Warner Bros. Discovery Inc (WBD) — Q2 2015 Earnings Call Transcript

Good morning, everyone. Thank you for joining us for Discovery Communications 2015 second quarter earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer; and Andy Warren, our Chief Financial Officer. You should have received our earnings release, but if not, feel free to access it on our website at www.discoverycommunications.com. On today's call we will begin with some opening comments from David and Andy, and then we will open up the call for your questions. Please keep to one question so we can accommodate as many people as possible. Before we start, I would like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our annual report for the year ended December 31, 2014, 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 thank you for joining us. Discovery’s strong start to the year continued in the second quarter, with steady growth across our global portfolio of brands and businesses. Propelled from a strong second quarter into what was a momentous start to the third quarter, I join you extremely confident in Discovery’s future growth prospects. I believe we will look back on July 2015 as a pivotal month in our company's history as we announced three transformative agreements. The multiplatform rights to the Olympic Games in Europe for the next decade, the deal to acquire 100% control of Eurosport and lastly, a favorable long-term renewal with Comcast for our U.S. Networks portfolio and distribution on the Xfinity Comcast platform. These deals together stabilized and enhanced our U.S. growth profile, continue our diversification internationally and give us more blue chip IP content and more distribution, so we continue to drive audience share across all consumer platforms. Earlier this month, we announced an exclusive deal in Europe, with the IOC for all the TV and multiplatform media rights to the four Olympic Games from 2018 to 2024. Never before has one media company been granted all rights on all platforms across Europe. We believe the Olympic Games will be a foundational programming piece for Eurosport and Discovery across the continent. Eurosport already dedicates over 40% of its programming schedule to Olympic Sports and bolstering our rights and offerings with the world's greatest sporting event is a perfect editorial and strategic fit for the linear channel and for eurosport.com, the leading online sports platform in Europe. Combined with full access to the Olympic programming archive, our use of the Olympic rings immediately following Rio and our existing Sports Federation Agreements, this deal substantially strengthens the Eurosport platform and brings the Olympic Games to more viewers on more platforms across Europe than ever before. We will maximize our reach to Europe’s 700 million residents across platforms. Following the June 29th Olympic announcement, we have seen an increase in conversations and feedback from our European distributors, advertising partners, and phone and new media players, who want to work more closely with us. Soon after the Olympic deal, we struck an agreement to acquire full ownership of Eurosport from the TF1 Group. In 2012, we began our investment with a 20% stake in Eurosport, and increased that investment to 51% more than a year ago. Taking full control of Eurosport allows us to further strengthen the brand and decision-making process, more readily secure important sports rights on a local or pan-regional basis, and fully realize the business's growth potential. Eurosport has two or three channels across 130 million homes, eurosport.com, and now the Olympics for the next decade, making us the clear leader in sports in Europe. Finally, the third transaction was signing a long-term Distribution Agreement with Comcast. Our renewal with Comcast is significant. It demonstrates that distributors continue to place great value on our content and brand, with meaningful increases, and it solidifies our TV Everywhere strategy with deployment on Xfinity, the primary TV Everywhere platform in the U.S. Four years ago we said we would reset our domestic affiliate rate structure with a step up and significant increases to reflect our increased investment in content and the growth of our audience share that our channel brands had earned. I am proud to say that we've achieved it. Prior to this renewal cycle our deals had price escalators at CPI. But we have now reset all of our affiliate agreements that have come up in the last four years, which is the majority, at a meaningful rate increase that reflects the strength of our brands and our increased market share. Andy will give you more details, but today we are positioned for long-term growth in the United States. Locking up that long cycle money with strong price escalators allows us to focus on other aspects of the business and gives our U.S. business a steady growth rate for years to come. And there is still real opportunity for value creation even on the affiliate side going forward. At 13% share reviewing, we were only getting a mid-single-digit share of affiliate fees even with our increases. There is still a gap to close in the future as well, which we see as a real opportunity in the years ahead. Even in a marketplace like the U.S., it is relatively flat and challenged. Combined with our multiple TV Everywhere rights deals signed in the past two years, we are now accelerating the expansion of streaming choices for our content across platforms and diversifying our distribution channels with multiple partners. It’s positive when new entrants come into the market, particularly when you have the number one channel in America for men with Discovery Channel and several top channels for women and the top channel for African-American women with OWN, all at a price point that is a very good value, which gives us a real advantage. Today I'm pleased to announce an agreement with Verizon to bring long and short-form content from Discovery Channel, TLC, Animal Planet, ID, and the Science Channel, including full episodes of prior seasons of hit shows to Verizon's U.S. mobile subscribers. This deal extends our platform reach to Verizon customers beyond our traditional pay-TV customer base and adds yet another source to our distribution revenue stream. While we drive to extend the delivery of our content to new platforms, we also are working to maximize and exploit our traditional business in the U.S. Headwinds notwithstanding, the U.S. pay-TV marketplace remains one of the world’s most important programming and advertising markets. Long-term we are evolving our approach to integrate advertising more deeply into our content, adding more branded integrations, pushing programmatic buying and driving higher CPMs from the scatter marketplace. In the second quarter in the U.S., revenue growth, yet again outpaced cost increases and adjusted OIBDA reached an all-time high. Hitting these metrics illustrates the strong command-and-control we have over our business. We have seen advertising market momentum pick up across all of our channels so far in Q3, as we continue to benefit from ratings outperformance driven by the flagship Discovery Channel. Led by new President, Rich Ross, the Discovery Channel team has done a fantastic job of creating and building programming that nourishes Discovery's core male viewers while attracting more diverse audiences including