Warner Bros. Discovery, Inc. (WBD) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Discovery Communications' Third Quarter 2013 Earnings Conference Call. My name is Sonia, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Craig Felenstein, Executive Vice President, Investor Relations. Please proceed, sir.

Good morning, everyone. Thank you for joining us for Discovery Communications' 2013 Third Quarter Earnings Call. Joining me today is David Zaslav, our President and Chief Executive Officer; and Andy Warren, our Chief Financial Officer. You should have received our earnings release. But if not, feel free to access it on our website at www.discoverycommunications.com. On today's call, we will begin with some opening comments from David and Andy. After which, we will open the call up for your questions. [Operator Instructions] 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. They involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our annual report for the year ended December 31, 2012, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I'll turn the call over to David.

Thanks, Craig. Good morning, everyone, and thank you for joining us. Discovery's consistent financial growth and strong operating momentum continued during the third quarter as our diverse family of brands and deep content portfolio attracted larger audiences around the globe enabling us to capitalize on a stable worldwide ad environment. At the same time, we further exploited the evolution of pay television across our unique international distribution platform and took further advantage of some of the opportunities that our recent strategic acquisitions provide. As we maximize the synergies associated with the SBS Nordic assets, our strategic priority remains exactly the same: Invest in high-quality content with broad and diverse appeal in those geographic locations that provide the most significant, long-term advertising and affiliate opportunities. This underlying focus has allowed us to keep our organic growth story strongly intact, as evidenced by our double-digit revenue and profit growth this quarter, excluding acquisitions. And this growth is broad based, with advertising and distribution revenues expanding nicely across both our domestic and international portfolios. Equally as important, by incrementally spending only on those brands and regions that have demonstrated meaningful upside, we can ensure that the majority of the revenue growth over the long term will fall directly to our bottom line, delivering sustained organic margin expansion, even as we invest in future growth. While investing judiciously is important in all facets of our business, it is especially true domestically, given the maturity level and competition in the U.S. market. Over the last several years, we have continuously expanded market share, grown ad revenues and delivered profit growth in the U.S., even as we invested in developing many new brands and strengthening our existing flagships. Since 2008, we have built several new networks off our existing distribution, including Investigation Discovery, Destination America, OWN, Hub and Velocity, while refocusing our existing networks such as Animal Planet and Science and reinforcing our 2 biggest networks, Discovery and TLC. Our targeted investment spend domestically has resulted in sustained audience growth, with viewership across our portfolio, up nearly 60% over the last 5 years. This past quarter, Discovery's domestic networks delivered their best third quarter ever, with viewership among key adult 25 to 54 demo, up 10% in prime time, led by 18% growth at the Discovery Channel. Discovery Channel produced record third quarter ratings, led by the best Shark Week in our history with over 50 million viewers tuning in. Remarkable, given that it has been on the air for 26 years. Shark Week's longevity, along with the success this past quarter of returning favorites, Deadliest Catch and Fast N' Loud, demonstrates the depth and range of Discovery's content and the enduring power of our mission to deliver high-quality content that satisfies curiosity. And with new hits such us Naked and Afraid joining the stable and a slate of exciting new content in the pipeline, Discovery Channel is poised to continue captivating audiences and delivering value to advertisers and affiliates. Our 2 other fully distributed networks also delivered nice viewership growth this past quarter. TLC was up 4% in its key female demographic, led by Sister Wives, Breaking Amish and Here Comes Honey Boo Boo. We continue to work to drive our relationship with our viewers through social media. Earlier this month, TLC paired the strength of Long Island Medium's Theresa Caputo, one of our most popular characters, with the power of Twitter in a season premiere that allowed fans to tweet to win a reading and maybe see their tweet on TV in real time. With live cut-ins of Theresa throughout the night, TLC had its most social day ever, generating more than 1 million tweets and 8 Twitter trending topics, and starting to prove out that Twitter and TV can be powerful partners. And Animal Planet increased viewership 5% this past quarter, driven by returning hit, Call of the Wildman and freshman series, Treehouse Masters, both of which delivered over 1.3 million viewers, helping Animal Planet finish as a top 20 network for men for the third consecutive quarter. The viewership gains across our flagship networks certainly fueled the overall portfolio growth during the quarter, but we also continued to develop our newest growth engines. ID was up 5% in its key demo, as it remains a top 10 network during the day and is the top ranked network in all of television for length of tune. Destination America was up 18% this quarter among adults 25 to 54 and is delivering real value for advertisers. And Velocity, the fastest growing men's lifestyle network on cable, was up nearly 30% versus the third quarter a year ago, as it delivered its best quarter ever. The combination of ratings growth and a