Warner Bros. Discovery, Inc. (WBD) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Discovery Communications, Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today, to Craig Felenstein, Senior Vice President of Investor Relations. You may proceed.

Thank you, Francis. Good morning, everyone, and welcome to Discovery Communications' Second 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 have 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. We urge you to please keep to 1 or 2 questions so we can accommodate as many folks as possible. Before we start, I would like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our 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 thank you for joining us. Discovery delivered another quarter of strong growth in Q2, maintaining the financial momentum we generated at the start of the year, as well as the strength we exhibited throughout 2010. We once again achieved double-digit OIBDA gains, despite the expected higher content amortization that we previously highlighted. Our focused investment in content remains a strategic imperative as we look to further strengthen our established brands, build new genres and take full advantage of our robust global distribution platform. It's important to note that while our amortization in 2011 is catching up to our cash investment over the last several years, we have only increased our content investment at a compound annual rate of 6% to 7% since 2008, as we remain diligent with regards to success-based investment. Maintaining appropriate cost structure continues to be a priority. So, as we look to grow revenues and build out our content assets, we remain persistent about controlling spending that does not end up on the screen, evidenced by margins increasing to 48% this quarter. Brad will take you through Discovery's quarterly results in a few minutes. But before he does, I'd like to illustrate how our sustained investment in content is translating into stronger brand position and increased financial returns, while also setting the company up to deliver continued robust operating strength in the future. About 2/3 of Discovery's content investment is dedicated to our U.S. Networks, where we are focused on strengthening the brands and storytelling of flagship networks, Discovery Channel and TLC; building new brands and genres with ID, Animal Planet, Science and Military; and filling the creative whitespace with our joint venture efforts in OWN and The Hub. Our investment has allowed us to create a diverse portfolio that appeals to both men and women, delivers real value to affiliate and advertising partners and positions us to grow market share across our networks. This past quarter, ratings were up 6% across our domestic portfolio, and we leveraged those bigger audiences into another quarter of double-digit advertising growth. The biggest engine driving both ratings and advertising gains remains Investigation Discovery. ID is the leading brand for viewers looking for high-quality investigative storytelling and has moved from the # 26 ranked network in the U.S. for women 25 to 54 last year to the 18th ranked network today. It continues to be the fastest-growing network in cable, with prime time viewership up nearly 70% this quarter, driven by the BEHIND MANSION WALLS, True Crime with Aphrodite Jones and Disappeared. ID is now in over 77 million homes and with commitments to be in over 80 million homes by year-end. And when you combine this reach with an audience that has one of the longest viewing times of any cable network, it becomes a great value proposition for advertisers. We also delivered solid ad growth this quarter from our flagship networks, Discovery and TLC. Discovery leveraged the continued ratings strength of Deadliest Catch, as well as the success of several documentaries, which focused on breaking news story such as KILLING BIN LADEN and Mega Quake. Discovery remains top 5 network among adults 25 to 54, and we are excited about the number of new hits we have returning in the back half of the year, including Gold Rush, Flying Wild Alaska and Sons of Guns, which returns for its second season in July and is delivering double-digit ratings gains from season 1. TLC group prime time viewership, 3% this quarter, including 7% in the key women 25 to 54 demo, led by returning series Sister Wives and Toddlers and Tiaras, while also launching several new hits including Extreme Couponing, New York INK and My Big Fat Gypsy Wedding. Gypsy Wedding is a great example of the advantage of having boots on the ground in so many markets like we do. We saw and heard the early buzz the Gypsy series generated in the U.K. We quickly acquired it and brought it to the TLC in the U.S. and are launching a companion series on the U.S. Gypsy community in the fourth quarter. TLC's second quarter momentum has continued after the quarter, as once again, it is enjoying summer success, highlighted by the latest iteration of its Say Yes to the Dress franchise, Bridesmaids. For the month of July, viewership was up 6%, and TLC was the # 2 network in America, behind only USA Network in the women 18 to 49 demo, giving TLC some strong ratings momentum, heading into the second half of the year. While our ad sales growth was led by Discovery, ID and TLC, all of our domestic networks delivered gains during the second quarter, including Animal Planet, which developed several new successful series, including Finding Bigfoot, while enjoying strong performances from the return of River Monsters and Whale Wars. Overall, our sustained investment in content has resulted in a domestic portfolio that was broader and deeper than it has ever been. The size and quality of the audience we are delivering enabled the company to generate another quarter of double-digit ad growth, as well as capitalize on the robust upfront market. In the upfront, we garnered upfront pricing increases in the high single to low double-digit range, while achieving the highest dollar volume in our history. We were also able to generate higher volumes for many of our emerging networks, as advertisers recognize the value of the brands we have invested in. As for what we're seeing today, current scatter pricing remains robust and healthy. And with a balanced portfolio of strong brands that reached both