Warner Bros. Discovery Inc (WBD) — Q3 2018 Earnings Call Transcript

Good morning, everyone. Thank you for joining us for Discovery's third quarter 2018 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 ir.corporate.Discovery.com. On today's call, we will begin with some opening comments from David and Gunnar and then we will open up the call for your questions. Please try to keep to one question, so we can accommodate as many 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 may 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 information on important factors that could affect these expectations, please see our Annual Report for the year ended December 31, 2017, 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 on today's call. Our business is strong and we feel great about what we have accomplished since we closed the Scripps merger. And we're proud of the results we have delivered this quarter. We really like our strategy. Discovery is a true global IP company, with real differentiation from the rest of the industry, and powerful operating momentum around the world. We remain optimistic about the road ahead as we drive forward with our plan to transform our global business. It was eight months ago that we closed on Scripps, and it has exceeded our expectations on every front. We are delivering strong cost synergies, enhancing our global suite of content and IP, and accelerating the process of broadening and refining our product offerings. In doing so, we continue to maximize value from the linear ecosystem while continuing to seek opportunities to drive our IP across the global direct-to-consumer landscape. Discovery is making strong headway in all these strategic areas, much of which is reflected in our operating results this quarter, which Gunnar will review in more detail shortly. Let me highlight a few operating metrics where we are very proud of the company's achievements and progress this quarter. First, our strong 5% domestic advertising growth, marked by accelerating performance at both the legacy Discovery and Scripps Networks on the back of improved ratings, healthy overall pricing, nice growth on our TV Everywhere apps, and strong execution by the sales and network teams. Secondly, our heightened focus on improving operating efficiency, fueled by our transformation efforts, drove impressive total company margin improvement of 500 basis points to 40%. This contributed to substantial free cash flow generation of over $900 million this quarter and facilitated us reducing our net debt by just about $1 billion this quarter, which helped us reduce our net leverage significantly faster than originally projected at close. Additionally, I'd like to focus this morning on a few key areas in which we are establishing differentiated growth performance relative to our peers and where we are gaining further traction from our strategic pivot. At Discovery's domestic networks, we are outperforming the marketplace and are currently bucking some of the trends we are seeing across the industry. Our ratings momentum has been an outlier in an industry where both cable and broadcast performance has been increasingly weak. For the third quarter, ratings and delivery across our core networks were up 1% in L3, well outperforming both the cable and broadcast markets. Discovery is the number two TV company in America, including both broadcast and cable, with NBCUniversal being the only company in the U.S. that reaches more people and is larger. Within the pay-TV universe, we deliver a near-20% share of viewership among all viewers and nearly a quarter share among women. That strong position in delivery provides a distinct advantage and an opportunity on the sales and marketing side to promote our content across a much larger audience base. This past quarter, we had three of the top five pay-TV channels for women in both prime time and total day and achieved a 23% share of the female audience. On any given night, we are getting between a 3 and a 4 rating in women 25 to 54 across the portfolio, and typically exceeding a 4 rating on Sunday night. And across the pay-TV universe alone, we are achieving between a 5.4 and a 7.2 rating in women 25 to 54 across the portfolio. Putting some context around this, premium IP in the U.S. today is incredibly scarce, with perhaps the NFL at the very top of the pyramid with respect to aggregating both male and female demographics on a large scale. Advertisers pay a significant premium for this IP. So, if you’re an advertiser buying the NFL to reach women, you could reach the same number by buying one spot, a roadblock, across our top women's networks: HGTV, Food, TLC, ID, and OWN. It's like a women's super-pack. And I believe we can intercept some of those huge CPM, NFL or broadcast dollars, which would be a big win for advertisers because it would be at a much lower CPM, a big increase for us, and a huge reach. It's something that nobody else can do because we have this ability now to aggregate so many compelling and strong female networks. It's one of the remarkable reveals of Discovery and Scripps coming together. One of the key methods by which we have continued to strengthen our ratings portfolio is by cross-promoting across our brands, having invested in data science and advanced analytics to improve our marketing efficiency. With the inclusion of the Scripps brands, we have increased our marketing reach by over 50%. Through effective use of day and date data-driven audience targeting, we are increasing sampling across our viewer base and driving audiences to more of our own content. We are also now layering in the targeted platform of our 18 GO TV Everywhere apps, one for each of our channels, in which we can take the pulse of what people are watching in real time, increasing our valuable