華納兄弟探索 (WBD) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Full Year and Q4 2017 Discovery Communications Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference call to Mr. Andrew Slabin, EVP, Global Investor Strategy.

You may begin, sir.

Good morning, everyone.

Thank you for joining us for Discovery Communications' Full Year and Fourth Quarter 2017 Earnings Call.

Joining me today are David Zaslav, our President and Chief Executive Officer; and 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 up 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 assumption 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, and thanks for joining us today.

Yesterday, we received some good news.

We spoke to the DOJ, and they told us that we have been given clearance to move forward with our acquisition of Scripps Networks Interactive.

And last night, we received the formal letter from the DOJ.

With our EC approval and DOJ clearance in hand, we expect this transformative merger to close sooner than expected within the next 2 weeks.

Discovery, with our collection of global IP, brands and strength in nonfiction, kids and sports globally, together with Scripps' channels and global content, we will be a formidable and differentiated company in the marketplace.

In bringing together Scripps and Discovery's suite of world-class brands, content and talent, our company will have the ability to reach viewers and fan groups around the globe on every screen and service, across every format, accelerating our pivot to becoming a stronger global IP company with more direct-to-consumer content that can offer advertisers and distributors a high-quality and engaged audience at real scale.

As new and deep-pocketed players enter scripted market, the competition and cost to create quality content has become intense, with over 500 scripted projects competing in the marketplace this year alone.

This creates a high-stakes game, which not everyone can win.

That side of scripted television and scripted movies, that's not us.

We're on the other side of the ledger.

We have always kept a keen eye on our production expenses and are proud of our efficiently run, low-cost global content engine.

In the nonfiction space, we're strong.

It's what we do.

We tell great stories with great characters, and we take that content around the world.

We don't do red carpets or fancy openings.

We stay focused on real-life entertainment, nonfiction, kids and sports.

But with the combination of Scripps fully aligned with that strategy, our content will be further differentiated, supported by a more attractive production cost basis, our global IP ownership and category leadership around relevant and valuable content verticals.

Simply stated, I love our hand.

Further, our significantly enhanced cash flow position will also provide increased flexibility to pay down debt, buyback shares when we are able and where it makes strategic and financial sense to invest in assets that help accelerate our digital transformation and global leadership in real-life entertainment.

In an environment where we can't control everything, this cash flow and this opportunity to grow cash flow becomes a strategic asset that strengthens our position in a meaningful way.

Ahead of the closing, we have taken parallel steps to optimize the geographic footprint, cost basis and core focus of our new company.

In January, we announced a new real estate strategy, which will see the development of a new global headquarters in New York; the closure and sale of our current global headquarters in Silver Spring, Maryland; and upon closure, the creation of a national operations headquarters at Scripps' current campus in Knoxville, Tennessee.

The more familiar we have become with Scripps and the identification of new initiatives for combined company, the more we feel like we are just beginning to scratch the surface of what's possible with this combination.

We have full confidence in the $350 million in cost synergies we estimated last July, which look increasingly conservative based on our latest analysis, and we look forward to providing you with greater transparency on synergy from the transaction in the future as we get our hands on more data and get a closer look at what the Scripps company looks like aligned with us.

In addition to our real estate strategy, yesterday, we announced the sale of a controlling interest in our education business to Francisco Partners, a leading technology-focused private equity firm, for cash consideration of $120 million and future brand-licensing payments.

Much like our plan to close Silver Spring, decisions like these are not easily made.

However, what I hope you will take away from these decisions is that we are sharpening our focus, we are on a clear and defined path and we are taking every step necessary to position our business for efficiency and long-term sustainable growth.

We are laser-focused on making the combined entity a success, and we're taking the necessary action to make sure it happens.

Let me now talk about another exciting event for Discovery that has been years in the making, the recently completed Olympic Games where Eurosport was Europe's home to the winter games in PyeongChang, South Korea for the past several weeks.

I am proud to report that we succeeded in our goal of making this the most digitally expansive and accessible Olympics in Europe yet, as we heard every minute of every competition, leveraging our broadcast networks, our Eurosport pay-TV channels, the Eurosport Player, our direct-to-consumer platform in the Nordics called Dplay and the Eurosport app and websites.

The team did an extraordinary job and delivered record ratings across our linear services, drove significant OTT subscriber gains, which I'll talk about in a little while and truly innovated in the production of the games through a sophisticated operation across 48 markets and 22 languages, with flawless technological execution.

The Eurosport brand has never been so strong or vibrant, and our alignment of the Discovery brand, the Eurosport brand and the Olympic Rings, has been realized.

In total, we delivered 4.5 billion video views and 1.7 billion hours of video to a cumulative 386 million users over the course of the games, with Discovery and Eurosport's digital and social platforms, including Eurosport Player, reaching an incredible 76 million viewers.

And we broke a number of our own records, achieving more than a 90% TV audience share in Sweden and Norway.

In total, approximately 58% of the population in Europe watched the games on free-to-air and pay-TV in our top 10 markets across Europe.

These impressive metrics are testament to our unmatched expertise as a global IP company in leveraging great content around the world and across multiple languages, regions and technology.

This is who we are, this is what we do, and nobody does it better.

Most importantly as we begin to assess the halo generated by the Olympics, we believe we've taken some major steps forward in the execution of our digital strategy.

Ahead of the Olympics, we surpassed the 1 million subscriber threshold for the Eurosport Player, our sports Netflix product.

And since then, we expanded the combined reach of our Eurosport and Dplay direct-to-consumer offerings by almost 0.5 million subscribers during the period of the Olympic Games.

While some of these subscribers will likely churn off in the weeks and months ahead, we feel great about the added brand awareness and engagement we've achieved with passionate sport fans across the region as well as an opportunity to cultivate these connections going forward.

We have their names, we have their credit cards, and most importantly, we have the data on the sports that they've watched and what they're passionate about.

