華納兄弟探索 (WBD) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Discovery Communications First Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Jackie Burka, Vice President, Investor Relations.

Ma'am, you may begin.

Good morning, everyone.

Thank you for joining us for Discovery Communications' First Quarter 2017 Earnings Call.

Joining me today are David Zaslav, our President and Chief Executive Officer; and for the first time, Gunnar Wiedenfels, 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 Gunnar, and then we will open up the call for your questions.

(Operator Instructions)

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, 2016, and our subsequent filings made with the U.S. Securities and Exchange Commission.

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

Good morning, everyone.

Thank you for joining us.

Discovery's first quarter marked a solid start to 2017, highlighted by strong gains in global distribution revenues, continued ratings momentum across our portfolio of superfan brands and channels, and distinct progress in growing our digital and direct-to-consumer businesses.

As the media landscape continues to evolve, we are focused on strengthening our global content portfolio and positioning it to reach our superfans every way they consume content.

We continue to make significant headway on our strategy of maximizing our existing linear business, while simultaneously driving growth and investing in areas like mobile and OTT.

Since the start of the year, we expanded multiple existing digital initiatives such as our Amazon SVOD channel's partnership in the U.S. We made demonstrable progress with Eurosport Player, our live-streaming service in Europe that provides an all-access pass to the greatest sports events.

And we entered into several strong, new digital partnerships, including a pioneering joint venture with Germany's ProSieben, to create a next-generation streaming OTT service, a first of its kind partnership in Europe.

I'd like to spend a moment talking about the solid performance of our global content portfolio.

In the U.S., our networks outperformed the downmarket in both prime and total day, led by Discovery and TLC, and also strength at ID, OWN and Velocity, which helped drive our U.S. ad sales up 2% on an underlying basis, or 1% excluding the impact of the Group Nine transaction.

And internationally, our ad sales grew 3%.

In the U.S., Discovery Channel was again the #1 non-sports cable network for men.

And TLC continued its resurgence, gaining nearly 20% and ranking as a top-ranked network for women.

Internationally, TLC posted strong double-digit viewership for the quarter and set new delivery records.

At ID, we maintained first place in total day viewing among women in the U.S., a significant achievement, with also the longest length of view in cable.

We did that while growing our international ID viewership by 17%.

Velocity and international counterpart, Turbo, saw their highest U.S. ratings ever and substantial international growth in the high-income men's demo.

Turning to our distribution business.

Our domestic affiliate revenue grew 5% in the first quarter, and our international affiliate revenue climbed 10% organically, driven in part by our enhanced portfolio of sports, including the Olympic Games in Europe for the next 4 games, which begins next year.

Looking next at our overall digital and direct-to-consumer business.

We continue to aggressively pursue our 3-pronged global digital strategy.

First, we are driving our authenticated TV Everywhere offerings that enable cable and satellite superfans to watch our long-form content wherever they want, whenever they want.

Second, we're taking our long-form content over the top with new distribution partners as well as direct-to-consumer offerings.

Finally, we are focused on short-form, mobile-first content that appeals largely to a younger audience.

During the quarter, we made real progress with our first initiative around TV Everywhere.

In the U.S., our suite of GO apps is growing rapidly and are also driving awareness and engagement for our linear brands.

Our GO apps are now available to 80% of U.S. households.

And by year-end, we expect they will be available on 115 million connected devices, including on Roku, PlayStation 4, Apple TV and Xbox.

We are seeing great consumer engagement with GO, especially with younger viewers.

Even as our streaming volume increases, 18- to 34-year-olds still account for half of our visitors.

GO is now delivering incremental revenues as well.

In the first quarter, we realized a full point of ad sales growth domestically from GO.

And we expect to continue improving our monetization going forward.

Outside the U.S., our market-leading TV Everywhere product in Latin America, Discovery Kids Play, continues to grow.

We now have 60% distribution across all of Latin America with 90% distribution in Brazil.

And in Europe, our direct-to-consumer streaming service, Dplay, reported 19% year-over-year subscriber growth as both local content and global tentpoles, like Gold Rush, helped drive higher overall viewing across linear and digital.

The second piece of our digital strategy is expanding the reach of our long-form content through over-the-top, direct-to-consumer and on to new and emerging platforms.

As mentioned, the Eurosport Player, our Sports Netflix product, is off to a fantastic start this year with year-to-date gross subs up over 70% and our total sub base up almost 50% year-over-year, suggesting our new season pass strategy from Paul Guyardo and his team is beginning to work.

You may recall that it was Paul who built DIRECTV's NFL SUNDAY TICKET season pass and other sports packages to an over $2 billion business.

Paul's country-by-country approach has pivoted the business away from a one-size-fit-all model to one that marries tailoring pricing and packaging strategies, such as seasons passes with specific premium and local sports rights.

Another key direct-to-consumer offering is our recently announced joint venture with Germany's #1 commercial broadcaster, ProSieben.

Together, we are launching an ad and subscription option video-on-demand service that will stream our combined free-to-air channels in Germany.

This product will help strengthen our all screen strategy and deliver incremental advertising dollars in one of our most important international markets.

We will welcome discussions with other media companies to participate in our partnership.

We also continue to pursue OTT and direct-to-consumer products in deep niche verticals that appeal to our fans with specific affinities and passions.

In the U.S., our Amazon streaming channels continue to grow, and we recently launched a third subscription video-on-demand channel on Amazon, Say Yes, featuring more than 500 hours of exclusive wedding content.