first-party data. We are just beginning to refine our capabilities in this area and what we may ultimately achieve across this truly differentiated platform. Internationally, we continue to see some very strong traction from our content sharing and monetization strategy, where we now have identified nearly 3,300 total hours from 50 unique shows and 150 individual seasons of Scripps content to use across the Discovery platform. We will continue to refine how to best optimize this treasure trove of content across every global region and platform and across linear, digital, and OTT. Turning to our distribution strategy, we’ve made substantial progress in reaching consumers across critical over-the-top platforms in the U.S. We look forward to having our networks launch on Sling later this year. We are excited about our new carriage deal with Hulu, where we just announced last week that in addition to the eight Discovery networks on Hulu's Live TV, we will have nine additional brands available to subscribers later this year, bringing our total to 17, inclusive of all tiers. Having recently launched on AT&T Watch with a robust eight of its 30-plus total channels, Discovery is as well positioned across the OTT ecosystem as any programmer or media company. The message here is clear, and there is no mystery. We pride ourselves on being great economic and strategic partners to our distributors. All of our deals provide fair value and incremental financial value to Discovery and align our economic interests to the future growth of subscribers on these platforms. As we consider the deployment of skinny bundles around the world, it does take time to determine the right pricing and marketing strategies, but in nearly every country, skinny bundles have grown and have been a significant growth driver. We expect the same here in the U.S. that over the next few years, the skinny bundles will provide real value. Our positioning will provide extra value to us, as we are on, in a compelling way, almost every one of those platforms. We remain steadfast in our goal to reach viewers across every key distribution platform and bundle offering in the ecosystem, both in the U.S. and around the world. We also continue to pursue our direct-to-consumer opportunities through an expanding number of initiatives and a broader global canvas. With the recent onboarding of Peter Faricy from Amazon, who ran Marketplace, we gain an experienced leader whose background in building platforms, tech stacks, and direct-to-consumer products gives us confidence that we are building the right type of team with the right skill set to drive this critical priority going forward. Our strategy here is differentiated from most other media companies. At our core is a great collection of fully controlled, quality and trusted programming, ranging from immersive storytelling to functional lifestyle content to long-tail and headline sports, such as the Olympics in Europe, and golf in every country in the world outside the U.S. We are now leaning heavily into OTT with some of our most passionate superfan brands and verticals, such as Motor Trend, where our subscriber base has more than doubled since we merged a year ago, and where we own a rich ecosystem of online and offline event entertainment and content for auto fans. Eurosport, which is finding real success in its more focused season pass model; Dplay, our direct-to-consumer product in Europe, which is gaining traction as an SVOD service in Scandinavian countries with original commissions; and our GO TV Everywhere apps, where we now have one for every one of our channels, augmenting and differentiating our linear bundle offering and establishing a great foothold in targeting a younger demographic of viewers. Our Golf TV product with the PGA Tour, where we will go live with a global offering early in 2019, with a broader phasing in over the next few years until we are fully global outside the U.S. We are more enthusiastic than ever about our partnership with the PGA Tour and the value of this superfan must-have content and the opportunity to build the global home for golf across all platforms with our Golf TV streaming service. We're excited to announce today our first Golf TV broadcast partner, J:COM, which will allow golf fans in Japan to enjoy extensive live action on J:COM's existing Golf Network linear channel. This is a real win for the passionate and growing community of golf fans in Japan, promising to deliver even more of golf's biggest moments all year round, available whichever way fans want to watch. We have ambitious plans to work together to develop a broader digital ecosystem, leveraging Golf TV's invigorated comprehensive content offering and J:COM's Golf Network Plus App. Like the competitive bidding environment that took place with Sky, we watch industry M&A closely and how it reinforces our evolving global strategy. We've made significant progress through our transformation to continue to reinforce that strategic position. Looking ahead, we see a stronger, more powerful, and more differentiated Discovery, one that is continually adapting to the changing needs and affinities of our global fans. While many in media continue to chase scripted content, Discovery is leaning into real-life entertainment on all screens and services. We have global scale, strong free cash flow, and now even greater depth in content and brands to launch more superfan services on more platforms. We are appropriately investing against this opportunity set in people, resources, and technology around the world to facilitate this strategic pivot. We look forward to providing you with additional progress reports as we move forward. To discuss the financial impact of all of this and our third quarter results, I'd like to turn it over to Gunnar.

