Warner Bros. Discovery Inc (WBD) — Q3 2017 Earnings Call Transcript

Good morning, everyone. Thank you for joining us for Discovery Communications' third quarter 2017 earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer and Gunnar Wiedenfels, our Chief Financial Officer. You should have received our earnings release, but if not, feel free to access it on our website at www.discoverycommunications.com. On today's call, we will begin with some opening comments from David and Gunnar, and then we will open the call up for your questions. Please keep to one question if possible, 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 made 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 involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our annual report for the year ended December 31, 2016, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I will turn the call over to David.

Good morning, everyone and thank you for joining us. This was another pivotal quarter for Discovery. We reported a solid set of operating results driven by gains in global advertising and distribution revenue with steady performance from our linear channels, enhanced by our growing suite of digital products. As we continue the transaction process around Scripps, we remain laser-focused on the two tracks designed to drive long-term growth and value for Discovery. Maximizing our linear business where our dual revenue stream continues to provide a stable, cash generating base and pivoting to become a leader in digital and mobile-first content. As subscriber declines continue across the pay television landscape, we continue to pursue our strategic pivot to take our content to consumers across every screen and service. We are a leading global IP company, and we will only get stronger with the addition of the Scripps content and brands. We will continue to capitalize on our deep global and flexible IP portfolio of strong niche, superfan brands. Moreover, as distributors consolidate and mobile and other platform operators look to differentiate their products, owning IP globally on all platforms like we do in almost 50 languages makes us truly unique and we are convinced will lead to strong monetization opportunities in the year ahead. We are long on IP. With global platform companies serving millions of users looking to offer content, we are one of very few media companies that can offer a global package of content with recognizable brands and IP to all parts of the world. I'll begin this morning with a few details about our linear TV portfolio, where we are enjoying healthy momentum across our top channels. TLC continues its impressive audience growth, as the network enjoyed growth of 15% in delivery in the third quarter, highlighted by the popularity of the 90 DAY FIANCÉ franchise. TLC has also tied with ID as the fastest growing primetime female network in cable year-to-date and has an impressive development pipeline for 2018. ID remained the number one ad-supported cable network in total day delivery for persons 25 to 54 and women 25 to 54 for the quarter, hitting a new milestone in September, breaking into the top 10 ad-supported cable networks in prime among persons 25 to 54. ID is just a terrific story, and it just keeps getting better. Discovery Channel maintained its position as the number one non-sports network for men this year through the third quarter, led by Deadliest Catch and Alaskan Bush People, the number one and number two unscripted cable series among men and persons respectively. We are now beginning to achieve measurable results on the three pillars we have identified as the foundation of our digital forward strategy: Ad-supported digital, including GO TV Everywhere apps, paid direct-to-consumer subscription video, and mobile-first short and mid-form content. On each of these, we are leveraging our IP portfolio beyond core pay TV, ensuring we remain relevant across every screen and platform. In just one year since launching GO nationally in the U.S., it has contributed over a point of incremental ad sales revenue growth to our base, and we expect GO to deliver another meaningful increase in revenue in 2018. Importantly, we see no signs that our U.S. GO TV Everywhere platform is cannibalizing our linear business, with nearly half of GO users being ages 18 to 34. TLC and ID are leading the way on GO, with digital original content and exclusive efforts around existing franchises helping to drive new viewing records, as total weekly GO streams increased by 50% from the first quarter to the third quarter. Looking ahead, and offering good examples of how we are programming and marketing our content across all platforms, is the return of TLC's highly anticipated series, Trading Spaces, which will also be accompanied by the digital original series, Training Spaces, available exclusively on TLC GO. GO is an exciting story within our company, while not only helping to augment our linear business, but also delivering valuable first-hand insights about our audience and reinforcing the fact that our content resonates with younger digital-first viewers. Internationally, we recently launched our joint premium entertainment streaming, AVOD service with ProSieben in Germany, bringing together nine of the most popular channels in Germany, including our own free-to-air channels and is structured to support additional content and joint venture partners in the future. If successful, we could look to expand this offering and create a template for future deals in key markets. For those of you not familiar with this product, it is like a German Hulu, and we are very excited about the level of interest and prospects we have seen so far. The second pillar, direct-to-consumer paid subscription video, continues to gain traction led in large part by the Eurosport Player. As we discussed this summer, we made a strategic decision to keep our Bundesliga rights exclusively for the Eurosport Player while at the same time pivoting the Player to a season pass model, focusing on one sport for a user. We are starting to gain real traction. We've learned a lot, and we have seen solid subscriber growth throughout the season. Overall, brand awareness of the Player throughout Europe continues to build. Further, we are particularly excited about Eurosport's momentum going into the 2018 Winter Olympic Games and our plan to deliver every minute of the events to viewers across linear TV and digital. We are now less than 100 days away from the start of the games in Pyeongchang, and remain on track with our internal estimates for third-party distribution sales. We're confident about delivering the most digitally accessible and differentiated Olympic Games yet in Europe for both our viewers and advertisers. Our direct-to-consumer strategy was further highlighted in Europe with the recent announcements of streaming partnerships with Amazon in the UK, Germany, and Austria for Discovery and Eurosport. The deals with Amazon bring Discovery programming, the Olympic Games, as well as top-tier sporting events and other library content to the Amazon channels, offering to Prime subscribers across these markets. Also, we recently closed our transaction to form a new car superfan joint venture with The Enthusiast Network, comprised of leading consumer online brands, including Motor Trend, Hotrod, and Automobile, as well as a wealth of editorial and video content. Indeed, Motor Trend OnDemand already has nearly 100,000 subscribers, making it a vibrant direct-to-consumer product offering in the U.S. serving this niche. We see a significant growth opportunity for the Motor Trend OnDemand service as we layer in our huge library of long-form content from Velocity, as well as live auto auctions and live events. While still early days, we believe the Motor Trend joint venture can serve as a roadmap for other high-value niche content offerings. Lastly, within our mobile-first content segment, Group Nine has proven to be a terrific asset, executing against a smart and aggressive strategic plan. In just one year since launch, Group Nine has become one of the leading digital-first media companies with over 5 billion monthly streams, superfan brands, strong traffic, tech, and data. Our investment in Group Nine has allowed us to grow our short and mid-form capabilities and open doors to other digital-first content relationships. For example, with Snap, we recently greenlit a show concept for MythBusters. And last month, we announced a partnership to create exclusive Eurosport content around the 2018 Winter Olympics for Snapchat's Discover platform. Lastly, a word about Scripps. Our recent integration planning work has reinforced what we knew to be true. This is the right transaction at the right time for Discovery. We're even more excited today than we were three months ago when we announced plans to join our two companies and brands, and we see even broader opportunities to enhance and grow our content, distribution, and advertising globally. We continue to anticipate closing in early 2018 and look forward to updating you in the months ahead as our vision to create the global leader in real-life entertainment. As the media ecosystem continues to evolve, and as new opportunities emerge, whether due to new technology or changes in consumer behavior, Discovery is increasingly well-positioned to adapt. We remain committed to establishing the basis for enhanced terminal value for our company, particularly as we invest in new products, content, and methods of delivery to meet both the challenges and opportunities that we envision will unfold in the coming years. We are fully engaged in leveraging our core assets and our broad and deep portfolio of global IP to drive a future-forward model of superfan content, engagement, and monetization. I'll now turn it over to Gunnar to go through the details of our third-quarter results.

