Warner Bros. Discovery, Inc. (WBD) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Discovery Communications Earnings Conference Call. My name is Derrick, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Craig Felenstein, Senior Vice President of Investor Relations. Please proceed.

Thank you, Derrick. Good morning, everyone, and welcome to Discovery Communications' First Quarter 2011 Earnings Call. Joining me today is David Zaslav, our President and Chief Executive Officer; Peter Liguori, our Chief Operating Officer; and Brad Singer, our Chief Financial Officer. Hopefully, you've all 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 Brad, after which, we will open the call up for your questions. 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 Form 10-K for the year ended December 31, 2010, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I'll turn it over to David.

Thanks, Craig. Good morning, everyone, and thanks for joining us. In a few moments, Brad will take you through Discovery's strong financial results for the first quarter. A great start to the year, building upon the solid growth we delivered throughout 2010. And demonstrating the sustained operating momentum we continue to generate across all aspects of the company. Our gains were spread across networks and geographic regions, with double-digit revenue and OIBDA growth at both our International and Domestic businesses. And the top line growth again, was well-balanced with ad sales up 16%, as we capitalized globally on the robust ad environment. And affiliate revenues were up 8% as we took advantage of our unique market position around the globe. The backbone of Discovery's growth remains the strength of the company's content and brand portfolio. As I have said in the past, we will continue to invest in content to ensure we deliver the highest quality programming to our subscribers. We're investing in content more efficiently and more strategically than ever before. And at the same time, tightly controlling all other costs that don't end up directly on the screen. This approach remains the core of our strategy. Our long-term investment in content is paying real dividends for many of our networks, both in terms of ratings and advertising dollars. Domestically, this past quarter, we built upon the 7% prime time viewership growth among adults 25 to 54, that we delivered in 2010 by increasing viewership 6% across our U.S. Networks. The biggest growth story this past quarter was once again ID, Investigation Discovery, which delivered the best quarter in the network's history. Viewership increased nearly 50% among adults 25 to 54, sustaining its position as the fastest-growing cable channel in America. ID now has 8 shows delivering over 1 rating, including On the Case with Paula Zahn and True Crime with Aphrodite Jones. ID's viewership will be further strengthened this year as we increase its distribution to 80 million homes by year-end. And with increased distribution, sustained ratings momentum and upside opportunity in pricing, we expect ID to deliver significant ad growth in 2011. We also had a great start to the year at our flagship network, the Discovery Channel. Viewership on Discovery was up 4% in the quarter. And what makes the first quarter growth so gratifying was that it was led by 2 new hit series, Gold Rush and Flying Wild Alaska. They combine Discovery, the highest-rated network in all of cable for men on Friday nights, and both are scheduled to return later this year. These are only 2 of our new series slated to return in 2011. We are also bringing back Auction Kings and Sons of Guns for second seasons. In fact, out of the 12 shows we premiered over the last 6 months, more than half are already scheduled to return for second seasons, a very healthy success rate. At the same time, our existing hits are performing well with returning favorites, Deadliest Catch, MythBusters and American Chopper, delivering very strong ratings in their latest seasons. The ratings comparisons in the second quarter will be skewed a little by the special series, Life, which aired a year ago. But with new series performing well and a great slate of returning hits, Discovery is poised to maintain its ratings momentum and deliver ad growth throughout 2011. Our second flagship, TLC, is also performing very well. It remains a top 10 network with ratings this past quarter up 4% in its key women demo led by Say Yes to the Dress and Cake Boss. With 14 series delivering over a 1 rating this quarter and several promising new shows including Extreme Couponing, which is 1 of the top 5 shows for women launched on cable this year, TLC should continue to deliver strong ad growth. We also expect advertising gains at all of our other domestic networks, including Science, which had its best ever quarter, delivering ratings growth of nearly 20%, as well as Animal Planet, which is focused on restoring the ratings momentum they've established over the past 2 years. Animal Planet enjoyed a strong performance from the return of River Monsters earlier this month, and we look forward to the return of Whale Wars in June. With a balanced portfolio of high-quality programming and our audience share expanding, we were able to grow domestic advertising 15%, excluding Discovery Health. Not only does this give us a great start to 2011, but it puts us in a great position heading into what is sure to be a robust upfront. We recently completed our upfront presentations, and while it is difficult to predict where the upfront market will ultimately end up, with scatter volumes strong, scatter pricing well above last year's