Say Yes follows the success of True Crime Files by ID and Destination Unknown, which were launched last year.

While it's early days, we believe our niche verticals have strong appeal with superfans, and we continue to explore opportunities for our genres where we have a unique brand advantage.

Our third area of focus in digital is creating short-form, mobile-first content that appeals primarily to a younger audience.

A key vehicle is our strategic partnership with Group Nine, which continues to build momentum and today achieves 4.2 billion monthly video views across our properties, including Thrillist, The Dodo, Seeker and Now This.

We continue to work together to sell our Group Nine brands in conjunction with our GO apps in order to deliver a true 360-degree solution targeting millennials.

During the quarter, we also announced that Group Nine's Now This, a leading creator of short-form video for social media, and Eurosport will partner to produce and distribute sports-related social media, including content around the 2018 Olympic Winter Games.

We're also working closely with SnapChat, which we see as an important new way to reach younger viewers, leveraging the platform's 160 million daily users, over half of who are ages 13 to 24.

We now have several SnapChat channels, including Eurosport, Now This and The Dodo.

And we'll also be creating premium SnapChat content around marquee Discovery brands, like Shark Week, starting this summer.

In summary, as the media industry continues to evolve, we will continue to grow our businesses while positioning ourselves for the future with new ways to reach and engage our global superfans.

Part of paving a successful road ahead is ensuring we have the best, most forward-looking team in media.

We recently welcomed Gunnar Wiedenfels as our new CFO, and he has hit the ground running.

Gunnar's extensive experience in Europe and international markets and in building direct-to-consumer and digital businesses is already proving invaluable as we focus increasingly on all 3 areas to drive growth at Discovery.

So for the first time, I'll turn the call over to Gunnar for a detailed look at our financial performance.

Thank you, David, and good morning, everyone, also from my side.

I want to start off by saying that I'm very excited to be here at Discovery.

Discovery is a company with an incredible global reputation, especially in Europe, and I have followed its trajectory closely throughout my career.

David and his team have built an unrivaled portfolio of global brands that is uniquely positioned for growth around the world.

I am thrilled to have joined this world-class team and to bring my prior experience in the European and digital markets to this exciting and dynamic company.

I am very optimistic about Discovery's strategic positioning and outlook, and I look forward to speaking with all of you more going forward.

Now delving into our financials.

As David highlighted, our first quarter results were driven by continued global distribution growth combined with a strict focus on cost management.

Our total company reported revenues and adjusted OIBDA were up 3% and 5%, respectively, while constant-currency revenues and adjusted OIBDA were up 5% and 4%, respectively.

Currency impacts continue to improve.

In the first quarter, currency reduced revenue growth by 2%, while the combination of our successful hedging program and certain emerging markets' currencies moving in our favor led to currency helping our adjusted OIBDA growth by about 1%.

Net income available to Discovery Communications of $215 million decreased versus the first quarter a year ago.

This was, on the positive side, driven by our improved operating performance and lower effective tax rate.

These positive effects were more than offset by a onetime debt extinguishment charge, a larger solar-related loss from equity investees and higher restructuring charges.

Please let me explain these effects in a bit more detail.

Our tax rate of 20% was a full 700 basis points lower than our full year 2016 rate as we began to realize the beneficial tax credits of our investments in solar power.

On the flip side, our equity income was impacted by an initial first quarter $83 million pretax book loss due to the timing of losses allocated from our solar investments.

These book losses created a negative equity income, which was otherwise positively impacted by improved contributions from OWN and other investments.

Looking forward on the full year, we still expect our full year tax rate to be 20% or below, primarily due to our solar investments, while the full year book loss from solar is expected to total approximately $200 million, approximately $30 million of which are expected for the second quarter.

Net-net, we still anticipate that our solar investments will have a positive impact on full year net income as the benefits from our tax credits as well as the tax shield on the book losses will more than outweigh the $200 million book losses.

Let us now turn to EPS.

Earnings per diluted share for the first quarter was $0.37, and adjusted earnings per diluted share, which excludes the impact of acquisition-related noncash amortization of intangible assets, was $0.41.

That means, excluding currency impact, adjusted EPS was down $0.05 or 11% for the quarter, but was up 9% year-over-year for the last 12-month period.

Excluding currency impacts and the $34 million or $0.06 after-tax onetime debt extinguishment charges, first quarter adjusted EPS increased by 2%.

First quarter free cash flow, while traditionally the lowest of the year, did increase significantly to $208 million.

This was primarily due to a large decrease in cash tax payments, partially due to certain payments being deferred to the second quarter this year versus being paid in the first quarter last year as well as our improved operating results despite higher capital expenditures due to an increase in technology and infrastructure spending.

Turning to the operating units.

Let me start with U.S. Networks.

Our U.S. Networks had another solid quarter with total revenues up 3%, led by 5% distribution growth and 1% advertising growth, and adjusted OIBDA up 6%, given our reduction of total domestic costs.

Our advertising growth of 1% or 2% on an underlying basis, excluding the impact of December's Group Nine transaction and the deconsolidation of Seeker and SourceFed, was primarily due to pricing and improved monetization of our GO platforms, which added 1 point of growth in the quarter, partially offset by lower delivery due to continued universe declines.