Thanks, David, and good morning, everyone. Our third-quarter results were again driven by continued strong global distribution growth and a nice uptick in both U.S. and international advertising growth, combined with our continued strict focus on cost management. While constant currency revenues were up 4%, and constant currency adjusted OIBDA was up 3%, our total company reported revenues were up 6% and adjusted OIBDA was up 3% in another quarter with a positive impact on our financial results from FX changes. Third-quarter reported net income available to Discovery Communications of $218 million was consistent with a year ago. On the positive side, we had improved operating results and a net positive impact of our solar deals. We realized a much higher tax benefit due to deal timing, and we also continued to see positive impacts on tax rates associated with our more global asset base. However, these positive effects were offset by $142 million or $0.25 per share of after-tax costs related to the Scripps acquisition, including transaction costs, the unwinding of interest rate hedges in conjunction with the Scripps debt rate, additional interest expense, and below-the-line currency-related losses versus a gain last year. On taxes, based on these trends, we still expect our full-year tax rate to be a couple hundred basis points below 20% and net-net, the positive impact of our solar investments on full-year net income. Now let us turn to adjusted EPS and free cash flow. Third-quarter adjusted earnings per diluted share, which excludes the impact of acquisition-related non-cash amortization of intangible assets, increased 8% to $0.43. For the last 12 months, adjusted EPS, excluding currency, FX, and Scripps transaction costs, increased 22%. Third-quarter free cash flow was up 67% to $699 million, due to lower cash taxes resulting from solar investments as well as the timing of content spent on working capital, as discussed on our second-quarter earnings call. For the last 12 months, reported free cash flow was up 16%, and excluding currency and Scripps transaction costs, free cash flow was up 17%. As I will discuss more later, we are reiterating both guidance metrics for the full year. Turning to the operating units. Let me start with our U.S. Networks. Our U.S. Networks' total revenues were up 4%, led by distribution growth of 6% and 3% advertising growth. Advertising grew by 3% or 4% excluding the impact of Group Nine, primarily due to strength in TLC and ID, higher overall pricing, and improved monetization of our GO platform, which this quarter added more than one point of growth, partially offset by overall lower delivery due to continued universe declines. As we looked ahead to the fourth quarter of 2017, we currently expect organic U.S. ad growth to be up in the low single-digit range. Now let us look at affiliate revenues. Our third-quarter domestic distribution revenues were up 6%. Our growth was driven by increases in affiliate rates as well as increases in content licensing revenues, partially offset by a decline in subscribers. We had higher content licensing revenue this quarter versus the last two quarters due to the timing of revenue recognition upon delivering more SVOD content and expect much lower licensing contributions in the fourth quarter. Finally, we're still confident in our full-year U.S. distribution guidance of mid-single-digit growth. Delving further into the drivers of U.S. affiliate subscriber trends, our top networks like Discovery and TLC, which are driving the lion's share of our economics, were consistent with the second quarter, with subs again down around 3%, driven by steeper declines at our smaller networks. Total portfolio subs in the third quarter declined by 5% year-over-year. Turning to the cost side. Operating expenses in the quarter were up 2%, leading to adjusted OIBDA growth of 5%. I will now turn to our International operations. Excluding currency, revenues increased 7% and adjusted OIBDA increased 1%. FX changes again had a positive impact on our revenue this quarter, so reported revenues were up 11% and adjusted OIBDA was flat. For comparability purposes, my following international comments will refer to our organic results only, so we'll exclude the impact of currency. The 7% third-quarter revenue growth was comprised of 9% distribution growth and 5% advertising growth. Our 9% distribution revenue growth was driven by strong double-digit growth in Europe, where we continue to realize higher affiliate rates on the back of our extended content portfolio that includes sports. We have been pleased with our progress in signing up subsequent Player after our strategic pivot to our Bundesliga gains in Germany, solely on this platform, and we remain ahead of our plan. Outside of Europe, growth was also driven by higher rate throughout Latin America. However, this growth was partially offset by continued overall subscriber declines in Latin America, particularly in Brazil and Mexico due to the current macroeconomic conditions, and pricing declines