華納兄弟探索 (WBD) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Discovery Full Year and Fourth Quarter 2019 Earnings Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy.

Sir, you may begin.

Good morning, everyone.

Thank you for joining us for Discovery's Fourth Quarter 2019 Earnings Call.

Joining me today are David Zaslav, our President and Chief Executive Officer; Gunnar Wiedenfels, our Chief Financial Officer; JB Perrette, President and CEO of Discovery Networks International; and Peter Faricy, CEO, Global Direct-to-Consumer.

You should have received our earnings release, but if not, feel free to access it on our website at corporate.discovery.com.

On today's call, we will begin with some opening comments from David and Gunnar, and then we will open the call for David, Gunnar, JB and Peter to take questions.

Before we start, I'd 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 Form 10-K for the year ended December 31, 2019, and our subsequent filings made with the U.S. Securities and Exchange Commission.

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

Good morning, everyone, and welcome to our Q4 and Full Year 2019 Earnings Conference Call.

We delivered a quarter and year of outstanding progress.

For 2019, I'm pleased to report that we met or exceeded all of our core guidance metrics and strategic objectives, and we feel terrific looking ahead into 2020.

We continued to deliver on the many promises we made to our shareholders over the last few years.

Promises made, promises kept.

On free cash flow, we set a goal of $3 billion for the combined Discovery and Scripps.

And this year, we over-delivered with $3.1 billion of free cash flow, which is even more impressive given the substantial direct-to-consumer investments we are making.

We are a free cash flow machine.

I said when we closed on Scripps that free cash flow will be like a moat in turbulent times, and the $3 billion plus in free cash flow, like bullets or weapons that we could use.

Promises made, promises kept.

On leverage, we had promised to bring leverage down from 4.8x following our deal to our target range of 3x to 3.5x by the end of 2019.

And by the end of Q4, our leverage was all the way back down to 3x, in large part driven by the $1.1 billion in free cash flow that we generated in Q4 alone.

Promises made, promises kept.

We expressed our strong desire to return capital to shareholders once we reached our target leverage range.

And in only 10 months, we exhausted our initial $1 billion authorization, and we are reloading as our Board just approved an additional $2 billion authorization.

Promises made, promises kept.

We identified international expansion as a key upside opportunity for our Scripps acquisition.

This year, we expanded distribution of our lifestyle brands to an additional 100 million new households across both free-to-air and pay, with food and home content and channels supporting our significant international growth in 2019.

All of which speaks to the truly unique position we enjoy within the industry, supported by the best and most stable management team in media today.

We continue to deliver consistent execution even in the face of a rapidly changing ecosystem.

In the U.S., we delivered solid advertising growth in the face of difficult domestic ratings trends.

And 5% domestic affiliate revenue growth was supported by our broad coverage across the virtual MVPD landscape, with better carriage more broadly than virtually any other media company in the U.S. International advertising revenue growth of 5% was in part driven by continued strength in our commercial share, while international affiliate growth once again achieved double digits, reflecting underlying tailwinds for both linear and direct-to-consumer.

In 2019, we also accelerated our direct-to-consumer pivot with a focus on 2 key pillars.

Number one, big scalable view products like our broad aggregated apps in Europe, Dplay, Joyn and the TVN Player.

These are local language, local sports, Hulu-like platforms, and we are seeing superb and very encouraging momentum and acceleration in trends in this space.

The key to these over-the-top products is that they're local, local, local.

In addition, we have our best-in-class aggregated GO streaming apps in the U.S., which continue to grow quickly and show meaningful scale growth.

And as we've mentioned previously, we are focusing hard at aggregating our brand into an OTT service here in the U.S., a major focus for our management team and me as we look to reach all passionate fans across all platforms and methods of distribution with our great IP, our great characters and our great stories.

The second key pillar is our growing affinity View and Do products focused on our passion verticals like food, sports and lifestyle.

Much of the content on our View and Do platforms have largely been amortized and afford us an incremental monetization opportunity, a second bite at the apple, and also encompasses our short-form strategy with our Group Nine investment and their strong affinity brands like NowThis, The Dodo and PopSugar.

We like our hand in this rapidly evolving ecosystem, and I have total conviction on the simple but valuable principle: Audiences love our content.

They now just want to see it on all platforms.

The landscape that is emerging plays to our strengths and to our strategic advantage.

We generated over $700 million of next-gen and direct-to-consumer revenue in 2019 and are well on our way to exceed $1 billion in 2020, representing a major milestone for us.

And it underscores the solid traction we are seeing across all components of our strategy.

Our organization is more aligned than ever around this priority.

Starting in 2020, a significant percentage of our employee incentive compensation across all levels and rank will be measured by how well we perform against our next-gen and direct-to-consumer goals.

Whether measured by our vast library, 60,000 hours, nearly 2x the size of Netflix, our current pipeline of 8,000 new hours we produce a year, with the milestone we crossed and held for more than half of last year as the #1 most watched portfolio in the United States for women across all of television.

We have a very strong portfolio of brands that are consistently ranked at the top of consumer preferences for brand strength and loyalty.

We have passionate superfans, authentic talent and characters that are loved in America and around the world: Oprah, Chip and Jo, the Property Brothers, Guy Fieri, Bobby Flay, we could go on and on.

And we are not a renter.

We own and control almost all of our IP globally.

We will continue to serve viewers within the traditional linear ecosystem, much like we've done for decades.

And we now serve them better than anyone within the virtual MVPD landscape, where we are more widely distributed than any of our peers.

And we serve them within our authenticated GO apps, where the average age of our users are below 30.

We also believe our aggregate content is very strong on a stand-alone basis and in addition would be a great complement to the many other scripted and AVOD/SVOD platforms that are already in the marketplace.

We're differentiated, and we fit well with all of them.

And of course, while being mindful of the balance and importance of the linear pay TV business, we are positioned to create dual revenue stream direct-to-consumer platforms.

And we continue to evaluate the possibility of offering an aggregated platform of all of our channels, brands and personalities, quite possibly with the help of any number of distribution partners in the U.S. and around the world.