men and women demographics, we are optimistic that advertising revenues will grow solidly for the remainder of the year. At the same time that we focused on strengthening our consolidated channels, we remain committed to growing the audiences at our 2 domestic joint ventures, OWN and The Hub. Last month, we announced that Oprah will take over as CEO and Chief Creative Officer of OWN. Oprah was just with me at TCA last week in L.A., and she in place as CEO already. Oprah has also reunited with the operating and creative leaders from Harpo, Erik Logan and Sheri Salata, who she worked with for many years, and her team is already working on creating compelling content for the network. We now have her creative team in place and a more robust lineup set for the fall and spring, including The Rosie Show, which launches on October 10, plus OWN Your Life, which integrates Oprah's 25-year library, with significant new Oprah content in each episode. In addition, in January, we will launch Oprah's Next Chapter. All in, we are optimistic about the brand strength, content pipeline and ratings potential of the network. We're also encouraged by what we are seeing at The Hub, especially with animated programs. June was the Hub's highest rating month since last December and Margaret Loesch, Hub's CEO, is continuing to make real progress with the new summer schedule. While we see continued opportunity ahead with our established and growing domestic channels, it is the current momentum and potential of our international assets that present a meaningful unique opportunity for us. I think we have built the best international platform media company in the world, and we've done it over the last 20 years. We have broad and deep distribution encompassing over 200 countries and territories, with an average of 5 or 6 channels per market. And we have also a leadership position in high definition, with channels in over 100 countries. We are generating significant financial returns today, while positioning ourselves to take advantage of the evolution of Pay TV in the years ahead. Pay TV penetration continues to grow across the globe, and in most markets, it still has a long way to go before it reaches the penetration levels we see domestically. Our subscriber base, internationally, expanded by 15% this quarter and that translated into affiliate growth of 12% in local currency terms. And while nearly every region exhibited double-digit gains, we are seeing some of our fastest growth in India and in Russia and in Latin America, where Brazil continues to lead the way. Latin America is a great example of a historically under-penetrated market that is delivering real growth. Operators are introducing packages to appeal to the emerging middle class, and our long-standing relationships allow us to ensure distribution on the faster-growing packages in that region. Pay TV penetration in Brazil still has a ways to go, as it is just over 20% of the market. But it's up from only 14% in 2009. And because we have 11 channels in that market, we will continue to benefit as that market grows and evolves. Combining a larger addressable audience across our international platforms, with a more robust programming offering, has resulted in substantial viewership gains. And these additional eyeballs are translating into sustained double-digit advertising growth. With advertising still only making up about 1/3 of our international revenue, we have plenty of room to grow this revenue stream and increase international margins. The breadth and diversity of our platforms also allows us to be nimble to take advantage of market trends and opportunities. There is no better example than how quickly we are building TLC into the most widely distributed female network in the world. We are replicating the strategy domestically of delivering a diversity to our affiliates and advertisers, by offering a strong female flagship to complement Discovery Channel. TLC recently launched outside the U.S. and in Netherlands and is now in over 80 million homes in 34 countries, and we expect to significantly exceed our goal of 100 million homes by the end of this year. At that point, TLC will be the most widely distributed female network in the world. But TLC is not the only content asset we are aggressively building. We are always on the lookout for unique programming opportunities, whether capitalizing on the ability to diversify our distribution across all platforms in Italy with Real Time, which we launched 8 months ago and is now a top 10 network, trailing only the broadcast networks. We're building local and customized channels across India, where we just received approval for 5 new channel licenses. Together, these new initiatives are contributing a significant portion of our ad growth internationally, and we will continue to be opportunistic in taking advantage of the unmatched platform we have assembled. Building new brands and strengthening our content pipeline remains our first strategic priority. But as we said in the past, we are focused on thoughtfully allocating capital. We have a very strong balance sheet and we will generate over $1 billion in free cash flow this year. We will continue to seek out value-enhancing opportunities, whether organically or through adding to our existing asset base, while also returning capital to shareholders. Since last November, we have returned over $1 billion in capital to our shareholders. And with the additional $1 billion buyback just authorized by our board, we will continue to do so aggressively if it is the best use of our balance sheet. Discovery had a great first half of 2011, delivering strong financial results, while simultaneously investing in our brands and platforms around the globe. With the continued robust operating environment, a diverse collection of content assets and a strong balance sheet, we are poised to continue our operating and financial momentum for the rest of the year. Before I finish off, I want to mention that, as most of you know, Brad will be leaving us after the first quarter of next year. He's been a great financial and operational leader, and he leaves us in tremendous shape to build upon the growth we delivered over the past few years together. We wish him the best of luck, and I'll now turn the call over to Brad Singer.