upfront, ratings momentum across our networks, a strong brand portfolio and the best ad sales team in the business, we fully expect to see significant increases in this year's upfront. At our upfront presentations, advertisers continue to express their enthusiasm about the potential of OWN: THE OPRAH WINFREY NETWORK. For the past 4 months, the network's focus has been on establishing its voice while working to build its original content. Since its January launch, OWN has premiered 14 original series, including Our America with Lisa Ling, which has already been renewed for a second season, and The Judds, which premiered earlier this month to 1.7 million viewers. As with any new cable channel, some content is working while other programming has not connected with an audience. OWN continues to invest in new programming, working hard to create compelling content. We're optimistic that the ratings at OWN will build throughout 2011, with 21 new series set to debut, including Why Not? with Shania Twain next month and we have Rosie and the Oprah 25-year library coming in the fall, and of course, with Oprah's broadcast show coming to a close, we couldn't be more excited that Oprah and her team will be turning their full attention to OWN. We also continue to make progress at The Hub, our joint venture with Hasbro. The Hub also completed its upfront presentations to advertisers recently and the feedback has been very positive, and the line up of new and returning shows are good. Lastly, on the domestic front, we recently took several strategic steps to further build market position. In collaboration with our partner Sony and IMAX, in February, we launched the first-ever 24-hour 3D network on DIRECTV. It is still early days from a consumer perspective, but this channel fits with Discovery's business strategy of delivering groundbreaking content through new platforms and technologies. Our other recent strategic initiative was the announcement of our upcoming re-brand of HD Theater into Velocity, an upscale male lifestyle network. Velocity is another step in maximizing the value of each of our cable platforms and will be a hub for viewers within this key demographic, as well as the many advertisers that target them. Building new brands and capitalizing on our channel space is not unique to the domestic market. We have launched several new channels internationally, including our strategy to make TLC the most widely distributed female network in the world. And we're off to a good start. TLC is now in over 73 million homes, well on its way to our goal of over 100 million homes by the end of this year. More importantly, audiences seem to be engaged by its content offering. We're still in the early stages, but the initial rating signs are very positive, including TLC ranking as the #1 network for women in Poland and the #1 international travel and lifestyle channel in Asia Pacific. Building a strong female network internationally is just part of our strategy. I just returned from Latin America where I visited Brazil, Chile and Argentina, and saw first-hand how well our focus on further expanding our reach and ramping up viewership through bigger brands and stronger content is paying off. In Brazil for example, we have 11 channels, including Discovery Kids, which is the #1 Pay TV channel in all of Brazil. Not the #1 Pay TV channel for kids, but the #1 Pay TV channel in all of Brazil. And with Pay TV pitching only around 20% in Brazil, as that market expands, we will continue to grow. Overall internationally, our subscribers grew 15% versus the first quarter a year ago. And we leverage that growth into affiliate revenue gains of 8%. The strength of our international platforms allows us to capitalize on the continued penetration of global Pay TV, with growth this quarter led by Latin America and Central and Eastern Europe. Affiliate revenue growth is only a part of what stronger distribution brings us. Combining this larger addressable audience with a more robust programming offering has resulted in rapid audience growth. And this increased viewership is translating directly into ad growth, with advertising up 19% in Q1 after growing more than 20% in 2010. This is key for Discovery. Our continued investment in original programming and strengthening our brands over the last several years is clearly working, paying dividends, both domestically and internationally. It is important to note that despite this investment, we continue to deliver margin expansion and free cash flow growth as we capture a bigger percentage of the ad dollars that come from increased ratings and reach. Margins expanded by more than 300 basis points versus a year ago to 45% in the first quarter, and we fully expect margin expansion for the full year despite the increased content expense, as our amortization catches up with our cash spent. As we invest further in our organic growth, we also remain committed to thoughtfully allocating the capital we generate. We expect to deliver over $1 billion of free cash flow this year, and we continue to seek value-enhancing opportunities while also returning capital to shareholders. So Discovery is off to a great start in 2011. The growing strength of our brands and distribution platforms have enabled us to expand our market share globally, while the strong economic climate has provided us a great opportunity to reap the rewards. Moving forward, we remain focused on building stronger brands and better content that will provide long-term value, while at the same time, delivering real operating leverage and free cash flow growth. And with that, let me turn it over to Brad.