We believe there are a number of direct-to-consumer business models that are scalable, sustainable economically and rational from a cost perspective as we expand and complement the linear ecosystem.

And evaluating this opportunity set is a strategic imperative for our leadership team.

As we sift through the analysis, we are confident that we are playing a different game than everyone else.

The efficiency of our content is unparalleled.

Our content costs are under control.

And for our affinity fan bases, we are delivering them truly coveted appointment viewing.

But the key variable that I keep coming back to that distinguishes us from our peers is not only the good storytelling and brands and characters we bring to our fans, storytelling and brands that drove more female viewers to our portfolio than any other for more than half of 2019, but the economics of our model.

Our content is a small fraction of what's taking place on the other side of the ledger.

The overbid, competitive, spiraling out-of-control costs for scripted, new and repeats is astounding.

That is not who we are.

We aren't paying hundreds of millions of dollars for content, original or repeats, that we can't even own.

And accordingly, as we begin to scale our products to millions of subscribers, we'll see profitability very early on.

Take TLC's 90 Day Fiance as a great example of what I've discussed.

It is the most watched program on Sunday nights in all of television among all key demos and consistently outdelivers each and every single broadcast network in women 25 to 54 in prime.

And we now have 90 Day and spin-offs dominating TV on Sunday and Monday nights almost all year at a cost per episode that is 1/10 of the cost of a scripted series.

In addition, the 90 Day Fiance franchise now airs across 170 countries, making it one of our top-rated shows globally.

The power of fully owned global IP.

Outside the U.S., we're very excited about the success of our locally differentiated Hulu-like products, such as Dplay.

These assets are becoming a meaningful part of our strategy in many key markets.

Our JV in Germany, Joyn, crossed 7 million monthly average users only 6 months after launch.

And we recently added an SVOD tier, underpinned by ambitious plans for 12 new and exclusive series this year in German language, local.

And we plan to combine and launch our TVN Player with Polsat to create the preeminent destination for Polish language content in this important and our largest European market.

We are actively exploring additional opportunities to expand our model to other major markets in partnership with local programming leaders, perhaps in other JV-type models, where we believe we offer a winning solution for incumbent broadcasters to align and create compelling packages for consumers.

You should expect that we will accelerate OTT services, such as our stand-alone aggregated app in Europe.

2020 is going to be a year where we really begin to fuel what's working, where we believe we have a strong hand to play, and Dplay is one of those key areas for us.

Expect us to play a bit more offense in select markets, particularly where consolidation in distributors means we have to push harder to get full value for our richer content portfolio.

One such market where this is taking place is in Denmark, and we are pushing ahead far more aggressively with our OTT solution.

In some countries like Sweden, for example, Dplay will be the only place fans can watch Allsvenskan, the local Swedish football league with 200-plus games.

It's must-have and compelling content in the marketplace and in part, the reason why Dplay continues to be the fastest-growing SVOD service in the Nordics.

Local entertainment, local sports, it's a great combination.

We intend to push Dplay expansion to nearly double the number of markets over the next year, up from 10 markets currently, supported by a robust technology platform and exclusive local content.

And it's likely we will see some near-term impact as we accelerate its push.

The cadence of affiliate fee growth will become a bit lumpier during this process.

However, we are confident of the longer-term financial and strategic payoff.

And keep in mind, as I said earlier, our costs and margin profile will enable us to achieve our financial goals at much lower subscriber levels than many of our leading DTC player competitors.

And our affinity View and Do platforms are completely differentiated from the intensely expensive and competitive fight taking place on the scripted side of the industry.

Food Network Kitchen continues to ramp up very nicely.

We and our partners at Amazon are pleased with the very strong engagement, product ratings and functionality of the service.

We recently announced a great distribution arrangement with Sur La Table here in the U.S., opening up Food Network Kitchen to an incredibly targeted audience base.

And stay tuned for additional distribution and marketing pushes that we have in the works.

For Eurosport, we are within 6 months of broadcasting our second Olympics across Europe and across all screens.

This is our first Summer Games, and we'll have 3x as many events as the Winter.

Our teams have been hard at work preparing for the challenge.

We are excited to outdeliver the amazing set of games we delivered in 2018, supported by vast improvements in our technology, programming expertise and the delivery platforms.

To finish, it is an unprecedented time in our industry, not only as measured by the magnitude of change, but also by the speed of that change.

We feel confident that our strategic agenda, the fact we are one of the few media companies that own almost all of our content globally, combined with the strength of our brands in connection with passionate audiences, all position us for long-term, sustainable growth.

We are singularly focused on strong execution and operational discipline and are always guided by an entrepreneurial zeal that got us to where we are today.

This work continues to fuel our strides in building the next generation of growth for Discovery as we position our business within an industry undergoing generational transformation.

I'd now like to turn the call over to Gunnar.

Thank you, David.

I am very pleased to present our financial results for 2019, and I am confident in our financial position as we tackle a very exciting global agenda in 2020.

Indeed, generating over $3.1 billion in free cash flow during 2019 after funding approximately USD 300 million of growth investments and nearly 67% conversion of AOIBDA is emblematic of both the cash generative capability of our business model and truly differentiated level of efficiency with which we are operating following our Scripps merger.

And we will maintain that laser-like focus on cash and efficiency.

Perhaps most importantly, our free cash flow underpins our ability to address the exciting opportunity set that David outlined and to continue investments to support our traditional linear networks while at the same time return capital to our shareholders, particularly given that our leverage is comfortably within our target range.

To that end, I am pleased to report that we have already bought back $1 billion of stock, and we take our Board's new $2 billion authorization as a strong sign of support for the initial momentum we are seeing as we lay the groundwork for our future growth plans.

And we are excited about what we are seeing across our portfolio of next-generation businesses, which include our direct-to-consumer businesses and the digital elements of our traditional business, like our GO products.

With this portfolio having already generated over $700 million in revenue in 2019 and being on track for at least 40% growth to over $1 billion in revenue in 2020, approaching 10% of total company revenues, we are very pleased with the early traction.