Thanks, David, and thank you, everyone, for joining us today. As David noted, I am extremely pleased to present a very strong set of financials for the third quarter. We have met or exceeded all of our third quarter guidance metrics. Let me point out four highlights before we delve into the details. First, 18% constant currency pro forma adjusted OIBDA growth, which, second, results from a substantial 500 basis points of margin improvement as we continue to benefit from the integration and transformation of our newly-combined company. Third, free cash flow of more than $900 million in the third quarter underpins the great ability of the new Discovery to generate cash. Fourth, we are seeing real traction in our U.S. Network portfolio, as evidenced by 5% domestic ad revenue growth. Indeed, as I've stated before, the further we proceed in executing our strategic plan, the better we feel about the opportunities ahead of us. Before I move on, be reminded that my commentary today will again focus on our pro forma results, which include the operations of Scripps as well as OWN and Motor Trend as if all have been owned since the beginning of 2017, and will be in constant currency terms for the international and total company commentary unless otherwise stated. Please refer to our earnings release filed earlier this morning for all of the detailed cuts of our third quarter results. Starting with total company, third quarter total company revenues grew 2%, driven by 4% domestic growth and 2% international growth, partially offset by a 91% revenue decline for Education and Other due to the April sale of our Education division. Adjusted OIBDA grew at a rate of 18%, well above revenue growth, as total company costs were again down year-over-year. We achieved a healthy 6% reduction in costs despite an increase in digital investments, as we continue to realize significant synergies from transforming the new Discovery with 13% adjusted OIBDA growth in the U.S. and 27% adjusted OIBDA growth in International. Now, let's look at each operating unit, starting with the U.S. segment. Third quarter U.S. total revenues were up 4%, with 5% advertising growth and flat affiliate revenues. This was an outstanding quarter for our U.S. ad sales. The better-than-expected 5% growth was due to a combination of solid ratings, strong pricing, strong demand driving additional inventory, and continued monetization and integration of our GO platform and digital offerings. Again, as David noted, we are benefiting from overlaying smart cross-promotional activity against an increasingly large footprint, which on certain evenings is delivering a near 30% share of women watching television. Our flat distribution growth was primarily due to increases in affiliate rates, partially offset by declines in subscribers, and lower revenues from SVOD against the sale of bulk Manhunt to Netflix in the third quarter of last year. Delving further into the drivers of U.S. affiliate and looking at pro forma sub trends, subscribers for our combined portfolio were again down 5%, due to continued high-single to low-double-digit losses at our smaller networks, primarily due to continued core shaving. More importantly, subscriber declines for our combined fully distributed networks improved to down 2%, an improvement versus down 3% in prior quarters, primarily due to virtual MVPD subscriber growth. Pro forma third quarter U.S. adjusted OIBDA increased 13%, as costs of revenues and SG&A were both down mid-single digits as we start to reap the benefits of the transformation, leading to 54% domestic margins or 500 basis points of year-over-year margin expansion. We are very pleased with this result in our second full quarter after closing the Scripps transaction. Turning now to the International segment, pro forma third quarter total International revenues were up 2%, driven by 2% advertising growth and 3% distribution growth. The 2% ad growth was driven by higher revenues overall in Europe, the largest ad region, primarily due to strength at TVN in Poland, partially offset by weakness in the UK and Italy due to weaker channel performance and declines in Norway and Denmark due to continued declines in PUD levels. Additionally, we saw modest declines in both Latin America due to overall market softness and in Asia due to weaker pricing. Affiliate growth of 3% was driven by growth in Europe and Latin America. In Europe, we had another quarter of solid growth, driven again by high ad digital revenues from the Eurosport Player. In Latin America, we also