in Asia, our smallest affiliate market where we lack strong sports or kids' content due to lower contracted rates as recently some deals have come up for renewal. And third, a small impact from natural disasters including those hurricanes in Puerto Rico and the Caribbean at the end of the third quarter. Assuming a continuation of these current trends, as well as a full quarter of expected impact from continued power outages in Puerto Rico, the Caribbean, and Mexico, we now expect our full-year 2017 constant currency affiliate growth to be 100 to 150 basis points below our prior goal of approximately 10%. And as we look ahead to growth into 2018, assuming a continuation of our Bundesliga strategy, current subscriber trends in Latin America, and pricing trends in Asia, we think next year's constant currency affiliate growth is more likely to come in below double digits as well. Turning to Advertising, our 5% increase was driven by growth across all regions. In particular, we had higher ratings in Southern Europe, Latin America, and CEEMEA, and higher pricing in CEEMEA and Latin America. As we look ahead to the fourth quarter, we expect ad sales growth to be around flat. We expect growth in Latin America and Southern and Eastern Europe to be offset primarily by expected declines in the Nordics, which continue to be impacted by part-level decline. Turning to the cost side, operating expenses internationally grew by 9%, primarily due to higher sports content and production costs, and adjusted OIBDA was up 1%. Now let us look at our overall financial picture. In the third quarter, we spent a total of only $102 million repurchasing our shares as we suspended our buyback program. As we have stated, until our gross leverage ratio is back within our new target range of 3 to 3.5 times, we will continue to allocate virtually all of our capital towards paying down debt. We have also decided not to make additional solar investments after the end of this year, when we will have fulfilled our current commitment, given our desire to preserve capital for debt reduction. Consequently, we continue to be very confident in our ability to bring back leverage to within our target range within two years from closing the deal at the latest. Turning to our full-year guidance, as mentioned, I'm pleased to reiterate both our adjusted EPS and free cash flow guidance metrics. With nine months of the year under our belt, we're tracking well with adjusted EPS, excluding currency and the impact of the Scripps-related transaction costs, up 22% and free cash flow, excluding currency and the impact of the Scripps-related transaction costs, up 43% year-to-date. As noted, we still expect 2017 free cash flow growth, excluding currency, and of course, the impacts from the Scripps transaction to be at least low double digits. And we also still expect adjusted EPS growth, excluding currency and the impact from the Scripps transaction, to be at least low to mid-teens. Please note, though, that we expect an additional $100 million to $150 million of pre-tax Scripps-related costs in the fourth quarter, including interest and other expenses. Let me also provide some color around the financial impact of the TEN transactions, our new autofocus joint venture that includes the Motor Trend SVOD services that we started consolidating at the end of the third quarter. Contributions from the TEN businesses, and note this does not include contributions from Velocity, which is already in our financials, are expected to initially be around $25 million to $30 million of revenue per quarter, with the majority coming from other revenues, which includes live events, content production, and licensing brands for third parties, and is expected to have a minimal impact on adjusted OIBDA. Finally, I want to update you on the expected year-over-year foreign exchange impact on our full-year reported results. Given the weakening of the dollar versus the European currencies, at the current rates, currency movements are expected to be a nice tailwind of both revenues and adjusted OIBDA for the full year now. So assuming rates stay constant for the rest of the year, the year-over-year FX impact on revenues is now expected to be a positive $40 million to $50 million, and on adjusted OIBDA, the impact is expected to be a positive $10 million to $20 million. Finally, the combined currency and Scripps-related transaction costs year-over-year impact on full-year adjusted EPS is expected to be negative $0.52 to $0.58. In closing, as David mentioned, we remain on track to close the Scripps transaction by early 2018 and remain extremely optimistic about the potential combination. I see multiple areas of cost and revenue upside, both domestically and internationally, which will drive the significant long-term value for our shareholders. Thank you again for your time this morning. And now David and I will be happy to answer your questions. Please note we cannot discuss Scripps results, and will therefore ask you to please keep your questions specific to Discovery.