In addition, for example, Olympics-related sporting events, such as the biathlon, Eliteserien football in Norway, the French Open and continued Bundesliga coverage -- there was a game last night -- are but a few many of the many strong content offerings providing us with a healthy tailwind to follow up behind our strong Olympic digital performance.

As I think about our direct-to-consumer growth, I can't think of another company or any offering or platform that has been able to garner almost 0.5 million subscribers in less than 15 days.

It's quite an achievement.

And to have a platform that delivered flawlessly almost 3,000 hours of long-form content as well as almost 700 short-form pieces of content distributed, produced and executed daily in multiple languages, it was a great accomplishment for our team and our company, and it builds our confidence as we look to take our IP to every platform and every device around the world.

Clearly achieving this growth hasn't been easy, and it has challenged us to embrace new and differentiated skill sets from the ones that have provided us with so much success in the traditional B2B ecosystem for so many years.

We're excited with the traction we are making as a direct-to-consumer company and the learning experience the Olympics has provided to us to leverage our scale in a more impactful way.

Moreover, an additional and more recent benefit of having a broader digital footprint is the breadth and depth of consumer usage data, which is proving to be invaluable as we push for greater scale.

And our long-term goal of trying to identify what nourishes consumers and how best for us to reach them.

Outside of the Player, our journey to build a portfolio of direct-to-consumer businesses that leverage our global IP is moving steadily forward.

Building on the initial success and learnings provided by Dplay, our GO apps here in the U.S. and more recently, the Motor Trend OnDemand, which is gaining super momentum in its core vertical, Motor Trend is a powerful brand, and I believe we can be a strong leader in nourishing passionate fans in the large auto category across linear, digital and mobile.

We now enjoy a very solid platform, and we are integrating nicely with Velocity, Turbo, DMAX and our other auto brands around the globe.

There's ample room for us to grow and expand, and we're working hard to do it.

Thanks for your time this morning.

I'll now turn it over to Gunnar for a closer look at the quarter and the full year.

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

Let me now walk through our full -- fourth quarter and full year financial results.

While our industry continues to evolve at a record pace, 2017 was an exciting year for Discovery, and we ended the year on a high note operationally, with solid global ad and distribution revenue growth and continued strong cost management.

For the full year, Discovery achieved both of our total company guidance metrics, with 16% full year adjusted EPS growth.

This metric excludes currency effects, the noncash European goodwill write-down, which I will discuss more later.

And Scripps transaction costs, it was at the high end of our guidance range of low to mid-teens.

And 25% full year free cash flow growth, including currency FX and Scripps' transaction cost well ahead of our guidance of at least 10%.

Looking at the rest of our full year results, our total company reported revenues and adjusted OIBDA were up 6% and 5%, respectively.

And on an organic basis or excluding the impact of foreign currency as well as the impacts from of The Enthusiast Network, or TEN, as well as OWN, which we began consolidating in December of last year, total company revenues and adjusted OIBDA both grew 4%.

Organic costs were up 4%, with 7% cost of revenue growth and flat global SG&A as we remain hyper-focused on controlling non-content costs.

So in 2017, we were again able to deliver solid financial results, while at the same time, investing in new areas of growth to strengthen our global content platforms and brands.

Full year net income available to Discovery Communications grew 10%, excluding currency, Scripps transaction cost and the goodwill write-down, mostly driven by improved operating results and the net positive impact from our solar deals, which helped reduce our book tax rate to 15%, excluding the impact of the goodwill write-down.

Turning to the operating units.

Full year U.S. revenues, excluding the impact of OWN and TEN, increased 3% led by 4% distribution growth in line with our guidance of mid-single-digit growth.

As noted in previous quarterly reports, growth was primarily due to increases in affiliate rates as well as increases in content licensing revenues, partially offset by declines in subscribers.

Advertising revenues increased 2%, excluding OWN, TEN and the deconsolidation of Seeker and SourceFed, which we contributed to Group Nine at the end of 2016.

Full year U.S. adjusted OIBDA grew 5%, excluding the impact of OWN, TEN and Group Nine, as costs were up only 1%.

Turning to the international segment.

For 2017, currency was actually a slight tailwind.

So while constant currency revenues and adjusted OIBDA were up 7% and 3%, respectively, reported revenues and adjusted OIBDA were up 8% and 3%.

For comparability purposes, all of my international comments today will refer to our organic results, so we'll exclude the impact of currency.

Full year affiliate growth was 9% and full year international advertising grew 3%, as all regions grew except for Asia, our smallest end market, which declined low single digits.

Focusing now on our fourth quarter results.

Total company revenues, excluding the impact of currency as well as TEN and OWN, grew 5% and adjusted OIBDA growth accelerated to 9%.

Looking at our individual operating units.

Our U.S. Networks grew revenues 3% on an organic basis or excluding the impacts of OWN and TEN.

Distribution revenue rose 3%, driven by increases in affiliate rates, partially offset by a decline in subscribers.

And this quarter, other distribution revenues did not contribute meaningfully to growth as compared to the prior quarter when we recognized unusually large contributions.

Building further into the drivers of U.S. affiliate, fourth quarter subscriber trends were in line with third quarter trends.

Subscriber trends at are top networks like Discovery and TLC, which are driving the lion's share of our economics, were consistent with the second and the third quarter with subs again declining 3% year-over-year.

And driven by steeper declines in our smaller [networks], total portfolio subs in the fourth quarter declined by 5% year-over-year, also consistent with third quarter trends.

Fourth quarter U.S. advertising revenues were up 3%, excluding OWN, TEN and Group Nine, primarily due to continued strength at TLC and ID and continuing improvement in the monetization of our GO platform, partially asset by overall lower linear delivery due to continued universe declines.

Fourth quarter domestic adjusted OIBDA was up 4%, excluding the impact of OWN, TEN and Group Nine, with operating expenses up only 1%.