women, Millennials, Hispanic viewers, and family co-viewing. For the quarter, Discovery’s prime time delivery with persons 25 to 54 rose 12% and 9% with men 25 to 54 and 16% with women 25 to 54. The network ranked as the number four channel and ad-supported cable for persons 25 to 54, up two spots from a year ago and with women 25 to 54 rose seven spots to number nine. Discovery held all of cable's top five unscripted series for men: Deadliest Catch, Naked and Afraid, Alaskan Bush People, Fast N’ Loud, and Street Outlaws. More recently, Shark Week, which aired a month earlier this year, continues to be a pop-culture juggernaut. For the science-based slate of programming that reinforce Discovery Channel's heritage, Shark Week 2015 became our highest-rated ever among persons 25 to 54 and women 25 to 54 and Discovery Channel's performance in July outside of Shark Week was strong as prime time delivery jumped 34% for persons 25 to 54 and 26% for men and 50% for women in the same age bracket, all making Discovery Channel the number one channel for men for the month of July. Internationally, Discovery Channel again reaches a record audience as many of our tent-pole shows replicated their success globally. Discovery Channel showed particular strength in India, Brazil, and Mexico where our share of audience rose more than 20%. ID also posted strong viewership gains in the U.S. and abroad in the second quarter. IDs U.S. delivery rose 7% and it was a top three ad-supported cable network with women 25 to 54 in total day, top three. IDs average international audience rose a record 23% for the quarter fueled by new market launches in organic viewership growth, including the June launch of ID in Sweden. On TLC, we have moved forward with new series that speak to what the TLC brand is best at: holding a mirror to the culture and telling stories in a thoughtful and sensitive way. There are no better examples than I Am Jazz, a heartwarming new series about a transgendered teen and her loving family. In its premiere, the series posted 1.8 million viewers and My Giant Life, a new series that chronicles the remarkable stories of the world's tallest women and has averaged nearly 2 million total viewers. These shows will soon be joined by returning series Our Little Family and The Little Couple. Meanwhile, TLC’s viewership overseas continues to grow. TLC’s average international audience rose 15% in the second quarter, led by strong viewership in South Africa, the Netherlands, the U.K. and Russia. Just as our global networks and programming are performing well, it is also important to note our IP content investments are similarly making real strides. All three, which we own through a joint venture with Liberty Global International, were nominated for 11 primetime Emmys this year, including the hit series Undercover Boss and Penny Dreadful. Overall, we again achieved new record reach in market share gains internationally. With 6% audience share growth across our entire global portfolio in the quarter, our audience and share gains were led by our pay-TV channels in India, Brazil, and Mexico, with the Discovery Kids, TLC, and Animal Planet brands driving our gains. We also saw strong delivery in the U.K., Germany, and Italy as we have many pay-TV and free-to-air channels in those markets and a strong and growing share presence. Latin America once again delivered a stellar quarter with average audience up 13%. We continue to see broad-based gains in viewership across the region. Led by Discovery Kids, Brazil's portfolio was up 23% and Mexico jumped 16%. Our CEEMEA region posted 5% growth in average audience in the second quarter. Last week in the region, we officially announced an expanded partnership in Turkey with the Doğuş Media Group, one of the leading media companies in the country. Doğuş is an important distribution partner for our 12 pay-TV channels in Turkey and with this new strategic partnership, we were able to extend our portfolio with positive economics and agreed to purchase our first free-to-air channel in this emerging growth market that expands and diversifies our platforms and windows for our content in Turkey, a key market for us. We will also partner with Doğuş to be our new exclusive representative for our advertising sales. We are also deploying a free-to-air partnership strategy in the growing Middle East and North African market. In June, we announced plans to launch Quest Arabiya in the region in the fourth quarter through an agreement with Image Nation, one of the leading content creators in the Middle East. This free-to-air Arabic language channel will reach 45 million homes, with the best locally produced male-oriented factual programming, mixed with programming from Discovery's vast global content engine. Quest Arabiya will expand Discovery’s seven-network portfolio in the market, which already includes six pay-TV Discovery brands and the free-to-air channel Fatafeat. Across Europe and Asia, our investment in Eurosport continues to demonstrate progress, with the business posting a 6% increase in average audience this quarter alone. As we approach the 2018 Olympic Winter Games, we will continue to build Eurosport’s offering and brand for the long-term across Europe and Asia. Since taking control of Eurosport a little more than a year ago, we've added 7,500 hours of coverage per year, with more than 3,300 of that live through more than 50 sports rights deals to drive viewership and strength of the offering, and Eurosport remains meaningfully profitable. Recent rights include the exclusive television and digital rights for eight major international cycle races from 2017 to 2021 in Asia-Pacific, Wimbledon in Belgium, the PGA Tour Golf in Norway, and the Europa League in the Nordics. Beyond linear, we are bullish about the impact of the Olympics and all the local and niche sports content we are acquiring will have on driving adoption of our over-the-top products in Europe. With the Eurosport Player in 52 countries and DPlay, which recently launched in Norway, Sweden, Denmark, and Italy, we are continuing to drive toward our stated goal to march to a million subscribers across those platforms in the next two years. We now have over 300,000 subscribers as of the end of last month. We are making real progress in our goal to maximize the linear platform while aggressively attacking digital distribution around the world. Our strategy centers on investing in premium content to grow market share, such as the Olympics, maximizing audience reach on pay-TV platforms by locking down long-cycle agreements like Comcast, while aggressively pushing our content to new distribution platforms like Verizon in the U.S., and finding new ways to monetize our content like with Doğuş in Turkey and evolving our approach to advertising through the use of data to drive addressability, dynamic ad insertion, and secondary guarantees using set-top box data. All of these efforts are designed to enhance growth in the U.S., while driving the expansion of our international footprint aggressively. Based on a 30-year track record of success, the transformative partnerships we've signed in just the past month alone, and our continued global growth horizon, I believe Discovery is well-positioned to grow across our 220 markets around the world for the years to come. With that, I will turn the call over to Andy to detail our second quarter financial results.