Thanks, David. Discovery began 2011 with robust operating results during the first quarter as the favorable advertising environment enabled us to enjoy global double-digit ad growth. Total revenues increased 9% compared to the prior year, led by 14% international revenue growth and complemented by 8% domestic growth. Please note that our 2011 results do not include the Discovery Health network. Pro forma for the de-consolidation of $18 million of Health revenues, our total revenues grew 12%. Our total operating expenses in the quarter increased 4%. Excluding the impact of foreign currency, $20 million of lower content impairment charges, operating expenses increased 6% compared to the prior year, primarily due to higher content amortization and personnel costs. Our ability to continue to grow revenues in excess of our expenses enabled us to increase our adjusted OIBDA by 17% to $427 million compared to the prior year. Excluding the impact of foreign currency and lower impairment charges and the de-consolidation of the Discovery Health, adjusted OIBDA increased 14%. Net income increased 80% to $305 million, reflecting our improved operating performance, and the $102 million net of tax gains as a result of contributing Discovery Health into THE OPRAH WINFREY NETWORK. The gain was driven primarily from the low historic carrying value of our contributed assets. Our free cash flow increased significantly to $206 million in the first quarter due to the improvement in our operating performance and lower tax payments. Turning to the operating units, our U.S. operations delivered another fine quarter. Domestic revenues grew 8%, with 9% ad revenue growth complemented by 6% affiliate fee growth. Excluding Discovery Health from the 2010 results, ad revenues grew 15%, and distribution revenues grew 7% compared to the prior year. The substantial ad growth was due to the strong performance of our domestic ad sales team and the continuation of favorable pricing and demand environments. The attractive current market conditions continue to exist in 2011. And we anticipate our second quarter domestic ad sales performance to approximate first quarter levels with positive or negative variability from our ratings performance. Our domestic operating expenses were flat with the prior year. Excluding the lower content impairment charges, our domestic operating expenses increased 8% to reflect the higher level of program reinvestment of the past several years, and our SG&A expenses declined modestly due to the de-consolidation of Discovery Health. Our domestic adjusted OIBDA increased 14%. Excluding the impact of Discovery Health and the lower content impairment charges, adjusted OIBDA increased 10% from the prior year. Turning to our international operations. Revenues increased 14%, led by a 19% increase in advertising and complemented by an 8% increase in distribution, excluding the impact of favorable exchange rates compared to 2010. International ad revenue growth was driven by significant growth in all of our regions, with each contributing at least 15% growth compared to the prior-year first quarter. Our international distribution revenue growth was led by the strength of our Eastern European and Latin American operations. Excluding the unfavorable currency impact to our expenses, our operating costs were up 6%, primarily driven by the timing of our marketing expenses, as well as higher content amortization and sales commissions. Excluding the foreign currency impact, our international operations increased adjusted OIBDA 20%, as our international team continued to grow revenues while thoughtfully investing in their operations. As we look forward to the remainder of 2011, we are encouraged that the improved pricing and ad trends we've experienced over the past several quarters have continued through April. For the full year 2011, we are refining our forecast and raising our revenue and adjusted OIBDA expectations by $25 million. We anticipate revenues of $4.025 billion to $4.125 billion, and adjusted OIBDA of $1.85 billion to $1.925 billion, primarily driven by our revenue growth. We expect overall adjusted OIBDA growth of mid-single digits for the second and third quarter due to domestic revenue increases being offset by the increased costs of domestic content amortization, as we have previously discussed, and the timing of certain SG&A expenses, with the resumption of double-digit adjusted OIBDA growth from the fourth quarter. Our net income is expected to increase to $1 billion to $1.075 billion, reflective of the noncash gain from contributing Discovery Health to the OWN joint venture. During the first quarter, we invested $224 million in strategic initiatives, and thoughtfully returning capital to our shareholders. Included in that is the $57 million we invested in THE OPRAH WINFREY NETWORK during the first quarter. While we have made progress with OWN, we believe based on the current business expectations, we will fund in excess of our prior $50 million incremental estimate. The funding level will be reflective of our ratings progress of the next several quarters. In the first quarter, we purchased 4.73 million shares of Series C common stock at an average price of $35.20 for a total purchase of $167 million. As we consider our current strategic investment initiatives and the potential funding requirements, we will likely increase the rate of our repurchase activities in the future. Before I finish up, I want to invite all the New York investors and analysts to TLC's Royal Wedding Viewing Party in Times Square, starting at 5:00 a.m. on Friday. I hope everyone tunes in to the return of Deadliest Catch on Discovery and Whale Wars on Animal Planet, and our new series, New York INK, on TLC and BEHIND MANSION WALLS on ID. David, Peter and I will now be happy to take your questions.

[Operator Instructions] And our first question is coming from the line of Jessica Reif-Cohen from Bank of America.