Over the course of this year, we plan to supercharge our expansion of Dplay in Europe, position additional direct-to-consumer initiatives, such as Magnolia ready for launch, start lighting up our BBC natural history content in multiple formats across the globe, significantly broaden the rollout of FNK and drive improvements and expansions across our entire portfolio.

To that end, we do anticipate spending more against these initiatives in 2020, which should lead to a roughly $600 million annual investment in the sense of short-term P&L losses from these growth initiatives, representing an incremental $300 million over 2019.

It is worth noting that we currently expect these investments to peak towards the end of 2020 or early '21 at the latest.

The year-over-year ramp-up for these growth initiatives is primarily driven by original content and marketing costs to drive subscriber growth, a healthy portion of which is success-based spending.

We will also largely complete the initial investment in our own technology stack as well as further round out our management team under Peter, all of which should scale nicely as the business grows.

Also it is important to note that excluding the step-up in expenses from our next-generation and D2C initiatives and the Olympics, our core expense base is planned to continue to decline, which again speaks to our resilience on expense management and high level of operating efficiency.

The contribution from next gen and direct-to-consumer will certainly help drive an acceleration in our overall global revenue in 2020, where we currently expect solid mid-single-digit revenue growth on a constant currency basis over 2019.

Now, this is our outlook as of what we see today and would expect in any business-as-usual environment.

Clearly, given the news flow around coronavirus, being a consumer-facing company, we'll have to carefully monitor these trends.

The other key item I'd like to review in more detail is the Olympics in Q3.

We will produce our first Summer Games from Tokyo, scheduled to take place from July 24 to August 9. Let me take a minute to provide some color around the games, which like the Winter Olympics that we produced in the first quarter of 2018, is something about which we're very excited.

We continue to expect the Olympics to break even over the life of the deal with monetization and exploitation of rights occurring before, during and after the games.

Key revenue drivers will again be sublicensing, which will be reported in other revenues and comprise the vast majority of Olympics revenues in the third quarter; advertising, which is tracking well with significant uplift versus the 2018 Winter Games; and distribution, which includes both traditional affiliate revenues as well as D2C revenues generated on Dplay and the Eurosport player.

Recall, we saw a healthy uplift in the Eurosport player subscriber base during the 2018 Winter Olympics.

With the transition to our owned and more effective tech stack, we expect to fare even better through these games.

And as a reminder, we expense the entire set of rights fees and production costs during the period in which the games are aired despite the fact that some Olympics-related revenue will be generated post the games.

Accordingly, like with the Winter Games in Q1 of 2018, we expect to incur an Olympics-driven AOIBDA loss in Q3 that will normalize in future quarters.

We expect the Q3 loss to be in the $175 million to $200 million range.

I'd like to shift to providing some commentary about the outlook for the year as we look across our key operating segments.

Like last year, we are not providing full year AOIBDA and free cash flow guidance, though I will describe a number of key factors, quantification of the one-off items, headwinds, tailwinds, building blocks, et cetera, to help you understand the cadence around the moving pieces this year.

Turning to segment drivers.

On the domestic side, advertising will continue to be impacted by underlying trends within the pay TV ecosystem.

We continue to fight the uphill battle with cord cutting and cord shaving as well as declining PUT levels, which ultimately lead to lower audience delivery.

And while our very strong yield and the strongly growing contributions from our GO business have more than offset these trends, rating headwinds at some of our key networks have put additional pressure on recent results.

All of which, though, is fortunately taking place in what continues to be a healthy marketplace for TV advertising.

Two months in, we're forecasting slightly up.

And as always, ratings trends will determine where we land.

With respect to domestic affiliate, we're coming off a very strong year, and we feel optimistic heading into 2020.

We remain the most widely distributed network group in the industry, though as you all know, we began to lap inclusion in Hulu and Sling in the fourth quarter and will lap YouTube TV in the second quarter of 2020, which places us more in line with the broader industry trends, as we have noted previously.

Visibility across this revenue line is also very much subject to shifting consumer patterns in and across different bundles and services as well as the pickup of D2C subscription revenues.

Near term, we would expect at least low single-digit revenue growth from domestic affiliate.

Turning to international.

Current operating trends and the outlook within advertising remain similar to what we have seen over the last few quarters on a constant currency basis.

Our continuing commercial share growth across many countries, in part from broader distribution of Scripps content internationally, continues to support a positive international ad revenue story.

Moreover, traction from the advertising side of our next-gen and direct-to-consumer products continues to provide additional tailwind.

Also please recall, we will lap the consolidation of UKTV in the second quarter of 2020.

And on the international affiliate side, as David discussed, there are, as always, a number of moving pieces.

Chief among them is our desire to accelerate the penetration of Dplay, which is finding very solid footing across its growing number of markets.

At the same time, we are, in some cases, pivoting to a hybrid model with some of our distributors selling on both a wholesale B2B basis as well as a B2B2C retail basis, while at the same time, driving direct-to-consumer.

As David noted, in instances where we had to push harder to get paid full value for our content, we have held firm, much like we did in 2017 in a number of countries, leading up to the 2018 Winter Games.

We now can and will take a more aggressive stance with a far faster pivot to a direct-to-consumer model, which we believe is ultimately the stronger move strategically.

This, however, will naturally create some near-term impact on our segment revenue growth.

And as a reminder, Q4 2018 provided a slightly easier comp, benefiting our 10% growth in fourth quarter of 2019.

To that end, we expect that near-term and annual international affiliate revenue will grow modestly slower in 2020 compared with the constant currency revenue growth of 5% in 2019.

As many of our growth initiatives evolve and become a bigger part of our overall revenue and as we prioritize investments between the individual initiatives, the balance of advertising and subscription revenue will evolve as will the cadence of expenses and the mix of domestic and international.

Against this backdrop, you will have noticed that we are providing slightly less precise and detailed quarterly guidance on revenue line items, where I have come to the conclusion that they would be much less helpful at this point than in the past.

Turning to free cash flow, which continues to be a top priority for us in 2020.

We expect another year characterized by a very strong AOIBDA to free cash flow conversion rate in the 60% range, give or take.

As discussed before, the Olympics are a cash outflow in 2020.