Thanks, David. Discovery continued its robust 2011 performance in the second quarter, and the favorable operating environment enabled us to enjoy double-digit global ad growth and strong international subscriber gains. Total revenues increased 11% compared to the prior year, led by 20% international revenue growth and complemented by 6% higher domestic revenues. Please note that pro forma for the de-consolidation of the Discovery Health Network, which had $21 million revenues in the prior year and excluding currency fluctuations, our company revenue growth remains 11%. Our total operating expenses in the quarter increased 10% compared to the prior year, primarily due to the higher content amortization we highlighted previously, as well as increased personnel cost. As a result of our ability to generate strong revenue growth, we increased our adjusted OIBDA 12% to $510 million compared to the prior year. Excluding the impact of foreign currency and the de-consolidation of the Discovery Health, adjusted OIBDA increased 11%. Net income more than doubled to $254 million, reflecting our improved operating performance and $105 million of losses related to the refinancing in the prior year. Excluding the prior year losses on extinguishing our debt, net income increased over 20%. Our free cash flow increased $242 million to $198 million in the second quarter of 2011 due to the improvement of our operating performance, lower tax and long-term incentive compensation payments and prior year refinancing costs. Turning to the operating units. Our U.S. operations delivered another solid quarter, with domestic revenues up 6%, led by 10% ad revenue growth and complemented by 4% domestic affiliate fee growth. Excluding Discovery Health from 2010 results and nonrecurring revenue items, ad revenues grew over 13% and distribution revenues grew 6%, compared to the prior year. The substantial ad growth was on top of a 13% increase in the second quarter of 2010 and led by the strong performance in Investigation Discovery, as well as the sustained favorable pricing and demand environment. The attractive current market conditions continue to exist in 2011, as we anticipate our third quarter domestic ad performance to be slightly below second quarter levels, due to the tougher 16% prior year comparable performance. Our domestic operating expenses were up 10% from the prior year, with the significant majority of increase due to the expected higher content amortization. On a reported basis, domestic adjusted OIBDA increased 4% versus a year ago. Excluding the impact of Discovery Health and nonrecurring items, adjusted OIBDA increased 5% from the prior year. Turning to our international operations. Our second quarter revenues grew 20%, driven by 25% advertising and 18% of affiliate growth. Excluding the impact of favorable exchange rates, revenues increased 14%, led by a 17% increase in advertising and complemented by 12% increase in distribution compared to 2010. International ad revenue growth was driven by growth across all of our regions, led by western Europe, which successfully launched TLC in several markets and repositioned Real Time in Italy. For the first half of 2011, our International ad revenue, excluding currency fluctuations, grew 19%. This was even more impressive, considering our 2010 first half ad revenues had increased 35%. Our international distribution revenue growth was led by continued strong subscriber additions in our Latin American, eastern European and Asia Pacific operations. With a 15% year-on-year subscriber growth at our most fully distributed network, Discovery Channel. Operating cost internationally were up 12%, excluding currency fluctuations, primarily due to higher content amortization, sales commissions and personnel cost. Our international team continued to deliver strong OIBDA growth, up 17%, excluding the favorable impact of foreign currency, while thoughtfully investing in key growth initiatives such as the roll out of TLC and expanding our presence in emerging markets with office openings in Moscow, Kiev and Almonte. As we look forward to the second half of 2011, we remain encouraged by the fact that the beneficial pricing and ad trends we have experienced over the last several quarters have continued through July, as well by the ample upfront sales demands David discussed in his remarks. As a result, for the full year 2011, we are refining our forecast and raising our expectations of revenue by $50 million and adjusted OIBDA by $25 million. We anticipate revenues $4.075 billion to $4.175 billion and adjusted OIBDA of $1.875 billion to $1.95 billion, primarily driven by our revenue growth, offset by acceleration of certain content cost on our digital networks. We expect overall adjusted OIBDA growth at mid-single digits for the third quarter due to the domestic revenue increases being fully offset by the increased domestic content amortization we've discussed previously and the timing of certain SG&A expenses, which we shifted from the second quarter, with the resumption of double-digit OIBDA growth in the fourth quarter. Turning to the balance sheet. We further strengthened our financial position this quarter, completing a $650 million 10-year debt offering with an effective rate of 4.45%. Over the past year, we have successfully reconstituted our balance sheet, significantly increasing our financial flexibility, while lowering our average cost. With our straightened balance sheet and strong operating performance, we continue to return capital to shareholders through execution of our share repurchase program. Our first priority is to invest our capital in our core business to enhance our shareholder returns. To the extent we have not found opportunities with attractive financial returns, we have accelerated utilizing the cash in our balance sheet, as well as the cash we generate to repurchase our shares. We have repurchased 210 million of our Class C shares during the quarter and over 609 million in total under our share repurchase program, in addition to the repurchase of 500 million preferred Class C shares. As a result of our share repurchase activity to date, we are increasing our share repurchase authorization by another $1 billion to enable us to continue to thoughtfully repatriate capital to our shareholders. Before I finish off, I would like to thank David Zaslav, a great friend and partner, John Hendricks and the Discovery board for providing me the opportunity to be a part of Discovery. Discovery is a truly unique company, with a wonderful culture and terrific colleagues. We've worked hard to ensure that Discovery delivers sustained operating performance, while further strengthening its strategic position. While it is difficult to leave a great position in a great company, in March of 2012, I firmly believe Discovery is in a strong position to achieve long-term success and continued growth. I hope everyone is enjoying Shark Week and will enjoy the premieres of Curiosity this Sunday, Crazy About Pippa on TLC, Who the (BLEEP) Did I Marry? on ID and Tanked on Animal Planet. David, Peter and I will now be happy to take your questions.