saw healthy growth, primarily due to higher pricing across most regions. Growth in Europe and Latin America was again offset by declines in Asia, where the trend seen in previous quarters continues. As we noted, affiliate growth would have been in the mid-single-digit range before the impact of the new ProSieben joint venture. Turning to the cost side, pro forma operating costs were down 5% in the third quarter, as costs of revenue were down 7% and SG&A was flat despite continued P&L investments in our digital businesses. As a result, adjusted OIBDA growth was up significantly at 27%, with margins expanding 600 basis points to 28%, benefiting from a combination of solid underlying growth due to strong cost management, accelerating transformation savings, and a reduction in marketing and production costs related to the Bundesliga in Germany, which are now incurred by our new ProSieben JV, partially offset by P&L investments back into digital and mobile growth areas, which is the only reason why SG&A did not decline for the DNI segment. If we exclude the ramp-up in those digital businesses internationally, overall SG&A was down 3%. Having reviewed the highlights of our third quarter results, let me now provide some color on certain forward-looking trends. As usual, I will specifically outline our fourth quarter top-line expectations for each major operating segment. Again, international commentary will focus on pro forma constant-currency growth. First, U.S. advertising; as I noted, Q3 was an outstanding quarter for us. For the fourth quarter, we expect continued strong pricing, continued monetization of digital as we expect further success of our GO apps, slightly offset by lower ratings in the third quarter partially due to the impact of news quarter-to-date leading up to Tuesday's midterm elections, and less tailwind from inventory sold than in previous quarters. All-in, we target 3% to 5% U.S. ad growth, with ratings trends being the primary determinant of where in that range we will land. Second, U.S. affiliate, we still expect fourth quarter growth to be around flat, which, as previously discussed, is largely due to a tough comp on the Scripps side due to their distribution agreement true-up in the fourth quarter of 2017, during which legacy Scripps domestic distribution revenue increased more than 10%. Looking towards next year, we remain confident in our ability to see a significant step-up in our affiliate growth rate in 2019, with growth expected to be comfortably in the mid-single-digit range for the full year, assuming no major change in current sub trends based on four important factors: number one, our DISH deal, which includes certain networks launching on Sling that will become effective later this year; number two, our recent announcement that we will have networks carried on Hulu Live; number three, pricing step-ups in our existing deals; number four, clearly, general subscriber trends in the market will be an important driver for our distribution revenue growth. We are assuming no major structural trend change in our 2019 guidance. Before moving on, I would like to give some color around our expanded Hulu partnership. While I cannot comment on specific deal terms, there are some key high-level points that are important. This is a mutually-beneficial deal, where both sides will see incremental value, and I am extremely pleased with the solid economics we received. As I said before, this is one of the main drivers of our expected growth acceleration in 2019. There are many elements of the deal, including additional SVOD hours and an increase in our channels carried to a total of eight Discovery networks in the base package on Hulu with Live TV. We are also pleased that additional networks will be available on the new Hulu with Live TV tier packages later this year. The deal has strong carriage projections, as do all of our deals for our top networks, and overall, we will see incremental economics next year and remain excited about our ability to drive greater returns from this distribution partnership as Hulu adds additional subscribers. And now on to International advertising, fourth quarter International advertising is expected to be around flat. Overall, we expect low-single-digit increases in Europe to be offset by slight declines in Latin America and Asia again. Finally, International affiliate, fourth quarter International affiliate is expected to be around flat as we continue to feel the impact from the new ProSieben joint venture, which reduces certain revenues