As we look ahead to the second quarter of 2017, we currently expect U.S. ad growth to be up low single digits on an underlying basis or flat to up slightly on a reported basis after including the impact from the Group Nine transaction.

In more detail, while delivery is expected to be down due to continued universe declines and Shark Week moving to the third quarter versus mostly in the second quarter last year, we continue to maximize yields on our linear networks as pricing remains healthy.

Additionally, included in our outlook is, again, 1 point of growth from our GO platform.

Looking at distribution.

Our first quarter domestic distribution revenues were up 5% with growth primarily driven by higher contracted affiliate rates, partially offset by a slight decline in subscribers.

To a lesser extent, the growth was driven by contributions from other distribution revenues, i.e., content deliveries under licensing agreements.

Total portfolio subs in the first quarter declined by just over 3% year-over-year, a slight acceleration versus the fourth quarter.

As we stated on our year-end call, we still expect 2017 full year distribution revenue growth to be in the mid-single-digit range, assuming subscriber trends remain relatively consistent.

We will continue to benefit from higher pricing in our existing affiliate deals, and we will also continue to aggressively pursue additional ways to increase our digital distribution revenues, and monetize our content across all platforms with existing and new distribution partners as the media landscape continues to change.

Turning to the cost side.

Operating expenses in the quarter were down 2%.

Cost of revenues were down 5%, mostly due to lower impairment charges and the timing of content expense.

SG&A increased 4%, primarily due to higher marketing costs.

The decline in total costs led to an adjusted OIBDA growth of 6%, with margins expanding by almost 200 basis points to an impressive 60%.

As we look ahead to the rest of the year, we will continue to focus on managing -- limiting U.S. cost growth with the year-over-year total cost growth expected to peak in the low single-digit range in the third quarter due to Shark Week and our scripted drama, Manhunt: Unabomber.

I will now turn to our international operations.

Reported revenues and adjusted OIBDA were up 5% and 7%, respectively.

While excluding currency, revenues increased 8% and adjusted OIBDA increased 4%.

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

The 8% first quarter revenue growth was comprised of 10% distribution growth and 3% advertising growth.

Our 10% distribution revenue growth was driven by higher affiliate rates throughout Europe, where we have already been successful in monetizing our expanded content portfolio that now includes sports to secure higher contracted pricing increases.

Second driver was Latin America with an increased subscriber number and higher pricing.

Looking forward, second quarter growth will decelerate a couple of hundred basis points from the 10% increase in the first quarter.

This is primarily due to prior year comps with a catch-up effect associated with contract renewals in the second quarter of last year.

That being said, for the full year, we're still aiming for distribution revenue growth of 12% to 13%.

Our 3% advertising growth was mostly driven by increases in the Nordics, primarily due to higher pricing and volume and the absence of a Telenor blackout that occurred in the first quarter of 2016, higher volume and ratings in Latin America and higher pricing and volume in CEEMEA.

These increases were offset by declines in the U.K., where we were impacted by overall market weakness as the total market was down in the high single-digit range as well as lower ratings on our OWN networks and declines in our smallest market, Asia-Pacific, primarily due to weakness in India post November's demonetization.

As we look ahead to the second quarter, we expect ad sales to again be up in the low to mid-single-digit range as we expect positive ad growth in Southern and Eastern Europe, the Nordics and LATAM to likely again be partly offset by declines in Asia-Pacific and the U.K. due to continued market softness.

Turning to the cost side.

Operating expenses internationally grew 9% in the first quarter, primarily due to higher sports content and production costs.

Looking ahead, we expect total cost growth to be in the high single-digits to low double-digit range each quarter for the rest of the year, with growth peaking in the third quarter, primarily due to the timing of our sports rights.

Now taking a look at our overall financial picture.

In the first quarter, we spent a total of $200 million repurchasing our own shares after investing a gross amount of $181 million in solar.

We have now spent over $8.2 billion in buying back shares since we began our buyback program in 2010, and we have reduced our outstanding share count by over 36%.

Discovery's capital allocation philosophy will be a top priority of mine over the next couple of months, and I will work closely with David, our senior management team and our Board of Directors on how to best position the company to maximize returns on our invested capital.

While we remain completely committed to maintain our investment-grade rating, we will take a fresh look at our target leverage ratios and investment priorities as well as hurdle rates.

At this point, for the second quarter, our capital allocation priorities will be the same as over the last 2 quarters.

We're not committing to a specific level of buybacks, but we'll allocate excess capital beyond any high-return investments towards repurchasing our shares.

On solar, we have already spent over half of the $340 million 2017 gross commitment amount.

And in the second quarter, we currently expect to invest another [$15] million in additional solar investments.

One other item I would like to note is the financial impact of the Raw and Betty sale, which closed at the end of April.

Raw and Betty contributed approximately $8 million to $10 million of revenues per quarter to our Education and Other segment, which includes our studios business, with a minimal impact on adjusted OIBDA.

Finally, we are reiterating our full year guidance of constant-currency adjusted EPS growth of at least low to mid-teens.

Growth will be driven by maximizing our advertising and distribution revenues on our existing linear business and across new and emerging platforms, combined with a continued laser-focus on controlling cost growth and a lower effective tax rate.

Pulling together our commentary on U.S. and international costs.

We continue to expect total company constant-currency cost of revenues to grow in the high single to low double-digits range, and total company constant-currency SG&A growth to be flat to up low single digits.