Thanks, David and thank you everyone for joining us today. Discovery’s ability to execute on key strategic global growth initiatives while focusing on controlling costs led to another quarter of solid results. On a reported basis, total company second quarter revenues increased 3% and adjusted OIBDA was down 2%. As expected, given our increasingly international business mix, the stronger dollar remained a headwind and changes in currency rates reduced both our reported revenues and adjusted OIBDA growth rates by 8%. Therefore, excluding currency, revenues and adjusted OIBDA were up an impressive 11% and 6% respectively. On an organic basis, so excluding the impact of foreign currency as well as the inclusion of Eurosport and Discovery Family, total company revenues grew 4% and adjusted OIBDA grew 3%. Our organic margins were flat year-over-year at 44%. Our strong cost and content spend allocation, discipline, and management continues. But note that we do expect to see a significant uptick in costs domestically and internationally in the third quarter, given the timing of certain content marketing investments. This third quarter cost uptick is embedded in our full-year guidance. Note also that because of the difficulties in separating Eurosport France from the rest of Eurosport results, we will continue to break out the impact of both transactions until the end of this year. It’s important to remind people, however, that when we break out and report the combined Eurosport results for another few quarters, the benefits of our owning Eurosport extend far beyond the standalone Eurosport results to the rest of the Discovery portfolio in Europe and Asia to the combined distribution and ad sales leverage in these countries. Net income available to Discovery Communications of $286 million was down versus last year's second quarter net income of $379 million, primarily due to unusually large amounts related to higher foreign currency losses of $54 million from the revaluation of both our euro-denominated debt and monetary assets in Venezuela, $28 million of lower gains related to selling SBS radio this year versus gains related to HowStuffWorks and Eurosport last year, and higher restructuring and other charges this year of $19 million, primarily due to content impairments charges from canceling TLC's 19 Kids & Counting. This all was partially offset by lower income tax expense as our effective tax rate decreased another 300 basis points year-over-year to 32%. As we remain extremely focused on lowering both our effective and cash tax rates, we expect our effective tax rate to be 33% for 2015 and still expect it to be at or below 30% for fiscal 2017, which will continue to drive sustained income growth as well as accelerate our free cash flow. Earnings per diluted share for the first quarter was $0.44 and adjusted earnings per diluted share from a relevant metric, from a comparability perspective that excludes the impact from acquisition-related non-cash amortization of intangible assets was $0.49. Excluding negative currency impacts, adjusted EPS was up 4% for the quarter and up 11% for the last 12 months. Free cash flow in the second quarter increased an impressive 55% to $313 million, due to lower cash taxes, working capital improvements, lower cash interest payments, and lower capital expenditures. We still expect our full-year free cash flow to be up low single digits versus 2014 and accelerate nicely in 2016. Turning now to the operating units. The U.S. Networks grew revenue 5%, as it benefited from another quarter of strong distribution growth, up 12% versus last year's second quarter and a small increase in ad sales. Our advertising revenues were up slightly versus last year's second quarter, as higher pricing and the consolidation of Discovery Family offset lower delivery. Total U.S. delivery did improve from the first quarter, led once again by the flagship Discovery Network, but it was still down low single digits versus the second quarter of last year. As David mentioned, this quarter marked our highest ad sales quarter in the company's history, as we benefited from the overall market shift from advanced upfront ad buying to higher price scatter volumes, as we also sold a record amount of scatter ad volume. Looking ahead, we are bullish on our third-quarter ad trends as our improved delivery, especially at Discovery, is allowing us to continue to take advantage of a healthier scatter market in respect to our third-quarter U.S. advertising revenue growth expected to modestly accelerate to low single-digit. It is still too early to have a solid read on Q4. Distribution revenues, excluding the impact from consolidated Discovery Family results, were up 6% this quarter, as we again benefited from the higher rates we garnered from our new deals with NCTC, Cablevision, Sony, and others at the end of 2014, as well as from contributions from our new Hulu deal, which started January 1st of this year. Organic growth decelerated from the first quarter due to tougher year-over-year SVOD comps and a decline of approximately 1% in the pay subscription universe. Given the one-time nature of the SVOD comp, we expect organic affiliate growth to accelerate slightly into the second half of the year, assuming that the rate of subscriber losses does not pick up. I also want to address the financial impact of our recently announced Comcast renewal. We are extremely pleased with the rate structure of our new comprehensive long-term agreement that again recognizes the value of Discovery’s Networks. Pricing for the new deal goes into effect January 1st of next year and includes a healthy initial step-up, followed by continued rate escalators over the life of the deal. This deal along with our other recently completed deals helps stabilize and accelerate our U.S. affiliate growth trajectory to high single digits in 2016 and significantly enhances our domestic affiliate revenue and cash flow growth expectations. Turning to the cost side, domestic operating expenses in the quarter were up 1% on a reported basis, but were down 3% excluding the Discovery family consolidation. Excluding family, cost revenues were up 2%, while SG&A declined 11%. Our laser focus on controlling costs with the domestic adjusted EBITDA growth of 7% on a reported basis versus last year’s second quarter and up 4% excluding family. While margins on a reported basis and excluding family, both expanded by 100 basis points year-over-year to our all-time high margin rate of 61%. Moving onto international operations, our international division drove another solid quarter of organic distribution growth, but did experience a near-term slowdown in organic advertising that is already reversing in the third quarter. On a reported basis, revenues grew 1% and reported adjusted EBITDA declined 11%. Excluding currency, revenues increased 19% and adjusted EBITDA increased 7%, as changes in FX rates reduced both revenue and adjusted EBITDA growth rates by 18%, as a stronger dollar versus last year remained a major headwind. On an organic basis, so excluding currency impacts as well as Eurosport, revenues and adjusted