Oh, thank you. I guess, first question on International. On the cost side, which seems to be elevated due to sports, can you just talk about the next three to five year outlook? You've known costs for sports. How do you think about overall expenses? And can you talk about monetizing? It seems like you're making some progress with the Player. And then on the domestic affiliate fees, you did say that it's stepping down a bit. Can you talk about some of the swing factors you're seeing there, both pricing, and what do you see in the universe overall over the next year or two?

Thanks, Jessica. Why don't I start out with domestic affiliate? We've said that we're done with our deals for a period of time. We got through a cycle very effectively with high single-digit increases over the term of those deals. What we're seeing is we're getting hit by the 3% decline. We are on Sony and DIRECTV. And we're not on those other skinny bundles, meaning Hulu and YouTube. And so we're continuing to talk to them and work on that. And we're focused very hard on the fact that the U.S. is the only market that doesn't have a bundle without sports. We're having some constructive discussions with distributors and some constructive discussions with other programmers. Over-the-top provides a significant opportunity to attack that. We see a meaningful market for that everywhere else in the world. There is a macro argument that most markets around the world are fairly stable; some are growing. Having the U.S. be the only market with very expensive all sports and re-trans packaging is what's causing this 3% decline. Without that, we might be looking like most of the other markets, where younger people or entry-level have a chance to get into the market, and we might be seeing flat to even up 1%. I think eventually we'll get there. We're at the front of the pack driving that. When we get the Scripps deal done, I think we'll have most of the really high-quality, superfan channels. If you look at the surveys, Discovery, HGTV, ID, Food, are four of the top services that people want for over-the-top. In many cases, they're ahead of broadcast networks. So we think we're well-positioned on our content and IP. We're being a little disadvantaged, I think, in the marketplace by not being on those platforms. We've heard it from you, and we're continuing to drive that.

