drivers, which is good for us, so the decline is really what we call the digit nets or lesser distributed networks. And it is good for us because that is not where the economics of our US businesses are at.

And so, the bigger mostly distributed higher CPM networks are kind of growing at or below that level. And then we are still seeing, by the way, growth on Velocity and some of the other networks that have a particular affinity group that we continue to see traction on. So, it is kind of a mixed bag, but again, good for us that it is the lesser valuable networks that are seeing the greatest extent of decline.

Thank you. And that concludes our question-and-answer session for today. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.