[Operator Instructions] Our first question is from the line of Doug Mitchelson from Deutsche Bank.

The question broadly, and I think more for David, when you look across the major media companies I think what stands out for you is the international platform, but I think it's the most profitable. Can you talk a bit about the international growth prospects in your prepared remarks? When you look at those big buckets, well, first are you worried at all about maturity in Europe and the difficult economic environment there right now? And on the other side, you talked about leveraging U.S. channels and building some local international channels and emerging market growth. So I guess when you think about those 3 buckets, what's the biggest 2 or 3 drivers of international in the next few to the extent that growth rate now is stronger? I hope it is sustainable.

Doug, we always are somewhat dependent on the economic environment. But we've seen real meaningful demand around the world on the advertising side, so there's a bit of a disconnect. Our advertising strength this past quarter was really across the board. But if you look fundamentally at our international business, we have a couple of levers. One, we have between 5 and 6 channels in over 200 countries, and most of those markets are still growing substantially. So you saw a 15% sub growth, which is like the U.S. 7 or 8 years ago. And so we expect that we'll continue to see meaningful sub growth over the next several years as Pay TV becomes more mature. It's in its adolescence in a lot of the markets, and in some of the emerging markets, you're seeing really robust growth. On the advertising side, we still only make about 1/3 of our money. Here in the U.S. it's about 50-50, maybe a little bit more on advertising. And internationally, it's about 35%. And that's another indicator that we need to mature more as we take our channels around the world. So we can really have a lot of growth there. And one of the other wins that's helping us is when you see in the U.S. that broadcast dollars about 15 years ago, started to move towards cable. You're starting to see that across the board around the world in some of the markets that are emerging. It's happening slower. But in France and in Russia, most of the money was being spent on broadcast. And in the past 2 years, it's transitioning now to cable, and the CPMs are starting to increase. And so that's a trend that we expect to continue for the next several years and will help us. And finally, our content travels well and we have really been reinforcing the value of our brands and our content around the world. We talked about, several years ago, that we thought we were the best platform media company in the world, and we were on a journey to become a great content company, to complement those platforms. We still have a long way to go but this past year, we've put a stake in the ground with TLC. We said we wanted to take TLC around the world and make it the largest women's network, but also have it have real impact. And it is having impact. In a number of markets, it's the top 10 network in the market. In Italy, where we launched our women's network, called Real Time, we had it on a cable platform at SKY Italia, and we put it on a broadcast platform. And in a market like Italy where there wasn't a lot of growth, we were able to grow our advertising 100% this past quarter. And so its sub growth, which we're positioned to take advantage of because we were there so early. Its ad growth, which is happening generically anyway, but we're growing our market share, and it's taking advantage of our brands and really building up our ratings. So we feel very confident. Mark Hollinger is our best operating leader in the company, and we moved him over about a year ago to run international, and he's built a great team. He's doing a great job, and I do think it's a unique advantage.

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

Just one clarification question for Brad and then one for David and Peter. Advertising outlook for Q3 Brad, are you talking about slightly below the reported ad number? Are you backing out the $8 million one-timer that you had this quarter?

Slightly below the adjusted 13% number.

Got you. And then taking up a little bit on the international point, David. And then, we go the other way, which is you have a unique platform, and I'm sure in markets like Latin America, Track TV reported this morning, they're, like, almost 500,000 net ads in Latin America. The market is just booming. And I'm wondering how you think about investing in content more substantially in those markets, because I'm sure if you look back to your -- over your career at NBC and think about cable in the U.S. years ago, this sort fighting and scratching and getting broadcast money. But you have such an opportunity in these high-growth markets to really kind of go forward on market share in terms of ratings and adding more hours of programming, and do more local, and you have an incredibly profitable business. How do you guys think about balancing investment in those really high-growth markets to try to take advantage of what seems to be just a really secularly booming market?

Well, we do have a targeted strategy where we look at the higher growth markets, and we lean in. And Latin America is a good example of that because in Latin America, we have Discovery Kids, which is, in most of the markets, they're the #1 network for -- kid’s network for kids 6 and under. In Brazil, it's the # 1 cable network in all of Brazil, because of co-viewing. So we have Discovery Kids. We also have the equivalent of a Home & Garden down there a channel called Home and Health. We've launched it early. We've invested in it, and it's been very successful for us, as well as Discovery, Animal Planet and TLC. When we look at Latin America, we have the most balanced portfolio there, but we are leaning in. I was in Brazil. I was in Argentina and Chile recently. We have very strong team driving that, and we're very cognizant of the fact that Latin America, India and Russia are big opportunities for us because we have a lot of platforms in those markets. We have 9 channels in Russia. We're going to launch 5 more channels in India. These are markets that have a lot more wind at the back. And given the fact our brands are strong there and we have boots on the ground that we should accelerate our opportunity there. But don't underestimate western Europe. We have a lot of growth in western Europe, and that has a lot to do with the fact that we've been in those markets, with growing market share, and advertising continues to grow in a number of those markets, whether it be in Germany, in the U.K. and in Italy. And so we're leaning in, in the growth markets but we're continuing to the advantage of the fact that we have real market share and scale in markets like western Europe.