We expect cash taxes to return to more normalized levels this year and will be up year-over-year to the low 20% range, excluding PPA amortization.

CapEx is expected to be more or less in the same ballpark as last year as we continue to invest in, number one, our growth initiatives; number two, global software and infrastructure spend geared to productivity and cost efficiency; and number three, the final build-out of our global headquarters.

FX is again expected to be a headwind both on revenue and AOIBDA in 2020, roughly a negative $120 million impact on revenue and a negative $60 million impact on AOIBDA.

On the balance sheet, we will remain comfortably within our target range of 3 to 3.5x net debt over AOIBDA.

While we're currently at the very low end of that range, with some of the lumpiness to our AOIBDA, particularly around the third quarter impact of the Olympics and continued share repurchases, our leverage multiple should increase modestly to around the middle of the range this year.

And keep in mind that given our normal seasonality and with the Olympics in the third quarter of this year, our free cash flow generation will be somewhat lumpy and skewing towards Q4.

Uses of capital have not changed.

We will continue to look for opportunities to invest in organic growth drivers.

And where it makes strategic sense, we will look at accretive inorganic opportunities as well.

And as we are where we want to be from a net leverage perspective, we largely expect to return excess capital to our shareholders.

As we progress through peak next-generation and direct-to-consumer investments and the Olympics, from a high level and without getting too far ahead of ourselves, 2021 should have a far more normalized cost curve.

We will comp against the Olympics while still enjoying tailwinds from Olympics-related revenues post the games.

And we should grow into and begin to scale our next-generation and direct-to-consumer content and technology expense structure.

All else being equal, we should enter 2021 with a certain amount of momentum.

In closing, let me reiterate my key points.

Since closing the Scripps deal, we have relentlessly executed our agenda and achieved our strategic and financial objectives, as evidenced, among others, by our industry-leading distribution, share growth in international and record free cash flow generation, and we have every intention to continue on this path.

And overall, even in the face of the secular headwinds facing Discovery and our peers, we expect our consolidated revenues to grow solidly in the mid-single-digit range this year on a constant currency basis.

Within that growth, we are seeing healthy traction of our next-generation direct-to-consumer businesses, with associated revenues expected to grow at least 40% to over $1 billion in 2020.

Expecting to hit peak P&L investments related to our growth initiatives around the end of 2020, we are set to gain significant operating leverage in these businesses from 2021 onwards.

Finally, our Board continues to express full confidence in our ability to execute on our agenda as underpinned by the new $2 billion buyback authorization.

I am convinced this is a great value-creation opportunity at these current share price levels.

With that, I'd like to turn it over to the operator to start taking questions.

(Operator Instructions) And our first question comes from Steven Cahall from Wells Fargo.

Thank you for the color on direct-to-consumer with the revenue numbers.

You talked about peak spending in '20 to '21, so just wondering if you have an estimate as to when you might get to breakeven on the next-gen portfolio.

And relatedly, I was wondering if you could tell us at all about the launch of Magnolia and the Science & Nature platform with the BBC.

On Magnolia, is this going to be a try-and-do element, a lot like Food Network Kitchen?

And on Science & Nature, do we have any idea in terms of price and whether that's going to be SVOD versus AVOD?

And then I got a quick follow-up.

Thanks, Steven.

Well, first on the BBC deal, when you put together their library with ours, we really see it as the definitive collection of science and natural history.

And as Iger went after the big brands when he did Marvel, if you think about the big brands, we have the overwhelming majority of nature and science and the big brands, whether it's Planet Earth, Frozen Planet, Walking with Dinosaurs, Blue Planet and everything that's produced by us and the BBC under those names for the next decade.

And so we think that that could be quite compelling.

And what we're looking at is, we own that globally outside of the U.K. and China, their library.

Do we go globally with this family product, which we've been getting a lot of data on, which looks quite differentiated and very compelling?

Or in some cases, do we put that together?

When you think about what we have here in the U.S. where for a big portion of last year, we were #1 in America for women, beating every one of the media companies.

And the quality of our brands, do we put those together?

And as we look at the marketplace, we see that a lot of these SVOD services, scripted series, scripted movies competing with each other, look an awful lot alike, a lot of the same movies on them, and people are going to be looking to figure out what could I have in addition to that, those that are not on traditional cable, that will provide a real package of content that they love and that they know how to curate.

And curation is going to be a big issue with a lot of these SVOD platforms and is.

One of Netflix big advantages is that algorithm, but people are still confused what should I watch next.

And when you take a look at us, Discovery and BBC or Discovery and Planet Earth and those logos, and if you look at what Disney is doing and then you see Oprah and Chip and Jo and Food and HG and TLC and ID, most people would take a look at that, and they seem to be saying, "Oh, that's all my favorite stuff." And they feel great about it.

And so that's what we're looking at, and that's what we're looking at globally.

Do we aggregate?

Or do we go into the silos, the very powerful superfan silos, like golf and cycling?

And we'll be making that determination soon.

But we think this combination of incredibly high-quality content for women that they love and know how to navigate, with great characters and brands, together with the definitive collection of science and nature, in my generation, whether it was World Book or Encyclopedia Britannica, no kid should go to college without watching the majority or a lot of that stuff.

How compelling could that be?

And what would the churn on a product like that be?

And that's what we're looking at.

On Magnolia.

On Magnolia, we're going to launch the channel itself.

Chip and Jo are doing great.

We've been -- we've greenlit a load of content.

They're producing all of it out of Waco.

We have a huge team down there.

And they're producing a lot of content, which they're involved in directly.

And we're going to just make the determination of when we do the direct-to-consumer and how we aggregate it, and we'll do that soon.

But right now, the content looks great.

Chip and Jo's popularity have never been higher, and they're super excited.

And we're getting on terrifically well.

Steve, one other thing, just to add to David's comments on the BBC content, is we are -- as he said, we're looking at experimenting.

And when we pull it together, either for the U.S. and other markets, we are already beginning to experiment with it internationally, where we're launching the BBC content on Dplay and seeing how that's going to drive the bigger package.

And so we are already making use of that content in Europe as of now.