and associated costs in Germany, as well, facing a tough comp versus the China Mobile deal in the fourth quarter of 2017. I would like to share a quick update on our integration of Scripps. Given our progress to date, we're extremely confident in our plan to deliver cost synergies of at least $600 million by March of 2020, or two years post-close. We are starting to really reap these benefits, as evidenced by our mid-single-digit declines in operating costs, both domestically and internationally, this quarter. We continue to make investments in next-generation platforms and new businesses as we pivot our strategy. At the same time, we were able to expand our total company adjusted OIBDA margins by 500 basis points year-over-year, as our transformation is more than absorbing these investments and overall underlying cost inflation. These investments netted approximately $25 million for the quarter, with a reduction of Bundesliga-related costs partially offsetting additional P&L investments across the digital portfolio. However, going forward, over the near term, as we ramp up existing and new digital initiatives like Golf TV, we expect to invest around $50 million per quarter in these types of activities. Now, let's look at cost to achieve. In the third quarter, we booked another $224 million of restructuring and other costs, mainly non-cash, bringing our total to $652 million year-to-date. This quarter's charges included an additional reserve for severance and additional content impairments following a full strategic review in both our domestic and international businesses to determine content from each legacy company that will no longer be used going forward, reflective of our content integration strategy. We expect an additional $20 million to $50 million of restructuring and other costs in the fourth quarter for a total of around $675 million to $700 million for the full year, above our prior estimate of $600 million. Cash costs to achieve will be around $350 million to $450 million, above our prior expectation of $300 million to $400 million. As David mentioned, we remain equally excited by the revenue opportunities and enhanced growth prospects we are just beginning to realize from the combination, and we are extremely pleased with our initial progress. Let me now turn to our outlook for the full year 2018. With stronger-than-expected U.S. ad revenues and our continued focus on controlling costs as our transformation and synergy generation progresses faster than planned, I am pleased to raise our full-year adjusted OIBDA guidance. We now expect pro forma constant currency adjusted OIBDA growth to be at least 7% versus 2017's pro forma adjusted OIBDA of $4.051 billion, which is above our prior guidance of mid-single-digit growth. Please keep in mind that our full-year reported adjusted OIBDA will be roughly $250 million lower than pro forma since we are only including Scripps in our reported numbers from March 6 on. Turning to free cash flow, despite the potentially higher cash costs to achieve, we continue to target our full-year reported free cash flow to be around $2.3 billion. The final result will, of course, depend on currency trends, the timing of the payout of restructuring costs, and working capital movements. I remain very pleased with our ability to generate significant free cash flow, as the third quarter performance shows. On taxes, we still expect our full-year book tax rate to be in the high-20% range, while our cash tax rate, excluding PPA, is expected to be at or below 20%, with full-year total intangible asset amortization still expected to be around $1.2 billion. We will continue to prioritize the reduction of our leverage. Given our higher adjusted OIBDA expectations, we now expect to delever more rapidly than previously expected. My latest estimate is that net leverage will be around 3.8 to 3.9 times adjusted OIBDA at the end of the year. Before I close, let me quantify the expected foreign exchange impact on our 2018 results. Given the recent strengthening of the dollar, while FX is still a tailwind, the impact on year-over-year results has come down a bit. At current spot rates, FX is now expected to positively impact revenues and adjusted OIBDA by approximately $70 million and $10 million, respectively, versus our 2017 reported results. In closing, we could not be more pleased with our exceptional progress and the strong outlook for the new Discovery. Thank you again for your time this morning. David and I will be happy to answer questions you may have.