Turning to our organic international results.

Fourth quarter advertising growth of 5% was ahead of our guidance of around flat, led by stronger-than-expected volume and pricing across key markets in Europe as well as higher volumes in Latin America.

Our 10% affiliate growth was driven by another quarter of solid pricing growth in Europe as we continue to benefit from successfully leveraging our expanded content portfolio that includes sports to drive higher contracted pricing step-ups as well as a new licensing deal in Asia.

Turning to the cost side.

Operating costs were up 7% in the fourth quarter, driven solely by sports and related production expenses, leading to 12% adjusted OIBDA growth.

Before I share some color on our financial outlook, I would like to address the $1.3 billion noncash goodwill impairment charge we took for our European reporting unit.

We have included a comprehensive description of a technical approach and the context in our earnings release, and I'm happy to delve in deeper in our Q&A session.

Let me just make a few comments to position this charge.

First, remember, as all goodwill impairments, this is a noncash accounting charge.

Second, for the 2-step approach to impairment testing, the comparably smaller change in the fair value of our European reporting unit over the past year has led to a fundamental revaluation of the goodwill in that unit driven by the specifics of purchase price accounting.

Number three, we have been conservative in not opting to early adopt the new accounting standard effective from 2018 onwards, which would have led to an approximate $100 million impairment instead of the $1.3 billion impairment that we booked.

So as a result of this larger impairment, the book value of the European reporting unit is now showing a substantial cushion of $1.1 billion post the impairment.

Recent operational performance in Europe has been encouraging, with strong revenue growth in the fourth quarter and very positive feedback from consumers, advertisers and the press on our execution of the 2018 Olympic Games.

As we look out, we remain optimistic about the growth of this region's business, with the Olympics breathing additional energy and value into our portfolio of brands, and we are also seeing real momentum behind our Eurosport Player and Dplay direct-to-consumer platforms.

Finally, please remember that we performed this test at the end of 2017.

That means on the basis of Discovery's stand-alone, we have not factored in any of the potential future financial impact front integrating Scripps' European business.

So now that I have reviewed the highlights of our 2017 results, let me share some forward-looking commentary for 2018.

With our Scripps deal not having closed yet, we don't believe it would be helpful to comment on Discovery's stand-alone financials for the full year 2018 at this point.

Of course, we expect significant change for the merged entity through the integration and transformation post closing, which is expected to occur within the next month.

Naturally, deal synergies will alter the growth trajectory of the combined company, and we intend to focus on pro forma results post close as stand-alone Discovery metrics will no longer be relevant.

For now, from a high-level perspective, we are expecting all key financial metrics for Discovery standalone, so revenues, adjusted OIBDA and free cash flow, to grow in 2018 versus 2017 on both a reported basis and organic basis.

So excluding the impacts from currency and the TEN and OWN transactions.

We expect another year of significant free cash flow growth coming off a very strong 2017 even before layering in any potential synergies from the merger.

This free cash flow increase will be driven by profit growth, increasing content efficiency, improvements in working capital and a small upside from tax reform.

We will provide greater transparency post close.

I would also like to provide some additional color on the quarterly cadence around projected 2018 stand-alone Discovery adjusted OIBDA growth.

Adjusted OIBDA growth will primarily be second-half weighted, given the timing of content spend and particularly the Olympics.

The first quarter will see an organic adjusted OIBDA decline in the low double digits to low-teens range, given the timing of Olympics-related revenues and costs.

With Olympic Games having just ended, I can offer some additional clarification with respect to our prior commentary.

As we have said before, the Olympics will be around breakeven for full year 2018 and are expected to be cash flow positive over the life of the rights through 2024.

However, it is important to keep in mind the timing of revenue and cost recognition.

For the 2018 games that just ended, total cost of around $240 million, $140 million for the rights and $100 million for production and other expenses, will largely all be recognized in the expense in the first quarter when the games were aired.

Conversely, note that only a portion of the corresponding revenues will be recognized in the first quarter, namely the sublicensing revenues, which account for over half of total Olympics-related revenues, and the advertising revenues, which is the smallest piece, primarily given time zone differences and the fact that a considerable amount of the viewing takes place on our sublicensees' broadcast networks.

The rest of the revenues, i.e., the associated effect of linear and digital affiliate revenues, will be spread out throughout the year and benefits non-Olympics years as well.

As we have stated before, the games have helped us secure higher rates for our linear distribution deals across our entire portfolio.

And depending on when these deals were renegotiated, affiliate phase will have been positively impacted both prior to the games as well as post the games.

As noted, we have also seen real momentum on the Eurosport Player aided by the sporter from the games.

As such, we anticipate that having greater awareness of the Player and continuity of content will help drive new subscribers to the platform post the games.

I would also like to remind you that our Olympics monetization model is very different from the U.S. model, which is more dependent on ratings and advertising versus our model.

I would also like to provide some color around the financial impact from the consolidation of OWN beginning December 2017.

Contributions from OWN are initially expected to be around $75 million to $85 million of revenues per quarter at a similar advertising versus affiliates, but as our overall business, though at a much lower margin than our U.S. Networks, given OWN has more scripted programming, which is far more expensive than our average cost per hour and have been operating as a stand-alone network.

With 2/3 of the first quarter now under our belt, I will also give some color around our 4 key revenue drivers on a stand-alone basis for the first quarter 2018, which is expected to be last quarter without owning Scripps for the full quarter.

On an organic basis, so excluding the impacts from currency OWN and TEN, first, for U.S. advertising, despite a small negative impact from the Olympics, growth is expected to be up at low to mid-single digits in the first quarter, driven by continued pricing increases and the continued monetization of our digital and GO products.

Second, first quarter U.S. affiliate growth is expected to be up low single digits.

Recall that given the timing and schedule of our affiliate renewals, we will not have a meaningful average step-up in pricing in 2018, as the only affiliate renegotiation we had at the end of 2017 was our smaller Fios deal.