Okay.

On the breakeven point, Steve, clearly, we're not in a position yet.

We have our models, but I'm certainly not going to talk about breakeven nor margin profiles at this point.

We're in the middle of a full-on transformation.

But if you look at what we have said, we're seeing traction on the revenue side.

We are expecting our investments to peak at the end of this year.

So that gives you a bit of a sense for what the model might look like.

And keep in mind, we have very, very strong economics with our content.

In general, it works very well across platforms.

And as you think about our rollout of the direct-to-consumer products, content is one of the big cost line items that's going to scale very well because it's (technical difficulty) cost component, and in many cases, we can leverage off of existing linear content.

Number two is personnel cost.

Peter has been starting to put together a great team.

We do expect additional ramp-up of personnel expenses this year.

And from that point on, it's probably going to plateau because we're essentially leveraging that same team across what we're doing.

And then you've got that big point of marketing expenses, which is going to be, to a large extent, success-based.

So it's just important to note, while we are striving to get these products as successful and as widely distributed as possible, we really don't need a crazy number of subscribers to be operating a profitable business here.

And the key point, again, is we're leveraging off our massive library, 300,000 hours of content in general, 60,000 hours that are currently on our GO platform that we're sort of actively using here.

Some of that's skewing much younger than our linear networks.

So again, bottom line is I think we have one of the strongest economic positions for the rollout of these products.

And stay tuned, and we'll give more color as we go along.

You see on the scripted series, scripted movie side in that very competitive environment, huge checks being -- with big battles for extra nourishment.

Think of the scale of what we have in terms of the ability to nourish subscribers domestically and internationally.

Because that content is not only in English, it's in every language.

Our next question comes from Michael Nathanson from MoffettNathanson.

I have one for David and one for Gunnar.

So David, when you think about the aggregation opportunity within the U.S., of taking all your content, all your brands into one over-the-top product, the question I have for you is, how do you balance the opportunity to actually find people outside the bundle with your need to keep your distributors happy?

Like you've seen what's happened with HBO, Max and Showtime where they've pissed off distributors who no longer support their products.

So how do you balance the opportunity that you see to get people outside the bundle, but to also keep the economics of your relationships intact?

That's one question for you.

Well, first, we're delivering like 20% of the audience.

And we're not proud of this, but we're getting less than 5% of the money.

So -- and they're selling in our channels.

And our channels have great affinity and very good CPM opportunity for appetite for the cable guys.

So we're an extremely good value, which we're trying to push on and advance, but we're an extremely good value, number one.

And number two, we're probably the best actor in the industry.

When you look around, we're not selling some of our best IP.

No one's waking up and going, whoa, you sold your best IP to Netflix.

You sold your best IP to Amazon.

We don't do that.

And when we walk in and talk to our distributors, they're like, what's going on?

Why are people doing that?

Why are they taking great content off the bundle and getting -- trying to get short-term economics?

We're not doing that.

Which gives us a real equitable position.

And we have great relationships with our distributors.

So we start with them.

I was talking to Rutledge last night.

And we're in discussions with all of our distributors.

The GO platform is a great example.

Hundreds of millions of dollars of young people that grew up watching our channels, Discovery, Food, HG, ID, that are consuming it on other devices, and we're monetizing it.

And so there's a lot of win-wins here, where we can take great content and figure out how to get Charter, Comcast, Cox, AT&T, Charlie, how do they figure -- there's ways that we can work together to create more value.

But the key for us is, we have to reach everybody.

We have this incredible content that people love.

And we've assembled most of the great brands and great characters outside of scripted and movies.

And it's what people spend about 40% of their time on, and they've been doing that for the last 50 years.

They love that content.

And so we feel good about it.

The cable guys aren't going to wake up and find out what we're doing.

They're going to be in rooms with us figuring out what we're doing that creates more value for both of us.

They have lots of broadband-only subs that they're only selling Netflix to.

And they don't like it, and we don't like it.

Okay.

Let me ask Gunnar because -- thanks for the Olympic color.

But the question would be, what if the Olympics don't occur this year?

What's the impact on the cost side?

And then all those revenue buckets you've talked about, how are those affected also?

Well, look, I mean obviously, on this issue, we're monitoring it closely.

We are following the IOC's lead, and that's about all we can do.

At this point, we are continuing to prepare for the Olympics.

And clearly, we're looking internally at all scenarios.

To the extent possible, we have taken out some insurance here.

So you should...

Which we took out a long time ago.

Yes.

You should rest assured that it's not going to have any adverse impact on our financials.

But JB, I don't know if you want to add any color from your discussions.

No, I think what you said is right.

We will continue to work very closely with the IOC and follow their lead.

And we're prepared and we're ready to go, and we're excited about going.

And obviously, should things change, we'll continue to keep you updated.

But we feel like it should be a positive for us.

And if it doesn't happen, as Gunnar said, we'll come back to you and update you, but it won't be an adverse impact on our financials.

Clearly the top line number would change because, as I pointed out, there is a contribution, but so would the expense line.

Our next question comes from Jessica Reif Ehrlich from Bank of America Securities.

I have a couple of direct-to-consumer questions.

Can you give us some metrics or color on what you've seen so far in Food Network Kitchen in regards to revenue mix, sponsorship, commerce?

Are you even seeing subscription revenue yet, given the 3-month free trial?

Anything you can say on engagement would also be helpful.

And then just separately, as you consider all your direct-to-consumer options, whether you aggregate or go with the silo route, would you consider selling your general entertainment content to other streaming platforms, whether it's Peacock or others?

Right now, we're looking at -- we think that we're the best global IP company.

And we're the only company that has it in every language with the depth that we have.

And so right now, our strategy is to keep it all for ourselves.

And if we do partner, it would be partnering more like what we did with ProSieben or what we did with Polsat, which we're finding as effective.

In the ecosystem of what do we think looks really scalable and exciting, I'm personally super excited about this local language, local sports and partnering with other local broadcasters across Europe and Latin America.

There is no other company that could do that.

There might be a bunch of companies that would like to do it.

But we're in every country, we have a significant library in every country.