I would also note, as has consistently been our practice, that our adjusted EPS guidance does not adjust for any below-the-line items, except for purchase price amortization, so it does not back out the first quarter onetime debt extinguishment charges.

It also assumes full year stock-based compensation of approximately $30 million to $40 million.

I am also pleased to reiterate our growth guidance for the full year 2017 constant-currency free cash flow of at least low double digits.

While we now expect capital expenditures to be up year-over-year to just over $100 million as we continue to invest in technology and infrastructure, we now expect our full year cash tax rate to be in the low to mid-20% range, down from our prior expectation of the high 20% range, due to the timing of expected additional refunds.

Finally, we are reiterating our 3-year 2015 to 2018 guidance for constant-currency adjusted EPS and constant-currency free cash flow CAGRs to grow at least low teens.

I also want to update you on our expected year-over-year foreign exchange impact on our full year reported results, which has improved versus our prior guidance, given the recent weakening of the dollar as well as our hedging program.

Assuming rates stay content -- constant for the rest of the year, the year-over-year FX impact on revenues is now expected to be negative $20 million to $30 million.

On AOIBDA, currency has become a slight tailwind and is expected to have a positive impact of $10 million to $20 million, and currency is now expected to have a negative $0.09 to $0.11 impact on adjusted EPS, primarily due to last year's below-the-line FX gains.

In closing, while I've only been here for a relatively short time, I'm extremely pleased with Discovery's start to 2017 and our outlook for the rest of the year.

I'm very optimistic [of our global] portfolio and our overall financial and operating momentum.

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

(Operator Instructions) And our first question comes from the line of Alexia Quadrani of JPMorgan.

Just following up on your comments on domestic advertising trends where you highlighted better pricing.

Is there any more color on the scatter market and how it's trending in the second quarter?

And then just a quick follow-up on your commentary on the -- on your investment in short-form, digital video that you highlighted.

Can you add some color on how you expect to monetize it over time?

Is it largely gaining mind share for the millennials in building up your brand?

Or do you see, I guess, an incremental revenue opportunity associated with those videos as well?

Sure.

Alexia, the advertising market kind of feels steady as she goes.

We don't have a lot of visibility to the upfront, but scatter pricing is up mid- to high teens over the upfront.

The volume is relatively steady.

We come into the market right now in the second quarter and into the upfront, I think, with a very compelling story.

Our ratings are up.

We're up in April, in prime, up 5, while the industry is down 8. And for the full year-to-date, we're flat in prime with the industry down 6 and broadcast down 12.

But more importantly, I think we're a very protected environment.

Our brands have never been stronger.

So not only do we have a growth story, but we have a real strength of viewership story on ID, on TLC, on Discovery, on OWN.

And so it's an environment that the advertisers are quite comfortable with.

And so I think that we're finding the market to be steady, and we're starting to take advantage of it with the quality of our brands and the fact that we actually have some real ratings.

On the short-form monetization, the good news for us is that we've -- we're learning a ton.

This whole Group Nine transaction has been terrific for us.

We're building even stronger relationships with Facebook and SnapChat.

We're understanding a lot more about the consumption of 1-minute videos.

We're up to over 4 billion in views.

We're the #1 or #2 video provider for news on Facebook, and we're experimenting with them in different ways to monetize that.

We are -- Guyardo is working with our entire team in putting Group Nine together with GO, together with our traditional inventory, so we have a great 360.

And so -- and together with SnapChat, I feel like we're reaching more demos, significant difference from 2 or 3 years ago where we felt like some of those demographics were being left behind.

And our storytelling capability in short form, we felt like it really needed to be improved.

So we're quite happy with where we are.

I think the monetization of short form has a fairly long way to go.

And so if there is upside there, or if it takes a turn, you -- we are now one of the -- we're the #2 or #3 provider of short-form content in terms of all the media companies.

And we have a right to take control of Group Nine in 2 years.

So I think it's a -- it's been good, and it's working very well with our ad sales team and it gives us, I think, a very forward-looking view in terms of being able to reach all demos as we hit the upfront.

And our next question comes from the line of Ben Swinburne of Morgan Stanley.

David, can you talk a little bit about your expectation?

I believe your guidance is for acceleration in international distribution revenue growth later this year.

And any update on sort of how you're thinking about the Bundesliga rights monetization?

And I don't know if you guys are comfortable talking about sort of the Olympics next year, but to the extent you can help us think about distribution revenue trajectory into '18, that would be really helpful.

And Gunnar, I was just curious if you could -- I don't know if you're willing to, but if you could give us the impact on U.S. distribution revenue from the licensing -- year-over-year licensing change and I don't know if there's any -- like a basis points impact to help us isolate the core number?

One point before I pass off to Gunnar, who spent enormous -- amount of time at dealing with these issues in Germany and -- with ProSieben.

One of our philosophies on our IP is that we own it on all platforms, which is meaningfully different from the way that sports is sold here in the U.S., for instance, where when you see it on a mobile player or on a another platform, it might be the league that sells it.

It might not -- somebody's buying a broadcast window or a cable window.

So when it comes to the Olympics and when it comes to the Bundesliga, when it comes to all of our sports rights, when it comes almost all of our IP, we own it for all platforms.

And so if you see our content turning up or if you see the Olympic Rings turning up with a mobile player in Europe, if you see the content over the top on mobile, on any platform or the Bundesliga or any of our sports, that's why we can go to direct-to-consumer with it.