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

Just one question on U.S. affiliate revenue growth, maybe for David or Brad. So Pay TV subscriber growth over the last couple of quarters has been pretty close to 0. I was just wondering if this persists because of the economy or housing or whatever. Do you think you can still sustain 6% affiliate revenue growth just on affiliate fee increases and higher digital penetration?

Spencer, when you look at the numbers, our fully distributed networks experienced year-on-year, the numbers of subscribers are about 0.5% higher. Our digital networks are about a little -- about 5% higher. And if you combine that with our rate increases, that's what got us to the 6% growth rate. And those are the components that got you there. Now you can play with the growth rate of digital or household formations, and those are the variables as you move forward in the future.

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

[Technical Difficulty]

Your next question is from the line of Jessica Reif-Cohen.

A couple of things, move a little away from international. The guidance, you increased for revenue and EBITDA but not for net income. Is that because of the JVs?

Jessica, it's because of 3 reasons. One is the JVs. If you look at our OIBDA increase of $25 million, so that translates naturally with our tax rate, it's about $15 million of net income. Now that $15 million, we didn't increase it because we have a higher interest costs related to the bond offering we just did. So that's one component of it. The JV are not having performed as well as we would have hoped, so that's one component. And our tax rate was up about 0.5%, as we look at it on a GAAP basis. So those 3 things led to that $15 million not flowing through.

And then separately, I know you guys tried in the past to syndicate some of your product, and it maybe wasn't as successful as you would have liked. But the growing platforms from Netflix and Amazon here and I guess, domestically as well, is this an opportunity to reuse your content?

Jessica, well, we sat out the use of our long-term content on the Web, and we really leaned in aggressively with clips with our characters and driving social media, because the economics weren't there. We didn't think the economics -- the right business model was there. There's probably never been a better time to be in the content business, particularly when you own your content. We have a 20-year library. We've converted into HD and digitized it. And a lot of that is content that really works and has a long life. So the good news for us is that we own all of our content. And for the first time, in terms of older windows, there were a number of players out there that are interested in offering that content in different ways, whether it's Netflix, Amazon, Google. Wal-Mart announced the other day that they are starting a service. And so all of that, directionally, is an opportunity for us. What we're working through right now is getting the right value for our content in any of the deals that we do. But it's very encouraging to have a number of new players out there that are looking to offer existing content to consumers and that the consumers are starting to like the opportunity, to consume it. So for us, we think it's good, and we continue -- we're talking to all of them, and we'll continue to talk to them.

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

Over the last -- just talking in a high-level, over the last 5 or 6 years, you've had pretty incredible ratings performance throughout your U.S. Networks. But the Discovery Channel is one where you probably hasn't gotten as much focus specifically versus some of your developing stories, which have worked out. When you look at it -- David, when you came in Billy Campbell left, and you've had Jane Root, John Ford, Clark Bunting, I guess, Eileen O'Neill, technically overseeing both major U.S. Networks now. But obviously, a lot of people running the Discovery Channel. And just would love -- kind of your thought process, where do you think the core Discovery Channel is? Why has there been so much management change? And how are you thinking about management going forward as Clark leaves?

Clark's been a great steward of Discovery, and Clark's going to be retiring in about 9 months or so. And I actually spent time with Clark over 20 years ago when I was a lawyer and Clark was at Discovery. So he's made a lot of great contributions to the company, and he has really helped to build Discovery over the last year. The challenge that we had is that we had some great series that were very robust with really strong characters and storytelling. And then we had a number of other series that were just okay. And so we have been struggling to get a great creative team in there to really drive better stories, better characters and deliver on the real promise of Discovery, what is Discovery when it's at its best. And we're excited about what we have now. We have a number of series with Gold Rush, Flying Wild Alaska, Sons of Guns. We have a whole new creative slate that Clark and Eileen are putting together. And we have a show called Curiosity, which the founder of Discovery came up with, and we've all gotten behind it a big way. It launches this Sunday. It will be every Sunday. It will be a show about curiosity, which is kind of heart and core of our brand. We've started experimenting in the last couple of months with instamentaries. We did a Bin Laden special. We did a mega quake special, both of which worked. I would say that right now Discovery is good, but it could and should be better. And by putting Eileen O'Neill and getting her involved in the network, she's got a lot more energy and a real drive toward that storytelling and character. She did it at TLC, where when she got to TLC it was # 20 network in America. And as I mentioned, last month, it was the # 2 network for women in 18 to 49, behind only USA. And she has about 25 shows that get over 1 million viewers, and she built a team that really focused on story and character. And that's what we're doing at Discovery now. I think we're making progress. The good news is that I think there's a lot of headroom for us to grow. Discovery has kind of performed at market level for the last 3 years or so, and we think we can outperform. We should outperform and that's our expectation, that's Eileen and Clark's expectation, and you should look for us to do that.