We have commercial teams in every single country.

And you could just -- that idea and the way that people are reacting to it, it's just you have Netflix out there and Disney+ coming, 2 great, great products, but they are always going to be 90-10, 80-20.

And this idea of having local sports and local content feels quite good to us, and we'll keep you up-to-date on that.

Peter, do you want to talk about our...

On Food Network Kitchen, we're very pleased so far.

We're 5 months into this, we're still in the early days, but I think the signals we look for are signals like what's the customer rating and how strong is the engagement, how big of a funnel are we building.

And I think we're very pleased with those -- the early results on those so far.

If you take a look at our product ratings, in iOS, we're up to a 4.8.

But we've been at 4.9 the last 2 months.

So out of the gate, that's a really, really great feedback from our consumers that we've built something that they love and they're using quite a bit.

And when you see a rating like that, you end up seeing -- actually, you only get a rating like that if there's a lot of engagement.

So we're very pleased with how much they're using the product.

And when we launched this, it was this combination of entertainment and utility that we think is an innovation.

And so far, that's exactly what's happened.

The second big thing is we're excited about the amount of interest we've had from partners.

And our partnership with Amazon, as David discussed earlier in the call, Amazon is very pleased so far.

I would say, they're very pleased with how much engagement they're getting with Alexa.

But for them, this is one of the most innovative apps on the Fire TV platform and beyond.

So stay tuned.

I think we have more to do with Amazon as the year goes on.

But we announced a few weeks ago this partnership with Sur La Table that we're quite excited about.

And the idea of that all these customers that are naturally attracted to cooking, who are visiting a Sur La Table store, either to buy a product or be part of their membership group or take a cooking class, are all going to get a 6-month free trial that rolls to pay is quite exciting for us.

So we're excited to see how that turns out.

You asked about the revenue mix, and it's still early, so I would imagine this is going to evolve over time.

But it's been about 45% ads, 45% subscription and maybe 10% commerce and other partnership activities.

But I'd say it's still early in the game.

We're, again, quite pleased with how much activity we're getting in the free layer.

The people who are subscribers have become very, very active users quite quickly.

So we're optimistic and look forward to giving you guys more details as the year goes on.

Our next question comes from Ben Swinburne from Morgan Stanley.

I wanted to ask either Gunnar or JB.

Gunnar, in your prepared remarks, you mentioned you're taking a more aggressive stance internationally, considering a faster pivot to DTC and talked about the impact on affiliate revenues over there.

Could you just give us a little more color on sort of -- on what's driving the relationship between that pivot and sort of slower revenue?

I would have thought more aggressive stance would lead to sort of higher affiliate fees or at least maybe a bigger opportunity in DTC.

Just trying to understand the bridge there.

And then David, there's been a lot of M&A in the AVOD space or some M&A, some speculated M&A in the press, like Pluto, Xumo, Tubi.

I'm just wondering what your view is on the AVOD market and whether there's inorganic opportunities.

Or if you're passing up on these, sort of why you think these are less interesting than building the business organically?

Great.

Thanks, Ben.

On the -- on your first question, I think it's a timing issue.

The reality is we do see -- and part of the reason why we're making some of these more aggressive pivots to direct-to-consumer, number one, is we're seeing, as we look at closing '19, some of the fastest growth rates of our direct-to-consumer, particularly Dplay subscriber growth that we've ever seen.

And even kicking into this year, we had our highest net adds in January that we've ever had.

And so we're seeing that growth curve accelerate.

And so when we see that opportunity, the product, as Peter mentioned, for FNK getting better and better, we want to lean in.

And therefore, the timing is really one where we may take some of the distribution -- traditional distribution money off the table to lean into the OTT space.

So what it creates is, to your question about the affiliate or distribution revenue line item, is just a timing difference, where you'll see some of the hit short term, but the benefit and the growth come in over the medium, obviously, to longer term.

And so that's the reason why you may see a bit more lumpiness in the near term as we accelerate into that growth that again we saw accelerate in '19 and in the first few months of '20, we've seen continue to accelerate.

On the AVOD, I think it's pretty fluid in terms of AVOD/SVOD.

And the way that the world used to think about this was everything had to be subscription.

But for instance, in the cycling and golf space, being able to aggregate millions and millions of people that love -- that have an affinity for free for golf or for cycling and have that and aggregate that globally is quite attractive to advertisers.

And you also have the ability to do shopping-type applications, so that you can view golf as having a subscription level, but also like a virtual global broadcast network for people that love golf.

They might not be -- they might have to pay to watch Thursday through Sunday, but they can come and they can read about the golf course.

They can see short form from Tiger.

They can see -- get a little bit of instruction.

They can figure out where to go on a golf vacation.

And more and more, we're seeing that advertisers are saying to us, "We want to get access to those people." Same on cycling, same with food.

We've built a very big funnel under food for people that want recipes.

And so that balance of, how much do you put behind the paywall, and how much you put below is something that we're trying to figure out.

But this idea of getting affinity groups globally, we think AVOD, aggregating a global virtual broadcast network of people that want recipes and love food, that could be quite monetizable.

And so we think that that's a -- and remember, one of the big advantages for us is we're owners.

And so we're really -- we don't -- we really don't want to get into the business of buying a product and then going out and trying to rent for a very high cost.

And then 2 to 3 years later, you got to pay up to keep it.

So we really like our model.

And we think AVOD actually is compelling.

And over time, we'll take you through these big funnels of AVOD and how we're monetizing them from advertisers or for transaction.

And then the subscription side, which we still think is going to be a very compelling piece and is a piece that we're driving around the world.

And the only other thing I'd add, Ben, is -- to what David said is, as we found in the linear world over the last 3 decades, having these brands and these superfan groups, where you own the category from a pricing and an advertising perspective is hugely valuable.

And so what we're seeing and what Peter is building, whether it be around cycling, whether it be around food, whether it be around Magnolia, we don't have to actually have an algorithm to define the customer base and the user base.

We own the category.

And so the endemic value of that is way more powerful from a pricing perspective than the algorithmic value.

And so I think that's something that also we think, is going to be a big, big tailwind as we get further into this.