Thank you. Maybe first just on the subscriber trends, I think for your fully distributed network, you saw a 1% improvement in the quarter. Could you just maybe deconstruct that a little bit for us, as to whether that came from traditional or nontraditional and what that number might look like if we start to think about it pro forma for the DISH Sling add and the Hulu add. And then, Gunnar, maybe just a follow-up on free cash flow, as you increase your cost to achieve in 2018, do you expect there to be a bigger run rate benefit to free cash flow in 2019? Thank you.

Okay. Good morning, Steven. Yeah, so on the sub trend first, the most important change driver was additional virtual MVPD subs that have helped. It's important to keep in mind that obviously this will be even more of a tailwind for us towards the end of the year and next year as we increase our carriage and the number of networks on Sling and Hulu. On the free cash flow side, yes, that’s right. We have paid out and we're planning to pay out a bit more than originally anticipated in terms of cash costs to achieve. So, if you assume, let's say, take the midpoint of $400 million number for cash costs to achieve, then that number obviously goes away in 2019 or at least largely goes away to a very small remaining amount that might be left, so it should be a significant step-up next year.

On moving from down 3% to down 2%, I see that as quite encouraging, and we're just getting started. If you look outside the U.S., subscribers are still growing 2% to 3% and here we've had this decline. I've talked about it before. It really is about these overstuffed $100, $80 packages where you have to carry every broadcast network and every sports network. There has been a rejection of these overpriced packages and it creates an ecosystem that has much more challenge than we should as an industry because we're walking away from many people who would love to have multichannel for a lower price. The interesting part is they have to figure out what channels to carry in these bundles and how to price them. So, it's encouraging that you have AT&T aggressive and you have Charlie Ergen with DISH aggressive; Hulu and Randy Freer being effective; Sony. There are more players in this space, and we're starting to quantify how they are doing with each other. Some are holding back with marketing until they figure out what the right channels are, but in almost every market in the world, these skinny bundles have been a significant accelerant for growth with a young generation. When GDP is flat or wages are declining, there's movement to these tiers. One major reason it's held it up for years is that the big distributors don't want someone who's paying $110 to revert down to a $40 or $45 package. But in the long run, almost every country has taken the gulp and moved toward that, and that's what's resulted in the 2% to 3% growth around the world. We are on the precipice of that now. As you look at each of these skinny bundles, we do extremely well in terms of not just having our channels carried, but if you do the calculation of the percentage of viewership that we're getting when we have 200 channels and we're getting 25% or 30% viewership, then how do we do when our top channels are carried against 30? It's quite significant. It will provide a lot of upside, and we think we could be the big winners here. We're eager to help these distributors market this. We love the Hulu deal. We're very excited about what Randall Stephenson is doing with AT&T Watch and DIRECTV NOW and the general space. In the next year or two, you're going to see an aggressive push into this space because the distributors are going to get, our currency is going to be how well you're doing, and this will be a big ticket. So we're excited about it.

Thanks very much.

Thank you. David, maybe following up on that last question just a little bit. We've seen the numbers from DIRECTV NOW and Sling, and I think one of the things is there's a pretty material deceleration in the net adds for both of those services. I was wondering if you could add some context, given that you have unique drivers because you're getting picked up by Hulu and Sling, but in terms of this skinny bundle class, these virtuals, some investors are concerned that they're slowing pretty quickly and the momentum's being lost. Maybe you could elaborate a little bit on that.

Well, look, I don't think we have seen that. More importantly, as we talk to the distributors, they're discussing with us how to market this. There's an awkwardness in that some of these packages are still carrying too much content, and so they're actually losing money when they sell a package for $40 or $45 or $35. They're forced to carry some stuff that they don't want to. What you're going to see is one, there will be a drive toward accelerating the growth even if they aren’t making as much money and look for long-term asset value, building the relationship with customers. But two, I think there are channels carried on these bundles that are going to take off because you look at how many of these channels have performed and the stuff that was forced in, and they’re not necessary from a consumer perspective. We're in this moment where they’re not really getting behind the marketing. Ask yourself if we want to take off a couple of channels, then we have some margin in that space before we go after certain consumers. DIRECTV NOW was doing well for a while, so you have to consider how they're being marketed. But in the long run, consumers want these packages. They have already signaled to the industry that they are going to get behind it. I'd say it's too soon to determine whether it's slowing. I believe there will be a significant acceleration in 2019 because there's a big demand, and there will be some share shift among who has the better package. Many countries have these skinny bundles, where it’s acceptable to lose money because you pick up broadband subscribers and you have an opportunity to offer that consumer more over time. All of this works to our advantage.

Thank you. That’s very helpful. And then just one follow-up for Gunnar, with the restructuring charges coming in a little bit higher than expected this year, could you provide an update on the cost synergy side? Are those also pacing ahead? I don’t know if you have sort of a new update on that number. Thank you.

Yeah, Drew. We’re ahead of plan. Things are moving in the right direction faster than originally planned. Just one thing to keep in mind on the restructuring charges; if you look at the types of charges, there are some content impairment numbers in there, which are difficult to anticipate or estimate upfront. Our teams reviewed the entire content portfolio and realigned programming strategies for the networks. They identified programming that we will no longer use going forward, reflective of our content integration strategy. We expect cash costs to achieve will be around $350 million to $450 million above our prior expectation of $300 million to $400 million, but overall feel good about the synergy number. We’ve said before, we're looking at $600 million-plus including additional reinvestment, and so we're ahead of plan, and we’ll continue to see margin momentum.