I guess a couple of questions. On international, Europe's been cited as falling down in the current quarter. Are you seeing any of that? And on your subscribers internationally, there was a little bit of a disparity between the subscriber growth and affiliate revenue, so are your deals generally flat fees?

Jessica, it's David. So let me take the first part on growth. We've seen real strength across the board internationally. So we actually grew over 15% in all of our market segments. So it was pretty broad-based and it's continuing thus far. As you know, internationally, we don't do an upfront in most markets so we don't get as much transparency in terms of long-term, but we aren't seeing any real softness. We're seeing strength pretty much across the board. In terms of our deals, we had 15% growth and 8% revenue growth. Part of that has to do with -- depending on the market, we don't speak about whether how our deals scale up, but in some markets where there's a lot of growth, we might have deals where the rates are lower and so that's what -- some of what you're seeing is that we're getting bigger growth in some of the emerging markets and some of those markets, the economics aren't as compelling.

And then just one last question. Brad just mentioned that you'll probably invest more in OWN. Can you give us any range in what the timing might be?

Jessica, if you look at where we are today, we're about $215 million of refunded through the first quarter, and that includes the $57 million. Our investment will be dependent on the progress of the ratings over the next several quarters. We are committed to the success of the assets and are confident that this is in the long-term success. But what we will do is evaluate our fundings, ensure they are appropriately weighed in either the joint venture with the long-term profitability expectations in network, and ultimately enhance the shareholder value. And that's how we think about it. It's not a 1 or 2 quarters, it's over a decent period of time.

And as we look at the network, the ratings have not been, out of the first few months here, they've been below our expectations. And so we've been digging in, we're focused on what does the audience want from OWN, we're fully committed to the brand. A lot of what we have coming is the strength that we think OWN is, which is Oprah herself. Her show will be winding down and we'll be getting Oprah and her team. We're going to get Rosie who I was with 2 weeks ago. So we have a lot of our stuff coming up, 21 more series. But it has been a slower start. As we said in the beginning, this is, it's a long-term play building a channel. We have a lot of advantages here. A lot of them haven't come to us to the channel yet, but it's going to take us a while and we're committed to it.

Your next question comes from the line of David Bank from RBC Capital Markets.

A couple of questions. You guys highlighted the strength of ID, and I was wondering if you could put the ID -- first off, can you tell us where, if you're going to be in 80 million homes by the end of this year, where you started the year? Second, could you put the ID affiliate fee, currently in the context of where some of the other flagship channels affiliate fees are? And maybe, I realize you can't give that much specifics, but some context around when we could start to see, potentially affiliates, the increases to pay for the, to be compensated for the success of ID?

Well, ID for the past 2 years has been not just the fastest growing cable network in terms of ratings, but the distribution team, which Bill Goodwyn heads up, has done a great job of driving the distribution. In the beginning of the year, we were at 70 million. And last year, we grew faster than anyone and by the end of the year, we had commitments to be in over 80 million. It also was a pretty good economic model and that the cost of the content compared to some of our other bigger channels is less. And the hit rate, which Life running it, has been quite strong. And so we're seeing real momentum. We can't really speak to the economics of the distribution, but we are beginning to be able to really monetize the value of the advertising. And when you hit 70 million, it's a big deal for the advertising community in terms of distribution. And when we hit 80 million, we think it's going to be significant. But you look at that channel today, it's the number 27 channel in America, and it has a real disadvantage. There's 20%, 25% of the homes it's not reaching. And within the homes that have it, there's still, the majority of the people don't know it's on their system. So we think that there's a lot of upside and in the near term, it'll be mostly be advertising driven because our deals aren't enough for a while.

Your next question comes from the line of Mr. Michael Nathanson from Nomura.

One for David, and one for Brad. David, just given the broad base of business you guys do in U.S. advertising, I wondered if you can talk a bit about second quarter scatter in terms of categories. Is there any weakness or strength that surprises you in the second quarter? Because, as you know, folks are kind of worried about either auto in Japan weakness or CPG and kind of [ph] inflations. So if you could give us your broad view on what's going on by categories in the second quarter?

Okay, well, let me address it by going through the first quarter where we saw strength pretty much across the board. The autos actually, were quite strong, and that may be a reflection of, you saw Ford's earnings earlier this week or late last week, but the autos across the board have been strong financials. All the categories are consumer electronics, everybody is in. So we're seeing some real strength. As Brad said, it's continuing through April. And we're going into our upfront, we'll have to see how that goes but everything feels right now like at least at this moment, it feels like it's going to be, we're hitting upfront at a very good time for our company because our channels are growing, our viewership and market share is growing, but we'll have to see with how it plays out over the next 2 months.