relatively healthy ad market enabled us to deliver another quarter of double-digit ad gains during Q3. And looking ahead, with sustained ratings momentum, a strong upfront under our belt, cancelations that are still at low levels and a scatter market that thus far remains robust, we remain confident that we can deliver sustained advertising growth moving forward. The ratings and advertising success we are enjoying across our consolidated domestic portfolio also extends to our joint venture networks. The Hub delivered its eighth consecutive quarter of double-digit growth this past quarter among kids 2 to 11 in Total Day. While OWN continued its torrid pace, with its highest quarter ever, growing over 50% in prime time versus the third quarter a year ago. OWN's multifaceted success has been driven by Oprah, Tyler Perry's 2 new hit series and Saturday's powerful lineup of Iyanla: Fix My Life, Welcome to Sweetie Pie's and Six Little McGhees. The overall rating growth is translating into significant advertising gains. And when combined with the affiliate fees that the channel had previously locked in, OWN was able to deliver additional cash flow back to Discovery this past quarter. Discovery's third quarter results also further demonstrate the value of owning the vast majority of our programming, as we recognized additional revenue under our existing license agreements. Owning our content provides flexibility regarding when and how we monetize our content library. We remain platform agnostic with regards to distributing our programming and continue to explore additional opportunities to extract value while operating within the existing pay-TV ecosystem. As we continue to build new avenues of growth across the more mature U.S. business, the bigger opportunity remains the potential of our international portfolio, where we are diligently applying our targeted investment approach to exploit our unparalleled market position and capitalize on those areas with significant upside from the evolution of pay television and the developing global advertising landscape. Discovery's thoughtful investment over the last 2 decades in securing distribution and establishing relationships with key affiliates, suppliers and advertisers in each market has given us a huge head start internationally. But it's the additional steps we have taken over the last several years to take advantage of our market position that is driving such strong results today and will allow us to continue to grow even as pay-TV penetration growth begins to slow eventually. As markets have developed, we have aggressively opened new offices in key countries, like Turkey, the Ukraine and India, to closely connect with an evolving middle class. At the same time, we have established in-house sales functions in markets where the revenue opportunity dictated a more hands-on approach, such as Russia, Colombia and Argentina. On the content side, we've increased our programming spend internationally by over 80% since 2010 to capitalize on market opportunities, including broadening the reach of our female flagship, TLC, into over 165 countries, making TLC the most distributed women's brand in the world from a standing start 24 months ago. Also expanding the footprint of our successful investigative and forensic content into 150 countries with ID, and we expect to approach 180 countries in the year ahead; or launching the kids network recently across Asia. All in, over the last 3 years, we have launched over 60 new feeds and 5 new languages to satisfy the growing demand for our content, and the strong revenue growth we are delivering today is certainly due in a large part to the this targeted investment. The strength and local feel of our suite of network brands, Discovery, Science, Animal Planet, ID and TLC, bringing 5 channels, which share content and content that we own and reach a diversified demographic of both men and women is really working. Together with the significant subscriber growth we are experiencing in many markets around the world, the result is more and more viewers connecting with our suite of networks, providing sustainable market share growth and corresponding ad growth this quarter of 29%. While it is certainly difficult to predict how the various international markets will perform going forward, we remain optimistic about our long-term growth prospects, given the platform we have built, the investments we have made and the growth we are delivering today, despite a relatively slow economic climate in many of the countries we operate in. As we continue to invest in our organic growth initiatives, we're also making significant strides integrating our recent SBS Nordic acquisition. The joint ad sales team we've assembled is closing deals in the spot market, while preparing upfront presentations to message during the first quarter that lay out the compelling content offering and value proposition we can deliver to ad clients. On the cost side, we have carefully eliminated any redundant positions and consolidated physical locations where appropriate, while programming teams have identified thousands of hours of content that can be shared across the combined portfolio. It's still early days, but after digging in, we remain certain that the combined entity of SBS Discovery Media further strengthens the unmatched platform Discovery has built up over the last 2 decades and helps to bolster the long-term growth outlook of our international portfolio. Overall, we head into the fourth quarter of 2013 with continued financial and operating momentum as we execute on our strategic priorities. Our focus remains building out our diverse set of brands and further developing our global distribution platform for long-term growth, while delivering consistent financial results. At the same time, given our strong balance sheet and the free cash flow we are generating, we are committed to returning additional capital to shareholders, so we can further build shareholder value. And with that, I will turn the call over to Andy.