Accordingly, despite what was a very favorable negotiation with Fios, average price increases on a per-sub basis will be up less in 2018 versus 2017 as compared to 2017 versus 2016.

I would also note that the rest of the year's quarterly cadence will depend on subscriber trends and the year-over-year impact from other digital licensing revenues.

Third, international advertising growth is expected to be up high single to low double digits, driven by the contributions from the Olympics in Europe.

And finally, international affiliate growth will be similar to the fourth quarter of 2017.

Overall trends remain consistent.

And in Q1, we will again benefit from contributions from the Asian licensing deal that could -- contributed to growth in Q4 2017.

I will also again quantify the expected foreign exchange impact on our 2018 results.

At current spot rates, FX is expected to be a nice tailwind and will positively impact revenues by approximately $120 million to $130 million and positively impact adjusted OIBDA by approximately $45 million to $55 million versus our 2017 reported results.

Now taking a look at our overall financial position.

We bought back a total of $603 million worth of shares during 2017 as we suspended our buyback program after announcing the Scripps transaction.

Please note that as it pertains to the collar associated with the Scripps acquisition, we will either use cash to satisfy the collar or if we issue stock, we will buyback a similar amount.

So we intend not to issue any additional shares on a net basis.

As we stated, beyond that, until our gross leverage ratio is back within our target range of 3 to 3.5x, we will continue to allocate virtually all of our free cash flow towards paying down debt.

And as David mentioned, our new real estate strategy and the [education] sale further support our ability to bring leverage into our target range by the end of 2019 at the latest.

In closing, as we prepare to combine our companies, we are all increasingly confident that our original target of $350 million of cost synergies within 2 years of closing the deal will prove to be very conservative.

We are extremely optimistic about this powerful combination, which will allow us to accelerate the transformation of our business, drive free cash flow and ultimately generate significant long-term value for our shareholders.

Thank you again for your time this morning.

And now David and I will be happy to answer any questions that you may have.

(Operator Instructions) Our first question comes from Steven Cahall with Royal Bank of Canada.

So maybe just the first question around the synergy.

We've seen a lot of media companies recently talk about using tax reform to increase their content investment.

David, you've said that you have a lot of confidence, and it sounds like maybe there's some upside to that synergy number.

So between your debt paydown and investing back in the business, how do you think about allocating a lot of that savings?

And then secondly on the advertising side, it looks like the Q1 pacing, both domestic and international, is pretty strong.

So can you give us any more color on what you're seeing in those markets, maybe from a pricing perspective to indicate the health in advertising?

Thanks, Steven.

Well, first on the advertising market.

It remains, I would say, pretty steady, maybe leaning a little bit toward, maybe a little improved versus the fourth quarter, but not a big difference.

But the pricing is good, volume is good, so we see the market as being steady to maybe a little bit stronger.

Remember, in the first quarter, we have the Olympics.

So even with the Olympics, seeing what we're seeing, it may be that behind that, there's a little more strength.

We'll just have to see.

On the synergy, as Gunnar and I said, we haven't been able to get too close, because we've been going through this process.

But the more that we look at Scripps, the stronger the synergies are.

So we think $350 million is very conservative.

Just conceptually, this is a one-over-one transaction.

When I was at NBC and we acquired Universal, there was a movie business, there was a theme park business.

So businesses that we didn't understand that we weren't in.

And then there was a cable business.

For us here, we're in the free-to-air and cable business around the world.

So we have 12 channels, they have 6 channels here in the U.S., and so everything we do, they do.

And so it's one-over-one.

So in terms of our ability to take that IP around the world, to put these channel factories together, to launch new channels with their IP and to take that IP around the world and put it on platforms, we have people in place and competency to do that in every language.

And so the more we look at it, the more we see, on the cost side, real optimism.

Having said that, we haven't included it all our revenue synergy.

And so the idea of what could these companies when you put them together be.

And one of the things that we've looked at in terms of really getting ready, locked and loaded, is the global piece of this.

We look at the Scripps IP, and we see there really hasn't been deployed outside the U.S. And in fact, outside of their Polish asset, they were losing a substantial amount of money internationally, and that was probably one of the biggest surprises we saw.

So the idea that we have infrastructure all over the world, we've already started to take a look at their best content, and we think that that's a piece that we can move pretty quickly on.

But -- and will keep you posted.

We do expect to invest a significant amount of money.

So we look at over delivering, we look at providing revenue synergy of real scale, and then we're going to be investing in this pivot, where we're starting to see real momentum.

Today, we have Group Nine, with a leader in short-form content.

We have several hundred people working there doing short form.

We have a few hundred people working for us doing short form in the car area.

What areas of content IP are going to accelerate our growth in the future and deal with this terminal value issue of having us long term growing and important on every platform.

And so our direct marketing business will grow, buying more IP to strengthen our direct-to-consumer business, and buying more IP to strengthen our position if we want to go with our own skinny bundle or go with others.

And so you should expect that we will reinvest, but we will reinvest for growth.

The left side of our company is cost, the right side is growth, growth is IP, it's direct marketing, it's skinny bundle and it's technology.

Steven, maybe if I can add a couple of points from the financial perspective.

I think it's worth taking a look at the 2017 numbers.

If you look at the development of our cost base, you'll see that we've grown cost of revenues at 7% while we've kept SG&A flat.

And I mean, I think that underscores how we are looking at the business.

We have invested into content, and we will continue to do so.

As I said in my speech, I'm pretty optimistic when it comes to cash flow for 2018.

Tax reform certainly is going to be a helper here, and I also think we can be even more efficient on our content investments.

So those are 2 additional points I would make from a financial perspective.

Gunnar made the point of what we're going to have our eyes on and we'll be pointing it out to you regularly, free cash flow.