EBITDA both increased 7%. For comparability purposes during our international comments, we refer to our organic results only, so exclude the impact of Eurosport and FX. The 7% second-quarter revenue growth was led by 7% advertising growth and 7% distribution growth. Ad growth was led by another quarter of over 20% growth in Latin America, led by strong volume, pricing, and delivery in Brazil, as well as strength in Argentina and Mexico. Asia PAC has also recovered nicely and grew advertising over 10%. The majority of the reasons our advertising growth rate decelerated from the first quarter were one-time in nature, namely tough comps related to the World Cup last year, as well as a slowdown in the U.K. due to elections in May. But we are now seeing a nice acceleration into the third quarter. We were also hurt in 2Q, our audience share in Norway. Looking forward, we still forecast full-year organic advertising growth to be in the low double-digit range, so it will depend upon no further share losses in Norway. Distribution revenues grew 7%, driven by another quarter of double-digit growth in Latin America due to higher rates and the continued expansion of pay television in key markets like Brazil, Mexico, and Argentina. We still expect organic affiliate growth in the back half of this year to be in the mid to high single-digit range. Turning to the cost side, operating expenses internationally grew 7% in the second quarter, primarily due to higher content amortization and increased personnel costs, as we further localize our international businesses. Adjusted OIBDA grew 7% and international organic margins were in line with last year at 38%. Eurosport’s standalone margin in the second quarter was 11% and we still expect margins to be in the high single-digit range for the full year. We continue to see significant strategic value in investing in additional sports IP in order to bolster and enhance both the Eurosport and total Discovery European platforms. And while these investments will drive real long-term portfolio value, the loss will continue to depress margins at standalone Eurosport and will also limit margin expansion going forward for total DNI. Our Education and Other segment reported a small operating loss for the quarter. Given our strategic focus on producing and utilizing more content for our in-house production studios, which has no margin associated with it, and our continued investment in education's digital textbooks to drive the long-term value of this industry-disrupting business, this segment, in total, continues to operate at a small loss for the remainder of the year. Now, taking a look at our overall financial position, in the second quarter we repurchased a total of $207 million worth of shares. We have now spent over $6.2 billion buying back shares since we began our buyback program at the end of 2010. We have reduced our outstanding share count by 30% as we continue to find the return on repurchasing our own shares extremely attractive. As we previously stated, we remain highly committed to our BBB rating and we will manage our capital planning and allocation with this commitment in mind. The rating agencies have recently taken a more conservative view on the media industry. Given our current debt to EBITDA threshold is at the higher end of target levels for a BBB company, we’re now focused on preserving cash for the remainder of this year. Therefore, we now expect to have less total available capital for fiscal 2015 than we previously stated. Including the $52 million worth of stock that we will soon buy from Advance/Newhouse under our preexisting buyback agreement with them, we will spend $575 million on total share buyback this year and it is unlikely that we will purchase any additional common stock for the remainder of this year. Given our capital allocation priorities remain, first and foremost, to invest and drive organic growth, and second, to invest in strategic M&A platforms and IP, and third, to buy back our stock. For the remainder of 2015, we need to retain flexibility for additional potential strategic investments, such as our recently announced accretive and growth-driving investment with Doğuş in Turkey while continuing to pay down debt. As we look towards 2016 however, we forecast having meaningfully more capital available and expect the amount of capital allocated to share repurchases to increase significantly next year. Turning to full year guidance; excluding currency impacts, we are pleased to reaffirm that we still expect revenue growth to be in the high single to low double-digit range and adjusted OIBDA growth to be in the low to mid single-digit range. Given our solid operating performance and lower tax rate trends, we are raising our full year adjusted EPS, excluding currency growth expectation, to be low double digits. The guidance ranges still include the sale of the non-core SBS radio assets, which closed at the end of the second quarter, as well as the $50 million negative non-FX related impact from Russia. Before moving onto Q&A, I want to update our full year foreign exchange impact on our 2015 results. While the dollar has been less volatile, there are slightly higher currency headwinds versus when we last reported, in large part due to Venezuela. At current spot rates, FX is now expected to reduce our constant currency guided revenues by $440 million, or roughly 7%, and adjusted OIBDA by $160 million, roughly 6%, versus our 2014 reported results. Additionally, we are now disclosing that FX will have a $0.23 to $0.28 impact on adjusted EPS versus last year's reported results, assuming no further below the line currency adjustments. Looking at our International Networks mix of currency exposures, the revenue mix in 2015 remains the same at around 30% euro, 30% Nordic, 20% US dollar, 10% British pound, and 5% Brazilian real. Our International Networks' adjusted OIBDA currency mix is forecasted to be around 25% euro, 25% Nordic, 15% real, 5% Russian ruble, 5% US dollar, and still slightly shorted British pound as our international headquarters are in London. Lastly, as a reminder, we have successfully hedged a portion of our currency exposures and did realize gains in these hedges in the first half. We only hedged about 60% of our international transactional exposures. We also do not hedge translational exposures, as these derivatives do not qualify for hedge accounting. In conclusion, as I look across our portfolio, I couldn't be happier with how we are currently positioned. Our current exposure to higher growth international markets is 50% and growing. While we will continue to benefit from the global evolution of pay-TV and continued audience share gains, as we leverage our marquee content across our unmatched global distribution platforms, about half of our global revenues are locked in for the next several years to long-term affiliate agreements, both domestically and internationally. David and I look forward to discussing our compelling and highly unique portfolio positioning in more depth at our Investor Day on September 29. And now we would like to open the line up for questions.