Thanks, David, and thank you, everyone, for joining us today. As David highlighted, Discovery's financial momentum continued during the third quarter as we delivered double-digit underlying revenue and OIBDA growth by further executing upon our key strategic growth initiatives in a relatively healthy global operating environment. On a reported basis, total company revenue in the third quarter increased 28%, led by 10% domestic and 59% international growth, which included several newly acquired businesses, most notably SBS Nordic, as well as additional licensing revenue primarily related to our deal with Netflix. Excluding these items and the impact of foreign currency, total company revenue growth was 12%. Total operating expenses on a reported basis increased 34%, primarily due to the inclusion of newly acquired businesses. Excluding these acquisitions, the additional cost related to our Netflix agreement and the impact from foreign currency movements, total company expenses increased 12% versus the prior year due to the expected higher content amortization and marketing spend during the quarter. As we highlighted on previous earnings calls, underlying operating expense growth will meaningfully abate in the fourth quarter. However due to anticipated several onetime expense items, which will result in reported operating expense growth similar to Q3. These onetime items include a charge related to the recently announced termination of our program and agreement with the BBC, as well as additional content impairment expense largely associated with the recent management change at TLC. On a reported basis, adjusted OIBDA in the third quarter increased 20%, excluding newly acquired businesses, the licensing agreements and foreign exchange. Discovery's continued ability to generate revenue growth in excess of expenses while also investing in sustained future growth opportunities translated into a robust 11% increase in adjusted OIBDA. Net income increased to $256 million in the third quarter, up 24%, driven by the strong operating performance across the company; $22 million of better equity results, primarily due to significant improvements at OWN; and a $19 million gain related to the sale of our Petfinder business. These items were partially offset by $29 million of higher tax expense, $12 million of increased interest expense related to the additional debt we issued in March of this year and $53 million [ph] of increased amortization expense, primarily related to the purchase accounting associated with the SBS Nordic acquisition. As I mentioned last quarter, the SBS purchase price allocation to amortizable trademarks, distribution contracts, broadcast licenses and other assets results in additional amortization expense for the last 9 months of 2013 of about $130 million with a similar amount anticipated for the 12 months of 2014. Earnings per diluted share for the third quarter was $0.71, 29% above the third quarter a year ago. Adjusted earnings per diluted share, a more relevant metric from a comparability perspective as it excludes the impact from noncash acquisition amortization of intangible assets, was $0.80 compared to $0.55 in Q3 2012, a 45% improvement. Free cash flow increased 24% in the quarter to $438 million, as the strong operating performance and lower tax payments primarily resulting from the extension of the accelerated content cost recovery under Section 181, was partially offset by higher content investment. Content spend year-to-date is up only mid-single digits, excluding the newly acquired businesses. And as David highlighted, the increased programming spend continues to pay off in terms of rating momentum and higher advertising revenue. Before I move on to the divisional results, I do want to highlight that while not part of our reported free cash flow, OWN accelerated its cash repayments to Discovery during the third quarter, as the joint venture paid down approximately $20 million of its total outstanding obligation. For the fourth quarter of this year, we expect OWN to further accelerate its cash repayments to Discovery, while generating positive equity income for the first time in the joint venture's history. Now turning to the operating units. The U.S. Networks continued to perform well during the third quarter, with total reported domestic revenues of 10%, including 10% distribution revenue growth due in part to additional licensing revenue. Excluding the additional licensing revenue, total domestic revenue increased 8% with distribution revenues up 5%, predominantly from higher rates and to a lesser extent, additional digital subscribers. Please note that we do not anticipate significant additional licensing revenue under our existing agreements during the fourth quarter of this year. The U.S. Network ad sales team generated another quarter of strong growth in Q3, translating to higher delivery, most notably from Discovery Channel, Animal Planet and Destination America, as well as higher pricing across all networks into 12% advertising growth versus the third quarter a year ago. Thus far in the fourth quarter, the current market trends continue to be encouraging with scatter pricing up double digits from the mid to high single-digit gains we garnered during our recent upfront negotiations. We do, however, have fewer premiere hour scheduled for the remainder of the year versus the same period a year ago. But given the strong market conditions, we still anticipate high single-digit advertising growth in the fourth quarter. Turning to the cost side. Domestic operating expenses were up 11% from the third quarter 2012, primarily due to anticipated higher content amortization associated with the increased programming cash spend over the past few years, additional content costs associated with digital licensing agreements and higher marketing costs for series on TLC and ID. Domestic adjusted OIBDA increased 10% on a reported basis versus last year's third quarter and 6% excluding the impact of licensing agreements. Turning to our international operations, current quarter reported results reflect the impact of newly acquired businesses, SBS Nordic, Switchover Media and Fatafeat. For comparability purposes, however, my following international comments will refer to the results excluding these acquisitions. Our international segment continued to deliver strong momentum across our global operations this past quarter, with revenues expanding 14%, led by 27% ad and 11% affiliated growth. Excluding the impact of exchange rates, total revenue growth was 18%, with advertising revenue increasing 29% and affiliate revenue up 14%. The advertising revenue growth clearly benefited from the impact of the Olympics a year ago, but we delivered broad-based increases with double-digit growth across every region, led by Western Europe, mainly from the continued success of several of our free-to-air initiatives, particularly in Italy and Spain; and by Latin America, from higher pricing and delivery across the regions. On the affiliate front, the year-on-year 14% increase was driven by subscriber growth, especially in Latin America from the continued expansion of pay television in Brazil and Argentina, as well as by the consolidation of Discovery Japan. Excluding Japan, our international affiliate revenue growth would have been up high single digits. Operating costs internationally were up 19%, excluding the currency impact, primarily driven by higher content amortization, increased personnel costs, as we further expand our global footprint, and the consolidation of Discovery Japan. The international segment delivered 17% adjusted OIBDA growth in the third quarter, excluding newly acquired businesses and foreign currency, as the international team continued to significantly grow revenues on investing in long-term growth initiatives. Taking a look at our financial position, with a strong balance sheet and sustained financial and operating momentum, we continue to return capital to shareholders through execution of our share repurchase program. As we've discussed, our first priority remains investing in our core businesses to drive sustained long-term growth, be it through investing in existing networks and platforms or through exploring acquisition opportunities. While that remains our core focus, given the healthy free cash flow we are generating, our gross leverage targets and strong long-range free cash flow per share growth assumptions, we had the opportunity to continue returning capital to shareholders, as well as investing in our global businesses. During the third quarter, Discovery repurchased nearly $450 million of stock, and we still anticipate buying back a similar amount of stock this year as we did in 2012. Since we began buying back shares towards the end of 2010, we have spent over $4 billion buying back shares, reducing our outstanding share count by more than 87 million shares or 21%. Turning to the remainder of 2013, we are encouraged by the sustained momentum across our portfolio and the continued strong ad sales trend we are seeing both domestically and internationally. Therefore, despite the additional fourth quarter onetime expenses I mentioned earlier, we are leaving our total year guidance unchanged. For the full year 2013, we still expect total revenues to be between $5.55 billion and $5.625 billion, adjusted OIBDA to be between $2.425 billion and $2.475 billion and net income to be between $1.1 billion and $1.15 billion. Thanks again for your time this morning. And now David and I will be more than happy to address your questions.