And in terms of the auto potential disruption, is there any -- how far ahead can you see that? Is there any signs of people worried about supply disruption therefore they're holding back on the auto side?

So far, we've seen nothing. In fact, the autos have kind of been a leader. Having said that, we don't have anybody, no category for us is over 11% of our overall advertising revenues. We're pretty well scattered.

Okay. And then for Brad or for both of you guys, your international margins keep going higher and higher, it's pretty amazing. We wondered which regions do you still have that, you say are below average margins that you're targeting? And in which regions have the source of the bulk of this improvement over the past couple of years? So if you could give us a sense of by-market we see have margin opportunity?

The greatest margin opportunities is the markets that have the lowest level of ad sales. In the U.S., our ad sales actually exceed our affiliate sales. Internationally, our affiliate sales are the dominant form of revenue, right? It's usually 60%, 70% or even more percent depending on the region. And so in Latin America, in Asia, in Eastern Europe, we have lower levels of ad sales, and that's where you see the margin expansion opportunity are the greatest.

Okay. And for the sources of the growth recent years, it would be the markets where you grew advertising the fastest [indiscernible] so Latin America would be a big source of margin improvement?

As well as faster subscriber growth.

Your next question comes from the line of Doug Mitchelson from Deutsche Bank.

. So a couple of clarification to the question, the 2Q ad sales comment where it's in line with 1Q depending on ratings variability, should we take that to mean that's excluding the tough comparisons against Life? Or do other programs need to make up for Life to get 2Q ad sales in line with 1Q?

I think it's meant to be -- we grew around 15% in the first quarter. And the second quarter, who is on a comparable trend, despite a tougher comp in terms of even, you're to going up against the 13% increase the prior year, we still think we'll have a nice mid-teens kind of growth rate. But we have to deliver the audience over that period of time.

Right. So it's really more audience the rest of the quarter?

Yes.

And then international, you mentioned subs grew 15% but you saw your revenue grew 8%. I understand sort of the mix issue there as you grow lower-priced subs in emerging markets, but is that a number that over time you think levels out?

Well, Doug, there's a couple of things that went into that. Part of it's David's spot on it. The mix issues, where the subs are coming from, played a big role. We also, if you remember last year, we went in one market in particular, we went nonexclusive. So what we've made up a little bit, and a decent amount in advertising went to a free-to-air product in one of the markets. And so we swapped affiliate fees for advertising so to speak. That shaved off a couple of hundred basis points of the growth rate if you would have added that back. And that will play about over the course of this year.

And just to build on that, that was realtime in Italy. And we took it to a -- made it a broadcast platform, a female channel, and it is now 1 of the top 10 channels in Italy. And we've had some real success in getting ratings and we've had some good success in monetizing it. But as Brad said, that was a channel that we were paid for. But we think in the long term, that could be a bigger channel for us with this configuration.

. And then a question for David, just on the TLC launch, you're making it look relatively easy because you're getting to 70 million homes very quickly. And I'm talking for the 100 million, but I'm sure, it's not all easy. How much of this is taking channels that you already had and just flipping them to the TLC brand of programming versus trying to garner a new carriage? And to the extent that you're out there getting new carriage, what's the model behind that? Do you pay upfront for carriage? Or are these distributors pretty excited that you're coming along with TLC?

One, we don't get into details on these deals, but we don't -- we're not paying for any upfront, for any carriage. It's a mix of both, Doug. We have a lot -- as you know, we have between 5 and 6 channels in 210 countries and so, we do have an advantage. We know just by taking channels that were underperforming, that we can flip those into TLC, and we've done that in a number of markets. But we also -- because we're on the ground with real relationships in a lot of these markets, for instance, in Poland, when we launched TLC, one of the reasons it's the #1 network for women in Poland is we were able to really drive the distribution of it. We went in and sold in the fact that we were going to go hard at a strong female network, and we were able to take a channel that had about 60% coverage in Poland and pick up the remaining 40%. So we have now a fully distributed channel. So in some cases, we're flipping. In some cases, we're enhancing the distribution we have with the channels, and in some cases, we're launching a new channel. But we're actually a little bit ahead of schedule with 72 million, so we should, by the end of the year, TLC should be the #1 most distributed women's brand in the world. And that sounds great, but we got some work to do to make it a strong channel that women affiliate with around the world. I would just add that it's a little bit of a different model than Discovery and Science and Animal Planet. And we went into it, understanding that we're probably going to need, that we will need more local. And the positive for us, and it's early, but the positive so far, is that more of the U.S. content is working than we thought. Because we kind of looked at TLC and saw it as a more of an American culture channel, it wouldn't travel as well. So more is working than we thought, not knowing near as much as we use of Animal Planet, Science and Discovery. But also, local content, the production, the cost of it, has been really manageable or lower than we expected. And so far, the channel's doing quite well. So it's early days, but it's very encouraging.