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

The success of ID has really been pretty astounding. And I'm kind of curious about once you get past the next leg of relatively greater distribution, as you guys have done this a bunch of times before, how long is the tailwind likely to last? Because the first boost obviously comes from just increased distribution and then, that comes with other benefits that go on into the future. So that's first part of the question about ID. And the second part is when you look at the ratings success, how much of it, over the past year, is about kind of seem subscriber ratings increases versus sort of increased distribution-related increases, if it's possible to look in that way?

Okay. Henry Schleiff has been on a mission with ID, and he and his team have done a -- I've never seen a cable channel grow this way. It is the #18 channel for women in America today, in the 25 to 54 demo. And the astonishing thing is it's in a little less than 80 million homes, and there's still only 35% of the people that have ID know that they have ID. And so there's tremendous upside there. About 2/3 of the growth is coming from pure Henry's team, building shows, show after show that's generating interest in ratings. And it has the-- I'm not going to say it's the longest but it might be, it's up there, in terms of the amount of time that people spend watching a network. So it's -- we have a group of people watching ID that really love it, a significant portion of the day. That's another indicator that we have upside when you put that together with the fact that 65% of the people that have it, don't know that they do. So we're very excited about ID. The other thing that gives us some real opportunity is that it grew so quickly that we haven't been able to really get the value on the CPM side, and that's traditional in the media business. Because we were doing mostly DR, and then we started weighing in Joe and Avers Aham's[ph] team, started bringing in national advertisers about 2 years ago. And we started from a pretty low base and all of a sudden, we have the compelling ratings. And it takes time, probably 2 to 3 years, for us to be able to get the CPMs that this channel deserves in light of the audience that it's delivering and the quality of the audience that it's delivering. So we're getting the growth of the audience. We're getting the growth of the subs, and we should get a very meaningful growth in the CPM. So it's an unusual asset, the credit goes to Henry Schleiff and his whole team that have -- they're having a ton of fun building a great network with great storytelling.

And one last thing on that, which again, will on the CPM and distribution growth front is time spent viewing. It is a leading, if not the leading network, with the audience spending their time in front of these shows. That is an incredible indication about the popularity and depth of storytelling that ID is providing.

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

First, for Brad, I just was hoping you could give us some more granularity around international in the third quarter, particularly advertising and affiliate. You were helpful on the domestic side, I think for domestic advertising churn. And then OIBDA, can you help us on that a little bit, third quarter and then turning to the fourth quarter for international? And then a follow-up.

International will be somewhat consistent with the second quarter. It shouldn't be dramatically different one way or the other. And now that could change because you have less visibility internationally, and you're in a higher growth environment. But the tranche should be somewhat similar.

In the third quarter and moving to the fourth quarter?

In the third quarter.

Okay. I was hoping maybe you could give it to us through the end of your tenure. And second question is for David, I suppose -- going back to an earlier question. It was asked about affiliate fees. One interpretation of your aggressiveness around content investments in the U.S. is that you're trying to design your portfolio and your content to increase your negotiating power with your affiliates as those re-ups and renegotiations come up. I presume, in the next year or 2, those -- you'll have some major re-ups with your traditional affiliate partners and then also with your digital distribution partners. So I'm wondering if you could just talk about that a little bit, about how you're preparing for those negotiations. And then following that would be, does it make sense for your to be opportunistic on the acquisition front in order to build your portfolio of networks ahead of those negotiations with your partners?

We don't have any large deals that come up before 2012, and then they're staggered, so we do have time. But there really is alignment. In order for us to grow as a company, we need to grow our market share. People still only watch 8 or 10 channels, and we're on a mission every day to have people have our channels be 1 of the 8 or 10 channels they spend time with. So when we grew this quarter 6%, it means 6% more people are spending time with our channels, and behaviorally, when you can get them to do that, it's pretty sticky. And so if we can grow our channels and people spend more time with us, then we're going to grow our ad revenue. And as you say, the stronger our channels, the stronger our hand when we sit down and have a discussion when our deals are up. But if you look at where we were when we did our deals, TLC was the # 20 or 22 service in America, ID was Discovery Times. The Science channel really didn't have a lot of original content, several years ago, and Military Channel was mostly library. So we've targeted TLC now as the top 5 channel in America, ID the top 20 network and growing, and Science a great niche network, where we've really invested in quality content. Morgan Freeman's Through the Wormhole has been a real success for that network, and there's a lot of original content Debbie Myers and her team had developed, and Henry Schleiff has now been pushing on Military, which has a good niche audience. And so all that of that are things we would do anyway. But it will be helpful to us as our 13 channels. We also have Discovery Español, which depending on the month, has been #1 or 2 network in America in the Hispanic space. It goes back and forth with Galavision. The stronger our channels are, the better economics we can deliver quarter-to-quarter, the better content we can drive around the world because our content goes around the world and the stronger our hand. And then of course, now there's this new opportunity, whether it's TV Everywhere, which we're very supportive of but we haven't done any TV Everywhere deals with the distributors yet or these new players like Netflix or Amazon or Google that want our content. Having stronger content and stronger brands also makes us -- gives us a more nourishing hand for those discussions. So there's full alignment. We have to build our brands, better shows, better channels, better storytelling, and so we do have clarity of purpose, which is helpful.