We think that putting these 2 companies together were a free cash flow machine.

And in difficult environment, as I've said before, we have -- we built a moat, and we have an opportunity to double our free cash flow very quickly.

And we're getting rid of other assets that we don't think that we need, and we'll use that to pay down, so that we can get ourselves in a position where we could start deploying capital to buy back our stock, to invest in the future.

So we're quite bullish.

Our next question comes from Jessica Reif with Bank of America Merrill Lynch.

Just a couple.

Given the changing landscape, it's actually global landscape with Disney FOX and potentially Comcast Sky today, can you talk about other areas of potential interest outside the U.S?

And then the second question is, given there's so many changes in the industry, again, globally, given the newer competition and global platforms from Netflix or Amazon, how are you thinking differently about either programming or marketing on a global basis?

Thanks, Jessica.

Let me deal with the second one first.

This is a different world.

Before, we generated content, we put it on our cable and free-to-air channels, and we did deals with our cable and satellite distributors.

Now we're doing business with the mobile players as well, as we look to create content on the mobile platform, but we have 4 big global platform companies now Apple, Amazon, Google, Facebook -- 5, and Netflix, and that matters.

They're in business with customers, and they're all in slightly better different businesses, but they're quite compelling.

They're very good at what they do.

And there's opportunities for us to either compete with them or to piggyback on those platforms.

When we look at a lot of those platforms, we think there's very few media companies in the world that have global content in every language and brands that are loved and characters that are loved everywhere in the world.

So if Amazon or Apple, or if there was a company -- if Facebook who wanted to do a deal with a media company and they wanted to hit a button and offer it globally, we're one of the few companies that could do that with the brands that will delight and be pulled through by customers.

That's -- so that's -- I guess that would be piece number one.

The other is that, and I alluded to this, we really see the industry now is dividing.

The right side of the industry -- here's Netflix and Amazon, and they get value differently, and they're really in the scripted series and scripted movie business.

And if you look at them, they're becoming more and more commoditized.

There's some -- a lot of the movies that you see on one, you see on another.

Then there's HBO and then there's Showtime and then there's all these aggregators.

We understand looking at what Rupert is doing.

If you look at 21st Century Fox and where they are in the pyramid and how they get valued versus some of these other players, that side, for someone that wants to get scripted in movies and getting nourished when they're hanging out before class or during the day or at night or on an weekend, that's over on the right side.

We have a very compelling offering that's completely differentiated from that.

We have some of the most quality brands on TV.

And you take a look at what people do when they can choose anything, they spent a lot of time looking at our kind of content, and we've got a very strong position, we own all of it, and we're differentiated.

And so we look at how -- we look at everybody, and we see that right side as being almost like a kid's soccer game.

Everyone's over at that ball.

And we're on our own position over here, and we think we have something that no one else has.

Plus, as people look for content to provide value and service, they're not going to get value in service by watching The Crown.

They're going to love The Crown for $13 million an hour, but they're not going to get value in service.

When you look at food, when you look at home and decorating, when you look at cars, when you look at science, as people start to use their phones and devices to be entertained, but also to be inspired and to learn, we have a lot of brands that will provide real service on all platforms going forward, and we own all that IP.

So we think more and more, we look like we're on a different road than that crew on the right, and we're happy about that.

Finally, I just think this -- the changing landscape is an affirmation of our strategy over the last 12 years that I've been here.

When I got here, 10% of our company was international.

We made less than $100 million outside the U.S. We're now the leader in pay-TV globally.

We have 12 channels and 220 countries.

We have free-to-air channels in a load of Europe.

With the leader in sports in Europe, we own all of our IP.

Our board has been supported of this idea of owning all of our IP for all platforms.

We're way IP long, which we think in the long run for long-term growth is the right play.

And when we see Comcast and Brian coming in and making a move on Sky, and we see Disney talking about the importance of international IP and international diversification, we say we completely agree with that.

And it makes us feel like a lot of what we did and have been doing, and how we've been differentiating makes us more valuable and more important.

And we expect there will be more consolidation.

There's going to be a race to try and be more global, to own more IP, to have some stuff that's going to work on mobile.

We've been doing that for 4 or 5 years.

Our next question comes from Tim Nollen with Macquarie.

I wanted to ask something about OTT strategy and distributional as well.

You've alluded a couple times now to some other distribution.

You seemed to be one of the few that's not really going after a direct-to-consumer strategy in the U.S. So I wonder if this is something that could be possible.

And you mentioned a couple of times, just now mobile, I wonder if there's something you could discuss about mobile distribution given some of the alignments that we're starting to see between content and mobile carriers.

And then one other very, very small question, regarding the Scripps transaction.

I believe there's a put option by UKTV there.

I wonder if there's any comment on that and if that factors into the closing here.

Okay.

Thanks, Tim.

Just on the OTT side, when you put our channels together, with Scripps, we have a lot of quality services.

We have a breadth of family channel offerings, and we have something that's differentiated.

We're -- the good news is that there are some skinny bundles that are starting to happen, Charter launched one.

DIRECTV NOW is growing.

We don't see any reason -- we're fully supported with those.

We don't see any reason why we can't ourselves, together with others, continue to see or grow that market.

We think that there's a big need in the U.S. for a low-priced entry product.

And we'll be -- after we close on Scripps, we'll be looking very hard at what we have ourselves, and we'll be talking to customers about what kind of opportunity there is to create an offering either ourselves or with others.

So I think we will be looking hard at that domestically and internationally.

We could create a pretty compelling offering for $6, $7, $8 that would look a lot different than Amazon Prime, a lot different than Netflix, and it could be very attractive in every language globally.

So we'll keep our eye on that.

On mobile, it's just common sense.

Facebook had this moment where they made that pivot.

We -- if you take a look at everything we've bought and everything we're doing, it's really this idea that we have to be on screens.