Okay. And Jessica, on the International content expenses and sports specifically. As you know, we haven't given any specific long-term guidance. I think a couple of points are safe to say. Number one, we will continue to be focused on making investments into IP; that's the core of our business, and will continue to be a priority for our capital allocation. On sports specifically, we have made some significant investments, and we feel that we're in a very good position now with the Olympics deal and several other premium sports rights that we have secured for Europe. So we're in a very, very good position there. For the financial outlook, clearly, 2018 is going to be the first year with an impact from the Olympics deal. I've said before that there's going to be an impact both on the top line and on the expense line, about $140 million from rights plus additional production costs. You can assume sort of a very marginal impact on profits for 2018. All that being said, if you look at the developments of our cost of sales line internationally, the majority of the increase is driven by those sports rights, and we've been managing content expenses outside of sports pretty much at a very low single-digit increase.

Yeah. So you'll see the sports IP relatively steady. It'll be a little bit bumpy because of the Olympics coming in and out. But Gunnar has made an important point. We are investing for the long-term. We are very IP-long. If you look back at that moment when John Malone was running Stars, he made the decision to not just buy movie rights for Stars, but he bought them for all platforms. At the time, he said he thinks those platforms will be worth more in value than Stars itself. And he turned out to be right. The other premium providers bought rights just for those channels. That is our core strategy. We own almost all of our IP everywhere in the world on all platforms. In sports, we own all of our sports in Europe on all platforms. We haven't fully monetized that IP yet. But if it gets sold to Deutsche Telekom, Vodafone, or BT, some gets sold exclusively to some distributors as we've done with Bolloré and Drahi in France, all of that is upside because we own that IP. We have the optionality of doing deals with Amazon, Apple, Facebook, or Google. That's why we love Scripps so much, because we own all that IP. It hasn't been used globally, and it fits along with our superfan IP global strategy. We feel good about it, but we also recognize that we could be dropping a lot more money to EBITDA if we weren't investing in IP or if we were just buying linear rights. So when you hear other companies announce they are going to go direct-to-consumer, if you hear us announce it, we have the right to do anything we want with any of our content. We believe that that can be compelling and will create long-term value and addresses the terminal value issue because we believe that our content long-term is going to work on mobile, it's going to work for Apple, Facebook, and the mobile guys, and it'll de-commoditize all of them as they're looking for IP.

And Jessica, on the Player, as David said in his speech, we're seeing some very encouraging progress on the subscriber base. Clearly, the theme is the Bundesliga exploitation. The season launched in the back end of August, and we're seeing a very healthy uptake. We've also switched our technical platform to the BAMTech platform across the whole footprint, including more than 60 markets, and that went very well, with some small hiccups that are usual in these type of launches. We're happy there. In terms of monetization, keep in mind we are ramping up the subscriber base. We will see more of an impact going forward. There's two aspects to this. Number one is I believe that with this premium right, we have repositioned the Eurosport brand, especially in the German market and across Europe. There's a positive pollination effect between the Player and the linear feeds. We're seeing ratings go up on the linear Eurosport network as well. So that is all working very well. Finally, it's a very good learning for us because we now have some premium rights with a lot of demand on the platform and we're expecting a lot of very valuable learnings as we approach the Olympics next year. So I think that's all going very well.