Your next question comes from the line of Spencer Wang from Credit Suisse.

Two questions. The first is heading to the upfront, it seems like the NFL situation could add some complexity onto this year's negotiations as advertisers think about contingency plans. So I was wondering if maybe David or Peter could just talk about the opportunity for Discovery should advertisers be looking at contingency plans? And then the second question is on authentication, and if David, maybe you could share your thoughts on authentication. Most of your deals seem to be on a trial basis, so are you waiting for affiliate renewals to ink longer-term deals?

Spencer, it's Brad. With regard to the NFL, I think we'll have to see how that plays out. I think whatever does happen, it's not a long-term impact, unless the NFL ultimately goes away, which I don't think anyone would ever think that would ever happen. So I think that is more wait-and-see. NFL will play itself out over I'd say, over the next several months, and we'll see what happens.

Spencer, no one's selling against it, so to speak. Everybody's aware of it, but no 1 is presenting themselves as an alternative to the NFL. I mean, we're confident in our audience and what we deliver and that's where we're sticking with.

On the authentication piece, it's a very interesting moment to be in the content business. We own all of our content. And historically, we've built strong relationships with the traditional distributors, and the content was consumed on the set. What TV Everywhere and some of these new platforms are presenting is an opportunity, as people consume content on different platforms, for us to have additional discussions about making our content available, whether -- right now, we're available on the TV, on the authenticated tests with Comcast and Time Warner. But as TV Everywhere becomes broader and as some of these other platforms become more meaningful, those are all opportunities for us as a content owner to talk about getting more value for our content. So it's a good moment. A lot of these business models have to really shake out. But it presents, I think, some upside opportunity for all of us in the content business.

Your next question comes from the line of John Janedis from UBS.

Can you guys speak to a couple of things. First is on programming at OWN, should we expect a ballpark of 600 hours or so in terms of content programming for the year? And did that change maybe from a quarter or 2 ago?

No. There hasn't been any changes, Peter, hasn't been any change. We do have a long-term plan. And roughly, I would look toward about 400 hours of original programming between the beginning and the end of the year in prime.

And, David, can you talk on audience broadly? It just feels like this season is one of the weaker ones we've seen from a combined broadcast and cable perspective. And when you look at the ecosystem more broadly, do you view the decline as a content or timing or programming issue? Or do you think maybe the consumer habits are at the crust of longer-term change?

Well, look, there's been a rotation, I think, off of broadcast to cable for a long time. And then cable, the overall viewership of cable over the last year has kind of flattened. And clearly, I think behaviorally, people are spending more time on with cable brands that they trust. And cable, the difference between cable and broadcast to viewers has narrowed. And in fact, a lot of the great original content now, a lot of the great talent, a lot of the great producers and writers have moved to cable over the last couple of years. And so, there is a -- that presents really a good opportunity for us because there's still a significant differential between the CPM on broadcast and cable, to a 30%, 35%, 38%. And when you can deliver big audiences -- there was some Friday nights when we had Gold Rush and Flying Wild Alaska, we're not only with Discovery, the #1 network for men, but it was the #1 network period that night. And so if we can deliver really good audiences with good stories on TLC on all of our channels in a good advertising environment, the ability for Joe Abruzzese and the sales team to go out there and talk about the fact that you can buy us, you could buy a tighter audience, and it's a big audience, and you can give us a very good price, but you can pay less than broadcast is an advantage. So trend-wise, I think at least at this point, it seems pretty flat on the cable side, but we've been able to -- we grew 7% last year. This year's 6% so far. I think it's because we're focused on making our channels stronger.

And maybe one last quick one. Can you just talk about the HD Theater re-branding of Velocity? What are the viewing conception habits of that target audience relative to the less affluent demo? And how large is the target audience?

Well, the difference in the 2 is we're going to be focusing more on upper-income men's lifestyle. And that will lead us more toward higher-end cars, car auctions, certain travel, certain lifestyle aspects. How big is the audience? We haven't painted a specific number because obviously, it's not just those people who are in that income range, but those people who aspire to be in that income range. So we do think it's a, got strong potential for us. Scammers [ph] is doing a good job of creating programming and really targeting in, not only on that demographic, but that psychographic as well.