Thank you very much. I have one for David and a couple quick ones for Andy. David, congratulations on the Comcast renewal. You mentioned that in your prepared remarks. You also mentioned the importance of data. So I thought I would ask about that. My understanding is that your content, as you said, will be deployed as part of the XFINITY TV Everywhere app. Do you guys have access to that viewership data? Some of your peers have had network apps that are specific to the network. Just wondering as part of your deal, do you have the rights to launch your own authenticated network app as part of the deal? And if not, why not do that or do you plan to do that? And I'll come back for my questions for Andy. Thanks.

Thanks, Anthony. Comcast was one of the final pieces of this overall strategy over the last four years where we grew our viewership from 5% share of viewership on cable to 13% to try and get more value and bigger increases. Comcast, together with all of our deals, put us in a position where we now can look forward and see high single-digit affiliate growth in the U.S., with all of our channels being carried to a very high percentage of subscribers. It puts us in, I think, a very good position and makes the U.S. for us, as we look forward, a growth market. When we say high single, we’re putting in there an expectation that the U.S. market is mature, it has been declining at about 1%, and we think we can get high single-digit growth, even if it accelerates a little bit. The big piece here is that we really have a very good affiliate revenue stream now. I mentioned that we still only represent about 5% or a little more than 5% of the economics, even though we’re 13% of viewership. We're quite a good bargain when someone is looking for content, whether it be new over-the-top platforms and so on. On the data piece, there is a data relationship with Comcast that we established. I think that's critical because the data inside the box is very important. The Comcast platform is probably the — if not the best, it's certainly up there and the X1 platform is terrific. It's a leader in TV Everywhere, but it also is one of the real leaders in data capture, which could help us on the monetization side. So we were all in on TV Everywhere with Comcast and with Neil. We’re glad to have that deal behind us. The other piece is that we own all of our content, which is quite unusual. This will be a very important element as you look at the future of a mature market because we own all of our content. We don’t have long-term commitments to sports and when we put our content on platforms, we get all the money. It gives us the chance to move our content on to platforms, and we have real ability to maneuver from a cost perspective.