And yes, we believe that the traditional business is going to continue to be there for us, and we think that we can continue to grow that business globally.

And outside the U.S., the business in many markets is much healthier than it is here.

And there are many markets where the traditional business is still growing.

But if you look at the U.S. and you look at a great company like AT&T with over 100 million mobile screens, Verizon over 100 million mobile screens, you look at Vodafone in Europe, Deutsche Telekom, Telecom Italia, we're talking to every one of those.

And the secret sauce hasn't happened yet.

But every one of them, together with us, is looking at what kind of content will people want to consume on mobile.

What will differentiate or decommoditize those mobile players?

And we now have a full menu, and we need to work on some of those recipes.

But if you want women, we have women.

If you want men, we have men.

If you want cars, we've got cars.

If you want food, you want home, you want Oprah, so we have a lot of stuff.

And we do think pivoting to mobile and devices is a very key element to us emerging as a very different media company that's around for a long time.

Right.

And, Tim, on the -- on UKTV, it's true, there is an obligatory put that's a change-of-control trigger.

I think the market would agree it's a quality asset, and we haven't closed the deal yet, so we'll figure it out.

But from a financial perspective, worst case if we have to put the asset, then that will lead to faster delevering, because we'll get the fair market value.

So let's cross the bridge when we get to it.

We have a very good relationship with the BBC, longstanding.

Tony Hall, who runs the BBC, is a wonderful man, very talented.

He and I are close friends.

We haven't talked about this because we haven't closed yet, but we have been in discussions about a lot of things, where there are things we can do for them and there are things that the BBC could do for us.

We've had that kind of a relationship in the past.

And I think with UKTV, it's another piece of the puzzle.

And we'll figure it out.

I think we'll figure something out together that's mutually beneficial.

Our next question comes from Todd Juenger with Sanford Bernstein.

David, if you don't mind, you've used some of my favorite words this morning, terminal value and moat.

And so if you don't mind, I'd love your thoughts on this.

I mean, if you think -- let's just keep it to the U.S., I know it's a big world.

But for the U.S., when you think about the world as this for you 5 years from now, is your view more that the decline of linear audience and ad-supported audiences will find the floor and settle down in sort of be stable, and therefore, you'll be okay?

Or is your view more that, no, those declines in viewership at least linearly will keep going down, but it's okay because you'll make it up in price on advertising and subscription fees, and that's how you'll maintain stability of growth?

Or is your view that no, that will keep going down, but we will replace it with some of the things you've said like mobile and OTT and make that trigger point change?

And I guess, depending on which of those views you have, how do you determine, like, when you would make those sort of strategic changes and what that could do to accelerate the other dynamics going on with your linear business, if you follow?

Just like to hear your thoughts on that.

Thanks, Todd.

First, I hate to talk about the U.S. because that's how you guys look, and I think in general people see us and they see what we do in the U.S. Nobody does what we do outside the U.S., where we're in 50 languages and we're a leader in -- with channels and brands and relationships with users everywhere in the world.

And more and more, our leadership in sports in Europe and our leadership with kids in Latin America is an important piece of our company as we see sports and kids being first movers to direct-to-consumer and first movers with a lot of the more scalable platforms in those markets.

But, look, we have no idea.

that's the honest answer.

We don't know what's going to happen.

I mean, personally, I'm optimistic.

I think that the U.S. has slowed down because of our behavior, because of irrational behavior and overall leveraging of sports and retrans.

You and I have talked about it a lot.

And I think finally, as you start to see declines in the U.S. that look nothing like anywhere else in the world where things are much more steady and younger people are still, in many cases, subscribing to cable even though they're also subscribing to Netflix and other products, and it's because it's so expensive here, it's $100.

And so when you see Charter launching a less expensive bundle, when you see Philo, when you see AT&T starting to be aggressive with DIRECTV NOW, all those things are encouraging.

My own view is if there were skinny bundles out there, we'd probably be flat to slightly up as an industry.

And we would be embracing a lot more younger people.

But I'm not in control of that.

We think we can have more of an impact because we're getting impatient.

So to the extent that the distributors don't do it, we may just do it ourselves.

We may do it ourselves, not with others.

But I kind of put that on the left.

We can't control that.

What we can control, which is important, is the cost of our business.

Unlike that right side I was talking about, where there was 200 scripted series a few years ago and now there's 500, you've got to pay more for the writers, more for the talent.

It's who's going to get them.

Is it going to go to Amazon?

Is it going to go to Netflix?

Is it going to HBO?

Is it going to Showtime?

Is it going to go to the big networks to support their broadcast platform?

There's -- the cost of that content is going up.

We don't see that on our side.

We have full command and control of our content.

We don't see the costs going up.

In fact, we think there are some real cost efficiencies because a lot of the brands that we have, whether it'd be Travel or Discovery, there's inability to maybe use content or promote content from one to another.

So we think we have a much better cost model with our average cost, $400,000 and the average cost of scripted, $5 million.

But what we really did here was we bought ourselves.

When I say moat, it's because basically the Scripps deal for all of our strategic advantage, which we believe is significant, for all of our revenue opportunity, which we think could be significant, we basically bought free cash flow.

That's what we did.

And in a turbulent and uncertain time to have global diversification, to have more scale and to be in a position where no matter what happens over the next 2 to 3 years, if we execute ourselves, we can grow our free cash flow and we can go from fourth gear to fifth gear.

We can just say we're going and just move the gear, and we can generate an accelerating free cash flow, even in an environment where there's secular decline advancement.

And so our ability to double our free cash flow, it's in our own hands.

And so I think we are now unique in that before we were on a boat, and that boat was on -- there was a current and we were along with everybody.

But now with Scripps, at least for the next 2 to 3 years, we've got a new engine.

And we can decide how hard we want to push it, but we think it steadies us, and we're going to focus on doubling our free cash flow.

And it gives us plenty of time, but -- and finally, what do we spend our money on?