Great. Thank you.

Thanks. There was a name change, but that's okay. David, on the streaming Golf channel, can you talk about what the incremental costs are to create this direct-to-consumer platform? You said you'll launch over a number of years, so just color on that. Is there any ripple effect on other parts of your business? Is there any other benefits that you would see?

Sure. Thanks, Jessica, and congratulations on the wedding! I know it’s Ehrlich now. Golf TV reflects this idea of who we are and there’s a bit of misunderstanding of who we are. We're not just a linear TV company. We bought Scripps because of the IP that they own around food, home, travel, and cooking; they own that content globally. We see food as universal, as everybody wakes up every day and asks, 'What’s for breakfast, what's for lunch, what’s for dinner?'. You can't say that about too much IP, and the opportunity against food and home is a reason we moved into sports in Europe. We have significant IP across the board, and we’re excited about Golf TV because we control the entire ecosystem. We will be investing to build out our offering in multiple markets. 48 weeks of golf content is a lot of consistent engagement with fans. There’s no other company that can manage that globally. So yes, we invest strategically in the Golf TV product, but that's already accounted for, and we think the possibility of showcasing our IP on a global scale is very unique to us. We will make exciting announcements along the way. We want to build awareness and we believe we have a great investment strategy in place to drive global interest.

Jessica, to add on the financial impact, it’s going to be loss-making initially. Given the structure that David laid out with seven markets coming online in 2019 and then the staggered roll-out globally over the next couple of years, it’s going to be a very small number hitting our P&L. We’ve been investing at a run rate of about $50 million per quarter in P&L investments, covering those investments as well. So it’s manageable and you can see we've been able to invest without major drain on our performance.

Thank you.

When you consider the superfan IP company, this is reflective of the vision we set five years ago, driven by John Malone, asking what do we have that people will watch when they could watch anything? We own this great IP and can take it to the FANG companies or regional providers. We will showcase a collection of content that appeals broadly to audiences and highlights histories around diverse cultures.

In terms of the outstanding U.S. advertising number underlying 8% for Discovery, if you decompose that into individual parts, the underlying Discovery was 8%. The delta between pro forma and the Discovery standalone is Scripps Networks, which performed well at 5%. Then we had some ratings-driven weakness on OWN and some slight declines in Motor Trend/Velocity.

Thank you.

Thanks. Good morning. David or Gunnar, I'm curious, when you think about Discovery GO, I know it contributes to your advertising revenue, but as a technology platform and set of data potentially analytics, what are you doing with that or what can you do with that insight into driving better monetization across linear and maybe better marketing and smarter programming decisions? Is that a tool that you think you can use to have a broader impact on the business, given it's a scaled data set of real-time viewing that you haven't had in your traditional business?

Thanks, Ben. The most important part about GO is it tests a simple question. Because of skinny bundle issues in the U.S., there are a lot of younger viewers who aren't watching TV or are not oriented to a living room set. How appealing is our content to that generation? When we look at the scale of young demos spending time with our GO apps across our brands, it’s compelling. We're doing original content for the GO apps. I think we’re further ahead than anyone else in this space because we have content that people love. We can see how long they watch, what they watch, and that helps improve our marketing efficiencies. The GO apps are starting to generate significant value for us and will continue.

That makes sense. That's very helpful. If I could just ask one follow up on your DISH agreement. I know you don’t want to talk specifically about a single deal, but Charlie Ergen alluded to some more stuff in that partnership. In the skinny or traditional world, could you just talk about the type of innovations around packaging or distribution that a platform like DISH and a company like Discovery could bring to the market? There seems to be more in that deal than we are aware of so far.

First, there are a lot of elements to every deal, but Charlie is very creative and clever. He was the first player to emerge with Spanish-only content and created a huge amount of asset value. He’s entrepreneurial. He looks at WHA and realizes our content will help him grow Sling's overall value and make it more competitive. There are various ways we can partner, including taking advantage of our international content and offering it in different languages; leveraging our local assets and IP that will appeal to specific demographics in U.S. urban areas, for example. It's about exploring options and new services with a platform like DISH.