We could offer some of it free.

And so I think -- there's no question we're a little bit long on IP.

We are profitable with our sports.

But we're long on it because we think owning that IP for all platforms, owning our Kids IP for all platforms is part of this transition we're making into real -- creating real value to address some of the terminal value concerns that the industry is facing.

Gunnar?

Yes.

Sure.

Ben, on the affiliate revenue growth guidance for international, as you could hear in my opening remarks, we're continuing to target a 12% to 13% full year growth rate.

And if you look at the run rates, as you say, we got 10% in Q1.

I also said that we're going to see a slightly lower rate in Q2, which is not a change in the trend, but it's more related to a prior year comp, where we had some catch-up in Q2 2016.

And then as you say, we're targeting a pickup in the second half based on some deals that are -- that we're working on currently, to get to that 12% to 13% figure for the full year.

On Bundesliga, specifically, maybe allow me 1 or 2 comments.

As David said, I've lived in that market for all of my life and, really, I mean it's important to understand Bundesliga is one of the top-top sports franchises in the market.

We got it -- we got a good share of that.

We own the rights for 4 years.

It's a strong right and a good deal for us in terms of the duration.

And looking at the number of players that are in the market that are looking for premium IP, we're talking to a number of players.

And I'm absolutely convinced that the Bundesliga deal will help us strengthen the portfolio in the market.

Talking about Bundesliga, again, from my perspective, a very interesting deal.

I very much like that Pan-European, cross-platform approach to that deal.

And again, I believe we will be able to create a lot of value, especially if you look at the 8-year period that we'll own it.

That -- the Olympics.

For the Olympics.

Yes.

And the deals that we've done for the Olympics thus far have been ahead of plan.

And by locking in those rights, we -- we're excited about the fact that Germany is kind of the real center spoke of Europe.

So not only do we have Eurosport free-to-air and pay in Germany, we have a free-to-air female channel, a free-to-air male channel.

And we'll be doing the Olympics ourselves in Germany, which we think will add a significant amount of value.

And having extra scale in Germany is important to us because it's such a robust market.

And then, Ben, maybe your second question, that impact of those other distribution revenues on the U.S. side.

We just felt it important to highlight that there were some contributions from those deals.

It's small in the greater scheme of things in the whole distribution revenue line item, and we see more of those deals coming forward as we look at the full year.

So that was really just some bulk delivery of content to our existing partners.

It was a very small component of Q1.

But when you add it on top, it provided some growth, so we felt it important to point that out.

And we may do more of those.

And our next question comes from the line of Michael Nathanson of MoffettNathanson.

Two, one following up on Ben and a new one.

David, you guys have been very clear about the Olympics in '18 driving affiliate revenue growth internationally, and it's going to step up.

Can you talk a bit about how the costs layer into the Olympics?

And is '18 incremental profitable because of those stepped-up affiliate fees?

Or is the Olympic profitability more back-ended?

And then on the cost line, if you go back to your Investor Day in '15, like almost 2 years ago, you guys talked about your ability to control costs under different scenarios of revenues.

Now that we're 2 years later, you kind of see the normal rate of growth in the market.

Can you talk again about your ability to control cost and kind of what's the right way to think about domestic cost growth, if this is the new normal of revenue growth?

Okay, Michael.

This is Gunnar.

Let me take that.

So on the Olympics, it's still too early to really talk about the exact cadence of how the P&L impact will turn out.

A couple of things that are clear from today's perspective is that the 2018 allocation of cost is going to be the lowest, given that we don't have all the rights or not as many rights as in later years.

So we will update our models and update you as soon as we have a reliable set of figures across those 8 years, right?

Generally speaking, the winter games are less expensive than the summer games, and we definitely see an upside from the Olympics deal, generally on affiliate revenues.

As a matter of fact, you can already see European affiliate revenues going back to double digit without even having factored in all the sports rights.

And we also, obviously, see contributions from our Eurosport Player, as we did before...

The cadence that Gunnar was talking about is simply that we got all the rights for 8 years.

But in the U.K. and in France, we didn't get the Olympic rights until '22 and '24.

But we did structure a deal with the BBC, where as part of their rights to carry the Olympics, we got a substantial amount of rights and extensive digital rights in '20 and '22.

But when you allocate the actual fees, because of the France and the U.K., the cadence is a little bit different, that's all.

And then Michael, on the cost guidance, I think, looking at the Q1 numbers, you see that the company is very focused on cost management.

Clearly, coming in, I will continue that focus and take a fresh look at cost as well.

But I must say, I'm very happy with the performance that Discovery has delivered on the cost side in Q1.

So the general guidance for us for 2017, as I said before, is total company organic cost of revenues up high single to low double digit.

And we will be even more restrictive on SG&A on a total company level, targeting flat to low single-digit increases for our cost base.

So please, be assured, it will continue to be a clear focus of the management team here.

And Michael, just to confirm our company but also my full engagement in social media.

I was following the hundreds of notes and likes for your birthday yesterday on Facebook as well as the numerous picture posts, all of which I thought were very nice.

Happy birthday.

And our next question comes from the line of Richard Greenfield of BTIG.

AT&T's Randall Stephenson had -- he was testifying before Congress late last year, and he said point-blank to Congress that he said a huge number of consumers want cheaper video bundles without the high cost of sports.

And David, you've talked to the rise of these new virtual MVPDs as an opportunity.