[Operator Instructions] The first question comes from the line of Ben Swinburne, Morgan Stanley.

David, I was wondering if you could comment a bit on the domestic TV Everywhere conversations. And the reason I'm asking is when you look at your results, you can see the value of your content coming through in the ad sales and digital licensing. And when you listen to the cable operators, who I know you're intimately involved with, they talk about the need for TV Everywhere to be pushed more aggressively, yet we seem to not be seeing as many deals as we would expect, particularly in your -- at your company. So if you could spend a minute on what the issue is and how you think this gets resolved and then maybe any timing around that as you head into another renewal discussion at the end of this year, I think that would be helpful. And then I just have a quick follow-up for Andy on corporate. The press release makes the corporate cost drop sound recurring. I just wanted to see if you could comment on that as we look into Q4.

Thanks, Ben. Look, TV Everywhere in concept is terrific for us because we get measured with our spots. Currently we only get measured when you watch it on your computer, but pretty quickly we'll be measured if you watch it on your pad. And so it's kind of -- it's an opportunity for us to move with technology on a fully measured basis. Our position is that right now, the cable operator only has the right to carry our channels through to the TV set. And giving that pliability to the consumer is a real benefit to the cable operator. And so for us, right now, we're just at this -- a little bit of an impasse on value. We think that there's substantial value in us allowing our 13 channels that represent almost 12% of viewership on cable to go. And from our perspective, and eventually it will happen, one of the reasons, I think, it hasn't happened with us as quickly is our deals haven't come up yet. So most of these get done when you do your deal. So it includes new -- launching of additional subs for channels and your fees go up, and then -- and TV Everywhere and what's the value for that, and in that value bundle, the TV Everywhere has gotten done for a lot of the other guys. So for us, I think we're having discussions about doing it separately. So you'll either see that we did a TV Everywhere deal or you might see that we did a deal early, which includes TV Everywhere. Or what will most likely happen, because we're supportive of TV Everywhere, is as we do renewals in the future, if we get the right value, we'll do it. The most important thing for us is that we've built our viewership on cable from about 5% or 6% to almost 12%, with real affinity networks. And when a distributor says TV Everywhere to consumer, TV Everywhere means to consumers that they can watch the shows they like and the channels they like when they want to. And I think we're in a very good position because people are really liking our channels. And with that kind of scale, the distributors are going to need to have us on TV Everywhere for it to be successful.

Great. Ben, it's Andy. Just to add one point to that. One element that we've talked a lot about is the need for measurements of authenticated viewership. And Nielsen's committed to, in 2014, a measurement approach for that, that we can monetize on Madison Avenue. But that also is a big question mark. And then on your corporate cost question, as we've said, we are very focused on cost containment and cost productivity, especially in our corporate area. So yes, the costs were down year-over-year in the third quarter. And yes, they will be down again year-over-year in the fourth quarter. So it's been an area of focus, and we've had some success.

The next question comes from David Bank, RBC Capital Markets.

If you guys look at your advertising growth for this quarter and for recent past ones and kind of near-term upcoming, can you quantify the contribution of, generally, of how you see kind of CPM growth, audience growth and then the growth in sort of integrated advertising as playing a role? Those sort of 3 distinct items. And if it's easier just to talk about the current quarter, that's fine too.

Thanks, David. We are seeing some CPM growth, particularly in the U.S., where the market has been pretty healthy. Outside the U.S., most of our strength so far has come from audience. But the fact that we were growing market share over the last 2 years and our scale is getting bigger; outside the U.S., we've been able also to push price. I think you'll see more of that in the quarters ahead. This quarter, our viewership was up 12% outside the U.S., and we were able to get 29% advertising growth. It's because we're starting to be able to get a better power ratio. On the integration piece, we're very well positioned for that because we produce all of our own content. And when you look at our 13 channels, we have the ability because we produce our content to do a lot of integrations. Joe Abruzzese has a terrific team. We have a whole group that focuses just on this. And it gets us an added hurdle of benefit when you take a look at the upfront or the scatter. And then we're able to bring in some premium advertisers because we can provide unique value. We're not doing as much of that outside the U.S. but we're doing more today than we were 1 year or 2 ago. So I think that will be something that we're going to continue to push on and should help us.

Is there any way -- you said it kind of gives you an added hurdle. Just as a follow-up, is there any way you could give us sort of a ballpark contribution level for what that hurdle is?