As Gunnar said on Eurosport, which I think is an important point, is right now it looks like we could find value in two baskets. Last year was a record year for Eurosport with ratings. Eurosport ratings are currently up 20% over that, at the same time that we're taking that IP direct-to-consumer. We have the right to take any of that IP. If we talk to someone who wants a certain kind of IP, more on the Player, we can just make the decision to take it off Eurosport, deliver it to the player, and then promote on Eurosport that you can get that match or that game on the player.

Thank you.

Yeah. Thank you, good morning. Maybe just first to follow up on the strategic pivot that you mentioned. You threw out Apple, Facebook, and Amazon as potential partners. So I guess, number one, can you talk about any burgeoning relationships you might have on that side for content partnerships? But then also, how you're thinking about the sale of content into licensing and how that may exacerbate some of the pressures you're seeing on the linear side and how you're thinking about managing that pivot. And then separately, regarding the Olympics, I think there's been some press reports about Eurosport taking a more holistic approach to measurement across all the platforms. I was just wondering if you could give us a little more detail on what sort of traction you're getting with that currency, and how you might be able to adopt that as you become a more multiplatform-centric company over time.

Thanks, Steven. At this point, what we're trying to do is figure out where the soccer ball is going to go. We want to build our core company which is very stable and still providing real growth with the global footprints that we have, more channels in more countries, with core niche content that people love. We are building momentum in this idea of our strategy of where we think that ball is going to be, and that is owning IP, and being in a position that you can sell that IP in different windows to different distributors. In the case of the big four, we've never seen, in my 30 years in this business, distribution platforms like Facebook has with 2 billion, like Amazon and Google and Apple. We're talking to all of them. We have deals already with Amazon in the UK, Germany, and Austria. They are quite creative. In those markets, we're going direct-to-consumer with Discovery for 4.99. We're selling Eurosport on Amazon. Amazon is selling our Player in Germany. We think the ball's going to go to the place that if you look back three years ago, those were platforms. Today, they're all in the game for IP. AT&T can go out and buy Time Warner. That makes a lot of sense in a market like the U.S., which is 350 million people, and that's probably going to be a very effective transaction for Randall. As you go across Europe and Latin America or Asia, and you're a distributor, at that point, it really is going to be less meaningful to go out and buy a big media company. You want to go to media companies and say, what IP do you have? So we think that if Apple wanted to do a deal, or if Facebook wanted to do that or Amazon, or if the mobile players wanted to do it in Europe, who could they go to? There's very few companies. It's maybe less than three. We have brands that we've been working on in those countries for 20 to 30 years and we have a massive content library and we think Scripps will add to that and rejuvenate it. We see Scripps as a beginning. Within two years, we'll be less than 3.5 times levered, and then we'll be looking for what other IP do we have. How do we accelerate direct-to-consumer? How do we accelerate our overall market share? We're trying to be where the ball is and we see those big distributors looking more and more for the ball, and the ball for them is content.

Okay. On the Eurosport question, as we have said multiple times, we're going to make sure that these games are the most digitally accessible games ever. We will be making available every event on a wide range of platforms. This does put us in a position to also deliver an audience across these multiple platforms. One of the big benefits is that we will have people signing up for the Player, so we will have the personal identifiable information which, especially in Europe, is a very big advantage because there's a lot more strict data protection rules over there. We see this Olympics event as a sort of kickstarter or a booster for our ability to deliver targeted advertising and data-driven products to the audience. Clearly, for any specific numbers, of course, it's too early right now.

Doing a deal with Snap across Europe, we think will bring in a younger demographic. With Facebook, we already have a very extensive partnership. With Group Nine, we're one of the leading providers of short-form, and when they launched mid-form, we were one of the leading providers of mid-form. I think staying close to those companies, figuring out what they need, and catering our superfan baskets in terms of content type, mid-form, short-form, and long-form. We have come a long way from two years ago. We have a full menu now.

Thank you.