The biggest challenge over the next decade, with people consuming more content than ever and everything being available is curation.

What do I watch?

Basic cable had real curation.

It was that everyone -- everybody watched 6 to 8 channels.

But everyone in the family had a different 6 to 8. In the Wild West world of every -- all the IP is out there.

Even if you subscribe to a lot of these services, the big challenge is going to be when you get there, do you have anxiety?

Are you confused?

Do you know how to navigate it?

What's there that I love?

And I think one of the big advantages that we're finding in the testing that we're doing is when people land on our products, AVOD or SVOD, the reaction is, oh, this is -- there are the brands that I love.

I know exactly where to go.

There are the characters that I love.

I want to spend more time with them.

And I think that is going to be over the long term, a huge value to us versus going out and telling everybody to watch a show.

Our next question comes from Alexia Quadrani from JPMorgan.

Just sort of 2 follow-up questions on your comments on streaming.

First, on the incremental investment spending in this year, how much is sort of put to content versus sort of technology?

And then my other one is just if you can maybe talk broadly about how big you think the addressable market is for Dplay and your other SVOD services.

Let me start with the incremental investment.

It's essentially a very similar structure to what we have done in 2019 as well.

So content is by far the largest line item here, you can assume roughly half of the spend.

And then as I said earlier, we are ramping up Peter's team further, and that's going to have a significant impact in 2020.

Peter has been very successful in bringing in a lot of great people with great credentials, and that's helping us pull in more junior people below.

So that's on a great track.

But obviously, it's going to be reflected in personnel expenses.

But as I said earlier, I expect that to plateau to a certain extent and then get some operating leverage as we grow the businesses further.

So those are those are 2 of the key components.

And then the third one, and again this is a little bit in flux, as you would expect, is performance marketing, and that's clearly the hardest to predict.

And as I've said many times, we will absolutely keep the flexibility to get behind something that we see working very well and potentially to cut back on spend in other areas if we don't see the return opportunity.

I hope that helps.

On the -- Alexia, on the question of the addressable universe for Dplay, look, we think we're in the first inning here.

Even though we're seeing great scale, the reality is, if you just look at our European footprint, we address almost 700 million people across the European footprint.

We are aggressively going after, obviously, Northern Europe, which is a smaller subset, but a wealthy and a high-paying subset, a very attractive demographic in the Nordics.

We're going after Germany with Joyn, almost 80 million people there.

We're going after Poland, our biggest current market in international and also a sizable market.

But we also have presences now in Italy, in the U.K., in Spain.

And so we're in early days, but we think the addressable market in Europe for the leading local content player in those markets is significant.

And then I'll just add a quick comment on the technology investments we're making.

One of the reasons we feel like the peak will be this year in 2020 is that we're building this central technology platform for all of our direct-to-consumer products.

So it will be one platform globally.

There's a lot of advantages for us in doing that.

Obviously, one of them is efficiency.

We don't have to keep building the same product over and over again across the world.

But probably the bigger advantage we like is that we can actually pivot faster and respond to customer feedback and build products that people love.

So if you guys take a look at the product ratings for Dplay, for Motor Trend, for Food Network Kitchen, for all of our GO apps, they have made significant improvements over the last 12 months.

And we're very excited about those.

Because if we're going to win in direct-to-consumer, it's going to be this great combination of the great content that we have, along with a great customer experience that we can build.

And we think we're in a unique position to be able to do both of those together.

Our next question comes from John Hodulik from UBS.

David, you mentioned the worsening ratings trends in the U.S. year-to-date.

Can you talk about any initiatives you've got to turn those trends as we look out into 2020?

And then number two, the buyback authorization, I think, was welcome.

Anything you could tell us about the timing or the cadence of those repurchases would be great.

Sure.

Well, I think we have a great portfolio of quality channels, and they go up and down.

I think, for us, we're laser-focused.

It's what we do for a living.

TLC right now is the #1 channel in America for women by a lot.

And it's the youngest of all the channels, and the length of view has gone up dramatically.

And TLC was like the #18 channel in America, and a lot of our new content wasn't working 3 years ago.

So we focused on who is the audience, what are we doing right, how do we do more of it.

We've been doing the same thing at Discovery.

Last year, we really enhanced our blue-chip content, which has significantly elevated the brand.

We went out and bought almost all of the quality IP together with the best producers to shore up the quality brand, which we think is a -- in terms of sustainable growth is very critical.

And we've been working on series, and Nancy Daniels and the team, you could see it, where really Discovery is really improving and we're moving -- every quarter.

ID, we're looking -- ID was growing and growing for the last 9 years.

For the last 9 months, it's been declining.

And so you're going to see a significant refresh.

Henry Schleiff and Kathleen have been working hard on it.

We'll be launching that relatively soon.

And so for us, I think, this is what we do for a living.

This is the car that we drive, we get in.

When we hear a noise, we know what's wrong with it.

You can't always, because of cycle, fix it as quickly as you'd like.

But we're quicker with our channels because we don't have scripted.

And so I think that you'll see some improvement on that, and you'll see that our -- you'll see us quarter-to-quarter.

It won't be all channels, but we feel quite good about that.

The bigger challenge that we have right now, that we're getting much more excited about, is how we aggregate that IP.

I think we're on to something in Europe.

And we're looking to land it here in the U.S. with the right mix.

And on the buybacks, John, a couple of points.

Clearly, we are generating a ton of cash.

And again, we have our capital allocation priorities, but we're returning the cash that we don't use for our business.

The second point is, again, I view this $2 billion authorization as a clear sort of sign of commitment from the Board to the team to the strategy here.

And as with the last authorization, I'm not going to put any specific time stamp or cadence next to that.

We value the flexibility.

Now that being said, as you heard earlier, we have essentially gone through the entire $1 billion authorization by buying back another $350 million worth of stock in the first quarter.

And if you look at the current share price levels, you shouldn't be surprised to see us very actively in the market right now.

Actually, not right now.

We're in blackout, but from -- in the next couple of weeks.

Our next question comes from Doug Mitchelson from Crédit Suisse.