Your next question is from the line of John Janedis with UPS -- UBS.

David, a bit of a follow-up for an earlier question. But historically, you've talked about Animal Planet and how you thought that network under-earned for a network of its size. And obviously, at this point ID's audience is probably going to rival or surpass that network on a consistent basis by year end. And so directionally, can you give us your thoughts about maybe how that roll of a gap has narrowed and is the cash flow opportunity there in maybe the mid-teens of millions as you do that?

Well, Animal Planet. We built a strong brand with Animal Planet. It was a little bit profitable a few years ago and now, it's making a substantial amount of money for us. We've been able to get the CPM up, and it continues to grow. It's hard to compare when we look at our portfolio of 13 channels. But there's no question that ID is a network where the audience is telling us that they want more of it, and they want to spend more time with it. It doesn't mean that Animal Planet isn't strong. It is strong. It is a great brand, and we continue to invest in it. And Margaret Caplin [ph] her team just recently launched Finding Bigfoot, a very successful show and Whale Wars and River Monsters have been -- there's a real following for Animal Planet. So we stay -- we remain optimistic. But when we look at the growth of ID, when we look at the growth of Science, when we look at the growth of Military, it's just encouraging that we've kind of amortized our growth portfolio where we have more that we can lean on and, like in any portfolio, there are some that are going to be doing better than others at different times. So we're just really listening to the audience.

Okay. And just on OWN, you give a good update there. A couple of weeks back, I think OWN bought the rights to Undercover Boss. I would assume that would be more expensive than the average cost of a program for the network, and so I'm wondering until what extent you are going to increase your mix or prior programming there. And also did you keep the investment at $250 million?

With regard to the cost, while we don't talk about specific programming costs in any one element, that is split between 2 different networks of ours. And even as a combined cost, it's not near our averages even. So it's -- I want to be careful about drawing too firm a conclusion about where we're going with the cost structure of any of our programming. And I'll turn over to Peter to -- the second part of your question.

Yes, we will continue to evaluate programming on an opportunistic basis. Does it fit the brand, or in this instance, brands? Can we get it for a price that will create value? And we're going to go on, on an ad hoc basis. It is not part of a long-term strategy to acquire programming. But good opportunity, we took advantage of it, we're leveraging it over 2 networks.

Your next question is from the line of Marla Backer from Hudson Square

I have a couple of questions, one is a housekeeping one. Now that Oprah has taken over the role of CEO and I think, Chief Creative Officer at OWN, is Peter still nearly as involved as he had been before that management change?

The answer is no, and it's good news. Sheri and Erik are there now. They ran Harpo before for Oprah and did a fantastic job. They have a great working relationship with Oprah, and they came over. Peter transitioned, and we feel that with Sheri and with Oprah that the network is in good shape. And so I think it frees Peter up to come back and spend more time with us. So it's a positive-positive.

Okay. And the other question is on the upfront. So the outlook remains strong in terms of where spot pricing is and the advances you were able to obtain in the upfront. But relative to prior years, did you leave yourself more or less inventory to benefit if pricing remains strong? Or were you kind of cautious because the economy seems a little uncertain -- seems too still uncertain now?

This is Brad. With regard to the upfront, we sold about 20%-ish more dollar volume than we did in the prior year and half of that is price-driven. And the other half when we look at the inventory component, it was really we're focusing on some of our non-prime inventory. And so I think we were -- the assessing is very good and very thoughtful. that's how they delivered the upfront dollars that we ultimately placed.

The other piece that Joe was very effective with is, instead of just looking at Discovery and TLC and Animal Planet, he was able to really increase the volume and the quality of the business that we were able to put in to our other 10 networks. And that was -- a big function of that was the quality of the brands in the networks have really improved and have more awareness. But also that the market was strong, and in a strong market, Joe was able to build volume on those networks that are sometimes have more -- tend to have more DR. And so that's a real value to us, a real plus-plus.

Your next question is from the line of Jim Goss from Barrington Research.

Domestically, launching a cable channel is notoriously constrained by its shelf space, availability and competitive issues program. I was wondering if you could discuss that situation, internationally. You were talking about adding like 5 or 6 new Indian channels. What is the environment like in those international markets? Could you also talk about the balance of growth versus costs? You have talked about TLC getting some better cost-wise programming in some of those international markets where ahead of the indigenous products and didn't transfer from the U.S. How is that working with the other channels?