Yeah. Maybe for Mr. Zaslav, you mentioned the U.S. is the only country that doesn't have a non-sports package. I assume that's on linear. I was just wondering if you could give us a little bit of a history lesson in terms of why that is. And then how easy do you think it is to change? I presume it has something to do with some of the bigger sports channels out there and the distributors' minimum guarantees that they have. But any color that you could share would be helpful. Thanks.

Sure. Well, the U.S. is the only market that has retransmission consent, starting with the fact that broadcasting is truly free in every other market. Here now, the broadcasters are charging $2 or $3 a month, which is quite good for them, but it's not so good for the consumers and it's not so good for the distributors who have to absorb that additional cost, which becomes a barrier to entry. It's also the only market where sports channels have leveraged their position to require full carriage of all of their sports channels, together with the fact that most sports channels are owned by the retrans broadcast companies. You have a combustible combination. If you want to get the broadcast network, if you want to get the regional sports – the U.S. has an extensive regional sports network structure. So between regional sports networks, big sports networks, and retrans, which is driven mostly by sports, sports has been effectively hyperextended here. This marketplace is causing consumers to deal with high prices. It's one of the reasons we believe the market is down 3%, because the cost of entry, which is why you see 65% of the entry-level market in Mexico offering a skinny bundle for $15. In Brazil, 90% of the growth in the last four years has been the skinny bundle. In every other market, you can get your sports to your ticket. I think it’s not sustainable. The ecosystem is getting much creakier in the U.S., not because the ecosystem is creaky globally. It is strong enough with people wanting to buy content and get packages of content, to be in a more stable environment, which is what we see everywhere else. Our channels are stronger now than they were a year ago. We think Scripps will strengthen the already strong quality of our channels. We have five channels that people would rate as either their most important or their second most important channel they watch and care about in terms of viewing time, including the broadcasters.

Very helpful. Very helpful. Thank you.

Oh, hi. Good morning. Thanks. I got a couple just housekeeping for Gunnar and then David, boy, I'd love to just pick up on that great discussion you just had with Jason. Gunnar, just super quickly, two on affiliate fees. So on domestic affiliate fees, I'm sorry if I missed this. Just wonder if you'd give us a number without the content licensing, so just sort of a clean distribution affiliate fee number for the quarter. Any comments on the ins and outs of licensing sort of next quarter or forward would be great. And also where did that licensing go, I wonder? Because I don't know – in the states, I know you're not licensing I think to the SVOD player, so if you're willing to say that, that'd be great. The other quick one, sorry, I promise it's quick. On International, I think you guys had indicated double-digit constant currency International affiliate fees for the year. I just wonder if you still feel that way. Okay. And then David, just sort of picking up, I can't help. It's such an important topic and you're sharing some thoughts on it. On this sort of skinny non-sports bundle, you did mention that your traditional distribution agreements, you're sort of through the cycle there. What are the implications, if any, if you were to team up and launch some sort of over-the-top non-sports package on your existing distribution agreements with your NVBDs as they exist, and maybe even if you think about the next cycle? How can you go ask for pricing increases from the cable companies if you have a low-priced over-the-top option for consumers? Thanks for bearing with that guys. Appreciate it.

I'll just answer the last one. We have no restrictions so we can do. It's already being done. YouTube is an offering that's in the marketplace. Hulu has an offering that is in the marketplace. Philo has an offering that's going to be in the marketplace. DIRECTTV NOW is an offering that's in the marketplace. You are starting to see additional offers. We're agnostic. We would do an over-the-top direct with others in a package. We would do an over-the-top with existing cable operators. We would do an over-the-top with existing mobile or satellite providers. We see our channels are stronger now than they were a year ago. We think one of the things that helps us with Scripps is we have more channels that are very important. We have five channels that people rate as either their most important or second-most important channel they watch and care about.

Okay, on domestic affiliate revenue, let me give you some more color. The Q3 numbers, as you see, are very well in line with the guidance that we've given for the full year of mid-single digit. As you heard, I also reiterated that guidance for the full year. That's still the best estimate. In terms of those content licensing revenues, we do not single out individual contributions to the distribution line. Those content licensing deals are small in the greater scheme of things, but as I said, we have seen a bit more impact in the third quarter, which is why we pointed it out specifically. In terms of who we're selling to, you will find some of our stuff on Hulu. We also do selective deals with Netflix. For example, in the case of a miniseries where we can get value from Netflix, we are fine to engage in a deal like that. However, that's always going to be a careful decision in our distribution strategy. We will see more of these SVOD revenues come through. They are slightly more lumpy than the simple subscriber number times ARPU business. But again, it's a small component.