Your next question comes from the line of Richard Greenfield from BTIG.

A couple of questions. One, just following up on David's question at the beginning, related to ID. I think you've said publicly that 75% of your cash flow kind of comes from your 2 major TLC, Discovery networks in the U.S. Can you, in some way, frame for us the contribution for an ID? Just to get a sense of as this starts to actually really gel, I mean, I know you would not like comment on affiliate fees, but what is the kind of relative profitability of an ID relative to your major developed networks in terms of a multiplier? And then two, I think you've got about $3.2 billion of net debt at the end of the quarter. You're talking about nearly $2 billion of EBITDA for the year. Obviously, that leverage is well south of 2x, and it seems like you've talked to a leverage target longer-term of 3-plus. And so, how do you just bridge that for us? How long do you stay so far below your target leverage? And any color would be helpful.

Sure, Rich. It's Brad. I'll take both questions, and let me take the second one first. With regard to how we're looking at our capital deployments, in my remarks, I highlighted that we will likely be accelerating our stark pay to share repurchase when we take into consideration what we see right now in the strategic environment. And so we had always taken that into account. And based on where we are today, you will see us deploy more capital at a higher level as we move through the year than we have in the past. So that will move us up in terms of deploying the cash we generated potentially, also depending on where or how much we spend, what we do with increasing our current position of leverage. With regard to ID and profitability and just to frame it, we still have the -- significant majority of our cash flow does come from the 3 fully distributed networks. ID is right now, a fraction of those networks. It's a young network, it's had its success for a year. We've done a very good job, our ad sales team is building the revenues from the tenths of millions to over $100 million this year. And our leader, and Henry Schleiff, has done a great job with his team delivering that audience. Over time, as it keeps growing, that should become over $100 million as those should keep progressing up to reflect the audience that it's delivering.

It takes a while for the catch up of -- you can't just take a CPM and double it. So the ratings have been growing. It's a process and it takes some time, domestically and around the world, not just with ID, but as we launch our channels. It takes some time to build up. So the audience is growing and our CPM is growing but -- and our team's doing, I think, a great job. But the full potential of our CPM, we think is significantly higher than where it is right now. But it's going to take a while for the market to catch up with it.

And as you look at our ad sales, the 15% growth rate, several hundred basis points of that growth is attributed to ID. And so you're seeing it play itself out right now in the ad sales line. And that will keep moved up. That we expect as we move forward this year and in future years, that will continue.

Your next question comes from the line of Ben Swinburne from Morgan Stanley.

Good morning, David. Can you talk a little bit about the rate volume mix in the 15% ad growth, or Brad, in Q1? And I'm also curious how much you think you're benefiting from the broadcast? And we heard from some of the broadcast companies that they've had some cancellations of auto, upfront buys, but they've been able to resell that at higher rates. I'm wondering if you're seeing a sort of a general acceleration in the slowdown to Discovery from broadcast because of ratings issues or any other things you'd want to highlight?

Ben, with regard to the mix, in the domestic, about 3/4 of the increase was pricing, 1/4 of it's volume in terms of the sellout. And that's how the quarter played itself out. With regard to what the broadcast, what the inventory position is and how that flows to us, it's a pretty firm scatter market so we've indicated there is some element of inventories being tight. So that's what I would say beyond just like any specific network or any work that broadcasters in general.

All of us have benefited over the last year-plus when the broadcasters end up having big make-good issues because their audience share is going down. It benefits all of us because it tightens up the market, and as I said earlier, that spread, that 35%, 40% spread gives mix -- the dollars can't go to broadcast and it gives us, Joe and the team, a chance to pick a lot of that up. And it's true I think for all of cable to get the benefit of that.

And just one follow up, David. I don't know if you're willing to comment on the U.K., either Q1 or just in general, if the market -- where the economy is sort of retrenched. The austerity measures have had an impact. I know that how you are sold in the U.K. is unique, but I just want any comment on how that market's performing for you.