There's a lot of stuff that we think we're going to spend our money on, but we're going to be wrong about a lot of that.

We'll decide when the time comes.

If we got good strategic opportunities, we'll do it.

If we're investing right now, we think we're doing really well with sports and kids.

We may find a year from now, we're going to invest a ton in food and taking food around the world.

If we don't -- we may invest a ton in buying back our stock.

We may buy.

And if the stock's cheap, we may buy back all of our stock.

We' got cash.

And in a difficult environment, that's -- we think that gives us great flexibility.

Our next question comes from Alexia Quadrani with JPMorgan.

Just looking at some of the ratings at your networks and the soon-to-be-owned Scripps in 2017, how disruptive is the elevated news cycle?

And I guess how much share do you think you're losing news if any at all?

And how do you manage that given that the issue doesn't appear to be as short-lived as we all once thought?

And when you look at the strength at TLC and the strength at ID, and they're immune because the programming is so strong or different [demo]?

I just would love to hear your thoughts on sort of the general environment for your networks here and the ratings and maybe the factors that influence in the performance going forward.

Thanks, Alexia.

It's hard to tell, we do get some -- we do look at the data.

We want to see basically people who love our channels, when they're not watching us, what are they watching.

And there are certain channels that have more of an overlap than others.

We don't have a depth of knowledge of exactly what's going inside of Scripps because they've bought a lot of that data and they're much more versed on it.

They have said publicly that they think that there's a significant overlap there.

It's sort of like what happens during the Olympics.

Discovery takes a bigger hit, but some of our other channels don't take much of a hit at all.

So we'll continue to look at that.

There's no question.

Look, I launched CNBC and MSNBC, and I've seen those channels.

And I think they're doing a great job.

They're all doing a terrific job if the goal is to aggregate an audience.

That's what they're doing.

They're infinity networks and they're aggregating an audience.

And they're basically, at this point, they're telling stories just like we are.

It's just playing out really as one of our shows in real time every day.

And so that's a big benefit for them, and they're doing a terrific job.

We can't control that.

We do have a large portfolio.

We get the advantage of being able to promote from one channel to another before we would spend money.

Scripps spent a lot of money on us, on ID and TLC and Oprah and Animal Planet, telling people to come over and watch their stuff and vice versa.

We get the ability to move content around.

We get the ability to promote, to tell people what's going on, on the different networks.

And we got a very -- we got a big portfolio, and that we're going to be able to take the best people from both companies, which is something we haven't talked a lot about it.

But one of the things we love about Scripps is Ken Lowe built a hell of a company.

They're great.

They understand brands.

They're great at creating characters, telling stories.

See, it's sort of like we think we're the best.

We look at them and we say sometimes we think, as much as we say that, we think they're the best.

And so they have kind of been our rival, and they've -- we've made each other better, and now we're going to be able to take the best of both, and I think you'll see that when we get this over the finish line.

And I think that will help us, and all -- this will all come to pass.

There's different trends.

And as I was saying, when I was there with MSNBC and you looked at CNN, it was very hard to get people to watch news.

That's not true now.

But at some point, it will be true again.

And so I like the diversity of our portfolio.

Our next question comes from John Janedis with Jefferies.

Two questions for me.

One is, David, it seems like your stand-alone digital business is starting to have more visible contribution on your ad growth.

And so with Scripps' 19 billion global video ad views last year and then layering on what you've been building, can you talk about to what extent the scale gives you the ability to accelerate either demand or ad growth, particularly given your share and some key demos.

And then separately, there's been a lot of focus on virtual MVPDs and distribution.

With the deal closing in a couple of weeks, do you have more confidence in the potential to be added to either existing or new platforms going forward?

Thanks, John.

Well, look, right now, we're not carried on Sling, on Hulu and on YouTube.

Our ambition is to be carried on every platform, and that's basically how we're carried almost everywhere in the world.

So we've had a lot of discussion about why we haven't been carried on those.

In many cases, they're paying $40 or $42 to carry every channel from Disney, Comcast and FOX.

We got to carry every one of them, and every regional sports network and every one of their channels.

Those are channels that consumers make a choice, and they prefer our channels to many of those channels.

And so -- and we're a great buy.

And the people that are running those 3 businesses are quite good.

They are looking at what consumers want.

Their platforms are good.

And I think over time, given the amount of time that people spend with our channels, it's going to be in our mutual interest to have people that choose those platforms to be able to spend time on -- with Discovery, with Oprah, with Food, with HG, with TLC, with ID.

And I'm an optimist, so I'm confident in the long run the consumers will win out.

And both of those -- all 3 of those platforms are terrific.

And the people there are very good, and they're dealing with an issue.

They have a very high cost structure.

But I think, over time, we'll got on there and they're looking at more and more data of what people want on their platforms.

And none of them are growing in ways that -- their growth, we think, could be helped by having more good stuff.

So that's our argument, and we continue to have that -- those discussions with them.

And I'm hoping that, eventually, we'll be on all of them.

We should be.

And then, John, on the digital contributions, I mean, as you say, we're seeing some traction in our advertising business.

Our GO platform has supported growth over the past couple of quarters and again made strong contributions in the fourth quarter.

We're seeing some real traction there.

Motor Trend OnDemand is developing well.

We're, as you know, bringing together the Velocity network, the linear network and Motor Trend OnDemand and sharing content, et cetera, that's -- there are some early positive signals there.

As David said in his speech, the Eurosport Player has really seen a lot of momentum, 0.5 million subs up even before the Olympics started.

And clearly, from what we've seen during the due diligence, Scripps is operating an impressive digital operation.

So I agree with you, I think there's a lot of potential as we look forward.

And obviously, a greater IP library is going to put us in a better position when it comes to exploiting the content in emerging platforms.

Look, this is really a journey for us.

Over the last 3 years, we have fallen down many, many times, the platform didn't work, we had buffering, we had consumer interface that wasn't loved.