So far, they seem all very sports-heavy, including kind of as a basis the broadcasters and the RSNs, which pushes not only the cost towards $40, but it also has led to Discovery and others being less out of things like Hulu and YouTube launches.

Wondering, what do you think of the prospects are for new bundles that may not have the broadcasters or may not have the RSNs that could be priced below $20?

And then I have a follow-up on Group Nine.

Thanks, Rich.

Well, first, I think, ultimately, consumer behavior and consumer consumption is what drives the capitalist markets.

So you can develop a channel, but you have to create content that people want to get nourished by.

So you could sit in a conference room and say what you want to provide people.

Ultimately, the consumer is the one that is always the determining winner.

And you look at outside the U.S., outside the U.S., there have been very successful skinny bundles.

We are on all of them.

We have quality content with strong brands that are valued.

Our cost of content is relatively low, and we've done extremely well on all of those skinny bundles all over the world, in Latin America, in Eastern Europe, in Europe.

And each of them have been in the very low price range.

And even when there is sports, sports is just hyperextended here in the U.S., reflected in regional sports, traditional sports, retransmission consent, the integration of sports with other channels.

And so this is a bit of a stuffed turkey here.

And in many ways, when I read about the skinny bundle here in the U.S., I see the skinny bundle in 200 countries.

When I look here in the U.S. and I read skinny bundle, there is no skinny bundle here.

Skinny bundle in the U.S. is a fiction.

The idea that you have a $40 offering filled with regional sports, sports and all of these -- an incomplete package, really, and then you have to buy broadband on top of it.

So the skinny bundle is $60 or $70.

So it's really not a skinny bundle.

It's a bundle.

It's a bundle that may be attractive to a small group of people.

But in the end, I think the market will be rationalized.

We represent 12% or 13% of viewership.

We have the top channel for women in ID, the #1 channel for men in Discovery, top channel in Middle America with TLC.

Top channel for African-Americans with Oprah and Tyler.

And our cost of content is low.

We are on DIRECTV NOW.

We're on Sony.

We're on many of the platforms.

But ultimately, there should be a bundle, like everywhere else in the world, that's $8, $10, $12.

And I believe that will happen.

I think these overstuffed turkeys are going to end up being a challenge from a consumer perspective.

And the consumer is going to say, "I'd like to have an opportunity here." And in many ways, Netflix is a terrific company, and they're -- and they continue to be very effective.

And so does Amazon.

But the -- we as an industry need to complement that with a quality offering that isn't -- that's a true skinny bundle in the spirit of what's working around the world.

And I think that will happen.

It's just a question of when.

And just wanted to follow up on Group Nine.

I think you mentioned 4-plus billion.

I lost the exact number, but 4-plus billion views is what you're getting across a variety of online mobile platforms.

Is that a business that at that scale is generating profits?

Or is that a business that's still losing money?

Or like, is there any way to size kind of the revenues and whether it's profitable or not?

Well, it's a -- it's not profitable, but it's a -- it's pretty close.

And our overall approach right now -- it's run by Ben Lerer, who's doing a terrific job there.

We put some of our assets into it.

When we closed on it, it's 3 billion.

Now it's 4.2 billion.

We continue to learn about what engages people.

We have great analytics.

So I think that it helped us lean into our understanding of what kind of content we can provide for SnapChat.

It's informing the way we tell stories, the kind of stories.

And so this pivot to mobile is quite important for us.

We -- as you look at over 7 billion screens out there, we're the leader in traditional platform on linear around the world.

And we own all of our content, so we can move a lot of our long-form content.

But being able to repackage the -- with The Dodo, we have Animal Planet, which is a leader around the world.

And now we have The Dodo with well -- is the leader now in short-form animal content on the web.

And so being able to own those different areas are critical.

We're not focused today on making money.

We're focused on learning.

We're focused on getting more scale.

We're focused on building our relationship with SnapChat, with Facebook, with all of the different outlets out there and have millennials kind of really get nourished and excited about what we're doing.

And in the long term, we're hopeful that they'll be a meaningful currency, and we're actually working with Facebook now on different ways that we can do that, which I think is in both of our interests.

And our next question comes from the line of Todd Juenger of Sanford Bernstein.

I'm following along for my colleagues across the various revenue lines.

I guess, maybe I'll tackle international advertising, if I may, especially since you guys probably have the best view of that of pretty much of any company I know.

So I guess I'd frame my question this way.

If you think about sort of the run rate that you are at this quarter and have been at for a while and compare that back to the Investor Day, which your expectations, I think, were somewhat higher.

I'm trying to figure out, like, what has -- what's caused that delta?

How much of it is cyclical?

How much of it is structural?

How much of it is geopolitical?

And are we basically at a new reality now where this -- the run rate we're seeing is kind of the run rate going forward?

And just a quick follow-on related is, we've talked about the Olympics in many ways.

Nobody's asked yet about Olympics advertising.

Again, I don't know what you're prepared to comment on, but that's only a year away for the winter games, which is a big geography for you.

Any help you can give on the advertising perspective, just the magnitude of that box as we're thinking of where the help could be there?

Okay.

Thanks, Todd.

On the advertising side.

Look, we -- in Europe, we really haven't gotten help in 11 years.

GDP across Europe, if you take out the U.K., has been effectively flat.

And the advertising follows GDP.

So we've been able to grow despite that.

But there have been some geopolitical issues.