I mean, I would say right now in the U.S., it's an added benefit. It's not significant but it's not immaterial. So it's one of those things that we look at us an edge on a lot of our competitors because we do produce our content. We have an intimate relationship with the advertisers. And so every time we can do it, it's added dollars and it's added benefit for the advertisers. So it's one of those things, I think, we can build on and it's unique to us and a couple of other media companies that really produce all of their own content in niche affinity groups.

The next question comes from John Janedis, UBS.

David, I know it's early, but did you say that 1Q cancelations are in line with historical levels? And can you talk a bit about the recent ratings trends at Discovery and TLC? Is some of the weakness related to the reduction of premiere hours you talked about? And would those tick up in 2014?

Sure. Thanks, John. Right now, in terms of cancelations, they're quite low. They are consistent with what we've been seeing. So we had a good upfront where we were mid to high single in terms of the kind of economic increase we were able to get. And so first quarter looks good. On the ratings side, for October we pulled back a little bit. The broadcasters have been strong. They were coming out with a lot of strong content. Football was coming in. And we felt like we should hold some of our powder and let the broadcasters have their thing. Let the viewers like -- wanted to try out a lot of that content. And so we're now feathering in. We just launched Gold Rush this past Friday. We launched Moonshiners on TLC. We rolled in some of our new content, which you're going to start to see this quarter, this week and the next 3 weeks. So I think that you'll see a real stabilization over the next 2 months with -- on TLC and Discovery. On our other networks, we didn't really change our approach because they're much more niche networks. And we didn't think the broadcast piece was going to have much of an effect on ID, much of an effect on Destination America or OWN; and in fact, it didn't.

And then just separately, you referenced SBS. Now that you've owned it for a few months, can you talk about what you're seeing relative to expectations? And are your synergies tracking in line from both the timing and cost savings perspective?

Sure. Well it's doing better than we expected. It's a very strong business. Just to remind everybody, it's about a 30% subscriber fee business. We've been effective in attacking the cost structure in terms of how we house our people. And we've -- we're now in the process of taking advantage of our revenue synergies. They get a lot more for their advertising than we do. They also -- because of scale, they were operating at 20%, 30%, 35% of market share in terms of viewership. So with distributors, they were stronger. So on advertising, we'll see it pretty quickly. And on the distribution, we'll see it as it -- as those deals flow in, which will be over the next 2 to 3 years, there's a shorter cycle. The revenue synergies, again, will be over time -- I would say, probably 2/3 of the cost synergies we've attacked. We've been over there a number of times. We've got a really good team, so a little more to come on that. You'll see the advertising again before you'll see the distribution. But it's all working as we hoped, and we think it's going to be a terrific asset for us.

The next question comes from the line of Todd Juenger.

Staying over across the pond, love to hear what's going on with TF1 and Eurosport, just generally how is that going. And any benefit that it's giving you across your portfolio? And then assuming you're going to say it's going well, any thoughts on your timing of when you might look to buy in the rest of that stake and if that might happen sooner than later? And then I have a follow-up.

Thanks, Todd. Things are going very well with Eurosport and with TF1 Group. They're great partners. Martin Bouygues is -- just getting a chance to get in a room with him and see how he sees the market in France and learn from his experience in Eurosport has been positive for us. We like the business a lot. We've been learning about the business. It's unusual. It's in 59 countries with between 1 and 4 channels, so it's a true Pan-European sports vehicle. I would say we think it -- looking at it now from the inside, we think it even has more potential, really because of the unique nature of it. It's -- all that distribution, in some ways, it falls in the category of what do we do and what do we understand. When I got to Discovery, we had all these channels all around the world. And the question for us was how do we maximize those to make the most money and reach the most viewers? And so Eurosport, like Discovery when I got here 8 years ago, has a fantastic platform portfolio. Nobody comes close. Nobody even -- there's no one that can tie even half of those countries together with even 1 channel, let alone 1 to 4. And so our challenge, us and TF1 together, is how do we take something that's doing well and has a unique platform and make it even stronger. And so we're going to attack it the same way we attacked Discovery, more local, looking at content in each country, looking at partnerships in each country. And we have that right to take control, and that -- it's a unilateral right, and we'll look at that over time.

Okay. And just a quick follow-up for Andy. Andy, you made some comments about the rate of spend in cash basis in terms of programming. Not always easiest to figure out on the outside the amortization schedule. Any comments you can make about how the rate of cash spend on programming this year and past years will translate into program amortization? How we should be thinking about that for the next year or so?

Sure, Todd. We said earlier this year that you'll see the -- or kind of moderate our investment in content, given the original hours that we invested in 2011 and '12. We all know there were some double-digit cash increases. We had some nice payback on that. This year though, one thing I highlighted was on an apples-to-apples basis, we're in the mid-single-digit growth year-over-year, which is what our commitment was earlier in the year. So from an amort perspective, you will still see double-digit amort coming through in 2013, but you'll see that abate in '14, as the single-digit cash investment this year helps next year's amort. So think in terms of a decreasing cash investment in 2013 and then a decreasing amort in '14.

The next question comes from Doug Mitchelson, Deutsche Bank. [Audio Gap]

advertising growth since it's so terrific. First, is there a way you can quantify how much the Olympics comp helped your growth?