The other side of our strategy of investing more in IP and owning more windows is we are quite strategically selective about how we monetize it. We could do a broad package to some of those SVOD providers, and you could see a very different result this year and next year. But we've opted not to do that, holding onto it. We believe it could be much more compelling in our offering or much more compelling to do something with an existing player. We believe our approach builds terminal value.

And on D&I affiliate, as I said during my speech, we saw a 9% underlying growth in the third quarter. We guide for slightly below 10% for the full year. The individual contributions to that growth show healthy double-digit growth in Europe with success on the sports side. Recovery in Latin America hasn't come through as we had hoped, and we are not anticipating it anymore in our planning. There has been a slight negative headwind in Asia with a few renewals recently, and there has also been a bit of impact from natural disasters that we've seen, which is why we wanted to be slightly more conservative as we look forward now.

Hi. Thank you. I might switch gears to the advertising side. You've seen some good ratings momentum, some improvement at some of your key networks, which I think you highlighted like TLC and Discovery and ID. I was wondering if you have good inventory still available to monetize that in the scatter market? Are you somewhat constrained by make-goods? Any color on the health of the scatter market, what you're seeing in the market.

The scatter market, the volume is good. The pricing is above upfront but slightly below what pricing was on scatter last year. We don't have a make-good issue in any meaningful way. The fact that TLC is up helps us. ID continues to grow and Discovery has really stabilized. The upfront was quite good for us. We did well and we sold a little deeper than we normally would. We got a bit of a strategic sense that there might be some scatter market money moving to the upfront, so we took a little more dollars. It was quite good for us.

As I said, going into the fourth quarter, we see similar low single-digit growth for the U.S. ad number for us.

And then just a quick follow-up on your networks here. You talked about better subscriber trends in your core networks in terms of the rate of decline and the fact that there are a bit higher declines in some of your non-core networks and smaller networks. Does that influence your investment spending ahead? Are you likely to reallocate some of your investment spending to some of your bigger networks?

I think generically, yes, and we've already been doing that. Majority of the economics in our deals are to our big six networks. We have some exceptions. We have Velocity, which is a very compelling superfan network. We put the channel together with the direct-to-consumer business, together with 30 titles of magazine titles. We didn't buy the magazine business, but all the editorial, pictures, and short-form content being generated around cars and the long-form library, live auctions, are in this new basket called Motor Trend OnDemand. We're enthusiastic about that service starting with 100,000 subscribers, without promotion or long-form content. This is part of our strategy of building a direct-to-consumer business.

Thank you very much.

Thanks. I have two for David. Can I go back to the non-core versus big six change in distribution? Is the fall of the non-core channels a function of maybe those platforms falling? Or the fact that perhaps you guys had maybe loosened up some of the minimums and traded that loosening for better pricing? So you talk a bit about, was this a self-planned type of erosion of the non-core sites?

No. It's actually just shaving. It's basically someone acknowledging the high price of $130 for cable. It's saying for those extra 30 channels, I'll save the extra $14. It's not being tiered. It's just someone looking at the very high price.

Okay. Okay, that makes sense. And then, you haven't talked about Sling at all, which seems like a good fit given their pricing and tiering. Is Sling a function of you having to get a dish deal done, or can Sling be done outside of a normal linear deal?

I don't want to speak to this specific. Sling is an effective platform. Charlie is attacking the issues I've mentioned. He is one of the people being innovative, and those distributors are asking themselves hard questions. I think we will probably be on those platforms. If you look at all the recent studies, we have six channels that are rated the same as broadcast or just behind it or ahead. The cost of our content is significantly less than one retrans channel. We see a good value-for-consumer argument. We have good aggregation, and when we close Scripps, we will have even more quality viewers and versatility. We would like to be on every platform.

Okay. Thanks, David.