Got you. Thanks. Thanks, David. And then for Andy, just on the comment you made about the cost uptick in 3Q, why don’t if you just clarify how is that breakdown U.S. versus international and specifically, which costs, I think, you talked about programming being part of that — timing of programming? And then the $0.23 to $0.28 of FX impact, could you give us how that compares to what your prior expectation was as of last quarter? And then, sorry about this, but just had a last one, which was, sound like 3Q is going really well on the ad side, just wondering is it more so a function of ad demand and help of the scatter market, or is it more so better audience delivery, given the strength that you guys have seen in terms of ratings in the month of July? Thanks.

Okay, Anthony. Look, on the first question, I am very happy with our cost trends right now. I really feel like that the point from David’s comments, that we have more content cost flexibility. We are definitely demonstrating a lot of discipline around other non-content costs, particularly in SG&A and we are seeing that benefit over the last several quarters. To your point, though in 3Q, we do expect double-digit increases for both domestic and international, predominantly on the content side, and a little bit on the marketing side, as we are going to put some more support and tailwind behind some of our new program launches. So there will definitely be a cost uptick in 3Q, but I want to highlight that as I think about our cost structures and going forward, I feel good about our sustained level of productivity and driving SG&A in particular to be in kind of that low single to mid single-digit range. The second question about the foreign exchange impact, yeah, the $0.23 to $0.28 is the latest view, that's a few cents higher than we would have thought back on our May conference call. It highlights the fact that while the euro has been relatively stable, given our global reach and global expansion of our platforms, clearly some other currencies, in particular Venezuela and Brazil, have continued to be some additional headwind. We definitely want to highlight for everyone what the impact is on our adjusted EPS going forward.

Okay. Thanks.

And the third question about ad sales trends? Yeah, look, it’s really the combination of both our performance and the market. Our deliveries are strong, particularly with Discovery, our sell-out has been strong, and some of the overall ad sales trends around cancellations are seeing normal levels. We are seeing some nice pricing in the scatter market. The fact that a lot of other networks have been more sold out, given some of the new constraints and given our relative ratings performance, we add more capacity and so we have more impressions to monetize. For the first time, I would say it's too early to make any projections for where fourth quarter will be, but the marketplace has absolutely picked up and the fact that we have rating points is allowing us to take advantage of that; scatter pricing has been fine for a long time, but the volume wasn't there. Fourth quarter was quite weak; we pointed that out and it was a surprise. Second quarter was okay, but third quarter really seems to be accelerating. It's too early to tell whether that will continue, but it feels good right now.

Yeah. And just to clarify that, six months ago, we all said around, I think everyone in the industry assumed, where is the money going? There is clearly less volume in the broadcast than 20 years ago and what we see today is a meaningful shift out of broadcast both in the calendar and scatter, and we are seeing the benefit of that scatter today, not only from the standpoint of volume but also because we are still seeing strong sustained pricing in the scatter market, helping us get an uptick in the third quarter. So, some overall nice dynamics.

Thank you very much for taking my questions.

Thank you. So just a question about the Olympics, now that the deal is done and as you look forward into your affiliates, the levers and the whole cycle when it comes to Eurosport going forward? What is the end of operating leverage you see from this process, especially when it comes to Eurosport margins? I mean, you guys are still at the single-digits kind of margin profile and once this process is completed, are we looking at a substantial bump over where Eurosport was when you guys acquired this asset? Thanks.

Well, I think exactly how the Olympics will play out long-term and their impact, some of it, one of the reasons why we were really keen about getting the Olympics for the next decade and we get the rings and library access right after Rio is that we have it on all platforms. The one element here is positioning ourselves for the future, where between Eurosport where we own all the sports IP and we have Olympic sports, many of which are top sports in particular countries, plus the Olympics, it positions us where for the long term, for the next 10 years, we have must-have IP and we've seen the response in the market meaningfully and from a number of different players on all platforms interested in talking to us about the Olympics. The sports content leads up to the Olympics, so we can take you from Michael Phelps, every event right up to the Gold Medal. There's real value in that; we will figure that out. When we look at how the Olympics is done in Europe, I was involved with the Olympics for 15 years in the U.S., NBC was effective in evolving the Olympics from just the free-to-air product to free and air, to free-to-air and cable, including getting incremental fees and lifting up the whole bundle of the NBC channels and then moving it on to other platforms. If you look at Europe, the U.S. is about 330 million people. All rights in Europe are over 700 million people, but in almost every one of those markets, it’s similar to the U.S. was in 1992, being sold to free-to-air players and to public stations in each market. We now hold that content, and we will look to monetize it together with all of our assets. So, I think it’s a little bit of a forcepiece of data that just looking at Eurosport, you need to take a look at what is our affiliate revenue in the aggregate doing, what is our advertising revenue in the aggregate doing, and what is our sponsorship advertising revenue in the aggregate look like. As we mentioned earlier, we are pushing hard into over-the-top. We are the only company in Europe that is going directly to consumers with sports and we have over 300,000 subscribers now that are paying us between $6 and $8 a subscriber in order to get the Eurosport programming. For the French Open, instead of watching three courts if you had three Eurosport channels, in your country, you could watch 15 courts and so, we are really looking to restructure our company for significant growth in the future by better IP, while at the same time growing our linear platforms. I think the Olympics together with Eurosport allows us to do that.