Yes. Roughly, if you look at it on a 2-year basis, clearly last year, there's a lot of advertising money, particularly in Europe, that was moved out of the third quarter into fourth. So say it's 5% to 10% of an improvement in the third quarter that helped the 29%. And then conversely, you'll see on a 2-year basis a similar kind of growth rate year-over-year. So there'll be roughly, call it, 20-plus in the fourth quarter.

The next question comes from Michael Nathanson from MoffettNathanson.

I have one for David and one for Andy. David, I wondered you made investments in Western Europe and you mentioned that Italy and Spain were definitely a bit better this quarter. What are you feeling about kind of the turn in Western Europe? Do you see potential green shoots of growth? Or was this more of an Olympic comp question? So I wondered kind of what your view is of the economic turn there?

Thanks, Michael. Well look, the good news about the way we've been able to build this -- our economic attack across Western Europe is we're the biggest cable program player in Western Europe. We make more money than anyone else in Western Europe. We have more channels than anyone in Western Europe. But because we can use our content across those countries so efficiently and because our channel position and sub fees are strong, we're -- we've been able to get sustainable growth, not just in terms of sub fees, but more importantly, we've been able to grow more than 20% in ad revenue across Western Europe when the majority of those countries are flat or in recession. And so for us, that's a big part of our growth strategy, is maintain high -- sustainable high-growth in a flat or recessionary environment. Now 2 weeks ago, I was in Madrid, and Munich and London. And you read about things getting better. Candidly, the buzz is better. As you go into those countries and you meet with the advertisers and you sit down with the government and you ask what are they seeing, what do they expect. Everyone seems to think things are better. Having said that, I would say it's pretty stable. Italy is still really struggling. France is struggling. Spain, they're saying that maybe they're going to make the turn and go to a plus 1%. We'll have to wait and see. I would say it's certainly not getting worse. But for us, I think we're in great shape. If a year from now, 2 years from now, 3 years from now, you start seeing Western Europe improving, then we're going to -- you're going to see a ton of energy against us because our market share is growing in those markets. Our pricing power is growing in those markets. And we're growing 20% in those markets given these conditions. So we feel very good about Western Europe. And for us, with a long approach to this, we see Western Europe as the new emerging market. We bought assets there. We've launched channels there. And in the aggregate, Western Europe is bigger than the U.S. So Latin America is huge for us. But Western Europe, we've been very opportunistic and we've been very careful in terms of how we spend our money. That could be a big growth engine for us.

Okay. And then can I just ask Andy one on SBS? I know it's lumped in and acquired with a couple of other assets. Can you give me a sense of your organic revenue growth, SBS, what the EBITDA growth was for that asset alone?

Yes, Michael. We -- if you look at the press release, we have a table that kind of lays this all out. For the third quarter, they're -- all the acquisitions together were about $33 million of OIBDA. And that's -- while, we're not highlighting specifically what their growth was, they've had some very nice growth year-over-year. And their performance, as David mentioned before, is at or better than our expectation going into the acquisition. So their performance is strong. And again, if you look at the table, we lay out specifically what the acquisitions -- what their impact was on both international and total company.

Right. But I just wondered what the base was off of last year, so we could look at our forward models and try to figure out if we're modeling the correct growth rates of these assets for the next couple quarters.

We look at it in total. So we're not going to split it out, Michael. But if you look at it in aggregate, it's -- again, the growth rate has been strong and it's been better than our expectation. But we're not going to specifically lay out SBS.

Okay. Then let me ask this question, seasonality is 3 -- how would 3Q compare over the 4 quarters as a contributor to EBITDA? Is it lighter? Is it stronger? So in terms of run rates, does fourth quarter compare [ph] for seasonality?

Yes. It's similar to what you see with our business. There's certainly some seasonality. You'll see growth in the fourth quarter is based on advertising and holiday spending. So you'll see seasonality exists there as you see in other parts, particularly in the ad supported businesses. So you'll see a greater contribution, a greater performance out of SBS in the fourth quarter.

The next question comes from Alexia Quadrani, JPMorgan.

You mentioned earlier that we should not -- we're not likely to see anymore additional licensing revenue in the fourth quarter of this year. I guess, can you talk about -- I don't know if it's too early, but should we expect some coming in 2014? I can't remember what your renewal cycle was. I think you might have a renewal up in the first quarter?

Yes. For the fourth quarter, it's going to be very small, Alexia. I mean, the revenue we had in the third quarter was largely driven by the extension of the Netflix option we had, but there will be a very immaterial amount of SVOD revenue in the fourth quarter.

And for next year, it'll depend on what deals we do. We haven't done deals outside the U.S. We did one very small one, but there's -- we're really contemplating where could we take advantage of that new window, which is almost all incremental margin for us, with companies like Amazon or LOVEFiLM, which is Amazon outside the U.S., and Netflix. So we're looking at that. We also have some deals coming up inside the U.S. that we could do. We have found that there's been no degradation of audience from the deals that we have done. And we think as we go into those discussions, as there's a lot interest in our content, we have series that are doing better. We have brands that are stronger. We have a lot more content. So right now, it's a very good time to be exploiting that market. Having said that, there are some markets where TV is really just growing. I was down in Brazil last week, and if you're -- you go to -- you're in São Paolo and you're in Rio and that you're looking at what's going on with the cable market, that you have a whole C-class that's opting on to television for the first time. And so for us, we're on that first starter C-class package. So if NET Brazil launches to approach the C-class with 12 channels, we have 5 of those channels. And that's how people are being introduced to TV, and it's quite hot there. And it's -- and then they get -- over time, they get -- they try and get the cable operators or distributors trying to push them up to a broader package. So in some markets, there's a real concern about doing some of the SVOD deals so early on. And so we're going to -- we're taking the long look at how do we grow our business in the long term, and we're -- if doing SVOD deals means extra dollars, extra value, extra eyeballs, we'll do them. And where holding off for a period of time is better for us in terms of long-term branding and growth, we're going to do that.