There's no question.

You have the U.K. down 4. And Brexit has had a meaningful impact on the U.K. That's a big market for us.

There was a restructure in Russia.

We are one of the leading players in Russia.

We were the first ones that were brought back.

Many of the media companies that want to get into Russia now have to go through our media partnership.

But Russia changed because we can only own 20% of it.

There are values that we can get outside of the 20%, but things changed there.

So in mainland Europe, we're doing quite well.

We're growing in -- outside of the U.K. and Asia, we're growing in every market, and Latin America is growing high single digit now.

But it was growing 20%, 30%.

So the fact that Brazil kind of tipped and Argentina struggled for a while and Mexico is having some challenges, is having an impact.

But it's -- we're still seeing high single-digit growth in Latin America.

We're still seeing growth across all of Europe.

Some of that has to do with the fact that our share is growing and our brands are stronger, but we expect that, that will continue.

And we're used to doing business in a difficult environment.

The other thing that we're seeing is Asia is tough and it's likely to be tougher.

In some ways, I'm -- we have a smaller business in India, but I'm glad we have a smaller business in India because the demonetization has been a struggle.

The recovery from that demonetization has been longer than expected.

We have a team -- we got a report out this morning and yesterday from a team over there now, looks like it's -- things are slow.

And there's a government regulation regime that's coming -- looks like it may be coming down in India that's going to put a damper on a lot of the growth that was assumed to be coming out of there.

The good news for us is that's not going to have a -- it's going to have a very minimal effect on us.

So I think our positioning of being big Europe, quite strong in Italy and Germany and across all of Europe with real scale, together with strong positioning in Latin America, probably puts us in as good of a position as we could be in.

I wouldn't want to overweight in Asia right now.

And the other Asia issue is just being the potential -- and we're looking at doing this, of just jumping right over in many of these markets, traditional distribution and going direct-to-consumer, which is what we're looking at doing in a lot of the areas in Asia.

We're entrenched in a very good business in Japan, but it's not growing that much.

And a lot of other areas of Asia, we're actually going to -- we're going to take all of our IP and we're going direct.

So I like our combination.

It's certainly not robust.

I would say, Steady Eddie in -- I wouldn't expect that things are going to get much better.

I hope we don't have more Brexits.

I think the France thing helps us.

And Todd, maybe if I can add one point to that discussion.

I think if you take a step back, where you referred to the 2015 midterm guidance, right?

Yes, advertising has been somewhat slower.

Affiliate has been slightly stronger.

And if you look at the total company guidance, EPS, free cash flow guidance has even been raised after

(technical difficulty).

Fair point.

Any comment on the Olympics while we're on this or not?

Yes, so I mean, as I said before, it's really too early to give you any specific numbers.

But I feel very strong about the Olympics deal.

We have all kinds of monetization opportunities, sublicensing, affiliate, advertising.

We have the complete rights, all platforms.

So we'll be able to cover literally every moment of the games on air, online, over-the-top, on the GO.

So I think there's a lot of opportunity for us.

But please understand, it's just too early to give you any specific guidance there.

And our next question comes from the line of Vijay Jayant of Evercore ISI.

This is David Joyce for Vijay.

Could you please help us think about the distribution opportunity internationally?

Obviously, you've talked a lot about of your over-the-top and direct-to-consumer opportunities.

But with the increasing penetration around the globe of the pay-TV footprint, how should we think about growth in the different regions?

Sure.

What we've seen is, across Europe, we'd expect it to be relatively flat, maybe even slightly down.

We pivoted.

We pulled our signal 4 times in the last 18 months.

So most of our growth now is coming from price.

We're being helped by sports.

In Latin America, a lot of our growth is coming from price, which is really a change.

If you look at the last 15 years, the majority of growth in Latin America, in Asia, even in a lot of Europe was really -- the U.S. was increasing price, so you got double dipped.

You got a higher price, and you got more subs during the kind of the heyday.

In -- outside the U.S., your price increase came from subscriber growth.

And so we have had to kind of retrain that market over the last 2 years by getting our content and our IP more important and by driving for price.

And we've been successful with that.

In some of the markets, Brazil was growing quite aggressively.

In the last 18 months, 2 years, Brazil has actually lost 2 million subscribers.

And so that's a function of the actual economy.

The C-class had accelerated, and then the disposable income had evaporated, and you actually -- if some of that comes back, which a lot of people are predicting that it will over time as Argentina is feeling better now, Colombia is feeling better.

If Brazil makes the turn, that would be upside for us.

We don't have that in our plan.

Our plan is that the growth would be coming from, primarily, price.

And our next question comes from the line of Steven Cahall of Royal Bank of Canada.

Maybe just one on subs.

And then sorry for another one on the Olympics.

Maybe first on the subs.

I think, in the press release, on domestic subs, you noted a slight decline.

And then I thought in the comments, you noted a slight acceleration.

So I wonder if you could just give us a little more color as to what you're seeing in the overall pay-TV sub picture domestically?

And then on the Olympics side, again, sorry to push you again.

I think this is going to be a theme for the next few quarters.

But looking at your filings, I think your President of International has some new targets around the Olympics.

When I sort of back into -- if he's able to achieve those, it would suggest to me a margin on the Olympics that maybe looks a little bit like that double digit you've talked about for Eurosport before.

Is that just getting way too exact, way too early on?

Or is that a reasonable assumption for how to think about the games in 2018?