Okay, I'm going to take the first part, and Brad will talk about the growth versus cost. The good news is that we got out about 20 years ago and invested significantly in building our platforms around the world. And in most markets, it is real beachfront real estate. So when we have 11 channels in Brazil, and we're sitting with 10 channels in Argentina and we have 8 channels in Italy, those channels are, if you had a great library and you went out and you made a great pitch, in many cases you cannot get carried at all. Or in some cases if you're going to be carried, you'd be carried on digital. So as you go around the world, you would see 5 or 6 on of our channels on analog, with meaningful sub fees in what would look like a community -- a channel community that we had here in the U.S. 10 or 15 years ago. And so in most markets, the fact that we're there with these channels is a real strategic advantage. In India, which is a growth market, the fact that we're there with a substantial number of channels, with brands and the success, we were able to use our boots on the ground to get when they do say that there's going to be an opportunity for some additional licenses that we could get be at the front of the line, and we were able to get 5 additional. But in general, what we do is we're improving the channels that we have, and we've also taken advantage of the fact that we saw what happened here in the U.S. with HD. We were one of the first to move -- we were to move into HD with Discovery HD theater. But we were also a very early mover. We have 7 HD channels here in the U.S. We went out very early. We spent a lot of capital converting our content into HD, and when the cable operators here in the U.S. said they want more HD content to drive the HD tier, we raised our hand and took 7 channels while they were available to take. And then, we saw what happened. The market closed up and a lot of people wanted HD channels. But because they took up so much bandwidth, it was tough to get. So we took that experience, and we went around the world. And as we did our deals with distributors around the world, we did them for our existing channels, but we also got commitments. If they had HD, they have a number of HD channels. If they didn't have HD, we have commitments that if they do launch HD that we will get some or one or more of the HD channels when they do launch. So continuing to be a platform leader is key for us. That's also why we launched the first 24-hour 3D channel here in the U.S., with Sony and with IMAX. And that's been helpful to us around the world because we have a ton of 3D content. We have some real experience with 3D content, and as we go around the world and we're renewing our deals, whether we do a channel or whether we just offer some 3D content, we have channels, HD and 3D. And so I think that, that early mover is a real gating opportunity for us. Brad?

And Jim with regard to your question on cost and growth, we look at it, whether it's domestic or international, very similarly, which is with the help of multi-year plan. And we try to lay out what are the benchmarks for success, and if we're hitting them, we try to accelerate that investment to be very success-based. And ID is a good example domestically where we've tripled our investment over the last few years in our programming, and our ad sales have actually more than tripled. So that worked out very well. TLC International, very similar. And so as we approach anything -- any type of the incremental investment or even launching new offices, we try to do -- we do a multi-year plan. If we do well, we can be a lot more aggressive with that investment.

Okay, and just a couple of follow-ups. Is ID a good International potential opportunity? And with regard to 3D, how soon before you think that's meaningful, 2 years, 5 years, 10 years? Where does that fit in?

On ID, we have launched ID as a separate channel in a number of markets, and it is doing well. But we also use ID because it aligns very well with Discovery, some of -- a number of those shows we use to make Discovery stronger around the world. On the 3D side, 3D candidly, has been slower than we expected. It's really going to be driven more -- it's going to be driven by the sets and how quick consumers really adopt to 3D. The good news for us is that we've gotten a lot of experience with it. If it transitions into a technology where you don't use glasses and it becomes robust, we'll be there. There are a number of markets where distributors feel like they need to hedge, even though the consumer demand isn't significant yet, that from a brand perspective it's important for them to have 3D or be a leader in 3D. And so the fact that we have it is important. The market demand has not developed yet, and it would probably be the consumer electronics crew, the technology crew, that can give you a better sense of if it will.

Operator, we have time for one last question, please.

And that question will come from the line of from Vasily Karasyov from Susquehanna Financial Group.

If we were to double dip in fact, what categories, advertising categories do you think you'll see as the leading indicator of this weakness? And then can you walk us through, please, the sequence of events in a weakening advertising environment? Is it the upfront cancellations first and then direct response increases and then branded scatter pricing comes under pressure?

Vasily, it's Brad Singer. With regard to which categories, I think, the ones that are most economically sensitive are usually the ones that would be the first you'd see some weakness in. That's how I phrase it, and I'll leave it to your judgment on which ones of those are. With regard to how -- what happens in an environment if it becomes more challenging, is it all depends. If you have a scatter market that's weak or if it is still above the upfront, you may not see as much upfront cancellations. What we saw in 2009, is we had a very good upfront, 2008 to 2009 broadcasting upfront. We saw that over the course of 2009, a mild acceleration of those cancellations during that period of time, and DR held in there pretty well. So that's, I think, the best analog or the most recent one that we can point to.

And just to confirm Brad, you don't see any of those signs at this point?

At this point, we have not seen any deterioration in our current market conditions.

Thank you for joining us everybody, and please give us a call with any follow-up questions. Thank you.

Thank you.

And ladies and gentlemen, this concludes your presentation. You may now disconnect, and have a great day.