We got over a 4-star rating on our Eurosport Player for the Olympics, and people -- we went online, and people were delighted by it.

But it -- what we ended up doing on that platform was a result of 3 years of talking to customers and making mistakes, and we've still got a long way to go.

But if you draw a circle around what you need to do to make somebody happy on a platform with a consuming content on a small device with -- and consuming content that they're excited about or they're a super fan, we're inside that circle now.

And we're doing things we didn't even think we would need to do or want to do a year ago.

We downloaded 700 pieces of short-form content every day on -- during the Olympics.

So our original thought was we just -- we got -- we just provide the games, but then we figured out that just as important as the games is this idea.

If you have a device, you hit that app 5 or 6x a day.

And if there isn't something fresh in there for you, that's interesting or funny or tells you something you didn't know, you go there 3 or 4 times and there's nothing there, you change -- you stop going there.

And it's very similar to a cable channel in the sense that if someone comes to Discovery 4 or 5 times and there's not something there that they lie, then they start to look elsewhere.

And so on our Eurosport Player, we were very careful with the consumer interface, we did a huge amount of short-form content that we published throughout the day and night, and then we even changed it.

A couple of days in, we saw that the content that we were publishing was the local athletes and coaches that were getting much more play and much more shares than the -- than our big-time talent.

And so we looked at that data, and we said, okay, it's local, local, local.

And so I think we're getting smarter, and we're getting more confident, almost 0.5 million subscribers in less than 15 days.

So we take -- we're going to take what we learned from that, and we're going to put that in the bank and start to try and get better at what we're doing.

And 1 or 2 years from now, we're going to be in a position where we're really going to understand how people consume content on a phone and what we have to give them so that they could feel like I love this thing.

But we're on our way.

Our next question comes from Jason Bazinet with Citi.

I just had 2 questions.

You mentioned on the call, your optimistic about the cost-savings synergies with the Scripps deal and revenue synergies.

Do you think that you will, post close, sort of update it with a hard number on the cost side?

And do you think you'll ever give a revenue synergy number?

Or you just let it play out as it plays out?

Look, Jason, I mean the reality is, given that we haven't closed to deal, we have stayed away from Scripps, of course.

So we've done a lot of work on our side.

And as David said, we're super confident with the analytical preparation work that we have done.

It looks like we're going to close the deal soon now, and certainly we want to take a couple weeks to sort of test some of our assumptions and get some more details, including the sort of the details on the Scripps side.

So we'll take that time.

But certainly then once we have a fully vetted view on what the -- not only the total number of synergies is going to be, but also what the -- what ours with the refined ramp-up timing is going to look like, we'll definitely come back and update the market on our plan there.

Great, and if I can just ask one follow-up.

I noticed -- and I think it was in January, you decided to move the headquarters to Knoxville out of Maryland.

And today, you announced that you're shedding your education business.

Can you just provide just a bit of color?

I mean it sounds like you guys are doing everything to get sort of very focused on the opportunities as you see it and sort of do everything you can to get more efficient.

So any color on either of those moves would be helpful.

Yes.

I guess you nailed it.

I mean, we're really committed to focus as much as we can.

The -- as David said, the headquarter decision has been a tough one, but there's no way we would be operating a combined company with 3 major locations in the U.S. So as tough the decision was, we've decided to move the headquarter to New York, actually.

And once the deal closes, build out Knoxville as an operational center going forward.

And you're right, the education sale is another $120 million cash in for us, and it's clearly one of our objectives to really focus and, as we said before, delever as quickly as we can as we go through this integration.

Our last question comes from Richard Greenfield with BTIG.

This is Mark Kelley on for Rich.

Even with the vMVPD benefit, even the biggest programmers are losing about 3% of their subs year-over-year.

And everyone's, not just Discovery's, ratings are continuing to fall.

So given that, can revenues in the U.S. really continue to grow long term with less and less subs and less and less viewership?

And just at what point if the weight on rate is simply unsustainable?

Look, I mean, I think it's clear that the one thing we do not control is those subscriber trends.

As David said, we're confident that this linear business is going to be around for a very, very long time.

And if you look at what we're doing, both on the affiliate side and on the advertising side, there has been significant step-ups in our deals, which has continued to lead to positive growth.

There certainly is additional upside from emerging bundles from direct-to-consumer offerings that we might be going after, especially internationally.

And on the advertising side, I mean, there's a very logical reason for increasing CPMs, as the only remaining mass medium becomes more and more scarce.

In terms of available inventory, there's an increasing value of 1,000 viewers.

So that's a pattern that has been very stable over the past couple of years.

And if you look at the technology evolution that's in the pipeline, I think TV as an industry, might benefit quite a bit from being more and more addressable and targeted in their advertising products.

So I think we have a healthy outlook.

The only thing I would add to that, which I think is a positive, is when you look at our portfolio, the things that would come to mind I think is all safe.

When you go on some of these other platforms, you got to worry about what you're going to be next to, what's going to show up, is it fully quantifiable in a way that's -- that you could take to the bank?

Then you take a look at our 18 channels here in the U.S., what they provide, the cross-section of demographics to quality of the content, and the things that we just don't do as a company, the safety, the knowing that if it's Discovery that there's a filter there and there's quality.

And that's a big deal, and that's what we're moving toward.

I mean, that's what the -- when you think about our owners, our biggest shareholders, the Newhouse family, Bob Miron, Donald and S.I. Newhouse, who built this company, and John Malone.

They came here for quality content that was going to entertain.

And when we're at our best, we would educate and inspire around the world globally and now on all platforms.

And so as there's a race to provide audience, there's often a degradation, or on many platforms, there's a disruption with quality content or good content not knowing where it's going to be and what's going to be next to it.

So we think long term, that's an advantage.

So thanks so much.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect, and have a wonderful day.