Yes.

So look, we're seeing -- what Gunnar said is what we're seeing.

We're seeing a slight acceleration on the universe decline.

We said we were on average about 3. And for our bigger networks, it's actually less than that.

And we have some pretty good protections against that.

That's where most of our -- overwhelming amount of money on it comes from.

Some of the smaller networks, we actually saw meaningfully higher.

So when you put it all together, it was about 3. That's in our plan.

So this is not ahead of what our plan was for the year.

If there was a significant acceleration from that, then that would affect our plan.

But we were doing a little bit better than planned last year.

And so now we're kind of on it.

So that's where we are on that.

One point on the Olympics, the overwhelming majority of the value that we get is kind of what I would call long cycle, sub distribution revenue.

We're holding back -- in some markets, we're doing all of it.

But in a lot of markets where we're sub-distributing to a free-to-air player, we get guaranteed revenue.

We've done that in multiple markets.

We then hold back a significant amount of content for Eurosport, which we then sell.

We then hold all the rights and we go direct-to-consumer.

We could offer it as a whole package.

We could do it by sport.

But this is the overwhelming majority of the dollars is sub distribution revenue that's more long cycle that we have -- that we'll be able to give you some visibility on, but we're ahead of plan on the deals that we've been doing.

But it's too early to talk about the actual margins.

But it's -- and it did -- because it's -- not only do we think that we'll do nicely on it, but it also has helped us in the marketplace.

It's helped us in terms of building up our overall distribution revenue.

It's helped us in getting -- in aligning with the federations.

It's helped us with the IOC, with additional sports throughout Europe.

So it's been a very -- it's been a big positive and we're looking forward to it.

And our next question comes from the line of Anthony DiClemente of Nomura Instinet.

I have 2. First for David on the Eurosport Player.

So David, you mentioned contributions from Eurosport -- or I mean, I suppose this might be for Gunnar as well.

How many subs do you have?

You talked last year, I think, about the March 2 million subs.

Just wondering, broadly, where we are?

You gave us pretty robust growth rates of subs in your prepared remarks.

And so what I'm getting to is, how many points of your international distribution growth is coming from Eurosport Player?

So you gave us the number of points from GO in the U.S. Just wondering right now how much of that growth is coming from Eurosport.

And then what's in your outlook for 2017 and beyond for contribution?

And then separately for Gunnar.

The company struck this streaming joint venture partnership with ProSieben, your alma mater, I suppose.

So what are the expectations for that product?

You'll be competing with, let's say, Netflix and other subscription OTT services in the German market.

Is this kind of ad-supported OTT strategy something that you think is specific for that market?

Or is it a blueprint that you can potentially replicate in other geographies?

Anthony, look, we're adding a substantial amount of subs.

We're doing a better job with churn.

But it's -- what's most important for us is directionally, we're figuring out what nourishes an audience, what people are willing to pay for, what excites them about the player and what kind of a player we need to have a really competitive Sports Netflix product to serve the 730 million potential opportunities we have across Europe.

And one of the big learnings we had is our old player was only able to offer all the sports.

And so by August of this year, maybe early September, we'll have our major league -- our BAM, major league baseball product deployed across Europe.

That's going to be a huge difference for us.

Because one of the things we're finding is, rather than people paying $8 to get a whole bunch of things, what they really would rather do is do a seasons pass.

They'd rather pay $6 and get all the cycling, and then they can hit another button and they can pick -- they can get all the tennis.

Or they can get all the speed skating or they can get all the Winter Sports or all the track and field or all the squash.

And so one of -- we've deployed a full team now that's operating out of the U.K. This is a team that helped build not just the NFL package here in the U.S. at DIRECTV but the NBA package.

So we've hired a whole different group of people.

And we haven't even launched our new player, which will be launching in the next couple of months.

So are we doing a lot better?

Yes.

Is our churn doing better?

Yes.

Are we -- but most of our success has come from the fact that we're learning that instead of offering a magazine that offers a little bit of a whole bunch of sports, that we're better off going to the superfan groups.

And over the next 1 year, 1.5 years, we'll give you significant -- much more information about how we're doing.

We first want the player to launch.

We want to -- we'll be offering the Olympics.

We'll be offering the Bundesliga.

We'll be offering individual sports, which we've already started to do in Northern Europe and in certain markets.

And right now, the affiliate growth is not in any meaningful way from the player.

And we have a significant amount of cost that we're putting against it.

Because we've hired a lot of people and we really believe that, that Sports Netflix product is a game change for us.

And Anthony, on that streaming JV.

I'm very excited about that deal.

I think it's a great JV in itself, and it's even more opportunity and optionality for us going forward.

So I think there is a desire for people -- for consumers in the marketplace to have one destination where they can get most of the stuff they want to consume on an OTT basis.

And I think we have done a great step towards that.

ProSieben has an established 7 TV platform with a strong installed base already and we're leveraging that now.

And I think there's a lot of optionality going forward.

We're open to bringing on other players via broadcasters or some of the networks that are otherwise only available in pay-TV.

So you can think about it in SVOD options, you can think about integrating the Eurosport Player, et cetera, et cetera.

So there's a ton of optionality and I'm very excited about that JV in the German market.

And I clearly think that it can be replicated in other markets in Europe and that should be our aspiration as well.

And ladies and gentlemen, that does concludes today's Q&A session.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone, have a great day.