One for David, one for Peter.

David, what kind of time frame would you put around your discussions and your thoughts around a U.S. direct-to-consumer service that might include all the channels?

And I think one of the things investors are struggling with is the ultimate business model behind that.

You're talking about some lumpiness in Europe.

Would doing something with Flex on Comcast, for example, be usage-based revenue stream?

Would it be a purely advertising sort of revenue share?

Or do you look at this as a way of, we can replicate the existing traditional economics in a sort of direct-to-consumer world in partnership with distributors.

That would be helpful.

And then Peter, for you, look, I'm just curious what you see as the execution hurdles or milestones looking forward.

It feels like you've got a lot of momentum across all of the streaming businesses.

Is it a glide path from here, and it's purely a marketing exercise?

What would you say are the challenges and opportunities as you look forward?

Hey, Peter, do you want to go first?

Sure.

Yes, Doug, the -- I think the way that I've been thinking about it is that the very first step we tried to take was to build this foundation so that at some point, it is a glide path.

It's not a glide path right now, I can assure you.

But the first 2 steps we took were building a really strong team and then building this technology platform.

And on the team side, I think we've talked about this before, I hired Avi Saxena as our CTO from Amazon.

We hired Tyler Whitworth as our leader for Food Network Kitchen and these lifestyle products.

And then we're going to announce later on this morning, I'm happy to say we've hired Lisa Holme to be our leader for content strategy, and she comes to us from Hulu, where she spent over the last 9 years, working on content and beyond.

So we're very excited about the talented team we're building in the technology foundation.

We have this great content.

And now I think the journey we're on is 3 things: Number one, how do we build products that consumers really love?

Number two, how do we build partnerships with others who can help us scale these products much faster?

And then three, how do we continue to iterate and respond to customer feedback?

The lesson I think I learned over my time at Amazon is, there's very few things that are a silver bullet and come out of the gate and are already instantly successful.

This is a journey.

And these consumer products, we're on a journey for the next 100 years to build these products and get them to be better and better and better over time.

But I do think getting most of our products over the technology platform in 2020 and 2021 is going to make the incremental investments we need to make in technology smaller over time.

And more and more of our attention will be focused on the content and the marketing as we go.

Yes.

On aggregating our content, the appeal of our content to people on other platforms, we've seen a lot have prove-out in GO.

And one of the things that I wanted to point out is we are driving people to GO because we make twice the CPM on that platform as we do on the traditional platform.

And the length of view is higher and the age is younger.

And so one of the things, when you look at our ratings, is you don't see that all day long, we're telling people on Food and HG and ID and Discovery to go to GO and OWN.

And every time somebody goes to GO, it's ca-ching for us.

And they're spending more time with us, they're on the devices, and we're getting double the money.

And so for us, number one, when you look at our ratings, unlike anybody else, we are literally pushing people off-platform because from a -- and it's one of the reasons you can see like you did last quarter and the quarter before that, hey, it looks like your ratings were down, how did you do so well?

Because we're pushing people to a better monetization platform.

We are talking to distributors.

And we'll come out when we're ready.

We want to come out with something that works for them, works for us.

But there's no question that we think, because of the monetization on the advertising side, that we can replicate the economics 100%, number one.

Number two is that the value of what we're offering, when you look at our aggregate package and all the IP that we have, and someone's paying $110 for cable, $80 for cable, and they grew up watching all of our stuff.

And now they can -- if we decide to aggregate that, they would have a chance to see all the stuff they love for a lot less, so we think on both ends of the ledger.

And the answer may be that we do both in a way that's quite clever with the -- working with the distributors and then in the ecosystem for people that are paying, and -- which is what we're doing now with GO and having some aggregation there, which would drive viewership and increase the value of the overall experience for consumers, and then have people that are not on the -- that aren't subscribing to cable or satellite have an opportunity for very -- for not too much money to be able to get the best of what's on in cable with a bigger library than Netflix.

And there may be some people that want to do -- a lot of people that want to do both.

They want the optionality.

So that's what we're trying to figure out.

We're talking to the distributors.

And we think we have -- because we own everything, we can move very quickly.

And because we have the platform already in place, we can move very quickly.

And I think you'll hear from us in the near term.

Doug, I want to add one point to what Peter said on the milestones point.

It's another case of us doing what we say, saying what we're doing.

You heard us, especially Peter, talk a lot about how we're focusing on the input factors first, and we're building a product, how we're getting App Store ratings up, how we're driving engagement, et cetera.

And again, we're very happy with what we're seeing, and you should view the fact that we're talking about next-generation revenues now as our commitment to start turning that into financial performance as well.

Our next question comes from David Miller from Imperial Capital.

Great numbers.

Gunnar, a question for you about free cash flow.

Other than the outflows with regard to the Olympics, assuming the Olympics happens, any other puts and takes on the working capital side that you can talk to us about as we just sort of model out what free cash flow might look like in 2020 versus 2019?

2019 free cash flow, you're just absolutely outstanding.

I've got you guys sort of slightly down, mostly just due to the working capital inputs I have in place right now, but I just wanted to kind of refine that if you're willing to kind of expound on that thought.

Well, great.

Thank you.

So yes, I mean again, I don't want to give specific guidance here.

But again, if you keep in mind that we have already funded $300 million of direct-to-consumer investments here in 2019, the underlying core run rate was actually at $3.4 billion.

And this is going to continue to be a huge priority for us.

My estimate is that we have generated north of $800 million in synergies since closing the deal, and there is more that we're working on.

That's why I made the comment earlier, you should assume that in the core business outside of our investment areas, we will continue to be relentlessly driving for cash and efficiency.

Now that being said, I do think that 2019 was an outstanding year.

And you're absolutely right, the investments on the Olympics side is something that's going to bring down the free cash flow to some extent.

But we'll continue to push hard.

And as you said, I'm glad that we were able to turn around that negative trend on working capital that we have been suffering from for a while.

Thank you very much.

I think we'll wrap it up there.

Thank you very much, and we'll speak to you next quarter.

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

This does conclude the program, and you may all disconnect.

Everyone, have a wonderful day.