Well, the U.K., there's 2 pieces to it. One is that the U.K. really dipped. And so we have a little bit of a CAGR that makes us feel really good because we're coming off a tougher base. Having said that -- and then you have the issue there that the way advertising is sold in almost every market in that year. And the way that it's sold in the U.K., there's a hesitation. You lose, you're actually selling, you get your ratings value in the next year. But the market has been, in addition to the CAGR issue, has been pretty strong for us. And some of it has to do with the fact that we now have 14 channels there. We got broadcast channel in Quest. Our overall viewership numbers in the U.K. are up. But the market itself is pretty decent. And so it's those 2 factors. The fact that it's comparing with the low-end number and the fact that we've actually done pretty well. And the market, it feels pretty good. It's a market that we weren't expecting a lot from, and it feels pretty good for us this quarter and it performed well.

Your next question comes from the line of Anthony DiClemente from Barclays Capital.

Speaking of the U.K., thanks for the invite to the royal wedding party. I'm just wondering if you guys could send out specific details on that as soon as possible.

It's at 47th and Broadway. Door is open, I think, at 5 a.m.

That's a.m., not p.m.

Brad, Reuters had reported a couple of weeks ago that Discovery was looking at ProSieben's Nordic TV assets. And so if you could just remind us, I don't know if you'd be willing to comment, just remind us of your M&A strategy, your M&A philosophy, and where you're spending the most time in terms of M&A.

You could take a look at our balance sheet and see that we, as Brad said, we're going to be buying back more stock. We would like to invest some of that money to strategically grow, primarily, I guess our focus, our first choice would be outside the U.S. We have, we think, the best international platform business in the world. We have -- we're in 210 markets with 6 channels. The good news is that we're growing now by investing in those channels and making them better and launching HD around the world where we lead. But we also look opportunistically for assets. And we don't talk about specific deals, but those ProSieben assets were good dual-revenue stream assets, the majority of them, in a very stable market, Norway, Denmark and Sweden, not a huge growth market, but very stable. And so if we had our way, buying assets outside the U.S. would be the first place we would go, but because we also have good synergy. But we don't want to overpay. And we're only going to buy assets if we think we can grow faster with them. Because we do feel like we have the alternative of investing in ourselves.

And then one follow up, David. I don't think you've mentioned Planet Green and FitTV. I know they're smaller networks, but along the sort of a theme of the HD Theater re-branding of Velocity, have you thought about -- are those candidates for re-branding? Or are those clicking along? Maybe just give us an update.

Well, FitTV is really Health, is now Health. And that's a pretty nice place for us because we had that library. We have all that content. And so putting it on there, there is an advertiser interest in it, and it was really the advertisers that pushed us to keep that going. And so it does well for us. Every 1 of our 13 channels here in the U.S. is profitable. The 1 that we think we could do better with is Planet Green. It's a good platform. The Planet Green concept itself hasn't worked out very well. We think that it's underperforming. And so we're looking at, over the next 9 months, what is the right next step for that platform? What could we do? We're talking to cable operators, we're talking to advertisers, and we'll probably come up with a shift on that, and when we figure out a really good idea.

Your next question comes from the line of Alan Gould from Evercore Partners.

My question's been asked.

Your next question comes from the line of Jason Bazinet from Citi.

Just a quick question for Mr. Singer. On the 2011 outlook, where you raised revenue and EBITDA by $25 million and net income by a bit more, but it includes the $100-and-some-odd million gain you booked in the quarter, what were the other drivers that caused the net income guidance not to move up as much given that includes the gain?

Jason, when we looked at our internal forecast, they actually did move up the same amount as the gain and maybe slightly more. What we did is we moved up the net income only $75 million, just to be cautious in terms of the noncash stock that moves around when share prices, with other share prices around, and as that goes away over time, it's much of an impact this year than it was last year, and it'll be much less next year. But that's how we just put a little cushion in for that.

Your final question comes from the line of David Joyce from Miller Tabak + Company.

I was just wondering if you could update us on your philosophy on making your content available on the incremental screens, given the new proliferation of more apps that are enabling that? If you could just update us there, please.

Sure. And I think this goes to the more global point I was trying to make that, now that there's, you have Netflix, you have the iPad, you got all kinds of tablets, you got consumers now looking to consume content on those platforms. In the next couple of months, there'll be more platforms. Even though the scale of that viewership isn't that significant at this point, it is an opportunity for us and we view it that way. I think we're unusual in that we own all of our content. We have a great library. We have brands that people really feel an affinity for and passionate about. And so we view all those as opportunities for us to work with those companies and with the cable and DDS distributors, whoever wants to figure out how to make content more available, more portable, on different platforms, every one of those conversations is a good conversation for us.

Thank you, everyone, for joining us. We appreciate it.

Ladies and gentlemen, that concludes Discovery Communications' conference call. You may now disconnect.