To elaborate on the question about margin, from a purely financial perspective, while the Olympics will dilute margins for Eurosport and DNI, it is positively going to be both cash flow OIBDA and FTV positive. When we look at the financials of the Olympics standalone, we couldn't be more enthused about the deal we did, the rights we have and the impacts it’s going to have over our portfolio.

Just one follow-up question, you guys do have affiliate deals coming up much prior to the Olympics. So when should we start seeing some of these fee bumps as a result of the Olympics? I mean, is 2016 kind of an event or is it further up?

The cycle for our affiliate deals outside the U.S. are shorter. They tend to be about three years versus in the U.S. where they are five to seven years. You’ll see it in two forms. You'll see it in an overall bundling. I oversaw the sale of the Olympics when I was at NBC and we were able to get several hundred million dollars for each Olympics. We’re not saying that that's exactly what we’re going to be able to do in Europe, but we do think we’ll be able to get meaningful fees for whether it's by the way we carve it up, charging for over the air usage, carrying it on cable, putting it on other platforms. Some of it will be in the form of affiliate revenue and some of it will be rights fees, where we'll be giving away some of those rights to carry the Olympics and the Olympic programming that leads up to it.

I think you'll see a similar kind of cadence that you saw from us in the U.S. As David said earlier, we committed four years ago as we were going into our renewal cycle and as we catch up to share of wallet, catching up to share of viewership. You’ll see our growth accelerating in 2016. As we said, it’s going to be a high single digit. I think the same kind of cadence will exist now for DNI. The combination of Eurosport and the Olympics and the leverage we will have will allow us to continue to accrete on the affiliate line for the next several years internationally.

Additionally, what's helpful here is we moved into Eastern and Western Europe in markets we viewed four or five years ago as emerging. We’ve gone local in those markets. We launched free-to-air channels at a very low cost, where we use our content to reach some markets that have low pay-TV. We’ve done more local content in these markets. We are now by far the largest pay-TV media company in Europe. The scale we've been able to get by the growth of our pay-TV together with free-to-air puts us in a much better position as we engage with distributors. Many other companies are local because most countries are either in recession or flat. It's been a long haul, and many local companies have spent less on content, which has helped us gain share.

Thank you.

Thanks so much. So David, with the total revenue now in good shape in the U.S., it's clear that the pressure is mostly on the advertising side. You're well aware of concerns that investors have for media. I’m curious how you feel non-fiction programming is positioned looking forward versus the secular concerns of human interest shows moving on to general entertainment, OTT platforms like Netflix. You also mentioned Discovery can close the gap further? I’m thinking you're suggesting that OTT platforms is a place where you can get better pricing than you have in traditional deals and perhaps that suggests that you’ve got a good chart ingredient to Apple TV Phase 1. But am I thinking about that comment right, that Discovery can continue to close the gap on affiliate revenue in the United States? Thanks.

First, we pivoted about a year and a half ago back, hard back to the core brand. I think that's one of the main reasons why a lot of our channels are much stronger. In July, Discovery became the number one cable channel in America for men. There have been several months in the last eight months where Discovery has been the number one cable channel with core structure that's very different from entertainment and sports channels. Remember that 80% of that content, we get to reuse around the world; we don't rent it just for the U.S. It's a very effective model. We've seen that the amount of time that our content is DVR-ed has gone up significantly, which is why people want our content. We’re excited about fully embracing TV Everywhere. We believe we'll learn more about that with our deal with Verizon. In Europe, we’re talking to many different players. We think we've reached the value gap, and we're able to reach a deal with Verizon. Our content is becoming more valuable. We could be on every SVOD platform if we wanted to. But since we own all of our content, we can also go directly to consumers. We're doing it in Europe with sports across all of Europe, and we're doing it with both entertainment and sports content in several countries in northern Europe and Italy. We have all that flexibility. My only point on the upside is that in a declining market where people are choosing channels, the fact that we are 13% viewership on cable and only 5% of the money is not something to brag about; we were much lower. The good news is we've had a significant step up with big increases. So the other good news for us is when people look to launch channels, they can get our channels. Even if our charges are higher, we are still a lot less expensive than the entertainment and sports channels that are in the reverse. I think it makes us attractive, and if we can continue to gain share as our deals come up, we’ll drive the value argument that we’re under indexing on economics and that we intend to do. In a marketplace that has some decline on subscribers.

That’s a pretty interesting comment, David. If I could just follow-up on the comments around direct-to-consumer. Based on what you’ve seen in the United States, I think you’ve talked about 1%, 1.5%, the core subscriber declines. Obviously, broadband-only homes are growing. Like what point do you think is optimal to consider launching your direct-to-consumer offering in the United States? Is it now, is it three or is it five-plus years?