Okay. And just a follow-up question, I think, on your earlier comments about the level of current cash investment in programming. It sounds like given the ratings success you've had in terms of the level of cash investment, should we assume sort of roughly the same level next year?

Yes. What we said is that going forward, model out high single-digit growth year-over-year in content spend, and there -- correspondingly increase of high single digit on a content amort. That's kind of our long-range planning and modeling around maximizing the value of the content, maximizing the value of our global reach. So high single digit is kind of our long-range thinking and planning.

The next question comes from Richard Greenfield, BTIG.

When you look at the broadcast cable ad dollars shift, the broadcasters seemed to be cheering quite a bit that if you look at their live ratings, yes, they're down meaningfully. But if you go to live plus 3 or live plus 7, it's all going to be okay. Discovery doesn't seem to talk about the big benefit from DVR viewing. It seems like you do a lot better in live year-over-year than your broadcast peers. And just wondering as you move into the upfront and even into just overall '14, '15 advertising, how do you think that changes or accelerates the shift in ad dollars?

Thanks, Rich. Well, first, we are not at the top of the list of channels that have high DVR shows. Having said that, we're moving in that direction. Because if you look at OWN, a lot of Oprah's Next Chapter, Tyler's shows, Sweetie Pie's, if you look at Discovery, we have more and more series. And so we're finding that we're getting a more meaningful pickup on the DVR plus 3. Having said that, I'd say 80% to 90% of the viewership on the DVR, we do get picked up in the first 3 days. I think the broadcaster will benefit more than we will if it goes to 7, but we'll get some benefit. The overall viewership trend that helps us in a market that's flat here in the U.S. is that, one, we're growing our market share, which is important. Two is we're growing women with OWN, ID, TLC, Animal Planet, Destination America. We have a real suite of women's networks. So that as viewers move off of broadcast, the viewers that are sometimes in the most demand are women, and we've really built that -- built up a very strong offering in that area. And the fact that the CPM is still significantly different. And so look, I think broadcasters had a good start to the season. They've been -- last quarter they were down 22%. Starting in this season, they're up a little bit and with DVR, they're up a little bit more. Good for them. I think it's good for all of us. More people are watching TV, more people are engaged in shows. We're often not the first choice. We're often the second or third choice, and that's a good thing. People, they may watch The Voice, and then they get a little bit bored and say what's my favorite and what are my 2 or 3 other favorite networks, and if we're -- if we get a good amount of that second, third viewership on Animal Planet, on ID, on a lot of our channels, that's how we make a lot of our bread and butter. So overall, I think if it goes to 7, it will help the broadcasters more but it'll help us some. And right now, it's pretty good for us.

The next question comes from Barton Crockett, FBR Capital Markets.

As you're coming onto the renewal cycle domestically in the fourth quarter, I was wondering if you could update us on how you feel about the current state of negotiations? And what do you see about the potential for you guys to see something like we've seen with the other operators, a bit of a blackout. You haven't had that historically. Do you still feel confident you won't see that? And then how do you feel about the potential for you guys to eventually move closer to the kind of high single-digit core affiliate growth rates that you see at many of your peers?

Thanks, Barton. Well, look, I think we're having a great run. We've built a terrific creative team and we've invested a lot of money in our content. And our viewership share has gone from 5% when we did most of these deals, or 6%, to almost 12%. OWN is the #1 or 2 network for African-American women in the U.S., beating BET, which is a fantastic network, 2 or 3 nights a week. We have TLC as a strong network. Discovery, the most valued network on cable, according to the cable operators surveys. ID, a top 10 network in America. So we've come a long way. Science is a great affinity network; Hub. So we've come a long way, and we've done it the hard way and the old way, old-fashioned way. We've invested more money in people, invested more money in content. And when we sit down with the cable operators who we have very good relationships with, they recognize that. Our cost of content has gone up a lot more than our subscriber fees. And we're probably the only guys that, that's the case for. And one of the reasons for that, I believe, is our deals haven't come up yet. And so what we've been doing is we've been good actors. We've done what we said we were going to do. We've got more and more people loving our channels. And now when we sit down and we negotiate our deals, we're going to be looking for fair value. And fair value for us is going to be substantially more than we were getting before because we've doubled our market share, our channels are working, we've invested a lot of money. And the cable operators and the distributors have gotten a lot of value out of that. They've been selling our channels. And so I think we've got a great hand, all of our deals come up together. So that when we sit down with a distributor, if we do have a collision, then we have all 13 of our channels. We have the #1 network for Hispanic men, with Discovery Español. So we have really been building these affinity niche groups. So our expectation is that we will get meaningful value in return for the strong performance for our channels. And if we don't, then we're going to have to stand for the value that we deserve. We've been doing it around the world, and we'll do it here. We did very nicely in our deals last year, but a very small percentage of our deals came up. We got higher increases; we got channels rolled down. We got some issues on channel position addressed and we didn't even use TV Everywhere. So I think we got a great hand. And if we have to, we'll stand up for ourselves because it's our time.