That's really helpful. Thanks, David.

Thank you. I had a question on the outlook for your networks. Specifically, we've seen such strong performance at TLC. I wonder if it’s mainly the 90 Day Fiancé or if there are other popular shows behind that. Just trying to get a sense of how that strength can continue. And any color you might give on the recent sort of weakness we've seen at the flagship Discovery Channel. Lastly, I guess any further color you could give on the domestic advertising market, looks like it’s really strong. Maybe you could give some color around scatter. Thank you.

TLC is strong across the board, but 90 Day Fiancé has been a standout. It’s massive and sustaining high social engagement, other shows are doing well, too. ID is thriving, Travel is up, HG has turned around. In terms of Discovery Channel, October was challenging; however, we've got an exciting new show launching soon in December called BORDER LIVE that gives us optimism. Our inherent advantage puts us in a good place. Broadcast is down 8% or 9% while we were up 1% last quarter. Even if we can be down 1% while everyone else is down, that increases our share of television.

The scatter market trends have been consistent recently. Pricing is up high teens versus upfront and high-single to low-double versus the prior year. This has been a consistent pattern over past quarters.

Thank you.

Oh, hi. Thanks very much for taking the question. Two, both related to sports. One, starting in Europe, I would love to hear your latest thinking on reconciling all the investments you've made behind Eurosport and acquiring sports rights across the continent compared to the affiliate fee and advertising growth rates you're seeing in your International segment, which are low-singles. How do you reconcile those two points?

When you look at a bid for Sky trading at 17 times, we have a strong business across Europe. We're the leader in sports, having multiple sports channels in every country. The return has to do with the overall asset value. If one aggregates the type of IP we have across Europe, it's low-single digit aggregate profit growth. We are broadening how to maximize these sports rights. We are getting smarter about how we do this. We have been able to grow our affiliate line, and we expect to see acceleration in the coming years. It’s a significant undertaking, aiming to reach sports fan communities across mobile and broadband platforms.

Just one more point on ROI; two things to note. Low-single-digit growth is against an elevated level driven by sports rights. Second, we see significant OIBDA improvement and margin expansion at 27%. We continue to see significant costs and margin improvements in the International space.

Thank you.

Thank you, Todd.

Thanks. I just wanted to follow up more on your comments on the Golf TV proposition. I understand the PGA rights you have do not include the majors. Is there an attempt now to buy rights for majors like the Ryder Cup and European Cup to create a more comprehensive offering? Secondly, can you summarize the performance of your GO products and how fast they’re growing?

The attractiveness of Golf TV allows for diverse content throughout the year. We have great IP with substantial content, mostly in real-time and primetime globally. Many see the unique opportunity with our ecosystem. As we build out Golf TV, engagement with fans for 48 weeks of great content is compelling. We believe we can manage an integrated approach and attract even more markets in the coming future.

We have seen significant growth in GO products and those revenues contribute meaningfully to our portfolio. While we don't single out percentages, revenue from those streams is beneficial, and we’re excited about the pipelines leading into 2020.

Thank you very much.

Thank you. Two questions, one for David and one for Gunnar, following on the idea you're now above the globe. David, do you think the next set of global sports rights like the NFL and Olympics will be able to command above-the-globe bids? Will bidding trends eventually go up for these larger contracts? Then I have one for Gunnar.

Disney can go above the globe with their kids' content, but we’re one of the few companies that can truly do this. We are deeply invested in IP and committed to building this above-the-globe platform which will include our strong sports offerings along with others. We are looking for content that has globally broad appeal and we will explore how we can aggregate this content and attract new audiences for diverse platforms. This requires careful planning and strategy.

Okay, thank you, David. And then one for Gunnar. Can you help me quantify what the Bundesliga deconsolidation was on the expense growth? Also, how do you think about the scaling and speed at which you’ll get cost out of International? It feels like it may take longer.

For the Bundesliga, there was about a $20 million impact. Total International adjustments showed solid OIBDA growth. We are very happy with the speed of achieving cost reductions internationally and our teams have managed to streamline operations. OIBDA continues to verify the underlying growth, and we will keep managing costs through increased efficiencies.

Okay. Thanks.