We are looking at everything. I think that the marketplace is stable right now. There are a lot of noise in the marketplace, but I was at NBC when viewership on the networks was declining; they are still declining. The fact that subscribers are going down 1%, maybe close to 1.5; that's not a good thing. The fact that we are locking in higher fees means we could be in a position to say now that even if the advertising market weakens, if it is flat, we still have a mid-single growth U.S. business, which is only half our company. A lot of our growth is coming from outside the U.S., where there is still double-digit or better growth and general growth dynamics that we historically saw in the U.S. For the direct-to-consumer piece, this is something that we can every opportunity to do as we own all of our content. We have super fan groups, so I think we're very well-positioned. We are looking at everything, but I think the marketplace for at least the next three years is going to stay relatively stable and we will probably have more people buying our content. We will be in a position, if we want, to start picking off some of those super fan groups. We do this in Europe. Our viewership on Eurosport is up, and the people that absolutely love tennis, or love cycling, or love Olympic sports or winter sports are signing up for Eurosport. What we are finding is in most cases, they are there, watching more Eurosport but when they're out of their home, they want to watch the sports they like. So for the near-term at least, we are double-dipping. The idea of having more than 300,000 people who we have their credit cards and we have a direct relationship, we can talk to them about what they like about our app, what they don't, we are learning a lot. If we want to move into any other region, we can.

Thank you so much for all the help, David.

Thank you. Good morning. I have a question for David and then a follow-up for Andy. David, on the Olympics, can you just educate us a little bit on the sublicensing and any kind of regulations around keeping Olympic content on broadcast free-to-air? I know you’ve got a lot of markets where you're free-to-air and a lot that you don't. And does the sort of retrans kick in to this conversation? If you look at the duration of your Olympic deal with your free-to-air networks, do you start thinking about fighting for retrans fees in some of these markets? Any help would be great.

Sure. It is complex, and I think it’s one of our advantages. When you are looking at Europe, you are looking at 55 countries in 20 languages and different regulations in each. The good news for us is that’s what we do for a living. We are already in all 55 of those countries. We have teams on the ground. We have an infrastructure that converts into every language. For us, it is what we do for a living. On the Olympic side, there are specific restrictions the IOC has on how much has to be free-to-air for summer and winter. In some countries, there are requirements in addition to the IOC requirements on free-to-air. We own all the rights. For instance, in the U.K., if the BBC has the rights, we can sit down with them historically and can talk about how much we want to give them. We look to preserve all the rights except for free-to-air. We could sub-distribute the free-to-air rights. In many markets, we have free-to-air channels that meet the requirements in the U.K., Norway, Denmark, Sweden, Finland, and several other countries. We have the free-to-air rights, and in that case, we will have to decide if we are better off selling it to someone in that market, the free-to-air only? Maybe we sell 60% of the rights, hold back 40% for cable, and then hold back all the rights for phone and other devices to go directly. We have plenty of time to think about it. The good news is it's mostly free-to-air. When you look back at the early '90s, they could watch this on broadcast, but they could see diving, cycling, and judo on cable. We could bring that to Europe, and I think it could be quite effective. We have the ability to make those decisions, and we have the ability in many cases to go all-in ourselves if we want to. I think that gives us a very good option.

Great. And then Andy, just to clarify on the affiliate revenue growth in the U.S., so make sure I heard you right. So you are saying high single-digit in ’16. Is there any licensing revenue trends contemplated, and are you excluding that? It sounded like that was the step-up, so does it decelerate from there? I just want to make we heard you right because you gave a lot of good information.

That's right, Ben. We're looking at high single-digit next year that does not contemplate any licensing revenues. It's really all about step-up. It's all about price escalators and even better than that, we've assumed a slight acceleration of the decline in the sub base.

Okay. And then just on the rating agency comment, you said that they've changed the view of how they're looking at media companies. Can you just help us with — what is your leverage today if you look at it as a rating agency and sort of where does it need to be, just so we can help triangulate all of the moving pieces here?

The agencies have definitely taken a little more conservative view on the sector in total. When they think about the ad trends and what’s happening with subscriber trends, they’ve taken a little more conservative view. Today, we are at about 3.3 times leverage. They like us to be, kind of in the low three times. So there is definitely a little bit of debt paydown here that we want to pursue in the next kind of six months to get more aligned with where they need to be. The 3.3 by the way is, to your question, how the agency defines leverage.

Okay. Got it.

On the subscriber fees, we are not guiding beyond next year but the high single does not reflect a one-time only in terms of where we are; that's not indicating a big step-up here. We are guiding that we got a step-up over the last four years in each deal with significant increases, and you'll see that coming through in the years ahead. We’re saying that next year will be high single.

Just to elaborate on that, all the deals that we’ve done, including the Comcast deal, certainly have year-over-year price escalators. So while there is a nice step-up in year one beginning in January with Comcast, clearly all of the deals, including Comcast, have continued escalators beyond ’16.