The next question comes from Michael Morris from Guggenheim Securities.

Hoping you could talk a bit about, a bit more about your free-to-air initiative internationally. You highlighted it as a driver of international ad growth. And I guess, a couple of questions are: how much of that is -- are you organic now in terms of that growth? Or was there some additional channels there in terms of the year-over-year growth? And how much did that contribute to that 29% growth? Also, do you see more opportunities for free-to-air channels either in Europe or in other geographies? And what's the risk that it cannibalizes your pay-TV, your traditional revenue stream channels?

Yes. Thanks, Michael. Well, first, this is all real growth because we fully lapped all of our launches. So what you're seeing now is pure year-over-year. The free-to-air is pretty limited. We've done it in markets like Spain that has low pay-TV or Italy that has low pay-TV and Germany. Germany has a massive market but there's only 3.5 million pay-TV subscribers, and we've been in that country for 15 years with great content. Remember, when people say free-to-air, they tend to think of one -- of a broadcast network. We really have what I would call a hybrid model. We buy a free-to-air channel, say, in Spain. But then our cost of content is virtually 0 because we have 15, 20 years of content in language that's never been seen in that market or by the overwhelming majority of the population. And so -- and we continue to churn out that content in other countries for channels that are in language. And so when we go into Spain, we start making money immediately. So we discovered -- we launched Discovery MAX in Spain, and it's getting about 2% market share from nothing. So -- but our cost of content is incredibly low, and so it's quite profitable for us. So we launched a number of free-to-airs in Italy. We're looking to launch another one in Spain. We launched the second free-to-air in Germany. All of them are profitable. And they become nice marketing vehicles for us because we could promote to our pay-TV channels in those markets. In Italy, in particular, the market is down 10% and we're up dramatically. We have our women's broadcast network in Italy, is 1 of the top 4 networks in all of Italy. And it's been a huge success for us, so we launched a male channel over the air there. And that's been a big success for us. And then we promote the Discovery, we promote the Animal Planet, we promote to our channels that are on SKY. That also helps us because when we sit down with SKY, there are some markets that only have 1 or 2 players. In Italy, it's SKY Italia and it's Berlusconi [ph], but Berlusconi [ph] is quite small. And so it gives us some optionality. They didn't want to give us a significant increase for our women's channel on the SKY platform, so we put it on broadcast, and it became a huge asset for us. They now want to carry it, an HD version of it on SKY Italia because it's so popular. Having said all of that, in -- as you look at Latin America, as you look at Russia and the Ukraine, as you look at India and Indonesia, those are growth markets we're playing the dual revenue stream game. That's the game we know how to play, that's the game we're going to play and we're not going to go into any market that has broad pay appeal with free-to-air channels.

And, Michael, just to add a little more financial color. If you look across all of our regions last quarter, we had strong double-digit ad sales growth in every region. And in 3 of those regions, we don't have free-to-air. So while free-to-air is a nice help -- helper, the core business, the dual stream business has had tremendous ad sales growth in really almost every market. So the real story here is consistent solid growth across our platforms.

The final thing that you see is -- suppose we're in a market and we have 5% market share, and then we launch a broadcast network, which gives us a couple more points. We're approaching in some of these markets with scale, and we've reached in some of these markets, Italy in particular, where we have enough scale that even in a down market, we can push price. And so sometimes, that's part of the thinking in some of these markets, and that we can bring along some of the pay-TV channels in price as well.

The next question comes from Vasily Karasyov, Sterne Agee.

Andy, I have a couple for you. One is about SBS Nordic advertising revenue seasonality. How much of a sequential ramp in advertising revenue should we see this year? Is it comparable to last year? Was the Olympics a factor or not? If you could give us any color, would appreciate it. And then you mentioned that OWN is doing very well currently. Could you give us an idea when you expect to start recognizing only your portion of the income there?

Sure, Vasily. On the first one, very similar kind of answer. Olympics had an impact, arguably a little less so for SBS, just given the market dynamics there. But the seasonality is very real. And you'll definitely see a meaningful, higher proportion of ad sales in the fourth quarter, and therefore, overall revenue growth for SBS in the fourth quarter. So the dynamics are very similar. With regard to OWN, look it's -- look, as David said, we're incredibly happy with the OWN performance. The $20 million net paydown of debt in the third quarter is tremendous and that will accelerate further in the fourth. With regard to our picking up 100% of what we expect to be profits in the fourth quarter, that will continue for a very long time because the nature isn't -- while they still have negative equity, we pick up 100% of their profit and losses. So as OWN moves to a profit profile, which again should be happening in the fourth quarter, we'll get 100% of that for the foreseeable future until their equity balance is fully restored.

Thank you, everybody for joining us. We appreciate your time. If you have any follow-up questions, please let us know. Thanks, again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.